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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, 2004
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
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(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (972) 699-4000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
- ------------------------------- -----------------------------------------
Common Stock, Without Par Value New York Stock Exchange
8 3/4% Convertible Subordinated New York Stock Exchange
Debentures due 2008
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--------- ---------
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Subsection 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K.
Yes X No
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Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes No X
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Aggregate market value of the voting stock held by non-affiliates of the
registrant: $74,485,914. This figure is estimated as of June 30, 2004, at which
date the closing price of the registrant's Common Stock on the New York Stock
Exchange was $2.46 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, 2005: 31,696,881.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III (Items 10, 11, 12, 13 and 14) of Form
10-K is incorporated by reference from portions of the Registrant's definitive
proxy statement to be filed with the Securities and Exchange Commission not
later than 120 days after the close of the fiscal year covered by this Report.
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PART I
Item 1. Business
GENERAL
Xanser Corporation ("Xanser" or the "Company") conducts its principal
businesses in two industry segments, technical services and information
technology services. The technical services and information technology services
segments operate through subsidiaries of Furmanite Worldwide, Inc. and Xtria
LLC, respectively. Furmanite Worldwide, Inc., and its domestic and international
subsidiaries and affiliates (collectively, "Furmanite"), provide specialized
technical services, including leak sealing under pressure, on-site machining,
valve testing and repair and other engineering products and services, primarily
to electric power generating plants, petroleum refineries and other process
industries in the United Kingdom, Continental Europe, North America, Latin
America and Asia-Pacific. For additional information see "Technical Services."
Xtria LLC ("Xtria") is engaged in the information technology services industry
and offers products and services that include hardware design and
implementation, web hosted data processing, networking, consulting and other
support services to the healthcare, finance and insurance industries, and to
agencies of the state and federal governments. Xtria also provides claims
administration support and automated document control. For additional
information see "Information Technology Services."
On November 27, 2000, the Board of Directors of the Company authorized the
distribution of its pipeline, terminaling and product marketing businesses (the
"Distribution") to its stockholders in the form of a new limited liability
company, Kaneb Services LLC ("KSL"). On June 29, 2001, the Distribution was
completed, with each shareholder of the Company receiving one common share of
KSL for each three shares of the Company's common stock held on June 20, 2001,
the record date for the Distribution, resulting in the distribution of 10.85
million KSL common shares.
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, 2004, Furmanite's revenues and
operating income were approximately $118.4 million and $7.9 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, 2004, 2003 and
2002, under pressure services represented approximately 43%, 42% and 46%,
respectively, of Furmanite's revenues, while turnaround services accounted for
approximately 47%, 48% and 46%, respectively, and product sales and other
industrial services represented approximately 10%, 10% and 8%, respectively, of
Furmanite's revenues for each of such years.
Furmanite's on-line, leak sealing under pressure services are performed on
a variety of flow-process industry machinery, often in difficult situations.
Many of Furmanite's techniques and materials are proprietary and some are
patented and, the Company believes, they provide Furmanite with a competitive
advantage over other organizations that provide similar services. Furmanite
holds approximately 200 patents and trademarks for its techniques, products and
materials. These patents, which are registered in jurisdictions around the
world, expire on dates ranging from May 2005 to December 2012. Furmanite's
skilled technicians work with equipment in a manner designed to enhance safety
and efficiency in temperature environments ranging from cryogenic to 1,400
degrees Fahrenheit and pressure environments ranging from vacuum to 5,000 pounds
per square inch. In many circumstances, Furmanite personnel are called upon to
custom-design tools, equipment or other materials to effect the necessary
repairs. These efforts are supported by an internal quality control group that
works with the on-site technicians in crafting these materials.
Customers and Markets
Furmanite's customer base includes petroleum refineries, chemical plants,
offshore energy production platforms, steel mills, nuclear power stations,
conventional power stations, pulp and paper mills, food and beverage processing
plants and other flow-process facilities in more than 25 countries. Over 80% of
Furmanite's revenues are derived from fossil and nuclear fuel power generation
companies, petroleum refiners and chemical producers, while other significant
markets include offshore oil producers and steel manufacturers. As the worldwide
industrial infrastructure continues to age, additional repair and maintenance
expenditures are expected to be required for the specialized services provided
by Furmanite. Other factors that may influence the markets served by Furmanite
include regulations governing construction of industrial plants, and safety and
environmental compliance requirements. No single customer accounted for more
than 10% of this segment's consolidated revenue during any of the past three
fiscal years.
Furmanite believes that it is the most recognized brand in its industry.
With its 75-year history, Furmanite's customer relationships are long-term and
worldwide. Furmanite serves its customers from its Richardson, Texas worldwide
headquarters and maintains a substantial presence in the United Kingdom,
Continental Europe and Asia-Pacific. Furmanite currently operates North American
offices in the United States in Baton Rouge, Louisiana; Beaumont, Texas;
Charlotte, North Carolina; Houston, Texas; Los Angeles, California;
Merrillville, Indiana and Salt Lake City, Utah. Furmanite's worldwide operations
are further supported by offices currently located in Australia, Belgium,
France, Germany, Hong Kong, Malaysia, the Netherlands, New Zealand, Norway,
Singapore and the United Kingdom and by licensee and agency 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 2004 were 23% for the United States, 62% for Europe and
15% for Asia-Pacific. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Note 9 to the Company's consolidated
financial statements.
Furmanite's leak sealing under pressure and other specialty field services
are marketed primarily through direct sales calls on customers by salesmen and
technicians based at Furmanite's various operating locations, which are situated
to facilitate timely customer response, 24 hours a day, seven days a week.
Customers are usually billed on a time and materials basis for services
typically performed pursuant to either job quotation sheets or purchase orders
issued under written customer agreements. Customer agreements are generally
short-term in duration and specify the range of and rates for the services to be
performed. Furmanite typically provides various limited warranties, depending
upon the services furnished, and has had no material warranty costs during the
three years ended December 31, 2004. 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 is an information technology services provider for the healthcare,
risk management and government markets through focused offerings of solutions,
services and systems. In the healthcare market, Xtria provides managed service
solutions for the implementation and management of picture archiving and
communications systems. In the risk management market, Xtria provides risk
management information systems that enable clients to mitigate risk and increase
profitability through improved decision support and active risk management. For
agencies of the federal, state and local government, Xtria provides information
technology and program services. With established intellectual capital and
product knowledge, Xtria's market-focused operations have many years of
experience and a track record of success in the healthcare, financial services,
insurance and government markets. For the year ended December 31, 2004, the
information services segment's revenues and operating income were $27.3 million
and $0.3 million, respectively. See "Management's Discussion and Analysis of
Financial Conditions and Results of Operations". Xtria is headquartered in
Richardson, Texas, and maintains offices in Bryan, Texas; McLean, Virginia; and
Frederick, Maryland.
Healthcare Services
Xtria facilitates healthcare organizations conversion from diagnostic film
images to digital radiology imaging systems, known as Picture Archival and
Communication Systems ("PACS"). PACS are used in connection with digitally
recorded diagnostic images, such as magnetic resonance imaging, computer
tomography scans, ultrasounds and digital x-rays, among others. The integrated
PACS communication network enables physicians to share studies and results
electronically while the digital imaging technologies are expected to increase
the throughput of imaging studies. The system also allows information to be
shared between facilities, including international locations, through secure
web-based and dedicated wide area connections. Beyond the benefits to patients
and medical staff, the system reduces the costs associated with traditional,
film-based radiology imaging, which requires processing, storing and
distributing images in film libraries.
Xtria's PACS implementation service provides evaluation of the healthcare
organization's PACS readiness, including a technology assessment, workflow
analysis, cost analysis and information systems integration plan, development of
a Request For Proposal tailored to the specific needs of the organization,
evaluation of vendor submissions and recommendations on technical compliance and
pricing, analysis of the top vendors, participation in on-site vendor
presentations, and negotiation of final vendor contracts. Upon completion of the
installation, Xtria's PACS implementation system continues to provide assistance
by development of a comprehensive transition plan incorporating the digital
imaging goals, project timelines and specific milestones necessary to ensure a
smooth transition to a digital environment for the healthcare organization.
Xtria also provides post-installation system support and testing by its staff of
engineers, physicists, and technicians to ensure the system is ready for
clinical use and meets the design specifications. Additionally, Xtria provides
on-going operational management to ensure peak performance of the PACS.
Financial and Insurance Services
Xtria's financial and insurance group provides risk management information
solutions and services for financial services and insurance companies. Xtria
helps clients mitigate risk and increase profitability through improved decision
support and active risk management. The Company's risk management solutions
include lien tracking and notification services, automated document control, and
federal and state delinquent payer compliance reporting. As part of its
services, Xtria monitors, on behalf of its customers, the status of insurance
coverage on automobiles and homes pledged as loan collateral. Xtria believes
that the market for these applications is fragmented among a number of small
competitors and that competition in this market is primarily based upon the
quality of the services provided.
Xtria also provides claims administration services, utilizing its industry
expertise, technical infrastructure, and process management capabilities to meet
the client's claims administration needs by tracking damaged collateral, issuing
settlement checks directly to the insured lender, obtaining salvage bids,
processing title transfers and providing loss reports. Xtria utilizes the
Tickler(TM) Tracking System to automate document control and manage risk
exposure from missing, expired or improper loan documentation. Sensitive
documents, such as UCC-1s, hazard insurance, title insurance, tax receipts,
financial statements, cash flow reports, letters of credit, stock values and CDs
can be regularly reviewed and tracked by the Tickler(TM) Tracking System.
Government Services
Xtria's government services division provides information and technical
solutions that help organizations and agencies of the government become more
efficient and competitive by leveraging Web-based technologies in the areas of
business services, program services and information systems services.
Xtria's business services include a full range of services to support early
childhood education research studies and services, training and technical
assistance, conference management, grant review services, Web development and
graphic design. Their program services provide comprehensive information and
technical solutions focusing on educational development, early childhood
development, child welfare, adoption, foster care and child support programs.
Xtria's knowledge of social services programs helps clients better understand
and meet the needs of children and families and evaluate the effectiveness of
programs deployed. Xtria's program services also include research and
evaluation, survey development, data collection, primary and secondary data
analysis, report preparation, training, technical assistance and support for
fulfilling federal reporting requirements. Xtria's team of experts ensure
information is complete, accurate and timely, to facilitate use of this
information for critical funding decisions, policy formations and program
oversight and improvements. The information systems services provide
comprehensive information and technical solutions that help organizations and
agencies of the government become more efficient and competitive by leveraging
the latest technologies in Web-based applications and data infrastructure.
Information systems services provide comprehensive solutions that range from
analysis and implementation to technical support and maintenance.
ENVIRONMENTAL MATTERS
Many of the Company's operations are subject to federal, state and local
laws and regulations relating to protection of the environment. Although the
Company believes that its operations generally are in compliance with applicable
environmental regulation, risks of additional costs and liabilities are inherent
in its operations, and there can be no assurance that significant costs and
liabilities will not be incurred by the Company. Moreover, it is possible that
other developments, such as increasingly stringent environmental laws,
regulations, enforcement policies thereunder, and claims for damages to property
or persons resulting from the operations of the Company could result in
substantial costs and liabilities. See "Technical Services - Safety,
Environmental and Other Regulatory Matters."
EMPLOYEES
At December 31, 2004, the Company and its subsidiaries employed 1,050
persons. The Furmanite group of companies employed a total of 897 persons and
138 persons were employed by the Xtria group of companies. As of December 31,
2004, approximately 388 of the persons employed by Furmanite were subject to
representation by unions or other similar associations for collective bargaining
or other similar purposes, including 135 of Furmanite's employees in the United
Kingdom who are subject to a collective bargaining contract. The Company
considers relations with its employees to be good.
AVAILABLE INFORMATION
The Company files annual, quarterly, and other reports and other
information with the Securities and Exchange Commission ("SEC") under the
Securities Exchange Act of 1934 (the "Exchange Act"). These reports and other
information that the Company files with the SEC may be read and copied at the
SEC's Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549.
Additional information about the Public Reference Room may be obtained by
calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet
site (http://www.sec.gov) that contains reports, proxy information statements
and other information regarding issuers that file electronically with the SEC.
The Company also makes available free of charge on or through its Internet
site (www.xanser.com) the Annual Report on Form 10-K, Quarterly Reports on Form
10-Q, Current Reports on Form 8-K, and other information statements and, if
applicable, amendments to those reports filed or furnished pursuant to Section
13(a) of the Exchange Act as soon as reasonably practicable after the reports
are electronically filed with, or furnished to, the SEC.
Item 2. Properties
The properties owned or utilized by the Company and its subsidiaries are
generally described in Item 1 of this Report and Note 4 to the Company's
consolidated financial statements. 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 properties located in the United Kingdom, which are
owned by Furmanite.
Item 3. Legal Proceedings
The Company has contingent liabilities resulting from litigation, claims
and commitments incident to the ordinary course of business. Management
believes, after consulting with counsel, that the ultimate resolution of such
contingencies, either individually or in the aggregate, will not have a
materially adverse effect on the financial position, results of operations or
liquidity of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
The Company did not hold a meeting of stockholders or otherwise submit any
matter to a vote of stockholders in the fourth quarter of 2004.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
Shares of the Company's Common Stock are listed and traded on the New York
Stock Exchange ("NYSE") under the symbol XNR. Prior to the Distribution of KSL
on June 29, 2001, the Company's Common Stock was traded on the NYSE under the
symbol KAB. At March 21, 2005, there were approximately 4,000 holders of Common
Stock of record. The following table sets forth, for the fiscal periods
indicated, the quoted high and low sales prices of the shares on the New York
Stock Exchange.
Quoted Stock Prices
for XNR
-------------------------
Calendar Year High Low
---------------------- ------ -------
2003:
First Quarter $ 1.90 $ 1.33
Second Quarter 2.50 1.65
Third Quarter 2.78 2.05
Fourth Quarter 2.75 2.18
2004:
First Quarter 2.65 2.25
Second Quarter 2.77 2.40
Third Quarter 2.55 2.23
Fourth Quarter 3.10 2.43
2005:
First Quarter 3.58 2.80
(through March 21, 2005)
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. At December 31, 2004, the Company was in
compliance with all debt covenants.
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. The Company has not
declared a dividend on its Common Stock for any of the periods presented.
Year Ended December 31,
-----------------------------------------------------------------------
2004 2003 2002 2001 2000
---------- --------- ---------- ---------- ----------
Income Statement Data:
Revenues............................ $ 145,687 $ 135,720 $ 131,436 $ 144,704 $ 127,641
========== ========= ========== ========== ==========
Operating income (loss)............. $ 4,959 $ (3,367) $ (4,207) $ 5,429 $ 4,102
========== ========= ========== ========== ==========
Income (loss) from continuing
operations before income taxes
and cumulative effect of change
in accounting principle.......... $ 4,144 $ (4,380) $ (5,511) $ 9,349 $ 889
Income tax benefit (expense)........ (1,748) (8,725) (b) 3,269 13,039 (c) 5,894 (d)
---------- --------- ---------- ---------- ----------
Income (loss) from continuing
operations before cumulative
effect of change in accounting
principle........................ 2,396 (13,105) (2,242) 22,388 6,783
Cumulative effect of change in
accounting principle-adoption
of new accounting standard for
goodwill, net of income taxes.... - - (45,269) - -
---------- --------- ---------- ---------- ----------
Income (loss) from continuing
operations....................... 2,396 (13,105) (47,511) 22,388 6,783
Income from discontinued operations
- businesses distributed to common
stockholders (a) - - - 3,337 10,386
---------- --------- ---------- ---------- ----------
Net income (loss)................... $ 2,396 $ (13,105) $ (47,511) $ 25,725 $ 17,169
========== ========= ========== ========== ==========
(a) As a result of the June 2001 Distribution of Kaneb Services LLC (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 stockholders".
(b) Includes a $12.1 million non-cash deferred income tax expense resulting
from a change in the valuation allowance for deferred tax assets arising
from prior year tax losses that are available to offset future taxable
income (see Note 2 to Consolidated Financial Statements).
(c) Includes $18.1 million in tax benefits resulting from recapitalization of a
foreign subsidiary.
(d) Includes the recognition of $6.3 million in expected benefits from prior'
years tax losses available to offset future taxable income.
Year Ended December 31,
-----------------------------------------------------------------------
2004 2003 2002 2001 2000
---------- --------- ---------- ---------- ----------
Per Share Data:
Earnings (loss) per common share:
Basic:
Continuing operations:
Before cumulative effect of
change in accounting
principle.................. $ 0.07 $ (0.41) $ (0.07) $ 0.68 $ 0.20
Cumulative effect of change
in accounting principle.... - - (1.38) - -
---------- -------- --------- ---------- ---------
0.07 (0.41) (1.45) 0.68 0.20
Discontinued operations........ - - - 0.10 0.33
---------- -------- --------- ---------- ---------
$ 0.07 $ (0.41) $ (1.45) $ 0.78 $ 0.53
========== ======== ========= ========== =========
Diluted:
Continuing operations:
Before cumulative effect of
change in accounting
principle.................. $ 0.07 $ (0.41) $ (0.07) $ 0.64 $ 0.19
Cumulative effect of change
in accounting principle.... - - (1.38) - -
---------- -------- --------- ---------- ---------
0.07 (0.41) (1.45) 0.64 0.19
Discontinued operations........ - - - 0.10 0.31
---------- -------- --------- ---------- ---------
$ 0.07 $ (0.41) $ (1.45) $ 0.74 $ 0.50
========== ======== ========= ========== =========
December 31,
-----------------------------------------------------------------------
2004 2003 2002 2001 2000
---------- --------- ---------- ---------- ----------
Balance Sheet Data:
Cash and cash equivalents............. $ 21,598 $ 21,240 $ 25,624 $ 29,545 $ 20,517
Working capital....................... 41,216 44,103 47,055 71,789 81,185
Total assets.......................... 111,920 104,790 127,647 186,219 226,643
Long-term debt, less current portion.. 17,498 20,457 28,409 37,801 39,593
Stockholders' equity.................. 55,890 52,452 61,549 115,506 166,039
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 Xanser Corporation (the "Company") and notes thereto
included elsewhere in this report.
OVERVIEW
The Company, formed in 1953, conducts its principal businesses in two
industry segments, technical services and information technology services.
The Company's technical services business, which is conducted through its
Furmanite group of subsidiaries, offers specialized technical services to an
international base of clients located in the United States, Europe and Asia
Pacific regions. The technical services business provides on-line repairs of
leaks in valves, pipes and other components of piping systems and related
equipment, typically in the flow-process industries. Other services provided
include on-site machining, bolting and valve testing and repair on such systems
and equipment. In addition, the division provides hot tapping, fugitive
emissions monitoring, passive fire protection, concrete repair and heat
exchanger repair.
The Company's information technology services business, Xtria, provides
services and related products to the healthcare industry, the financial and
insurance industries, and various governmental agencies. The segment's primary
business is information technology services, including application software,
hardware, web hosted data processing, networking, consulting and support
services.
CONSOLIDATED RESULTS OF OPERATIONS
Year Ended December 31,
----------------------------------------------------
2004 2003 2002
------------- ------------- ---------------
(in thousands, except per share amounts)
Revenues.................................................... $ 145,687 $ 135,720 $ 131,436
============= ============= ===============
Operating income (loss)..................................... $ 4,959 $ (3,367) $ (4,207)
============= ============= ===============
Income (loss) before income taxes and cumulative effect
of change in accounting principle........................ $ 4,144 $ (4,380) $ (5,511)
============= ============= ===============
Net income (loss)........................................... $ 2,396 $ (13,105) $ (47,511)
============= ============= ===============
Earnings (loss) per common share:
Basic:
Before cumulative effect of change in
accounting principle................................ $ 0.07 $ (0.41) $ (0.07)
Cumulative effect of change in
accounting principle................................ - - (1.38)
------------- ------------- --------------
$ 0.07 $ (0.41) $ (1.45)
============= ============= ==============
Diluted:
Before cumulative effect of change in
accounting principle................................ $ 0.07 $ (0.41) $ (0.07)
Cumulative effect of change in
accounting principle................................ - - (1.38)
------------- ------------- --------------
$ 0.07 $ (0.41) $ (1.45)
============= ============= ==============
Capital expenditures........................................ $ 4,533 $ 3,311 $ 5,504
============= ============= ==============
For the year ended December 31, 2004, consolidated revenues increased by
$10.0 million, or 7%, when compared to 2003, due to a $17.4 million increase in
revenues from the technical services business, partially offset by a $7.4
million decrease in revenues from the information technology services business.
The 2004 increase in technical services revenues was due to an increased sales
and marketing effort and favorable foreign currency exchange rates (see
"Technical Services" below). The 2004 decrease in information technology service
revenues was primarily related to non-performing operations which were closed in
late 2003, partially offset by an increase in government solutions and digital
healthcare revenues (see "Information Technology Services" below).
Consolidated operating income increased by $8.3 million in 2004, when
compared to 2003, due primarily to a $1.5 million increase in operating income
from the technical services business and a $6.9 million increase in operating
income from the information technology services business. The increase in
technical services operating income was due to overall higher revenue levels and
operating margins and the impact of favorable foreign currency exchange rates.
The increase in information technology services operating income was primarily
the result of the effects of closing the non-performing operations in late 2003
and overall lower general and administrative costs.
Net income before income taxes and cumulative effect of change in
accounting principle increased by $8.5 million in 2004, when compared to 2003,
due to the overall increase in operating income and decreases in interest
expense (see "Interest Expense" below). Net income was $2.4 million for the year
ended December 31, 2004, compared to a net loss of $13.1 million in 2003, which
includes a non-cash accounting adjustment related to deferred taxes of $12.1
million.
For the year ended December 31, 2003, consolidated revenues increased by
$4.3 million, or 3%, when compared to 2002, due to a $10.3 million increase in
revenues from the technical services business, partially offset by a $6.0
million decrease in revenues from the information technology services business.
The 2003 increase in technical services revenues was due to an increased sales
and marketing effort in Europe and Asia-Pacific and favorable foreign currency
exchange rates, partially offset by lower revenues in the United States (see
"Technical Services" below). The 2003 decrease in information technology service
revenues was due to lower revenues from certain non-performing operations which
were closed in late 2003, partially offset by an increase in healthcare sector
revenues (see "Information Technology Services" below).
The consolidated operating loss decreased by $0.8 million in 2003, when
compared to 2002, due to a $2.8 million increase in operating income from the
technical services business and a $0.8 million decrease in general and
administrative expenses (see "General and Administrative Expenses" below),
partially offset by a $2.7 million increase in operating loss from the
information technology services business. The increase in technical services
operating income was due to overall higher revenue levels and operating margins
in Europe and Asia-Pacific, and the impact of favorable foreign currency
exchange rates. The increase in information technology services operating loss
was primarily the result of a fourth quarter charge of $3.5 million pertaining
to the write-down of software and inventory costs, and employee and other
termination expenses resulting from the closing of non-performing operations.
Loss before income taxes and cumulative effect of change in accounting
principle decreased by $1.1 million, when compared to 2002, due to the overall
decrease in operating loss and a decrease in interest expense (see "Interest
Expense" below). Income (loss) from continuing operations was ($13.1) million
for the year ended December 31, 2003 and includes a non-cash accounting
adjustment in the fourth quarter of 2003 related to deferred taxes of $12.1
million (see "Income Taxes" below).
TECHNICAL SERVICES
Year Ended December 31,
---------------------------------------
2004 2003 2002
--------- --------- -------
(in thousands)
Revenues:
United States........................................ $ 27,769 $ 23,285 $ 26,199
Europe............................................... 73,069 62,995 53,186
Asia-Pacific......................................... 17,577 14,738 11,362
--------- --------- --------
$ 118,415 $ 101,018 $ 90,747
========= ========= ========
Operating income (loss):
United States........................................ $ (459) $ (1,688) $ (1,562)
Europe............................................... 8,152 7,756 5,990
Asia-Pacific......................................... 2,480 2,147 1,007
Headquarters......................................... (2,294) (1,878) (1,855)
--------- --------- --------
$ 7,879 $ 6,337 $ 3,580
========= ========= ========
Capital expenditures.................................... $ 2,927 $ 1,897 $ 2,912
========= ========= ========
For the year ended December 31, 2004, technical services revenues increased
by $17.4 million, or 17%, when compared to 2003, due to increased sales and
marketing efforts and favorable foreign currency exchange rates. In the United
States, revenues increased by $4.5 million, or 19%, when compared to 2003, due
to the increase in sales and marketing efforts and increases in underpressure
and turnaround services performed periodically at the request of customers. In
Europe, revenues increased by $10.1 million, or 16%, when compared to 2003, due
to approximately $6.9 million in favorable foreign currency exchange rates and
increases in turnaround, other process plant and underpressure services.
Asia-Pacific revenues increased by $2.8 million, or 19%, when compared to 2003,
due to increases in underpressure services and approximately $1.6 million in
favorable foreign exchange rates.
Overall, 2004 technical services operating income increased by $1.5
million, or 24%, when compared to 2003. In the United States, the operating loss
decreased by $1.2 million, when compared to 2003, due to overall higher revenues
and increases in operating margins. In Europe and Asia-Pacific, operating income
increased by $0.4 million, or 5%, and $0.3 million, or 16%, respectively, due to
overall higher revenue levels and the impact of favorable foreign currency
exchange rates, partially offset by slightly lower operating margins due to the
mix of business. The foreign currency exchange rates had a favorable impact of
approximately $0.7 million on 2004 operating income in Europe and approximately
$0.2 million on 2004 operating income in Asia-Pacific.
For the year ended December 31, 2003, technical services revenues increased
by $10.3 million, or 11%, when compared to 2002, due to favorable foreign
currency exchange rates and an increased sales and marketing effort in Europe
and Asia-Pacific, partially offset by lower revenues in the United States. In
the United States, revenues decreased by $2.9 million, or 11%, when compared to
2002, due to decreases in turnaround and underpressure services performed at the
discretion of customers and strategic decisions to exit non-performing contracts
which did not meet current requirements for generating favorable returns. In
Europe, revenues increased $9.8 million, or 18%, when compared to 2002, due to
favorable foreign currency exchange rates and increases in turnaround and
underpressure services, and product sales. The favorable foreign currency
exchange rates accounted for approximately $7.2 million of the 2003 revenue
increase in Europe. Asia-Pacific revenues increased $3.4 million, or 30%, when
compared to 2002, due to increases in turnaround services and favorable foreign
exchange rates. The favorable foreign currency exchange rates accounted for
approximately $1.6 million of the 2003 revenue increase in Asia-Pacific.
Overall, 2003 technical services operating income increased by $2.8
million, or 77%, when compared to 2002. In the United States, operating income
decreased by $0.1 million, compared to 2002, due to lower levels of business. In
Europe and Asia-Pacific, operating income increased by $1.8 million, or 29%, and
$1.1 million, or 113%, respectively, due to overall higher revenue levels and
operating margins, and the impact of favorable foreign currency exchange rates.
The favorable foreign currency exchange rates accounted for approximately $0.9
million of the 2003 operating income increase in Europe and approximately $0.2
million of the operating income increase in Asia-Pacific.
INFORMATION TECHNOLOGY SERVICES
Year Ended December 31,
---------------------------------------
2004 2003 2002
--------- --------- --------
(in thousands)
Revenues................................................ $ 27,272 $ 34,702 $ 40,689
========= ========= ========
Operating income (loss)................................. $ 342 $ (6,518) $ (3,796)
========= ========= ========
Capital expenditures.................................... $ 1,606 $ 1,309 $ 2,592
========= ========= ========
For the year ended December 31, 2004, information technology services
revenues decreased by $7.4 million, or 21% when compared to 2003, due primarily
to the Company's strategic decision to close non-performing operations in the
fourth quarter of 2003, partially offset by an overall increase in government
solutions and healthcare solutions revenues. Revenues for the year ended
December 31, 2003 included approximately $13.6 million for communication-related
installation services and low-margin government service and equipment sales
operations, as well as certain other non-profitable operations, closed in 2003.
Government solutions and healthcare solutions revenues increased by $4.0 million
and $3.1 million, respectively, when compared to 2003, due to additional work
related to new contracts.
Overall, operating income for the information technology services
operations increased by $6.9 million in 2004, when compared to 2003, due to the
inclusion in 2003 of $3.5 million of write-downs and termination costs and the
losses from the non-performing operations exited in late 2003, overall lower
administrative costs, and the increase in government solutions and digital
healthcare revenues. Operating income for the year ended December 31, 2004
includes approximately $1.0 million related to favorable developments pertaining
to the resolution of certain contingencies related to the Company's intellectual
property.
For the year ended December 31, 2003, information technology services
revenues decreased by $6.0 million, or 15%, when compared to 2002, due to
decreases in both communications-related installation revenues and government
services equipment sales revenues, partially offset by increases in healthcare
sector revenues. The Company's communications-related installation services
operations and low-margin government service and equipment sales operations, as
well as certain other non-performing operations, were closed in the fourth
quarter of 2003. Revenues from equipment sales, which were furnished at the
request of selected government customers, decreased by $1.8 million in 2003,
when compared to 2002, due to normal fluctuations in customer needs. Government
services revenues decreased by $3.8 million in 2003, when compared to 2002, due
entirely to revenue decreases from a government contract which was completed.
Additionally, communications-related installation revenues decreased by $2.7
million in 2003, when compared to 2002, due to lower communication-related
installation revenues from a large customer as a result of the economic downturn
in the technology industry, and the impact of closing this business in the
fourth quarter of 2003. Partially offsetting the 2003 revenue decrease was a
$2.5 million increase in healthcare sector revenues, resulting from an increased
sales and marketing effort and incremental revenues from a contract expansion
with a large customer.
Included in operating income in 2003 is a fourth quarter charge of $3.5
million pertaining to the write-down of inventory and software costs, and
employee and other termination expenses resulting from the closing of
non-performing operations. Unpaid termination costs at December 31, 2003 were
not material. Overall, the 2003 operating loss for the information technology
services operations increased by $2.7 million in 2003, when compared to 2002,
primarily due to the $3.5 million of write-downs and termination costs and the
losses from the non-performing operations exited in late 2003.
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expense includes compensation and benefits paid
to corporate officers and employees, certain insurance, legal, tax, financial
reporting and other administrative costs, including costs of maintaining a
public company, which are not related to specific business segments. For the
year ended December 31, 2004, general and administrative expense was
approximately $3.3 million, an increase of $0.1 million from prior year, due
primarily to an increase in insurance costs.
For the year ended December 31, 2003, general and administrative expense
was approximately $3.2 million, a decrease of $0.8 million from the prior year.
The decrease in 2003 general and administrative expense, when compared to 2002
levels, was the result of an overall decrease in corporate personnel-related
expenses, and decreases in consulting and professional fees related primarily to
corporate governance matters.
INTEREST EXPENSE
For the year ended December 31, 2004, interest expense decreased by $0.3
million, when compared to 2003, due to reductions in debt (see "Liquidity and
Capital Resources"), partially offset by an overall increase in interest rates
on variable rate borrowings.
For the year ended December 31, 2003, interest expense decreased by $0.5
million, when compared to 2002, due to reductions in debt (see "Liquidity and
Capital Resources") and lower interest rates on variable-rate borrowings.
INCOME TAXES
During the fourth quarter of 2003, the Company, pursuant to an evaluation
performed in accordance with the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 109 "Accounting for Income Taxes", recorded a $12.1
million non-cash deferred income tax expense resulting from a change in the
valuation allowance for deferred tax assets arising from prior years' tax losses
(net operating loss carryforwards) that are available to offset future taxable
income. As a result, all domestic federal and state income taxes recorded for
the year ended December 31, 2004 are fully offset by a corresponding change in
valuation allowance.
Prior to December 31, 2003, the Company recognized a full federal and state
income tax expense or benefit for income or losses generated by its domestic
operations. Federal and state benefits recorded for the years ended December 31,
2003 and 2002 aggregated $4.5 million (before a $12.1 million change in
valuation allowances) and $4.8 million, respectively.
Income tax benefit differs from the expected tax at statutory rates due
primarily to the change in valuation allowance for deferred tax assets and
different tax rates in the various state and foreign jurisdictions.
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities was $6.0 million, $4.9 million and
$3.5 million during the years 2004, 2003 and 2002, respectively. The increase in
2004 operating cash flows, when compared to 2003, was due to overall increases
in technical services revenues and operating income and information technology
services operating income, combined with normal changes in working capital
requirements resulting from the timing of cash receipts and disbursements. The
increase in 2003 operating cash flows, when compared to 2002, was due to overall
increases in technical services revenues and operating income, combined with
normal changes in working capital requirements resulting from the timing of cash
receipts and disbursements.
Capital expenditures for continuing operations were $4.5 million, $3.3
million and $5.5 million for the years ended December 31, 2004, 2003 and 2002,
respectively. Consolidated capital expenditures for 2005 have been budgeted at
$3 million to $5 million, depending on the economic environment and the needs of
the businesses. Such expenditures, however, will depend on many factors beyond
the Company's control, including, without limitation, demand for services in the
technical services and information services businesses, local, state and federal
government regulations. No assurance can be given that required capital
expenditures will not exceed anticipated amounts during 2005 or thereafter.
Capital expenditures (excluding acquisitions) in 2005 are expected to be funded
from existing cash and anticipated cash flows from operations.
In connection with a stock repurchase plan authorized by the Company's
Board of Directors, the Company purchased in 2002 approximately 1,744,000 shares
of the Company's common stock, at a cost of $3.3 million. The stock purchases
were funded with cash on hand.
At December 31, 2004, $11.5 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
Parent Company. Borrowings under the Loan Agreement bear interest at the option
of the borrower at variable rates (3.95% at December 31, 2004), based on either
the LIBOR rate or prime rate, have a commitment fee on the unused portion of the
facility and contain certain financial and operational covenants with respect to
the technical services group, including percentage of tangible assets and
revenues related to certain geographical areas, ratios of debt to cash flow, as
defined in the Loan Agreement, and cash flow to fixed charges and capital
expenditures. At December 31, 2004, the Company was in compliance with all
covenants. The Loan Agreement matures in January 2009 and is secured by
substantially all of the tangible assets of the technical services group.
The Company's 8.75% subordinated debentures ($5.0 million outstanding at
December 31, 2004) are convertible into shares of the Company's common stock at
the conversion price of $5.26 per share. On March 1, 2002, the Company purchased
$10.0 million of subordinated debentures at par value, which satisfies its
sinking fund requirements on these subordinated debentures until their final
maturity in 2008. On September 30, 2003, the Company purchased an additional
$4.9 million of subordinated debentures at par value, plus accrued interest.
On 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. Pursuant to the Distribution, the Company entered
into an agreement (the "Distribution Agreement") with KSL, whereby KSL is
obligated to pay the Company amounts equal to certain expenses and tax
liabilities incurred by the Company in connection with the Distribution. In
January of 2002, KSL paid the Company $10.0 million for tax liabilities due
under the terms of the Distribution Agreement. The Distribution Agreement also
requires KSL to pay the Company an amount calculated based on any income tax
liability of the Company that, in the sole judgement of the Company, (i) is
attributable to increases in income tax from past years arising out of
adjustments required by federal and state tax authorities, to the extent that
such increases are properly allocable to the businesses that became part of KSL,
or (ii) is attributable to the distribution of KSL's common shares and the
operations of KSL's businesses prior to the Distribution date. In the event of
an examination of the Company by federal or state tax authorities, the Company
will have unfettered control over the examination, administrative appeal,
settlement or litigation that may be involved, notwithstanding that KSL has
agreed to pay any additional tax. At December 31, 2004, $6.5 million was
recorded in current assets as receivable from businesses distributed to common
stockholders pursuant to the provisions of the Distribution Agreement.
The following is a schedule by period of the Company's debt repayment
obligations and material contractual commitments at December 31, 2004:
Less than After
Total 1 year 1-3 years 4-5 years 5 years
---------- --------- ---------- ---------- ----------
(in thousands)
Debt:
Technical services credit facility $ 11,532 $ - $ - $ 11,532 $ -
Parent company convertible
subordinated debentures........ 5,000 - - 5,000 -
---------- --------- ---------- ---------- ----------
16,532 - - 16,532 -
Capital leases.................... 1,490 524 822 142 2
---------- --------- ---------- ---------- ----------
Debt subtotal.................. 18,022 524 822 16,674 2
---------- --------- ---------- ---------- ----------
Interest on debt.................. 3,521 982 1,857 682 -
---------- --------- ---------- ---------- ----------
Debt and interest total........ 21,543 1,506 2,679 17,356 2
---------- --------- ---------- ---------- ----------
Other contractual commitments:
Pension Plan contributions........ 9,400 940 1,880 1,880 4,700
Operating leases.................. 14,490 4,289 6,255 2,231 1,715
---------- --------- ---------- ---------- ----------
Total.......................... $ 45,433 $ 6,735 $ 10,814 $ 21,467 $ 6,417
========== ========= ========== ========== ==========
Interest on debt is calculated based on outstanding balances, using
interest rates in effect at December 31, 2004. Estimated annual pension plan
contributions are assumed to be consistent with current expected contribution
levels.
OFF-BALANCE SHEET TRANSACTIONS
The Company was not a party to any off-balance sheet transactions at
December 31, 2004, or for any of the years ended December 31, 2004, 2003 or
2002.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of the Company's financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates. Significant policies are presented in the Notes to the
Consolidated Financial Statements.
Critical accounting policies are those that are most important to the
portrayal of our financial position and results of operations. These policies
require management's most difficult, subjective or complex judgments, often
employing the use of estimates about the effect of matters that are inherently
uncertain. Our most critical accounting policies pertain to revenue recognition,
allowance for doubtful accounts, the impairment of excess of cost over fair
value of net assets of acquired businesses and income taxes. Critical accounting
policies are discussed regularly (at least quarterly) with the Company's Audit
Committee.
The technical services segment's revenues are based primarily on time and
materials and are generally short term in nature. Revenues are recognized when
services to customers have been rendered or when products are shipped and risk
of ownership is passed to the customer. The technical services business provides
limited warranties to customers, depending upon the service performed. Warranty
claim costs were not material during the three years ended December 31, 2004.
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 Emerging Issues Task Force ("EITF") Issue No.
00-21, "Revenue Arrangements with Multiple Deliverables" and with AICPA
Statement of Position ("SOP") No. 97-2 "Software Revenue Recognition". ETIF No.
00-21 provides guidance on how to account for arrangements that involve the
delivery or performance of multiple products, services and/or rights to use
assets. 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. In
addition, the information technology services segment's revenues under long-term
service contracts are accounted for using a proportional performance method or
on a straight-line basis in accordance with the Securities and Exchange
Commission's Staff Accounting Bulletin ("SAB") No. 101 "Revenue Recognition in
Financial Statements", as amended by SAB No. 104.
The Company's technical services and information technology services
businesses evaluate and adjust allowances for doubtful accounts receivable
through a continuous process of assessing accounts receivable balances on
individual customers and on an overall basis. This process consists of, among
other tasks, a review of historical collection experience, current aging status
and financial condition of customers. As this process involves a significant
amount of judgment and estimation, and sometimes involves significant dollar
amounts, actual write-offs could differ from estimated amounts, which could have
a material effect on the results of operations of the Company.
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, 2004, 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, 2004, 2003 and
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 (up to the current goodwill
carrying value of $13.8 million), which could have a material effect on the
results of operations of the Company.
At December 31, 2004, the Company had a significant amount of net deferred
tax assets, which consisted principally of net operating loss carryforwards,
alternative minimum tax credit carryforwards and temporary differences resulting
from differences in the tax and book basis of certain assets and liabilities.
The net operating loss carryforwards expire, if unused, as follows: $1.2 million
in 2006; $3.0 million in 2007; $13.4 million in 2022; $10.9 million in 2023;
and, $1.2 million in 2024. The alternative minimum tax credit carryforwards have
no expiration date. Based on evaluations performed by the Company pursuant to
SFAS No. 109 in the fourth quarter of 2003, a non-cash valuation allowance of
$12.1 million was provided with respect to the Company's federal and state net
deferred tax assets (see Note 2 to the Company's Consolidated Financial
Statements). The utilization of net operating loss carryforwards could be
subject to limitation in the event of a change in ownership, as defined in the
tax laws. To the extent that factors or conditions change, it is possible that
reductions in the non-cash valuation allowance could occur (up to the current
valuation allowance of $16.7 million), which could have a material effect on the
results of operating of the Company.
RECENT ACCOUNTING PRONOUNCEMENT
In December of 2004, the Financial Accounting Standards Board issued SFAS
No. 123 (revised 2004), "Share-Based Payment" (SFAS No. 123R), which addresses
the accounting for share-based payment transactions in which an enterprise
receives employee services in exchange for equity instruments of the enterprise,
or liabilities that are based on the fair value of the enterprise's equity
instruments or that may be settled by the issuance of such equity instruments.
SFAS No. 123R eliminates the ability to account for share-based compensation
transactions using the intrinsic value method under Accounting Principles Board
Opinion 25, "Accounting for Stock Issued to Employees", and generally requires
that such transactions be accounted for using a fair-value-based method. The
Company is currently evaluating the provisions of SFAS No. 123R to determine
which fair-value-based model and transitional provision to follow upon adoption.
The alternatives for transition include either the modified prospective or the
modified retrospective methods. The modified prospective method requires that
compensation expense be recorded for all unvested stock options and restricted
stock as the requisite service is rendered beginning with the first quarter of
adoption. The modified retrospective method requires recording compensation
expense for stock options and restricted stock beginning with the first period
restated. Under the modified retrospective method, prior periods may be restated
either as of the beginning of the year of adoption or for all periods presented.
SFAS No. 123R will be effective for the Company beginning in the third quarter
of 2005. The impact of adoption on the Company's consolidated financial
statements is still being evaluated.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
The principal market risks (i.e., the risk of loss arising from the adverse
changes in market rates and prices) to which the Company is exposed are interest
rates on the Company's debt and investment portfolios and fluctuations in
foreign currency.
The Company centrally manages its debt and investment portfolios
considering investment opportunities and risks, tax consequences and overall
financing strategies. The Company's investment portfolio consists of cash
equivalents; accordingly, the carrying amounts approximate fair value. The
Company's investments are not material to the financial position or performance
of the Company. Assuming variable rate debt of $11.5 million at December 31,
2004, a one percent increase in interest rates would increase annual interest
expense by approximately $0.1 million.
A significant portion of the technical services business is exposed to
fluctuations in foreign currency exchange rates (see Item 7 "Technical
Services"). Based on annual 2004 foreign currency-based revenues and operating
income of $90.6 million and $10.6 million, respectively, a one percent
fluctuation of all applicable foreign currencies would result in an annual
change in revenues and operating income of $0.9 million and $0.1 million,
respectively.
Item 8. Financial Statements and Supplementary Data
The consolidated financial statements and supplementary data of the Company
begin on page F-1 of this report. Such information is hereby incorporated by
reference into this Item 8.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Item 9A. Controls and Procedures.
Xanser Corporation's principal executive officer and principal financial
officer, after evaluating as of December 31, 2004, the effectiveness of the
Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) of the Securities Exchange Act of 1934), have concluded that, as of
such date, the Company's disclosure controls and procedures are adequate and
effective to ensure that material information relating to the Company and its
consolidated subsidiaries would be made known to them by others within those
entities.
During the fourth quarter of 2004, there have been no changes in the
Company's internal controls over financial reporting that have materially
affected, or are reasonably likely to materially affect, those internal controls
subsequent to the date of the evaluation. As a result, no corrective actions
were required or undertaken.
PART III
The information required by Items 10, 11, 12, 13 and 14 of Form 10-K is
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, 2004.
PART IV
Item 15. Exhibits and Financial Statement Schedules
Beginning
(a) (1) Financial Statements Page
Set forth below are financial statements appearing in this report.
Xanser Corporation and Subsidiaries Financial Statements:
Reports of Independent Registered Public Accounting Firms........................... F - 1
Consolidated Statements of Income - Three Years Ended
December 31, 2004, 2003 and 2002.................................................. F - 3
Consolidated Balance Sheets - December 31, 2004 and 2003............................ F - 4
Consolidated Statements of Cash Flows - Three Years Ended
December 31, 2004, 2003 and 2002.................................................. F - 5
Consolidated Statements of Changes in Stockholders'
Equity - Three Years Ended December 31, 2004, 2003 and 2002....................... 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, 2004, 2003 and 2002........... F - 24
Balance Sheets - December 31, 2004 and 2003......................................... F - 25
Statements of Cash Flows - Three Years Ended
December 31, 2004, 2003 and 2002.................................................. F - 26
Schedule II - Xanser Corporation Valuation and Qualifying Accounts -
Three Years Ended December 31, 2004, 2003 and 2002.................................. F - 27
Schedules, other than those listed above, have been omitted because of the
absence of the conditions under which they are required or because the required
information is included in the consolidated financial statements or related
notes thereto.
(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, as amended and restated March 10, 2005,
filed herewith.
4.1 Certificate of Designation, Preferences and Rights related to the
Registrant's Series B Junior Participating Preferred Stock, filed as
Exhibit 4.2 to the Registrant's 10-K for the year ended December 31,
1998, which exhibit is incorporated herein by reference.
4.2 Indenture between Moran Energy Inc. ("Moran") and First City National
Bank of Houston ("First City"), dated January 15, 1984, under which
Moran issued the 8 3/4% Convertible Subordinated Debentures due 2008,
filed as Exhibit 4.1 to Moran's Registration Statement on Form S-3
(SEC File No. 2-81227), which exhibit is hereby incorporated by
reference.
4.3 First Supplemental Indenture between the Registrant and First City,
dated as of March 20, 1984, under which the Registrant assumed
obligations under the Indenture listed as Exhibit 4.5 above, filed as
Exhibit 4.7 of the Registrant's Form 10-K for the year ended December
31, 1983, which exhibit is hereby incorporated by reference.
10.1* Xanser Corporation (formerly Kaneb Services, Inc.) Savings Investment
Plan, as amended, filed as Exhibit 4.10 of the exhibits to the
Registrant's Registration Statement on Form S-8 ("Form S-8") (S.E.C.
File No. 33-41295) as Exhibit 4.1 to the exhibits of the Registrant's
Form S-8 (S.E.C. File No. 333-14067), and as Exhibit 4.9 to the
exhibits of the Registrant's Form S-8 (S.E.C. File No. 333-83968),
which exhibits are hereby incorporated by reference.
10.2* Xanser Corporation (formerly Kaneb Services, Inc.) 1994 Stock
Incentive Plan, filed as Exhibit 4.12 to the exhibits of the
Registrant's Form S-8 (S.E.C. File No. 33-54027), as Exhibit 10.1 to
the Registrant's Current Report on Form 8-K filed on August 22, 2001,
and as Exhibit 10.1 to the exhibits of the Registrant's Form 10-Q for
the period ended June 30, 2003, which exhibits are hereby incorporated
by reference.
10.3* Xanser Corporation (formerly Kaneb Services, Inc.) Deferred Stock
Unit Plan, as amended, filed as Exhibit 4.1 to the exhibits of the
Registrant's Form S-8 (S.E.C. File No. 333-08725) as Exhibit 10.1 to
the exhibits of the Registrant's Current Report on Form 8-K ("Form
8-K"), and as Exhibits 4.9 and 4.10 to the exhibits of the
Registrant's Form S-8 (S.E.C. File No. 333-83970), which exhibits are
hereby incorporated by reference.
10.4* Kaneb Services, Inc. 1996 Supplemental Deferred Compensation Plan,
filed as Exhibit 4.1 to the exhibits of the Registrant's Form S-8
(S.E.C. File No. 333-08727), and as Exhibit 10.2 to the Exhibits of
the Registrant's Form 8-K, which exhibits are hereby incorporated by
reference.
10.5* Kaneb Services, Inc. $1.63 Director Stock Options, filed as Exhibit
4.1 to the exhibits of the Registrant's Form S-8 (S.E.C. File No.
33-58981), which exhibit is hereby incorporated by reference.
10.6* Kaneb Services, Inc. Directors Stock Options I, filed as Exhibit 4.1
to the exhibits of the Registrant's Form S-8 (S.E.C. File No.
333-14069), which exhibit is hereby incorporated by reference.
10.7* Kaneb Services, Inc. 1996 Directors Stock Incentive Plan, as amended,
filed as Exhibit 4.1 to the exhibits of the Registrant's Form S-8
(S.E.C. File No. 333-14071) and as Exhibit 4.1 to the exhibits of the
Registrant's Form S-8 (S.E.C. File No. 333-22109), and as
supplemented, filed as Exhibit 4.2 to the Exhibits of the Registrant's
Form S-8 (S.E.C. File No. 333-60195), and as Exhibit 10.1 to the
Exhibits of the Registrant's Form 8-K, which exhibits are hereby
incorporated by reference.
10.8* Kaneb Services, Inc. Non-Employee Directors Deferred Stock Unit Plan,
filed as Exhibit 4.1 to the exhibits of the Registrant's Form S-8
(S.E.C. File No. 333-08723), and as Exhibit 10.3 to the Exhibits of
the Registrant's Form 8-K, which exhibits are hereby incorporated by
reference.
10.9* Kaneb Services, Inc. 1994 Stock Option Agreements, filed as Exhibits
10.1, 10.2, 10.3 and 10.4 to the exhibits of the Registrant's Form S-8
(S.E.C. File No. 333-34489), which exhibits are hereby incorporated by
reference.
10.10* Form of Termination Agreement, filed as Exhibit 10.10 to the
exhibits of the Registrant's Form 10-K for the year ended December 31,
1996, which exhibit is hereby incorporated by reference.
10.11* Form of Indemnification Agreement, filed as Exhibit 10.11 to the
Registrant's Form 10-K for the year ended December 31, 1999, which
exhibit is hereby incorporated by reference.
10.12 Amended and Restated Loan Agreement between Furmanite PLC, Bank of
Scotland and certain other Lenders, dated May 1, 1991, as amended,
(the "Furmanite Loan Agreement"), filed as Exhibit 10.8 of the
exhibits to the Registrant's Form 10-K for the year ended December 31,
1994; Exhibit 10.12 of the exhibits to the Registrant's Form 10-K for
the year ended December 31, 1996; Exhibit 10.12 of the Registrant's
Form 10-K for the year ended December 31, 1997; and, Exhibit 10.13 of
the Registrant's Form 10-K for the year ended December 31, 1999, which
exhibits are hereby incorporated by reference.
21 List of subsidiaries of the Registrant, filed herewith.
23.1 Consent of Grant Thornton LLP, filed herewith.
23.2 Consent of KPMG LLP, filed herewith.
31.1 Certification of Chief Executive Officer, Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002, dated as of March 30, 2005.
31.2 Certification of Chief Financial Officer, Pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002, dated as of March 30, 2005.
32.1 Certification of Chief Executive Officer, Pursuant to Section 906(a)
of the Sarbanes-Oxley Act of 2002, dated as of March 30, 2005.
32.2 Certification of Chief Financial Officer, Pursuant to Section 906(a)
of the Sarbanes-Oxley Act of 2002, dated as of March 30, 2005.
* Denotes management contracts.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Shareholders and Board of Directors
Xanser Corporation:
We have audited the accompanying consolidated balance sheet of Xanser
Corporation and subsidiaries (the "Company") as of December 31, 2004 and the
related consolidated statement of income, shareholders' equity and cash flows
for the year then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Xanser
Corporation and subsidiaries as of December 31, 2004, and the consolidated
results of their operations and their cash flows for the year then ended, in
conformity with accounting principles generally accepted in the United States of
America.
Our audit was conducted for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The related financial
statement Schedules I and II are presented for purposes of additional analysis
and is not a required part of the basic consolidated financial statements. These
schedules have been subjected to the auditing procedures applied in the audit of
the basic consolidated financial statements and, in our opinion, are fairly
stated in all material respects in relation to the basic consolidated financial
statements taken as a whole.
Grant Thornton LLP
Dallas, Texas
March 21, 2005
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of Xanser Corporation:
We have audited the consolidated financial statements of Xanser Corporation and
its subsidiaries as of and for each of the years in the two year period ended
December 31, 2003, 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 of and for each of the years
in the two year period ended December 31, 2003, 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 the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company and its
subsidiaries as of December 31, 2003, and the results of their operations and
their cash flows for each of the years in the two-year period ended December 31,
2003, in conformity with U.S. generally accepted accounting principles. Also, in
our opinion, the related financial statement schedules, when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set forth therein.
As discussed in Note 1, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets" in
2002.
KPMG LLP
Dallas, Texas
February 25, 2004
XANSER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
----------------------------------------------------
2004 2003 2002
-------------- -------------- ---------------
Revenues:
Services............................................... $ 138,697,000 $ 120,790,000 $ 114,659,000
Products............................................... 6,990,000 14,930,000 16,777,000
-------------- -------------- ---------------
Total revenues....................................... 145,687,000 135,720,000 131,436,000
-------------- -------------- ---------------
Costs and expenses:
Operating costs........................................ 129,058,000 116,503,000 112,159,000
Cost of products sold.................................. 4,856,000 13,538,000 15,828,000
Depreciation and amortization.......................... 3,552,000 5,860,000 3,665,000
General and administrative............................. 3,262,000 3,186,000 3,991,000
-------------- -------------- ---------------
Total costs and expenses............................. 140,728,000 139,087,000 135,643,000
-------------- -------------- ---------------
Operating income (loss).................................... 4,959,000 (3,367,000) (4,207,000)
Interest income............................................ 174,000 260,000 460,000
Interest expense........................................... (989,000) (1,273,000) (1,764,000)
-------------- -------------- ---------------
Income (loss) before income taxes and cumulative effect
of change in accounting principle...................... 4,144,000 (4,380,000) (5,511,000)
Income tax benefit (expense)............................... (1,748,000) (8,725,000) 3,269,000
-------------- --------------- ---------------
Income (loss) before cumulative effect of change in
accounting principle................................... 2,396,000 (13,105,000) (2,242,000)
Cumulative effect of change in accounting principle -
adoption of new accounting standard for goodwill,
net of income taxes.................................... - - (45,269,000)
-------------- -------------- ---------------
Net income (loss).......................................... $ 2,396,000 $ (13,105,000) $ (47,511,000)
============== ============== ===============
Earnings (loss) per common share - basic and diluted:
Before cumulative effect of change in
accounting principle................................. $ 0.07 $ (0.41) $ (0.07)
Cumulative effect of change in
accounting principle................................. - - (1.38)
-------------- -------------- ---------------
$ 0.07 $ (0.41) $ (1.45)
============== ============== ===============
XANSER CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
-------------------------------------
2004 2003
-------------- --------------
ASSETS
Current assets:
Cash and cash equivalents......................................... $ 21,598,000 $ 21,240,000
Accounts receivable, trade (net of allowance for doubtful
accounts of $667,000 in 2004 and $1,183,000 in 2003)............ 35,470,000 31,902,000
Receivable from businesses distributed to common stockholders..... 6,699,000 7,564,000
Inventories....................................................... 9,131,000 8,697,000
Prepaid expenses and other........................................ 5,283,000 4,182,000
-------------- --------------
Total current assets............................................ 78,181,000 73,585,000
-------------- --------------
Property and equipment............................................... 46,571,000 42,152,000
Less accumulated depreciation and amortization....................... 32,933,000 29,879,000
-------------- --------------
Net property and equipment........................................ 13,638,000 12,273,000
-------------- --------------
Excess of cost over fair value of net assets of acquired businesses.. 13,802,000 13,802,000
Deferred income taxes and other assets............................... 6,299,000 5,130,000
-------------- --------------
$ 111,920,000 $ 104,790,000
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt................................. $ 524,000 $ 738,000
Accounts payable.................................................. 5,416,000 3,098,000
Accrued expenses.................................................. 23,416,000 18,255,000
Accrued income taxes.............................................. 7,609,000 7,391,000
-------------- --------------
Total current liabilities....................................... 36,965,000 29,482,000
-------------- --------------
Long-term debt, less current portion:
Technical services................................................ 12,250,000 15,457,000
Information technology services................................... 248,000 -
Parent company.................................................... 5,000,000 5,000,000
-------------- --------------
Total long-term debt, less current portion...................... 17,498,000 20,457,000
-------------- --------------
Other liabilities.................................................... 1,567,000 2,399,000
Commitments and contingencies
Stockholders' equity:
Common stock, without par value. Authorized, 60,000,000 shares;
issued, 37,353,755 shares in 2004 and 37,336,176 shares in 2003. 4,335,000 4,333,000
Additional paid-in capital........................................ 126,550,000 126,561,000
Treasury stock, at cost........................................... (26,180,000) (26,267,000)
Retained earnings (accumulated deficit)........................... (46,299,000) (48,695,000)
Accumulated other comprehensive income (loss)..................... (2,516,000) (3,480,000)
-------------- --------------
Total stockholders' equity...................................... 55,890,000 52,452,000
-------------- --------------
$ 111,920,000 $ 104,790,000
============== ==============
XANSER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
------------------------------------------------------
2004 2003 2002
-------------- ------------- ---------------
Operating activities:
Net income (loss)...................................... $ 2,396,000 $ (13,105,000) $ (47,511,000)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization...................... 3,552,000 4,272,000 3,665,000
Deferred income taxes.............................. (1,061,000) 7,863,000 (1,266,000)
Cumulative effect of change in accounting principle - - 45,269,000
Write-down of software costs....................... - 2,338,000 -
Write-down of inventory............................ 206,000 500,000 -
Other, net......................................... (832,000) 587,000 736,000
Changes in current assets and liabilities:
Accounts receivable, net......................... (3,568,000) 4,306,000 978,000
Inventories...................................... (640,000) (773,000) 518,000
Prepaid expenses and other....................... (1,101,000) 1,079,000 2,370,000
Accounts payable and accrued expenses............ 7,062,000 (2,178,000) (1,239,000)
-------------- ------------- --------------
Net cash provided by operating activities............ 6,014,000 4,889,000 3,520,000
-------------- ------------- --------------
Investing activities:
Capital expenditures................................... (4,533,000) (3,311,000) (5,504,000)
Other, net............................................. 1,214,000 1,363,000 1,298,000
-------------- ------------- --------------
Net cash used in investing activities................ (3,319,000) (1,948,000) (4,206,000)
-------------- ------------- --------------
Financing activities:
Issuance of debt....................................... 1,836,000 330,000 4,750,000
Payments on debt ...................................... (5,421,000) (8,278,000) (15,641,000)
Purchase of treasury stock............................. - - (3,286,000)
Common stock issued and other.......................... 78,000 9,000 450,000
(Increase) decrease in receivable from businesses
distributed to common stockholders................... 865,000 (152,000) 10,492,000
-------------- ------------- --------------
Net cash used in financing activities................ (2,642,000) (8,091,000) (3,235,000)
-------------- ------------- --------------
Effect of exchange rate changes on cash................... 305,000 766,000 -
-------------- ------------- --------------
Increase (decrease) in cash and cash equivalents.......... 358,000 (4,384,000) (3,921,000)
Cash and cash equivalents at beginning of year............ 21,240,000 25,624,000 29,545,000
-------------- ------------- --------------
Cash and cash equivalents at end of year.................. $ 21,598,000 $ 21,240,000 $ 25,624,000
============== ============= ==============
Supplemental cash flow information:
Cash paid for interest............................... $ 952,000 $ 1,534,000 $ 2,244,000
============== ============= ==============
Cash paid for income taxes........................... $ 2,546,000 $ 1,899,000 $ 926,000
============== ============= ==============
XANSER CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Retained Accumulated
Earnings Other
Common Additional Treasury (Accumulated Comprehensive Comprehensive
Stock Paid-In Capital Stock Deficit) Income (Loss) Income (Loss)
------------ --------------- ------------- ------------- ------------- -------------
Balance at January 1, 2002...... $ 4,270,000 $ 128,744,000 $ (23,423,000) $ 11,921,000 $ (6,006,000)
Net income (loss)............ - - - (47,511,000) - $ (47,511,000)
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.. - - - - (3,374,000) (3,374,000)
Foreign currency trans-
lation adjustment.......... - - - - 1,901,000 1,901,000
Taxes associated with the
Distribution of KSL and
other...................... - (2,308,000) - - - -
------------ -------------- ------------- ------------- ------------- -------------
Comprehensive income(loss). $ (48,984,000)
=============
Balance at December 31, 2002.... 4,333,000 126,675,000 (26,390,000) (35,590,000) (7,479,000)
Net income (loss)............ - - - (13,105,000) - $ (13,105,000)
Common stock issued.......... - (153,000) 123,000 - - -
Deferred stock units,
vested..................... - 39,000 - - - -
Minimum pension liability
adjustment for subsidiary.. - - - - 1,147,000 1,147,000
Foreign currency trans-
lation adjustment ......... - - - - 2,852,000 2,852,000
------------ -------------- ------------- ------------- ------------- -------------
Comprehensive income(loss)... $ (9,106,000)
=============
Balance at December 31, 2003.... 4,333,000 126,561,000 (26,267,000) (48,695,000) (3,480,000)
Net income................... - - - 2,396,000 - $ 2,396,000
Common stock issued.......... 2,000 (50,000) 87,000 - - -
Deferred stock units,
vested..................... - 39,000 - - - -
Minimum pension liability
adjustment for subsidiary.. - - - - (445,000) (445,000)
Foreign currency trans-
lation adjustment.......... - - - - 1,409,000 1,409,000
------------ -------------- ------------- ------------- ------------- -------------
Comprehensive income....... $ 3,360,000
=============
Balance at December 31, 2004.... $ 4,335,000 $ 126,550,000 $ (26,180,000) $ (46,299,000) $ (2,516,000)
============ ============== ============= ============= =============
XANSER CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
General
The consolidated financial statements include the accounts of Xanser
Corporation (the "Company" or "Parent") and its wholly-owned subsidiaries.
On November 27, 2000, the Board of Directors of the Company authorized the
distribution of its pipeline and terminaling and product marketing business (the
"Distribution") to its stockholders in the form of a new limited liability
company, Kaneb Services LLC ("KSL"). On June 29, 2001, the Distribution was
completed, with each shareholder of the Company receiving one common share of
KSL for each three shares of the Company's common stock held on June 20, 2001,
the record date for the Distribution, resulting in the distribution of 10.85
million KSL common shares. Pursuant to the Distribution, the Company entered
into an agreement (the "Distribution Agreement") with KSL, whereby, KSL is
obligated to pay the Company amounts equal to certain expenses and tax
liabilities incurred by the Company in connection with the Distribution. In
January of 2002, KSL paid the Company $10.0 million for tax liabilities due
under the terms of the Distribution Agreement. The Distribution Agreement also
requires KSL to pay the Company an amount calculated based on any income tax
liability of the Company that, in the sole judgement of the Company, (i) is
attributable to increases in income tax from past years arising out of
adjustments required by federal and state tax authorities, to the extent that
such increases are properly allocable to the businesses that became part of KSL,
or (ii) is attributable to the distribution of KSL's common shares and the
operations of KSL's businesses prior to the distribution date. In the event of
an examination of the Company by federal or state tax authorities, the Company
will have unfettered control over the examination, administrative appeal,
settlement or litigation that may be involved, notwithstanding that KSL has
agreed to pay any additional tax. At December 31, 2004, $6.5 million was
recorded in current assets as receivable from businesses distributed to common
stockholders pursuant to the provisions of the Distribution Agreement.
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. The Company does not have any derivative
financial instruments.
Allowance for Doubtful Accounts Receivable
The Company regularly evaluates and adjusts allowances for doubtful
accounts receivable based on a combination of write-off history, aging analysis,
and information available on specific accounts.
Changes in the allowance for doubtful accounts receivable for the years
ended December 31, 2004, 2003 and 2002 are as follows:
Allowance for doubtful accounts receivable at January 1, 2002 ............. $ 1,034,000
Charged to costs and expenses.......................................... 719,000
Charged to other accounts.............................................. 33,000
Deductions............................................................. (286,000)
-------------
Allowance for doubtful accounts receivable at December 31, 2002............ 1,500,000
Charged to costs and expenses.......................................... 979,000
Charged to other accounts.............................................. 43,000
Deductions............................................................. (1,339,000)
-------------
Allowance for doubtful accounts receivable at December 31, 2003............ 1,183,000
Charged to costs and expenses.......................................... 285,000
Charged to other accounts.............................................. 17,000
Deductions............................................................. (818,000)
-------------
Allowance for doubtful accounts receivable at December 31, 2004............ $ 667,000
=============
Inventories
Substantially all of the Company's inventory balance at December 31, 2004
and 2003 consists of consumable materials and supplies used in the process of
providing technical services to customers. Inventories are valued at the lower
of cost or market. Cost is determined using the weighted average cost method.
Inventory quantities on hand are reviewed regularly based on related service
levels and functionality and carrying cost is reduced accordingly, if the review
indicates a reduction in value is required.
Cost of products sold primarily relates to the cost of equipment sales.
Inventories consumed in the process of providing technical services are included
in operating costs.
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.
The Company follows the provisions of 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. Under SFAS No. 144, the carrying
value of property and equipment is reviewed whenever events or changes in
circumstances indicate that an impairment may exist, using undiscounted future
cash flows. 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. For the years
ended December 31, 2003 and 2002, amortization expense totaled $2.0 million and
$0.1 million, respectively. The Company had no unamortized software costs
capitalized at December 31, 2004 and 2003.
Revenue Recognition
The technical services segment's revenues are based primarily on time and
materials and are generally short term in nature. Revenues are recognized when
services to customers have been rendered or when products are shipped and risk
of ownership is passed to the customer. The technical services business provides
limited warranties to customers, depending upon the service performed. Warranty
claim costs were not material during the three years ended December 31, 2004.
The information technology services segment's revenues under long-term
service contracts are accounted for using a proportional performance method or
on a straight-line basis in accordance with the Securities and Exchange
Commission's Staff Accounting Bulletin ("SAB") No. 101 "Revenue Recognition in
Financial Statements", as amended by SAB No. 104. The accounting policies for
revenue recognition in the information technology services segment comply with
Emerging Issues Task Force ("EITF") Issue No. 00-21, "Revenue Arrangements with
Multiple Deliverables" and with AICPA Statement of Position ("SOP") No. 97-2
"Software Revenue Recognition". ETIF No. 00-21 provides guidance on how to
account for arrangements that involve the delivery or performance of multiple
products, services and/or rights to use assets. 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.
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, 2004 and 2003,
accumulated other comprehensive income (loss) consists of cumulative foreign
currency translation adjustments of ($2.9) million and ($1.5) million,
respectively, and minimum pension liability adjustments for subsidiaries (see
Note 3) of $5.4 million and $5.0 million, respectively.
Excess of Cost Over Fair Value of Net Assets of Acquired Businesses
Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and
Other Intangible Assets", which eliminates the amortization for goodwill (excess
of cost over fair value of net assets of acquired businesses) and other
intangible assets with indefinite lives. Under SFAS No. 142, intangible assets
with lives restricted by contractual, legal, or other means will continue to be
amortized over their useful lives. At December 31, 2004, the Company had no
intangible assets subject to amortization under SFAS No. 142. Goodwill and other
intangible assets not subject to amortization are tested for impairment annually
at year end or more frequently if events or changes in circumstances indicate
that the assets might be impaired. SFAS No. 142 requires a two-step process for
testing impairment. First, the fair value of each reporting unit is compared to
its carrying value to determine whether an indication of impairment exists. If
an impairment is indicated, then second, the implied fair value of the reporting
unit's goodwill is determined by allocating the unit's fair value to its assets
and liabilities (including any unrecognized intangible assets) as if the
reporting unit had been acquired in a business combination. The amount of
impairment for goodwill and other intangible assets is measured as the excess of
a reporting unit's carrying value over its implied fair value. Based on
valuations and analysis performed by independent valuation consultants and the
Company in the first quarter of 2002, the Company determined that the carrying
value of its goodwill exceeded implied fair value, and therefore, the Company
recorded a non-cash charge, after income taxes, of $45.3 million as the
cumulative effect of a change in accounting principle. No impairment charge was
appropriate under the previous goodwill impairment standard (SFAS No. 121),
which was based on undiscounted cash flows. Based on valuations and analysis
performed by the Company at December 31, 2004, 2003 and 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 years ended December 31, 2004 and 2003 and
2002 are as follows:
Excess of cost over fair value of net assets of acquired
businesses at December 31, 2001......................................... $61,054,000
Cumulative effect of change in accounting principle
recorded in the first quarter of 2002................................... (47,252,000)
-----------
Excess of cost over fair value of net assets of acquired
businesses (technical services) at December 31, 2004, 2003 and 2002..... $13,802,000
===========
Stock Option Plans
In December of 2004, the Financial Accounting Standards Board (FASB) issued
SFAS No. 123 (revised 2004), "Share-Based Payment" (SFAS No. 123R), which
addresses the accounting for share-based payment transactions in which an
enterprise receives employee services in exchange for equity instruments of the
enterprise, or liabilities that are based on the fair value of the enterprise's
equity instruments or that may be settled by the issuance of such equity
instruments. SFAS No. 123R eliminates the ability to account for share-based
compensation transactions using the intrinsic value method under Accounting
Principles Board (APB) Opinion 25, "Accounting for Stock Issued to Employees",
and generally requires that such transactions be accounted for using a
fair-value-based method. The Company is currently evaluating the provisions of
SFAS No. 123R to determine which fair-value-based model and transitional
provision to follow upon adoption. The alternatives for transition include
either the modified prospective or the modified retrospective methods. The
modified prospective method requires that compensation expense be recorded for
all unvested stock options and restricted stock as the requisite service is
rendered beginning with the first quarter of adoption. The modified
retrospective method requires recording compensation expense for stock options
and restricted stock beginning with the first period restated. Under the
modified retrospective method, prior periods may be restated either as of the
beginning of the year of adoption or for all periods presented. SFAS No. 123R
will be effective for the Company beginning in the third quarter of 2005. The
impact of adoption on the Company's consolidated financial statements is still
being evaluated.
In accordance with the provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation", the Company applies APB Opinion 25 and related
interpretations in accounting for its stock option plans and, accordingly, does
not recognize compensation cost based on the fair value of the options granted
at grant date as prescribed by SFAS No. 123. The Company also applies the
disclosure provisions of SFAS No. 123, as amended by SFAS No. 148, "Accounting
for Stock-based Compensation - Transition and Disclosure" as if the
fair-value-based method had been applied in measuring compensation expense. The
Black-Scholes option pricing model has been used to estimate the value of stock
options issued, and the assumptions in the calculations under such model include
stock price standard deviation or volatility ranging from 35.5% to 35.8% for the
year ended December 31, 2004, 36.2% to 36.3% for the year ended December 31,
2003 and 32.7% to 36.6% for the year ended December 31, 2002, based on weekly
average variances of the stock for the five year period preceding issuance, a
risk-free rate of return ranging from 3.71% to 3.75% for the year ended December
2004, 3.27% to 3.54% for the year ended December 31, 2003 and 3.25% to 4.78% for
the year ended December 31, 2002, 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,
--------------------------------------------------
2004 2003 2002
--------------- -------------- --------------
Reported net income (loss)............................... $ 2,396,000 $ (13,105,000) $ (47,511,000)
Stock-based employee compensation expense determined
under the fair value based method...................... (381,000) (138,000) (620,000)
--------------- -------------- --------------
Pro forma net income (loss).............................. $ 2,015,000 $ (13,243,000) $ (48,131,000)
=============== ============== ==============
Earning (loss) per share:
Basic - as reported.................................... $ 0.07 $ (0.41) $ (1.45)
=============== ============== ==============
Basic - pro forma...................................... $ 0.06 $ (0.41) $ (1.48)
=============== ============== ==============
Diluted - as reported.................................. $ 0.07 $ (0.41) $ (1.45)
=============== ============== ==============
Diluted - pro forma.................................... $ 0.06 $ (0.41) $ (1.48)
=============== ============== ==============
Change in Presentation
Certain prior year financial statement items have been reclassified to
conform with the 2004 presentation.
Estimates
The preparation of the Company's financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
2. INCOME TAXES
Income (loss) before cumulative effect of change in accounting principle
and income tax expense is comprised of the following components:
Year Ended December 31,
-----------------------------------------------------
2004 2003 2002
-------------- ------------- --------------
Domestic operations......................... $ (1,101,000) $ (12,562,000) $ (11,427,000)
Foreign operations.......................... 5,245,000 8,182,000 5,916,000
-------------- ------------- -------------
Income (loss) before income taxes........... $ 4,144,000 $ (4,380,000) $ (5,511,000)
============== ============= =============
Income tax expense (benefit) before cumulative effect of change in
accounting principle is comprised of the following components:
Year Ended
December 31, Federal Foreign State Total
------------------------ -------------- ------------- -------------- --------------
2004:
Current............... $ - $ 2,809,000 $ - $ 2,809,000
Deferred.............. - (1,061,000) - (1,061,000)
-------------- ------------- -------------- --------------
$ - $ 1,748,000 $ - $ 1,748,000
============== ============= ============== ==============
2003:
Current............... $ (1,704,000) $ 2,623,000 $ (57,000) $ 862,000
Deferred.............. 8,616,000 (1,530,000) 777,000 7,863,000
-------------- ------------- -------------- --------------
$ 6,912,000 $ 1,093,000 $ 720,000 $ 8,725,000
============== ============= ============== ==============
2002:
Current............... $ (2,140,000) $ 65,000 $ 72,000 $ (2,003,000)
Deferred.............. (1,825,000) 1,427,000 (868,000) (1,266,000)
-------------- ------------- -------------- --------------
$ (3,965,000) $ 1,492,000 $ (796,000) $ (3,269,000)
============== ============= ============== ==============
The reasons for the differences between the amount of tax expense (benefit)
provided and the amount of tax expense (benefit) computed by applying the
statutory federal income tax rate to income (loss) before income taxes and
cumulative effect of change in accounting principle for the years 2004, 2003 and
2002 are as follows:
Year Ended December 31,
-----------------------------------------------------------------
2004 2003 2002
----------------- ------------------ -----------------
Expected tax expense (benefit)
at statutory rates............. $ 1,409,000 $ (1,533,000) $ (1,929,000)
Increase (decrease) in taxes
resulting from:
Change in valuation allowance.. 589,000 12,112,000 -
State income taxes, net........ (102,000) (468,000) (517,000)
Foreign tax rate differences... (35,000) (1,689,000) (629,000)
Resolution of state and foreign
tax issues and other......... (113,000) 303,000 (194,000)
----------------- ------------------ ----------------
$ 1,748,000 $ 8,725,000 $ (3,269,000)
================= ================== ================
At December 31, 2004, the Company had available domestic tax net operating
loss carryforwards ("NOLs"), which will expire, if unused, as follows:
$1,211,000 in 2006; $3,033,000 in 2007; $13,365,000 in 2022; $10,871,000 in
2023; and, $1,220,000 in 2024. 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.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
2004 and 2003 are as follows:
December 31,
-------------------------------------
2004 2003
-------------- --------------
Deferred tax assets:
Net operating loss carryforwards......................... $ 10,494,000 $ 9,610,000
Alternative minimum tax credit carryforwards............. 2,504,000 2,505,000
Accrued liabilities...................................... 1,290,000 1,547,000
Intangibles.............................................. 1,293,000 1,528,000
Foreign subsidiaries, primarily accrued liabilities...... 3,302,000 2,036,000
Other.................................................... 1,608,000 1,399,000
-------------- --------------
Total gross deferred tax assets.......................... 20,491,000 18,625,000
Deferred tax liabilities:
Plant and equipment, principally due to differences in
depreciation........................................... (354,000) (343,000)
Foreign deferred tax liabilities......................... (15,000) -
-------------- --------------
Net deferred tax asset before valuation allowance.......... 20,122,000 18,282,000
Less valuation allowance................................... (16,835,000) (16,246,000)
-------------- --------------
Net deferred tax asset................................... $ 3,287,000 $ 2,036,000
============== ==============
The Company maintains a valuation allowance to adjust the basis of net
deferred tax assets in accordance with SFAS No. 109 "Accounting for Income
Taxes". Based on evaluations performed by the Company pursuant to SFAS No. 109
in the fourth quarter of 2003, a non-cash valuation allowance of $12.1 million
was provided with respect to the Company's federal and state net deferred tax
assets.
3. RETIREMENT PLANS
The Company has a defined contribution plan which covers substantially all
domestic employees and provides for varying levels of employer matching.
Contributions to this plan were $0.7 million, $0.7 million and $0.8 million for
2004, 2003 and 2002, respectively.
One of the Company's foreign subsidiaries has a defined benefit pension
plan covering substantially all of its United Kingdom employees (the "U.K.
Plan"). The benefit is based on the average of the employee's salary for the
last three years of employment. Generally, the employee contributes 5.5% to 12%
and the employer contributes up to 12% of pay. Plan assets are primarily
invested in unitized pension funds managed by United Kingdom registered fund
managers. The most recent valuation of the U.K. Plan was performed as of October
31, 2004.
Net pension cost for the U.K. Plan included the following components:
Year Ended December 31,
---------------------------------------------------
2004 2003 2002
-------------- ------------- -------------
Net periodic pension cost:
Service cost................................ $ 466,000 $ 787,000 $ 658,000
Interest cost............................... 3,461,000 2,954,000 2,522,000
Expected return on plan assets.............. (3,587,000) (2,946,000) (3,012,000)
Amortization of prior service cost.......... (112,000) 16,000 15,000
Recognized net loss......................... 737,000 768,000 4,000
-------------- ------------- -------------
Net periodic pension cost..................... $ 965,000 $ 1,579,000 $ 187,000
============== ============= =============
The weighted average assumptions used to determine benefit obligations and
net periodic costs are as follows:
December 31,
--------------------------------
2004 2003
-------------- --------------
Discount rate............................................... 5.8% 6.0%
Expected long-term return on plan assets.................... 7.5% 7.5%
Rate of compensation increase............................... 3.3% 3.3%
The expected long-term rate of return on invested assets is determined
based on the weighted average of expected returns on asset investment categories
as follows: 8.5% for equity securities, 8.5% for real estate, 6.0% for debt
securities and 5.0 % for cash and other.
December 31,
--------------------------------
2004 2003
-------------- --------------
Projected benefit obligation:
Beginning of year.......................................... $ 56,466,000 $ 48,326,000
Service cost............................................... 466,000 787,000
Interest cost.............................................. 3,461,000 2,954,000
Contributions.............................................. 920,000 761,000
Benefits paid.............................................. (1,726,000) (1,472,000)
Foreign currency translation adjustment and other.......... 6,018,000 5,110,000
------------- -------------
End of year................................................ 65,605,000 56,466,000
------------- -------------
Fair value of plan assets:
Beginning of year.......................................... 46,822,000 38,234,000
Actual gain on plan assets................................. 5,045,000 4,667,000
Contributions.............................................. 920,000 761,000
Benefits paid.............................................. (1,726,000) (1,472,000)
Foreign currency translation adjustment and other.......... 3,763,000 4,632,000
------------- -------------
End of year................................................ 54,824,000 46,822,000
------------- -------------
Excess projected obligation over fair value at end of year... (10,781,000) (9,644,000)
Unrecognized net actuarial loss.............................. 14,803,000 13,591,000
Unamortized prior service cost............................... (1,402,000) (1,416,000)
------------- -------------
Net pension prepaid asset.................................... 2,620,000 2,531,000
Additional minimum liability................................. (10,121,000) (8,845,000)
------------- -------------
Net pension liability........................................ $ (7,501,000) $ (6,314,000)
============= =============
The accumulated benefit obligation for the U.K. Plan was $62.3 million and
$53.1 million at December 31, 2004 and 2003, respectively.
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 2004, 2003 and
2002, the Company recorded adjustments to minimum liabilities of $0.6 million,
$(1.9) million and $4.9 million, respectively, which, net of deferred income
taxes of $0.2 million, $(0.7) million and $1.5 million, respectively, was
recorded as accumulated other comprehensive income.
The U.K. Plan's weighted average asset allocations are as follows:
December 31,
--------------------------------
2004 2003
-------------- --------------
Equity securities............................................ 57.3% 59.2%
Debt securities.............................................. 34.9% 35.8%
Real estate.................................................. 0.7% 1.6%
Cash and other............................................... 7.1% 3.4%
------------- ------------
100.0% 100.0%
============= ============
The trustees of the U.K. Plan have established a long-term investment
strategy comprising global investment weightings targeted at 55% for equity
securities and 45% for debt securities and other.
The Company expects to contribute approximately $0.9 million (unaudited) to
the U.K. Plan in 2005.
At December 31, 2004, expected future benefit payments, which reflect
expected future service, are as follows:
Year ending December 31,
2005............................................. $ 1,824,000
2006............................................. 1,920,000
2007............................................. 2,016,000
2008............................................. 2,112,000
2009............................................. 2,304,000
2010-2014........................................ 13,438,000
4. PROPERTY AND EQUIPMENT
The cost of property and equipment is as follows:
Estimated
Useful December 31,
Life --------------------------------
(Years) 2004 2003
-------------- -------------- --------------
Technical services........................ 3 - 20 $ 34,264,000 $ 31,237,000
Information technology services........... 3 - 7 8,402,000 6,962,000
General corporate......................... 3 - 10 3,905,000 3,953,000
-------------- --------------
Total property and equipment.............. 46,571,000 42,152,000
Less accumulated depreciation
and amortization........................ 32,933,000 29,879,000
-------------- --------------
Net property and equipment................ $ 13,638,000 $ 12,273,000
============== ==============
Equipment under capital leases is included in the cost, and accumulated
depreciation and amortization, of property and equipment as follows:
December 31,
--------------------------------
2004 2003
-------------- --------------
Equipment.............................................. $ 2,920,000 $ 2,707,000
Less accumulated depreciation and amortization ........ 1,473,000 1,160,000
-------------- --------------
Net equipment acquired under capital leases............ $ 1,447,000 $ 1,547,000
============== ==============
5. LONG-TERM DEBT
Long-term debt is summarized as follows:
December 31,
--------------------------------
2004 2003
-------------- --------------
Technical services credit facility due in January of 2009 $ 11,532,000 $ 14,296,000
Technical services foreign subsidiary notes, repaid in
2004 ................................................ - 301,000
Capital leases......................................... 1,490,000 1,598,000
Parent company 8.75% convertible subordinated
debentures due in 2008............................... 5,000,000 5,000,000
-------------- --------------
Total long-term debt................................... 18,022,000 21,195,000
Less current portion................................... 524,000 738,000
-------------- --------------
Total long-term debt, less current portion............. $ 17,498,000 $ 20,457,000
============== ==============
At December 31, 2004, $11.5 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
Parent Company. Borrowings under the Loan Agreement bear interest at the option
of the borrower at variable rates (3.95% at December 31, 2004), based on either
the LIBOR rate or prime rate, have a commitment fee on the unused portion of the
facility and contain certain financial and operational covenants with respect to
the technical services group, including percentage of tangible assets and
revenues related to certain geographical areas, ratios of debt to cash flow, as
defined in the Loan Agreement, and cash flow to fixed charges and capital
expenditures. At December 31, 2004, the Company was in compliance with all
covenants. The Loan Agreement matures in January 2009 and is secured by
substantially all of the tangible assets of the technical services group.
The Company's 8.75% subordinated debentures ($5.0 million outstanding at
December 31, 2004) are convertible into shares of the Company's common stock at
the conversion price, adjusted in 2001 for the Distribution of KSL, of $5.26 per
share. On March 1, 2002, the Company purchased $10.0 million of subordinated
debentures at par value, which satisfies its sinking fund requirements on these
subordinated debentures until their maturity in 2008. On September 30, 2003, the
Company purchased an additional $4.9 million of subordinated debentures at par
value, plus accrued interest. The purchases were funded with cash on hand.
At December 31, 2004, annual sinking fund requirements and debt maturities
on consolidated debt, including capital leases, were as follows: $0.5 million;
$0.4 million; $0.4 million; $5.1 million; and $11.6 million; respectively, for
each of the five years ending December 31, 2009.
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, 2002.......................... 36,809,267 4,097,847 32,711,420
Common shares issued (repurchased), net............. 526,909 1,686,609 (1,159,700)
------------ ------------ --------------
Balance at December 31, 2002........................ 37,336,176 5,784,456 31,551,720
Common shares issued................................ - (28,806) 28,806
------------ ------------ --------------
Balance at December 31, 2003........................ 37,336,176 5,755,650 31,580,526
Common shares issued................................ 17,579 (19,149) 36,728
------------ ------------ --------------
Balance at December 31, 2004........................ 37,353,755 5,736,501 31,617,254
============ ============ ==============
In connection with a stock repurchase plan authorized by the Company's
Board of Directors, the Company purchased in 2002 approximately 1,744,000 shares
of the Company's common stock, at a cost of $3.3 million. The stock purchases
were funded with cash on hand.
Series 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, 2004 and 2003 there were no Series B Preferred shares outstanding.
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, 2004,
options on 3,334,174 shares at prices ranging from $0.54 to $2.90 were
outstanding, of which 2,115,335, were exercisable at prices ranging from $0.54
to $2.90. At December 31, 2003, options on 3,008,711 shares at prices ranging
from $.54 to $3.05 were outstanding, of which 1,925,330, were exercisable at
prices ranging from $.54 to $3.05. At December 31, 2002, options on 3,103,014
shares at prices ranging from $.54 to $3.05 were outstanding, of which 1,749,743
were exercisable at prices ranging from $.54 to $3.05. The weighted average fair
market value of options at the time of grant for the years 2004, 2003 and 2002
was $0.92 per share, $0.96 per share and $0.86 per share, respectively,
calculated using the Black-Scholes option pricing model.
At December 31, 2004, the range of option exercise prices, number of
options outstanding, number of options exercisable and weighted average exercise
price, are as follows:
Options Average Price per Option Average
Range of Exercise ---------------------------- ------------------------ Contractual
Price Outstanding Exercisable Outstanding Exercisable Life (years)
------------------------ ------------- ------------- ----------- ----------- -------------
$0.54 - $0.81........... 70,000 70,000 $ 0.56 $ 0.56 0.2
$0.82 - $1.23........... 817,629 817,629 $ 0.90 $ 0.90 1.4
$1.24 - $1.86........... 514,411 499,411 $ 1.59 $ 1.58 3.9
$1.87 - $2.81........... 1,911,134 715,695 $ 2.41 $ 2.41 8.0
$2.82 - $2.90........... 21,000 12,600 $ 2.90 $ 2.90 6.6
------------- ------------
3,334,174 2,115,335 $ 1.87 $ 1.57 5.5
============= ============
The changes in stock options outstanding for the Company's plans for the
years 2004, 2003 and 2002 were as follows:
Average Price
Shares per Share
------------- ---------------
Outstanding at January 1, 2002......................... 3,049,083 $ 1.66
Granted................................................ 956,132 $ 2.20
Exercised.............................................. (533,234) $ 1.09
Forfeited.............................................. (368,967) $ 2.71
-------------
Outstanding at December 31, 2002....................... 3,103,014 $ 1.80
Granted................................................ 155,000 $ 2.58
Forfeited.............................................. (249,303) $ 2.22
-------------
Outstanding at December 31, 2003....................... 3,008,711 $ 1.80
Granted................................................ 725,161 $ 2.50
Exercised.............................................. (17,579) $ 1.53
Forfeited.............................................. (382,119) $ 2.50
-------------
Outstanding at December 31, 2004....................... 3,334,174 $ 1.87
=============
There were no stock options which expired during the years ended December
31, 2004, 2003 and 2002.
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, 2004, 21,921 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, 2004, approximately 415,718 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") before cumulative effect of change in accounting principle:
Weighted
Average
Net Common Per-Share
Income (loss) Shares Amount
--------------- -------------- --------------
Year Ended December 31, 2004
----------------------------
Basic EPS -
Net income............................. $ 2,396,000 32,035,000 $ 0.07
Effect of dilutive securities............. - 1,173,000
--------------- --------------
Diluted EPS -
Net income............................. $ 2,396,000 33,208,000 $ 0.07
=============== ============== ==============
Year Ended December 31, 2003
----------------------------
Basic EPS -
Net income (loss)...................... $ (13,105,000) 31,995,000 $ (0.41)
Effect of dilutive securities............. - -
--------------- --------------
Diluted EPS -
Net income (loss)...................... $ (13,105,000) 31,995,000 $ (0.41)
=============== ============== ==============
Year Ended December 31, 2002
----------------------------
Basic EPS -
Net income (loss), before cumulative
effect of change in accounting
principle............................ $ (2,242,000) 32,747,000 $ (0.07)
==============
Effect of dilutive securities............. - -
--------------- --------------
Diluted EPS -
Net income (loss), before cumulative
effect of change in accounting
principle............................ $ (2,242,000) 32,747,000 $ (0.07)
=============== ============== ==============
Options to purchase 134,432 shares of common stock at weighted average
prices of $2.73 were outstanding at December 31, 2004, 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. As a result of the net losses
for 2003 and 2002, all 3,008,711 and 3,103,014 stock options, at weighted
average prices of $1.80 for 2003 and 2002, respectively, were excluded from the
computation of diluted earnings per share because the effects would be
anti-dilutive. The convertible subordinated debentures were excluded from the
computations of diluted EPS in 2004 because the conversion price was greater
than the market price. Additionally, the Company's 8.75% convertible
subordinated debentures were excluded from the computation of diluted EPS in
2003 and 2002 because the effect of assumed conversion was 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 was
$3.8 million for 2004, $4.1 million for 2003 and $3.9 million for 2002.
At December 31, 2004, future minimum rental commitments under all capital
leases and operating leases are as follows:
Capital Operating
Leases Leases
-------------- --------------
2005..................................................... $ 598,000 $ 4,289,000
2006 .................................................... 514,000 3,816,000
2007..................................................... 387,000 2,439,000
2008..................................................... 110,000 1,221,000
2009..................................................... 41,000 1,010,000
Thereafter............................................... 2,000 1,715,000
-------------- --------------
Total minimum lease payments............................. 1,652,000 $ 14,490,000
==============
Less amounts representing interest....................... 162,000
--------------
Present value of net minimum lease payments.............. $ 1,490,000
==============
The Company has contingent liabilities resulting from litigation, claims
and commitments incident to the ordinary course of business. Management
believes, after consulting with counsel, that the ultimate resolution of such
contingencies will not have a materially adverse effect on the financial
position, results of operations or liquidity of the Company.
9. BUSINESS SEGMENT DATA
The Company provides technical services to an international client base
that includes refineries, chemical plants, pipelines, offshore drilling and
production platforms, steel mills, food and drink processing facilities, power
generation, and other process industries. Additionally, the Company's
information technology services segment provides consulting services, hardware
sales and other related information management and processing services to
healthcare, governmental, insurance and financial institutions.
The Company measures segment profit as operating income. Segment operating
results are reported on the basis that is used internally for evaluating segment
performance and deciding how to allocate resources to segments. General
corporate includes compensation and benefits paid to corporate officers and
employees, certain insurance, legal, tax, financial reporting and other
administrative costs, including costs of maintaining a public company, which are
not related to specific business segments.
Segment assets are those assets, including excess of cost over fair value
of net assets of acquired businesses, controlled by each reportable segment.
General corporate assets include corporate cash balances, deferred taxes and
other assets not related to specific segments.
Year Ended December 31,
---------------------------------------------------
2004 2003 2002
--------------- -------------- --------------
Business segment revenues:
Technical services.......................... $ 118,415,000 $ 101,018,000 $ 90,747,000
Information technology services............. 27,272,000 34,702,000 40,689,000
--------------- -------------- --------------
$ 145,687,000 $ 135,720,000 $ 131,436,000
=============== ============== ==============
Technical services segment revenues:
Under pressure services..................... $ 50,308,000 $ 41,875,000 $ 41,192,000
Turnaround services......................... 56,212,000 48,768,000 41,949,000
Other services.............................. 11,895,000 10,375,000 7,606,000
--------------- -------------- --------------
$ 118,415,000 $ 101,018,000 $ 90,747,000
=============== ============== ==============
Business segment profit (loss):
Technical services ......................... $ 7,879,000 $ 6,337,000 $ 3,580,000
Information technology services............. 342,000 (6,518,000) (3,796,000)
General corporate........................... (3,262,000) (3,186,000) (3,991,000)
--------------- -------------- --------------
Operating income (loss)................... 4,959,000 (3,367,000) (4,207,000)
Interest income............................. 174,000 260,000 460,000
Interest expense............................ (989,000) (1,273,000) (1,764,000)
--------------- -------------- --------------
Income (loss) before income taxes and
cumulative effect of change in accounting
principle................................. $ 4,144,000 $ (4,380,000) $ (5,511,000)
=============== ============== ==============
Business segment assets:
Depreciation and amortization:
Technical services........................ $ 2,582,000 $ 2,609,000 $ 2,540,000
Information technology services........... 970,000 3,251,000 1,125,000
--------------- -------------- --------------
$ 3,552,000 $ 5,860,000 $ 3,665,0000
=============== ============== ==============
Capital expenditures:
Technical services........................ $ 2,927,000 $ 1,897,000 $ 2,912,000
Information technology services........... 1,606,000 1,309,000 2,592,000
General corporate......................... - 105,000 -
--------------- -------------- --------------
$ 4,533,000 $ 3,311,000 $ 5,504,000
=============== ============== ==============
December 31,
---------------------------------------------------
2004 2003 2002
--------------- -------------- --------------
Total assets:
Technical services........................ $ 69,962,000 $ 66,117,000 $ 63,319,000
Information technology services........... 16,720,000 14,902,000 26,956,000
General corporate......................... 25,238,000 23,771,000 37,372,000
--------------- -------------- --------------
$ 111,920,000 $ 104,790,000 $ 127,647,000
=============== ============== ==============
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,
---------------------------------------------------
2004 2003 2002
--------------- -------------- --------------
Geographical area revenues:
United States............................... $ 55,041,000 $ 57,987,000 $ 66,888,000
Europe...................................... 73,069,000 62,995,000 53,187,000
Asia-Pacific................................ 17,577,000 14,738,000 11,361,000
--------------- -------------- --------------
$ 145,687,000 $ 135,720,000 $ 131,436,000
=============== ============== ==============
Geographical area operating income (loss):
United States............................... $ (5,673,000) $ (13,270,000) $ (11,204,000)
Europe...................................... 8,152,000 7,756,000 5,990,000
Asia-Pacific................................ 2,480,000 2,147,000 1,007,000
--------------- -------------- --------------
$ 4,959,000 $ (3,367,000) $ (4,207,000)
=============== ============== ==============
December 31,
---------------------------------------------------
2004 2003 2002
--------------- -------------- --------------
Geographical area property and equipment, net:
United States............................... $ 5,145,000 $ 5,128,000 $ 7,269,000
Europe...................................... 6,930,000 5,874,000 5,652,000
Asia-Pacific................................ 1,563,000 1,271,000 1,034,000
--------------- -------------- --------------
$ 13,638,000 $ 12,273,000 $ 13,955,000
=============== ============== ==============
Included in the Europe geographic region for the years ended December 31,
2004, 2003 and 2002 is United Kingdom revenues of $45.4 million, $37.8 million
and $31.9 million, respectively, and United Kingdom operating income of $5.9
million, $4.6 million and $4.1 million, respectively. At December 31, 2004, 2003
and 2002, United Kingdom property plant and equipment, net was $4.7 million,
$4.4 million and $4.2 million, respectively.
10. ACCRUED EXPENSES
Accrued expenses are comprised of the following components:
December 31,
---------------------------------
2004 2003
-------------- --------------
Accrued compensation and benefits............................. $ 11,016,000 $ 9,664,000
Accrued equipment cost of sales............................... 3,841,000 -
Accrued taxes other than income............................... 913,000 703,000
Accrued interest.............................................. 200,000 202,000
Other......................................................... 7,446,000 7,686,000
-------------- --------------
$ 23,416,000 $ 18,255,000
============== ==============
11. 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, 2004 and 2003 was approximately
$18 million and $22 million as compared to the carrying value of $18 million and
$21 million, respectively. These fair values were estimated using discounted
cash flow analysis, based on the Company's current incremental borrowing rates
for similar types of borrowing arrangements, when quoted market prices were not
available. The Company has not determined the fair value of its capital leases
as it is not practicable. The estimates presented above are not necessarily
indicative of the amounts that would be realized in a current market exchange.
The Company has no derivative financial instruments.
The technical services segment provides services to an international client
base that includes petroleum refineries, chemical plants, offshore energy
production platforms, steel mills, nuclear power stations, conventional power
stations, pulp and paper mills, food and beverage processing plants and other
flow-process facilities. The information technology services segment provides
services and related products to the U. S. Government and commercial sectors.
The Company does not believe that it has a significant concentration of credit
risk at December 31, 2004, as the Company's accounts receivable are generated
from these distinct business segments with customers located throughout the
United States, Europe and Asia-Pacific.
12. QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly operating results for 2004 and 2003 are summarized as follows:
Quarter Ended
----------------------------------------------------------------------
March 31, June 30, September 30, December 31,
-------------- --------------- -------------- --------------
2004:
Revenues.......................... $ 32,164,000 $ 35,656,000 $ 35,764,000 $ 42,103,000
============== =============== ============== ==============
Operating income.................. $ 390,000 $ 1,617,000 $ 1,261,000 $ 1,691,000
============== =============== ============== ==============
Net income........................ $ 110,000 $ 869,000 $ 205,000 $ 1,212,000
============== =============== ============== ==============
Earnings per common share -
basic and diluted............... $ - $ 0.03 $ 0.01 $ 0.04
============== =============== ============== ==============
2003:
Revenues.......................... $ 32,224,000 $ 33,233,000 $ 37,742,000 $ 32,521,000
============== =============== ============== ==============
Operating income (loss)........... $ 226,000 $ 689,000 $ 238,000 $ (4,520,000)
============== =============== ============== ==============
Net income (loss)................. $ 143,000 $ 420,000 $ 367,000 $ (14,035,000)(a)
============== =============== ============== ==============
Earnings (loss) per common share -
basic and diluted............... $ - $ 0.01 $ 0.01 $ (0.44)
============== =============== ============== ==============
(a) See Note 2 regarding increase in valuation allowance for deferred
tax assets. Additionally, fourth quarter 2003 results include a
charge of $3.5 million pertaining to the write-down of inventory
and software costs, and employee and other termination expenses
resulting from the closing of such operations.
Schedule I
XANSER CORPORATION (PARENT COMPANY)
CONDENSED STATEMENTS OF INCOME
Year Ended December 31,
-----------------------------------------------------
2004 2003 2002
------------- ------------- --------------
General and administrative expenses..................... $ (3,262,000) $ (3,186,000) $ (3,991,000)
Interest expense........................................ (477,000) (693,000) (991,000)
Interest and other income............................... 69,000 159,000 360,000
Equity in income (loss) of subsidiaries................. 6,066,000 (1,426,000) (1,969,000)
------------- ------------- --------------
Income (loss) before income taxes and cumulative effect
of change in accounting principle.................... 2,396,000 (5,146,000) (6,591,000)
Income tax benefit (expense)............................ - (7,959,000) 4,349,000
------------- ------------- --------------
Income (loss) before cumulative effect of change in
accounting principle................................. 2,396,000 (13,105,000) (2,242,000)
Cumulative effect of change in accounting principle -
adoption of new accounting standard for
goodwill, net of income taxes........................ - - (45,269,000)
------------- ------------- --------------
Net income (loss)....................................... $ 2,396,000 $ (13,105,000) $ (47,511,000)
============= ============= ==============
Earnings (loss) per common share - basic and diluted:
Before cumulative effect of change in
accounting principle.............................. $ 0.07 $ (0.41) $ (0.07)
Cumulative effect of change in accounting
principle......................................... - - (1.38)
------------- ------------- -------------
$ 0.07 $ (0.41) $ (1.45)
============= ============== =============
Schedule I
(Continued)
XANSER CORPORATION (PARENT COMPANY)
CONDENSED BALANCE SHEETS
December 31,
--------------------------------------
2004 2003
--------------- ---------------
ASSETS
Current assets:
Cash and cash equivalents............................................ $ 15,060,000 $ 13,109,000
Receivable from businesses distributed to common stockholders........ 6,699,000 7,564,000
Prepaid expenses and other........................................... 63,000 961,000
--------------- ---------------
Total current assets............................................... 21,822,000 21,634,000
--------------- ---------------
Property and equipment.................................................. 3,905,000 3,953,000
Less accumulated depreciation and amortization.......................... 3,848,000 3,848,000
--------------- ---------------
Net property and equipment......................................... 57,000 105,000
--------------- ---------------
Investments in, advances to and notes receivable
from subsidiaries..................................................... 47,482,000 43,891,000
--------------- ---------------
$ 69,361,000 $ 65,630,000
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses................................ $ 6,904,000 $ 7,004,000
--------------- ---------------
Total current liabilities.......................................... 6,904,000 7,004,000
--------------- ---------------
Long-term debt, less current portion.................................... 5,000,000 5,000,000
Other liabilities....................................................... 1,567,000 1,174,000
Stockholders' equity:
Common stock, without par value...................................... 4,335,000 4,333,000
Additional paid-in capital........................................... 126,550,000 126,561,000
Treasury stock, at cost.............................................. (26,180,000) (26,267,000)
Retained earnings (accumulated deficit).............................. (46,299,000) (48,695,000)
Accumulated comprehensive income (loss).............................. (2,516,000) (3,480,000)
--------------- ---------------
Total stockholders' equity....................................... 55,890,000 52,452,000
--------------- ---------------
$ 69,361,000 $ 65,630,000
=============== ===============
Schedule I
(Continued)
XANSER CORPORATION (PARENT COMPANY)
CONDENSED STATEMENTS OF CASH FLOWS
Year Ended December 31,
-----------------------------------------------------------
2004 2003 2002
----------------- ---------------- ------------------
Operating activities:
Net income (loss)................................. $ 2,396,000 $ (13,105,000) $ (47,511,000)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Equity in income of subsidiaries, net of
dividends................................... (2,627,000) 1,554,000 (155,000)
Deferred income taxes......................... - 9,393,000 181,000
Cumulative effect of change in accounting
principle................................... - - 45,269,000
Other, net.................................... 393,000 477,000 648,000
Changes in current assets and liabilities:
Prepaid expenses and other current assets... 898,000 (400,000) 2,246,000
Accounts payable and accrued expenses ...... (100,000) 84,000 (4,672,000)
----------------- ---------------- ------------------
Net cash provided by (used in) operating
activities................................ 960,000 (1,997,000) (3,994,000)
----------------- ---------------- ------------------
Investing activities:
Capital expenditures.............................. - (105,000) -
Change in other assets, net....................... 48,000 2,852,000 1,883,000
----------------- ---------------- ------------------
Net cash provided by investing activities... 48,000 2,747,000 1,883,000
----------------- ---------------- ------------------
Financing activities:
Payments on debt.................................. - (4,930,000) (11,466,000)
Common stock issued and other..................... 78,000 9,000 450,000
Purchase of treasury stock........................ - - (3,286,000)
Increase (decrease) in receivable from businesses
distributed to common stockholders.............. 865,000 (152,000) 10,492,000
----------------- ---------------- ------------------
Net cash provided by (used in)
financing activities...................... 943,000 (5,073,000) (3,810,000)
----------------- ---------------- ------------------
Increase (decrease) in cash and cash equivalents..... 1,951,000 (4,323,000) (5,921,000)
Cash and cash equivalents at beginning of year....... 13,109,000 17,432,000 23,353,000
----------------- ---------------- ------------------
Cash and cash equivalents at end of year............. $ 15,060,000 $ 13,109,000 $ 17,432,000
================= ================ ==================
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, 2004:
For doubtful receivables
classified as current assets... $ 1,183 $ 285 $ 17(a) $ (818)(b) $ 667
============= =========== ============= ============ ===========
For deferred tax asset valuation
allowance classified as
non-current assets............. $ 16,246 $ 589 $ - $ - $ 16,835
============= ============ ============= ============ ===========
Year Ended December 31, 2003:
For doubtful receivables
classified as current assets... $ 1,500 $ 979 $ 43(a) $ (1,339)(b) $ 1,183
============= ============ ============= ============ ===========
For deferred tax asset valuation
allowance classified as
non-current assets............. $ 4,134 $ 12,112 $ - $ - $ 16,246
============= ============ ============= ============ ===========
Year Ended December 31, 2002:
For doubtful receivables
classified as current assets... $ 1,034 $ 719 $ 33(a) $ (286)(b) $ 1,500
============= ============ ============= ============ ===========
For deferred tax asset valuation
allowance classified as
non-current assets............. $ 4,134 $ - $ - $ - $ 4,134
============= ============ ============= ============ ===========
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 30, 2005
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 30, 2005
- ---------------------------------------- Officer and Director
Principal Accounting Officer
//s// MICHAEL R. BAKKE Controller March 30, 2005
- ----------------------------------------
Directors
//s// SANGWOO AHN Director March 30, 2005
- ----------------------------------------
//s// FRANK M. BURKE, JR. Director March 30, 2005
- ----------------------------------------
//s// CHARLES R. COX Director March 30, 2005
- ----------------------------------------
//s// HANS KESSLER Director March 30, 2005
- ----------------------------------------
//s// JAMES R. WHATLEY Director March 30, 2005
- ----------------------------------------
Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, John R. Barnes, Chief Executive Officer of Xanser Corporation certify that:
1. I have reviewed this annual report on Form 10-K of Xanser Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this annual report is being prepared;
b) [intentionally omitted pursuant to SEC Release No. 34-47986];
c) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this annual report our conclusions
about the effectiveness of the disclosure controls and procedures, as
of the end of the period covered by this annual report, based on such
evaluation; and
d) disclosed in this annual report any change in the registrant's
internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter that has materially affected,
or is reasonably likely to materially affect, the registrant's
internal control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: March 30, 2005
//s// JOHN R. BARNES
-------------------------------------
John R. Barnes
President and Chief Executive Officer
Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Howard C. Wadsworth, Chief Financial Officer of Xanser Corporation certify
that:
1. I have reviewed this annual report on Form 10-K of Xanser Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this annual report is being prepared;
b) [intentionally omitted pursuant to SEC Release No. 34-47986];
c) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this annual report our conclusions
about the effectiveness of the disclosure controls and procedures, as
of the end of the period covered by this annual report, based on such
evaluation; and
d) disclosed in this annual report any change in the registrant's
internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter that has materially affected,
or is reasonably likely to materially affect, the registrant's
internal control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of the registrant's board
of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: March 30, 2005
//s// HOWARD C. WADSWORTH
-----------------------------------------
Howard C. Wadsworth
Vice President, Treasurer and Secretary
(Chief Financial Officer)
Exhibit 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 906(A) OF THE SARBANES-OXLEY ACT OF 2002
The undersigned, being the Chief Executive Officer of Xanser Corporation
(the "Company") hereby certifies that, to his knowledge, the Company's Annual
Report on Form 10-K for the year ended December 31, 2004, filed with the United
States Securities and Exchange Commission pursuant to Section 13(a) or 15(d) of
the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)), fully complies
with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act
of 1934 and that information contained in such Annual Report fairly presents, in
all material respects, the financial condition and results of operations of the
Company.
This written statement is being furnished to the Securities and Exchange
Commission as an exhibit to such Form 10-K. A signed original of this written
statement required by Section 906 has been provided to Xanser Corporation and
will be retained by Xanser Corporation and furnished to the Securities and
Exchange Commission or its staff upon request.
Date: March 30, 2005
//s// JOHN R. BARNES
----------------------------------------
John R. Barnes
President and Chief Executive Officer
Exhibit 32.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 906(A) OF THE SARBANES-OXLEY ACT OF 2002
The undersigned, being the Chief Financial Officer of Xanser Corporation
(the "Company") hereby certifies that, to his knowledge, the Company's Annual
Report on Form 10-K for the year ended December 31, 2004, filed with the United
States Securities and Exchange Commission pursuant to Section 13(a) or 15(d) of
the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)), fully complies
with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act
of 1934 and that information contained in such Annual Report fairly presents, in
all material respects, the financial condition and results of operations of the
Company.
This written statement is being furnished to the Securities and Exchange
Commission as an exhibit to such Form 10-K. A signed original of this written
statement required by Section 906 has been provided to Xanser Corporation and
will be retained by Xanser Corporation and furnished to the Securities and
Exchange Commission or its staff upon request.
Date: March 30, 2005
//s// HOWARD C. WADSWORTH
---------------------------------------
Howard C. Wadsworth
Vice President, Treasurer and Secretary
(Chief Financial Officer)
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
We have issued our report dated March 21, 2005, accompanying the consolidated
financial statements included in the Annual Report of Xanser Corporation on Form
10-K for the year ended December 31, 2004. We hereby consent to the
incorporation by reference of said report in the Registration Statements on Form
S-8 (File No. 333-101996, 333-87446, 333-83970, 333-83968, 333-68558, 333-34496,
333-60195, 333-22109, 333-14071, 333-14069, 333-14067, 333-08727, 333-08725,
333-08723, 33-58981, 33-54027 and 33-41295).
GRANT THORNTON LLP
Dallas, Texas
March 21, 2005
Exhibit 23.2
Consent of Independent Registered Public Accounting Firm
The Board of Directors
Xanser Corporation:
We consent to the incorporation by reference in the registration statements
numbers 333-101996, 333-87446, 333-83970, 333-83968, 333-68558, 333-34496,
333-60195, 333-22109, 333-14071, 333-14069, 333-14067, 333-08727, 333-08725,
333-08723, 33-58981, 33-54027 and 33-41295 on Form S-8 of Xanser Corporation of
our report dated February 25, 2004, with respect to the consolidated balance
sheets of Xanser Corporation as of December 31, 2003 and the related
consolidated statements of income, changes in stockholders' equity, and cash
flows for each of the years in the two-year period ended December 31, 2003, and
all related financial statement schedules, which report appears in the December
31, 2004, annual report on Form 10-K of Xanser Corporation. Our report refers to
a change in accounting for goodwill in 2002.
KPMG LLP
Dallas, Texas
March 28, 2005