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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____ TO ____
FOR THE QUARTERLY PERIOD COMMISSION FILE
ENDED MARCH 31, 1994 NUMBER 1-5083
KANEB SERVICES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 75-1191271
(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
2400 LAKESIDE BOULEVARD
RICHARDSON, TEXAS 75082
(Address of principal executive offices, including zip code)
(214) 699-4000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class of Common Stock Outstanding at
--------------------- May 3, 1994
no par value -----------
32,373,345 shares
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KANEB SERVICES, INC.
FORM 10-Q
QUARTER ENDED MARCH 31, 1994
Page No.
--------
Part I. Financial Information
Item 1. Financial Information (Unaudited)
Consolidated Statements of Income--Three
Months Ended March 31, 1994 and 1993 1
Condensed Consolidated Balance Sheets
March 31, 1994 and December 31, 1993 2
Condensed Consolidated Statements of Cash Flows--
Three Months Ended March 31, 1994 and 1993 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 5
Signature 7
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KANEB SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS - EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------
1994 1993
------- --------
<S> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $50,687 $41,285
------- -------
Costs and expenses:
Operating costs . . . . . . . . . . . . . . . . . . . . . . . . . 39,581 33,771
Depreciation and amortization . . . . . . . . . . . . . . . . . . 3,047 2,461
General and administrative expenses . . . . . . . . . . . . . . . 1,055 987
------- -------
Total costs and expenses . . . . . . . . . . . . . . . . . . . 43,683 37,219
------- -------
Operating income . . . . . . . . . . . . . . . . . . . . . . . . . 7,004 4,066
Interest income and other income (expense) . . . . . . . . . . . . 39 (2)
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . (3,312) (3,462)
Amortization of excess of cost over fair value of
net assets of acquired business . . . . . . . . . . . . . . . . . (462) (461)
------- -------
Income from continuing operations
before minority interest and income tax expense . . . . . . . . . 3,269 141
Minority interest in net income . . . . . . . . . . . . . . . . . . (3,121) (1,951)
Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . (547) (257)
------- -------
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (399) (2,067)
Dividends applicable to preferred stock . . . . . . . . . . . . . . 354 373
------- -------
Net loss applicable to common stock . . . . . . . . . . . . . . . . $ (753) $(2,440)
======= =======
Loss per common share . . . . . . . . . . . . . . . . . . . . . . . $ (.02) $ (.08)
======= =======
Weighted average number of common
shares outstanding . . . . . . . . . . . . . . . . . . . . . . 32,322 31,777
======= =======
</TABLE>
See Notes to Consolidated Financial Statements.
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KANEB SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
March 31, December 31,
1994 1993
---------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . $ 16,615 $ 24,327
Accounts receivable, trade . . . . . . . . . . . . . . . . . . . . . . 28,968 27,300
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,514 6,189
Prepaid expenses and other current assets . . . . . . . . . . . . . . 4,445 3,209
--------- ---------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . 56,542 61,025
--------- ---------
Property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . 238,128 234,368
Less accumulated depreciation and amortization . . . . . . . . . . . . . 83,705 81,085
--------- ---------
Net property and equipment . . . . . . . . . . . . . . . . . . . . . . 154,423 153,283
--------- ---------
Excess of cost over fair value of net assets
of acquired business . . . . . . . . . . . . . . . . . . . . . . . . 68,260 68,722
--------- ---------
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,034 4,442
--------- ---------
$ 284,259 $ 287,472
========= =========
LIABILITIES AND EQUITY
Current liabilities:
Current portion of long-term debt . . . . . . . . . . . . . . . . . . 16,399 12,461
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . 9,292 10,414
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,376 18,313
Accrued distribution payable . . . . . . . . . . . . . . . . . . . . . 3,980 3,995
--------- ---------
Total current liabilities . . . . . . . . . . . . . . . . . . . . 51,047 45,183
--------- ---------
Long-term debt, less current portion . . . . . . . . . . . . . . . . . . 144,264 152,678
--------- ---------
Net liabilities of discontinued operations . . . . . . . . . . . . . . . 5,055 4,606
--------- ---------
Deferred income taxes and other liabilities . . . . . . . . . . . . . . . 5,025 4,939
--------- ---------
Minority interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64,365 65,205
--------- ---------
Commitments and contingencies
Shareholders' equity:
Preferred stock, without par value . . . . . . . . . . . . . . . . . . 13,452 13,707
Common stock, without par value . . . . . . . . . . . . . . . . . . . 4,223 4,222
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . 201,711 201,976
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . (177,071) (176,318)
Treasury stock, at cost . . . . . . . . . . . . . . . . . . . . . . . (28,255) (28,755)
Cumulative foreign currency translation adjustment . . . . . . . . . . 443 29
--------- ---------
Total shareholders' equity . . . . . . . . . . . . . . . . . . . . . 14,503 14,861
--------- ---------
$ 284,259 $ 287,472
========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
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KANEB SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1994 AND 1993
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
1994 1993
-------- ---------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (399) $ (2,067)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . 3,047 2,461
Minority interest in net income . . . . . . . . . . . . . . . . . 3,121 1,951
Amortization of excess of cost over fair value of net assets
acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . 462 461
Deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . . . 244 146
Changes in current assets and liabilities . . . . . . . . . . . . (1,541) 4,292
-------- --------
Net cash provided by operating activities . . . . . . . . . . 4,934 7,244
-------- --------
INVESTING ACTIVITIES:
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . (4,450) (2,036)
Acquisition of ST . . . . . . . . . . . . . . . . . . . . . . . . . - (62,500)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 152 (664)
-------- --------
Net cash used in investing activities . . . . . . . . . . . . . . (4,298) (65,200)
-------- --------
FINANCING ACTIVITIES:
Issuance of long-term debt . . . . . . . . . . . . . . . . . . . . . 1,000 63,100
Payments on long-term debt . . . . . . . . . . . . . . . . . . . . . (5,660) (3,209)
Preferred stock dividends paid . . . . . . . . . . . . . . . . . . . (116) (132)
Minority interest distributions . . . . . . . . . . . . . . . . . . (4,021) (2,814)
-------- --------
Net cash provided by (used in) financing activities . . . . . (8,797) 56,945
-------- --------
CASH PROVIDED BY DISCONTINUED OPERATIONS . . . . . . . . . . . . . . . 449 1,738
-------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . (7,712) 727
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD . . . . . . . . . . . 24,327 10,596
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD . . . . . . . . . . . . . . $ 16,615 $ 11,323
======== ========
SUPPLEMENTAL INFORMATION ON CASH PAID DURING THE PERIOD FOR:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,577 $ 2,818
======== ========
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 354 $ -
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
3
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KANEB SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
The unaudited consolidated financial statements of Kaneb Services, Inc.,
and its subsidiaries (the "Company") for the periods ended March 31, 1994
and 1993 have been prepared in accordance with generally accepted
accounting principles applied on a consistent basis. Significant
accounting policies followed by the Company and its subsidiaries were
disclosed in the notes to the financial statements included in the
Company's Form 10-K Annual Report for the year ended December 31, 1993. In
the opinion of the Company's management, the accompanying consolidated
financial statements contain the adjustments, consisting of normal
recurring accruals, necessary to present fairly the financial position of
the Company and its consolidated subsidiaries at March 31, 1994 and
December 31, 1993 and the results of their operations and cash flows for
the periods ended March 31, 1994 and 1993. Operating results for the three
month period ended March 31, 1994 are not necessarily indicative of the
results that may be expected for the year ended December 31, 1994.
2. CHANGE IN PRESENTATION
Certain financial statement items for 1993 have been restated to conform
with the 1994 presentation.
3. COMMITMENTS AND CONTINGENCIES
In December 1987, a lawsuit was filed against the Company by Kanland
Associates in the 240th District Court of Fort Bend County, Texas.
Kanland, a Texas limited partnership, alleges that in January, 1987, the
Company materially breached agreements with it, and as a consequence
thereof Kanland defaulted on its obligations under a mortgage agreement
relating to the Company's office building in Sugar Land, Texas, and on
November 3, 1987, a foreclosure sale of the property was held, causing
Kanland to suffer damages of an undetermined value. In February 1989,
Kanland amended its petition against the Company to add a Company
subsidiary, to expand its causes of action and to quantify its alleged
damages at $20 million. In January 1994, Kanland again amended its
petition to add two more causes of action and to requantify its alleged
damages at more than $38 million plus pre- judgment interest, legal fees,
court costs and punitive damages. On January 20, 1994, the court partially
granted the Company's motion for summary judgment, dismissing three of
Kanland's four original causes of action. A summary judgment hearing for
the two causes of action added in January 1994 was heard on April 21, 1994.
The court granted the Company's motion for summary judgement by dismissing
both of Kanland's two additional causes of action. The Kanland suit is
currently set for trial commencing on May 24, 1994. Also, in November
1989, Panance Property Corporation, an affiliate of Kanland's general
partner, filed suit in a Harris County, Texas, district court against the
Company and a subsidiary seeking damages for nonpayment by Kanland of a
deferred fee note as a result of defendants' alleged breach of their
agreements with Kanland. This case has been stayed pending the outcome of
the Kanland suit. The Company continues to deny liability in the remaining
claims under the Kanland case as well as the Panance suit and intends to
vigorously defend these actions.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion should be read in conjunction with the consolidated financial
statements of Kaneb Services, Inc. and notes thereto included elsewhere in this
report.
ANALYSIS OF SEGMENT OPERATIONS:
INDUSTRIAL SERVICES
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-----------------------------
1994 1993
------ ------
(In millions)
<S> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 28.9 $ 26.3
====== ======
Operating income (loss):
United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ .9 $ .3
United Kingdom . . . . . . . . . . . . . . . . . . . . . . . . . . . . - (.2)
Germany . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (.6) .4
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2 (.2)
------ ------
$ .5 $ .3
====== ======
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . $ .6 $ .1
====== ======
</TABLE>
This segment provides specialized industrial services to plants primarily in
the process and power industry. The US and UK operations reported improvement
in 1994 over the comparable period in 1993. Although the privatization
projects in eastern Germany have provided profits over the past two years,
there has been a substantial decline in the amount of work being performed at
these locations. The Company believes that this decline is the result of high
unemployment and over capacity in the power industry in the eastern part of
Germany. The Company expects this segment to continue to improve, but the
improvement will not be significant until these German projects have returned
to profitability.
The $.2 million other operating loss in 1993 includes the operations in
France and Spain. The operation in Spain was closed in the summer of 1993 and
the French operation was at breakeven for the first quarter of 1994 as compared
to a $.2 million operating loss in the first quarter of 1993.
PIPELINE AND TERMINALING SERVICES
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------------------------------
1994 1993 1993
------ ------ ------
(Pro forma) (Historical)
<S> <C> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . . . . $ 18.4 $ 16.9 $ 12.1
====== ====== ======
Operating income . . . . . . . . . . . . . . . . . $ 7.2 $ 6.0 4.8
====== ====== =======
Capital expenditures . . . . . . . . . . . . . . . $ 3.9 $ 2.2 1.9
====== ====== =======
</TABLE>
This segment provides transportation services of refined petroleum products
through its pipeline system that extends from Kansas to North Dakota.
Additionally, this segment provides terminaling services for petroleum
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products and specialty liquids at its 21 terminals. The terminaling operation
was acquired effective March 1, 1993.
The increase in the first quarter over the 1993 pro forma results in both
revenues and operating income is due to a 8% increase in long-haul barrels
delivered on the pipeline system and a increase of 8% of the average rate per
barrel stored at the terminaling operation.
OTHER OPERATIONS
The Company recorded operating income of $.3 million in the first three
months of 1994 compared to breakeven for the same period in 1993 related to
subsidiaries that provide information services to financial and retail
customers. The increase in minority interest expense in 1994 as compared to
1993 is attributable to the 2.25 million senior preference units that were
issued in April 1993 by the Partnership.
FINANCIAL CONDITION
Cash and cash equivalents was $16.6 million at March 31, 1994, a decrease of
$7.7 million from $24.3 million at December 31, 1993. Net cash provided by
operations of $4.9 million was offset by $4.4 million of capital expenditures
and net payments on long- term debt of $4.6 millon and distributions to
minority interest owners of KPP of $4.0 million. The increase of $1.2 million
in minority interest distributions from the first quarter of 1993 represents
the fourth quarter 1993 distribution on the 2.25 million partnership units that
were issued by the Partnership in April, 1993.
The Partnership reclassified $10 million of its term loan to current at
March 31, 1994. The Partnership is currently evaluating alternative methods of
refinancing this obligation and expects to have the refinancing completed prior
to December 31, 1994.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned.
KANEB SERVICES, INC.
(Registrant)
Date: May 13, 1994 /s/ Tony M. Regan
Tony M. Regan
Controller
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