<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, 1996 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)
2435 NORTH CENTRAL EXPRESSWAY
RICHARDSON, TEXAS 75080
(Address of principle 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.
Outstanding at
Class of Common Stock August 1, 1996
--------------------- --------------
no par value 33,652,151 shares
================================================================================
<PAGE> 2
KANEB SERVICES, INC.
FORM 10-Q
QUARTER ENDED JUNE 30, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Income
- Three and Six Months Ended June 30, 1996 and 1995 1
Condensed Consolidated Balance Sheets
- June 30, 1996 and December 31, 1995 2
Condensed Consolidated Statements of Cash Flows
- Six Months Ended June 30, 1996 and 1995 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 6
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 8
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,
------------------------ ------------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues $ 57,215 $ 53,005 $ 112,054 $ 99,657
---------- ---------- ---------- ----------
Costs and expenses:
Operating costs 38,802 37,883 77,099 71,675
Depreciation and amortization 3,678 3,351 7,552 6,538
General and administrative 1,266 1,223 2,251 2,201
---------- ---------- ---------- ----------
Total costs and expenses 43,746 42,457 86,902 80,414
---------- ---------- ---------- ----------
Operating income 13,469 10,548 25,152 19,243
Interest income and other expense, net (99) (189) (132) (169)
Interest expense (3,752) (4,359) (7,620) (8,506)
Amortization of excess of cost over fair
value of net assets of acquired business (462) (463) (924) (925)
---------- ---------- ---------- ----------
Income from continuing operations before
interest of outside non-controlling
partners in pipeline partnership's net
income and income tax expense 9,156 5,537 16,476 9,643
Interest of outside non-controlling
partners in pipeline partnership's
net income (6,764) (3,168) (12,624) (6,336)
Income tax expense (692) (820) (1,321) (1,135)
---------- ---------- ---------- ----------
Net income 1,700 1,549 2,531 2,172
Dividends applicable to preferred stock 124 390 238 785
---------- ---------- ---------- ----------
Net income applicable to common stock $ 1,576 $ 1,159 $ 2,293 $ 1,387
========== ========== ========== ==========
Net income per common share $ .05 $ .03 $ .07 $ .04
========== ========== ========== ==========
Weighted average number of common
shares outstanding 33,652 33,357 33,652 33,257
========== ========== ========== ==========
</TABLE>
See 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,
1996 1995
---------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 20,090 $ 30,389
Accounts receivable, trade 36,307 32,708
Inventories 5,703 5,809
Prepaid expenses and other current assets 6,157 7,465
---------- ----------
Total current assets 68,257 76,371
---------- ----------
Property and equipment 365,957 363,545
Less accumulated depreciation and amortization 105,310 99,698
---------- ----------
Net property and equipment 260,647 263,847
---------- ----------
Excess of cost over fair value of net assets
of acquired business 64,107 65,031
---------- ----------
Other assets 4,445 4,578
---------- ----------
$ 397,456 $ 409,827
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 4,340 $ 4,134
Accounts payable 9,216 11,947
Accrued expenses 33,412 29,750
Accrued distribution payable 6,035 6,037
Accrued redemption of preferred stock -- 8,201
---------- ----------
Total current liabilities 53,003 60,069
---------- ----------
Long-term debt, less current portion:
Industrial field services 24,719 25,691
Pipeline and terminaling services 135,506 136,489
Parent company 23,666 29,666
---------- ----------
Total long-term debt, less current portion 183,891 191,846
---------- ----------
Net liabilities of discounted operations 3,169 3,320
---------- ----------
Deferred income taxes and other liabilities 11,444 11,235
---------- ----------
Interest of outside non-controlling partners in
pipeline partnership 74,798 74,335
---------- ----------
Commitments and contingencies
Shareholders' equity:
Preferred stock, without par value 5,815 5,814
Common stock, without par value 4,230 4,230
Additional paid-in-capital 197,173 197,151
Accumulated deficit (115,825) (118,118)
Treasury stock, at cost (19,552) (19,552)
Cumulative foreign currency translation adjustment (690) (503)
---------- ----------
Total shareholders' equity 71,151 69,022
---------- ----------
$ 397,456 $ 409,827
========== ==========
</TABLE>
See notes to consolidated financial statements.
2
<PAGE> 5
KANEB SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1996 1995
-------- --------
<S> <C> <C>
Operating activities:
Net income $ 2,531 $ 2,172
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 7,552 6,538
Interest of outside non-controlling partners in
pipeline partnership 12,624 6,336
Amortization of excess of cost over fair
value of net assets acquired 924 925
Deferred income taxes 560 144
Changes in current assets and liabilities (1,432) 1,524
-------- --------
Net cash provided by operating activities 22,759 17,639
-------- --------
Investing activities:
Capital expenditures (5,083) (6,279)
Acquisitions made by pipeline partnership -- (27,100)
Other 222 1,243
-------- --------
Net cash used in investing activities (4,861) (32,136)
-------- --------
Financing activities:
Issuance of long-term debt 375 4,992
Issuance of long-term debt by pipeline partnership 68,000 28,500
Payments on long-term debt (7,240) (7,914)
Payments of long-term debt by pipeline partnership (68,857) (2,248)
Preferred stock dividends paid (238) (686)
Distributions to outside non-controlling partners in
pipeline partnership (12,061) (8,134)
Redemption of preferred stock (8,025) --
-------- --------
Net cash provided by (used in) financing activities (28,046) 14,510
-------- --------
Cash used in discontinued operations (151) (447)
-------- --------
Decrease in cash and cash equivalents (10,299) (434)
Cash and cash equivalents at beginning of period 30,389 9,506
-------- --------
Cash and cash equivalents at end of period $ 20,090 $ 9,072
======== ========
Supplemental information on cash paid during the period for:
Interest $ 7,544 $ 5,598
======== ========
Income taxes $ 585 $ 697
======== ========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 6
KANEB SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- -------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
The unaudited consolidated financial statements of Kaneb Services, Inc.
and its subsidiaries (the "Company") for the periods ended June 30, 1996
and 1995 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, 1995. 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, 1996 and the
results of its operations and cash flows for the periods ended June 30,
1996 and 1995. Operating results for the six-months ended June 30, 1996
are not necessarily indicative of the results that may be expected for the
year ended December 31, 1996.
2. ACQUISITIONS
Effective February 24, 1995, the Company, through Kaneb Pipe Line
Partners, L.P. ("KPP"), acquired the refined petroleum product pipeline
assets (the "West Pipeline") of Wyco Pipe Line Company for $27.1 million,
plus transaction costs and the assumption of certain environmental
liabilities. The acquisition was financed by the issuance of $27 million
of first mortgage notes.
In December 1995, KPP acquired the liquids terminaling assets of Steuart
Petroleum Company and certain of its affiliates (collectively, "Steuart")
for $68 million, plus transaction costs and the assumption of certain
environmental liabilities. The acquisition price was financed by bank
borrowings.
The acquisitions have been accounted for using the purchase method of
accounting and, accordingly, the results of operations have been included
in the Company's consolidated statements of income subsequent to the date
of acquisition. The allocation of the purchase price of the Steuart
acquisition presented in the consolidated financial statements is
preliminary and subject to adjustment.
The following summarized unaudited pro forma consolidated results of
operations for the three and six month periods ended June 30, 1996 and
1995, assume both acquisitions occurred as of the beginning of the periods
presented. The unaudited pro forma financial results have been prepared
for comparative purposes only and may not be indicative of the results
that would have occurred if KPP had acquired the pipeline assets of the
West Pipeline and the liquid terminaling assets of Steuart on the dates
indicated, or which may occur in the future.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ---------------------------
Pro forma Pro forma
1996 1995 1996 1995
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues $ 57,215 $ 57,592 $ 112,054 $ 111,963
============ ============ ============ ============
Net income $ 1,700 $ 1,842 $ 2,531 $ 2,722
============ ============ ============ ============
Net income per common share $ .05 $ .04 $ .07 $ .06
============ ============ ============ ============
</TABLE>
4
<PAGE> 7
KANEB SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- -------------------------------------------------------------------------------
3. REDEMPTION OF PREFERRED STOCK AND RETIREMENT OF LONG-TERM DEBT
On December 28, 1995, the Company notified the Series D Preferred
stockholders that it would redeem its outstanding 12% Convertible Class A
Preferred Stock, Series D and the Series was fully redeemed on January 26,
1996. On February 1, 1996, the Company retired its $6.0 million 8.85%
convertible senior note.
5
<PAGE> 8
KANEB SERVICES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
Operating Results
Industrial Field Services (In millions)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
United States $ 8.8 $ 8.0 $ 17.0 $ 15.5
United Kingdom 8.7 9.6 16.8 18.5
Germany 3.8 4.5 7.6 8.2
Rest of World 5.2 4.7 10.1 8.2
-------- -------- -------- --------
$ 26.5 $ 26.8 $ 51.5 $ 50.4
======== ======== ======== ========
Operating income:
United States $ .6 $ .5 $ 1.0 $ 1.3
United Kingdom .3 1.0 .4 1.2
Germany .1 (.4) .2 (.5)
Rest of World .5 .3 .9 .3
Headquarters (.2) (.2) (.4) (.4)
-------- -------- -------- --------
$ 1.3 $ 1.2 $ 2.1 $ 1.9
======== ======== ======== ========
Capital expenditures $ .5 $ .8 $ 1.1 $ 1.5
======== ======== ======== ========
</TABLE>
This business segment provides specialized industrial field services to
plants primarily in the process and the power industries.
For the three months ended June 30, 1996 continued improvements in Germany
and improvements in the United States and Rest of World operations were
partially offset by non-recurring projects in the United Kingdom primarily
related to the completion of a multi year passive fire protection job in
1995 and some softness in machining services in 1996. The Company expects
the demand for machining services to increase to normal levels by the end
of the year and is currently evaluating the market for passive fire
protection services.
For the six months ended June 30, 1996, increases in core operations in
Germany and the Rest of World were partially offset by decreases in the
United Kingdom and United States. The increase in revenues and decrease in
operating income for the United States is primarily related to the mix of
services provided for 1996 compared to 1995, while the decline in the
United Kingdom is primarily related to the completion of a multi year
passive fire protection job and some softness in machining services in
1996. The improvements in Rest of World operations resulted primarily from
an increase in product sales in the Far East in addition to the opening of
new offices in Beijing and Shangai in China.
6
<PAGE> 9
KANEB SERVICES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- --------------------------------------------------------------------------------
Pipeline and Terminaling Services (In millions)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues $ 28.8 $ 23.3 $ 56.6 $ 43.7
Operating income $ 12.8 $ 10.1 $ 24.4 $ 18.6
Capital expenditures $ 1.9 $ 2.5 $ 4.0 $ 3.0
</TABLE>
This business segment provides transportation services of refined
petroleum products through its pipeline systems that extend through the
midwest and eastern rocky mountain area. Additionally, this business
segment provides terminaling services for petroleum products and specialty
liquids.
The increase in revenues and operating income for the three and six months
ended June 30, 1996 primarily results from the acquisitions of the West
Pipeline in February 1995 and the Steuart terminals in December 1995.
Other Operations
The Company recorded an increase in operating income of $.07 million and
$.01 million for the three and six months ended June 30, 1996 over the
comparable 1995 periods related to subsidiaries that provide information
services to financial and retail customers. The decrease in interest
expense in 1996, as compared to the fourth quarter of 1995, is
attributable to the decrease in parent company debt in 1995 and in
February 1996, partially offset by an increase in pipeline partnership
debt arising from the acquisitions of the West Pipeline in February 1995
and the Steuart terminals in December 1995.
Financial Condition
Cash and cash equivalents was $20.1 million at June 30, 1996, a decrease
of $10.3 million from $30.4 million at December 31, 1995. For the six
months ended June 30, 1996 operating cash flow of $22.8 million was
reduced by the redemption of approximately $8.2 million of the Company's
12% Convertible Class A Preferred Stock, Series D on January 26, 1996,
retirement of a $6.0 million 8.85% Convertible Senior Note on February 1,
1996, $5.1 million of capital expenditures and $12.1 million of
distributions to outside non-controlling partners in the pipeline
partnership.
7
<PAGE> 10
KANEB SERVICES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
27. Financial Data Schedule
(b) Reports on Form 8-K. None
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 7, 1996 /s/ Tony M. Regan
-------------------------
Tony M. Regan
Controller
8
<PAGE> 11
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
27 - Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 20,090
<SECURITIES> 0
<RECEIVABLES> 36,947
<ALLOWANCES> 640
<INVENTORY> 5,703
<CURRENT-ASSETS> 68,257
<PP&E> 365,957
<DEPRECIATION> 105,310
<TOTAL-ASSETS> 397,456
<CURRENT-LIABILITIES> 53,003
<BONDS> 183,891
<COMMON> 4,230
0
5,815
<OTHER-SE> 81,348
<TOTAL-LIABILITY-AND-EQUITY> 397,456
<SALES> 0
<TOTAL-REVENUES> 112,054
<CGS> 0
<TOTAL-COSTS> 86,902
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,620
<INCOME-PRETAX> 16,476
<INCOME-TAX> 1,321
<INCOME-CONTINUING> 2,531
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,531
<EPS-PRIMARY> 0.07
<EPS-DILUTED> 0.07
</TABLE>
