<PAGE> 1
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 JUNE 30, 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.
<TABLE>
<CAPTION>
Outstanding at
Class of Common Stock August 4, 1994
--------------------- --------------
<S> <C>
no par value 32,768,979 shares
</TABLE>
<PAGE> 2
KANEB SERVICES, INC.
FORM 10-Q
QUARTER ENDED JUNE 30, 1994
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
Part I. Financial Information
Item 1. Financial Information (Unaudited)
Consolidated Statements of Income--Three and Six
Months Ended June 30, 1994 and 1993 1
Consolidated Condensed Balance Sheets
June 30, 1994 and December 31, 1993 2
Consolidated Statements of Cash Flows--Six Months
Ended June 30, 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
Part II. Other Information
Item 1. Legal Proceedings 7
Item 4. Submission of Matters to a Vote of Security Holders 7
Signature 8
</TABLE>
<PAGE> 3
KANEB SERVICES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS - EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- ------------------------
1994 1993 1994 1993
-------- ------- -------- --------
<S> <C> <C> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . . . . $ 51,540 $52,375 $ 102,227 $ 93,660
-------- ------- --------- --------
Costs and expenses:
Operating costs . . . . . . . . . . . . . . . . 38,852 40,047 78,433 73,818
Depreciation and amortization . . . . . . . . . 3,279 3,200 6,326 5,661
General and administrative . . . . . . . . . . 1,017 984 2,072 1,971
-------- ------- --------- --------
Total costs and expenses . . . . . . . . . . 43,148 44,231 86,831 81,450
-------- ------- --------- --------
Operating income . . . . . . . . . . . . . . . . . 8,392 8,144 15,396 12,210
Interest income and other income . . . . . . . . . 140 68 179 66
Interest expense . . . . . . . . . . . . . . . . . (3,291) (3,552) (6,603) (7,014)
Amortization of excess of cost over fair value
of net assets of acquired business . . . . . . . (462) (461) (924) (922)
-------- ------- --------- --------
Income before minority interest, income taxes
and gain on issuance of units by partnership. . 4,779 4,199 8,048 4,340
Minority interest in net income . . . . . . . . . (3,120) (2,797) (6,241) (4,748)
Income tax expense . . . . . . . . . . . . . . . . (568) (434) (1,115) (691)
Gain on issuance of units by partnership . . . . . - 15,122 - 15,122
-------- ------- --------- --------
Net income . . . . . . . . . . . . . . . . . . . . 1,091 16,090 692 14,023
Dividends applicable to preferred stock . . . . . . 368 371 722 744
-------- ------- --------- --------
Net income (loss) applicable to common stock . . . $ 723 $15,719 $ (30) $ 13,279
======== ======= ========= ========
Income per common share . . . . . . . . . . . . . . $ .02 $ .49 $ - $ .42
======== ======= ========= ========
Weighted average number of common shares
outstanding . . . . . . . . . . . . . . . . . . 32,713 31,810 32,457 31,794
======== ======= ========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
1
<PAGE> 4
KANEB SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 1994 1993
--------- ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . $ 12,508 $ 24,327
Accounts receivable, trade . . . . . . . . . . . . . . . . . . . . . . 30,788 27,300
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,830 6,189
Prepaid expenses and other current assets . . . . . . . . . . . . . . 4,316 3,209
-------- ---------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . 53,442 61,025
-------- ---------
Property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . 249,183 234,368
Less accumulated depreciation and amortization . . . . . . . . . . . . 86,545 81,085
-------- ---------
Net property and equipment . . . . . . . . . . . . . . . . . . . . . 162,638 153,283
-------- ---------
Excess of cost over fair value of net assets of acquired business . . . . 67,799 68,722
-------- ---------
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,166 4,442
-------- ---------
$289,045 $ 287,472
======== =========
LIABILITIES AND EQUITY
Current liabilities:
Current portion of long-term debt . . . . . . . . . . . . . . . . . . $ 31,759 $ 12,461
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,321 10,414
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,008 18,313
Accrued distribution payable . . . . . . . . . . . . . . . . . . . . . 3,980 3,995
-------- ---------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . 69,068 45,183
-------- ---------
Long-term debt, less current portion . . . . . . . . . . . . . . . . . . 130,278 152,678
-------- ---------
Net liabilities of discontinued operations . . . . . . . . . . . . . . . 4,863 4,606
-------- ---------
Deferred income taxes and other liabilities . . . . . . . . . . . . . . . 5,218 4,939
-------- ---------
Minority interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 63,593 $ 65,205
-------- ---------
Commitments and contingencies
Stockholders' equity:
Preferred stock, without par value . . . . . . . . . . . . . . . . . . 13,686 13,707
Common stock, without par value . . . . . . . . . . . . . . . . . . . 4,224 4,222
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . 201,545 201,976
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . (176,348) (176,318)
Treasury stock, at cost . . . . . . . . . . . . . . . . . . . . . . . (27,727) (28,755)
Cumulative foreign currency translation adjustment . . . . . . . . . . 645 29
-------- ---------
Total stockholders' equity . . . . . . . . . . . . . . . . . . . . 16,025 14,861
-------- ---------
$289,045 $ 287,472
======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 5
KANEB SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1994 AND 1993
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
1994 1993
------- -------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 692 $ 14,023
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . 6,326 5,661
Minority interest in net income . . . . . . . . . . . . . . . . . . . . . . . . 6,241 4,748
Gain on issuance of units by partnership . . . . . . . . . . . . . . . . . . . . - (15,122)
Amortization of excess of cost over fair value of net assets of acquired
business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 924 922
Deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 446 -
Changes in current assets and liabilities . . . . . . . . . . . . . . . . . . . 351 6,700
-------- --------
Net cash provided by operating activities . . . . . . . . . . . . . . . . . . 14,980 16,932
-------- --------
INVESTING ACTIVITIES:
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (15,267) (4,276)
Acquisition of ST . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . - (62,500)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 639 (125)
-------- --------
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . (14,628) (66,901)
-------- --------
FINANCING ACTIVITIES:
Issuance of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,428 63,100
Payments on long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . (11,092) (55,152)
Preferred stock dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . (722) (736)
Minority interest distributions . . . . . . . . . . . . . . . . . . . . . . . . . (8,042) (5,598)
Proceeds from sale of units by partnership . . . . . . . . . . . . . . . . . . . . - 53,206
-------- --------
Net cash provided by (used in) financing activities . . . . . . . . . . . . . (12,428) 54,820
-------- --------
Cash provided by (used in) discontinued operations . . . . . . . . . . . . . . . . . 257 (1,541)
-------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS . . . . . . . . . . . . . . . . . . (11,819) 3,310
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD . . . . . . . . . . . . . . . . . . 24,327 10,596
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD . . . . . . . . . . . . . . . . . . . . . $ 12,508 $ 13,906
======== ========
SUPPLEMENTAL INFORMATION ON CASH PAID DURING THE PERIOD FOR:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,469 $ 4,876
======== ========
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 875 $ 221
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE> 6
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 June
30, 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. Gains and losses resulting from foreign currency
translations are accumulated as a separate component of shareholders'
equity. Gains or losses resulting from foreign currency transactions
are included in the statements of income. 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 June 30, 1994 and December
31, 1993 and the results of their operations and cash flows for the
periods ended June 30, 1994 and 1993. Operating results for the three
and six month periods ended June 30, 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
On April 21, 1994, summary judgment was granted in favor of the
Company in connection with two recently added causes of action in its
litigation with Kanland Associates in the 240th District Court of Fort
Bend County, Texas, and on May 20, 1994, the sole remaining cause
of action was likewise dismissed. The parties have agreed to suspend
further litigation in this case pending efforts to enter into a
negotiated settlement. Management believes, based on the advice of
counsel, that the ultimate resolution of this matter will not have a
material adverse effect on the financial position or results of
operations of the Company.
4
<PAGE> 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion and analysis 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 June 30, Six Months Ended June 30,
--------------------------- -------------------------
1994 1993 1994 1993
---- ---- ---- -----
(In millions)
<S> <C> <C> <C> <C>
Revenues:
United States . . . . . . $ 8.6 $ 8.9 $18.7 $17.4
United Kingdom . . . . . 9.6 8.0 17.7 14.1
Germany 8.4 10.6 15.8 19.1
Other . . . . . . 3.3 3.2 6.6 6.4
----- ----- ----- -----
$29.9 $30.7 $58.8 $57.0
===== ===== ===== =====
Operating income (loss):
United States . . . . . $ .6 $ .6 $ 1.5 $ .9
United Kingdom . . . . . 1.0 .2 1.0 -
Germany . . . . . . . . (.8) .8 (1.4) 1.2
Other . . . . . . . . . .2 (.1) .4 (.3)
----- ----- ----- -----
$ 1.0 $ 1.5 $ 1.5 $ 1.8
===== ===== ===== =====
Capital expenditures . . . . $ .6 $ .7 $ 1.2 $ .7
===== ===== ===== =====
</TABLE>
This segment provides specialized industrial services to plants primarily in
the process and power industry. The improvements made in the United Kingdom
operations for the quarter ended June 30, 1994 and in both the United Kingdom
and United States operations for the six month period were more than offset
by the adverse effects of the continued deterioration in Germany. Although
the privatization projects in eastern Germany provided substantial profits over
the past two years, there has been a significant decline in the amount of work
being provided at these locations as a result of over capacity in the power
industry and a weakened economy in Germany. The Company expects continued
improvements in the United States and United Kingdom operations. The
Company has initiated action plans and made appropriate adjustments to the
greatest extent possible to the parts of the German operations that have
been adversely affected by the current business environment, however, the
Company does not anticipate the German operation to return to profitability
until 1995.
PIPELINE AND TERMINALING SERVICES
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- ---------------------------------------
1994 1993 1994 1993 1993
---- ---- ---- ---- ----
(in millions) (Pro forma) (Historical)
<S> <C> <C> <C> <C> <C>
Revenues . . . . . . . . . . $18.8 $ 18.1 $37.2 $ 35.0 $30.2
===== ====== ===== ======= =====
Operating income . . . . . . $ 8.1 $ 7.5 $15.3 $ 13.5 $12.3
===== ====== ===== ======= =====
Capital expenditures . . . . $10.0 $ .9 $13.9 $ 3.1 $ 3.1
===== ====== ===== ======= =====
</TABLE>
5
<PAGE> 8
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 products
and specialty liquids at its 21 terminals. The terminaling operation was
acquired effective March 1, 1993.
The increases in revenues and operating income are due to the implementation of
a 5.5% tariff increase on the pipeline effective April 1, 1994, an increase in
long-haul shipments on the pipeline, and an increase in the average monthly
revenue per barrel stored in the terminaling operation. There was a $1.5
million increase in minority interest expense in 1994 over 1993 due to the
distributions accrued for the full six month period in 1994 compared with the
two month period in 1993 relating to the 2.25 million senior preference units
that were issued by KPP in April 1993.
FINANCIAL CONDITION
Cash and cash equivalents decreased by $11.8 million to $12.5 million at June
30, 1994, primarily as a result of the terminal acquisitions by ST. Net cash
provided by operations was $15.0 million for the six months ended June 30,
1994. Capital expenditures for the six month period totaled $15.3 million,
including three terminal acquisitions at ST which amounted to $11.1 million.
In July, the Company announced the acquisition of a fourth terminal located
at Augusta, Georgia for $.6 million. KPP financed these acquisitions with
existing cash and a $5.2 million draw on its line of credit. Additional
information regarding the Company's cash flow is shown in the accompanying
financial statements.
The current portion on long-term debt has increased by $19.3 million to
$31.8 million at June 30, 1994, primarily due to a $10 million credit
facility of the Company which is due in June 1995 and to reflect payments
due on the KPP term loan over the next twelve months. Additionally, $43.2
million of the Company's subordinated debentures are due in November 1995.
Both the Company and the Partnership are evaluating the payment and/or
refinancing of these debt issues.
6
<PAGE> 9
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On April 21, 1994, summary judgment was granted in favor of the registrant
in connection with two recently added causes of action in its litigation with
Kanland Associates in the 240th District Court of Fort Bend County, Texas,
and on May 20, 1994, the sole remaining cause of action was likewise
dismissed. The parties have agreed to suspend further litigation in this case
pending efforts to enter into a negotiated settlement.
Item 4. Submission of Matters to a Vote of Security Holders
(a) Registrant held its annual meeting of stockholders on May 20, 1994.
(b) Proxies for the meeting were solicited pursuant to Regulation 14
under the Exchange Act, there was no solicitation in opposition
to the management's nominees listed in the proxy statement and all
such nominees were elected.
(c) In addition to election of directors, shareholders also considered
and voted to approve a new stock incentive plan. The following
votes were cast:
Election of Directors
<TABLE>
<CAPTION>
Nominee For Against Abstain
<S> <C> <C> <C>
Sangwoo Ahn 28,214,868 296,623
John Barnes 28,214,604 296,887
C.E. Bentley 28,213,925 297,566
Preston Peak 28,192,968 318,523
Ralph Rehm 28,216,922 294,569
James Whatley 28,217,725 293,766
Adoption of the 1994 Stock Incentive Plan
25,766,808 2,497,051 247,632
</TABLE>
7
<PAGE> 10
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: August 12, 1994 /s/ TONY M. REGAN
Tony M. Regan
Controller
8
