<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 September 30, 1996 Number 1-5083
KANEB SERVICES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 74-1191271
(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)
(972) 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 November 13, 1996
--------------------- -----------------
<S> <C>
no par value 33,652,151 shares
</TABLE>
================================================================================
<PAGE> 2
KANEB SERVICES, INC.
FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Income
- Three and Nine Months Ended September 30, 1996 and 1995 . . . . . . . . . . . . 1
Condensed Consolidated Balance Sheets
- September 30, 1996 and December 31, 1995 . . . . . . . . . . . . . . . . . . . . 2
Condensed Consolidated Statements of Cash Flows
Nine Months Ended September 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 Nine Months Ended
September 30, September 30,
--------------------------- ---------------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . $ 57,010 $ 56,956 $ 169,064 $ 156,613
---------- ---------- ---------- ----------
Costs and expenses:
Operating costs . . . . . . . . . . . . 37,795 40,713 114,894 112,388
Depreciation and amortization . . . . . 3,966 3,283 11,518 9,821
General and administrative . . . . . . . 1,265 1,243 3,516 3,444
---------- ---------- ---------- ----------
Total costs and expenses . . . . . . 43,026 45,239 129,928 125,653
---------- ---------- ---------- ----------
Operating income . . . . . . . . . . . . . . 13,984 11,717 39,136 30,960
Gain on sale of partnership interests . . . . - 54,157 - 54,157
Interest income and other expense, net . . . (17) (264) (149) (433)
Interest expense . . . . . . . . . . . . . . (3,943) (4,387) (11,563) (12,893)
Amortization of excess of cost over fair
value of net assets of acquired business . (462) (462) (1,386) (1,387)
---------- ---------- ---------- ----------
Income from continuing operations
before interest of outside non-
controlling partners in pipeline
partnership's net income and
income tax expense . . . . . . . . . . . . 9,562 60,761 26,038 70,404
Interest of outside non-controlling
partners in pipeline partnership's
net income . . . . . . . . . . . . . . . . (6,675) (4,237) (19,299) (10,573)
Income tax expense . . . . . . . . . . . . . (574) (745) (1,895) (1,880)
---------- ---------- ---------- ----------
Net income . . . . . . . . . . . . . . . . 2,313 55,779 4,844 57,951
Dividends applicable to preferred stock . . . 132 373 370 1,158
---------- ---------- ---------- ----------
Net income applicable to common stock . . . . $ 2,181 $ 55,406 $ 4,474 $ 56,793
========== ========== ========== ==========
Net income per common share . . . . . . . . . $ .06 $ 1.66 $ .13 $ 1.70
========== ========== ========== ==========
Weighted average number of common
shares outstanding . . . . . . . . . . . . 33,652 33,604 33,652 33,374
========== ========== ========== ==========
</TABLE>
See 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,
1996 1995
------------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . $ 25,060 $ 30,389
Accounts receivable, trade . . . . . . . . . . . . . . . . . . . . . . . . 34,732 32,708
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,889 5,809
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . 3,073 7,465
------------ -----------
Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . 68,754 76,371
------------ -----------
Property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . 367,898 363,545
Less accumulated depreciation and amortization . . . . . . . . . . . . . . . 108,217 99,698
------------ -----------
Net property and equipment . . . . . . . . . . . . . . . . . . . . . . . . 259,681 263,847
------------ -----------
Excess of cost over fair value of net assets of acquired business . . . . . . 63,645 65,031
------------ -----------
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,356 4,578
------------ -----------
$ 396,436 $ 409,827
============ ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt . . . . . . . . . . . . . . . . . . . . $ 4,445 $ 4,134
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,857 11,947
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31,276 29,750
Accrued distribution payable . . . . . . . . . . . . . . . . . . . . . . . 6,582 6,037
Accrued redemption of preferred stock . . . . . . . . . . . . . . . . . . - 8,201
------------ -----------
Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . 51,160 60,069
------------ -----------
Long-term debt, less current portion:
Industrial field services . . . . . . . . . . . . . . . . . . . . . . . . 24,262 25,691
Pipeline and terminaling services . . . . . . . . . . . . . . . . . . . . 134,989 136,489
Parent company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,666 29,666
------------ -----------
Total long-term debt, less current portion . . . . . . . . . . . . . . . . 182,917 191,846
------------ -----------
Net liabilities of discontinued operations . . . . . . . . . . . . . . . . . 2,769 3,320
------------ -----------
Deferred income taxes and other liabilities . . . . . . . . . . . . . . . . . 11,455 11,235
------------ -----------
Interest of outside non-controlling partners in pipeline partnership . . . . 74,898 74,335
------------ -----------
Commitments and contingencies
Shareholders' equity:
Preferred stock, without par value . . . . . . . . . . . . . . . . . . . . 5,814 5,814
Common stock, without par value . . . . . . . . . . . . . . . . . . . . . 4,230 4,230
Additional paid-in-capital . . . . . . . . . . . . . . . . . . . . . . . . 197,181 197,151
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . (113,648) (118,118)
Treasury stock, at cost . . . . . . . . . . . . . . . . . . . . . . . . . (19,552) (19,552)
Cumulative foreign currency translation adjustment . . . . . . . . . . . . (788) (503)
------------ -----------
Total shareholders' equity . . . . . . . . . . . . . . . . . . . . . . . . 73,237 69,022
------------ -----------
$ 396,436 $ 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>
Nine Months Ended September 30,
------------------------------------
1996 1995
-------------- -------------
<S> <C> <C>
Operating activities:
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,844 $ 57,951
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . 11,518 9,821
Gain on sale of partnership interests . . . . . . . . . . . . . - (54,157)
Interest of outside non-controlling partners in
pipeline partnership . . . . . . . . . . . . . . . . . . . . 19,299 10,573
Amortization of excess of cost over fair
value of net assets acquired . . . . . . . . . . . . . . . . 1,386 1,387
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . 761 270
Changes in current assets and liabilities . . . . . . . . . . . 548 (1,928)
-------------- -------------
Net cash provided by operating activities . . . . . . . . . . 38,356 23,917
-------------- -------------
Investing activities:
Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . (8,186) (10,111)
Acquisitions made by pipeline partnership . . . . . . . . . . . . . - (27,100)
Net proceeds from sale of partnership interests . . . . . . . . . . . - 74,812
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151 4,842
-------------- -------------
Net cash provided by (used in) investing activities . . . . . (8,035) 42,443
-------------- -------------
Financing activities:
Issuance of long-term debt . . . . . . . . . . . . . . . . . . . . . 932 6,759
Issuance of long-term debt by pipeline partnership . . . . . . . . . 68,000 28,500
Payments on long-term debt . . . . . . . . . . . . . . . . . . . . . (8,232) (66,395)
Payments of long-term debt by pipeline partnership . . . . . . . . . (69,309) (2,641)
Preferred stock dividends paid . . . . . . . . . . . . . . . . . . . (370) (808)
Distributions to outside non-controlling partners in
pipeline partnership . . . . . . . . . . . . . . . . . . . . . . . (18,095) (12,201)
Redemption of preferred stock . . . . . . . . . . . . . . . . . . . (8,025) -
-------------- -------------
Net cash provided by (used in) financing activities . . . . . (35,099) (46,786)
-------------- -------------
Cash used in discontinued operations . . . . . . . . . . . . . . . . . (551) (863)
-------------- -------------
Increase (decrease) in cash and cash equivalents . . . . . . . . . . . (5,329) 18,711
Cash and cash equivalents at beginning of period . . . . . . . . . . . 30,389 9,506
-------------- -------------
Cash and cash equivalents at end of period . . . . . . . . . . . . . . $ 25,060 $ 28,217
============== =============
Supplemental information on cash paid during the period for:
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,559 $ 12,400
============== =============
Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 649 $ 830
============== =============
</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 September 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 September 30, 1996 and the results of its
operations and cash flows for the periods ended September 30, 1996 and
1995. Operating results for the nine months ended September 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 initially financed by
bank borrowings. In June 1996, the Partnership refinanced the bank
borrowings with the issuance of $68 million of first mortgage notes.
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 nine month periods ended September 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 Nine Months Ended
September 30, September 30,
-------------------------- ----------------------------
Pro forma Pro forma
1996 1995 1996 1995
--------- ---------- ---------- ------------
<S> <C> <C> <C> <C>
Revenues . . . . . . . . . . . . . . . . . $ 57,010 $ 61,171 $ 169,064 $ 173,134
========= ========== ========== ============
Net income . . . . . . . . . . . . . . . . $ 2,313 $ 55,498 $ 4,844 $ 58,219
========= ========== ========== ============
Net income per common share . . . . . . . $ .06 $ 1.65 $ .13 $ 1.71
========= ========== ========== ============
</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 January 26, 1996, the Company fully redeemed its outstanding 12%
Convertible Class A Preferred Stock, Series D. 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 (IN MILLIONS)
INDUSTRIAL FIELD SERVICES
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- --------------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
United States . . . . . . . . . . . . $ 7.6 $ 8.4 $ 24.6 $ 23.9
United Kingdom . . . . . . . . . . . 8.7 10.8 25.5 29.3
Germany . . . . . . . . . . . . . . . 4.0 3.9 11.6 12.1
Rest of World . . . . . . . . . . . . 4.8 4.8 14.9 13.0
---------- ---------- ---------- ----------
$ 25.1 $ 27.9 $ 76.6 $ 78.3
========== ========== ========== ==========
Operating income:
United States . . . . . . . . . . . . $ .5 $ .4 $ 1.5 $ 1.7
United Kingdom . . . . . . . . . . . . .9 1.5 1.3 2.7
Germany . . . . . . . . . . . . . . . .2 (.3) .4 (.8)
Rest of World . . . . . . . . . . . . .5 .3 1.4 .6
Headquarters . . . . . . . . . . . . . (.3) (.2) (.7) (.6)
---------- ---------- ---------- ----------
$ 1.8 $ 1.7 $ 3.9 $ 3.6
========== ========== ========== ==========
Capital expenditures . . . . . . . . . . . $ 1.2 $ 1.5 $ 2.3 $ 3.0
========== ========== ========== ==========
</TABLE>
This business segment provides specialized industrial field services to
plants primarily in the process and the power industries.
For the three months ended September 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.
For the nine months ended September 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 in 1995. 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 Shanghai 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
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------------- ----------------------------
1996 1995 1996 1995
------------ ---------- ---------- ------------
<S> <C> <C> <C> <C>
Revenues . . . . . . . . . . . . . . . . . . $ 30.0 $ 26.5 $ 86.6 $ 70.3
Operating income . . . . . . . . . . . . . . $ 12.8 $ 10.9 $ 37.2 $ 29.5
Capital expenditures . . . . . . . . . . . . $ 2.3 $ 2.4 $ 6.3 $ 7.1
</TABLE>
This business segment provides transportation services of refined petroleum
products through its pipeline systems that extend through the Midwest and
Eastern Rocky Mountain areas. Additionally, this business segment provides
terminaling services for petroleum products and specialty liquids.
The increase in revenues and operating income for the three and nine months
ended September 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 $.3 million and $.4
million for the three and nine months ended September 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 1995, is attributable to the decrease in
parent company debt in the third quarter of 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 $25.1 million at September 30, 1996, a
decrease of $5.3 million from $30.4 million at December 31, 1995. For the
nine months ended September 30, 1996 operating cash flow of $38.4 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, $8.2 million of capital expenditures and $18.1 million of
distributions to outside non-controlling partners in the pipeline
partnership.
On October 10, 1996, the pipeline partnership announced an increase in its
quarterly cash distributions to $ .60 per unit. This increase will result
in $1.0 million of additional cash flow, on an annual basis, to the parent
company from the units it owns.
7
<PAGE> 10
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: November 13, 1996 /s/ Tony M. Regan
--------------------------------------
Tony M. Regan
Controller
8
<PAGE> 11
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 25,060
<SECURITIES> 0
<RECEIVABLES> 35,185
<ALLOWANCES> 453
<INVENTORY> 5,889
<CURRENT-ASSETS> 68,754
<PP&E> 367,898
<DEPRECIATION> 108,217
<TOTAL-ASSETS> 396,436
<CURRENT-LIABILITIES> 51,160
<BONDS> 182,917
0
5,814
<COMMON> 4,230
<OTHER-SE> 83,533
<TOTAL-LIABILITY-AND-EQUITY> 396,436
<SALES> 0
<TOTAL-REVENUES> 169,064
<CGS> 0
<TOTAL-COSTS> 129,928
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,563
<INCOME-PRETAX> 26,038
<INCOME-TAX> 1,895
<INCOME-CONTINUING> 4,844
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,844
<EPS-PRIMARY> 0.13
<EPS-DILUTED> 0.13
</TABLE>
