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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-5083
XANSER CORPORATION
(Exact name of Registrant as specified in its Charter)
Delaware 74-1191271
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
2435 North Central Expressway
Richardson, Texas 75080
- ------------------------------- -------------------
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (972) 699-4000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
- ------------------------------- -----------------------------------------
Common Stock, Without Par Value New York Stock Exchange
8 3/4% Convertible Subordinated New York Stock Exchange
Debentures due 2008
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Subsection 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. Yes X No
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes No X
Aggregate market value of the voting stock held by non-affiliates of the
registrant: $58,527,999. This figure is estimated as of June 28, 2002, at which
date the closing price of the registrant's Common Stock on the New York Stock
Exchange was $1.82 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 21, 2003: 31,568,740.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III (Items 10, 11, 12 and 13) of Form 10-K
is incorporated by reference from portions of the Registrant's definitive proxy
statement to be filed with the Securities and Exchange Commission not later than
120 days after the close of the fiscal year covered by this Report.
PART I
Item 1. Business
GENERAL
Xanser Corporation ("Xanser" or the "Company") conducts its principal
businesses in two industry segments, technical services and information
technology services. The technical services and information technology services
segments operate through subsidiaries of Furmanite Worldwide, Inc. and Xtria
LLC, respectively. Furmanite Worldwide, Inc., and its domestic and international
subsidiaries and affiliates (collectively, "Furmanite"), provide specialized
technical services, including leak sealing under pressure, on-site machining,
valve testing and repair and other engineering products and services, primarily
to electric power generating plants, petroleum refineries and other process
industries in the United Kingdom, Continental Europe, North America, Latin
America and Asia-Pacific. For additional information see "Technical Services."
Xtria LLC ("Xtria") is engaged in the information technology services industry
and offers products and services that include application software, computer
hardware, web hosted data processing, networking, consulting, and support
services to the healthcare, financial, and insurance industries, and to agencies
of the U.S. Government. Xtria also provides integration and consulting services
to healthcare organizations implementing digital radiology imaging systems and
software solutions to assist healthcare organizations with compliance with
Health Insurance Portability and Accounting Act ("HIPAA") and other
accreditation and training requirements. For additional information see
"Information Technology Services."
On November 27, 2000, the Board of Directors of the Company authorized the
distribution of its pipeline, terminaling and product marketing businesses (the
"Distribution") to its stockholders in the form of a new limited liability
company, Kaneb Services LLC ("KSL"). On June 29, 2001, the Distribution was
completed, with each shareholder of the Company receiving one common share of
KSL for each three shares of the Company's common stock held on June 20, 2001,
the record date for the Distribution, resulting in the distribution of 10.85
million KSL common shares. As a result, the accompanying consolidated financial
statements reflect the results of operations of KSL prior to the Distribution as
"Discontinued operations - businesses distributed to common shareholders".
Xanser was incorporated in Delaware on January 23, 1953. The Company's
principal operating office is located at 2435 North Central Expressway, Suite
700, Richardson, Texas 75080 and its telephone number is (972) 699-4000.
OPERATING SEGMENTS
Financial information regarding the Company's operating segments and
foreign operations is presented under the caption "Business Segment Data" in
Note 9 to the Company's consolidated financial statements. Such information is
hereby incorporated by reference into this Item 1.
TECHNICAL SERVICES
The Furmanite group of companies offers specialized technical services to
an international base of clients. Founded in Virginia Beach, Virginia in the
1920s as a manufacturer of leak sealing kits, Furmanite Worldwide, Inc. has
evolved into an international service company that provides technical and
technology solutions. In the 1960s, Furmanite expanded within the United
Kingdom, primarily through its leak sealing products and services, and, during
the 1970s and 1980s, grew through geographic expansion and the addition of new
techniques, processes and services to become one of the largest leak sealing and
on-site machining companies in the world. The Company acquired Furmanite in 1991
to diversify the Company's operations and pursue international growth
opportunities. For the year ended December 31, 2002, Furmanite's revenues and
operating income were approximately $90.7 million and $3.6 million,
respectively. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
Products and Services
Furmanite provides on-line repairs of leaks ("leak sealing") in valves,
pipes and other components of piping systems and related equipment typically
used in flow-process industries. See "Customers and Markets." Other services
provided by Furmanite include on-site machining, bolting and valve testing and
repair on such systems and equipment. These services tend to complement
Furmanite's leak sealing service, since these "turnaround services" are usually
performed while a plant or piping system is off-line. In addition, Furmanite
provides hot tapping, fugitive emissions monitoring, passive fire protection,
concrete repair and heat exchanger repair. Furmanite also performs diagnostic
services on valves and motors by, among other methods, utilizing its patented
Trevitest(R) system. In performing these services, Furmanite technicians
generally work at the customer's location, frequently responding on an emergency
basis. Over its history, Furmanite has established a reputation for delivering
quality service and helping its customers avoid or delay costly plant or
equipment shutdowns. For each of the years ended December 31, 2002, 2001 and
2000, under pressure services represented approximately 46%, 42% and 42%,
respectively, of Furmanite's revenues, while turnaround services accounted for
approximately 46%, 50% and 48%, respectively, and product sales and other
industrial services represented approximately 8%, 8%, 10%, respectively, of
Furmanite's revenues for each of such years.
Furmanite's on-line, leak sealing under pressure services are performed on
a variety of flow-process industry machinery, often in difficult situations.
Many of Furmanite's techniques and materials are proprietary and/or patented
and, the Company believes, they provide Furmanite with a competitive advantage
over other organizations that provide similar services. Furmanite holds
approximately 200 patents and trademarks for its techniques, products and
materials. These patents, which are registered in jurisdictions around the
world, expire on dates ranging from April 2003 to December 2012. Furmanite's
skilled technicians work with equipment in a manner designed to enhance safety
and efficiency in temperature environments ranging from cryogenic to 1,400
degrees Fahrenheit and pressure environments ranging from vacuum to 5,000 pounds
per square inch. In many circumstances, Furmanite personnel are called upon to
custom-design tools, equipment or other materials to effect the necessary
repairs. These efforts are supported by an internal quality control group that
works with the on-site technicians in crafting these materials.
Customers and Markets
Furmanite's customer base includes petroleum refineries, chemical plants,
offshore energy production platforms, steel mills, nuclear power stations,
conventional power stations, pulp and paper mills, food and beverage processing
plants and other flow-process facilities in more than 25 countries. Over 80% of
Furmanite's revenues are derived from fossil and nuclear fuel power generation
companies, petroleum refiners and chemical producers, while other significant
markets include offshore oil producers and steel manufacturers. As the worldwide
industrial infrastructure continues to age, additional repair and maintenance
expenditures are expected to be required for the specialized services provided
by Furmanite. Other factors that may influence the markets served by Furmanite
include regulations governing construction of industrial plants, and safety and
environmental compliance requirements. No single customer accounted for more
than 10% of this segment's consolidated revenue during any of the past three
fiscal years.
Furmanite believes that it is the most recognized brand in its industry.
With its 65-year history, Furmanite's customer relationships are long-term and
worldwide. Furmanite serves its customers from its Richardson, Texas worldwide
headquarters and maintains a substantial presence in the United Kingdom,
Continental Europe and Asia-Pacific. Furmanite currently operates North American
offices in the United States in Baton Rouge, Louisiana; Beaumont, Texas;
Charlotte, North Carolina; Chicago, Illinois; Houston, Texas; Los Angeles,
California; Merrillville, Indiana and Salt Lake City, Utah. Furmanite's
worldwide operations are further supported by offices currently located in
Australia (6 locations), Belgium, France, Germany, Hong Kong, Malaysia, the
Netherlands, New Zealand, Norway, Singapore and the United Kingdom (6 locations)
and by licensee, agency and/or minority ownership interest arrangements in
Argentina, Brazil, Chile, Croatia, Cyprus, Czech Republic, Egypt, Finland,
Hungary, India, Indonesia, Italy, Japan, Kuwait, Macedonia, Poland, Portugal,
Puerto Rico, Saudi Arabia, Slovak Republic, South Korea, Sweden, Thailand,
Trinidad, Ukraine, the United Arab Emirates and Venezuela. Sales by major
geographic region for 2002 were 29% for the United States, 59% for Europe and
12% for Asia-Pacific. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Note 9 to the Company's consolidated
financial statements.
Furmanite's leak sealing under pressure and other specialty field services
are marketed primarily through direct sales calls on customers by salesmen and
technicians based at Furmanite's various operating locations, which are situated
to facilitate timely customer response, 24 hours a day, seven days a week.
Customers are usually billed on a time and materials basis for services
typically performed pursuant to either job quotation sheets or purchase orders
issued under written customer agreements. Customer agreements are generally
short-term in duration and specify the range of and rates for the services to be
performed. Furmanite typically provides various limited warranties, depending
upon the services furnished, and has had no material warranty claims during the
three years ended December 31, 2002. Furmanite competes on the basis of service,
product performance and price, generally on a localized basis with smaller
companies and the in-house maintenance departments of its customers or potential
customers. In addition to staff reductions and the trend toward outsourcing,
Furmanite believes it currently has an advantage over in-house maintenance
departments because of the ability of its multi-disciplined technicians to use
Furmanite's proprietary and patented techniques to perform quality repairs on a
timely basis while customer equipment remains in service.
Safety, Environmental and Other Regulatory Matters
Many aspects of Furmanite's operations are subject to governmental
regulation. Federal, state and local authorities of the U.S. and various foreign
countries have each adopted safety, environmental and other regulations relating
to the use of certain methods, practices and materials in connection with the
performance of Furmanite's services and which otherwise affect its operations.
Further, because of its international operations, Furmanite is subject to a
number of political and economic risks, including taxation policies, labor
practices, currency exchange rate fluctuations, foreign exchange restrictions,
local political conditions, import and export limitations and expropriation of
equipment. Except in certain developing countries, where payment in a specified
currency is required by contract, Furmanite's services are paid, and its
operations are typically funded, in the currency of the particular country in
which its business activities are conducted. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Leak sealing under pressure and other Furmanite services are often
performed in emergency situations under circumstances involving exposure to high
temperatures and pressures, potential contact with caustic or toxic materials,
fire and explosion hazards and environmental contamination, any of which can
cause serious personal injury or property damage. Furmanite manages its
operating risks by providing its technicians with extensive on-going classroom
and field training and supervision, maintaining a technical support system
through its staff of specialists, establishing and enforcing strict safety and
competency requirements, standardizing procedures and evaluating new materials
and techniques for use in connection with its lines of service. Furmanite also
maintains insurance coverage for certain risks, although there is no assurance
that insurance coverage will continue to be available at rates considered
reasonable or that the insurance will be adequate to protect the Company against
liability and loss of revenues resulting from the consequences of a significant
accident.
INFORMATION TECHNOLOGY SERVICES
Xtria provides information technology services and related products to the
healthcare industry, the financial industry, the insurance industry and to
agencies of the U.S. Government. The segment's primary business is information
technology services including application software, hardware, web hosted data
processing, networking, consulting, and support services. For the year ended
December 31, 2002 the information services segment's revenues and operating
losses were $40.7 million and $3.8 million, respectively. See "Management's
Discussion and Analysis of Financial Conditions and Results of Operations". A
substantial portion of the revenues of this business segment is attributable to
contracts with agencies of the U.S. Government. Xtria manages its businesses
from its headquarters in Richardson, Texas, and maintains offices in Bryan,
Texas; Chantilly, Manassas and McLean, Virginia; Burlington, Vermont; and
Frederick, Maryland.
Application Software Services
Xtria provides comprehensive application software services to the
healthcare, financial and insurance industries, as well as to agencies of the
U.S. Government. These services include consulting, design, software
development, implementation, data processing, and on-going support and
maintenance.
Healthcare. Xtria's healthcare application software consists of: Insight, a
comprehensive web-based enterprise wide policy and procedure management and risk
analysis tool; Empower, a web-based educational tool for employee training and
certification; and Encompass, a customer hosted software application that
securely delivers applications from existing legacy systems to the customer's
desktop via a standard web browser. These application software programs were
initially developed to meet the patient data privacy requirements of HIPAA, but
they also fulfill other risk management, training, and security needs of the
healthcare industry. Xtria's healthcare application software enables these
organizations to face the immediate challenges of patient data privacy and
security, as well as maintaining compliance in the future and are designed for
long term use by its customers.
Financial and Insurance. Xtria's financial and insurance software, Insure,
provides a comprehensive web-based risk management application to help financial
institutions lower the cost of insuring the collateral pledged to their loan
portfolios, to provide senior insurance executives with a reporting system to
alert them of positive and negative early financial performance trends and to
help reduce the costs and risks associated with timely and accurate compliance
with state and federal regulatory reporting requirements. This application is
linked with third party document imaging to create a paperless work environment.
As part of its services, Xtria monitors, on behalf of its customers, the status
of insurance coverage on automobiles pledged as loan collateral and flood
insurance on homes. Xtria believes that the market for these applications is
fragmented among a number of small competitors and that competition in this
market is primarily based upon the quality of the services provided.
U.S. Government. In the U.S. Government sector, Xtria provides web-enabled
software applications and services for the Department of Health and Human
Services. Xtria contracts for these services on renewable annual contracts based
principally on its General Services Administration Schedule. The web-enabled
software applications developed by Xtria include field research and program
analysis tools, shared statistical analysis tools, and logistics coordination
tools. The Company believes that the capabilities Xtria offers in web-related
services with large database components offer opportunities for further
expanding its market.
Digital Radiology Imaging Services
Xtria provides consulting, design, implementation training and maintenance
to healthcare organizations of digital radiology imaging systems, known as
Picture Archival and Communication Systems ("PACS"). PACS are used in connection
with digitally recorded images, such as magnetic resonance imaging, computer
tomography scans, ultrasounds and digital x-rays, among others. Xtria provides
technical support at every stage of the implementation of a PACS by healthcare
organizations, including planning and feasibility studies, workflow design,
specification development, procurement assistance, on-site technical supervision
of PACS installers, quality assurance and acceptance testing. Xtria also assists
the healthcare organizations with warranty and service issues that may arise
with the manufacturer of the PACS components. Xtria personnel who perform the
consulting services are highly trained electrical, biomedical, and clinical
engineers.
The integrated PACS communication network enables physicians to share
studies and results electronically while the digital imaging technologies are
expected to increase the throughput of imaging studies. The system also allows
information to be shared between facilities, including international locations,
through secure web-based and dedicated wide area connections. Beyond the
benefits to patients and medical staff, the system reduces the costs associated
with traditional, film-based radiology imaging, which requires processing,
storing and distributing images in film libraries. Xtria also works with PACS
providers, such as Fuji, General Electric and Phillips, in connection with the
sale and installation of PACS, and for end users of the systems.
Network Services
Xtria provides, as part of its information technology services, end-to-end
data network services that include technical consulting services, third party
telecommunications networks, system security and related networking equipment.
Its principal network services customers are healthcare, financial, and
insurance commercial customers and agencies of the U.S. Government. Xtria also
provides installation and replacement services, training, software and hardware
systems to these commercial sectors and government agencies.
ENVIRONMENTAL CONTROLS
Many of the Company's operations are subject to federal, state and local
laws and regulations relating to protection of the environment. Although the
Company believes that its operations are in general compliance with applicable
environmental regulation, risks of additional costs and liabilities are inherent
in its operations, and there can be no assurance that significant costs and
liabilities will not be incurred by the Company. Moreover, it is possible that
other developments, such as increasingly stringent environmental laws,
regulations, enforcement policies thereunder, and claims for damages to property
or persons resulting from the operations of the Company could result in
substantial costs and liabilities. See "Technical Services - Safety,
Environmental and Other Regulatory Matters."
EMPLOYEES
At December 31, 2002, the Company and its subsidiaries employed 1,082
persons. The Furmanite group of companies employed a total of 837 persons and
226 persons were employed by the Xtria group of companies. As of December 31,
2002, approximately 368 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. The Company considers relations with its employees to be good.
AVAILABLE INFORMATION
The Company files annual, quarterly, and other reports and other
information with the Securities and Exchange Commission ("SEC") under the
Securities Exchange Act of 1934 (the "Exchange Act"). These reports and other
information that the Company files with the SEC may be read and copied at the
SEC's Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. You
may obtain additional information about the Public Reference Room by calling the
SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site
(http://www.sec.gov) that contains reports, proxy information statements, and
other information regarding issuers that file electronically with the SEC.
The Company also makes available free of charge on or through our Internet
site (www.xanser.com) the Annual Report on Form 10-K, Quarterly Reports on Form
10-Q, Current Reports on Form 8-K, and other information statements and, if
applicable, amendments to those reports filed or furnished pursuant to Section
13(a) of the Exchange Act as soon as reasonably practicable after the reports
are electronically filed with, or furnished to, the SEC.
Item 2. Properties
The properties owned or utilized by the Company and its subsidiaries are
generally described in Item 1 of this Report. Additional information concerning
the obligations of the Company and its subsidiaries for lease and rental
commitments is presented under the caption "Commitments and Contingencies" in
Note 8 to the Company's consolidated financial statements. Such descriptions and
information are hereby incorporated by reference into this Item 2.
The Company's corporate headquarters is located in an office building in
Richardson, Texas, pursuant to a lease agreement that expires in 2007. The
facilities used in the operations of the Company's subsidiaries are generally
held under lease agreements having various expiration dates, rental rates and
other terms, except for two Furmanite properties located in the United Kingdom,
which are owned in fee.
Item 3. Legal Proceedings
The Company was the Plaintiff in a legal proceeding involving malpractice
issues with a professional service provider previously used by the Company. This
matter was settled in December 2001 with a payment to the Company which, net of
expenses, totaled $6.0 million and is included in other income (expense) in the
accompanying 2001 consolidated statements of income.
The Company has contingent liabilities resulting from litigation, claims
and commitments incident to the ordinary course of business. Management
believes, based on the advice of counsel, that the ultimate resolution of such
contingencies will not have a materially adverse effect on the financial
position or results of operations of the Company.
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 2002.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
Shares of the Company Common Stock are listed and traded principally on the
New York Stock Exchange ("NYSE"), under the symbol XNR. Prior to the
Distribution of KSL on June 29, 2001, the Company's Common Stock was traded on
the NYSE under the symbol KAB. At March 21, 2003, there were approximately 4,000
holders of Common Stock of record. The following table sets forth, for the
fiscal periods indicated, the quoted high and low sales prices of the shares on
the New York Stock Exchange.
Quoted Stock Prices Quoted Stock Prices
for KAB for XNR
------------------------ ------------------------
Calendar Year High Low High Low
---------------------- ------ ----- ------ -----
2001:
First Quarter $6.50 $5.69 NA NA
Second Quarter 7.75 5.56 NA NA
Third Quarter NA NA $3.13 $1.88
Fourth Quarter NA NA 2.25 1.81
2002:
First Quarter NA NA 2.76 1.87
Second Quarter NA NA 3.45 1.80
Third Quarter NA NA 2.01 1.25
Fourth Quarter NA NA 1.98 1.25
2003:
First Quarter NA NA 1.89 1.33
(through March 21, 2003)
NA - Not Applicable
The Company currently intends to retain future earnings for the development
of its business and does not anticipate paying cash dividends on its Common
Stock in the foreseeable future. The Company's dividend policy is reviewed
periodically and determined by its Board of Directors on the basis of various
factors, including, but not limited to, its results of operations, financial
condition, capital requirements and investment opportunities. Additionally, the
credit facilities for the working capital of Furmanite contain restrictions on
the respective subsidiary's ability to pay dividends or distributions to the
Company, if an event of default exists.
Item 6. Summary Historical Financial Data
The following selected financial data (in thousands, except per share
amounts) is derived from the Company's Consolidated Financial Statements and
should be read in conjunction with the Consolidated Financial Statements and
related notes thereto included elsewhere in this report. As a result of the June
2001 Distribution of KSL (See Note 1 to the Consolidated Financial Statements),
the Company's pipeline, terminaling and product marketing businesses have been
reclassified as "Discontinued operations - businesses distributed to common
shareholders" for all periods presented. The Company has not declared a dividend
on its Common Stock for any of the periods presented.
Year Ended December 31,
-----------------------------------------------------------------------
2002 2001 2000 1999 1998
---------- --------- ---------- ---------- ----------
Income Statement Data:
Revenues............................ $ 131,436 $ 144,704 $ 127,641 $ 135,433 $ 135,825
========== ========= ========== ========== ==========
Operating income (loss)............. $ (4,207) $ 5,429 $ 4,102 $ (4,566) $ 3,335
========== ========= ========== ========== ==========
Income (loss) from continuing
operations before income taxes
and cumulative effect of change
in accounting principle.......... $ (5,511) $ 9,349 $ 889 $ (8,057) $ (791)
Income tax benefit (expense)........ 3,269 13,039 5,894 38,507 (473)
---------- --------- ---------- ---------- ----------
Income (loss) from continuing
operations before cumulative
effect of change in accounting
principle........................ (2,242) 22,388 6,783 30,450 (1,264)
Cumulative effect of change in
accounting principle-adoption
of new accounting standard, net
of income taxes.................. (45,269) - - - -
---------- --------- ---------- ---------- ----------
Income (loss) from continuing
operations....................... (47,511) 22,388 6,783 30,450 (1,264)
Income from discontinued operations
- businesses distributed to common
shareholders - 3,337 10,386 28,459 14,840
---------- --------- ---------- ---------- ----------
Net income (loss)................... $ (47,511) $ 25,725 $ 17,169 $ 58,909 $ 13,576
========== ========= ========== ========== ==========
Per Share Data:
Earnings (loss) per common share:
Basic:
Continuing operations:
Before cumulative effect of
change in accounting
principle.................. $ (0.07) $ 0.68 $ 0.20 $ 0.95 $ (0.06)
Cumulative effect of change
in accounting principle.... (1.38) - - - -
--------- --------- ---------- ---------- ----------
(1.45) 0.68 0.20 0.95 (0.06)
Discontinued operations........ - 0.10 0.33 0.91 0.47
---------- --------- ---------- ---------- ---------
$ (1.45) $ 0.78 $ 0.53 $ 1.86 $ 0.41
========= ========= ========== ========== =========
Diluted:
Continuing operations:
Before cumulative effect of
change in accounting
principle.................. $ (0.07) $ 0.64 $ 0.19 $ 0.92 $ (0.06)
Cumulative effect of change
in accounting principle.... (1.38) - - - -
--------- --------- ---------- ---------- ----------
(1.45) 0.64 0.19 0.92 (0.06)
Discontinued operations........ - 0.10 0.31 0.87 0.47
--------- --------- ---------- ---------- ---------
$ (1.45) $ 0.74 $ 0.50 $ 1.79 $ 0.41
========= ========= ========== ========== =========
December 31,
-----------------------------------------------------------------------
2002 2001 2000 1999 1998
---------- --------- ---------- ---------- ----------
Balance Sheet Data:
Cash and cash equivalents........... $ 25,624 $ 29,545 $ 20,517 $ 14,516 $ 7,264
Working capital..................... 47,055 71,789 81,185 42,191 18,709
Total assets........................ 127,647 186,219 226,643 219,540 158,796
Long-term debt...................... 28,409 37,801 39,593 44,223 43,958
Stockholders' equity................ 61,549 115,506 166,039 144,803 87,445
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This discussion should be read in conjunction with the Consolidated
Financial Statements of the Company and notes thereto included elsewhere in this
report.
GENERAL
On November 27, 2000, the Board of Directors of the Company authorized the
distribution of its pipeline, terminaling and product marketing businesses (the
"Distribution") to its stockholders in the form of a new limited liability
company, Kaneb Services LLC ("KSL"). On June 29, 2001, the Distribution was
completed, with each shareholder of the Company receiving one common share of
KSL for each three shares of the Company's common stock held on June 20, 2001,
the record date for the Distribution, resulting in the distribution of 10.85
million KSL common shares. As a result of the Distribution, the Company's
pipeline, terminaling and product marketing businesses have been reclassified as
"Discontinued operations - businesses distributed to common shareholders" for
all periods presented.
The Company's continuing operations are conducted through two business
segments, technical services and information technology services.
CONSOLIDATED RESULTS OF OPERATIONS
Year Ended December 31,
--------------------------------------------
2002 2001 2000
----------- ----------- -----------
(in thousands)
Revenues.................................................. $ 131,436 $ 144,704 $ 127,641
=========== =========== ==========
Operating income (loss)................................... $ (4,207) $ 5,429 $ 4,102
=========== =========== ==========
Income (loss) from continuing operations before
income taxes and cumulative effect of change
in accounting principle................................ $ (5,511) $ 9,349 $ 889
=========== =========== ==========
Net income (loss):
Continuing operations.................................. $ (47,511) $ 22,388 $ 6,783
Discontinued operations - businesses
distributed to common shareholders................... - 3,337 10,386
----------- ----------- ----------
Net income (loss)................................... $ (47,511) $ 25,725 $ 17,169
=========== =========== ==========
Capital expenditures from continuing operations,
excluding acquisitions................................. $ 5,504 $ 4,625 $ 2,690
=========== =========== ==========
For the year ended December 31, 2002, revenues decreased by $13.3 million,
or 9%, when compared to 2001, due to a $7.7 million decrease in revenues from
the information technology services business and a $5.6 million decrease in
revenues from the technical services business. Operating income decreased by
$9.6 million in 2002, when compared to 2001, due primarily to a $7.4 million
decrease in operating income from the information technology services business
and a $2.0 million decrease in operating income from the technical services
business. Income (loss) from continuing operations before income taxes and
cumulative effect of change in accounting principle decreased by $14.9 million,
compared to 2001, due to the decrease in operating income and the 2001
recognition of $6.0 million of other income, net of expenses, from a legal
proceeding, partially offset by a decrease in interest expense. Income (loss)
from continuing operations was ($47.5) million for the year ended December 31,
2002 and includes a charge of $45.3 million for (net of income taxes) the
cumulative effect of a change in accounting principle-adoption of new accounting
standard for goodwill (see "Critical Accounting Policy").
For the year ended December 31, 2001, revenues increased by $17.1 million,
or 13%, when compared to 2000, due to a $12.9 million increase in revenues from
the information technology services business and a $4.2 million increase in
revenues from the technical services business. Operating income increased by
$1.3 million, or 32%, in 2001, compared to 2000, due to a $2.5 million decrease
in general and administrative expenses due to lower costs in the second half of
the year as a result of the Distribution and a non-cash charge of $1.4 million
in 2000 for increases in the estimated redemption value of a preferred stock
series, partially offset by a $0.7 million decrease in technical services
operating income and a $0.5 million decrease in information technology services
operating income. Income from continuing operations before income taxes and
cumulative effect of change in accounting principle increased by $8.5 million in
2001, compared to 2000, due to the recognition of $6.0 million of other income,
net of expenses, from the resolution of a legal proceeding in 2001 and the $2.5
million decrease in general and administrative expenses. Income from continuing
operations was $22.4 million for the year ended December 31, 2001 and includes
$18.1 million in income tax benefits resulting from the recapitalization of a
foreign subsidiary.
TECHNICAL SERVICES
The Company's technical services business is conducted through its
Furmanite group of subsidiaries. Furmanite provides specialized services,
including leak sealing under pressure, on-site machining, safety and relief
valve testing and repair, passive fire protection and fugitive emissions
inspections to the process and power industries worldwide.
Year Ended December 31,
---------------------------------------
2002 2001 2000
--------- --------- -------
(in thousands)
Revenues:
United States........................................ $ 26,199 $ 35,788 $ 31,743
Europe............................................... 53,186 48,554 50,446
Asia-Pacific......................................... 11,362 11,979 9,953
--------- --------- --------
$ 90,747 $ 96,321 $ 92,142
========= ========= ========
Operating income (loss):
United States........................................ $ (1,562) $ 1,306 $ 1,624
Europe............................................... 5,990 7,011 6,997
Asia-Pacific......................................... 1,007 879 862
Headquarters......................................... (1,855) (3,615) (3,163)
--------- --------- --------
$ 3,580 $ 5,581 $ 6,320
========= ========= ========
Capital expenditures, excluding acquisitions............ $ 2,912 $ 3,331 $ 2,160
========= ========= ========
For the year ended December 31, 2002, technical services revenues decreased
by $5.6 million, or 6%, when compared to 2001, due to the impact of the economic
downturn on its customers' business, particularly in the United States. In the
United States, revenues decreased by $9.6 million, or 27%, compared to 2001, due
to decreases in turnaround and underpressure services. In Europe, revenues
increased $4.6 million, or 10%, compared to 2001, due to increases in
underpressure services and differences in foreign currency exchange rates,
partially offset by decreases in turnaround and other process services.
Asia-Pacific revenues decreased $0.6 million, or 5%, compared to 2001, due to
decreases in turnaround services and product sales, partially offset by
differences in foreign exchange rates. Overall, 2002 technical services
operating income decreased by $2.0 million, or 36%, compared to 2001. In the
United States, operating income decreased by $2.9 million, compared to 2001, due
to the lower levels of business. In Europe, operating income decreased by $1.0
million, compared to 2001, as favorable pension cost adjustments recorded in
2001 were not totally offset by the margins resulting from increased revenues in
2002. In Asia-Pacific, operating income increased $0.1 million, compared to
2001, due to increases in operating margins, which more than offset the lower
revenues.
Headquarters costs for 2001 and 2000 include $1.9 million and $2.0 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 "Critical Accounting Policy").
For the year ended December 31, 2001, technical services revenues increased
by $4.2 million, or 5%, compared to 2000. In the United States, revenues
increased by $4.1 million, or 13%, compared to 2000, due to increases in
turnaround and leak sealing services. In Europe, revenues decreased by $1.9
million, or 4%, compared to 2000, due to differences in foreign currency
exchange rates and lower levels of fire protection services in the United
Kingdom. In Asia Pacific, revenues increased by $2.0 million, or 20%, compared
to 2000, due to increases in turnaround services in Australia and Singapore and
increases in product sales in Australia. Overall, 2001 operating income
decreased by $0.7 million in 2001, compared to 2000, due to slightly lower
operating margins in the United States and increases in general and
administrative expenses due to planned investments in management, marketing and
product development costs.
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.
Year Ended December 31,
---------------------------------------
2002 2001 2000
--------- --------- ---------
(in thousands)
Revenues................................................ $ 40,689 $ 48,383 $ 35,499
========= ========= =========
Operating income (loss)................................. $ (3,796) $ 3,651 $ 4,134
========= ========= =========
Capital expenditures, excluding acquisitions............ $ 2,592 $ 1,294 $ 530
========= ========= =========
For the year ended December 31, 2002, revenues decreased by $7.7 million,
or 16%, when compared to 2001, due to decreases in both service revenues and
equipment sales. The decrease in service revenues is due primarily to lower
communication-related installation revenues from a large customer as a result of
the economic downturn in the technology industry. Revenues from equipment sales,
furnished at the request of selected customers, decreased slightly due to normal
fluctuations in customer needs. Overall, 2002 operating income decreased by $7.4
million, when compared to 2001, due to the lower revenues and planned
investments in management, marketing and product development costs.
Information technology services operating income for 2001 and 2000 includes
$0.4 million and $0.2 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
"Critical Accounting Policy").
For the year ended December 31, 2001, revenues increased by $12.9 million,
or 36%, compared to 2000, due to increases in service revenues and the November
2000 acquisition of a cabling and communications business. 2001 operating income
decreased by $0.5 million, or 12%, compared to 2000, as increases in services
operating results were more than offset by planned investments in management,
marketing and product development costs.
INTEREST EXPENSE
For the year ended December 31, 2002, interest expense decreased by $1.7
million, compared to 2001, due to decreases in debt levels resulting from the
March 1, 2002 purchase of $10 million of 8.75% subordinated debentures (see
"Liquidity and Capital Resources"), and lower interest rates on variable rate
debt.
For the year ended December 31, 2001, interest expense decreased by $0.4
million, compared to 2000, due to decreases in debt levels and lower interest
rates on variable rate debt.
INCOME TAXES
Income tax benefit for the periods presented differs from the expected tax
at statutory rates due primarily to different tax rates in the various state and
foreign jurisdictions.
For the year ended December 31, 2001, income from continuing operations
includes $18.1 million in income tax benefits resulting from the
recapitalization of a foreign subsidiary. Additionally, income taxes for the
years ended December 31, 2001, and 2000 include benefits of $0.6 million and
$1.1 million, respectively, related to favorable developments pertaining to
certain state and foreign income tax issues.
For the year ended December 31, 2000, the Company recognized $6.3 million
of expected benefits from prior years' tax losses (change in valuation
allowance) that were available to offset future taxable income. The Company
reduced the valuation allowance as a result of its reevaluation of the
realizability of income tax benefits from future operations. The Company
considered positive evidence, including the effect of the Distribution, recent
historical levels of taxable income, the scheduled reversal of deferred tax
liabilities, tax planning strategies, revised estimates of future taxable income
growth, and expiration periods of net operating loss carryforwards ("NOLs")
among other things, in making this evaluation and concluding that it is more
likely than not that the Company will realize the benefit of its net deferred
tax assets. Upon completion of the Distribution in June 2001, all remaining
deferred tax assets relating to previously recorded net operating loss
carryforwards ($38.8 million), which were utilized to offset federal income
taxes resulting from the Distribution, were charged directly to stockholders'
equity.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities of continuing operations was $3.5
million, $3.1 million and $8.8 million during the years 2002, 2001 and 2000,
respectively. The increase in 2002, compared to 2001, was due primarily to
normal changes in working capital requirements resulting from the timing of cash
receipts and disbursements, partially offset by overall decreases in revenues
and operating income. The decrease in 2001, compared to 2000, was due primarily
to increases in working capital requirements in the expanded information
technology services business.
Capital expenditures for continuing operations were $5.5 million, $4.6
million and $2.7 million for the years ended December 31, 2002, 2001 and 2000,
respectively. Consolidated capital expenditures for 2003 have been budgeted at
$4 million to $6 million, depending on the economic environment and the needs of
the business. Capital expenditures (excluding acquisitions) in 2003 are expected
to be funded from existing cash and anticipated cash flows from operations.
In connection with a stock repurchase plan authorized by the Company's
Board of Directors, the Company purchased in 2002 and 2000 approximately
1,744,000 shares and 306,300 shares, respectively, of the Company's common
stock, at a cost of $3.3 million and $1.5 million, respectively. The stock
purchases were funded with cash on hand.
At December 31, 2002, $16.3 million was outstanding under a $25 million
Amended and Restated Bank Loan Agreement ("Loan Agreement") that provides
working capital for the technical services group and is without recourse to the
Company. Borrowings under the Loan Agreement bear interest at the option of the
borrower at variable rates (3.12% at December 31, 2002), based on either the
LIBOR rate or prime rate, have a commitment fee on the unused portion of the
facility and contain certain financial and operational covenants with respect to
the technical services group. During the fourth quarter of 2002, the technical
services group replaced a significant number of its vehicle capital leases with
new capital leases containing more favorable economic terms and the bank
modified, subsequent to December 31, 2002, the capital expenditure financial
covenant for the fourth quarter of 2002 to allow for these new leases. The Loan
Agreement matures in January 2009 and is secured by substantially all of the
tangible assets of the technical services group.
The Company's 8.75% subordinated debentures ($9.9 million outstanding at
December 31, 2002) are convertible into shares of the Company's common stock at
the conversion price, adjusted in 2001 for the Distribution of KSL, of $5.26 per
share. On March 1, 2002, the Company purchased $10.0 million of subordinated
debentures at par value, which satisfies its sinking fund requirements on these
subordinated debentures through 2007.
At December 31, 2002, annual sinking fund requirements and debt maturities
on consolidated debt, including capital leases, were as follows: $0.7 million;
$0.6 million; $0.4 million; $0.4 million; and $0.3 million; respectively, for
each of the five years ending December 31, 2007.
On March 30, 2001, the Company's Series A Preferred Stock was redeemed for
cash at the stated redemption price of $10.67 per share, plus accrued and unpaid
dividends, for a total cost of approximately $6.1 million. The redemption cost
included a $0.4 million redemption premium, which was recognized as dividends
and redemption premium applicable to preferred stock in 2001. Additionally, on
June 12, 2001, the Company exchanged, in non-cash transactions, 1,356,777 shares
of the Company's common stock for all Series C Preferred and Series F Preferred
shares outstanding.
Pursuant to the Distribution, the Company entered into an agreement (the
"Distribution Agreement") with KSL, whereby, KSL is obligated to pay the Company
amounts equal to certain expenses and tax liabilities incurred by the Company in
connection with the Distribution. In January of 2002, KSL paid the Company $10.0
million for tax liabilities due under the terms of the Distribution Agreement.
The Distribution Agreement also requires KSL to pay the Company an amount
calculated based on any income tax liability of the Company that, in the sole
judgement of the Company, (i) is attributable to increases in income tax from
past years arising out of adjustments required by federal and state tax
authorities, to the extent that such increases are properly allocable to the
businesses that became part of KSL, or (ii) is attributable to the distribution
of KSL's common shares and the operations of KSL's businesses in the current
year and the preceding years. In the event of an examination of the Company by
federal or state tax authorities, the Company will have unfettered control over
the examination, administrative appeal, settlement or litigation that may be
involved, notwithstanding that KSL has agreed to pay any additional tax.
Additional information related to the sources and uses of cash is presented
in the financial statements included in this report.
CRITICAL ACCOUNTING POLICIES
The preparation of the Company's financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates. Significant policies are presented in the Notes to the
Consolidated Financial Statements.
Critical accounting policies are those that are most important to the
portrayal to our financial position and results of operations. These policies
require management's most difficult, subjective or complex judgments, often
employing the use of estimates about the effect of matters that are inherently
uncertain. Our most critical accounting policies pertain to revenue recognition,
the impairment of excess of cost over fair value of net assets of acquired
businesses and income taxes.
The Company's information technology services segment includes revenue
recognized under multiple element arrangements with its customers, which
requires the use of significant judgments and estimates by management. The
accounting policies for revenue recognition in the information technology
services segment comply with AICPA Statement of Position No. 97-2 "Software
Revenue Recognition" (SOP No. 97-2). SOP No. 97-2 requires revenue to be
recognized only after software is delivered, all significant obligations of the
Company are fulfilled, and all significant uncertainties regarding customer
acceptance have expired. SOP No. 97-2 also requires the unbundling of multiple
elements and the allocation of pricing to each element based upon vendor
specific objective evidence of fair value. In addition, the information
technology services segment's revenues under long-term service contracts are
accounted for using a proportional performance method or on a straight-line
basis in accordance with the Securities and Exchange Commission's Staff
Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements".
Effective January 1, 2002, the Company adopted SFAS No. 142, which
eliminates the amortization for goodwill (excess of cost over fair value of net
assets of acquired businesses) and other intangible assets with indefinite
lives. Under SFAS No. 142, intangible assets with lives restricted by
contractual, legal, or other means will continue to be amortized over their
useful lives. As of December 31, 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. Based on
valuations and analysis performed by the Company at December 31, 2002, no
additional impairment charge was required. Future evaluations of the fair value
of goodwill and other intangible assets are dependent on many factors, several
of which are out of the Company's control, including the demand for services
provided. To the extent that such factors or conditions change, it is possible
that future impairments could occur, which could have a material effect on the
results of operations of the Company.
At December 31, 2002, the Company had a significant amount of net deferred
tax assets, which consisted principally of net operating loss and alternative
minimum tax credit carryforwards and temporary differences resulting from
differences in the tax and book basis of certain assets and liabilities. The net
operating loss carryforwards expire, if unused, in varying amounts and dates
from 2006 to 2022 and the alternative minimum tax credit carryforwards have no
expiration date (see Note 2 to the Company's Consolidated Financial Statements).
Under SFAS No. 109, the Company periodically evaluates the realizability of its
deferred tax assets from future operations. Such evaluations must consider
various factors, including estimates of future taxable income growth and the
expiration periods of net operating loss carryforwards, and conclude that it is
more likely than not that the Company will realize the benefit of its net
deferred tax assets. Additionally, the utilization of net operating loss
carryforwards could be subject to limitation in the event of a change in
ownership, as defined in the tax laws. To the extent that factors or conditions
change, it is possible that a valuation allowance against the net deferred tax
asset might be required, which could have a material effect on the results of
operations of the Company.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 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 of 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 to be recorded when they are both 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.
In November of 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements of Guarantees, Including Indirect
Guarantees of Indebtedness to Others, an interpretation of FASB Statements No.
5, 57, and 107, and a rescission of FASB Interpretation No. 34." This
interpretation elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under guarantees
issued. The interpretation also clarifies that a guarantor is required to
recognize, at inception of a guarantee, a liability for the fair value of the
obligation undertaken. The initial recognition and measurement provisions of the
interpretation are applicable to guarantees issued or modified after December
31, 2002. The disclosure requirements are effective for financial statements of
interim or annual periods ending after December 15, 2002 and have been adopted.
Management of the Company believes that the application of this interpretation
will have no effect on the consolidated financial statements of the Company.
In December of 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure." SFAS No. 148, which amends
SFAS No. 123, provides for alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation and requires additional disclosures in annual and interim financial
statements regarding the method of accounting for stock-based employee
compensation and the effect of the method used on financial results. The Company
will continue to account for stock-based compensation in accordance with
Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to
Employees" and has provided the required disclosures in its consolidated
financial statements.
In January of 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities, an interpretation of ARB No. 51." This
interpretation addressed the consolidation by business enterprises of variable
interest entities as defined in the interpretation. The interpretation applies
immediately to variable interests in variable interest entities created after
January 31, 2003, and to variable interests in variable interest entities
obtained after January 31, 2003. The interpretation requires certain disclosures
in financial statements issued after January 31, 2003. Management of the Company
believes that the application of this interpretation will have no effect on the
consolidated financial statements of the Company.
Item 7(a). Quantitative and Qualitative Disclosure About Market Risk
The principal market risks (i.e., the risk of loss arising from the adverse
changes in market rates and prices) to which the Company is exposed are interest
rates on the Company's debt and investment portfolios and fluctuations in
foreign currency.
The Company centrally manages its debt and investment portfolios
considering investment opportunities and risks, tax consequences and overall
financing strategies. The Company's investment portfolio consists of cash
equivalents; accordingly, the carrying amounts approximate fair value. The
Company's investments are not material to the financial position or performance
of the Company. Assuming variable rate debt of $17.3 million at December 31,
2002, a one percent increase in interest rates would increase interest expense
by approximately $0.2 million.
A significant portion of the technical services business is exposed to
fluctuations in foreign currency exchange rates. Foreign currency gains and
losses included in the consolidated statement of income for the year ended
December 31, 2002 were not significant.
Item 8. Financial Statements and Supplementary Data
The consolidated financial statements and supplementary data of the Company
begin on page F-1 of this report. Such information is hereby incorporated by
reference into this Item 8.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
The information required by Items 10, 11, 12 and 13 of Form 10-K are hereby
incorporated by reference to the Company's Definitive Proxy Statement to be
filed pursuant to Regulation 14A under the Securities Exchange Act of 1934
within 120 days after December 31, 2002.
Item 14. Controls and Procedures.
Included in its recent Release No. 34-46427, effective August 29, 2002, the
Securities and Exchange Commission 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 Exchange Act of 1934 (the "Exchange Act"). While management believes
that the Company's existing disclosure controls and procedures have been
effective to accomplish these objectives, it intends to continue to examine,
refine and formalize the Company's disclosure controls and procedures and to
monitor ongoing developments in this area.
The Company's principal executive officer and principal financial officer,
after evaluating the effectiveness of the Company's disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14(c) and Rule 15d-14(c)) as of
a date within 90 days before the filing date of this Report, have concluded
that, as of such date, the Company's disclosure controls and procedures are
adequate and effective to ensure that material information relating to the
Company and its consolidated subsidiaries would be made known to them by others
within those entities.
There have been no changes in the Company's internal controls or in other
factors known to management that could significantly affect those internal
controls subsequent to the date of the evaluation, nor were there any
significant deficiencies or material weaknesses in the Company's internal
controls. As a result, no corrective actions were required or undertaken.
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
Beginning
(a)(1) Financial Statements Page
Set forth below are financial statements appearing in this report.
Xanser Corporation and Subsidiaries Financial Statements:
Independent Auditors' Report........................................................ F - 1
Consolidated Statements of Income - Three Years Ended
December 31, 2002, 2001 and 2000.................................................. F - 2
Consolidated Balance Sheets - December 31, 2002 and 2001............................ F - 4
Consolidated Statements of Cash Flows - Three Years Ended
December 31, 2002, 2001 and 2000.................................................. F - 5
Consolidated Statements of Changes in Stockholders'
Equity - Three Years Ended December 31, 2002, 2001 and 2000....................... F - 6
Notes to Consolidated Financial Statements.......................................... F - 7
(a)(2) Financial Statement Schedules
Set forth are the financial statement schedules appearing in this
report.
Schedule I - Xanser Corporation (Parent Company) Condensed Financial Statements:
Statements of Income - Three Years Ended December 31, 2002, 2001 and 2000........... F - 27
Balance Sheets - December 31, 2002 and 2001......................................... F - 28
Statements of Cash Flows - Three Years Ended
December 31, 2002, 2001 and 2000.................................................. F - 29
Schedule II - Xanser Corporation Valuation and Qualifying Accounts -
Three Years Ended December 31, 2002, 2001 and 2000.................................. F - 30
Schedules, other than those listed above, have been omitted because of
the absence of the conditions under which they are required or because
the required information is included in the consolidated financial
statements or related notes thereto.
(a)(3) List of Exhibits
3.1 Restated Certificate of Incorporation of the Registrant, dated
September 26, 1979, filed as Exhibit 3.1 of the exhibits to the
Registrant's Registration Statement on Form S-16, which exhibit
is hereby incorporated by reference.
3.2 Certificate of Amendment to the Restated Certificate of
Incorporation of the Registrant, dated April 30, 1981, filed as
Exhibit 3.2 of the exhibits to the Registrant's Annual Report on
Form 10-K ("Form 10-K") for the year ended December 31, 1981,
which exhibit is hereby incorporated by reference.
3.3 Certificate of Amendment to the Restated Certificate of
Incorporation of the Registrant, dated May 28, 1985, filed as
Exhibit 4.1 of the exhibits to the Registrant's Quarterly Report
on Form 10-Q ("Form 10-Q") for the quarter ended June 30, 1985,
which exhibit is hereby incorporated by reference.
3.4 Certificate of Amendment to the Restated Certificate of
Incorporation of the Registrant, dated September 17, 1985, filed
as Exhibit 4.1 of the exhibits to the Registrant's Form 10-Q for
the quarter ended September 30, 1985, which exhibit is hereby
incorporated by reference.
3.5 Certificate of Amendment to the Restated Certificate of
Incorporation of the Registrant, dated July 10, 1990, filed as
Exhibit 3.5 of the exhibits to the Registrant's Form 10-K for the
year ended December 31, 1990, which exhibit is hereby
incorporated by reference.
3.6 Certificate of Amendment to the Restated Certificate of
Incorporation of the Registrant, dated September 21, 1990, filed
as Exhibit 3.5 of the exhibits to the Registrant's Form 10-Q for
the quarter ended September 30, 1990, which exhibit is hereby
incorporated by reference.
3.7 Certificate of Amendment to the Restated Certificate of
Incorporation of the Registrant, dated August 8, 2001, filed as
Exhibit 3.1 to the Registrant's Current Report on Form 8-K filed
on August 22, 2001, which exhibit is hereby incorporated by
reference.
3.8 By-laws of the Registrant, filed as exhibit 3.7 to Registrant's
Form 10-K for the year ended December 31, 1998, which exhibit is
hereby incorporated by reference.
4.1 Certificate of Designation, Preferences and Rights related to the
Registrant's Series B Junior Participating Preferred Stock, filed
as Exhibit 4.2 to the Registrant's 10-K for the year ended
December 31, 1998, which exhibit is incorporated herein by
reference.
4.2 Indenture between Moran Energy Inc. ("Moran") and First City
National Bank of Houston ("First City"), dated January 15, 1984,
under which Moran issued the 8 3/4% Convertible Subordinated
Debentures due 2008, filed as Exhibit 4.1 to Moran's Registration
Statement on Form S-3 (SEC File No. 2-81227), which exhibit is
hereby incorporated by reference.
4.3 First Supplemental Indenture between the Registrant and First
City, dated as of March 20, 1984, under which the Registrant
assumed obligations under the Indenture listed as Exhibit 4.5
above, filed as Exhibit 4.7 of the Registrant's Form 10-K for the
year ended December 31, 1983, which exhibit is hereby
incorporated by reference.
10.1* Xanser Corporation (formerly Kaneb Services, Inc.) Savings
Investment Plan, as amended, filed as Exhibit 4.10 of the
exhibits to the Registrant's Registration Statement on Form S-8
("Form S-8") (S.E.C. File No. 33-41295) as Exhibit 4.1 to the
exhibits of the Registrant's Form S-8 (S.E.C. File No.
333-14067), and as Exhibit 4.9 to the exhibits of the
Registrant's Form S-8 (S.E.C. File No. 333-83968), which exhibits
are hereby incorporated by reference.
10.2* Xanser Corporation (formerly Kaneb Services, Inc.) 1994 Stock
Incentive Plan, filed as Exhibit 4.12 to the exhibits of the
Registrant's Form S-8 (S.E.C. File No. 33-54027), and as Exhibit
10.1 to the Registrant's Current Report on Form 8-K filed on
August 22, 2001, which exhibits are hereby incorporated by
reference.
10.3* Xanser Corporation (formerly Kaneb Services, Inc.) Deferred
Stock Unit Plan, as amended, filed as Exhibit 4.1 to the exhibits
of the Registrant's Form S-8 (S.E.C. File No. 333-08725) as
Exhibit 10.1 to the exhibits of the Registrant's Current Report
on Form 8-K ("Form 8-K"), and as Exhibits 4.9 and 4.10 to the
exhibits of the Registrant's Form S-8 (S.E.C. File No.
333-83970), which exhibits are hereby incorporated by reference.
10.4* Kaneb Services, Inc. 1996 Supplemental Deferred Compensation
Plan, filed as Exhibit 4.1 to the exhibits of the Registrant's
Form S-8 (S.E.C. File No. 333-08727), and as Exhibit 10.2 to the
Exhibits of the Registrant's Form 8-K, which exhibits are hereby
incorporated by reference.
10.5* Kaneb Services, Inc. $1.63 Director Stock Options, filed as
Exhibit 4.1 to the exhibits of the Registrant's Form S-8 (S.E.C.
File No. 33-58981), which exhibit is hereby incorporated by
reference.
10.6* Kaneb Services, Inc. Directors Stock Options I, filed as Exhibit
4.1 to the exhibits of the Registrant's Form S-8 (S.E.C. File No.
333-14069), which exhibit is hereby incorporated by reference.
10.7* Kaneb Services, Inc. 1996 Directors Stock Incentive Plan, as
amended, filed as Exhibit 4.1 to the exhibits of the Registrant's
Form S-8 (S.E.C. File No. 333-14071) and as Exhibit 4.1 to the
exhibits of the Registrant's Form S-8 (S.E.C. File No.
333-22109), and as supplemented, filed as Exhibit 4.2 to the
Exhibits of the Registrant's Form S-8 (S.E.C. File No.
333-60195), and as Exhibit 10.1 to the Exhibits of the
Registrant's Form 8-K, which exhibits are hereby incorporated by
reference.
10.8* Kaneb Services, Inc. Non-Employee Directors Deferred Stock Unit
Plan, filed as Exhibit 4.1 to the exhibits of the Registrant's
Form S-8 (S.E.C. File No. 333-08723), and as Exhibit 10.3 to the
Exhibits of the Registrant's Form 8-K, which exhibits are hereby
incorporated by reference.
10.9* Kaneb Services, Inc. 1994 Stock Option Agreements, filed as
Exhibits 10.1, 10.2, 10.3 and 10.4 to the exhibits of the
Registrant's Form S-8 (S.E.C. File No. 333-34489), which exhibits
are hereby incorporated by reference.
10.10* Form of Termination Agreement, filed as Exhibit 10.10 to the
exhibits of the Registrant's Form 10-K for the year ended
December 31, 1996, which exhibit is hereby incorporated by
reference.
10.11* Form of Indemnification Agreement, filed as Exhibit 10.11 to
the Registrant's Form 10-K for the year ended December 31, 1999,
which exhibit is hereby incorporated by reference.
10.12 Amended and Restated Loan Agreement between Furmanite PLC, Bank
of Scotland and certain other Lenders, dated May 1, 1991, as
amended, (the "Furmanite Loan Agreement"), filed as Exhibit 10.8
of the exhibits to the Registrant's Form 10-K for the year ended
December 31, 1994; Exhibit 10.12 of the exhibits to the
Registrant's Form 10-K for the year ended December 31, 1996;
Exhibit 10.12 of the Registrant's Form 10-K for the year ended
December 31, 1997; and, Exhibit 10.13 of the Registrant's Form
10-K for the year ended December 31, 1999, which exhibits are
hereby incorporated by reference.
21 List of subsidiaries of the Registrant, filed herewith.
23 Consent of KPMG LLP, filed herewith.
99.1 Certification of Chief Executive Officer, Pursuant to Section
906(a) of the Sarbanes-Oxley Act of 2002, dated as of March 28,
2003, filed herewith.
99.2 Certification of Chief Financial Officer, Pursuant to Section
906(a) of the Sarbanes-Oxley Act of 2002, dated as of March 28,
2003, 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.
* Denotes management contracts.
(b) Reports on Form 8-K
None.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and
Stockholders of Xanser Corporation:
We have audited the consolidated financial statements of Xanser Corporation and
its subsidiaries as listed in the index appearing under Item 15(a)(1). In
connection with our audits of the consolidated financial statements, we have
also audited the financial statement schedules as listed in the index appearing
under Item 15(a)(2). These consolidated financial statements and financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on the consolidated financial statements
and financial statement schedules based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company and its
subsidiaries as of December 31, 2002 and 2001, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2002, in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, the related
financial statement schedules, when considered in relation to the basic
consolidated financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein.
As discussed in Note 1, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets" in
2002.
KPMG LLP
Dallas, Texas
February 25, 2003
XANSER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
----------------------------------------------------
2002 2001 2000
-------------- -------------- ---------------
Revenues:
Services............................................... $ 114,659,000 $ 127,421,000 $ 110,440,000
Products............................................... 16,777,000 17,283,000 17,201,000
-------------- -------------- ---------------
Total revenues....................................... 131,436,000 144,704,000 127,641,000
-------------- -------------- ---------------
Costs and expenses:
Operating costs........................................ 112,159,000 114,735,000 96,341,000
Cost of products sold.................................. 15,828,000 15,529,000 15,749,000
Depreciation and amortization.......................... 3,665,000 5,208,000 5,097,000
General and administrative............................. 3,991,000 3,803,000 6,352,000
-------------- -------------- ---------------
Total costs and expenses............................. 135,643,000 139,275,000 123,539,000
-------------- -------------- ---------------
Operating income (loss).................................... (4,207,000) 5,429,000 4,102,000
Interest income............................................ 460,000 665,000 909,000
Other income (expense)..................................... - 6,741,000 (239,000)
Interest expense........................................... (1,764,000) (3,486,000) (3,883,000)
-------------- -------------- ---------------
Income (loss) from continuing operations before
income taxes and cumulative effect of change in
accounting principle................................... (5,511,000) 9,349,000 889,000
Income tax benefit......................................... 3,269,000 13,039,000 5,894,000
-------------- -------------- ---------------
Income (loss) from continuing operations before cumulative
effect of change in accounting principle............... (2,242,000) 22,388,000 6,783,000
Cumulative effect of change in accounting principle -
adoption of new accounting standard for goodwill,
net of income taxes.................................... (45,269,000) - -
-------------- -------------- ---------------
Income (loss) from continuing operations................... (47,511,000) 22,388,000 6,783,000
Income from discontinued operations - businesses
distributed to common shareholders, net of
income taxes........................................... - 3,337,000 10,386,000
-------------- -------------- ---------------
Net income (loss).................................... (47,511,000) 25,725,000 17,169,000
Dividends and redemption premium applicable to
preferred stock........................................ - 493,000 479,000
-------------- -------------- ---------------
Net income (loss) applicable to common stock............... $ (47,511,000) $ 25,232,000 $ 16,690,000
============== ============== ===============
See notes to consolidated financial statements.
F - 2
Year Ended December 31,
----------------------------------------------------
2002 2001 2000
-------------- -------------- ---------------
Earnings (loss) per common share:
Basic:
Continuing operations:
Before cumulative effect of change in
accounting principle............................. $ (0.07) $ 0.68 $ 0.20
Cumulative effect of change in
accounting principle............................. (1.38) - -
------------- -------------- ---------------
(1.45) 0.68 0.20
Discontinued operations.............................. - 0.10 0.33
-------------- -------------- ---------------
$ (1.45) $ 0.78 $ 0.53
============= ============== ===============
Diluted:
Continuing operations:
Before cumulative effect of change in
accounting principle............................. $ (0.07) $ 0.64 $ 0.19
Cumulative effect of change in
accounting principle............................. (1.38) - -
------------- -------------- ---------------
(1.45) 0.64 0.19
Discontinued operations.............................. - 0.10 0.31
-------------- -------------- ---------------
$ (1.45) $ 0.74 $ 0.50
============= ============== ===============
See notes to consolidated financial statements.
F - 3
XANSER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
-------------------------------------
2002 2001
-------------- --------------
ASSETS
Current assets:
Cash and cash equivalents...................................... $ 25,624,000 $ 29,545,000
Accounts receivable, trade (net of allowance for doubtful
accounts of $1,500,000 in 2002 and $1,034,000 in 2001)....... 36,208,000 37,186,000
Receivable from businesses distributed to common shareholders.. 7,412,000 17,904,000
Inventories.................................................... 8,424,000 8,942,000
Current deferred income tax assets............................. 253,000 2,300,000
Prepaid expenses and other..................................... 5,011,000 7,532,000
-------------- --------------
Total current assets......................................... 82,932,000 103,409,000
-------------- --------------
Property and equipment............................................ 38,830,000 33,381,000
Less accumulated depreciation and amortization.................... 24,875,000 21,995,000
-------------- --------------
Net property and equipment..................................... 13,955,000 11,386,000
-------------- --------------
Excess of cost over fair value of net assets of acquired businesses 13,802,000 61,054,000
Deferred income taxes and other assets............................ 16,958,000 10,370,000
-------------- --------------
$ 127,647,000 $ 186,219,000
============== ==============
LIABILITIES AND EQUITY
Current liabilities:
Current portion of long-term debt.............................. $ 747,000 $ 2,173,000
Accounts payable............................................... 3,919,000 6,205,000
Accrued expenses............................................... 21,419,000 13,159,000
Accrued income taxes........................................... 9,792,000 10,083,000
-------------- --------------
Total current liabilities.................................... 35,877,000 31,620,000
-------------- --------------
Long-term debt, less current portion:
Technical services............................................. 18,479,000 17,871,000
Parent company................................................. 9,930,000 19,930,000
-------------- --------------
Total long-term debt, less current portion................... 28,409,000 37,801,000
-------------- --------------
Other liabilities................................................. 1,812,000 1,292,000
Commitments and contingencies
Stockholders' equity:
Common stock, without par value. Authorized
60,000,000 shares; issued 37,336,176 shares in 2002 and
36,809,267 shares in 2001.................................... 4,333,000 4,270,000
Additional paid-in capital..................................... 126,675,000 128,744,000
Treasury stock, at cost........................................ (26,390,000) (23,423,000)
Retained earnings (accumulated deficit)........................ (35,590,000) 11,921,000
Accumulated other comprehensive income (loss).................. (7,479,000) (6,006,000)
-------------- --------------
Total stockholders' equity................................... 61,549,000 115,506,000
-------------- --------------
$ 127,647,000 $ 186,219,000
============== ==============
See notes to consolidated financial statements.
F - 4
XANSER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
------------------------------------------------------
2002 2001 2000
-------------- ------------- ---------------
Operating activities:
Income (loss) from continuing operations............... $ (47,511,000) $ 22,388,000 $ 6,783,000
Adjustments to reconcile income from continuing
operations to net cash provided by operating
activities:
Depreciation and amortization...................... 3,665,000 5,208,000 5,097,000
Increase in the estimated redemption value of
preferred stock.................................. - - 1,387,000
Deferred income taxes.............................. (1,266,000) (15,436,000) (6,150,000)
Cumulative effect of change in accounting principle 45,269,000 - -
Other, net......................................... 736,000 296,000 410,000
Changes in current assets and liabilities:
Accounts receivable, net......................... 978,000 (7,866,000) 5,857,000
Inventories...................................... 518,000 (1,301,000) 1,359,000
Prepaid expenses and other....................... 2,370,000 (3,102,000) (2,346,000)
Accounts payable and accrued expenses............ (1,239,000) 2,939,000 (3,589,000)
-------------- ------------- --------------
Operating activities of continuing operations........ 3,520,000 3,126,000 8,808,000
Operating activities of discontinued operations...... - 59,753,000 53,407,000
-------------- ------------- --------------
Net cash provided by operating activities............ 3,520,000 62,879,000 62,215,000
-------------- ------------- --------------
Investing activities:
Capital expenditures................................... (5,504,000) (4,625,000) (2,690,000)
Acquisitions........................................... - (811,000) (4,804,000)
Other, net............................................. 1,298,000 605,000 (418,000)
Investing activities of discontinued operations........ - (128,258,000) (20,067,000)
-------------- ------------- --------------
Net cash used in investing activities................ (4,206,000) (133,089,000) (27,979,000)
-------------- ------------- --------------
Financing activities:
Issuance of debt and capital leases.................... 4,750,000 4,441,000 924,000
Payments on debt and capital leases ................... (15,641,000) (4,655,000) (7,429,000)
Preferred stock dividends and redemption premium paid.. - (493,000) (479,000)
Common stock issued.................................... 450,000 545,000 255,000
Purchase of treasury stock............................. (3,286,000) - (1,530,000)
Redemption of preferred stock.......................... - (5,676,000) -
Decrease in receivable from businesses distributed to
common shareholders.................................. 10,492,000 14,076,000 -
Financing activities of discontinued operations........ - 71,000,000 (19,976,000)
-------------- ------------- --------------
Net cash provided by (used in) financing activities.. (3,235,000) 79,238,000 (28,235,000)
-------------- ------------- --------------
Increase (decrease) in cash and cash equivalents.......... (3,921,000) 9,028,000 6,001,000
Cash and cash equivalents at beginning of year............ 29,545,000 20,517,000 14,516,000
-------------- ------------- --------------
Cash and cash equivalents at end of year.................. $ 25,624,000 $ 29,545,000 $ 20,517,000
============== ============= ==============
Supplemental cash flow information from continuing operations:
Cash paid for interest............................... $ 2,244,000 $ 3,383,000 $ 3,755,000
============== ============= ==============
Cash paid for income taxes........................... $ 926,000 $ 1,270,000 $ 1,716,000
============== ============= ==============
See notes to consolidated financial statements.
F - 5
XANSER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
PAGE 1 OF 2
Preferred Common Additional Treasury
Stock Stock Paid-In Capital Stock
------------- ------------- --------------- -------------
Balance at January 1, 2000 $ 5,792,000 $ 4,249,000 $ 197,313,000 $ (30,278,000)
Net income for the year............ - - - -
Common stock issued................ - 1,000 (114,000) 368,000
Deferred stock units, vested....... - - 540,000 -
Series F Preferred stock to be
exchanged for common stock....... - - 6,250,000 -
Purchase of treasury stock ........ - - - (1,530,000)
Preferred stock dividends declared - - - -
Foreign currency translation
adjustment ...................... - - - -
------------- ------------- ------------- -------------
Comprehensive income for the year..
Balance at December 31, 2000 5,792,000 4,250,000 203,989,000 (31,440,000)
Net income for the year............ - - - -
Common stock issued................ - 20,000 380,000 257,000
Deferred stock units, vested....... - - 651,000 -
Redemption of Series A Preferred
stock............................ (5,680,000) - - -
Repurchase of Series C and F
Preferred stock.................. (112,000) - (7,725,000) 7,760,000
Dividends and redemption premium
applicable to preferred stock.... - - - -
Distribution of KSL................ - - (74,664,000) -
Gain on issuance of units by KPP... - - 6,113,000 -
Minimum pension liability
adjustment for subsidiary........ - - - -
Foreign currency translation
adjustment....................... - - - -
------------- ------------- ------------- -------------
Comprehensive income for the year..
Balance at December 31, 2001 - 4,270,000 128,744,000 (23,423,000)
Net income (loss) for the year..... - - - -
Common stock issued................ - 63,000 68,000 319,000
Deferred stock units, vested....... - - 171,000 -
Purchase of treasury stock......... - - - (3,286,000)
Minimum pension liability
adjustment for subsidiary........ - - - -
Foreign currency translation
adjustment....................... - - - -
Taxes associated with the
Distribution of KSL and other.... - - (2,308,000) -
------------- ------------- ------------- -------------
Comprehensive income (loss)
for the year.....................
Balance at December 31, 2002 $ - $ 4,333,000 $ 126,675,000 $ (26,390,000)
============= ============= ============= =============
See notes to consolidated financial statements.
F - 6
XANSER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
PAGE 2 OF 2
Accumulated Other
Retained Comprehensive Comprehensive
Earnings Income (Loss) Income (Loss)
------------- ----------------- -------------
Balance at January 1, 2000 $ (30,001,000) $ (2,272,000)
Net income for the year............ 17,169,000 - $ 17,169,000
Common stock issued................ - - -
Deferred stock units, vested....... - - -
Series F Preferred stock to be
exchanged for common stock....... - - -
Purchase of treasury stock ........ - - -
Preferred stock dividends
declared......................... (479,000) - -
Foreign currency translation
adjustment ...................... - (969,000) (969,000)
------------- ------------- -------------
Comprehensive income for the year.. $ 16,200,000
=============
Balance at December 31, 2000 (13,311,000) (3,241,000)
Net income for the year............ 25,725,000 - $ 25,725,000
Common stock issued................ - - -
Deferred stock units, vested....... - - -
Redemption of Series A Preferred
stock............................ - - -
Repurchase of Series C and F
Preferred stock.................. - - -
Dividends and redemption premium
applicable to preferred stock.... (493,000) - -
Distribution of KSL................ - 640,000 -
Gain on issuance of units by KPP... - - -
Minimum pension liability
adjustment for subsidiary........ - (2,773,000) (2,773,000)
Foreign currency translation
adjustment....................... - (632,000) (632,000)
------------- ------------- -------------
Comprehensive income for the year.. $ 22,320,000
=============
Balance at December 31, 2001 11,921,000 (6,006,000)
Net income (loss) for the year..... (47,511,000) - $ (47,511,000)
Common stock issued................ - - -
Deferred stock units, vested....... - - -
Purchase of treasury stock........ - - -
Minimum pension liability
adjustment for subsidiary........ - (3,374,000) (3,374,000)
Foreign currency translation
adjustment....................... - 1,901,000 1,901,000
Taxes associated with the
Distribution of KSL and other.... - - -
------------- ------------- -------------
Comprehensive income (loss)
for the year..................... $ (48,984,000)
=============
Balance at December 31, 2002 $ (35,590,000) $ (7,479,000)
============= =============
See notes to consolidated financial statements.
F - 6
XANSER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
The consolidated financial statements include the accounts of Xanser
Corporation (the "Company") and its wholly-owned subsidiaries.
On November 27, 2000, the Board of Directors of the Company authorized the
distribution of its pipeline and terminaling and product marketing business (the
"Distribution") to its stockholders in the form of a new limited liability
company, Kaneb Services LLC ("KSL"). On June 29, 2001, the Distribution was
completed, with each shareholder of the Company receiving one common share of
KSL for each three shares of the Company's common stock held on June 20, 2001,
the record date for the Distribution, resulting in the distribution of 10.85
million KSL common shares. As a result, the accompanying financial statements
reflect the operations of KSL prior to the Distribution as "Discontinued
operations - businesses distributed to common shareholders" (See Note 10).
Pursuant to the Distribution, the Company entered into an agreement (the
"Distribution Agreement") with KSL, whereby, KSL is obligated to pay the Company
amounts equal to certain expenses and tax liabilities incurred by the Company in
connection with the Distribution. In January of 2002, KSL paid the Company $10.0
million for tax liabilities due under the terms of the Distribution Agreement.
The Distribution Agreement also requires KSL to pay the Company an amount
calculated based on any income tax liability of the Company that, in the sole
judgement of the Company, (i) is attributable to increases in income tax from
past years arising out of adjustments required by federal and state tax
authorities, to the extent that such increases are properly allocable to the
businesses that became part of KSL, or (ii) is attributable to the distribution
of KSL's common shares and the operations of KSL's businesses in the current
year and the preceding years. In the event of an examination of the Company by
federal or state tax authorities, the Company will have unfettered control over
the examination, administrative appeal, settlement or litigation that may be
involved, notwithstanding that KSL has agreed to pay any additional tax.
The following significant accounting policies are followed by the Company
and its subsidiaries in the preparation of its consolidated financial
statements. All significant intercompany transactions and balances are
eliminated in consolidation.
Cash and Cash Equivalents
The Company's policy is to invest cash in highly liquid investments with
original maturities of three months or less. Accordingly, uninvested cash
balances are kept at minimum levels. Such investments are valued at cost, which
approximates market, and are classified as cash equivalents. The Company does
not have any derivative financial instruments.
Inventories
Inventories consist primarily of materials and supplies and are valued at
the lower of cost or market. Cost is determined using the weighted average cost
method.
Property and Equipment
Property and equipment are carried at historical cost. Certain leases have
been capitalized and the leased assets have been included in property and
equipment. Additions of new equipment and major renewals and replacements of
existing equipment are capitalized. Repairs and minor replacements that do not
materially increase values or extend useful lives are expensed. Depreciation of
property and equipment is provided on the straight-line basis at rates based
upon the expected useful lives of the various classes of assets.
Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets", which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. The adoption of
SFAS No. 144 did not have a material impact on the consolidated financial
statements of the Company. Under SFAS No. 144, the carrying value of property
and equipment is periodically evaluated using undiscounted future cash flows as
the basis for determining if impairment exists. To the extent impairment is
indicated to exist, an impairment loss will be recognized based on fair value.
Capitalized Software
Costs incurred to purchase or develop computer software to be sold or
leased is capitalized in accordance with SFAS No. 86 "Accounting for the Costs
of Computer Software to Be Sold, Leased, or Otherwise Marketed". Under SFAS No.
86, amortization expense is based on current and projected revenues for each
capitalized product, with an annual minimum equal to the straight-line method of
amortization over the product's remaining estimated economic life. At December
31, 2002 and 2001, unamortized software costs capitalized under SFAS No. 86
totaled $1.3 million and $13,000, respectively. Amortization expense totaled
$0.1 million in 2002. No amortization expense was incurred in 2001 or 2000.
Revenue Recognition
Revenues are recognized when services to customers have been rendered or
when products have been delivered.
The accounting policies for revenue recognition in the information
technology services segment comply with AICPA Statement of Position No. 97-2
"Software Revenue Recognition" (SOP No. 97-2). SOP No. 97-2 requires revenue to
be recognized only after software is delivered, all significant obligations of
the Company are fulfilled, and all significant uncertainties regarding customer
acceptance have expired. SOP No. 97-2 also requires the unbundling of multiple
elements and the allocation of pricing to each element based upon vendor
specific objective evidence of fair value. In addition, the information
technology services segment's revenues under long-term service contracts are
accounted for using a proportional performance method or on a straight-line
basis in accordance with the Securities and Exchange Commission's Staff
Accounting Bulletin No. 101 "Revenue Recognition in Financial Statements".
Earnings Per Share
The amount of earnings for the period applicable to each weighted average
share of common stock outstanding during the period ("Basic" earnings per share)
and the amount of earnings for the period applicable to each weighted average
share of common stock outstanding during the period and to each share that would
have been outstanding assuming the issuance of common shares for dilutive
potential common shares outstanding during the period ("Diluted" earnings per
share) have been presented in the consolidated statements of income.
Foreign Currency Translation
The Company translates the balance sheets of its foreign subsidiaries using
year-end exchange rates and translates income statement amounts using the
average exchange rates in effect during the year. The gains and losses resulting
from the change in exchange rates from year to year have been reported
separately as a component of accumulated other comprehensive income (loss) in
stockholders' equity. Gains and losses resulting from foreign currency
transactions are included in the consolidated statements of income.
Comprehensive Income
The Company follows the provisions of SFAS No. 130, "Reporting
Comprehensive Income", for the reporting and display of comprehensive income and
its components in a full set of general purpose financial statements. SFAS No.
130 only requires additional disclosure and does not affect the Company's
financial position or results of operations. At December 31, 2002 and 2001,
accumulated other comprehensive loss consists of cumulative foreign currency
translation adjustments of $1.3 million and $3.2 million, respectively, and
minimum pension liability adjustments for subsidiaries of $6.2 million and $2.8
million, respectively.
Excess of Cost Over Fair Value of Net Assets of Acquired Businesses
Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and
Other Intangible Assets", which eliminates the amortization for goodwill (excess
of cost over fair value of net assets of acquired businesses) and other
intangible assets with indefinite lives. Under SFAS No. 142, intangible assets
with lives restricted by contractual, legal, or other means will continue to be
amortized over their useful lives. As of December 31, 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. Based on valuations and analysis performed by the
Company at December 31, 2002, no additional impairment charge was required.
The changes in the carrying amount of excess of cost over fair value of net
assets of acquired businesses for the year ended December 31, 2002 is as
follows:
Excess of cost over fair value of net assets of acquired
businesses at December 31, 2001........................ $61,054,000
Cumulative effect of change in accounting principle
recorded in the first quarter of 2002.................. (47,252,000)
-----------
Excess of cost over fair value of net assets of acquired
businesses (technical services) at December 31, 2002... $13,802,000
===========
The effects of the adoption of SFAS No. 142 on income (loss) from
continuing operations is as follows:
Year Ended December 31
-------------------------------------------------
2002 2001 2000
-------------- ------------- --------------
Reported income (loss) from
continuing operations............................... $ (47,511,000) $ 22,388,000 $ 6,783,000
Amortization of excess of cost
over fair value of net assets
of acquired businesses, net
of income taxes..................................... - 2,164,000 2,101,000
Cumulative effect of change in
accounting principle - adoption
of new accounting standard
for goodwill, net of income taxes................... 45,269,000 - -
-------------- ------------- --------------
Adjusted income (loss) from
continuing operations............................... $ (2,242,000) $ 24,552,000 $ 8,884,000
============== ============= ==============
Reported diluted earnings (loss)
per common share from
continuing operations............................... $ (1.45) $ 0.64 $ 0.19
Amortization of excess of cost over
fair value of net assets of
acquired businesses, net of
income taxes........................................ - 0.06 0.06
Cumulative effect of change in accounting
principle, net of income taxes...................... 1.38 - -
-------------- ------------- --------------
Adjusted diluted earnings (loss)
per common share from
continuing operations............................... $ (0.07) $ 0.70 $ 0.25
============== ============= ==============
Stock Option Plans
In December of 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation-Transition and Disclosure." SFAS No. 148, which amends
SFAS No. 123, provides for alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee
compensation and requires additional disclosures in annual and interim financial
statements regarding the method of accounting for stock-based employee
compensation and the effect of the method used on financial results.
In accordance with the provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), the Company applies APB Opinion 25 and
related interpretations in accounting for its stock option plans and,
accordingly, does not recognize compensation cost based on the fair value of the
options granted at grant date as prescribed by SFAS 123. The Black-Scholes
option pricing model has been used to estimate the value of stock options
issued, and the assumptions in the calculations under such model for the three
years ended December 31, 2002 include stock price variance or volatility ranging
from 9.32% to 13.38% based on weekly average variances of the stock for the five
year period preceding issuance, a risk-free rate of return ranging from 3.25% to
6.63% based on the 30-year U.S. treasury bill rate for the five-year expected
life of the options, and no dividend yield.
The following illustrates the effect on net income (loss) and basic and
diluted earnings (loss) per share if the fair value based method had been
applied:
Year Ended December 31,
--------------------------------------------------
2002 2001 2000
--------------- -------------- --------------
Reported net income (loss)............................... $ (47,511,000) $ 25,725,000 $ 17,169,000
Stock-based employee compensation expense determined
under the fair value based method, net of income taxes. (620,000) (593,000) (625,000)
--------------- -------------- --------------
Pro forma net income (loss).............................. $ (48,131,000) $ 25,132,000 $ 16,544,000
=============== ============== ==============
Earning (loss) per share:
Basic - as reported.................................... $ (1.45) $ 0.78 $ 0.53
=============== ============== ==============
Basic - pro forma...................................... $ (1.48) $ 0.75 $ 0.50
=============== ============== ==============
Diluted - as reported.................................. $ (1.45) $ 0.74 $ 0.50
=============== ============== ==============
Diluted - pro forma.................................... $ (1.48) $ 0.71 $ 0.48
=============== ============== ==============
Estimates
The preparation of the Company's financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Recent Accounting Pronouncements
In July 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 of 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 to be recorded when they are both 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.
In November of 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements of Guarantees, Including Indirect
Guarantees of Indebtedness to Others, an interpretation of FASB Statements No.
5, 57, and 107, and a rescission of FASB Interpretation No. 34." This
interpretation elaborates on the disclosures to be made by a guarantor in its
interim and annual financial statements about its obligations under guarantees
issued. The interpretation also clarifies that a guarantor is required to
recognize, at inception of a guarantee, a liability for the fair value of the
obligation undertaken. The initial recognition and measurement provisions of the
interpretation are applicable to guarantees issued or modified after December
31, 2002. The disclosure requirements are effective for financial statements of
interim or annual periods ending after December 15, 2002 and have been adopted.
Management of the Company believes that the application of this interpretation
will have no effect on the consolidated financial statements of the Company.
In January of 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities, an interpretation of ARB No. 51." This
interpretation addressed the consolidation by business enterprises of variable
interest entities as defined in the interpretation. The interpretation applies
immediately to variable interests in variable interest entities created after
January 31, 2003, and to variable interests in variable interest entities
obtained after January 31, 2003. The interpretation requires certain disclosures
in financial statements issued after January 31, 2003. Management of the Company
believes that the application of this interpretation will have no effect on the
consolidated financial statements of the Company.
2. INCOME TAXES
Income (loss) from continuing operations before cumulative effect of change
in accounting principle and income tax expense is comprised of the following
components:
Year Ended December 31,
----------------------------------------------------
2002 2001 2000
-------------- ------------- ------------
Domestic operations......................... $ (11,427,000) $ 3,246,000 $ (2,371,000)
Foreign operations.......................... 5,916,000 6,103,000 3,260,000
-------------- ------------- ------------
Income (loss) before income taxes........... $ (5,511,000) $ 9,349,000 $ 889,000
============== ============= ============
Income tax expense (benefit) from continuing operations before cumulative
effect of change in accounting principle is comprised of the following
components:
Year Ended
December 31, Federal Foreign State Total
------------------------ ------------- ------------ ------------ ------------
2002:
Current............... $ (2,140,000) $ 65,000 $ 72,000 $ (2,003,000)
Deferred.............. (1,825,000) 1,427,000 (868,000) (1,266,000)
------------- ------------ ------------ ------------
$ (3,965,000) $ 1,492,000 $ (796,000) $ (3,269,000)
============= ============ ============ ============
2001:
Current............... $ 1,483,000 $ 649,000 $ 265,000 $ 2,397,000
Deferred.............. (15,418,000) 919,000 (937,000) 15,436,000)
------------- ------------ ------------ ------------
$ (13,935,000) $ 1,568,000 $ (672,000) $(13,039,000)
============= ============ ============ ============
2000:
Current............... $ 47,000 $ 1,031,000 $ (822,000) $ 256,000
Deferred.............. (5,699,000) (278,000) (173,000) (6,150,000)
------------- ------------ ------------ ------------
$ (5,652,000) $ 753,000 $ (995,000) $ (5,894,000)
============= ============ ============ ============
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 (loss) from continuing operations before income taxes and
cumulative effect of change in accounting principle for the years 2002, 2001 and
2000 are as follows:
Year Ended December 31,
-----------------------------------------------------------------
2002 2001 2000
----------------- ------------------ -----------------
Expected tax (benefit) at
statutory rates................ $ (1,929,000) $ 3,272,000 $ 311,000
Increase (decrease) in taxes
resulting from:
Change in valuation allowance.. - - (6,280,000)
State income taxes, net........ (517,000) (437,000) (647,000)
Foreign tax rate differences... (629,000) 141,000 (388,000)
Goodwill amortization ......... - 664,000 598,000
Benefit from recapitalization
of foreign subsidiary........ - (18,137,000) -
Resolution of state and
foreign tax issues and
other........................ (194,000) 1,458,000 512,000
----------------- ------------------ ----------------
$ (3,269,000) $ (13,039,000) $ (5,894,000)
================= ================== ================
At December 31, 2002, the Company had available domestic tax net operating
loss carryforwards ("NOLs"), which will expire, if unused, as follows:
$11,211,000 in 2006; $3,033,000 in 2007; and, $715,000 in 2022. The utilization
of these NOLs could be subject to significant limitation in the event of a
"change in ownership", as defined in the tax laws, which might be caused by
purchases or sales of the Company's securities by persons or groups now or in
the future having 5% or greater ownership of the Company's common stock.
For the year ended December 31, 2001, income taxes include $18.1 million in
tax benefits resulting from the recapitalization of a foreign subsidiary.
Additionally, income taxes for the years ended December 31, 2001 and 2000
include benefits of $0.6 million and $1.1 million, respectively, related to
favorable developments pertaining to certain state and foreign income tax
issues.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
2002 and 2001 are as follows:
December 31,
-------------------------------------
2002 2001
-------------- --------------
Deferred tax assets:
Net operating loss carryforwards......................... $ 5,793,000 $ 1,469,000
Alternative minimum tax credit carryforwards............. 4,385,000 6,357,000
Accrued liabilities...................................... 1,076,000 879,000
Intangibles.............................................. 1,739,000 -
Foreign deferred tax assets.............................. 424,000 205,000
Other.................................................... 889,000 531,000
-------------- --------------
Total gross deferred tax assets.......................... 14,306,000 9,441,000
-------------- --------------
Deferred tax liabilities-plant and equipment, principally due to
differences in depreciation.............................. (355,000) (85,000)
-------------- --------------
Net deferred tax asset................................... $ 13,951,000 $ 9,356,000
============== ==============
For the year ended December 31, 2000, the Company recognized $6.3 million
of expected benefits from prior years' tax losses (change in valuation
allowance) that were available to offset future taxable income. The Company
reduced the valuation allowance as a result of its reevaluation of the
realizability of income tax benefits from future operations. The Company
considered positive evidence, including the effect of the Distribution, recent
historical levels of taxable income, the scheduled reversal of deferred tax
liabilities, tax planning strategies, revised estimates of future taxable income
growth, and expiration periods of NOLs among other things, in making this
evaluation and concluding that it is more likely than not that the Company will
realize the benefit of its net deferred tax assets. Upon completion of the
Distribution, all remaining deferred tax assets relating to previously recorded
net operating loss carryforwards ($38.8 million), which were utilized to offset
federal income taxes resulting from the Distribution, were charged directly to
stockholders' equity.
3. RETIREMENT PLANS
The Company has a defined contribution plan which covers substantially all
domestic employees and provides for varying levels of employer matching.
Contributions from continuing operations to this plan were $0.8 million, $0.8
million and $0.7 million for 2002, 2001 and 2000, respectively.
One of the Company's foreign subsidiaries has a defined benefit pension
plan covering substantially all of its United Kingdom employees (the "U.K.
Plan"). The benefit is based on the average of the employee's salary for the
last three years of employment. Generally, the employee contributes 5.5% to 6.5%
and the employer contributes up to 12% of pay. Plan assets are primarily
invested in unitized pension funds managed by United Kingdom registered funds
managers. The most recent valuation of the U.K. Plan was performed as of October
31, 2002.
Net pension cost for the U.K. Plan included the following components:
Year Ended December 31,
---------------------------------------------------
2002 2001 2000
-------------- ------------- -------------
Net periodic pension cost:
Service cost................................ $ 658,000 $ 515,000 $ 623,000
Interest cost............................... 2,522,000 2,287,000 2,269,000
Expected return on plan assets.............. (3,012,000) (3,516,000) (2,805,000)
Amortization of prior service cost.......... 15,000 15,000 15,000
Recognized net (gain) loss.................. 4,000 (321,000) (222,000)
-------------- ------------- -------------
Net periodic pension cost (benefit)........... $ 187,000 $ (1,020,000) $ (120,000)
============== ============= =============
Actuarial assumptions used in the accounting for the U.K. Plan were a
weighted average discount rate of 6.0% for 2002 and 2001 and 6.5% for 2000, an
expected long-term rate of return on assets of 7.5% for 2002, 2001 and 2000 and
a rate of increase in compensation levels of 3.0% for 2002, 2001 and 2000. The
funded status of the U.K. Plan is as follows:
December 31,
--------------------------------
2002 2001
-------------- --------------
Projected benefit obligation:
Beginning of year.......................................... $ 40,798,000 $ 36,548,000
Service cost............................................... 658,000 515,000
Interest cost.............................................. 2,522,000 2,287,000
Contributions.............................................. 607,000 565,000
Benefits paid.............................................. (1,243,000) (1,907,000)
Foreign currency translation adjustment and other.......... 4,984,000 2,790,000
------------- -------------
End of year................................................ 48,326,000 40,798,000
------------- -------------
December 31,
--------------------------------
2002 2001
-------------- --------------
Fair value of plan assets:
Beginning of year.......................................... 38,980,000 46,507,000
Actual loss on plan assets................................. (4,569,000) (5,289,000)
Contributions.............................................. 607,000 565,000
Benefits paid.............................................. (1,243,000) (1,907,000)
Foreign currency translation adjustment and other.......... 4,459,000 (896,000)
------------- -------------
End of year................................................ 38,234,000 38,980,000
------------- -------------
Excess projected obligation over fair value.................. (10,092,000) (1,818,000)
Unrecognized net actuarial loss.............................. 13,115,000 4,136,000
Unamortized prior service cost............................... 119,000 122,000
------------- -------------
Net pension prepaid asset.................................... 3,142,000 2,440,000
Additional minimum liability................................. (9,184,000) (4,082,000)
------------- -------------
Net pension liability........................................ $ (6,042,000) $ (1,642,000)
============= =============
The Company recognizes a minimum pension liability for underfunded plans
equal to the excess of the accumulated benefit obligation over plan assets. A
corresponding amount is recognized as either an intangible asset, to the extent
of previously unrecognized prior service cost, or a reduction of accumulated
other comprehensive income included in stockholders' equity. In 2002 and 2001,
the Company recognized additional minimum liabilities of $4.9 million and $4.1
million, respectively, which, net of deferred income taxes of $1.5 million and
$1.3 million, respectively, is recorded as a reduction in accumulated other
comprehensive income.
4. PROPERTY AND EQUIPMENT
The cost of property and equipment is as follows:
Estimated
Useful December 31,
Life --------------------------------
(Years) 2002 2001
-------------- -------------- --------------
Technical services........................ 3 - 20 $ 26,833,000 $ 23,969,000
Information technology services........... 3 - 7 8,149,000 5,564,000
General corporate......................... 3 - 10 3,848,000 3,848,000
-------------- --------------
Total property and equipment.............. 38,830,000 33,381,000
Less accumulated depreciation
and amortization........................ 24,875,000 21,995,000
-------------- --------------
Net property and equipment................ $ 13,955,000 $ 11,386,000
============== ==============
Equipment under capital leases is included in the cost of property and
equipment as follows:
December 31,
--------------------------------
2002 2001
-------------- --------------
Technical services equipment........................... $ 2,808,000 $ 2,566,000
Less accumulated depreciation.......................... 887,000 1,189,000
-------------- --------------
Net equipment acquired under capital leases............ $ 1,921,000 $ 1,377,000
============== ==============
5. LONG-TERM DEBT
Long-term debt is summarized as follows:
December 31,
--------------------------------
2002 2001
-------------- --------------
Technical services credit facility due
in January of 2009................................... $ 16,286,000 $ 16,283,000
Notes of technical services foreign subsidiary,
with interest ranging from 6.75% to 8.0%,
due through 2012..................................... 1,010,000 855,000
Capital leases of technical services subsidiary........ 1,930,000 1,440,000
Parent company 8.75% convertible subordinated
debentures due in 2008............................... 9,930,000 21,396,000
--------------- -------------
Total long-term debt................................... 29,156,000 39,974,000
Less current portion................................... 747,000 2,173,000
--------------- -------------
Total long-term debt, less current portion............. $ 28,409,000 $ 37,801,000
=============== =============
At December 31, 2002, $16.3 million was outstanding under a $25 million
Amended and Restated Bank Loan Agreement ("Loan Agreement") that provides
working capital for the technical services group and is without recourse to the
Company. Borrowings under the Loan Agreement bear interest at the option of the
borrower at variable rates (3.12% at December 31, 2002), based on either the
LIBOR rate or prime rate, have a commitment fee on the unused portion of the
facility and contain certain financial and operational covenants with respect to
the technical services group. During the fourth quarter of 2002, the technical
services group replaced a significant number of its vehicle capital leases with
new capital leases containing more favorable economic terms and the bank
modified, subsequent to December 31, 2002, the capital expenditure financial
covenant for the fourth quarter of 2002 to allow for these new leases. The Loan
Agreement matures in January 2009 and is secured by substantially all of the
tangible assets of the technical services group.
The Company's 8.75% subordinated debentures ($9.9 million outstanding at
December 31, 2002) are convertible into shares of the Company's common stock at
the conversion price, adjusted in 2001 for the Distribution of KSL, of $5.26 per
share. On March 1, 2002, the Company purchased $10.0 million of subordinated
debentures at par value, which satisfies its sinking fund requirements on these
subordinated debentures through 2007.
At December 31, 2002, annual sinking fund requirements and debt maturities
on consolidated debt, including capital leases, were as follows: $0.7 million;
$0.6 million; $0.4 million; $0.4 million; and $0.3 million; respectively, for
each of the five years ending December 31, 2007.
6. CAPITAL STOCK
The changes in the number of issued and outstanding shares of the Company's
common stock are summarized as follows:
Common Stock
Issued Held in Treasury Outstanding
------------ ---------------- --------------
Balance at January 1, 2000.......................... 36,638,069 5,260,967 31,377,102
Common shares issued (repurchased), net............. 3,052 238,452 (235,400)
------------ ------------ --------------
Balance at December 31, 2000........................ 36,641,121 5,499,419 31,141,702
Common shares issued (repurchased), net............. 168,146 (1,401,572) 1,569,718
------------ ------------ --------------
Balance at December 31, 2001........................ 36,809,267 4,097,847 32,711,420
Common shares issued (repurchased), net............. 526,909 1,686,609 (1,159,700)
------------ ------------ --------------
Balance at December 31, 2002........................ 37,336,176 5,784,456 31,551,720
============ ============ ==============
In connection with a stock repurchase plan authorized by the Company's
Board of Directors, the Company purchased in 2002 and 2000 approximately
1,744,000 shares and 306,300 shares, respectively, of the Company's common
stock, at a cost of $3.3 million and $1.5 million, respectively. The stock
purchases were funded with cash on hand.
Series A Preferred Stock
On March 30, 2001, the Company redeemed its 567,950 shares of Cumulative
Class A Adjustable Rate Preferred Stock, Series A ("Series A Preferred") for
cash at the stated redemption price of $10.67 per share, plus accrued and unpaid
dividends, for a total cost of approximately $6.1 million. The redemption cost
included a $0.4 million redemption premium, which was recognized as dividends
and redemption premium applicable to preferred stock in 2001.
Series B Preferred Stock
On April 9, 1998, the Board of Directors of the Company declared a dividend
distribution of one stock purchase right ("Right") for each outstanding share of
common stock to stockholders of record on April 19, 1998. These Rights are
substantially similar to, and were issued in replacement of, rights that expired
on April 19, 1998, pursuant to the Company's Stockholders Rights Plan. Pursuant
to the replacement plan, each Right entitles the holder, upon the occurrence of
certain events, to purchase from the Company one one-hundredth of a share of
Series B Junior Participating Preferred Stock, no par value, at a price of $15,
subject to adjustment. The Rights will not separate from the common stock or
become exercisable until a person or group either acquires beneficial ownership
of 15% or more of the Company's common stock or commences a tender or exchange
offer that would result in ownership of 20% or more, whichever occurs earlier.
The Rights, which expire on April 19, 2008, are redeemable in whole, but not in
part, at the Company's option at any time for a price of $0.01 per Right. At
December 31, 2002 and 2001 there were no Series B Preferred shares outstanding.
Stock Compensation Plans
Series C and F Preferred Stock - On June 12, 2001, the Company exchanged in
non-cash transactions, 1,356,777 shares of the Company's common stock for all
Adjustable Rate Cumulative Class A Preferred Stock, Series C and Series F shares
issued to certain officers of the Company. General and administrative expense in
the accompanying consolidated statements of income includes a non-cash charge of
$1.4 million for the year ended December 31, 2000 for the estimated value of the
preferred shares.
Stock Option Plans - The Company has stock option plans and agreements for
officers, directors and key employees. The options granted under these plans and
agreements generally vest over periods ranging from zero to five years and
expire ten years from date of grant. All options were granted at prices greater
than or equal to the market price at the date of grant or repricing. At December
31, 2002, options on 3,103,014 shares at prices ranging from $.54 to $3.05 were
outstanding, of which 1,749,743 were exercisable at prices ranging from $.54 to
$3.05. At December 31, 2001, options on 3,049,083 shares at prices ranging from
$.54 to $3.05 were outstanding, of which 2,168,083 were exercisable at prices
ranging from $.54 to $3.05. At December 31, 2000, options on 2,198,283 shares at
prices ranging from $1.63 to $6.00 were outstanding, of which 1,007,319 were
exercisable at prices ranging from $1.63 to $5.63.
The changes in stock options outstanding for the Company's plans for the
years 2002, 2001, and 2000 were as follows:
Average Price
Shares per Share
---------- -------------
Outstanding at January 1, 2000......................... 2,066,800 $ 3.42
Granted................................................ 207,840 $ 5.18
Exercised.............................................. (17,494) $ 4.99
Forfeited.............................................. (58,863) $ 4.65
-------------
Outstanding at December 31, 2000....................... 2,198,283 $ 3.54
Granted................................................ 1,016,000 $ 2.67
Exercised.............................................. (165,200) $ 2.89
-------------
Outstanding at December 31, 2001....................... 3,049,083 $ 1.66
Granted................................................ 956,132 $ 2.20
Exercised.............................................. (533,234) $ 1.09
Forfeited.............................................. (368,967) $ 2.71
-------------
Outstanding at December 31, 2002....................... 3,103,014 $ 1.80
=============
There were no stock options which expired during the years ended December
31, 2002, 2001 or 2000.
In connection with the Distribution, the exercise price for each option to
purchase shares of the Company's common stock was reduced to an amount equal to
the result of (1) the fair market value of a share of the Company's common stock
on the ex-dividend date multiplied by (2) a fraction, the numerator of which is
the original exercise price for the option and the denominator of which was the
fair market value of a share of the Company's common stock on the last trading
date prior to the ex-dividend date. The number of shares subject to the
Company's stock options were not changed as a result of the Distribution.
Additionally, KSL agreed to issue to the Company's option holders an option to
purchase KSL shares. The exercise price applicable to a given KSL option was
that price that created the same ratio of exercise price to market price as in
the adjusted exercise price applicable to the holder's Company option. The
number of common shares subject to KSL options was such number as was necessary
to produce an intrinsic value (determined as of the ex-dividend date) that, when
added to the intrinsic value of the adjusted Company option (determined as of
the ex-dividend date), equaled the pre-distribution intrinsic value of the
Company's option, if any, (determined as of the last trading date prior to the
ex-dividend date). However, options to purchase fractional KSL common shares
were not granted. The fair market values of shares of the Company's common stock
and KSL common shares were based upon the closing sales price of the stock on
the last trading date prior to the ex-distribution date and the opening sales
price of the shares on the ex-distribution date. Further, excluding the
Company's corporate staff, the Company removed restrictions on exercise or
"vested" all Company options which were not yet exercisable prior to the
Distribution.
Deferred Stock Unit Plans - In 2002, the Company initiated a Deferred Stock
Unit Plan (the "2002 DSU Plan"), pursuant to which key employees of the Company
have, from time to time, been given the opportunity to defer a portion of their
compensation for a specified period toward the purchase of deferred stock units
("DSUs"), an instrument designed to track the Company's common stock. Under the
2002 DSU Plan, DSUs are purchased at a value equal to the closing price of the
Company's common stock on the day by which the employee must elect (if they so
desire) to participate in the 2002 DSU Plan; which date is established by the
Compensation Committee, from time to time (the "Election Date"). During a
vesting period of one to three years following the Election Date, a
participant's DSUs vest only in an amount equal to the lesser of the
compensation actually deferred to date or the value (based upon the then-current
closing price of the Company's common stock) of the pro-rata portion (as of such
date) of the number of DSUs acquired. After the expiration of the vesting
period, which is typically the same length as the deferral period, the DSUs
become fully vested, but may only be distributed through the issuance of a like
number of shares of the Company's common stock on a pre-selected date, which is
irrevocably selected by the participant on the Election Date and which is
typically at or after the expiration of the vesting period and no later than ten
years after the Election Date, or at the time of a "change of control" of the
Company, if earlier. DSU accounts are unfunded by the Company. Each person that
elects to participate in the 2002 DSU Plan is awarded, under the Company's stock
incentive plan, an option to purchase a number of shares of the Company's common
stock ranging from one-half to one and one-half times (depending on the length
of deferral) the number of DSUs purchased by such person at 100% of the closing
price of the Company's common stock on the Election Date, which options become
exercisable over a specified period after the grant, according to a schedule
determined by the Compensation Committee. At December 31, 2002, no DSUs had
vested under the 2002 DSU Plan.
In 1996, the Company initiated a Deferred Stock Unit plan (the "1996 DSU
Plan") with terms and conditions similar to the 2002 DSU Plan. In connection
with the Distribution, KSL agreed to issue to all DSU holders the number of DSUs
equivalent in price to KSL shares issuable in the Distribution. All other terms
remained unchanged. Similarly, the Company agreed to issue to employees of KSL
who hold DSUs, the number of shares of the Company's common stock subject to the
DSUs held by those employees. At December 31, 2002, approximately 500,000 shares
of the Company's common stock were issuable to employees of the Company and KSL
employees under this arrangement and the terms of the 1996 DSU Plan.
7. EARNINGS PER SHARE
The following is a reconciliation of basic and diluted earnings per share
("EPS") from continuing operations before cumulative effect of change in
accounting principle:
Weighted
Average
Net Common Per-Share
Income (loss) Shares Amount
--------------- -------------- --------------
Year Ended December 31, 2002
Basic EPS -
Income (loss) from continuing
operations applicable to common
stock before cumulative effect of
change in accounting principle....... $ (2,242,000) 32,747,000 $ (0.07)
==============
Effect of dilutive securities............. - -
--------------- --------------
Diluted EPS -
Income (loss) from continuing
operations applicable to common
stock, before cumulative effect
of change in accounting principle.... $ (2,242,000) 32,747,000 $ (0.07)
=============== ============== ==============
Year Ended December 31, 2001
Income from continuing operations......... $ 22,388,000
Dividends and redemption premium
applicable to preferred stock.......... (493,000)
---------------
Basic EPS -
Income applicable to common stock...... 21,895,000 32,503,000 $ 0.68
==============
Effect of dilutive securities -
Common stock options, Series F
Preferred Stock and DSUs............. - 1,631,000
--------------- --------------
Diluted EPS -
Income applicable to common stock,
Series F Preferred stock, DSUs
and assumed options exercised........ $ 21,895,000 34,134,000 $ 0.64
=============== ============== ==============
Year Ended December 31, 2000
Income from continuing operations......... $ 6,783,000
Dividend applicable to preferred stock.... (479,000)
---------------
Basic EPS -
Income applicable to common stock...... 6,304,000 31,767,000 $ 0.20
==============
Effect of dilutive securities -
Common stock options, Series F
Preferred Stock and DSUs............. - 1,319,000
--------------- --------------
Diluted EPS -
Income applicable to common stock,
Series F Preferred stock, DSUs
and assumed options exercised........ $ 6,304,000 33,086,000 $ 0.19
=============== ============== ==============
As a result of the losses from continuing operations applicable to common
stock for 2002, all stock options (3,013,014 options, at a weighted average
price of $1.80) were excluded from the computation of diluted earnings per share
because the effects would be anti-dilutive. Options to purchase 959,000 and
284,597 shares of common stock at weighted average prices of $2.71 and $5.40
were outstanding at December 31, 2001 and 2000, respectively, but were not
included in the computation of diluted EPS because the options' exercise price
was greater than the average market price of the common stock. Additionally, the
Company's 8.75% convertible subordinated debentures were excluded from the
computation of diluted EPS because the effect of assumed conversion is
anti-dilutive.
8. COMMITMENTS AND CONTINGENCIES
The Company leases vehicles, office space, office equipment and other items
of personal property under leases expiring at various dates. Management expects
that, in the normal course of business, leases that expire will be renewed or
replaced by other leases. Total rent expense incurred under operating leases
attributable to continuing operations was $3.9 million for 2002, $3.6 million
for 2001, and $3.2 million for 2000.
At December 31, 2002, future minimum rental commitments attributable under
all capital leases and operating leases are as follows:
Capital Operating
Leases Leases
-------------- --------------
2003..................................................... $ 748,000 $ 3,178,000
2004..................................................... 551,000 2,666,000
2005..................................................... 370,000 1,779,000
2006 .................................................... 291,000 1,289,000
2007..................................................... 200,000 545,000
Thereafter............................................... - 1,459,000
-------------- --------------
Total minimum lease payments............................. 2,160,000 $ 10,916,000
==============
Less amounts representing interest....................... 230,000
--------------
Present value of net minimum lease payments.............. $ 1,930,000
==============
The Company was the Plaintiff in a legal proceeding involving malpractice
issues with a professional service provider previously used by the Company. This
matter was settled in December 2001 with a payment to the Company which, net of
expenses, totaled $6.0 million and is included in other income (expense) for the
year ended December 31, 2001.
The Company has contingent liabilities resulting from litigation, claims
and commitments incident to the ordinary course of business. Management
believes, based on the advice of counsel, that the ultimate resolution of such
contingencies will not have a materially adverse effect on the financial
position or results of operations of the Company.
9. BUSINESS SEGMENT DATA
The Company provides technical services to an international client base
that includes refineries, chemical plants, pipelines, offshore drilling and
production platforms, steel mills, food and drink processing facilities, power
generation, and other process industries. Additionally, the Company's
information technology services segment provides consulting services, hardware
sales and other related information management and processing services to
governmental, insurance and financial institutions. General corporate includes
compensation and benefits paid to officers and employees of the Company,
insurance premiums, general and administrative costs, tax and financial
reporting costs, legal and audit fees not reasonably allocable to specific
business segments. General corporate assets include cash, deferred taxes and
other assets not related to its segments.
The Company measures segment profit as operating income. Total assets are
those assets, including excess of cost over fair value of net assets of acquired
businesses, controlled by each reportable segment.
Year Ended December 31,
---------------------------------------------------
2002 2001 2000
--------------- -------------- --------------
Business segment revenues:
Technical services.......................... $ 90,747,000 $ 96,321,000 $ 92,142,000
Information technology services............. 40,689,000 48,383,000 35,499,000
--------------- -------------- --------------
$ 131,436,000 $ 144,704,000 $ 127,641,000
=============== ============== ==============
Technical services segment revenues:
Under pressure services..................... $ 41,192,000 $ 39,903,000 $ 38,652,000
Turnaround services......................... 41,949,000 48,301,000 44,283,000
Other services.............................. 7,606,000 8,117,000 9,207,000
--------------- -------------- --------------
$ 90,747,000 $ 96,321,000 $ 92,142,000
=============== ============== ==============
Business segment profit (loss):
Technical services ......................... $ 3,580,000 $ 5,581,000 $ 6,320,000
Information technology services............. (3,796,000) 3,651,000 4,134,000
General corporate........................... (3,991,000) (3,803,000) (6,352,000)
--------------- -------------- --------------
Operating income (loss)................... (4,207,000) 5,429,000 4,102,000
Interest income............................. 460,000 665,000 909,000
Other income (expense)...................... - 6,741,000 (239,000)
Interest expense............................ (1,764,000) (3,486,000) (3,883,000)
--------------- -------------- --------------
Income (loss) from continuing operations
before income taxes and cumulative
effect of change in accounting principle.. $ (5,511,000) $ 9,349,000 $ 889,000
=============== ============== ==============
Business segment assets:
Depreciation and amortization:
Technical services........................ $ 2,540,000 $ 4,514,000 $ 4,585,000
Information technology services........... 1,125,000 694,000 512,000
--------------- -------------- --------------
$ 3,665,000 $ 5,208,000 $ 5,097,000
=============== ============== ==============
Capital expenditures (excluding acquisitions):
Technical services........................ $ 2,912,000 $ 3,331,000 $ 2,160,000
Information technology services........... 2,592,000 1,294,000 530,000
--------------- -------------- --------------
$ 5,504,000 $ 4,625,000 $ 2,690,000
=============== ============== ==============
December 31,
---------------------------------------------------
2002 2001 2000
--------------- -------------- --------------
Total assets:
Technical services........................ $ 63,319,000 $ 102,147,000 $ 103,817,000
Information technology services........... 26,956,000 30,877,000 20,086,000
General corporate......................... 37,372,000 53,195,000 60,918,000
Discontinued operations, net.............. - - 41,822,000
--------------- -------------- --------------
$ 127,647,000 $ 186,219,000 $ 226,643,000
=============== ============== ==============
The following geographical area data includes revenues and operating income
(loss) based on location of the operating segment and net property and equipment
based on physical location:
Year Ended December 31,
---------------------------------------------------
2002 2001 2000
--------------- -------------- --------------
Geographical area revenues:
United States............................ $ 66,888,000 $ 84,171,000 $ 67,242,000
Europe................................... 53,187,000 48,554,000 50,446,000
Asia-Pacific............................. 11,361,000 11,979,000 9,953,000
--------------- -------------- --------------
$ 131,436,000 $ 144,704,000 $ 127,641,000
=============== ============== ==============
Geographical area operating income (loss):
United States............................ $ (11,204,000) $ (2,461,000) $ (3,757,000)
Europe................................... 5,990,000 7,011,000 6,997,000
Asia-Pacific............................. 1,007,000 879,000 862,000
--------------- -------------- --------------
$ (4,207,000) $ 5,429,000 $ 4,102,000
=============== ============== ==============
December 31,
---------------------------------------------------
2002 2001 2000
--------------- -------------- --------------
Geographical area net property and equipment:
United States............................ $ 7,269,000 $ 5,346,000 $ 3,099,000
Europe................................... 5,652,000 5,110,000 6,506,000
Asia-Pacific............................. 1,034,000 930,000 937,000
--------------- -------------- --------------
$ 13,955,000 $ 11,386,000 $ 10,542,000
=============== ============== ==============
10. DISCONTINUED OPERATIONS - BUSINESSES DISTRIBUTED TO COMMON SHAREHOLDERS
The results of operations for the pipeline, terminaling and product
marketing businesses are reflected in the accompanying consolidated statements
of income as "Discontinued operations - businesses distributed to common
shareholders" (See Note 1). Prior to the Distribution, KSL held the 2% general
partner interest and a 25% limited partner interest in Kaneb Pipe Line Partners,
L.P. ("KPP") and the Company's previously wholly-owned petroleum marketing
subsidiary. A summary of operating results of discontinued operations for the
years ended December 31, 2001 (through date of Distribution on June 29, 2001)
and 2000 is presented below:
Year Ended December 31,
--------------------------------------------
2001 2000
--------------- ----------------
Revenues:
Pipeline and terminaling.................. $ 101,021,000 $ 156,232,000
Product marketing business................ 187,231,000 381,186,000
--------------- ----------------
$ 288,252,000 $ 537,418,000
=============== ================
Operating profit:
Pipeline and terminaling.................. $ 39,896,000 $ 58,104,000
Product marketing business................ (264,000) 2,472,000
Distribution expenses..................... (1,923,000) -
--------------- ----------------
$ 37,709,000 $ 60,576,000
=============== ================
Income before income taxes and interest
of outside non-controlling partners in
KPP's net income and extraordinary item... $ 32,653,000 $ 48,688,000
Income taxes................................ (3,090,000) (5,609,000)
Extraordinary loss on KPP debt
extinguishment, net of income taxes
and interest of outside non-controlling
partners in KPP's net income.............. (859,000) -
Interest of outside non-controlling partners
in KPP's net income....................... (25,367,000) (32,693,000)
--------------- ----------------
Income from discontinued operations,
net of income taxes....................... $ 3,337,000 $ 10,386,000
=============== ================
On January 3, 2001, KPP, through a wholly-owned subsidiary, acquired Shore
Terminals LLC ("Shore") for $107 million in cash and 1,975,090 KPP limited
partnership units (valued at $56.5 million on the date of agreement and its
announcement). Financing for the cash portion of the purchase price was supplied
under KPP's $275 million unsecured revolving credit agreement with a group of
banks. The acquisition has been accounted for using the purchase method of
accounting. As a result of KPP issuing additional units to unrelated parties,
the Company's pro-rata share of net assets of KPP increased by $9.9 million.
Accordingly, the Company recorded a $9.9 million increase in additional paid-in
capital, before deferred income taxes of $3.8 million, in 2001.
In March of 2001, a wholly-owned subsidiary of KPP entered into two
contracts for the purpose of locking in interest rates on $100 million of
anticipated ten-year public debt offerings. As the interest rate locks were not
designated as hedging instruments pursuant to the requirements of SFAS No. 133,
increases or decreases in the fair value of the contracts are recognized by KPP
in results of operations on a current basis. On May 22, 2001, the contracts were
settled resulting in an aggregate gain to KPP of $3.8 million.
11. ACCRUED EXPENSES
Accrued expenses are comprised of the following components:
December 31,
---------------------------------
2002 2001
-------------- --------------
Accrued compensation and benefits............................. $ 8,694,000 $ 4,393,000
Accrued taxes other than income............................... 582,000 409,000
Accrued interest.............................................. 456,000 1,014,000
Other accrued expenses........................................ 11,687,000 7,343,000
-------------- --------------
$ 21,419,000 $ 13,159,000
============== ==============
12. FAIR VALUE OF FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
The estimated fair value of cash equivalents, accounts receivable and
accounts payable approximate their carrying amounts due to the relatively short
period to maturity of these instruments. The estimated fair value of all debt
(excluding capital leases) as of December 31, 2002 and 2001 was approximately
$27 million and $37 million as compared to the carrying value of $27 million and
$39 million, respectively. These fair values were estimated using discounted
cash flow analysis, based on the Company's current incremental borrowing rates
for similar types of borrowing arrangements, when quoted market prices were not
available. The Company has not determined the fair value of its capital leases
as it is not practicable. The estimates presented above are not necessarily
indicative of the amounts that would be realized in a current market exchange.
The Company has no derivative financial instruments.
The technical services segment provides services to an international client
base that includes petroleum refineries, chemical plants, offshore energy
production platforms, steel mills, nuclear power stations, conventional power
stations, pulp and paper mills, food and beverage processing plants and other
flow-process facilities. The information technology services segment provides
services and related products to the U. S. Government and commercial sectors. A
substantial portion of the revenues from the information technology segment is
attributable to contracts with agencies of the U. S. Government. The Company
does not believe that it has a significant concentration of credit risk at
December 31, 2002, as the Company's accounts receivable are generated from these
distinct business segments with customers located throughout the United States,
Europe and Asia-Pacific.
13. QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly operating results for 2002 and 2001 are summarized as follows:
Quarter Ended
----------------------------------------------------------------------
March 31, June 30, September 30, December 31,
-------------- -------------- -------------- --------------
2002:
Revenues.......................... $ 28,168 $ 32,413 $ 31,884 $ 38,971
============== ============== ============== ==============
Operating income (loss)........... $ (1,396) $ (1,155) $ (1,244) $ (412)
============== ============== ============== ==============
Net income (loss) before
cumulative effect of change
in accounting principle......... $ (914) $ (573) $ (431) $ (324)
Cumulative effect of change
in accounting principle, net
of income taxes (a)............. (45,269) - - -
-------------- -------------- -------------- --------------
Net income (loss)................. $ (46,183) $ (573) $ (431) $ (324)
============== ============== ============== ==============
Earnings (loss) per common share:
Basic:
Before cumulative effect
of change in accounting
principle.................. $ (0.03) $ (0.02) $ (0.01) $ (0.01)
Cumulative effect of change
in accounting principle (a) (1.36) - - -
-------------- -------------- -------------- --------------
Total.................... $ (1.39) $ (0.02) $ (0.01) $ (0.01)
============== ============== ============== ==============
Diluted:
Before cumulative effect
of change in accounting
principle.................. $ (0.03) $ (0.02) $ (0.01) $ (0.01)
Cumulative effect of change
in accounting principle (a) (1.36) - - -
-------------- -------------- -------------- --------------
Total.................... $ (1.39) $ (0.02) $ (0.01) $ (0.01)
============== ============== ============== ==============
2001:
Revenues.......................... $ 35,892,000 $ 38,724,000 $ 34,935,000 $ 35,153,000
============== ============== ============== ==============
Operating income.................. $ 1,524,000 $ 1,388,000 $ 1,585,000 $ 932,000
============== ============== ============== ==============
Net income (loss):
Continuing operations........... $ 373,000 $ 685,000 $ 1,229,000 $ 20,101,000(b)
Discontinued operations......... 657,000 2,766,000 - (86,000)
-------------- -------------- -------------- --------------
Total......................... $ 1,030,000 $ 3,451,000 $ 1,229,000 $ 20,015,000
============== ============== ============== ==============
Earnings per common share:
Basic:
Continuing operations......... $ - $ 0.02 $ 0.04 $ 0.60
Discontinued operations....... 0.02 0.09 - -
-------------- -------------- -------------- --------------
Total...................... $ 0.02 $ 0.11 $ 0.04 $ 0.60
============== ============== ============== ==============
Diluted:
Continuing operations......... $ - $ 0.02 $ 0.04 $ 0.59
Discontinued operations....... 0.02 0.08 - -
-------------- ------------- -------------- --------------
Total...................... $ 0.02 $ 0.10 $ 0.04 $ 0.59
============== ============= ============== ==============
(a) See Note 1 regarding cumulative effect of change in accounting
principle resulting from adoption of new accounting standard for
goodwill.
(b) See Note 2 regarding income tax benefits resulting from the
recapitalization of a foreign subsidiary ($18.1 million).
Schedule I
XANSER CORPORATION (PARENT COMPANY)
CONDENSED STATEMENTS OF INCOME
Year Ended December 31,
-----------------------------------------------------
2002 2001 2000
------------- ------------- --------------
General and administrative expenses..................... $ (3,991,000) $ (3,803,000) $ (6,352,000)
Interest expense........................................ (991,000) (2,270,000) (2,242,000)
Intercompany fees and expenses.......................... 1,145,000 2,446,000 2,915,000
Interest and other income, net.......................... 360,000 7,254,000 804,000
Equity in income (loss) of subsidiaries................. (3,114,000) 4,112,000 9,648,000
------------- ------------- --------------
Income (loss) from continuing operations
before income taxes and cumulative effect
of change in accounting principle.................... (6,591,000) 7,739,000 4,773,000
Income tax benefit...................................... 4,349,000 14,649,000 2,010,000
------------- ------------- --------------
Income (loss) from continuing operations before
cumulative effect of change in accounting principle.. (2,242,000) 22,388,000 6,783,000
Cumulative effect of change in accounting principle -
adoption of new accounting standard for
goodwill, net of income taxes........................ (45,269,000) - -
------------- ------------- --------------
Income (loss) from continuing operations................ (47,511,000) 22,388,000 6,783,000
Income from discontinued operations - businesses
distributed to common shareholders, net of
income taxes......................................... - 3,337,000 10,386,000
------------- ------------- --------------
Net income (loss)....................................... (47,511,000) 25,725,000 17,169,000
Dividends and redemption premium applicable
to preferred stock................................... - 493,000 479,000
------------- ------------- --------------
Net income (loss) applicable to common stock........... $ (47,511,000) $ 25,232,000 $ 16,690,000
============= ============= ==============
Earnings (loss) per common share:
Basic:
Continuing operations:
Before cumulative effect of change in
accounting principle.......................... $ (0.07) $ 0.68 $ 0.20
Cumulative effect of change in accounting
principle..................................... (1.38) - -
------------- ------------- --------------
(1.45) 0.68 0.20
Discontinued operations........................... - 0.10 0.33
------------- ------------- --------------
$ (1.45) $ 0.78 $ 0.53
============= ============= ==============
Diluted:
Continuing operations:
Before cumulative effect of change in
accounting principle.......................... $ (0.07) $ 0.64 $ 0.19
Cumulative effect of change in accounting
principle..................................... (1.38) - -
------------- ------------- --------------
(1.45) 0.64 0.19
Discontinued operations........................... - 0.10 0.31
------------- ------------- --------------
$ (1.45) $ 0.74 $ 0.50
============= ============= ==============
See "Notes to Consolidated Financial Statements"
of Xanser Corporation and Subsidiaries included in this report.
F - 27
Schedule I
(Continued)
XANSER CORPORATION (PARENT COMPANY)
CONDENSED BALANCE SHEETS
December 31,
--------------------------------------
2002 2001
--------------- ---------------
ASSETS
Current assets:
Cash and cash equivalents............................................ $ 17,432,000 $ 23,353,000
Receivable from businesses distributed to common shareholders........ 7,412,000 17,904,000
Current deferred income tax assets................................... 253,000 2,300,000
Prepaid expenses and other........................................... 561,000 2,807,000
--------------- ---------------
Total current assets............................................... 25,658,000 46,364,000
--------------- ---------------
Property and equipment.................................................. 3,848,000 3,848,000
Less accumulated depreciation and amortization.......................... 3,848,000 3,848,000
--------------- ---------------
Net property and equipment......................................... - -
--------------- ---------------
Investments in, advances to and notes receivable
from subsidiaries..................................................... 50,939,000 97,444,000
Deferred income tax and other assets.................................... 11,714,000 6,831,000
--------------- ---------------
$ 88,311,000 $ 150,639,000
=============== ===============
LIABILITIES AND EQUITY
Current liabilities:
Current portion of long-term debt.................................... $ - $ 1,466,000
Accounts payable and accrued expenses................................ 11,054,000 13,472,000
--------------- ---------------
Total current liabilities.......................................... 11,054,000 14,938,000
--------------- ---------------
Long-term debt, less current portion.................................... 9,930,000 19,930,000
Deferred income taxes and other liabilities............................. 5,778,000 265,000
Stockholders' equity:
Common stock, without par value...................................... 4,333,000 4,270,000
Additional paid-in capital........................................... 126,675,000 128,744,000
Treasury stock, at cost.............................................. (26,390,000) (23,423,000)
Retained earnings (accumulated deficit).............................. (35,590,000) 11,921,000
Accumulated comprehensive income (loss).............................. (7,479,000) (6,006,000)
---------------- ---------------
Total stockholders' equity....................................... 61,549,000 115,506,000
--------------- ---------------
$ 88,311,000 $ 150,639,000
=============== ===============
See "Notes to Consolidated Financial Statements"
of Xanser Corporation and Subsidiaries included in this report.
F - 28
Schedule I
(Continued)
XANSER CORPORATION (PARENT COMPANY)
CONDENSED STATEMENTS OF CASH FLOWS
Year Ended December 31,
-----------------------------------------------------------
2002 2001 2000
----------------- ---------------- ------------------
Operating activities:
Income (loss) from continuing operations.......... $ (47,511,000) $ 22,388,000 $ 6,783,000
Adjustments to reconcile income from
continuing operations to net cash used in
operating activities:
Equity in loss (income) of subsidiaries....... 3,114,000 (4,112,000) (9,648,000)
Deferred income taxes......................... 181,000 (21,032,000) (1,223,000)
Cumulative effect of change in accounting
principle................................... 45,269,000 - -
Other, net.................................... 648,000 - -
Increase in the estimated redemption value of
preferred stock............................. - - 1,387,000
Changes in current assets and liabilities:
Prepaid expenses and other current assets... 2,246,000 121,000 (1,694,000)
Accounts payable and accrued expenses ...... (4,672,000) 1,250,000 141,000
----------------- ---------------- ------------------
Net cash used in operating activities....... (725,000) (1,385,000) (4,254,000)
----------------- ---------------- ------------------
Investing activities:
Change in other assets, net....................... 1,883,000 (507,000) (2,092,000)
----------------- ---------------- ------------------
Net cash provided by (used in)
investing activities...................... 1,883,000 (507,000) (2,092,000)
----------------- ---------------- ------------------
Financing activities:
Payments on debt.................................. (11,466,000) - (2,270,000)
Change in investments in, advances to and notes
receivable from subsidiaries.................... (3,269,000) 345,000 2,655,000
Common stock issued............................... 450,000 545,000 255,000
Purchase of treasury stock........................ (3,286,000) - (1,530,000)
Preferred stock dividends and redemption
premium paid.................................... - (493,000) (479,000)
Redemption of preferred stock..................... - (5,676,000) -
Decrease in receivable from businesses
distributed to common shareholders.............. 10,492,000 14,076,000 -
Change in net assets of discontinued operations... - 2,495,000 11,928,000
----------------- ---------------- ------------------
Net cash provided by (used in)
financing activities...................... (7,079,000) 11,292,000 10,559,000
----------------- ---------------- ------------------
Increase (decrease) in cash and cash equivalents..... (5,921,000) 9,400,000 4,213,000
Cash and cash equivalents at beginning of year....... 23,353,000 13,953,000 9,740,000
----------------- ---------------- ------------------
Cash and cash equivalents at end of year............. $ 17,432,000 $ 23,353,000 $ 13,953,000
================= ================ ==================
See "Notes to Consolidated Financial Statements"
of Xanser Corporation and Subsidiaries included in this report.
F - 29
Schedule II
XANSER CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Additions
------------------------------
Balance at Charged to Charged to Balance at
Beginning of Costs and Other End of
Descriptions Period Expenses Accounts Deductions Period
- --------------------------------------- ------------ ------------ ------------- -------------- -----------
ALLOWANCE DEDUCTED FROM
ASSETS TO WHICH THEY APPLY
Year Ended December 31, 2002:
For doubtful receivables
classified as current assets... $ 1,034 $ 719 $ 33 (a) $ (286)(b)$ 1,500
=========== ============= =========== ============= ===========
Year Ended December 31, 2001:
For doubtful receivables
classified as current assets... $ 605 $ 485 $ (9)(a) $ (47)(b)$ 1,034
=========== ============= =========== ============= ===========
Year Ended December 31, 2000:
For doubtful receivables
classified as current assets... $ 999 $ 92 $ (10)(a) $ (476)(b)$ 605
=========== ============= =========== ============= ===========
For deferred tax asset valuation
allowance classified as
noncurrent assets.............. $ 7,204 $ - $ - $ (7,204) $ -
=========== ============= =========== ============= ===========
Notes:
(a) Foreign currency translation adjustments.
(b) Receivable write-offs and reclassifications, net of recoveries.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, Xanser Corporation has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
XANSER CORPORATION
By: //s// JOHN R. BARNES
-----------------------------------
President and Chief Executive Officer
Date: March 28, 2003
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of Xanser
Corporation and in the capacities and on the date indicated.
Signature Title Date
Principal Executive Officer
//s// JOHN R. BARNES President, Chief Executive March 28, 2003
- ---------------------------------------- Officer and Director
Principal Accounting Officer
//s// MICHAEL R. BAKKE Controller March 28, 2003
- ----------------------------------------
Directors
//s// SANGWOO AHN Director March 28, 2003
- ----------------------------------------
//s// JOHN R. BARNES Director March 28, 2003
- ---------------------------------------
//s// FRANK M. BURKE, JR. Director March 28, 2003
- ----------------------------------------
//s// CHARLES R. COX Director March 28, 2003
- ----------------------------------------
//s// HANS KESSLER Director March 28, 2003
- ----------------------------------------
//s// JAMES R. WHATLEY Director March 28, 2003
- ----------------------------------------
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, John R. Barnes, Chief Executive Officer of Xanser Corporation certify that:
1. I have reviewed this annual report on Form 10-K of Xanser Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 28, 2003
//s// JOHN R. BARNES
-------------------------------------
John R. Barnes
President and Chief Executive Officer
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Howard C. Wadsworth, Chief Financial Officer of Xanser Corporation certify
that:
1. I have reviewed this annual report on Form 10-K of Xanser Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 28, 2003
//s// HOWARD C. WADSWORTH
---------------------------------------
Howard C. Wadsworth
Vice President, Treasurer and Secretary
(Chief Financial Officer)