<PAGE> 1
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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 SEPTEMBER 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.
Class of Common Stock Outstanding at
--------------------- November 11, 1994
no par value -----------------
32,941,972 shares
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<PAGE> 2
KANEB SERVICES, INC.
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1994
<TABLE>
<CAPTION>
Page #
------
<S> <C> <C>
Part I. Financial Information
Item 1. Financial Information (Unaudited)
Consolidated Statements of Income--Three and Nine
Months Ended September 30, 1994 and 1993 1
Consolidated Condensed Balance Sheets
September 30, 1994 and December 31, 1993 2
Consolidated Statements of Cash Flows--Nine Months
Ended September 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 6. Exhibits
(a) Exhibits Index
Exhibit
-------
27 Financial Data Schedule
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 Nine Months Ended
September 30, September 30,
------------------------ ------------------------
1994 1993 1994 1993
------- ------- -------- -------
<S> <C> <C> <C> <C>
Revenues......................................... $54,233 $51,527 $156,460 145,187
------- ------- -------- -------
Costs and expenses:
Operating costs................................. 41,116 38,745 119,549 112,563
Depreciation and amortization................... 3,026 3,156 9,352 8,817
General and administrative...................... 989 924 3,061 2,895
------- ------- ----- -------
Total costs and expenses...................... 45,131 42,825 131,962 124,275
------- ------- ------- -------
Operating income................................. 9,102 8,702 24,498 20,912
Interest income and other income (expense)....... (101) (76) 78 (10)
Interest expense................................. (3,430) (3,158) (10,033) (10,172)
Amortization of excess of cost over fair value of
net assets of acquired business................. (462) (462) (1,386) (1,384)
------- ------- ------ -------
Income before minority interest, income taxes
and gain on issuance of units by partnership 5,109 5,006 13,157 9,346
Minority interest in net income ................. (3,159) (3,121) (9,400) (7,869)
Income tax expense............................... (720) (701) (1,835) (1,392)
Gain on issuance of units by partnership......... - - - 15,122
------- ------- --- -------
Net income....................................... 1,230 1,184 1,922 15,207
Dividends applicable to preferred stock.......... 380 359 1,102 1,103
------- ------- ----- -------
Net income applicable to common stock............ $ 850 $ 825 $820 $14,104
======= ======= ==== =======
Income per common share.......................... $ .03 $ .03 $.03 $ .44
======= ======= ==== =======
Weighted average number of common shares
outstanding..................................... 32,747 31,855 32,555 31,815
======= ======= ====== =======
</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>
September 30, December 31,
1994 1993
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivelents........................................... $ 13,472 $ 24,327
Accounts receivable, trade.......................................... 31,597 27,300
Inventories......................................................... 5,775 6,189
Prepaid expenses and other current assets........................... 6,631 3,209
-------- --------
Total current assets.............................................. 57,475 61,025
-------- --------
Property and equipment 252,202 234,368
Less accumulated depreciation and amortization......................... 89,272 81,085
-------- --------
Net property and equipment.......................................... 162,930 153,283
-------- --------
Excess of cost over fair value of net assets of acquired business...... 67,338 68,722
-------- --------
Other assets........................................................... 4,953 4,442
-------- --------
292,696 287,472
======== ========
LIABILITIES AND EQUITY
Current liabilities:
Current portion of long-term debt................................... $ 14,847 $ 12,461
Accounts payable.................................................... 11,608 10,414
Accrued expenses.................................................... 24,607 18,313
Accrued distribution payable........................................ 4,021 3,995
-------- --------
Total current liabilities......................................... 55,083 45,183
-------- --------
Long-term debt, less current portion................................... 146,265 152,678
-------- --------
Net liabilities of discontinued operations............................. 4,342 4,606
-------- --------
Deferred income taxes and other liabilities............................ 5,730 4,939
-------- --------
Minority interest...................................................... 62,633 65,205
-------- --------
Commitments and contingencies
Stockholders' equity:
Preferred stock, without par value.................................. 14,150 13,707
Common stock, without par value..................................... 4,224 4,222
Additional paid-in capital.......................................... 200,006 201,976
Accumulated deficit................................................. (175,498) (176,318)
Treasury stock, at cost............................................. (25,254) (28,755)
Cumulative foreign currency translation adjustment.................. 1,015 29
-------- --------
Total stockholders' equity........................................ 18,643 14,861
-------- --------
$292,696 $287,472
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE> 5
KANEB SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 1994 AND 1993
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
1994 1993
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income.......................................................... $ 1,922 $ 15,207
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization...................................... 9,352 8,817
Minority interest in net income.................................... 9,400 7,869
Gain on issuance of units by partnership........................... - (15,122)
Amortization of excess of cost over fair value of net assets
of acquired business............................................. 1,386 1,384
Deferred taxes..................................................... 623 -
Changes in current assets and liabilities.......................... (37) 6,689
-------- --------
Net cash provided by operating activities........................ 22,646 24,844
-------- --------
INVESTING ACTIVITIES:
Capital expenditures................................................. (18,342) (6,867)
Acquisition of ST.................................................... - (62,677)
Other................................................................ 2,013 (1,720)
-------- --------
Net cash used in investing activities.............................. (16,329) (71,264)
-------- --------
FINANCING ACTIVITIES:
Issuance of long-term debt........................................... 14,253 65,101
Payments on long-term debt........................................... (18,304) (59,316)
Preferred stock dividends paid....................................... (856) (858)
Minority interest distributions...................................... (12,001) (9,488)
Proceeds from sale of units by partnership........................... - 53,163
-------- --------
Net cash provided by (used in) financing activities (16,908) 48,602
-------- --------
Cash used in discontinued operations................................... (264) (2,244)
-------- --------
DECREASE IN CASH AND CASH EQUIVALENTS.................................. (10,855) (62)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD....................... 24,327 10,596
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............................. $ 13,472 $ 10,534
======== ========
SUPPLEMENTAL INFORMATION ON CASH PAID DURING THE PERIOD FOR:
Interest............................................................. $ 7,644 $ 6,931
======== ========
Income taxes......................................................... $ 1,637 $ 699
======== ========
</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
September 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 are 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 and reported 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 September 30, 1994 and
December 31, 1993 and the results of their operations and cash flows
for the periods ended September 30, 1994 and 1993. Operating results
for the three and nine month periods ended September 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 October 10, 1994, the Company completed a settlement agreement
relating to two lawsuits styled Kanland Associates v. Kaneb Services,
Inc. and Panance Property Corporation v. Kaneb Services, Inc. pending
in Texas state courts. These lawsuits were filed in the late 1980's
and related to an office building formerly occupied by the Company
near Houston, Texas. Reserves that were established in prior years
included adequate consideration of this dispute.
4
<PAGE> 7
KANEB SERVICES, INC.
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 September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
1994 1993 1994 1993
------------ ------------- ----------- -------------
(In millions)
<S> <C> <C> <C> <C>
Revenues:
United States...... $ 7.5 $ 7.2 $26.2 $24.6
United Kingdom..... 9.9 8.5 27.6 22.6
Germany............ 9.4 11.1 25.2 30.2
Other.............. 3.8 3.1 10.4 9.5
----- ----- ----- -----
$30.6 $29.9 $89.4 $86.9
===== ===== ===== =====
Operating income:
United States...... $ .1 $ (.1) $ 1.6 $ .8
United Kingdom..... .7 .7 1.7 .7
Germany............ (.8) .9 (2.2) 2.1
Other.............. .7 .4 1.1 .1
----- ----- ----- -----
$ .7 $ 1.9 $ 2.2 $ 3.7
===== ===== ===== =====
Capital expenditures.... $ .7 $ .8 $ 2.0 $ 1.5
===== ===== ===== =====
</TABLE>
This segment provides specialized industrial services to plants primarily in
the process and power industry. The improvements made in both the United
Kingdom and United States operations for the nine 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, the United Kingdom and other
countries around the world. 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 anticipates the losses to continue in the
German operations through the end of 1994.
PIPELINE AND TERMINALING SERVICES
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- ------------------------------------------------
1994 1993 1994 1993 1993
------------ ------------- ----------- ------------- -------------
(in millions) (Pro forma) (Historical)
<S> <C> <C> <C> <C> <C>
Revenues............... $20.7 $ 18.5 $ 57.9 $ 53.5 $48.7
===== ====== ====== ====== =====
Operating income....... $ 9.1 $ 7.4 $ 24.4 $ 20.9 $19.7
===== ====== ====== ====== =====
Capital expenditures... $ 2.3 $ 1.7 $ 16.3 $ 4.8 $ 4.8
===== ====== ====== ====== =====
</TABLE>
5
<PAGE> 8
This segment provides transportation services of refined petroleum products
through its pipeline system that extends from Kansas to North Dakota. A
terminaling operation was acquired effective March 1, 1993 which provides
terminaling services for petroleum products and specialty chemicals at its 21
terminals.
The increases in revenues and operating income are primarily due to the
implementation of a tariff increase by 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 nine month period in 1994 compared with the
five 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 $10.9 million to $13.5 million at
September 30, 1994, primarily as a result of the terminal acquisitions by ST.
Net cash provided by operations was $22.6 million for the nine months ended
September 30, 1994. Capital expenditures for the nine month period totaled
$18.3 million, including four terminal acquisitions at ST which aggregated
$11.7 million and were financed with existing cash and a $5.2 million draw on
KPP's line of credit. Additional information regarding the Company's cash flow
is shown in the accompanying financial statements.
The Company is evaluating the payment and/or refinancing options related to the
$43.2 million of it's subordinated debentures which are due November 1995 and
will be reclassified to current liabilities during the fourth quarter of 1994
persuant to the maturity of the indenture.
6
<PAGE> 9
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On October 10, 1994, the Company completed a settlement agreement relating to
two lawsuits styled Kanland Associates v. Kaneb Services, Inc. and Panance
Property Corporation v. Kaneb Services, Inc. pending in Texas state courts.
These lawsuits were filed in the late 1980's and related to an office building
formerly occupied by the Company near Houston, Texas. Reserves that were
established in prior years included adequate consideration of this dispute.
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: November 11, 1994 /s/ Tony M. Regan
Tony M. Regan
Controller
8
<PAGE> 11
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
- - ------- ----------- ------------
<S> <C> <C>
27 Financial Data Schedule.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> SEP-30-1994
<CASH> 13,472
<SECURITIES> 0
<RECEIVABLES> 31,597
<ALLOWANCES> 0
<INVENTORY> 5,775
<CURRENT-ASSETS> 57,475
<PP&E> 252,202
<DEPRECIATION> 89,272
<TOTAL-ASSETS> 292,696
<CURRENT-LIABILITIES> 55,083
<BONDS> 146,265
<COMMON> 4,224
0
14,150
<OTHER-SE> 269
<TOTAL-LIABILITY-AND-EQUITY> 292,696
<SALES> 0
<TOTAL-REVENUES> 156,460
<CGS> 0
<TOTAL-COSTS> 131,962
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,033
<INCOME-PRETAX> 13,157
<INCOME-TAX> 1,835
<INCOME-CONTINUING> 1,922
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,922
<EPS-PRIMARY> .03
<EPS-DILUTED> .03
</TABLE>
