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, 1999 Number 001-05083
KANEB SERVICES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 74-1191271
(State or other jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
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.
Class of Common Stock Outstanding at July 30, 1999
No par value 31,441,349 shares
<PAGE>
KANEB SERVICES, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED JUNE 30, 1999
- --------------------------------------------------------------------------------
Page No.
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Income - Three and Six Months
Ended June 30, 1999 and 1998 1
Condensed Consolidated Balance Sheets - June 30, 1999
and December 31, 1998 2
Condensed Consolidated Statements of Cash Flows - Six
Months Ended June 30, 1999 and 1998 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 18
<PAGE>
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,
---------------------- ----------------------
1999 1998 1999 1998
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues $ 122,951 $ 100,492 $ 222,307 $ 159,993
--------- --------- --------- ---------
Costs and expenses:
Operating costs 48,212 41,342 92,054 81,275
Cost of sales 52,798 38,607 87,474 40,455
Depreciation and amortization 4,561 4,202 9,063 8,249
General and administrative 1,261 1,360 2,385 2,426
--------- --------- --------- ---------
Total costs and expenses 106,832 85,511 190,976 132,405
--------- --------- --------- ---------
Operating income 16,119 14,981 31,331 27,588
Other income 163 62 447 25
Interest expense (4,789) (3,891) (9,324) (7,636)
Amortization of excess of cost over fair
value of net assets of acquired businesses (555) (495) (1,066) (970)
--------- --------- --------- ---------
Income before interest of outside non-
controlling partners in KPP's net
income and income tax expense 10,938 10,657 21,388 19,007
Interest of outside non-controlling
partners in KPP's net income (7,338) (6,762) (14,702) (12,817)
Income tax benefit (expense) 412 (530) (365) (989)
--------- --------- --------- ---------
Net income 4,012 3,365 6,321 5,201
Dividends applicable to preferred stock 108 158 222 308
--------- --------- --------- ---------
Net income applicable to common stock $ 3,904 $ 3,207 $ 6,099 $ 4,893
========= ========= ========= =========
Earnings per common share -
Basic and Diluted $ .12 $ .10 $ .19 $ .15
========= ========= ========= =========
</TABLE>
See notes to consolidated financial statements.
1
<PAGE>
KANEB SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
June 30, December 31
1999 1998
--------- -----------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 20,464 $ 9,134
Accounts receivable, trade 57,205 47,540
Inventories 14,523 13,465
Prepaid expenses and other current assets 7,465 6,615
--------- ---------
Total current assets 99,657 76,754
--------- ---------
Property and equipment 454,112 411,285
Less accumulated depreciation and amortization 136,596 130,759
--------- ---------
Net property and equipment 317,516 280,526
--------- ---------
Investment in affiliate 22,423 21,005
Excess of cost over fair value of net assets
of acquired businesses 63,764 62,521
Other assets 7,102 7,239
--------- ---------
$ 510,462 $ 448,045
========= =========
LIABILITIES AND EQUITY
Current liabilities:
Short-term and current portion of long-term debt $ 2,376 $ 15,293
Accounts payable 18,764 14,520
Accrued expenses 41,558 41,309
--------- ---------
Total current liabilities 62,698 71,122
--------- ---------
Long-term debt, less current portion:
Pipeline and terminaling services 211,719 153,000
Product marketing services 3,632 --
Industrial field services 21,037 20,292
Parent company 23,666 23,666
--------- ---------
Total long-term debt, less current portion 260,054 196,958
--------- ---------
Deferred income taxes and other liabilities 19,004 15,626
Interest of outside non-controlling partners in KPP 75,595 76,894
Commitments and contingencies
Stockholders' equity:
Preferred stock, without par value 5,792 5,792
Common stock, without par value 4,241 4,239
Additional paid-in-capital 197,287 197,263
Accumulated deficit (82,324) (88,423)
Unamortized restricted stock (141) (141)
Treasury stock, at cost (29,709) (29,775)
Accumulated other comprehensive income (loss) -
foreign currency translation adjustment (2,035) (1,510)
--------- ---------
Total stockholders' equity 93,111 87,445
--------- ---------
$ 510,462 $ 448,045
========= =========
See notes to consolidated financial statements.
2
<PAGE>
KANEB SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
Six Months Ended
June 30
--------------------
1999 1998
-------- --------
Operating activities:
Net income $ 6,321 $ 5,201
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 9,063 8,249
Equity in earnings of affiliate (1,556) --
Interest of outside non-controlling partners
in KPP 14,702 12,817
Amortization of excess of cost over fair
value of net assets of acquired businesses 1,066 970
Deferred income taxes 596 292
Changes in working capital components (6,140) (6,748)
-------- --------
Net cash provided by operating activities 24,052 20,781
-------- --------
Investing activities:
Capital expenditures (5,171) (7,192)
Acquisitions, net of cash acquired (41,255) (7,829)
Change in other assets, net (995) (2,417)
-------- --------
Net cash used in investing activities (47,421) (17,438)
-------- --------
Financing activities:
Issuance of short-term and long-term debt 51,490 10,247
Payments on long-term debt (1,311) (5,655)
Preferred stock dividends (222) (228)
Distributions to outside non-controlling partners
in KPP (15,350) (14,255)
Common stock issued 92 137
Purchase of treasury stock -- (4,736)
-------- --------
Net cash provided by (used in) financing
activities 34,699 (14,490)
-------- --------
Increase (decrease) in cash and cash equivalents 11,330 (11,147)
Cash and cash equivalents at beginning of period 9,134 23,025
-------- --------
Cash and cash equivalents at end of period $ 20,464 $ 11,878
======== ========
Supplemental cash flow information:
Cash paid for interest $ 8,940 $ 7,480
======== ========
Cash paid for income taxes $ 615 $ 2,060
======== ========
See notes to consolidated financial statements.
3
<PAGE>
KANEB SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES
The unaudited condensed consolidated financial statements of Kaneb
Services, Inc. and its subsidiaries (the "Company") for the three and six
month periods ended June 30, 1999 and 1998, 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 consolidated
financial statements included in the Company's Annual Report on Form 10-K
for the year ended December 31, 1998. In the opinion of the Company's
management, the accompanying condensed consolidated financial statements
contain the adjustments, consisting of normal recurring accruals, necessary
to present fairly the consolidated financial position of the Company and
its consolidated subsidiaries at June 30, 1999 and the consolidated results
of their operations and cash flows for the periods ended June 30, 1999 and
1998. Operating results for the three and six months ended June 30, 1999
are not necessarily indicative of the results that may be expected for the
year ending December 31, 1999.
2. ACQUISITION BY KPP
On February 1, 1999, Kaneb Pipe Line Partners, L.P. ("KPP") acquired six
terminals in the United Kingdom from GATX Terminals Limited for (pound)22.6
million (approximately $37.2 million) plus the assumption of certain
liabilities. The acquisition, which was financed by term loans from a bank,
has been accounted for using the purchase method of accounting. The term
loans, which bear interest in varying amounts, are secured by the capital
stock of the subsidiaries that acquired the United Kingdom terminals, and
pari passu with the existing mortgage notes and credit facility, by a
mortgage on the East Pipeline. The term loans, which are without recourse
to the Company, contain certain financial and operational covenants. $18.3
million of the term loans were repaid in July 1999 with the proceeds from a
public offering of KPP units (see Note 3). The remaining portion ($25.9
million) is due in January 2002. The pro forma effect of the acquisition
was not material to the results of operations.
3. PUBLIC OFFERING OF KPP UNITS
In July 1999, KPP issued 2.25 million limited partnership units in a public
offering at $30.75 per Unit, generating approximately $65.7 million in net
proceeds. A portion of the proceeds was used to repay in full KPP's $15.0
million promissory note, KPP's $25.0 million revolving credit facility and
$18.3 million of KPP's term loans resulting from the United Kingdom
terminal acquisition referred to in Note 2. Accordingly, the current debt
repaid with offering proceeds ($33.3 million at June 30, 1999) has been
reclassified as long-term in the accompanying balance sheet.
As a result of KPP issuing additional units to unrelated parties, the
Company's pro-rata share of the net assets of KPP increased by $15.2
million. Accordingly, the Company will recognize a gain, before deferred
income taxes, of $15.2 million in the third quarter of 1999.
4. COMPREHENSIVE INCOME
Comprehensive income for the three and six months ended June 30, 1999 and
1998 is as follows:
Three Months Ended Six Months Ended
June 30, June 30,
----------------- -----------------
1999 1998 1999 1998
------- ------- ------- -------
(in thousands)
Net income $ 4,012 $ 3,365 $ 6,321 $ 5,201
Other comprehensive income (loss)
foreign currency translation
adjustment 35 26 (525) 27
------- ------- ------- -------
Comprehensive income $ 4,047 $ 3,391 $ 5,796 $ 5,228
======= ======= ======= =======
5. EARNINGS PER SHARE
The following is a reconciliation of Basic and Diluted earnings per share
(in thousands, except for per share amounts):
Weighted
Average
Net Common Per-Share
Income Shares Amount
-------- -------- ---------
Three Months Ended June 30, 1999
--------------------------------
Net income $ 4,012
Dividends applicable to preferred stock (108)
-------
Basic earnings per share -
Income applicable to common stock 3,904 31,436 $ .12
=======
Effect of dilutive securities -
Common stock options and DSUs -- 1,084
------- -------
Diluted earnings per share -
Income applicable to common stock,
DSUs and assumed options exercised $ 3,904 32,520 $ .12
======= ======= =======
Three Months Ended June 30, 1998
--------------------------------
Net income $ 3,365
Dividends applicable to preferred stock (158)
-------
Basic earnings per share -
Income applicable to common stock 3,207 31,944 $ .10
=======
Effect of dilutive securities -
Common stock options and DSUs -- 800
------- -------
Diluted earnings per share -
Income applicable to common stock,
DSUs and assumed options exercised $ 3,207 32,744 $ .10
======= ======= =======
Six Months Ended June 30, 1999
------------------------------
Net income $ 6,321
Dividends applicable to preferred stock (222)
-------
Basic earnings per share -
Income available to common stock 6,099 31,425 $ .19
========
Effect of dilutive securities -
Common stock options -- 1,069
------- --------
Diluted earnings per share -
Income available to common stock
and assumed options exercised $ 6,099 32,494 $ .19
======= ======= ========
Six Months Ended June 30, 1998
------------------------------
Net income $ 5,201
Dividends applicable to preferred stock (308)
-------
Basic earnings per share -
Income available to common stock 4,893 32,066 $ 0.15
========
Effect of dilutive securities -
Common stock options -- 777
------- --------
Diluted earnings per share -
Income available to common stock
and assumed options exercised $ 4,893 32,843 $ 0.15
======= ======= ========
Options to purchase 94,553 and 652 shares of common stock at weighted
average prices of $5.20 and $5.63, were outstanding at June 30, 1999 and
1998, respectively, but were not included in the computation of diluted
earnings per share because the options' exercise price was greater than the
average market price of the common stock. Additionally, the Company's 8.75%
convertible subordinated debentures were excluded from the computation of
diluted earnings per share because the effect of assumed conversion is
anti-dilutive.
6. CONTINGENCIES
The operations of the Company are subject to Federal, state and local laws
and regulations relating to protection of the environment. Although the
Company believes that its operations are in general compliance with
applicable environmental regulation, risks of additional costs and
liabilities are inherent in its operations, and there can be no assurance
that significant costs and liabilities will not be incurred by the Company.
Moreover, it is possible that other developments, such as increasingly
stringent environmental laws, regulations, enforcement policies thereunder,
and claims for damages to property or persons resulting from the operations
of the Company, could result in substantial costs and liabilities to the
Company.
Certain subsidiaries of KPP are defendants in a lawsuit filed in a Texas
state court in 1997 by Grace Energy Corporation, the entity from whom KPP
acquired ST Services in 1993. The lawsuit involves environmental response
and remediation allegedly resulting from jet fuel leaks in the early 1970's
from a pipeline. The pipeline, which connected a former Grace terminal with
Otis Air Force Base, was abandoned in 1973, and the connecting terminal was
sold to an unrelated entity in 1976. Grace alleges that it has incurred
since 1996 expenses of approximately $3 million for response and
remediation required by the State of Massachusetts and that it expects to
incur additional expenses in the future. Future expenses could potentially
include claims by the United States Government, as described below. Grace
alleges that KPP acquired the abandoned pipeline as part of the acquisition
of ST Services in 1993 and assumed responsibility for environmental damages
caused by the jet fuel leaks from the pipeline. Grace is seeking a ruling
that KPP's subsidiaries are responsible for all present and future
remediation expenses for these leaks and that Grace has no obligation to
indemnify KPP for these expenses. The case is set for trial in September
1999.
KPP's consistent position is that they did not acquire the abandoned
pipeline as part of the 1993 ST transaction and did not assume any
responsibility for the environmental damage. In a motion for partial
summary judgment, the trial judge has ruled that the pipeline was an asset
of the company KPP acquired. KPP intends to seek a rehearing on this issue
from the trial judge. In addition, KPP is continuing with its defense that
the pipeline had been abandoned prior to the acquisition of ST Services and
could not have been included in the assets KPP acquired. The defendants
also believe that they have certain rights to indemnification from Grace
under the acquisition agreement with Grace. These rights include claims
against Grace for fraud and breach of environmental representations in the
acquisition agreement. The acquisition agreement also includes Grace's
agreement to indemnify KPP against 60% of post-closing environmental
remediation costs, subject to a maximum indemnity payment of $10 million.
The Otis Air Force Base is a part of the Massachusetts Military
Reservation, which has been declared a Superfund Site pursuant to the
Comprehensive Environmental Response, Compensation and Liability Act. The
MMR Site contains nine groundwater contamination plumes, two of which are
allegedly associated with the pipeline, and various other waste management
areas of concern, such as landfills. The United States Department of
Defense and the United States Coast Guard, pursuant to a Federal Facilities
Agreement, has been responding to the Government remediation demand for
most of the contamination problems at the MMR Site. Grace and others have
also received and responded to formal inquiries from the United States
Government in connection with the environmental damages allegedly resulting
from the jet fuel leaks. KPP has voluntarily responded to an invitation
from the Government to provide information indicating that it does not own
the pipeline. In connection with a court-ordered mediation between Grace
and KPP, the Government advised the parties in April 1999 that it has
identified the two spill areas that it believes to be related to the
pipeline that is the subject of the Grace suit. The Government advised the
parties that it believes it has incurred costs of approximately $34
million, and expects in the future to incur costs of approximately $55
million, for remediation of one of the spill areas. This amount was not
intended to be a final accounting of costs or to include all categories of
costs. The Government also advised the parties that it could not at that
time allocate its costs attributable to the second spill area. Any claims
by the Government could be material in amount and, if made and ultimately
sustained against KPP, could adversely affect KPP's ability to pay cash
distributions to its unitholders.
The Company has other contingent liabilities resulting from litigation,
claims and commitments incident to the ordinary course of business.
Management believes, based on the advice of counsel, that the ultimate
resolution of such contingencies will not have a materially adverse effect
on the financial position or results of operations of the Company.
7. BUSINESS SEGMENT DATA
The Pipeline and Terminaling Segment includes the pipeline and terminaling
operations of KPP which consist of the transportation of refined petroleum
products in the Midwestern states as a common carrier and the storage of
petroleum products, specialty chemicals and other liquids. The Company's
Product Marketing Segment provides wholesale motor fuel marketing services
throughout the Midwest and Rocky Mountain regions, as well as California.
The Company's Information Services Segment provides consulting services,
hardware sales and other related information management and processing
services to governmental, insurance and financial institutions.
Additionally, the Company provides Industrial Field Services to an
international client base that includes refineries, chemical plants,
pipelines, offshore drilling and production platforms, steel mills, food
and drink processing facilities, power generation, and other process
industries.
During the second quarter of 1999, the Company changed the composition of
its segments to report Product Marketing Services as a separate segment.
Comparable prior year amounts have been restated to conform to the current
presentation.
The Company measures segment profit as operating income. Total assets are
those controlled by each reportable segment.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
1999 1998 1999 1998
------------- ------------- ------------- --------------
(in thousands)
<S> <C> <C> <C> <C>
Business segment revenues:
Pipeline and terminaling services $ 39,171 $ 30,553 $ 76,016 $ 58,623
Product marketing services 51,173 37,699 82,540 39,626
Information services 7,542 2,731 14,570 4,746
Industrial field services 25,065 29,509 49,181 56,998
------------- ------------- ------------- --------------
$ 122,951 $ 100,492 $ 222,307 $ 159,993
============= ============= ============= ==============
Pipeline and terminaling services segment
revenues:
Pipeline operations $ 16,182 $ 15,351 $ 31,346 $ 29,452
Terminaling operations 22,989 15,202 44,670 29,171
------------- ------------- ------------- --------------
$ 39,171 $ 30,553 $ 76,016 $ 58,623
============= ============= ============= ==============
Industrial field services segment revenues:
Underpressure services $ 9,500 $ 9,955 $ 19,225 $ 20,648
Turnaround services 12,909 13,948 23,525 25,573
Other services 2,656 5,606 6,431 10,777
------------- ------------- ------------- --------------
$ 25,065 $ 29,509 $ 49,181 $ 56,998
============= ============= ============= ==============
Business segment profit:
Pipeline and terminaling services $ 15,642 $ 12,924 $ 30,566 $ 24,808
Product marketing services 327 260 692 318
Information services 1,154 956 2,078 1,680
Industrial field services 257 2,201 380 3,208
General corporate (1,261) (1,360) (2,385) (2,426)
------------- ------------- ------------- --------------
Operating income 16,119 14,981 31,331 27,588
Other income 163 62 447 25
Interest expense (4,789) (3,891) (9,324) (7,636)
Amortization of excess of cost
over fair value of net assets
of acquired businesses (555) (495) (1,066) (970)
------------- ------------- ------------- --------------
Income before interest of outside
non-controlling partners of
KPP's net income and
income tax expense $ 10,938 $ 10,657 $ 21,388 $ 19,007
============= ============= ============= ==============
June 30, December 31,
1999 1998
------------- --------------
Total assets:
Pipeline and terminaling services $ 356,632 $ 310,825
Product marketing services 17,617 12,233
Information services 17,017 11,082
Industrial field services 109,503 110,603
General corporate 9,693 3,302
------------- --------------
$ 510,462 $ 448,045
============= ==============
</TABLE>
<PAGE>
KANEB SERVICES, INC. AND SUBSIDIARIES
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. (the "Company") and notes
thereto included elsewhere in this report.
Operating Results:
Pipeline and Terminaling Services
This business segment includes the operations of Kaneb Pipe Line Partners,
L.P. ("KPP"). KPP provides transportation services of refined petroleum
products through a pipeline system that extends through the Midwestern
states as a common carrier and provides terminaling and storage services
for petroleum products, specialty chemicals and other liquids. The Company
operates, manages and controls the pipeline and terminaling operations of
KPP through its 2% general partner interest and a 31% limited partner
interest (27% after KPP's July 1999 public unit offering - See "Liquidity
and Capital Resources") in the partnership.
Three Months Ended Six Months Ended
June 30, June 30,
----------------- -----------------
1999 1998 1999 1998
------- ------- ------- -------
(in thousands)
Revenues $39,171 $30,553 $76,016 $58,623
======= ======= ======= =======
Operating income $15,642 $12,924 $30,566 $24,808
======= ======= ======= =======
Capital expenditures,
excluding acquisitions $ 2,392 $ 3,423 $ 4,074 $ 5,774
======= ======= ======= =======
On October 30, 1998, KPP, through a wholly-owned subsidiary, entered into
acquisition and joint venture agreements with Northville Industries Corp.
to acquire and manage the former Northville terminal located in Linden, New
Jersey. Under the agreements, KPP acquired a 50% interest in the newly
formed ST Linden Terminal LLC for $20.5 million plus transaction costs.
During the year ended December 31, 1998, the Partnership acquired other
terminals for aggregate consideration of $15.9 million. On February 1,
1999, KPP acquired six terminals in the United Kingdom from GATX Terminal
Limited for approximately $37.2 million plus the assumption of certain
liabilities. The acquisitions (the "Acquisitions") were funded by KPP with
bank financing, a portion of which were paid off using proceeds from KPP's
public unit offering in July 1999 (see "Liquidity and Capital Resources").
For the three months ended June 30, 1999, revenues for the Pipeline and
Terminaling business increased by $8.6 million, or 28%, when compared to
1998, due to a $0.8 million increase in revenues in the pipeline business
and $7.8 million increase in terminaling revenues, when compared to the
same 1998 period. The $17.4 million, or 30%, increase in Pipeline and
Terminaling business revenues for the six month period ended June 30, 1999
is due to a $1.9 million increase in revenues in the pipeline business and
a $15.5 million increase in the terminaling revenues, when compared to the
same 1998 period. The increase in pipeline revenues for the three and six
months ended June 30, 1999 is due to overall increases in volumes shipped
when compared to the same periods in 1998. Over 90% of the year-to-date
increase in volumes shipped was on the East Pipeline. Barrel miles totaled
4.6 billion and 4.0 billion for the three months ended June 30, 1999 and
1998, respectively, and 8.6 billion and 7.7 billion for the six months
ended June 30, 1999 and 1998, respectively. The increase in terminaling
revenues for the three and six months ended June 30, 1999 is due to the
Acquisitions and an increase in tank utilization resulting from favorable
market conditions, partially offset by a decrease in the overall average
price realized for storage. For the six months ended June 30, 1999, average
annualized revenues per barrel of tankage utilized decreased to $4.00,
compared to $4.40 per barrel for the same prior year period, the result of
the storage of a larger proportionate volume of petroleum products, which
are historically at lower per barrel rates than specialty chemicals.
Average annual tankage utilized for the six months ended June 30, 1999
increased to 22.3 million barrels from 13.3 barrels for the comparable
prior year period, as a result of the Acquisitions and increased
utilization at KPP's largest petroleum storage facility.
The $2.7 million increase in operating income for the quarter ended June
30, 1999, compared to 1998, is due to a $0.8 million increase in pipeline
operating income and a $1.9 million increase in terminaling operating
income. For the six month period ended June 30, 1999, operating income
increased $5.8 million, compared to 1998, due to a $1.3 million increase in
pipeline operating income and a $4.5 million increase in terminaling
operating income. The increase in pipeline operating income for the three
and six months ended June 30, 1999, is due to the increase in volumes
shipped. The increase in terminaling operating income for the three and six
months ended June 30, 1999, compared to 1998, is a result of the
Acquisitions and the increase in tank utilization.
The interest of outside non-controlling partners in KPP's net income was
$7.3 million and $6.8 million for the three month periods ended June 30,
1999 and 1998, respectively, and $14.7 million and $12.8 million for the
six month periods ended June 30, 1999 and 1998, respectively. Distributions
paid to the outside non-controlling unitholders of KPP aggregated
approximately $15.4 million and $14.3 million for the six month periods
ended June 30, 1999 and 1998, respectively.
Capital expenditures of $2.4 million and $4.1 million for the three and six
months ended June 30, 1999, relate to the maintenance of existing
operations. Routine maintenance capital expenditures for 1999 are currently
estimated to be between $12 million and $16 million.
Product Marketing Services
The Company's petroleum products marketing business provides wholesale
motor fuel marketing services throughout the Great Lakes and Rocky Mountain
regions, as well as California.
Three Months Ended Six Months Ended
June 30, June 30,
----------------- -----------------
1999 1998 1999 1998
------- ------- ------- -------
(in thousands)
Revenues $51,173 $37,699 $82,540 $39,626
======= ======= ======= =======
Operating income $ 327 $ 260 $ 692 $ 318
======= ======= ======= =======
For the three months ended June 30, 1999, revenues increased by $13.5
million, or 36%, and operating income increased by $0.1 million, or 26%,
when compared to the same 1998 period. For the six months ended June 30,
1999, revenues increased by $42.9 million, or 108%, and operating income
increased by $0.4 million, or 118%, when compared to 1998. The increase in
revenues and operating income for the three month period is primarily a
result of a 40% increase in sales volumes when compared to the same 1998
period. The incremental increase for the six months ended June 30, 1999,
when compared to 1998, is due to the products marketing business being
acquired in late March 1998.
Information Services
The Company's information services business is conducted through a variety
of wholly-owned subsidiaries. The information services group provides
consulting services, sales of computer hardware manufactured by others,
insurance tracking services and other related information management and
processing services primarily for governmental, insurance and financial
institutions.
Three Months Ended Six Months Ended
June 30, June 30,
----------------- -----------------
1999 1998 1999 1998
------- ------- ------- -------
(in thousands)
Revenues $ 7,542 $ 2,731 $14,570 $ 4,746
======= ======= ======= =======
Operating income $ 1,154 $ 956 $ 2,078 $ 1,680
======= ======= ======= =======
On March 23, 1999, the Company, through a wholly-owned subsidiary, acquired
the capital stock of Ellsworth Associates, Inc. ("Ellsworth"). Ellsworth
provides information technology services, including network, database and
systems design, and application programming, primarily to government
agencies.
For the three months ended June 30, 1999, revenues increased by $4.8
million, or 176%, and operating income increased by $0.2 million, or 21%,
when compared to the same 1998 period. For the six months ended June 30,
1999, revenues increased by $9.8 million, or 207%, and operating income
increased by $0.4 million, or 24%, when compared to 1998. The increase in
revenues and operating income for the three and six month periods is a
result of the Ellsworth acquisition and increases in computer hardware
sales and consulting services provided to various federal government
agencies.
Industrial Field Services
This business segment provides specialized industrial field services,
including underpressure leak sealing, on-site machining, safety and relief
valve testing and repair, passive fire protection and fugitive emissions
inspections to the process and power industry worldwide.
Three Months Ended Six Months Ended
June 30, June 30,
----------------- -----------------
1999 1998 1999 1998
------- ------- ------- -------
(in thousands)
Revenues:
United States $ 8,037 $ 8,904 $ 15,506 $ 17,838
Europe 14,091 17,914 27,911 33,801
Asia-Pacific 2,937 2,691 5,764 5,359
-------- -------- -------- --------
Total Revenues $ 25,065 $ 29,509 $ 49,181 $ 56,998
======== ======== ======== ========
Operating income:
United States $ 409 $ 327 $ 448 $ 809
Europe 1,204 1,873 1,314 2,434
Asia-Pacific 100 242 419 347
Headquarters (398) (241) (743) (382)
-------- -------- -------- --------
Operating income before
severance and other costs 1,315 2,201 1,438 3,208
Severance and other costs (1,058) -- (1,058) --
-------- -------- -------- --------
Total operating income $ 257 $ 2,201 $ 380 $ 3,208
======== ======== ======== ========
Capital expenditures,
excluding acquisitions $ 616 $ 725 $ 971 $ 1,347
======== ======== ======== ========
For the three and six months ended June 30, 1999, revenues for the
Industrial Field Services segment decreased by 15% and 14%, respectively,
when compared to the same 1998 periods, due to adverse market conditions in
the United States and Europe, partially offset by modest gains in
Asia-Pacific. In the United States, revenues decreased by 10% and 13%,
respectively, for the three and six month period ended June 30, 1999,
compared to the same periods in 1998, due to declines in turnaround
services and other process plant services. In Europe, revenues decreased by
21% and 17%, respectively, for the three and six month periods ended June
30, 1999 due to lower turnaround and other process plant services in the
United Kingdom. Asia-Pacific revenues increased by 9% in the second quarter
of 1999 and increased by 8% in the first half of 1999, compared to the same
periods in 1998, due to increases in turnaround services in Australia,
partially offset by first quarter 1999 declines in underpressure services
in Hong Kong.
Overall, Industrial Field Services operating income, before severance and
other costs, decreased by $0.9 million and $1.8 million for the three and
six months ended June 30, 1999, respectively, when compared to the same
1998 periods, due to the adverse market conditions in the United States and
Europe. Severance and other costs result from matching the segment's
workforce to the current market conditions in these regions.
Income tax expense for the three and six months ended June 30, 1999
includes a $0.9 million benefit related to favorable developments
pertaining to the resolution of certain foreign income tax issues.
Liquidity and Capital Resources
During the first six months of 1999, the Company's working capital
requirements for operations and capital expenditures (excluding
acquisitions) were funded through the use of internally generated funds.
Cash provided by operations was $24.1 million and $20.8 million for the six
months ended June 30, 1999 and 1998, respectively. Capital expenditures
(excluding acquisitions) were $5.2 million for the six months ended June
30, 1999, compared to $7.2 million in 1998. Routine maintenance capital
expenditures in 1999 are expected to be funded by internally generated
funds.
In July 1999, KPP issued 2.25 million limited partnership units in a public
offering at $30.75 per Unit, generating approximately $65.7 million in net
proceeds. A portion of the proceeds was used to repay in full KPP's $15.0
million promissory note, KPP's $25.0 million revolving credit facility and
$18.3 million of KPP's term loans resulting from the United Kingdom
terminal acquisition. As a result of KPP issuing additional units to
unrelated parties, the Company's pro-rata share of the net assets of KPP
increased by $15.2 million. Accordingly, the Company will recognize a gain,
before deferred income taxes, of $15.2 million in the third quarter of
1999.
In January 1999, KPP entered into a credit agreement with a bank that
provides for the issuance of $39.2 million of term loans in connection with
the United Kingdom terminal acquisition and $5.0 million for general
partnership purposes. The term loans, which bear interest in varying
amounts, are secured by the capital stock of the subsidiaries that acquired
the United Kingdom terminals, and pari passu with the existing mortgage
notes and credit facility, by a mortgage on the East Pipeline. The term
loans, which are without recourse to the Company, contain certain financial
and operational covenants. $18.3 million of the term loans were repaid in
July 1999 with the proceeds from a public offering of KPP units. The
remaining portion ($25.9 million) is due in January 2002.
Additional information related to the sources and uses of cash is presented
in the financial statements included in this report.
Year 2000 Issue
The Company recognizes the challenges associated with Year 2000 Issues
("Y2K") and has undertaken a review and testing of its computer systems to
identify Y2K-related issues associated with any items of software or
hardware used in its business operations. Most of the software systems used
by the Company are licensed from third parties and are Y2K compliant or
will be upgraded to Y2K compliant releases before the end of 1999. This
issue is being addressed by the Company in multiple phases, including
assessment, remediation, testing and implementation, and progress is being
monitored by the Company's senior management. All material systems, on a
world-wide basis, including non-information technology systems that may
house non-compliant, embedded technology are being evaluated.
In addition to addressing the Company's own systems, as described above,
the Company must assess the state of readiness of the systems of other
entities with which it does business. With respect to its third-party
relationships, the Company has contacted its primary suppliers and service
providers to assess their state of Y2K readiness. The Company continues to
receive information from its critical suppliers and service providers to
assist the Company in assessing the Y2K readiness of these parties. Failure
by these third parties to adequately resolve their Y2K problems could have
a material adverse effect on the Company's operations.
The Company believes its success in being Y2K compliant will not be
conclusively known until the year 2000 is actually reached. Although
failure by one or more of the Company's own systems could result in lost
revenues and/or additional expenses required to carry out manual processing
of transactions, the Company cannot predict the effect that external forces
could have on its business. Failures by banking institutions, the
telecommunications industry and others could have far-reaching effects on
the entire economy and the Company.
At June 30, 1999, the initial assessment phase has been completed for the
Company's information technology and non-information technology systems.
Most of the major information technology systems on which the Company's
operations depend have been updated, tested and certified to be Y2K
compliant. The Company continues to evaluate the appropriate courses of
action of its non-information technology systems, including embedded chips
located in pipeline, terminaling and other hardware. The Company expects to
complete all phases of its Y2K program prior to December 31, 1999.
The Company believes that it is not possible to determine with certainty
that all Y2K problems affecting the Company have been identified or
corrected. The number of devices that could be affected and the
interactions among these devices are simply too numerous. In addition, the
Company cannot accurately predict how many failures related to the Y2K
problem will occur or the severity, duration or financial consequences of
such failures. The Company has hired an outside Y2K consultant to assist
the Company in meeting its goals and in developing contingency plans to
define and address the worst-case scenario likely to be faced by the
Company. The plan is expected to be in place by September 30, 1999.
Through June 30, 1999, the Company has incurred approximately $0.9 million
of costs related to assessing, remediating and testing its information
technology and non-information technology systems. A portion of these costs
would have been incurred as part of normal system and application upgrades.
In certain cases, the timing of these expenditures has been accelerated due
to Y2K considerations. The Company does not anticipate that future costs to
become fully Y2K compliant will be material.
<PAGE>
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
Registrant's Current Report on Form 8-K, dated July 9, 1999.
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 13, 1999 //s//
Michael R. Bakke
Controller
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