SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES AND EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
Commission file number 1-5083
KANEB SERVICES, INC.
(Exact name of Registrant as specified in its Charter)
Delaware 74-1191271
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
2435 North Central Expressway
Richardson, Texas 75080
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (972) 699-4000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
Common Stock, Without Par Value New York Stock Exchange
Adjustable Rate Cumulative Class A New York Stock Exchange
Preferred Stock
8 3/4% Convertible Subordinated New York Stock Exchange
Debentures due 2008
Securities registered pursuant to Section 12(g) of the Act: None
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 by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Subsection 229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K.[ X ]
Aggregate market value of the voting stock held by non-affiliates of the
Registrant: $147,323,368. This figure is estimated as of March 15, 2000, at
which date the closing price of the Registrant's Common Stock on the New York
Stock Exchange was $5.125 per share, and assumes that only the Registrant's
officers and directors were affiliates of the Registrant.
Number of shares of Common Stock, without par value, of the Registrant
outstanding at March 15, 2000: 31,205,382.
DOCUMENTS INCORPORATED BY REFERENCE
The information required by Part III (Items 10, 11, 12 and 13) of Form 10-K
is incorporated by reference from portions of the Registrant's definitive proxy
statement to be filed with the Securities and Exchange Commission not later than
120 days after the close of the fiscal year covered by this Report.
<PAGE>
PART I
Item 1. Business
GENERAL
Kaneb Services, Inc. ("Kaneb" or the "Company") conducts its principal
businesses in four industry segments: (i) pipeline and terminaling, (ii) product
marketing, (iii) information services and (iv) specialized industrial services.
The pipeline and terminaling and product marketing segments operate through a
wholly-owned subsidiary of the Company, Kaneb Pipe Line Company. The information
services and industrial services segments operate through the wholly-owned
subsidiaries of Kaneb Information Services, Inc. and Furmanite Worldwide, Inc.,
respectively. Kaneb Pipe Line Company ("KPL") operates and manages refined
petroleum products pipeline transportation systems and petroleum products and
specialty liquids terminal storage and pipeline facilities for the benefit of
Kaneb Pipe Line Partners, L.P. ("KPP" or the "Partnership"), which owns such
systems and facilities through its subsidiaries. See "Pipeline and Terminaling
Services." KPL also conducts product marketing activities through another
wholly-owned subsidiary. Acquired by KPL in March 1998, this business provides
wholesale motor fuel marketing services throughout the Great Lakes and Rocky
Mountain regions and in California. See "Product Marketing Services." Kaneb
Information Services, Inc. is engaged in the information management services
industry through its wholly-owned subsidiaries, which offer products and
services that, among other functions, provide consulting services and computer
hardware to federal and state governmental agencies and private sector
customers, provide consulting services to hospitals and hospital networks
implementing telemedicine systems and enable financial institutions to monitor
the insurance coverage of their loan collateral. See "Information Services."
Furmanite Worldwide, Inc., and its domestic and international subsidiaries and
affiliates (collectively, "Furmanite"), provide specialized industrial services,
including underpressure leak sealing, on-site machining, valve testing and
repair and other engineering products and services, primarily to electric power
generating plants, petroleum refineries and other process industries in
Continental Europe, North America, Latin America and Asia-Pacific. See
"Industrial Services."
Kaneb Services, Inc. was incorporated in Delaware on January 23, 1953.
The Company conducts its business through the subsidiaries identified above,
among others. Kaneb's principal operating office is located at 2435 North
Central Expressway, Richardson, Texas 75080 and its telephone number is (972)
699-4000.
OPERATING SEGMENTS
Financial information regarding Kaneb's operating segments and foreign
operations is presented under the caption "Business Segment Data" in Note 11 to
the Company's consolidated financial statements. Such information is hereby
incorporated by reference into this Item 1.
PIPELINE AND TERMINALING SERVICES
Through its KPL subsidiary, Kaneb manages and operates its refined
petroleum products pipeline transportation system and petroleum products and
specialty liquids terminal storage business, for the benefit of KPP, which owns
such systems and facilities through its subsidiaries. The pipeline business
consists primarily of the transportation, as a common carrier, of refined
petroleum products in Colorado, Iowa, Kansas, Nebraska, North Dakota, South
Dakota and Wyoming, as well as related terminaling activities. The terminaling
business is conducted by KPP under the tradenames of "ST Services" and
"StanTrans, Inc.," among others (collectively, "ST"). Kaneb operates ST's 34
terminal storage facilities in 19 states and the District of Columbia and six
terminal storage facilities in the United Kingdom, with total storage capacity
of approximately 28.8 million barrels. Including those situated along its
refined petroleum products pipeline systems, the Partnership's terminal storage
operations comprise the third largest independent liquids terminaling company in
the United States. For the year ended December 31, 1999, the pipeline and
terminaling services segments' revenues and operating income were $158.0 million
and $64.3 million, respectively. See "Management's Discussion and Analysis of
Financial Conditions and Results of Operations". For a more detailed discussion
of the business, activities and results of operations of KPP, reference is made
to its Annual Report on Form 10-K for the year ended December 31, 1999, and
other publicly filed documents of the Partnership (NYSE: KPP).
<PAGE>
Pipeline Transportation Systems
Markets Served
KPP pipeline transportation operations currently consist of two primary
pipeline systems: the East and West Pipelines (the "Pipelines"), with its
operational headquarters located in Wichita, Kansas. The East Pipeline, which
was built commencing in 1953, is a 2,092 mile integrated pipeline, ranging
between six and sixteen inches in diameter, that transports refined petroleum
products received from refineries in southeast Kansas or other interconnecting
pipelines to terminals in Iowa, Kansas, Nebraska, North Dakota and South Dakota
and to receiving pipeline connections in Kansas. The East Pipeline has direct
connections to two Kansas refineries and has direct access by third-party
pipelines to four other refineries in Kansas, Oklahoma and Texas. The East
Pipeline also provides access to Gulf Coast suppliers of refined petroleum
products through connecting pipelines which receive products from a pipeline
originating on the Gulf Coast and receives propane through five connecting
pipelines from gas processing plants in Kansas, New Mexico, Oklahoma and Texas.
The East Pipeline's operation also includes 16 public truck loading terminals
located in five states, comprised of a total of 233 tanks having storage
capacity of approximately 3,500,000 barrels of product, and has intermediate
storage facilities in McPherson and El Dorado, Kansas, consisting of 23 tanks
having an aggregate storage capacity of approximately 922,000 barrels.
The West Pipeline, acquired by the Partnership from Wyco Pipe Line
Company in February 1995, consists of approximately 550 miles of six to eight
inch diameter pipeline that transports refined petroleum products received
directly and by other interconnecting pipelines from refineries located in
Colorado, Montana, South Dakota and Wyoming to terminals in Colorado, South
Dakota and Wyoming. The West Pipeline's operations include four public truck
loading terminals, also located in Colorado, South Dakota and Wyoming, having
storage capacity of over 1,700,000 barrels of product. Through these facilities
and operations, the West Pipeline serves the Denver and northeastern Colorado
markets and supplies jet fuel to Ellsworth Air Force Base, Rapid City, South
Dakota.
The West Pipeline is the nearest pipeline system paralleling the East
Pipeline to the west. Consequently, there is a high level of commonality of
shippers on the Pipelines and, due to the proximity of the East and West
Pipelines to one another, they often face similar competitive issues. The
Pipelines' more significant competitors include refineries, common carrier
pipelines, proprietary pipelines owned and operated by major integrated and
large independent oil companies and other companies in the areas where the
Partnership's pipeline systems and operations deliver products. In particular,
the Pipelines' major competitor is an independent regulated common carrier
pipeline system that operates approximately 100 miles east of and parallel to
the East Pipeline. Competition between common carrier pipelines is primarily
based upon transportation charges, quality of customer service and proximity to
end users. KPL, in its capacity as General Partner of the Partnership, believes
that high capital costs, tariff regulation, environmental considerations and
problems in acquiring rights-of-way make it unlikely that other competing
pipeline systems comparable in size and scope to the Pipelines will be built in
the near future, provided that the pipeline has available capacity to satisfy
demand and its tariffs remain at reasonable levels. Further, while pipeline
transportation systems are generally the lowest cost method for intermediate and
long-haul overland movement of refined petroleum products, trucks may also
competitively deliver products in some of the areas served by the Pipelines.
However, as trucking costs render that mode of transportation uncompetitive for
longer hauls or larger volumes, KPL, in its capacity as General Partner of the
Partnership, does not believe that, over the long term, trucks are effective
competition to the Pipelines' long-haul volumes.
Products
The mix of refined petroleum products delivered by the Pipelines varies
seasonally, with gasoline demand peaking in early summer, diesel fuel demand
peaking in late summer and propane demand higher in the fall. In addition,
weather conditions in the geographic areas served by the Pipelines affect the
demand for and the mix of the refined petroleum products delivered through the
Pipelines, although any such impact on the volumes shipped has historically been
short-term. Most of the refined petroleum products delivered through the East
Pipeline are ultimately used in agricultural operations, including fuel for farm
equipment, irrigation systems, crop-drying facilities and trucks used to
transport crops to a variety of destinations; while the West Pipeline's products
are generally delivered to a more urban and commercial marketplace. The
agricultural sector served by the East Pipeline is also affected by governmental
policy and crop prices. Further, the Pipelines are dependent upon adequate
levels of production of refined petroleum products by refineries that are
connected to the Pipeline, which refineries are, in turn, dependent upon
adequate supplies of suitable grades of crude oil. KPL, in its capacity as
General Partner of the Partnership, believes that, in the event that operations
at any one refinery were discontinued (and assuming unchanged demand in the
markets served by the Pipelines), the effects thereof would be short-term in
nature and the Partnership's business would not be materially adversely affected
over the long term. However, a substantial reduction of output by several
refineries as a group could affect the Pipelines' operations to the extent that
a greater percentage of the supply would have to come from refineries outside
the Pipelines' connecting access pipelines.
Tariffs
Substantially all of the Pipelines' operations constitute common
carrier activities that are subject to Federal or state tariff regulation. Such
common carrier activities are those under which transportation services through
the pipeline are available at published tariffs, as filed with the Federal
Energy Regulatory Commission ("FERC") or the applicable state regulatory
authority, to any shipper of refined petroleum products who requests such
services, provided that each refined petroleum product for which transportation
is requested satisfies the conditions, requirements and specifications for
transportation.
Terminal Storage Operations
Facilities
The terminaling business, a significant portion of which was acquired
by the Partnership in 1993, has a proven track record of more than 40 years of
quality service and experience in the operation of specialty liquids terminal
storage facilities. ST's terminal facilities provide throughput and storage on a
fee basis for a wide variety of products from petroleum products to specialty
chemicals and edible and other liquids. ST's 34 facilities offer storage
capacity ranging from 40,000 to 5.5 million barrels, comprised of two to 162
tanks per facility. In February 1999, ST acquired six terminals in the United
Kingdom, having aggregate capacity of approximately 5.4 million Bbls capacity in
307 tanks. As of December 31, 1999, ST's six largest facilities were located at
Piney Point, Maryland (5,403,000 Bbls capacity; 28 tanks); Linden, New Jersey
(3,884,000 Bbls capacity; 22 tanks); Eastham, England (2,185,000 Bbls capacity;
162 tanks); Jacksonville, Florida (2,066,000 Bbls capacity; 30 tanks); Texas
City, Texas (2,002,000 Bbls capacity; 124 tanks); and Grays, England (1,945,000
Bbls capacity; 53 tanks). The Linden, New Jersey terminal was acquired as a part
of a November 1998 joint venture transaction with Northville Industries Corp. in
which ST acquired a 50% interest in, and the management of, the facility. In
addition to the foregoing, the other ST facilities are located in Alabama (2),
Arizona, California, the District of Columbia (2), Florida (2), Georgia (6),
Illinois (3), Indiana, Kansas, Maryland (2), Minnesota, New Mexico, Oklahoma,
Pennsylvania, Texas, Virginia (2), Washington, Wisconsin and the United Kingdom
(4). These terminals provide ST with a geographically diverse base of customers
and revenue. ST's operational headquarters is located in Dallas, Texas.
The independent liquids terminaling industry is fragmented and includes
both large, well financed publicly-traded companies that own and/or operate many
terminal locations and small private companies that may own and/or operate only
a single terminal location. In addition to the terminals owned by independent
terminal operators, many major energy and chemical companies also own extensive
terminal facilities. Although such terminals often have the same capabilities as
those owned by independent operators, they generally do not provide terminaling
services to third parties. In many instances, major energy and chemical
companies that own storage facilities are also significant customers of
independent terminal operators when independent terminals have more cost
effective locations near key transportation links such as deep water ports.
Major energy and chemical companies also require independent terminal storage
when their captive storage facilities are inadequate, either because of size
constraints, the nature of the stored material or specialized handling
requirements. Independent terminal owners, such as ST, compete on the basis of
location, versatility of terminals, service and price. For example, a favorably
located terminal will have access to various means of cost-effective
transportation both to and from the terminal. Terminal versatility is a function
of the operator's ability to offer safe handling for a diverse group of products
having complex handling requirements. The service function typically provided by
the terminal includes, among other things, the safe storage of the product at
specified temperature, moisture and other conditions, as well as variety in the
method of loading and unloading of product at the terminal. Additionally,
another increasingly important service factor is the ability of a terminal
operator to offer product handling and storage that complies with applicable
environmental, safety and health regulations, among others.
Products
The variety of products that can be stored at ST's terminal storage
facilities is a significant part of what KPL, in its capacity as General Partner
of the Partnership, believes is its competitive advantage among similarly
situated organizations. ST's terminals provide storage capacity for such
products as petroleum products, specialty chemicals, asphalt, fertilizer,
herbicides, latex and caustic solutions, and edible liquids, including animal
and vegetable fats and oils. Further, the terminaling and pipeline
transportation of jet fuel for the U.S. Department of Defense is an important
part of its business. Eleven of ST's terminal sites are involved in the
terminaling or transport (via pipeline) of jet fuel for the Defense Department.
Two of these locations are presently without government business. Of the eleven
locations, five include pipelines that deliver jet fuel directly to nearby
military bases.
Safety, Environmental and Other Regulatory Matters
In addition to tariff regulation of the Partnership's pipeline
activities, certain operations of the Partnership are subject to Federal, state
and local laws and regulations relating to the construction, maintenance and
management of its facilities, the safety of its personnel and the protection of
the environment. Although KPL, in its capacity as General Partner of the
Partnership, believes that the operations of the Partnership are in general
compliance with applicable laws and regulations, risks of substantial costs and
liabilities are inherent in both pipeline and terminaling operations, and there
can be no assurance that significant costs and liabilities will not be incurred
by the Partnership. For example, contamination resulting from spills or releases
of refined petroleum products within the petroleum pipeline industry, or refined
petroleum or other products within the terminaling industry, are not unusual in
such industries. From time to time, the Partnership has experienced limited
contamination along the pipelines and at certain of its pipeline-related
terminal sites, resulting from spills or leakage of refined petroleum products.
In each instance, the appropriate regulatory authorities have been notified of
these events and appropriate remediation activities have either been completed
or are ongoing. In connection with the formation of the Partnership, the Company
agreed to bear the costs associated with environmental contamination relating to
the operations of the East Pipeline arising prior to October 3, 1989; however,
such costs have not been, and are not in the future anticipated to be, material.
Additionally, from time to time, the Partnership has experienced
limited contamination at certain of its current and former terminal storage
facilities, as a result of operations at or around these locations. Again, in
each instance, the appropriate regulatory authorities have been notified of
these events and appropriate remediation activities have either been completed,
are ongoing or are under investigation. In certain instances where other
unrelated companies may also have responsibility for the contamination of a
particular facility or area, the Partnership, through the appropriate operating
subsidiary, has entered into agreements (or is in the process of negotiating
such agreements) with such company or companies providing for the allocation of
the costs and/or responsibilities of remediation of such facilities or areas.
PRODUCT MARKETING SERVICES
In March 1998, Kaneb, through a wholly-owned subsidiary of KPL,
acquired a products marketing business. For over 40 years, this operation and
its predecessors have engaged in the business of acquiring quantities of motor
fuels and reselling them in smaller lots at truck racks located in terminal
storage facilities along pipelines primarily located throughout California,
Colorado, Illinois, Indiana, Ohio, Wisconsin and Wyoming. Kaneb's products
marketing subsidiary does not own any retail outlets, pipelines or terminals.
For the year ended December 31, 1999, the product marketing segment's revenues
and operating income were $212.3 million and $1.5 million, respectively. See
"Management's Discussion and Analysis of Financial Conditions and Results of
Operations".
Products and Services
The products include petroleum motor fuels such as various grades of
gasoline and diesel and gasoline blend stocks such as ethanol and natural
gasoline. These products are generally purchased in large batches in petroleum
pipelines or in large storage tanks and are distributed through an extensive
geographic area which includes the Great Lakes Region of primarily Illinois,
Indiana, Ohio and Wisconsin; the Rocky Mountain Region of primarily Colorado and
Wyoming; and the Far West Region of primarily California. The products are sold
at petroleum terminals into tank trucks. The petroleum terminals are not owned
by Kaneb's marketing subsidiary but are leased as needed.
Customers
The business is essentially a wholesaling business requiring both
favorable customer and supplier relationships. Customers of the products
marketing business are primarily independent retail distributors. These
"unbranded" customers often cannot obtain supplies from major ("branded") oil
companies or cannot obtain supplies from majors or others at competitive prices.
Suppliers to the products marketing business include major and large independent
oil companies and petroleum traders. The suppliers are attempting to increase
their volume or capture some of the independent retail sales which they could
not otherwise price to obtain without undercutting their branded customers.
The products marketing industry is highly competitive with customers
very sensitive to pricing. Kaneb's products marketing business must position
itself as a low-cost supplier to its customers to be successful. Changing
product prices can cause some volatility in earnings. Kaneb's products marketing
business minimizes pricing risk through high inventory turnover (on average
approximately 10 days of inventory on hand) and product exchange liabilities.
Product exchange liabilities provide a partial hedge to the inventory position.
Kaneb's product marketing business does not currently engage in commodity
futures trading to hedge pricing volatility, but may do so in the future in a
limited fashion if increases in volumes make it a prudent measure.
INFORMATION SERVICES
Kaneb Information Services, Inc., together with its wholly owned
subsidiaries (collectively, "KIS"), provides a variety of information services
and products to the U.S. Government and private customers. For the year ended
December 31, 1999 the information services segment's revenues and operating
income were $37.4 million and $5.6 million, respectively. See "Management's
Discussion and Analysis of Financial Conditions and Results of Operations". A
substantial portion of the revenues of this business segment are attributable to
contracts with agencies of the U.S. Government. KIS manages its businesses from
its headquarters in Richardson, Texas, and maintains offices in Chantilly and
McLean, Virginia, and Frederick, Maryland, to more effectively serve its
Washington, DC-based government clients and to promote awareness of its
services, products and capabilities.
Computer Networking
KIS provides consulting services and specially configured computers and
related networking equipment to agencies of the Department of Justice through
teaming agreements on a contract basis. The contract is renewable annually by
the Department of Justice. Under this contract, KIS also provides installation
and replacement services, training and software and hardware security systems to
the agencies. Hardware components provided under this contract are fully
interchangeable, permitting routine upgrades and swaps with minimal
compatibility problems.
Telemedicine Services
KIS provides consulting services in support of the purchase and
implementation of digital imaging systems, known as Picture Archival and
Communication Systems ("PACS"), by medical facilities. PACS are used in
connection with digitally recorded images, such as magnetic resonance imaging,
computer tomography scans, ultrasounds and digital x-rays, among others. KIS
provides technical support at every stage of the implementation of a PACS by a
medical facility, including planning and feasibility studies, workflow design,
specification development, procurement assistance, on-site technical supervision
of PACS installers, quality assurance and acceptance testing. KIS also assists
the medical facilities with warranty and service issues that may arise with the
manufacturer of the PACS. KIS personnel who perform the consulting services are
highly trained electrical, biomedical, and clinical engineers.
KIS also performs work for PACS manufacturers, such as General Electric
and IBM, in connection with the sale and installation of PACS, and for end users
of the systems. KIS' principal customer in the PACS consulting field has been
the Department of Defense, with whom KIS has contracted to provide consulting
services for eleven hospitals, with Brooke Army Medical Center, San Antonio,
Texas, as the hub. KIS also provides these services to other military hospitals
and to major teaching hospitals. KIS is also marketing wearable digitized
medical records ("digital dog tags") for the military and other government and
private sector applications. KIS is exploring the potential for expanding its
services in this area to teledermatology, telecardiology and home monitoring
applications.
Ellsworth Acquisition
In March 1999, KIS acquired Ellsworth Associates, Inc., an information
services company based in McLean, Virginia. Through Ellsworth, KIS provides web
site development and maintenance, network engineering, application development
(including e-commerce applications), project planning and development, needs and
assessments planning, programmatic analysis and research, and statistical work,
primarily for the Department of Health and Human Resources and the Department of
Commerce. KIS also maintains the database for the Head Start program of the
Department of Health and Human Resources.
KIS generally contracts for these services on renewable annual
contacts, with pricing based principally upon its GSA schedule. In marketing its
services in this area, KIS competes with a number of other government
contractors, primarily on the basis of expertise and knowledge about the needs
of its customers. KIS believes that the expertise it has developed in child
welfare related database systems creates opportunities to market its services to
state agencies which provide information to the U.S. Department of Health and
Human Services.
Financial Industry Software and Services
KIS licenses proprietary PC-based software and provides services to
community banks for internal accounting; tracking, monitoring, analyzing and
managing loans and deposits; and other banking functions. KIS also licenses a
proprietary professional lending system to loan companies and an automated
contingency planning system for disaster recovery to commercial banks.
Collateral Insurance Monitoring
KIS monitors, on behalf of its customers, the status of insurance
coverage on automobiles pledged as loan collateral and flood insurance on homes.
It coordinates communications among financial institutions, insurance companies
and borrowers regarding the status of insurance coverage protecting the
financial institution's loan collateral. KIS uses its own proprietary software
to cross-collate databases and generate reports for lenders and insurance
companies, charging monthly fees to its customers. Some customers also pay fees
to KIS in instances where KIS's services result in the issuance of a
forced-placement insurance policy to replace lapsed coverage. KIS believes that
the market for these services is fragmented among a number of small competitors,
and that competition in this market is primarily based upon the quality of the
service provided. KIS believes that its expertise in this field may have other
applications, including cross-collating and reporting on FEMA-required flood
insurance and delinquent child support payers.
INDUSTRIAL SERVICES
The Furmanite group of companies offers a variety of specialized
industrial services to an international base of flow-process industry clients.
Founded in Virginia Beach, Virginia in the 1920s as a manufacturer of leak
sealing kits, Furmanite has evolved into an international service company. In
the 1960s, Furmanite expanded within the United Kingdom, primarily through its
leak sealing products and services, and, during the 1970's and 1980's, grew
through geographic expansion and the addition of new techniques, processes and
services to become one of the largest leak sealing and on-site machining
companies in the world. Kaneb acquired Furmanite in 1991 to diversify the
Company's operations and take advantage of international growth opportunities.
For the year ended December 31, 1999, Furmanite's revenues and operating income
were approximately $98.1 million and $3.6 million (before $1.8 million in
severance costs), respectively. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Products and Services
Furmanite is an industry leader in providing on-line repairs of leaks
("leak sealing") in valves, pipes and other components of piping systems and
related equipment typically used in flow-process industries. See "Customers and
Markets." Other services provided by Furmanite include on-site machining,
bolting and valve testing and repair on such systems and equipment. These
services tend to complement Furmanite's leak sealing service, since these
"turnaround services" are usually performed while a plant or piping system is
off-line. In addition, Furmanite provides hot tapping, fugitive emissions
monitoring, passive fire protection, concrete repair and heat exchanger repair.
Furmanite also performs diagnostic services on valves and motors by, among other
methods, utilizing its patented Trevitest(R) system and employing proprietary
diagnostic equipment under license from Framatome Technologies. In performing
these services, Furmanite technicians generally work at the customer's location,
frequently responding on an emergency basis. Over its history, Furmanite has
established a reputation for delivering quality service and helping its
customers avoid or delay costly plant or equipment shutdowns. For each of the
years ended December 31, 1999, 1998, and 1997, underpressure services
represented approximately 40%, 38% and 35%, respectively, of Furmanite's
revenues, while turnaround services accounted for approximately 45%, 46% and
45%, respectively, and product sales and other industrial services represented
approximately 15%, 16% and 20%, respectively, of Furmanite's revenues for each
of such years.
Furmanite's on-line, underpressure leak sealing services are performed
on a variety of flow-process industry machinery, often in difficult situations.
Many of Furmanite's techniques and materials are proprietary and/or patented
and, the Company believes, provide Furmanite with a competitive advantage over
other organizations that provide similar services. Furmanite's skilled
technicians work with equipment in a manner designed to enhance safety and
efficiency in temperature environments ranging from cryogenic to 1,400 degrees
Fahrenheit and pressure environments ranging from vacuum to 5,000 pounds per
square inch. In many circumstances, Furmanite personnel are called upon to
custom-design tools, equipment or other materials in order to effect the
necessary repairs. These efforts are supported by an internal quality control
group that works together with the on-site technicians in crafting these
materials.
Customers and Markets
Furmanite's customer base spans a broad industry spectrum, which
includes petroleum refineries, chemical plants, offshore energy production
platforms, steel mills, power generation and other flow-process industries in
more than 25 countries. Over 80% of Furmanite's revenues are derived from fossil
and nuclear fuel power generation companies, petroleum refiners and chemical
producers, while other significant markets include offshore oil producers and
steel manufacturers. As the worldwide industrial infrastructure continues to
age, additional repair and maintenance expenditures are expected to be required
for the specialized services provided by Furmanite and similarly situated
organizations. Other factors that may influence the markets served by Furmanite
include regulations governing construction of industrial plants, safety and
environmental compliance requirements, and fulfillment of specialized services
through the increased use of outsourcing, rather than an organization's in-house
staff.
Furmanite serves its customers from its Houston, Texas worldwide
headquarters and maintains a strong presence in the United Kingdom, continental
Europe and the Asia-Pacific. Furmanite currently operates North American offices
in the United States in Baton Rouge, Beaumont, Charlotte, Chicago, Houston,
Merrillville, Cherryhill and Salt Lake City. Furmanite's worldwide strength is
further supported by offices currently located in Australia (6 offices),
Belgium, China, France, Germany, Hong Kong, Malaysia, the Netherlands, New
Zealand, Norway, Singapore and the United Kingdom (6 locations) and by licensee,
agency and/or minority ownership interest arrangements in Argentina, Brazil,
Chile, Croatia, Cyprus, Czech Republic, Egypt, Finland, Hungary, India,
Indonesia, Italy, Japan, Kuwait, Macedonia, Poland, Portugal, Puerto Rico, Saudi
Arabia, Slovak Republic, Korea, Sweden, Thailand, Trinidad, Ukraine, the United
Arab Emirates and Venezuela. Sales by major geographic region for 1999 were 30%
for the United States, 59% for Europe and 11% for Asia-Pacific. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and Note 11 to the Company's consolidated financial statements.
Furmanite's underpressure leak sealing and other specialty field
services are marketed primarily through direct sales calls on customers by
salesmen and technicians based at Furmanite's various operating locations, which
are situated to facilitate timely customer response, 24 hours a day, seven days
a week. Customers are usually billed on a time and materials basis for services
typically performed pursuant to either job quotation sheets or purchase orders
issued under written customer agreements. Customer agreements are generally
short-term in duration and specify the range of and rates for the services to be
performed. Furmanite typically provides various limited warranties, depending
upon the services furnished, and, to date, has had no material warranty claims.
Furmanite competes on the basis of service, product performance and price,
generally on a localized basis with smaller companies and the in-house
maintenance departments of its customers or potential customers. In addition to
staff reductions and the trend toward outsourcing, Furmanite believes it
currently has an advantage over in-house maintenance departments because of the
ability of its multi-disciplined technicians to use Furmanite's proprietary and
patented techniques to perform quality repairs on a timely basis while customer
equipment remains in service.
Safety, Environmental and Other Regulatory Matters
Many aspects of Furmanite's operations are subject to governmental
regulation. National, state and local authorities of the U.S. and various
foreign countries have each adopted safety, environmental and other regulations
relating to the use of certain methods, practices and materials in connection
with the performance of Furmanite's services and which otherwise affect its
operations. Additionally, Furmanite participates, from time to time, with
various regulatory authorities in certain studies, reviews and inquiries of its
projects and/or operations. Further, because of its international presence,
Furmanite is subject to a number of political and economic uncertainties,
including taxation policies, labor practices, currency exchange rate
fluctuations, foreign exchange restrictions, local political conditions, import
and export limitations and expropriation of equipment. Except in certain
developing countries, where payment in a specified currency is required by
contract, Furmanite's services are paid, and its operations are typically
funded, in the currency of the particular country in which its business
activities are conducted.
Underpressure leak sealing and other Furmanite services are often
performed in emergency situations under circumstances involving exposure to high
temperatures and pressures, potential contact with caustic or toxic materials,
fire and explosion hazards and environmental contamination, any of which can
cause serious personal injury or property damage. Furmanite manages its
operating risks by providing its technicians with extensive on-going classroom
and field training and supervision, maintaining a technical support system
through its staff of professionally qualified specialists, establishing and
enforcing strict safety and competency requirements, standardizing procedures
and evaluating new materials and techniques for use in connection with its lines
of service. Furmanite also maintains insurance coverage for certain risks,
although there is no assurance that insurance coverage will continue to be
available at rates considered reasonable or that the insurance will be adequate
to protect the Company against liability and loss of revenues resulting from the
consequences of a significant accident.
ENVIRONMENTAL CONTROLS
Many of Kaneb's operations are subject to national, state and local
laws and regulations relating to protection of the environment. Although Kaneb
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.
EMPLOYEES
At December 31, 1999, Kaneb and its subsidiaries employed 1,740
persons, of which a total of 618 persons were employed by KPL, its pipeline and
terminaling subsidiaries and subsidiaries of KPP; 17 were employed by Martin Oil
Corporation; 190 were employed by the KIS group of companies; and, 886 persons
were employed by the Furmanite group of companies. The Partnership itself has no
employees, as the business and operations of the KPP are conducted by KPL, the
General Partner of KPP and a wholly-owned subsidiary of Kaneb. As of December
31, 1999, approximately 196 of the persons employed by KPL were subject to
representation by unions for collective bargaining purposes; however, only 85
persons employed at four of KPL's terminal unit locations were subject to
collective bargaining or similar contracts at that date. Union contracts
regarding conditions of employment for 17, 20, 14 and 34 employees are in effect
through November 1, 2000, June 30, 2001, February 28, 2002 and June 29, 2002,
respectively. Additionally, as of December 31, 1999, approximately 275 of the
persons employed by Furmanite were subject to representation by unions or other
similar associations for collective bargaining or other similar purposes;
however, there were no significant collective bargaining or other similar
contracts covering the Furmanite employees in effect at that date. All such
contracts are subject to automatic renewal for successive one year periods
unless either party provides written notice in a timely manner to terminate or
modify such agreement.
Item 2. Properties
The properties owned or utilized by Kaneb and its subsidiaries are
generally described in Item 1 of this Report. Additional information concerning
the obligations of Kaneb and its subsidiaries for lease and rental commitments
is presented under the caption "Commitments and Contingencies" in Note 10 to the
Company's consolidated financial statements. Such descriptions and information
are hereby incorporated by reference into this Item 2.
Kaneb's corporate headquarters is located in an office building in
Richardson, Texas, pursuant to a lease agreement that expires in 2002, subject
to a five-year renewal option. The facilities used in the operations of the
Company's subsidiaries, other than the Partnership, are generally held under
lease agreements having various expiration dates, rental rates and other terms,
except for three Furmanite properties located in the United Kingdom, which are
owned in fee. The properties used in the operations of the Pipelines are owned
by KPP, through its subsidiary entities, except for KPL's operational
headquarters, located in Wichita, Kansas, which is held under a lease that
expires in 2004. The majority of ST's facilities are owned, while the remainder,
including most of its terminal facilities located in port areas and its
operational headquarters, located in Dallas, Texas, are held pursuant to lease
agreements having various expiration dates, rental rates and other terms. For
additional information regarding the properties utilized in the operations of
the Partnership, reference is made to the Annual Report on Form 10-K of the
Partnership.
Item 3. Legal Proceedings
A subsidiary of the Company that is no longer actively conducting any
operations was notified in 1989 that it is a "potentially responsible party" in
connection with a governmental investigation relating to a waste disposal
facility which has been subject to remedial action as a location listed on the
Environmental Protection Agency's ("EPA") Superfund Federal Priority List
("Superfund"). Proceedings arising under Superfund typically involve numerous
waste generators and other waste transportation and disposal companies for each
identified facility and seek to allocate or recover costs associated with site
investigation and cleanup, which costs could be substantial. This proceeding
involves actions allegedly taken by a former operating subsidiary of the Company
at a time prior to the acquisition of such subsidiary by the Company. The
Company's subsidiary has been included within a de minimis group of waste
generators that are involved in this proceeding, who have been negotiating a
collective settlement of their liabilities with the EPA. However, the Company
has joined with others within this de minimis group who are each contesting
their respective liability. Proceedings in this matter are ongoing. The Company
has reviewed its potential exposure, if any, in connection with this matter,
giving consideration to the nature, accuracy and strength of evidence relating
to the Company's alleged relationship to the location, the amount and nature of
waste taken to the location, and the number, relationship and financial ability
of other named and unnamed "potentially responsible parties" at the location.
While the Company does not anticipate that the amount of expenditures from its
involvement in the above matter will have a material adverse effect on the
Company's operations or financial condition, the possibility remains that
technological, regulatory, enforcement or legal developments, the results of
environmental studies or other factors could materially alter this expectation
at any time.
The Company is Plaintiff in unrelated legal proceedings involving
malpractice issues with two professional service providers previously used by
the Company. The Company has appealed a lower court dismissal in one of the
proceedings and the other action is in the initial stages of discovery and
proceedings. Accordingly, at this time the Company is unable to reasonably
estimate potential recoveries, if any, under such actions.
Certain subsidiaries of KPP are defendants in a lawsuit filed in a
Texas state court in 1997 by Grace Energy Corporation ("Grace"), the entity from
which 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. On January 20, 2000, the Massachusetts Department of
Environmental Protection notified KPP's subsidiary that it had reason to believe
that the subsidiary was also a Potentially Responsible Party. The subsidiary
replied to that letter denying any responsibility for the Massachusetts response
and/or remediation. Future expenses could potentially include claims by the
United States Government, as described below. Grace alleges that subsidiaries of
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 these subsidiaries
are responsible for all present and future remediation expenses for these leaks
and that Grace has no obligation to indemnify these subsidiaries for these
expenses. The case is set for trial in May 2000.
The consistent position of KPP's subsidiaries 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 an order granting
partial summary judgment, the trial judge has ruled that the pipeline was an
asset of the company acquired by the subsidiary. The subsidiaries are continuing
with their defense that the pipeline had been abandoned prior to the acquisition
of ST Services and could not have been included in the assets they acquired. The
defendants have also counter-claimed against Grace for fraud and mutual mistake,
among other defenses. If they are successful at trial with their defenses and/or
counterclaims, the judge's partial summary judgment order will be moot. The
defendants also believe they have certain rights to indemnification from Grace
under the acquisition agreement with Grace. These rights include claims against
Grace for breaches of numerous representations in the agreement including the
environmental representations. The acquisition agreement includes Grace's
agreement to indemnify the subsidiaries 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 ("MMR"), 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's
subsidiaries have voluntarily responded to an invitation from the Government to
provide information indicating that they do not own the pipeline. In connection
with a court-ordered mediation between Grace and the subsidiaries, 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. KPP
believes that the ultimate cost of the remediation, while substantial, will be
considerably less than the Government has indicated. KPP also believes that,
even if the lawsuit determines that the subsidiary is the owner of the pipeline,
the defendants have defenses to any claim of the Government. Any claims by the
Government could be material in amount and, if made and ultimately sustained
against KPP's subsidiaries, could adversely affect KPP's ability to pay cash
distributions to its unitholders, including the Company.
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.
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
Kaneb did not hold a meeting of stockholders or otherwise submit any
matter to a vote of stockholders in the fourth quarter of 1999.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
Shares of Kaneb Common Stock are listed and traded principally on the
New York Stock Exchange, under the symbol KAB. At March 15, 2000, there were
approximately 4,500 holders of Common Stock of record. The following table sets
forth, for the fiscal periods indicated, the quoted high and low sales prices of
the shares on the New York Stock Exchange.
Quoted Stock Prices
-------------------------------
Calendar Year High Low
-------------------- -------- -------
1998:
First Quarter 5 11/16 4 13/16
Second Quarter 6 7/16 5 3/16
Third Quarter 6 4 1/8
Fourth Quarter 5 1/16 3 1/2
1999:
First Quarter 4 5/8 3 7/8
Second Quarter 4 9/16 3 7/8
Third Quarter 5 1/8 4 1/8
Fourth Quarter 5 4 3/16
2000:
First Quarter 5 1/4 4 5/16
(through 3/15/00)
Kaneb currently intends to retain future earnings for the development
of its business and does not anticipate paying cash dividends on its Common
Stock in the foreseeable future. Kaneb's dividend policy is reviewed
periodically and determined by its Board of Directors on the basis of various
factors, including, but not limited to, its results of operations, financial
condition, capital requirements and investment opportunities. Additionally, the
credit facilities for the working capital of Furmanite and KPL and its
subsidiaries contain restrictions on the respective subsidiary's ability to pay
dividends or distributions to the Company, if an event of default exists.
Item 6. Summary Historical Financial Data
The following selected financial data (in thousands, except per share
amounts) is derived from Kaneb's consolidated financial statements and should be
read in conjunction with the consolidated financial statements and related notes
thereto included elsewhere in this report. Kaneb has not declared a dividend on
its Common Stock for any of the periods presented.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Revenues ........................... $505,759 $375,857 $236,936 $228,861 $212,062
======== ======== ======== ======== ========
Operating income ................... $ 68,239 $ 61,312 $ 58,660 $ 53,815 $ 43,465
======== ======== ======== ======== ========
Income before benefit of recognizing
tax loss carryforwards (change in
valuation allowance) and gain on
sale or issuance of units by KPP $ 16,254 $ 13,576 $ 10,643 $ 7,024 $ 5,024
Benefit of recognizing tax loss
carryforwards (change in
valuation allowance) ............ 37,124 -- -- -- --
Gain on sale or issuance of units
by KPP, net of deferred income
taxes ........................... 10,394 -- -- -- 54,157
-------- -------- -------- -------- --------
Net income .................... $ 63,772 $ 13,576 $ 10,643 $ 7,024 $ 59,181
======== ======== ======== ======== ========
<PAGE>
Per Share Data:
Earnings per common share:
Basic ........................... $ 2.01 $ .41 $ .31 $ .19 $ 1.72
======== ======== ======== ======== ========
Diluted ......................... $ 1.94 $ .40 $ .30 $ .19 $ 1.59
======== ======== ======== ======== ========
Cash Flow Data - Net cash provided
by operating activities ......... $ 50,068 $ 54,206 $ 55,120 $ 48,628 $ 39,964
Balance Sheet Data:
Cash and cash equivalents .......... $ 20,766 $ 9,134 $ 23,025 $ 23,693 $ 30,389
Working capital .................... 56,990 5,632 20,423 20,033 16,302
Total assets ....................... 560,315 448,045 402,273 404,691 409,827
Long-term debt ..................... 211,251 196,958 181,052 186,544 191,846
Stockholders' equity (a) ........... 149,666 87,445 78,447 75,366 69,022
</TABLE>
(a) See Note 8 to the Company's Consolidated Financial Statements for a
discussion of the Company's Preferred Stock.
<PAGE>
Item 7. 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 and notes thereto included elsewhere in this
report.
Consolidated Results of Operations
<TABLE>
<CAPTION>
(in millions)
--------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Consolidated revenues .................................... $ 505.8 $ 375.9 $ 236.9
Consolidated operating income ............................ $ 68.2 $ 61.3 $ 58.7
Consolidated income before benefit of recognizing
tax loss carryforwards (change in valuation allowance)
and gain on issuance of units by KPP, net of deferred
income taxes .......................................... $ 16.3 $ 13.6 $ 10.6
Consolidated net income .................................. $ 63.8 $ 13.6 $ 10.6
Consolidated capital expenditures, excluding acquisitions $ 17.3 $ 12.3 $ 13.0
</TABLE>
For the year ended December 31, 1999, consolidated revenues increased
$129.9 million, or 35%, when compared to 1998, largely from a $98.1 million
increase in revenues from the products marketing business acquired in late March
of 1998. In addition, revenues from the pipeline and terminaling operations and
the information services business increased by $32.2 million and $16.7 million,
respectively, in 1999, partially offset by a 1999 decrease in industrial
services revenues of $17.0 million. Consolidated operating income in 1999
increased by $6.9 million, or 11%, with significant improvements achieved in the
pipeline and terminaling and the information services businesses.
Consolidated income before the benefit of recognizing tax loss
carryforwards (change in valuation allowance) and the gain on issuance of units
by KPP, net of deferred income taxes, increased $2.7 million, or 20%, for the
year ended December 31, 1999, compared to the same 1998 period. 1999
consolidated net income includes a gain of $10.4 million, net of deferred income
taxes, resulting from the issuance of units by KPP (See "Liquidity and Capital
Resources") and $37.1 million in expected benefits from prior years' tax losses
(change in valuation allowance) that are available to offset future taxable
income (See "Income Taxes"). Consolidated net income, including these items, was
$63.8 million for the year ended December 31, 1999.
For the year ended December 31, 1998, consolidated revenues increased
$139.0 million, or 59%, when compared to 1997, largely from the $114.2 million
in revenues generated by the products marketing business. In addition, revenues
from the pipeline and terminaling business, the information services business
and industrial services business increased by $4.6 million, $13.1 million and
$6.9 million, respectively, in 1998. Consolidated operating income in 1998
increased by $2.6 million, or 5%, with the most significant improvements in the
pipeline and terminaling and the information services businesses. Consolidated
net income for the year ended December 31, 1998 increased $3.0 million, or 28%,
compared to the year ended December 31, 1997.
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 and provides terminaling and storage services for petroleum products,
specialty chemicals and other liquids. Kaneb operates, manages and controls the
pipeline and terminaling operations of KPP through its 2% general partner
interest and a 28% (as of December 31, 1999) limited partner interest in the
Partnership.
(in millions)
------------------------------
1999 1998 1997
-------- -------- --------
Revenues ................................... $ 158.0 $ 125.8 $ 121.2
======== ======== ========
Operating income ........................... $ 64.3 $ 55.1 $ 53.4
======== ======== ========
Capital expenditures,
excluding acquisitions................. $ 14.6 $ 9.4 $ 10.6
======== ======== ========
For the year ended December 31, 1999, pipeline and terminaling revenues
increased by $32.2 million, or 26% compared to 1998, due to a $28 million
increase in terminaling revenues and a $4.2 million increase in pipeline
revenues. For the year ended December 31, 1998, pipeline and terminaling
revenues increased by $4.6 million, or 4%, compared to 1997, due to a $2.5
million increase in terminaling revenues and a $2.1 million increase in pipeline
revenues. The 1999 and 1998 increase in terminaling revenues is due to terminal
acquisitions and increased utilization of existing terminals due to favorable
market conditions, partially offset by a decrease in the overall average price
realized for storage. Average annual tankage utilized for the years ended
December 31, 1999, 1998 and 1997 aggregated 22.6 million barrels, 15.2 million
barrels and 12.4 million barrels, respectively. The 1999 and 1998 increases in
average annual tankage utilized resulted from the acquisitions and increased
storage at KPP's largest petroleum storage facility. Average revenues per barrel
of tankage utilized for the years ended December 31, 1999, 1998 and 1997 was
$4.00, $4.11 and $4.83, respectively. The decrease in 1999 and 1998 average
annual revenues per barrel of tankage utilized was due to the storage of a
larger proportionate volume of petroleum products, which are historically at
lower per barrel rates than specialty chemicals. The 1999 and 1998 increases in
pipeline revenues are due to increases in volumes shipped, primarily on the East
Pipeline. Barrel miles totaled 18.4 billion, 17.0 billion and 16.1 billion for
the years ended December 31, 1999, 1998 and 1997, respectively.
Pipeline and terminaling operating income increased by $9.2 million, or
17% in 1999, compared to 1998, due to a $7.0 million increase in terminaling
operating income and a $2.2 million increase in pipeline operating income. For
the year ended December 31, 1998, pipeline and terminaling operating income
increased by $1.7 million, or 3%, compared to 1997, due to improved pipeline
operating income. The increase in 1999 terminaling operating income is the
result of the acquisitions and the increase in tank utilization. The 1999 and
1998 improvement in pipeline operating income is due to increases in volumes
shipped.
The interest of outside non-controlling partners in KPP's net income
was $33.5 million, $29.2 million and $27.7 million in 1999, 1998 and 1997,
respectively. Distributions paid to the outside non-controlling unitholders of
KPP aggregated approximately $35.4 million, $28.5 million and $26.9 million in
1999, 1998 and 1997, respectively.
Capital expenditures relate to the maintenance of existing operations.
Routine capital expenditures for 2000 are currently estimated to be between $12
million and $15 million.
On February 1, 1999, KPP acquired six terminals in the United Kingdom
from GATX Terminal Limited for (pound)22.6 million (approximately $37.2 million)
plus transaction costs and the assumption of certain liabilities. The
acquisition of the six locations, which have an aggregate tankage capacity of
5.4 million barrels, was financed by term loans from a bank. $13.3 million of
the term loans were repaid in July 1999 with the proceeds from KPP's public
offering. (See "Liquidity and Capital Resources") Three of the terminals,
handling petroleum products, chemicals and molten sulfur, respectively, operate
in England. The remaining three facilities, two in Scotland and one in Northern
Ireland, are primarily petroleum terminals. All six terminals are served by
deepwater marine docks.
On October 30, 1998, KPP entered into acquisition and joint venture
agreements with Northville Industries Corp. ("Northville") 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. The petroleum storage facility,
which has capacity of 3.9 million barrels in 22 tanks, was funded with bank
financing which was paid off using a portion of the proceeds from KPP's public
unit offering in July 1999. (See "Liquidity and Capital Resources")
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.
(in millions)
---------------------------
1999 1998
------- -------
Revenues.................................... $ 212.3 $ 114.2
======= =======
Operating income ........................... $ 1.5 $ 0.9
======= =======
On March 25, 1998, a wholly-owned subsidiary of Kaneb acquired the
petroleum products marketing business for $1.5 million, plus the cost of
inventories. The Company's product marketing services segment consists of the
operations of that business since the acquisition date.
For the year ended December 31, 1999, revenues increased $98.1 million,
or 86%, and operating income increased by $0.6 million, or 67%, when compared to
1998, due to an increase in both sales volumes and sales price. Total gallons
sold increased to 348.6 million in 1999, compared to 221.8 million in 1998, due
to a combination of increasing the number of terminals through which products
are sold and increasing the volumes at existing locations. The average price
realized per gallon of product sold increased to $0.61 in 1999, compared to
$0.52 in 1998, but product price volatility reduced 1999 average gross profit
margins by 7% from 1998.
Information Services
Kaneb's information services business is conducted through a variety of
wholly-owned subsidiaries. The information services group provides network
design and installation services, database management and processing services,
specialized medical technology services, insurance tracking services, hardware
distribution and other related information technology services. The medical
services division provides systems integration and open architecture based
telemedicine solutions, including assessment and planning, installation
assistance, clinical systems integration, acceptance testing, and systems
maintenance and management of telemedicine applications.
(in millions)
------------------------------
1999 1998 1997
-------- -------- --------
Revenues ................................... $ 37.4 $ 20.7 $ 7.6
======== ======== ========
Operating income ........................... $ 5.6 $ 3.7 $ 2.7
======== ======== ========
Capital expenditures,
excluding acquisitions................. $ 0.4 $ 0.3 $ 0.3
======== ======== ========
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 year ended December 31, 1999, revenues increased $16.7 million,
or 81% and operating income increased $1.9 million, or 51%, when compared to
1998, primarily due to the Ellsworth acquisition and increased consulting
services and computer hardware sales provided to various national governmental
agencies and the private sector. For the year ended December 31, 1998, revenues
increased $13.1 million, or 172% and operating income increased $1.0 million, or
37% when compared to 1997, primarily from increased consulting services and
computer hardware sales provided to various national government agencies and the
private sector. Industrial Services
Kaneb's industrial services business is conducted through its Furmanite
group of wholly-owned subsidiaries. Furmanite provides specialized services,
including under pressure leak sealing, on-site machining, safety and relief
valve testing and repair, passive fire protection and fugitive emissions
inspections to the process and power industries worldwide.
(in millions)
------------------------------
1999 1998 1997
-------- -------- --------
Revenues:
United States..................... $ 29.8 $ 35.5 $ 33.7
Europe............................ 57.3 68.1 66.4
Asia-Pacific...................... 11.0 11.5 8.1
-------- -------- --------
$ 98.1 $ 115.1 $ 108.2
======== ======== ========
Operating income:
United States..................... $ 1.0 $ 1.7 $ 1.8
Europe............................ 3.3 5.5 6.1
Asia-Pacific...................... .5 1.0 1.1
Headquarters...................... (1.2) (1.5) (1.6)
-------- -------- --------
Operating income before severance
and other costs.............. 3.6 6.7 7.4
Severance and other costs......... (1.8) - -
-------- -------- --------
Operating income $ 1.8 $ 6.7 $ 7.4
======== ======== ========
Capital expenditures,
excluding acquisitions............ $ 2.3 $ 2.6 $ 2.0
======== ======== ========
For the year ended December 31, 1999, Furmanite's revenues decreased by
$17.0 million, or 15%, when compared to 1998, due to extremely weak industry
market conditions in the United States and Europe. In the United States,
revenues decreased by $5.7 million, or 16%, due to declines in turnaround and
other services resulting from the weak market conditions. In Europe, revenues
decreased by $10.8 million, or 16%, due to lower turnaround and other process
plant services, primarily in the United Kingdom and Germany, also the result of
weak market conditions in these regions. The 1999 decrease in Asia-Pacific
revenues is primarily due to declines in underpressure and other services.
For the year ended December 31, 1998, Furmanite's revenues increased by
$6.9 million, or 6%, when compared to 1997, due to overall increases in each of
the three geographical areas. In the United States, revenues increased by $1.8
million, or 5%, due primarily to improvements in on-site machining and leak
sealing services. In Europe, revenues increased by $1.7 million, or 3%, due to
increases in leak sealing, passive fire protection and turnaround services. The
increase in Asia-Pacific revenues is primarily attributable to the Australian
operations, acquired effective July 1, 1997.
Overall, Furmanite's operating income, before severance and other
costs, decreased by $3.1 million, or 46%, in 1999, compared to 1998, due to the
extremely weak industry market conditions in the United States and Europe.
Severance and other costs resulted from resizing Furmanite's work force to the
current market conditions in these regions. As of December 31, 1999,
substantially all of such costs had been paid. Furmanite's 1998 operating income
decreased by $0.7 million, or 9%, compared to 1997, due primarily to lower
margin work performed in the United Kingdom as a result of a general economic
slowdown during the last half of 1998.
Capital expenditures are primarily related to field services equipment
and capital costs related to the implementation of new services. Capital
expenditures for 2000 are currently estimated to be $3 million to $5 million,
depending on the economic environment and the needs of the business.
Income Taxes
Income tax expense for the year ended December 31, 1999 includes the
recognition in the fourth quarter of $37.1 million in expected benefits from
prior years' tax losses (change in valuation allowance) that are available to
offset future taxable income. The Company reduced the valuation allowance as a
result of its reevaluation of the realizability of income tax benefits from
future operations. The Company considered positive evidence supported by recent
historical levels of taxable income, the scheduled reversal of deferred tax
liabilities, tax planning strategies, revised estimates of future taxable income
growth, and expiration periods of NOLs ($67.4 million expires in 2002), among
other things, in making this evaluation and concluding that it is more likely
than not that the Company will realize the benefit of its net deferred tax
assets. Ultimate realization of the deferred tax asset is dependent upon, among
other factors, the Company's ability to generate sufficient taxable income
within the carryforward periods (2000 to 2007) and is subject to change
depending on the tax laws in effect in the years in which the carryforwards are
used. As a result of the 1999 recognition of expected future income tax
benefits, subsequent periods will reflect a full effective tax rate provision.
Additionally, the Company's income tax expense for the year ended December 31,
1999 includes benefits of $3.1 million related to favorable developments
pertaining to certain state and foreign income tax issues.
Liquidity and Capital Resources
Cash provided by consolidated operating activities was $50.1 million,
$54.2 million and $55.1 million during the years 1999, 1998 and 1997,
respectively. The decrease in 1999 and 1998, was due primarily to increases in
working capital requirements relating to increased sales volume levels in the
product marketing business acquired in March 1998.
At December 31, 1999, $17.9 million was outstanding under a credit
facility, as amended, that was originally obtained by a wholly-owned subsidiary
in conjunction with the acquisition of Furmanite. The credit facility, which is
without recourse to the parent company, is due 2001, bears interest at the
option of the borrower at variable rates based on either the LIBOR rate or the
prime rate plus a differential of up to 150 basis points and contains certain
financial and operational covenants with respect to the industrial services
group of companies.
KPP has a credit agreement with two banks that currently provides a $25
million revolving credit facility for working capital and other Partnership
purposes. Borrowings under the credit facility bear interest at variable rates
and are due and payable on January 31, 2001. The credit agreement, which is
without recourse to the Company, has a commitment fee of 0.15% per annum of the
unused credit facility. At December 31, 1999, $2.2 million was drawn under the
credit facility.
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 by a mortgage on the East Pipeline, and are pari passu with the existing
mortgage notes and credit facility. 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 a portion of the
proceeds from a public offering of KPP units. The remaining portion ($25.8
million) is due in January 2002.
In July 1999, KPP issued 2.25 million limited partnership units in a
public offering at $30.75 per unit, generating approximately $65.6 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 (including $13.3 million in 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 $16.8 million. Accordingly, the Company recognized a
$16.8 million gain before deferred income taxes of $6.4 million.
In December 1995, Kaneb entered into an agreement with an international
bank that provides for a $15 million revolving credit facility through December
1, 2000 that bears interest at a variable rate at the Company's option based on
the LIBOR rate plus 100 basis points or at the prime rate in effect from time to
time with a commitment fee of 0.5% per annum of the unused credit facility. No
amounts were drawn under the credit facility at December 31, 1999, 1998 or 1997.
In March 1998, a wholly-owned subsidiary of the Company entered into a
credit agreement with a bank that, as amended, provides for a $15 million
revolving credit facility through March 2001. The credit facility bears interest
at variable rates, has a commitment fee of 0.25% per annum on unutilized amounts
and contains certain financial and operational covenants. The credit facility,
which is without recourse to the Company, is secured by essentially all of the
tangible and intangible assets of the products marketing business and by 500,000
KPP limited partnership units held by a wholly-owned subsidiary of the Company.
At December 31, 1999, $11.0 million was drawn on the facility.
Consolidated capital expenditures for 2000 have been budgeted at $15
million to $20 million, depending on the economic environment and the needs of
the business. Consolidated debt maturities are $2.5 million; $2.4 million;
$100.1 million (including $70.2 million of KPP debt); $54.9 million (including
$52.8 million of KPP debt); and $10.1 million (including $8.0 million of KPP
debt), respectively, for each of the five years ending December 31, 2004.
Capital expenditures (excluding acquisitions) in 2000 are expected to be funded
from existing cash and anticipated cash flows from operations.
Year 2000 Issue
As of the date of this Report, the Company has not experienced any
significant disruptions in its operations during the transition into the Year
2000 ("Y2K"). In the third quarter of 1999, the Company announced that it had
completed its assessment of Y2K risks and that it had formulated contingency
plans to mitigate potential adverse effects which might have arisen from
noncompliant systems or third parties who had not adequately addressed the Y2K
issue. To date, the Company has not incurred any significant costs related to
Y2K issues. The Company will continue to monitor its operations and systems and
address any date-related problems that may arise as the year progresses.
Item 7(a). Quantitative and Qualitative Disclosure About Market Risk
The principal market risks (i.e., the risk of loss arising from the
adverse changes in market rates and prices) to which the Company is exposed are
interest rates on the Company's debt and investment portfolios. The Company
centrally manages its debt and investment portfolios considering investment
opportunities and risks, tax consequences and overall financing strategies. The
Company's investment portfolio consists of cash equivalents; accordingly, the
carrying amounts approximate fair value. The Company's investments are not
material to the financial position or performance of the Company. Assuming
year-end 1999 variable rate debt and investment levels, a one percent increase
in interest rates would increase net interest expense and decrease interest of
outside non-controlling partners in KPP's net income by approximately $0.4
million and less than $0.1 million, respectively.
Item 8. Financial Statements and Supplementary Data
The consolidated financial statements and supplementary data of the
Company begins on page F-1 of this report. Such information is hereby
incorporated by reference into this Item 8.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Reference is made to the Registrant's Current Reports on Forms 8-K and
8-K/A, dated November 6, 1998 and March 9, 1999, respectively which reports are
incorporated herein by reference.
PART III
The information required by Part III (Items 10, 11, 12 and 13) of Form 10-K is
incorporated by reference from portions of the Registrant's definitive proxy
statement to be filed with the Securities and Exchange Commission not later than
120 days after the close of the fiscal year covered by this Report.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
Beginning
(a)(1) Financial Statements Page
Set forth below are financial statements appearing in this report.
Reports of Independent Accountants............................... F - 1
Financial Statements of Kaneb Services, Inc., and Subsidiaries:
Consolidated Statements of Income - Years Ended
December 31, 1999, 1998 and 1997............................... F - 3
Consolidated Balance Sheets - December 31, 1999 and 1998......... F - 4
Consolidated Statements of Cash Flows - Years Ended
December 31, 1999, 1998 and 1997............................... F - 5
Consolidated Statements of Changes in Stockholders'
Equity - Years Ended December 31, 1999, 1998 and 1997.......... F - 6
Notes to Consolidated Financial Statements....................... F - 7
(a)(2) Financial Statement Schedules
Set forth are the financial statement schedules appearing in this report.
Schedule I - Kaneb Services, Inc. (Parent Company)
Condensed Financial Statements:
Statements of Income - Years Ended December 31, 1999,
1998 and 1997............................................ F - 26
Balance Sheets - December 31, 1999 and 1998................ F - 27
Statements of Cash Flows - Years Ended
December 31, 1999, 1998 and 1997......................... F - 28
Schedule II - Kaneb Services, Inc. Valuation and Qualifying
Accounts - Years Ended December 31, 1999, 1998 and 1997.... F - 29
Schedules, other than those listed above, have been omitted because of
the absence of the conditions under which they are required or because
the required information is included in the consolidated financial
statements or related notes thereto.
(a) (3) List of Exhibits
3.1 Restated Certificate of Incorporation of the Registrant, dated
September 26, 1979, filed as Exhibit 3.1 of the exhibits to the
Registrant's Registration Statement on Form S-16, which exhibit is
hereby incorporated by reference.
3.2 Certificate of Amendment to the Restated Certificate of Incorporation
of the Registrant, dated April 30, 1981, filed as Exhibit 3.2 of the
exhibits to the Registrant's Annual Report on Form 10-K ("Form 10-K")
for the year ended December 31, 1981, which exhibit is hereby
incorporated by reference.
3.3 Certificate of Amendment to the Restated Certificate of Incorporation
of the Registrant, dated May 28, 19875, filed as Exhibit 4.1 of the
exhibits to the Registrant's Quarterly Report on Form 10-Q ("Form
10-Q") for the quarter ended June 30, 1985, which exhibit is hereby
incorporated by reference.
3.4 Certificate of Amendment to the Restated Certificate of Incorporation
of the Registrant, dated September 17, 1985, filed as Exhibit 4.1 of
the exhibits to the Registrant's Form 10-Q for the quarter ended
September 30, 1985, which exhibit is hereby incorporated by reference.
3.5 Certificate of Amendment to the Restated Certificate of Incorporation
of the Registrant, dated July 10, 1990, filed as Exhibit 3.5 of the
exhibits to the Registrant's Form 10-K for the year ended December 31,
1990, which exhibit is hereby incorporated by reference.
3.6 Certificate of Amendment to the Restated Certificate of Incorporation
of the Registrant, dated September 21, 1990, filed as Exhibit 3.5 of
the exhibits to the Registrant's Form 10-Q for the quarter ended
September 30, 1990, which exhibit is hereby incorporated by reference.
3.7 By-laws of the Registrant, filed as exhibit 3.7 to Registrant's Form
10-K for the year ended December 31, 1998, which exhibit is hereby
incorporated by reference.
4.1 Certificate of Designation related to the Registrant's Adjustable Rate
Cumulative Class A Preferred Stock, filed as Exhibit 4 of the exhibits
to the Registrant's Form 10-Q for the quarter ended September 30, 1983,
which exhibit is hereby incorporated by reference.
4.2 Certificate of Designation, Preferences and Rights related to the
Registrant's Series B Junior Participating Preferred Stock, filed as
Exhibit 4.2 to the Registrant's 10-K for the year ended December 31,
1998, which exhibit is incorporated herein by reference.
4.3 Certificate of Designation related to the Registrant's Adjustable Rate
Cumulative Class A Preferred Stock, Series C, dated April 23, 1991,
filed as Exhibit 4.4 of the exhibits to Registrant's Form 10-K for the
year ended December 31, 1991, which exhibit is hereby incorporated by
reference.
4.4 Certificate of Designation related to the Registrant's Adjustable Rate
Cumulative Class A Preferred Stock, Series F, dated June 12, 1997,
filed as Exhibit 4.4 of the Exhibits to Registrant's Form 10-K for the
year ended December 31, 1997, which exhibit is hereby incorporated by
reference.
4.5 Indenture between Moran Energy Inc. ("Moran") and First City National
Bank of Houston ("First City"), dated January 15, 1984, under which
Moran issued the 8 3/4% Convertible Subordinated Debentures due 2008,
filed as Exhibit 4.1 to Moran's Registration Statement on Form S-3 (SEC
File No. 2-81227), which exhibit is hereby incorporated by reference.
4.6 First Supplemental Indenture between the Registrant and First City,
dated as of March 20, 1984, under which the Registrant assumed
obligations under the Indenture listed as Exhibit 4.5 above, filed as
Exhibit 4.7 of the Registrant's Form 10-K for the year ended December
31, 1983, which exhibit is hereby incorporated by reference.
10.1 Kaneb Services, Inc. Savings Investment Plan, as amended, filed as
Exhibit 4.10 of the exhibits to the Registrant's Registration Statement
on Form S-8 ("Form S-8") (S.E.C. File No. 33-41295) and as Exhibit 4.1
to the exhibits of Registrant's Form S-8 (S.E.C. File No. 333-14067),
which exhibits are hereby incorporated by reference.
10.2 Kaneb Services, Inc. 1984 Nonqualified Stock Option Plan, filed as
Exhibit 10.26 to the exhibits of the Registrant's Form S-8 (S.E.C. File
No. 2-90929), which exhibit is hereby incorporated by reference.
10.3 Kaneb Services, Inc. 1994 Stock Incentive Plan, filed as Exhibit 4.12
to the exhibits of the Registrant's Form S-8 (S.E.C. File No.
33-54027), which exhibit is hereby incorporated by reference.
10.4 Kaneb Services, Inc. Deferred Stock Unit Plan, as amended, filed as
Exhibit 4.1 to the exhibits of the Registrant's Form S-8 (S.E.C. File
No. 333-08725) and as Exhibit 10.1 to the Exhibits of the Registrant's
Current Report on Form 8-K ("Form 8-K"), which exhibits are hereby
incorporated by reference.
10.5 Kaneb Services, Inc. 1996 Supplemental Deferred Compensation Plan,
filed as Exhibit 4.1 to the exhibits of the Registrant's Form S-8
(S.E.C. File No. 333-08727), and as Exhibit 10.2 to the Exhibits of the
Registrant's Form 8-K, which exhibits are hereby incorporated by
reference.
10.6 Kaneb Services, Inc. $1.63 Director Stock Options, filed as Exhibit 4.1
to the exhibits of the Registrant's Form S-8 (S.E.C. File No.
33-58981), which exhibit is hereby incorporated by reference.
10.7 Kaneb Services, Inc. Directors Stock Options I, filed as Exhibit 4.1 to
the exhibits of the Registrant's Form S-8 (S.E.C. File No. 333-14069),
which exhibit is hereby incorporated by reference.
10.8 Kaneb Services, Inc. 1996 Directors Stock Incentive Plan, as amended,
filed as Exhibit 4.1 to the exhibits of the Registrant's Form S-8
(S.E.C. File No. 333-14071) and as Exhibit 4.1 to the exhibits of the
Registrant's Form S-8 (S.E.C. File No. 333-22109), and as supplemented,
filed as Exhibit 4.2 to the Exhibits of the Registrant's Form S-8
(S.E.C. File No. 333-60195), and as Exhibit 10.1 to the Exhibits of the
Registrant's Form 8-K, which exhibits are hereby incorporated by
reference.
10.9 Kaneb Services, Inc. Non-Employee Directors Deferred Stock Unit Plan,
filed as Exhibit 4.1 to the exhibits of the Registrant's Form S-8
(S.E.C. File No. 333-08723), and as Exhibit 10.3 to the Exhibits of the
Registrant's Form 8-K, which exhibits are hereby incorporated by
reference.
10.10 Form of Termination Agreement, filed as Exhibit 10.10 to the exhibits
of the Registrant's Form 10-K for the year ended December 31, 1996,
which exhibit is hereby incorporated by reference.
10.11 Form of Indemnification Agreement, filed as Exhibit 10.11 to the
Registrant's Form 10-K for the year ended December 31, 1999, which
exhibit is hereby incorporated by reference.
10.12 Amended and Restated Loan Agreement between Furmanite PLC, Bank of
Scotland and certain other Lenders, dated May 1, 1991, as amended, (the
"Furmanite Loan Agreement"), filed as Exhibit 10.8 of the exhibits to
the Registrant's Form 10-K for the year ended December 31, 1994,
Exhibit 10.12 of the exhibits to the Registrant's Form 10-K for the
year ended December 31, 1996, and Exhibit 10.12 of the Registrant's
Form 10-K for the year ended December 31, 1997, which exhibits are
hereby incorporated by reference.
10.13 Amendments to the Furmanite Loan Agreement, filed herewith.
10.14 Loan Agreement between the Registrant, KPL and Bank of Scotland, dated
as of December 1, 1995, filed as Exhibit 10.10 of the exhibits to the
Registrant's Form 10-K for the year ended December 31, 1995, which
exhibit is hereby incorporated by reference.
21 List of subsidiaries of the Registrant, filed herewith.
23 Consents of independent accountants: KPMG LLP and
PricewaterhouseCoopers LLP, filed herewith.
27 Financial Data Schedule, filed herewith.
Certain instruments respecting long-term debt of the Registrant have
been omitted pursuant to instructions as to Exhibits. The Registrant
agrees to furnish copies of any of such instruments to the Commission
upon request.
(b) Reports on Form 8-K
None.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Kaneb Services, Inc.
We have audited the 1999 and 1998 consolidated financial statements of Kaneb
Services, Inc. and its subsidiaries (the "Company") as listed in the index
appearing under Item 14(a)(1) on page 20. In connection with our audits of the
1999 and 1998 consolidated financial statements, we have also audited the 1999
and 1998 financial statement schedules as listed in the index appearing under
Item 14(a)(2) on page 20. These consolidated financial statements and financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on the consolidated financial statements
and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company and its
subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for the years then ended, in conformity with
generally accepted accounting principles. Also, in our opinion, the related 1999
and 1998 financial statement schedules, when considered in relation to the 1999
and 1998 basic consolidated financial statements taken as a whole, present
fairly, in all material respects, the information set forth therein.
KPMG LLP
Dallas, Texas
February 25, 2000
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Kaneb Services, Inc.
In our opinion, the consolidated statements of income, of cash flows and of
changes in stockholders' equity as of and for the year ended December 31, 1997
(listed in the index appearing under Item 14(a)(1) and (2) on page 20) present
fairly, in all material respects, the results of operations and cash flows of
Kaneb Services, Inc. and its subsidiaries (the "Company") for the year ended
December 31, 1997, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for the opinion expressed
above. We have not audited the consolidated financial statements of Kaneb
Services, Inc. and its subsidiaries for any period subsequent to December 31,
1997.
PRICEWATERHOUSECOOPERS LLP
Dallas, Texas
February 19, 1998
<PAGE>
KANEB SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------
1999 1998 1997
------------- ------------- -------------
<S> <C> <C> <C>
Revenues:
Services ...................................... $ 271,504,000 $ 250,225,000 $ 236,936,000
Products ...................................... 234,255,000 125,632,000 --
------------- ------------- -------------
Total revenues .............................. 505,759,000 375,857,000 236,936,000
------------- ------------- -------------
Costs and expenses:
Operating costs ................................ 185,375,000 171,742,000 156,654,000
Cost of sales .................................. 228,383,000 121,509,000 --
Depreciation and amortization .................. 18,818,000 16,203,000 16,715,000
General and administrative ..................... 4,944,000 5,091,000 4,907,000
------------- ------------- -------------
Total costs and expenses ..................... 437,520,000 314,545,000 178,276,000
------------- ------------- -------------
Operating income ................................... 68,239,000 61,312,000 58,660,000
Interest income .................................... 750,000 189,000 533,000
Other income (expense) ............................. 21,000 679,000 (696,000)
Interest expense ................................... (17,695,000) (15,714,000) (15,531,000)
Amortization of excess of cost over fair
value of net assets of acquired businesses ..... (2,172,000) (1,948,000) (1,879,000)
------------- ------------- -------------
Income before interest of outside non-controlling
partners in KPP's net income, gain on issuance
of units by KPP and income taxes ............... 49,143,000 44,518,000 41,087,000
Gain on issuance of units by KPP ................... 16,764,000 -- --
Income tax benefit (expense) ....................... 31,344,000 (1,768,000) (2,789,000)
Interest of outside non-controlling partners
in KPP's net income ............................ (33,479,000) (29,174,000) (27,655,000)
------------- ------------- -------------
Net income .......................................... 63,772,000 13,576,000 10,643,000
Dividends applicable to preferred stock ............. 487,000 508,000 538,000
------------- ------------- -------------
Net income applicable to common stock .............. $ 63,285,000 $ 13,068,000 $ 10,105,000
============= ============= =============
Earnings per common share:
Basic .......................................... $ 2.01 $ .41 $ .31
============= ============= =============
Diluted ........................................ $ 1.94 $ .40 $ .30
============= ============= =============
</TABLE>
See notes to consolidated financial statements.
F - 3
<PAGE>
KANEB SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
------------------------------
1999 1998
------------- -------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents ........................... $ 20,766,000 $ 9,134,000
Accounts receivable, trade (net of allowance for
doubtful accounts of $1,532,000 in 1999 and
$925,000 in 1998) ................................. 66,991,000 47,540,000
Inventories ......................................... 18,063,000 13,465,000
Prepaid expenses and other current assets ........... 14,957,000 6,615,000
------------- -------------
Total current assets .............................. 120,777,000 76,754,000
------------- -------------
Property and equipment ................................. 470,351,000 411,285,000
Less accumulated depreciation and amortization ......... 142,207,000 130,759,000
------------- -------------
Net property and equipment .......................... 328,144,000 280,526,000
------------- -------------
Investment in affiliate ................................ 21,978,000 21,005,000
Excess of cost over fair value of net assets of
acquired businesses ............................... 62,657,000 62,521,000
Deferred tax assets .................................... 22,754,000 2,250,000
Other assets ........................................... 4,005,000 4,989,000
------------- -------------
$ 560,315,000 $ 448,045,000
============= =============
LIABILITIES AND EQUITY
Current liabilities:
Short-term and current portion of long-term debt:
Pipeline and terminaling services ................. $ -- $ 10,000,000
Product marketing services ........................ -- 2,852,000
Industrial services ............................... 2,471,000 2,441,000
------------- -------------
Total short-term and current portion of long-term
debt ......................................... 2,471,000 15,293,000
Accounts payable .................................... 20,146,000 14,520,000
Accrued expenses .................................... 41,170,000 41,309,000
------------- -------------
Total current liabilities ......................... 63,787,000 71,122,000
------------- -------------
Long-term debt, less current portion:
Pipeline and terminaling services ................... 155,987,000 153,000,000
Product marketing services .......................... 11,041,000 --
Industrial services ................................. 20,557,000 20,292,000
Parent company ...................................... 23,666,000 23,666,000
------------- -------------
Total long-term debt, less current portion ........ 211,251,000 196,958,000
------------- -------------
Deferred income taxes and other liabilities ............ 10,791,000 15,626,000
Interest of outside non-controlling partners in KPP .... 124,820,000 76,894,000
Commitments and contingencies
Stockholders' equity:
Preferred stock, without par value .................. 5,792,000 5,792,000
Common stock, without par value. Authorized
60,000,000 shares; issued 36,638,069 shares
in 1999 and 36,554,206 shares in 1998 ............. 4,249,000 4,239,000
Additional paid-in capital .......................... 197,454,000 197,263,000
Treasury stock, at cost ............................. (30,278,000) (29,775,000)
Other ............................................... (141,000) (141,000)
Accumulated deficit ................................. (25,138,000) (88,423,000)
Accumulated other comprehensive income (loss) -
foreign currency translation adjustment ........... (2,272,000) (1,510,000)
------------- -------------
Total stockholders' equity ........................ 149,666,000 87,445,000
------------- -------------
$ 560,315,000 $ 448,045,000
============= =============
</TABLE>
See notes to consolidated financial statements.
F - 4
<PAGE>
KANEB SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------
1999 1998 1997
------------- ------------- --------------
<S> <C> <C> <C>
Operating activities:
Net income ............................................ $ 63,772,000 $ 13,576,000 $ 10,643,000
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization...................... 18,818,000 16,203,000 16,715,000
Amortization of excess of cost over fair value
of net assets of acquired businesses............. 2,172,000 1,948,000 1,879,000
Interest of outside non-controlling partners in KPP 33,479,000 29,174,000 27,655,000
Gain on issuance of units by KPP................... (16,764,000) -- --
Deferred income taxes.............................. (29,647,000) 518,000 86,000
Equity in earnings of affiliate,
net of distribution............................. (1,072,000) -- --
Changes in current assets and liabilities:
Accounts receivable.............................. (17,175,000) (12,272,000) (2,111,000)
Inventories...................................... (4,592,000) (4,600,000) (373,000)
Prepaid expenses and other current assets........ (3,079,000) (922,000) 674,000
Accounts payable and accrued expenses............ 4,172,000 10,581,000 (48,000)
------------- ------------- --------------
Net cash provided by operating activities............ 50,084,000 54,206,000 55,120,000
------------- ------------- --------------
Investing activities:
Capital expenditures................................... (17,339,000) (12,256,000) (13,011,000)
Acquisitions........................................... (48,439,000) (47,947,000) (4,855,000)
Increase in other assets, net.......................... (3,504,000) (8,000) (1,819,000)
------------- ------------- --------------
Net cash used in investing activities................ (69,282,000) (60,211,000) (19,685,000)
------------- ------------- --------------
Financing activities:
Issuance of debt ...................................... 62,318,000 40,717,000 8,619,000
Payments on debt and capital leases ................... (60,847,000) (14,912,000) (12,768,000)
Distributions to outside non-controlling
partners in KPP...................................... (35,426,000) (28,509,000) (26,864,000)
Preferred stock dividends paid......................... (487,000) (508,000) (538,000)
Common stock issued.................................... 253,000 194,000 33,000
Purchase of treasury stock............................. (555,000) (4,868,000) (4,585,000)
Net proceeds from issuance of units by KPP............. 65,574,000 -- --
------------- ------------- --------------
Net cash provided by (used in) financing activities.. 30,830,000 (7,886,000) (36,103,000)
------------- ------------- --------------
Increase (decrease) in cash and cash equivalents.......... 11,632,000 (13,891,000) (668,000)
Cash and cash equivalents at beginning of year............ 9,134,000 23,025,000 23,693,000
------------- ------------- --------------
Cash and cash equivalents at end of year.................. $ 20,766,000 $ 9,134,000 $ 23,025,000
============= ============= ==============
</TABLE>
See notes to consolidated financial statements.
F - 5
<PAGE>
KANEB SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
PART 1 OF 2
<TABLE>
<CAPTION>
Preferred Common Additional Treasury
Stock Stock Paid-In Capital Stock Other
------------- ------------- --------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1997 $ 5,792,000 $ 4,230,000 $ 197,213,000 $ (20,631,000) $ -
Net income for the year....... - - - - -
Common stock issued........... - 4,000 29,000 - -
Purchase of treasury stock ... - - - (4,585,000) -
Preferred stock dividends
declared..................... - - - - -
adjustment .............. - - - - -
------------- ------------ ------------- ------------- -------------
Comprehensive income
for the year.................
Balance at December 31, 1997 5,792,000 4,234,000 197,242,000 (25,216,000) -
Net income for the year...... - - - - -
Common stock issued.......... - 5,000 21,000 309,000 (141,000)
Purchase of treasury stock .. - - - (4,868,000) -
Preferred stock dividends
declared..................... - - - - -
Foreign currency translation
adjustment ............. - - - - -
------------- ------------- ------------- ------------- -------------
Comprehensive income
for the year.................
Balance at December 31, 1998 5,792,000 4,239,000 197,263,000 (29,775,000) (141,000)
Net income for the year...... - - - - -
Common stock issued.......... - 10,000 191,000 52,000
Purchase of treasury stock .. - - - (555,000) -
Preferred stock dividends
declared..................... - - - - -
Foreign currency translation
adjustment ............. - - - - -
------------- ------------- ------------- ------------- -------------
Comprehensive income
for the year.................
Balance at December 31, 1999 $ 5,792,000 $ 4,249,000 $ 197,454,000 $ (30,278,000) $ (141,000)
============= ============= ============= ============= ==============
</TABLE>
See notes to consolidated financial statements.
F - 6
<PAGE>
KANEB SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
PART 2 OF 2
<TABLE>
<CAPTION>
Accumulated Other
Accumulated Comprehensive Comprehensive
Deficit Income (Loss) Income
------------- ------------------ --------------
<S> <C> <C> <C>
Balance at January 1, 1997 $(111,596,000) $ 358,000 $ --
Net income for the year....... 10,643,000 -- 10,643,000
Common stock issued........... -- -- --
Purchase of treasury stock ... -- -- --
Preferred stock dividends
declared..................... (538,000) -- --
Foreign currency translation
adjustment .............. -- (2,472,000) (2,472,000)
------------- -------------- -------------
Comprehensive income
for the year................. $ 8,171,000
=============
Balance at December 31, 1997 (101,491,000) (2,114,000) --
Net income for the year...... 13,576,000 -- 13,576,000
Common stock issued.......... -- -- --
Purchase of treasury stock .. -- -- --
Preferred stock dividends
declared..................... (508,000) -- --
Foreign currency translation
adjustment ............. -- 604,000 604,000
-------------- -------------- -------------
Comprehensive income
for the year................. $ 14,180,000
=============
Balance at December 31, 1998 (88,423,000) (1,510,000) --
Net income for the year...... 63,772,000 -- 63,772,000
Common stock issued.......... -- -- --
Purchase of treasury stock .. -- -- --
Preferred stock dividends
declared..................... (487,000) -- --
Foreign currency translation
adjustment ............. -- (762,000) (762,000)
-------------- -------------- -------------
Comprehensive income
for the year................. $ 63,010,000
=============
Balance at December 31, 1999 $ (25,138,000) $ (2,272,000)
============= ==============
</TABLE>
See notes to consolidated financial statements.
F - 6
<PAGE>
KANEB SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following significant accounting policies are followed by Kaneb
Services, Inc. (the "Company") and its subsidiaries in the preparation of
its consolidated financial statements.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries and Kaneb Pipe Line Partners, L.P. ("KPP"). The
Company controls the operations of KPP through its 2% general partner
interest and 28% limited partner interest as of December 31, 1999. All
significant intercompany transactions and balances are eliminated in
consolidation.
Cash and Cash Equivalents
The Company's policy is to invest cash in highly liquid investments with
original maturities of three months or less. Accordingly, uninvested cash
balances are kept at minimum levels. Such investments are valued at cost,
which approximates market, and are classified as cash equivalents. The
Company does not have any derivative financial instruments.
Inventories
Inventories consist primarily of finished goods of the industrial
services segment and petroleum products purchased for resale in the
products marketing business and are valued at the lower of cost or
market. Cost is determined using the weighted average cost method.
Property and Equipment
Property and equipment are carried at original cost. Certain leases have
been capitalized and the leased assets have been included in property and
equipment. Additions of new equipment and major renewals and replacements
of existing equipment are capitalized. Repairs and minor replacements
that do not materially increase values or extend useful lives are
expensed.
Depreciation of property and equipment is provided on the straight-line
basis at rates based upon the expected useful lives of the various
classes of assets. The rates used for pipeline and certain storage
facilities, which are subject to regulation, are the same as those
promulgated by the Federal Energy Regulatory Commission.
The carrying value of property and equipment is periodically evaluated
using undiscounted future cash flows as the basis for determining if
impairment exists under the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of". To the
extent impairment is indicated to exist, an impairment loss will be
recognized under SFAS No. 121 based on fair value.
Revenue Recognition
Substantially all revenues are recognized when services to customers have
been rendered or when products have been delivered. Pipeline
transportation revenues are recognized upon receipt of the products into
the pipeline system.
Sales of Securities by Subsidiaries
The Company recognizes gains and losses in the statements of income
resulting from subsidiary sales of additional equity interests, including
KPP limited partnership units, to unrelated parties.
Earnings Per Share
The amount of earnings for the period applicable to each share of common
stock outstanding during the period ("Basic" earnings per share) and the
amount of earnings for the period applicable to each share of common
stock outstanding during the period and to each share that would have
been outstanding assuming the issuance of common shares for dilutive
potential common shares outstanding during the period ("Diluted" earnings
per share) have been presented in the consolidated statements of income.
Foreign Currency Translation
The Company translates the balance sheets of its foreign subsidiaries
using year-end exchange rates and translates income statement amounts
using the average exchange rates in effect during the year. The gains and
losses resulting from the change in exchange rates from year to year have
been reported separately as a component of accumulated other
comprehensive income (loss) in stockholders' equity. Gains and losses
resulting from foreign currency transactions are included in the
statements of income.
Excess of Cost Over Fair Value of Net Assets of Acquired Businesses
The excess of the cost over the fair value of net assets of acquired
businesses is being amortized on a straight-line basis over a period of
40 years. Accumulated amortization was $16.3 million and $14.1 million at
December 31, 1999 and 1998, respectively.
The Company periodically evaluates the propriety of the carrying amount
of the excess of cost over fair value of net assets of acquired
businesses, as well as the amortization period, to determine whether
current events or circumstances warrant adjustments to the carrying value
and/or revised estimates of useful lives. The Company believes that no
such impairment has occurred and that no reduction in estimated useful
lives is warranted.
Environmental
KPP environmental expenditures that relate to current operations are
expensed or capitalized as appropriate. Expenditures that relate to an
existing condition caused by past operations, and which do not contribute
to current or future revenue generation, are expensed. Liabilities are
recorded when environmental assessments and/or remedial efforts are
probable, and the costs can be reasonably estimated. Generally, the
timing of these accruals coincides with the completion of a feasibility
study or KPP's commitment to a formal plan of action.
Estimates
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosures of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
Change in Presentation
Certain prior year financial statement items have been reclassified to
conform with the 1999 presentation.
2. ASSET ACQUISITIONS
On March 25, 1998, a wholly-owned subsidiary of the Company acquired a
products marketing business for $1.5 million, plus the cost of product
inventories. The products marketing business provides wholesale motor
fuel marketing services throughout the Great Lakes and Rocky Mountain
regions, as well as California. The asset purchase agreement includes a
provision for an earn-out based on annual operating results of the
acquired business for a five-year period ending in March 2003. No amounts
were payable under the earn-out provision in 1999 or 1998. The
acquisition was accounted for using the purchase method of accounting.
On October 30, 1998, KPP entered into acquisition and joint venture
agreements with Northville Industries Corp. ("Northville") 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. The
investment is being accounted for by the equity method of accounting,
with the excess cost over net book value of the equity investment being
amortized over the life of the underlying assets. During 1998, KPP
acquired other terminals and pipelines for aggregate consideration of
$23.9 million.
On February 1, 1999, KPP acquired six terminals in the United Kingdom
from GATX Terminal Limited for (pound)22.6 million (approximately $37.2
million) plus transaction costs and the assumption of certain
liabilities. The acquisition, which was initially financed with term
loans from a bank, has been accounted for using the purchase method of
accounting. $13.3 million of the term loans were repaid in July 1999 with
the proceeds from a public unit offering (see Note 3). 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 $65.6
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 (including $13.3
million in term loans resulting from the United Kingdom terminal
acquisition referred to in Note 2). 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 $16.8 million. Accordingly, the Company
recognized a $16.8 million gain before deferred income taxes of $6.4
million. This transaction reduced the Company's limited partner interest
in KPP from 31% to 28%.
4. INCOME TAXES
Income before income tax expense and interest of outside non-controlling
partners in KPP's net income is comprised of the following components:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------
1999 1998 1997
-------------- ------------- -------------
<S> <C> <C> <C>
Domestic operations......................... $ 33,549,000 $ 17,540,000 $ 11,769,000
Foreign operations.......................... 2,160,000 (1,339,000) 1,663,000
-------------- ------------- -------------
Income before non-taxable interest of outside
non-controlling partners in KPP's net
income.................................... 35,709,000 16,201,000 13,432,000
Non-taxable interest of outside non-controlling
Partners in KPP's net income.............. 30,198,000 28,317,000 27,655,000
-------------- ------------- -------------
$ 65,907,0000 $ 44,518,000 $ 41,087,000
============== ============= =============
</TABLE>
Income tax expense (benefit) is comprised of the following components:
<TABLE>
<CAPTION>
Year Ended
December 31, Federal Foreign State Total
-------------------------- ------------- ------------ ------------ -------------
<S> <C> <C> <C> <C>
1999:
Current................. $ 392,000 $ (735,000) $ (1,354,000) $ (1,697,000)
Deferred................ (31,253,000) 1,304,000 302,000 (29,647,000)
------------- ------------ ------------ -------------
$ (30,861,000) $ 569,000 $ (1,052,000) $ (31,344,000)
============= ============ ============ =============
1998:
Current................. $ 330,000 $ 320,000 $ 600,000 $ 1,250,000
Deferred................ 518,000 - - 518,000
------------- ------------ ------------ -------------
$ 848,000 $ 320,000 $ 600,000 $ 1,768,000
============= ============ ============ =============
1997:
Current............... $ 577,000 $ 925,000 $ 1,201,000 $ 2,703,000
Deferred.............. 74,000 12,000 - 86,000
------------- ------------ ------------ -------------
$ 651,000 $ 937,000 $ 1,201,000 $ 2,789,000
============= ============ ============ =============
</TABLE>
The reasons for the differences between the amount of tax expense
provided and the amount of tax expense computed by applying the statutory
Federal income tax rate to income before income taxes and interest of
outside non-controlling partners in KPP's net income for the years 1999,
1998 and 1997 are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------
1999 1998 1997
---------------------- ---------------------- ----------------------
Amount % Amount % Amount %
------------- ---- --------------- ---- -------------- -----
<S> <C> <C> <C> <C> <C> <C>
Expected tax at
statutory rates................ $ 12,498,000 35.0 $ 5,671,000 35.0 $ 4,701,000 35.0
Increase (decrease) in taxes
resulting from:
Change in valuation allowance.. (43,143,000) (120.8) (7,066,000) (43.6) (3,048,000) (22.6)
State income taxes, net........ 1,065,000 3.0 390,000 2.4 781,000 5.8
Foreign losses not benefited and
Foreign income taxes......... 526,000 1.5 2,098,000 12.9 355,000 2.6
Resolution of state and foreign
tax issues and other......... (2,290,000) (6.5) 675,000 4.2 -- --
------------- ------ --------------- ----- -------------- -----
$ (31,344,000) (87.8) $ 1,768,000 10.9 $ 2,789,000 20.8
============= ===== =============== ===== ============== =====
</TABLE>
At December 31, 1999, the Company had available domestic tax net
operating loss carryforwards ("NOLs"), which will expire, if unused, as
follows: $67,449,000 in 2002, $12,626,000 in 2003, $16,866,000 in 2005,
$17,508,000 in 2006 and $3,033,000 in 2007. Additionally, at December 31,
1999, the Company had investment tax credits aggregating $1,786,000,
which will expire, if unused, in 2000, that could be used to offset
current domestic income taxes, but only after all available NOLs are
utilized. The utilization of these carryforwards could be subject to
significant limitation in the event of a "change in ownership", as
defined in the tax laws, which might be caused by purchases or sales of
the Company's securities by persons or groups now or in the future having
5% or greater ownership of the Company's common stock.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
December 31,
-------------------------------------
1999 1998
-------------- --------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards......................... $ 41,119,000 $ 45,521,000
Investment tax credit carryforwards...................... 1,786,000 3,957,000
Alternative minimum tax credit carryforwards............. 3,996,000 3,668,000
Accrued liabilities...................................... 2,328,000 3,593,000
Other.................................................... 2,266,000 1,806,000
-------------- --------------
Total gross deferred tax assets.......................... 51,495,000 58,545,000
Less valuation allowance................................. (9,654,000) (52,797,000)
-------------- --------------
Net deferred tax assets.................................. 41,841,000 5,748,000
-------------- --------------
Deferred tax liabilities:
Plant and equipment, principally due to differences
in depreciation........................................ $ (8,437,000) $ (3,507,000)
Unconsolidated domestic subsidiaries..................... (3,741,000) (3,599,000)
Foreign deferred tax liabilities......................... (1,637,000) (317,000)
-------------- --------------
Total gross deferred tax liabilities..................... (13,815,000) (7,423,000)
-------------- --------------
Net deferred tax asset (liability)....................... $ 28,026,000 $ (1,675,000)
============== ==============
</TABLE>
The Company maintains a valuation allowance to adjust the total deferred
tax assets to net realizable value in accordance with SFAS No. 109. In
the fourth quarter of 1999, the Company reduced the valuation allowance
by $37.1 million as a result of its reevaluation of the realizability of
income tax benefits from future operations. The Company considered
positive evidence supported by recent historical levels of taxable
income, the scheduled reversal of deferred tax liabilities, tax planning
strategies, revised estimates of future taxable income growth, and
expiration periods of NOLs ($67.4 million expires in 2002), among other
things, in making this evaluation and concluding that it is more likely
than not that the Company will realize the benefit of its net deferred
tax assets. Ultimate realization of the deferred tax asset is dependent
upon, among other factors, the Company's ability to generate sufficient
taxable income within the carryforward periods (2000 to 2007) and is
subject to change depending on the tax laws in effect in the years in
which the carryforwards are used.
5. RETIREMENT PLANS
The Company has a defined contribution plan which covers substantially
all domestic employees and provides for varying levels of employer
matching. Company contributions to this plan were $1.4 million, $1.2
million and $1.1 million for 1999, 1998 and 1997, respectively.
One of the Company's foreign subsidiaries has a defined benefit pension
plan covering substantially all of its United Kingdom employees (the
"U.K. Plan"). The benefit is based on the average of the employee's
salary for the last three years of employment. Generally, the employee
contributes 5% and the employer contributes up to 12% of pay. Plan assets
are primarily invested in unitized pension funds managed by United
Kingdom registered funds managers. The most recent valuation of the U.K.
Plan was performed as of October 31, 1999.
Net pension cost for the U.K. Plan included the following components:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------
1999 1998 1997
-------------- ------------- ------------
<S> <C> <C> <C>
Net periodic benefit cost:
Service cost................................ $ 1,164,000 $ 1,352,000 $ 1,254,000
Interest cost............................... 2,151,000 2,311,000 2,021,000
Expected return on plan assets.............. (4,443,000) (2,527,000) (2,720,000)
Amortization of prior service cost.......... 27,000 27,000 27,000
Recognized net (gain) loss.................. 1,859,000 (508,000) (121,000)
-------------- ------------- -------------
Net periodic pension cost..................... $ 758,000 $ 655,000 $ 461,000
============== ============= =============
</TABLE>
Actuarial assumptions used in the accounting for the U.K. Plan were a
weighted average discount rate of 6.5% for 1999, 6.25% for 1998 and 7.5%
for 1997, an expected long-term rate of return on assets of 7.5% for 1999
and 1998 and 9.0% for 1997 and a rate of increase in compensation levels of
3.0% for 1999 and 1998 and 5.5% for 1997. The funded status of the U.K.
Plan is as follows:
December 31,
----------------------------
1999 1998
------------ ------------
Projected benefit obligation:
Beginning of year ....................... $ 35,438,000 $ 30,564,000
Service cost ............................ 1,164,000 1,352,000
Interest cost ........................... 2,151,000 2,311,000
Contributions ........................... 786,000 1,116,000
Benefits paid ........................... (636,000) (525,000)
Other ................................... (1,805,000) 620,000
------------ ------------
End of year ............................. 37,098,000 35,438,000
------------ ------------
Fair value of plan assets:
Beginning of year ....................... 36,266,000 33,138,000
Actual return on plan assets ............ 6,364,000 1,957,000
Contributions ........................... 786,000 1,116,000
Benefits paid ........................... (636,000) (525,000)
Other ................................... (875,000) 580,000
------------ ------------
End of year ............................. 41,905,000 36,266,000
------------ ------------
Excess fair value over projected obligation 4,807,000 828,000
Unrecognized net actuarial gain ........... (4,811,000) (990,000)
Unamortized prior service cost ............ 168,000 299,000
------------ ------------
Net pension prepaid asset ................. $ 164,000 $ 137,000
============ ============
6. PROPERTY AND EQUIPMENT
The cost of property and equipment is as follows:
December 31,
------------------------------
1999 1998
-------------- ------------
Pipeline and terminaling services ....... $ 439,537,000 $ 377,248,000
Product marketing services .............. 97,000 53,000
Information services .................... 3,643,000 3,354,000
Industrial services ..................... 23,226,000 26,782,000
General corporate ....................... 3,848,000 3,848,000
------------- -------------
Total property and equipment ............ 470,351,000 411,285,000
Accumulated depreciation and amortization (142,207,000) (130,759,000)
------------- -------------
Net property and equipment .............. $ 328,144,000 $ 280,526,000
============= =============
Equipment under capital leases and included in the cost of property and
equipment is as follows:
December 31,
------------------------------
1999 1998
------------- -------------
Industrial services equipment ........... $ 2,144,000 $ 4,044,000
Accumulated depreciation ................ (1,222,000) (3,147,000)
------------- -------------
Net equipment acquired under capital
leases.............................. $ 922,000 $ 897,000
============= =============
7. DEBT
Debt is summarized as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------
1999 1998
------------ ------------
<S> <C> <C>
Pipeline and terminaling services:
Mortgage notes due 2001 and 2002 ................... $ 60,000,000 $ 60,000,000
Mortgage notes due 2001 through 2016 ............... 68,000,000 68,000,000
Revolving credit facility due January 2001 ......... 2,200,000 25,000,000
Term loans due in 2002 ............................. 25,787,000 --
Promissory note, repaid in June 1999 ............... -- 10,000,000
------------ ------------
Total debt .................................... 155,987,000 163,000,000
Less short-term and current portion ................ -- 10,000,000
------------ ------------
$155,987,000 $153,000,000
============ ============
Product marketing services:
Revolving credit facility due March 2001 ........... $ 11,041,000 $ 2,852,000
------------ ------------
Total debt ....................................... 11,041,000 2,852,000
Less short-term and current portion ................ -- 2,852,000
------------ ------------
$ 11,041,000 $ --
============ ============
Industrial services:
Credit facility due through 2001 ................... $ 17,945,000 $ 17,764,000
Various notes of foreign subsidiaries, with
interest ranging from 6.75% to 8.0%, due
through 2001 ..................................... 4,097,000 4,020,000
Capital leases ..................................... 986,000 949,000
------------ ------------
Total debt .................................... 23,028,000 22,733,000
Less current portion ............................... 2,471,000 2,441,000
------------ ------------
$ 20,557,000 $ 20,292,000
============ ============
Parent company:
8.75% convertible subordinated debentures
due through 2008.................................. $ 23,666,000 $ 23,666,000
Revolving credit facility........................... -- --
------------ ------------
Total debt................................... 23,666,000 23,666,000
Less current portion.............................. -- --
------------ -------------
$ 23,666,000 $ 23,666,000
============ =============
Total consolidated debt............................... $213,722,000 $ 212,251,000
Short-term and current portion........................ 2,471,000 15,293,000
------------ -------------
Total consolidated debt, less short-term and
current portion................................... $211,251,000 $ 196,958,000
============ =============
</TABLE>
Pipeline and Terminaling Services
In 1994, KPP, through a wholly-owned subsidiary, entered into a restated
credit agreement with a group of banks that, as subsequently amended,
provides for a $25 million revolving credit facility through January 31,
2001. The credit facility, which is without recourse to the Company,
bears interest at variable interest rates and has a commitment fee of
0.15% per annum of the unused credit facility. At December 31, 1999, $2.2
million was drawn under the credit facility.
Also in 1994, KPP, through another wholly-owned subsidiary, issued $33
million of first mortgage notes ("Notes") to a group of insurance
companies. The Notes bear interest at the rate of 8.05% per annum and are
due on December 22, 2001. In 1995, KPP, through a wholly-owned
subsidiary, issued $27 million of additional Notes due February 24, 2002
which bear interest at the rate of 8.37% per annum. The Notes and credit
facility, which are without recourse to the Company, are secured by a
mortgage on the East Pipeline and contain certain financial and
operational covenants.
In June 1996, KPP, through a wholly-owned subsidiary, issued $68 million
of new first mortgage notes bearing interest at rates ranging from 7.08%
to 7.98%. $35.0 million of these notes is due June 2001, $8.0 million is
due June 2003, $10.0 million is due June 2006 and $15.0 million is due
June 2016. The loan, which is without recourse to the Company, is
secured, pari passu with the existing Notes and credit facility, by a
mortgage on the East Pipeline.
In January 1999, KPP, through two wholly-owned subsidiaries, 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, $18.3 million of which bore interest in varying amounts, are
secured by the capital stock of the subsidiaries that acquired the United
Kingdom terminals and by a mortgage on the East Pipeline and, are pari
passu with the existing mortgage notes and credit facility. The term
loans, which are without recourse to the Company, contain certain
financial and operational covenants. $18.3 million of the terms loans
were repaid in July 1999 with the proceeds from a public offering of KPP
units. The remaining portion ($25.8 million) with a fixed rate of 7.14%
is due in January 2002.
Product Marketing Services
In March 1998, a wholly-owned subsidiary of the Company entered into a
credit agreement with a bank that, as amended, provides for a $15 million
revolving credit facility through March 2001. The credit facility bears
interest at variable rates (7.24% at December 31, 1999), has a commitment
fee of 0.25% per annum on unutilized amounts and contains certain
financial and operational covenants. The credit facility, which is
without recourse to the Company, is secured by essentially all of the
tangible and intangible assets of the products marketing business and by
500,000 KPP limited partnership units held by a wholly-owned subsidiary
of the Company. At December 31, 1999, $11.0 million was drawn on the
facility.
Industrial Services
At December 31, 1999, $17.9 million was outstanding under a credit
facility, as amended, that was obtained by a wholly-owned subsidiary in
conjunction with the acquisition of Furmanite. The credit facility, which
is without recourse to the Company, is due 2001, bears interest at the
option of the borrower at variable rates (6.23% at December 31, 1999)
based on either the LIBOR rate or the prime rate plus a differential of
up to 150 basis points, has a commitment fee equal to one-half of one
percent per annum on unutilized amounts, contains certain financial and
operational covenants with respect to the industrial services group of
companies, and restricts the subsidiary from paying dividends to the
Company under certain circumstances. This credit facility is secured by
substantially all of the tangible assets of the industrial services
group.
Parent Company
The 8.75% subordinated debentures are convertible into shares of the
Company's common stock at a conversion price of $17.54 per share. The
Company has satisfied the sinking fund requirements on these subordinated
debentures through 2000.
In December 1995, the Company entered into an agreement with an
international bank that provides for a $15 million revolving credit
facility through December 1, 2000, that bears interest at a variable rate
at the Company's option based on the LIBOR rate plus 100 basis points or
at the prime rate in effect from time to time with a commitment fee of
0.5% per annum of the unused credit facility. The credit facility is
secured by 1.0 million of the Company's limited partnership units in KPP.
No amounts were drawn under the credit facility at December 31, 1999 or
1998.
Consolidated Maturities
Annual sinking fund requirements and debt maturities on consolidated
debt, including capital leases, are: $2.5 million; $2.4 million; $100.1
million (including $70.2 million of KPP debt); $54.9 million (including
$52.8 million of KPP debt); and $10.1 million (including $8.0 million of
KPP debt), respectively, for each of the five years ending December 31,
2004.
8. CAPITAL STOCK
The changes in the number of issued and outstanding shares of the
Company's preferred and common stock are summarized as follows:
<TABLE>
<CAPTION>
Common Stock
-------------------------------------------------
Preferred Held in
Stock Issued Issued Treasury Outstanding
------------- -------------- -------------- ----------------
<S> <C> <C> <C> <C>
Balance at January 1, 1997................. 568,450 36,491,027 3,156,076 33,334,951
Series F Preferred Stock issued............ 1,000 -- -- --
Common shares issued or purchased.......... -- 36,256 1,190,900 (1,154,644)
------------- -------------- -------------- ----------------
Balance at December 31, 1997............... 569,450 36,527,283 4,346,976 32,180,307
Common shares issued or purchased.......... -- 26,923 797,608 (770,685)
------------- -------------- -------------- -----------------
Balance at December 31, 1998............... 569,450 36,554,206 5,144,584 31,409,622
Common shares issued or purchased.......... -- 83,863 116,383 (32,520)
------------- -------------- -------------- ----------------
Balance at December 31, 1999............... 569,450 36,638,069 5,260,967 31,377,102
============= ============== ============== ================
</TABLE>
Series A Preferred Stock
The Company has 567,950 shares of Cumulative Class A Adjustable Rate
Preferred Stock, Series A ("Series A Preferred") with a stated value of
$10 per share outstanding at December 31, 1999. Dividends accrue
quarterly at the applicable U.S. Treasury rate plus 2.00 percentage
points (200 basis points) ("Applicable Rate"), but will in no event be
less than 7.5% per annum or greater than 14% per annum. If dividends are
in arrears for two or more quarters, additional dividends accrue on all
dividends in arrears at a rate equal to the Applicable Rate plus 25 basis
points for each quarter dividends are in arrears (but not more than the
lesser of 14% per annum or 300 basis points more than the Applicable
Rate). If unpaid accrued dividends exist with respect to eight or more
quarters, the holders of the Series A Preferred may elect individually to
require the Company to redeem their shares at a price of $12 per share
plus dividends in arrears. No such arrearages existed as of December 31,
1999, 1998 and 1997. The Company, at its option, may redeem shares at any
time at a price of $12 per share (reduced ratably to $10 over 15 years
unless unpaid accrued dividends exist with respect to eight or more
quarters) plus accrued and unpaid dividends thereon.
Series B Preferred Stock
On April 9, 1998, the Board of Directors of the Company declared a
dividend distribution of one stock purchase right ("Right") for each
outstanding share of common stock to stockholders of record on April 19,
1998. These Rights are substantially similar to, and were issued in
replacement of, rights that expired on April 19, 1998, pursuant to the
Company's Stockholders Rights Plan. Pursuant to the replacement plan,
each Right entitles the holder, upon the occurrence of certain events, to
purchase from the Company one one-hundredth of a share of Series B Junior
Participating Preferred Stock, no par value, at a price of $15, subject
to adjustment. The Rights will not separate from the common stock or
become exercisable until a person or group either acquires beneficial
ownership of 15% or more of the Company's common stock or commences a
tender or exchange offer that would result in ownership of 20% or more,
whichever occurs earlier. The Rights, which expire on April 19, 2008, are
redeemable in whole, but not in part, at the Company's option at any time
for a price of $0.01 per Right. At December 31, 1999 and 1998 there were
no Series B Preferred shares outstanding.
Series C Preferred Stock
In April 1991, the Company authorized 1,000 shares of Adjustable Rate
Cumulative Class A Preferred Stock, Series C ("Series C Preferred") which
have a preference value of $1.00 per share and are only entitled to a
dividend if the value of the Company's common stock increases. The Series
C Preferred, as an entire class, is entitled to an annual dividend
commencing January 1, 1992, equal to 1/2 of 1% (proportionately reduced
for authorized but unissued shares in the class) of the increase in the
average per share market value of the Company's common stock during the
year preceding payment of the dividend, over $4.79 (the average per share
market value of the Company's common stock during 1990) multiplied by the
average number of shares of common stock outstanding. The Series C
Preferred has mandatory redemption requirements in the event of certain
types of corporate reorganizations and may be redeemed at the option of
the Company during the first 60 days of each year commencing 1994. The
redemption price is the sum of (i) one divided by the average annual
yield of all issues of preferred stock listed on the New York Stock
Exchange during the calendar year preceding the date of the redemption
period times the average dividend for the two most recent years plus (ii)
a pro rata portion of the prior year's dividend based upon the number of
elapsed days in the year of redemption plus (iii) any accrued and unpaid
dividends. The Company may also repurchase the shares of a holder at such
redemption price during the first 60 days following the year in which the
holder first ceases to be an employee of the Company. A holder of the
Series C Preferred may, at his option, require the Company to redeem his
shares at 120% of such redemption price if the Company elects, within 10
days after the most recent dividend payment date, not to pay the accrued
dividend. Upon liquidation, holders of the Series C Preferred are
entitled to receive $1.00 per share plus accrued and unpaid dividends. As
of December 31, 1999, there were 500 shares of Series C Preferred issued
and outstanding to certain officers of the Company.
Series F Preferred Stock
In June 1997, the Company authorized and issued 1,000 shares of
Adjustable Rate Cumulative Class A Preferred Stock, Series F ("Series F
Preferred"), with a stated value of $1.00 per share to an officer of the
Company. The annual dividend for the entire class of Series F Preferred,
which accrues on January 1 of each year and is payable on April 1 of each
year, is calculated by multiplying (i) 1% of the annual improvement (but
not including amounts related to any gains or losses on the sale of any
KPP units nor any amounts related to any other gains or losses in excess
of $1 million on the sale of other capital assets) in the Company's
diluted earnings per share of common stock ("Common EPS"), by (ii) the
amount of issued and outstanding shares of the Company's common stock on
January 1, 1997. The calculation of the annual dividend for 1999 excludes
the gain on the issuance of units by KPP ($10.4 million net of deferred
taxes) as well as the benefit of recognizing tax loss carryforwards
($37.1 million reduction in the valuation allowance) and calculations of
the annual dividend for subsequent periods will be adjusted for any tax
provision required as a result of recognizing the benefit of the tax loss
carryforwards in 1999.
If the Common EPS increase for the five-year period ending December 31,
2001 has not exceeded 20% compounded annually, the series will be
redeemed for $1.00 per share on April 1, 2002. Otherwise, the series will
be redeemed on April 1, 2002 at a "Redemption Price" for the entire class
of the series equal to the average percentage increase in excess of 20%
in Common EPS for such period multiplied by (i) seventy-five hundredths
of 1% of the cumulative Common EPS for each calendar year ended for which
the series is outstanding, and (ii) the amount of issued and outstanding
shares of the Company's Common Stock on January 1, 1997.
Redemption of the series may be deferred at the Company's option until no
later than April 1, 2003 if the Common EPS increase for the 2001 calendar
year is less than 15%. The Series F Preferred may be redeemed at the
option of the holder at 120% of the Redemption Price if the Company fails
to pay an annual dividend within 10 days of the due date or in the event
of a change of control, or at the Redemption Price in the event of
certain corporate reorganizations or the authorization of a class of
preferred stock ranking higher in priority to the Series F Preferred.
Upon liquidation, holders of the Series F Preferred are entitled to
receive $1.00 per share plus accrued and unpaid dividends.
Stock Compensation Plans
The Company has stock option plans and agreements for officers, directors
and key employees. The options granted under these plans and agreements
generally expire ten years from date of grant. All options were granted
at prices greater than or equal to the market price at the date of grant
or repricing. At December 31, 1999, options on 2,066,800 shares at prices
ranging from $1.63 to $5.63 were outstanding, of which 733,951 were
exercisable at prices ranging from $1.63 to $5.63.
In accordance with the provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), the Company applies APB Opinion
25 and related interpretations in accounting for its stock option plans
and, accordingly, does not recognize compensation cost based on the fair
value of the options granted at grant date as prescribed by SFAS 123. The
Black-Scholes option pricing model has been used to estimate the value of
stock options issued and the assumptions in the calculations under such
model include stock price variance or volatility ranging from 11.74% to
11.88% based on weekly average variances of the stock for the five year
period preceding issuance, a risk-free rate of return ranging from 5.07%
to 6.07% based on the 30-year U.S. treasury bill rate for the five-year
expected life of the options, and no dividend yield. Using estimates
calculated by such option pricing model, pro forma net income, basic
earnings per share and diluted earnings per share would have been
$63,155,359, $1.99 and $1.98, respectively for the year ended December
31, 1999, as compared to the reported amounts of $63,772,000, $2.01 and
$1.94, respectively. For the year ended December 31, 1998, pro forma net
income, basic earnings per share and diluted earnings per share would
have been $13,020,000, $0.39 and $0.39, respectively for the year ended
December 31, 1998, as compared to the reported amounts of $13,576,000,
$0.41 and $0.40, respectively. For the year ended December 31, 1997, pro
forma net income, basic earnings per share and diluted earnings per share
would have been $10,327,000, $0.30 and $0.30, respectively, as compared
to the reported amounts of $10,643,000, $0.31 and $0.30, respectively.
The changes in stock options outstanding for the Company's plans for
1999, 1998 and 1997 were as follows:
Average Price
Shares per Share
---------- -------------
Outstanding at January 1, 1997 . 1,620,178 $ 2.60
Granted ........................ 138,872 $ 3.74
Exercised ...................... (64,535) $ 2.29
Forfeited ...................... (116,000) $ 2.63
----------
Outstanding at December 31, 1997 1,578,515 $ 2.70
Granted ........................ 617,347 $ 4.98
Exercised ...................... (59,910) $ 2.51
Forfeited ...................... (44,600) $ 3.75
----------
Outstanding at December 31, 1998 2,091,352 $ 3.36
Granted ........................ 210,191 $ 4.29
Exercised ...................... (80,121) $ 2.64
Forfeited ...................... (154,622) $ 4.14
----------
Outstanding at December 31, 1999 2,066,800 $ 3.42
==========
Deferred Stock Unit Plan
In 1996, the Company initiated a Deferred Stock Unit Plan (the "DSU
Plan"), pursuant to which key employees of the Company have, from time to
time, been given the opportunity to defer a portion of their
compensation, for a specified period toward the purchase of deferred
stock units ("DSUs"), an instrument designed to track the Company's
Common Stock. Under the plan, as amended in 1998, DSUs are purchased at a
value equal to the closing price of the Company's common stock on the day
by which the employee must elect (if they so desire) to participate in
the DSU Plan; which date is established by the Compensation Committee,
from time to time (the "Election Date"). During a vesting period of one
to three years following the Election Date, a participant's DSUs vest
only in an amount equal to the lesser of the compensation actually
deferred to date or the value (based upon the then-current closing price
of the Company's common stock) of the pro-rata portion (as of such date)
of the number of DSUs acquired. After the expiration of the vesting
period, which is typically the same length as the deferral period, the
DSUs become fully vested, but may only be distributed through the
issuance of a like number of shares of the Company's common stock on a
pre-selected date, which is irrevocably selected by the participant on
the Election Date and which is typically no earlier than the expiration
of the vesting period and no later than ten years after the Election
Date. DSU accounts are unfunded by the Company and do not bear interest.
Each person that elects to participate in the DSU Plan is awarded, under
the Company's 1994 Stock Incentive Plan, an option to purchase a number
of shares of the Company's common stock ranging from one-half to one and
one-half times (depending on the length of deferral) the number of DSUs
purchased by such person at 100% of the closing price of the Company's
common stock on the Election Date, which options become exercisable over
a specified period after the grant, according to a schedule determined by
the Compensation Committee.
<PAGE>
9. EARNINGS PER SHARE
The following is a reconciliation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
Weighted
Average
Net Common Per-Share
Income Shares Amount
--------------- -------------- --------------
<S> <C> <C> <C>
Year Ended December 31, 1999
Net income................................ $ 63,772,000
Dividend applicable to preferred stock.... (487,000)
---------------
Basic EPS -
Net income applicable to common stock.. 63,285,000 31,452,868 $ 2.01
==============
Effect of dilutive securities -
Common stock options and DSUs.......... - 1,099,269
--------------- --------------
Diluted EPS -
Income applicable to common stock, DSUs
and assumed options exercised........ $ 63,285,000 32,552,137 $ 1.94
=============== ============== ==============
Year Ended December 31, 1998
Net income................................ $ 13,576,000
Dividend applicable to preferred stock.... (508,000)
----------------
Basic EPS -
Net income applicable to common stock.. 13,068,000 31,739,572 $ .41
==============
Effect of dilutive securities -
Common stock options and DSUs.......... - 1,057,846
--------------- --------------
Diluted EPS -
Income applicable to common stock, DSUs
and assumed options exercised........ $ 13,068,000 32,797,418 $ .40
=============== ============== ==============
Year Ended December 31, 1997
Net income................................ $ 10,643,000
Dividend applicable to preferred stock.... (538,000)
----------------
Basic EPS -
Net income applicable to common stock.. 10,105,000 32,547,371 $ .31
==============
Effect of dilutive securities -
Common stock options................... - 585,926
--------------- --------------
Diluted EPS -
Income applicable to common stock
and assumed options exercised........ $ 10,105,000 33,133,297 $ .30
=============== ============== ==============
</TABLE>
Options to purchase 605,600, 189,523 and 15,000 shares of common stock at
weighted average prices of $4.90, $5.50 and $5.00, were outstanding at
December 31, 1999, 1998 and 1997, respectively, but were not included in
the computation of diluted EPS 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 EPS because the effect of assumed
conversion is anti-dilutive.
10. COMMITMENTS AND CONTINGENCIES
The Company leases vehicles, office space, office equipment and other
items of personal property under leases expiring at various dates.
Management expects that, in the normal course of business, leases that
expire will be renewed or replaced by other leases. Total rent expense
under operating leases was $5.9 million for 1999, $3.8 million for 1998
and $3.5 million for 1997.
<PAGE>
At December 31, 1999, minimum rental commitments under all capital leases
and operating leases for future years are as follows:
Capital Operating
Leases Leases
----------- -----------
2000 ................................. $ 388,000 $ 4,432,000
2001 ................................. 384,000 3,263,000
2002 ................................. 199,000 1,926,000
2003 ................................. 135,000 1,275,000
2004 ................................. -- 712,000
Thereafter ........................... -- 1,109,000
----------- -----------
Total minimum lease payments .............. 1,106,000 $12,717,000
===========
Less amounts representing interest ........ (120,000)
-----------
Present value of net minimum lease payments $ 986,000
===========
KPP makes quarterly distributions of 100% of its Available Cash (as
defined in the Partnership Agreement) to holders of limited partnership
units and the general partner. Available Cash consists generally of all
the cash receipts of the Partnership less all of its cash disbursements
and reserves. The assets of KPP, other than Available Cash, cannot be
distributed without a majority vote of the non-affiliated unitholders.
The operations of the Company are subject to Federal, state and local
laws and regulations relating to protection of the environment. Although
KPP 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 KPP.
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 KPP, could result in substantial costs and liabilities
to KPP. KPP has recorded an undiscounted reserve in other liabilities for
environmental claims of $8.2 million, including $7.6 million related to
acquisitions of pipelines and terminals. During 1999 and 1998,
respectively, KPP incurred $0.9 million and $0.6 million of costs related
to such acquisition reserves and reduced the liability accordingly.
Certain subsidiaries of KPP are defendants in a lawsuit filed in a Texas
state court in 1997 by Grace Energy Corporation ("Grace"), the entity
from which 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. On January 20, 2000, the Massachusetts Department of
Environmental Protection notified KPP's subsidiary that it had reason to
believe that the subsidiary was also a Potentially Responsible Party. The
subsidiary replied to that letter denying any responsibility for the
Massachusetts response and/or remediation. Future expenses could
potentially include claims by the United States Government, as described
below. Grace alleges that subsidiaries of 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 these subsidiaries are
responsible for all present and future remediation expenses for these
leaks and that Grace has no obligation to indemnify these subsidiaries
for these expenses. The case is set for trial in May 2000.
The consistent position of KPP's subsidiaries 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 an order
granting partial summary judgment, the trial judge has ruled that the
pipeline was an asset of the company acquired by the subsidiary. The
subsidiaries are continuing with their defense that the pipeline had been
abandoned prior to the acquisition of ST Services and could not have been
included in the assets they acquired. The defendants have also
counter-claimed against Grace for fraud and mutual mistake, among other
defenses. If they are successful at trial with their defenses and/or
counterclaims, the judge's partial summary judgment order will be moot.
The defendants also believe they have certain rights to indemnification
from Grace under the acquisition agreement with Grace. These rights
include claims against Grace for breaches of numerous representations in
the agreement including the environmental representations. The
acquisition agreement includes Grace's agreement to indemnify the
subsidiaries 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 ("MMR"), 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's
subsidiaries have voluntarily responded to an invitation from the
Government to provide information indicating that they do not own the
pipeline. In connection with a court-ordered mediation between Grace and
the subsidiaries, 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. KPP believes that the ultimate cost of the
remediation, while substantial, will be considerably less than the
Government has indicated. KPP also believes that, even if the lawsuit
determines that the subsidiary is the owner of the pipeline, the
defendants have defenses to any claim of the Government. Any claims by
the Government could be material in amount and, if made and ultimately
sustained against KPP's subsidiaries, could adversely affect KPP's
ability to pay cash distributions to its unitholders, including the
Company.
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.
11. 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
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. General Corporate includes compensation and
benefits paid to officers and employees of the Company, insurance
premiums, general and administrative costs, tax and financial reporting
costs, legal and audit fees not reasonably allocable to specific business
segments. Effective July 1, 1999, the responsibilities of certain
officers of the Industrial Services and Information Services segments
were expanded and their compensation and benefit costs (which totaled
approximately $0.2 million for the six month period ended December 31,
1999 for each of these segments) were transferred to General Corporate
and no longer considered by the Company in assessing the measurement of
such segment's results. In 1999, the Company managed the Product
Marketing Segment as a separate operating segment. Those operations were
previously combined with the Pipeline and Terminaling segment.
Information for 1998 has been recast to be consistent with the 1999
presentation.
The Company measures segment profit as operating income. Total assets are
those assets, including excess of cost over fair value of net assets of
acquired businesses, controlled by each reportable segment.
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------
1999 1998 1997
--------------- -------------- --------------
<S> <C> <C> <C>
Business segment revenues:
Pipeline and terminaling services........... $ 158,028,000 $ 125,812,000 $ 121,156,000
Product marketing services.................. 212,298,000 114,220,000 -
Information services........................ 37,358,000 20,709,000 7,557,000
Industrial services......................... 98,075,000 115,116,000 108,223,000
--------------- -------------- --------------
$ 505,759,000 $ 375,857,000 $ 236,936,000
=============== ============== ==============
Pipeline and terminaling services segment revenues:
Pipeline operations....................... $ 67,607,000 $ 63,421,000 $ 61,320,000
Terminaling operations.................... 90,421,000 62,391,000 59,836,000
--------------- -------------- --------------
$ 158,028,000 $ 125,812,000 $ 121,156,000
=============== ============== ==============
Industrial services segment revenues:
Underpressure services...................... $ 38,873,000 $ 43,208,000 $ 37,769,000
Turnaround services......................... 43,859,000 52,924,000 48,655,000
Other services.............................. 15,343,000 18,984,000 21,799,000
--------------- -------------- --------------
$ 98,075,000 $ 115,116,000 $ 108,223,000
=============== ============== ==============
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------
1999 1998 1997
--------------- -------------- --------------
<S> <C> <C> <C>
Business segment profit:
Pipeline and terminaling services........... $ 64,311,000 $ 55,117,000 $ 53,420,000
Product marketing services.................. 1,495,000 940,000 -
Information services........................ 5,627,000 3,690,000 2,709,000
Industrial services ........................ 1,750,000 6,656,000 7,438,000
General corporate........................... (4,944,000) (5,091,000) (4,907,000)
--------------- -------------- --------------
Operating income.......................... 68,239,000 61,312,000 58,660,000
Interest expense............................ (17,695,000) (15,714,000) (15,531,000)
Other income (expense)...................... 771,000 868,000 (163,000)
Amortization of excess of cost over fair value
of net assets of acquired businesses...... (2,172,000) (1,948,000) (1,879,000)
--------------- -------------- --------------
Income before interest of outside
non-controlling partners in KPP's net
income, gain on issuance of units by KPP
and income taxes.......................... $ 49,143,000 $ 44,518,000 $ 41,087,000
=============== ============== ==============
Business segment assets:
Depreciation and amortization:
Pipeline and terminaling services......... $ 15,043,000 $ 12,148,000 $ 11,711,000
Product marketing services................ 15,000 9,000 -
Information services...................... 280,000 192,000 151,000
Industrial services....................... 3,480,000 3,854,000 4,563,000
General corporate......................... - - 290,000
--------------- -------------- --------------
$ 18,818,000 $ 16,203,000 $ 16,715,000
=============== ============== ==============
Capital expenditures (excluding acquisitions):
Pipeline and terminaling services......... $ 14,568,000 $ 9,401,000 $ 10,641,000
Product marketing services................ 52,000 - -
Information services...................... 391,000 281,000 327,000
Industrial services....................... 2,328,000 2,574,000 2,013,000
General corporate......................... - - 30,000
--------------- -------------- --------------
$ 17,339,000 $ 12,256,000 $ 13,011,000
=============== ============== ==============
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------
1999 1998 1997
--------------- -------------- --------------
<S> <C> <C> <C>
Total assets:
Pipeline and terminaling services......... $ 366,935,000 $ 310,825,000 $ 270,055,000
Product marketing services................ 28,101,000 12,233,000 -
Information services...................... 17,911,000 11,082,000 5,429,000
Industrial services....................... 108,094,000 110,603,000 116,503,000
General corporate......................... 39,274,000 3,302,000 10,286,000
--------------- -------------- --------------
$ 560,315,000 $ 448,045,000 $ 402,273,000
=============== ============== ==============
</TABLE>
The following geographical area data includes revenues based on location
of the operating segment and net property and equipment based on physical
location:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------
1999 1998 1997
--------------- -------------- --------------
<S> <C> <C> <C>
Geographical area revenues:
United States............................ $ 415,640,000 $ 296,336,000 $ 162,367,000
Europe................................... 79,089,000 68,050,000 66,431,000
Asia-Pacific............................. 11,030,000 11,471,000 8,138,000
--------------- -------------- --------------
$ 505,759,000 $ 375,857,000 $ 236,936,000
=============== ============== ==============
Geographical area operating income:
United States............................ $ 59,767,000 $ 54,858,000 $ 51,384,000
Europe................................... 7,915,000 5,456,000 6,139,000
Asia-Pacific............................. 557,000 998,000 1,137,000
--------------- -------------- --------------
$ 68,239,000 $ 61,312,000 $ 58,660,000
=============== ============== ==============
Geographical area net property and equipment:
United States............................ $ 278,787,000 $ 271,228,000 $ 249,470,000
Europe................................... 47,993,000 7,781,000 10,419,000
Asia-Pacific............................. 1,364,000 1,517,000 1,472,000
--------------- -------------- --------------
$ 328,144,000 $ 280,526,000 $ 261,361,000
=============== ============== ==============
</TABLE>
12. ACCRUED EXPENSES
Accrued expenses are comprised of the following components at December
31, 1999 and 1998:
December 31,
-------------------------
1999 1998
----------- -----------
Accrued distribution payable .... $ 9,250,000 $ 7,127,000
Accrued income taxes ............ 1,545,000 2,212,000
Accrued taxes other than income . 4,217,000 2,631,000
Accrued interest ................ 2,554,000 2,454,000
Accrued compensation and benefits 3,729,000 3,735,000
Accrued environmental ........... 2,482,000 1,702,000
Deferred terminaling fees ....... 3,075,000 3,526,000
Other accrued expenses .......... 14,318,000 17,922,000
----------- -----------
$41,170,000 $41,309,000
=========== ===========
<PAGE>
13. SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental information on cash paid during the period for:
Year Ended December 31,
-------------------------------------------------
1999 1998 1997
-------------- --------------- ------------
Interest............ $ 16,972,000 $ 15,385,000 $ 15,373,000
============== =============== ============
Income taxes........ $ 1,447,000 $ 2,310,000 $ 1,535,000
============== =============== ============
14. FAIR VALUE OF FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
The estimated fair value of cash equivalents, accounts receivable and
accounts payable approximate their carrying amounts due to the relatively
short period to maturity of these instruments. The estimated fair value
of all debt (excluding capital leases) as of December 31, 1999 and 1998
was approximately $219 million and $217 million as compared to the
carrying value of $213 million and $211 million, respectively. These fair
values were estimated using discounted cash flow analysis, based on the
Company's current incremental borrowing rates for similar types of
borrowing arrangements, when quoted market prices were not available. The
Company has not determined the fair value of its capital leases as it is
not practicable. The estimates presented above are not necessarily
indicative of the amounts that would be realized in a current market
exchange. The Company has no derivative financial instruments.
The Company does not believe that it has a significant concentration of
credit risk at December 31, 1999, as the Company's accounts receivable
are generated from four distinct business segments with customers located
throughout the United States, Europe and Asia-Pacific.
15. QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly operating results for 1999 and 1998 are summarized as follows:
<TABLE>
<CAPTION>
Quarter Ended
-----------------------------------------------------------------------
March 31, June 30, September 30, December 31,
-------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
1999:
Revenues................ $ 99,356,000 $ 122,951,000 $ 134,280,000 $ 149,172,000
============== =============== ============== ==============
Operating income........ $ 15,212,000 $ 16,119,000 $ 19,251,000 $ 17,657,000
============== =============== ============== ==============
Net income ............. $ 2,309,000 $ 4,012,000 $ 15,547,000(a) $ 41,904,000(b)
============== =============== ============== ==============
Earnings per
common share:
Basic................ $ .07 $ .12 $ .49 $ 1.33
============== =============== ============== ==============
Diluted.............. $ .07 $ .12 $ .47 $ 1.28
============== =============== ============== ==============
1998:
Revenues................ $ 59,501,000 $ 100,492,000 $ 105,476,000 $ 110,388,000
============== =============== ============== ==============
Operating income........ $ 12,607,000 $ 14,981,000 $ 17,907,000 $ 15,817,000
============== =============== ============== ==============
Net income ............. $ 1,836,000 $ 3,365,000 $ 4,434,000 $ 3,941,000
============== =============== ============== ==============
Earnings per
common share:
Basic................ $ .05 $ .10 $ .14 $ .12
============== =============== ============== ==============
Diluted.............. $ .05 $ .10 $ .13 $ .12
============== =============== ============== ==============
</TABLE>
(a) See Note 3 regarding gain on issuance of units by KPP.
(b) See Note 4 regarding reduction in valuation allowance for deferred
tax assets.
<PAGE>
Schedule I
KANEB SERVICES, INC. (PARENT COMPANY)
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
General and administrative expenses .... $ (4,944,000) $ (5,091,000) $ (4,617,000)
Depreciation and amortization .......... -- -- (290,000)
Interest expense ....................... (2,218,000) (2,212,000) (2,239,000)
Intercompany fees and expenses ......... 3,189,000 3,022,000 2,266,000
Interest income ........................ 264,000 284,000 372,000
Other income (expense) ................. 1,413,000 1,354,000 (1,024,000)
Equity in income of subsidiaries and KPP 26,906,000 16,219,000 16,175,000
------------ ------------ ------------
Income before income tax expense ....... 24,610,000 13,576,000 10,643,000
Income tax benefit ..................... 39,162,000 -- --
------------ ------------ ------------
Net income ............................. 63,772,000 13,576,000 10,643,000
Dividends applicable to preferred stock 487,000 508,000 538,000
------------ ------------ ------------
Net income applicable to common stock . $ 63,285,000 $ 13,068,000 $ 10,105,000
============ ============ ============
Earnings per common share:
Basic ............................... $ 2.01 $ .41 $ .31
============ ============ ============
Diluted ............................. $ 1.94 $ .40 $ .30
============ ============ ============
</TABLE>
See "Notes to Consolidated Financial Statements" of
Kaneb Services, Inc. and Subsidiaries included in this report.
<PAGE>
Schedule I
(Continued)
KANEB SERVICES, INC. (PARENT COMPANY)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
------------------------------
1999 1998
------------- -------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents ...................... $ 9,740,000 $ 875,000
Prepaid expenses and other current assets ...... 6,484,000 177,000
------------- -------------
Total current assets .............................. 16,224,000 1,052,000
------------- -------------
Property and equipment ............................ 3,848,000 3,848,000
Less accumulated depreciation ..................... (3,848,000) 3,848,000
------------- -------------
Net property and equipment ................... -- --
------------- -------------
Investments in, advances to and notes receivable
from subsidiaries and KPP ....................... 133,987,000 123,567,000
Deferred tax and other assets ..................... 33,649,000 2,250,000
------------- -------------
$ 183,860,000 $ 126,869,000
============= =============
LIABILITIES AND EQUITY
Current liabilities - accounts payable
and accrued expenses ........................... $ 5,600,000 $ 7,367,000
Long-term debt .................................... 23,666,000 23,666,000
Deferred credits and other liabilities ............ 4,928,000 8,391,000
Stockholders' equity:
Preferred stock, without par value ............. 5,792,000 5,792,000
Common stock, without par value ................ 4,249,000 4,239,000
Additional paid-in capital ..................... 197,454,000 197,263,000
Treasury stock, at cost ........................ (30,278,000) (29,775,000)
Other .......................................... (141,000) (141,000)
Accumulated deficit ............................ (25,138,000) (88,423,000)
Accumulated comprehensive income (loss) -
foreign currency translation adjustment ...... (2,272,000) (1,510,000)
------------- -------------
Total stockholders' equity ................. 149,666,000 87,445,000
------------- -------------
$ 183,860,000 $ 126,869,000
============= =============
</TABLE>
See "Notes to Consolidated Financial Statements" of
Kaneb Services, Inc. and Subsidiaries included in this report.
<PAGE>
Schedule I
(Continued)
KANEB SERVICES, INC. (PARENT COMPANY)
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------
1999 1998 1997
----------------- ---------------- ------------------
<S> <C> <C> <C>
Operating activities:
Net income ....................................... $ 63,772,000 $ 13,576,000 $ 10,643,000
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization................... - - 290,000
Equity in net income of subsidiaries and KPP.... (26,906,000) (16,219,000) (16,175,000)
Deferred income taxes........................... (36,918,000) - -
Changes in current assets and liabilities:
Accounts receivable........................... - - 102,000
Prepaid expenses.............................. (1,057,000) (177,000) 818,000
Accounts payable and accrued expenses ........ (1,767,000) 3,380,000 (4,439,000)
----------------- ---------------- -------------------
Net cash provided by (used in)
operating activities........................ (2,876,000) 560,000 (8,761,000)
----------------- ---------------- -------------------
Investing activities:
Capital expenditures.............................. - - (30,000)
Change in other assets, net....................... (3,956,000) 667,000 (3,082,000)
----------------- ---------------- -------------------
Net cash provided by (used in)
investing activities........................ (3,956,000) 667,000 (3,112,000)
----------------- ---------------- -------------------
Financing activities:
Preferred stock dividends paid.................... (487,000) (508,000) (538,000)
Change in investments in, advances to and notes
receivable from subsidiaries and KPP............ 16,486,000 (3,213,000) 16,075,000
Common stock issued............................... 253,000 194,000 33,000
Purchase of treasury stock........................ (555,000) (4,868,000) (4,585,000)
----------------- ----------------- -------------------
Net cash provided by (used in) financing
activities.................................. 15,697,000 (8,395,000) 10,985,000
----------------- ---------------- ------------------
Increase (decrease) in cash and cash equivalents..... 8,865,000 (7,168,000) (888,000)
Cash and cash equivalents at beginning of year....... 875,000 8,043,000 8,931,000
----------------- ---------------- ------------------
Cash and cash equivalents at end of year............. $ 9,740,000 $ 875,000 $ 8,043,000
================= ================ ==================
</TABLE>
See "Notes to Consolidated Financial Statements" of
Kaneb Services, Inc. and Subsidiaries included in this report.
<PAGE>
Schedule II
KANEB SERVICES, INC.
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
<TABLE>
<CAPTION>
Additions
----------------------------------------------
Balance at Charged to Charged to Balance at
Beginning of Costs and Other End of
Descriptions Period Expenses Accounts Deductions Period
- ------------------------------------ ------------- ----------- ------------- ------------ -----------
ALLOWANCE DEDUCTED FROM
ASSETS TO WHICH THEY APPLY
<S> <C> <C> <C> <C> <C>
Year Ended December 31, 1999:
For doubtful receivables
classified as current assets... $ 925 $ 1,117 $ (119)(a) $ (391)(b) $ 1,532
============= =========== ============= =========== ===========
For deferred tax asset valuation
allowance classified as
noncurrent assets.............. $ 52,797 $ -- $ -- $ (43,143) $ 9,654
============= =========== ============= ============ ===========
Year Ended December 31, 1998:
For doubtful receivables
classified as current assets... $ 570 $ 430 $ 99(a) $ (174)(b) $ 925
============= =========== ============= ============ ===========
For deferred tax asset valuation
allowance classified as
noncurrent assets.............. $ 55,684 $ -- $ -- $ (2,887) $ 52,797
============= =========== ============= =========== ===========
Year Ended December 31, 1997:
For doubtful receivables
classified as current assets... $ 666 $ 246 $ (19)(a) $ (323)(b) $ 570
============= =========== ============= =========== ===========
For deferred tax asset valuation
allowance classified as
noncurrent assets.............. $ 86,698 $ -- $ -- $ (31,014) $ 55,684
============= =========== ============= =========== ===========
</TABLE>
Notes:
(a) Foreign currency translation adjustments.
(b) Receivable write-offs and reclassifications, net of recoveries.
See "Notes to Consolidated Financial Statements" of
Kaneb Services, Inc. and Subsidiaries included in this report.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, Kaneb Services, Inc. has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
KANEB SERVICES, INC.
By: JOHN R. BARNES
President and Chief Executive Officer
Date: March 24, 2000
Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of Kaneb
Services, Inc. and in the capacities and on the date indicated.
Signature Title Date
Principal Executive Officer
JOHN R. BARNES President, Chief Executive March 24, 2000
Officer and Director
Principal Accounting Officer
MICHAEL R. BAKKE Controller March 24, 2000
Directors
SANGWOO AHN Director March 24, 2000
JOHN R. BARNES Director March 24, 2000
FRANK M. BURKE, JR. Director March 24, 2000
CHARLES R. COX Director March 24, 2000
HANS KESSLER Director March 24, 2000
JAMES R. WHATLEY Director March 24, 2000
<PAGE>
EXHIBIT LIST
Exhibit
Number Title
- -------- ----------------------------------------------------------------------
10.13 Amendments to the Amended and Restated Loan Agreement between
Furmanite PLC, Bank of Scotland and certain other Lenders, dated May
1, 1991, as amended, (the "Furmanite Loan Agreement"), filed as
Exhibit 10.8 of the exhibits to the Registrant's Form 10-K for the
year ended December 31, 1994, Exhibit 10.12 of the exhibits to the
Registrant's Form 10-K for the year ended December 31, 1996, and
Exhibit 10.12 of the Registrant's Form 10-K for the year ended
December 31, 1997, which exhibits are hereby incorporated by
reference.
21 List of Subsidiaries
23 Consents of independent accountants: KPMG LLP and
PricewaterhouseCoopers LLP
27 Financial Data Schedule
Exhibit 10.13
AMENDMENT NO. 6 TO
AMENDED AND RESTATED LOAN AGREEMENT AND WAIVER
AMENDMENT and WAIVER (this "Amendment") dated as of March 31, 1999
among FURMANITE PLC (formerly KANEB UK PLC), a company incorporated under the
laws of England and Wales (registered number 2530049) (the "Borrower"),
FURMANITE WORLDWIDE INC. (formerly KANEB INTERNATIONAL, INC.), a Delaware
corporation ("Holding"), the financial institutions which are party to the Loan
Agreement hereinafter referred to (each a "Bank" and collectively, the "Banks"),
and BANK OF SCOTLAND, as agent for the Banks under such Loan Agreement (in such
capacity, the "Agent"), to the AMENDED AND RESTATED LOAN AGREEMENT dated as of
May 3,1991 (as amended by an amendments thereto dated as of December 7, 1994,
July 15, 1996, June 27, 1997, December 15, 1997 and December 22, 1997, the "Loan
Agreement") among the Borrower, Holding, the Banks and the Agent.
W I T N E S S E T H
WHEREAS, the Borrower has asked the Agent and the Banks to waive the
Borrower's defaults arising under Section 7.1(a) of the Loan Agreement from the
Borrower's failure to provide to the Agent and the Banks monthly financial
information as required there in and, on and subject to the terms hereof, the
Agent and the Banks are amendable to granting such a waiver;
WHEREAS, the Borrower and Holding have advised the Agent and the Banks
that they desire that the Loan Agreement be amended so that the financial
covenant set forth in Section 8.22 is calculated on a rolling four quarter basis
and so that certain special charges referred to below are excluded from the
calculation of EBITDA for certain quarters and, on and subject to the terms
hereof, the Agent and the Banks are willing to so amend the Loan Agreement; and,
WHEREAS, the Borrower and Holding have requested that the Agent and the
Banks extend the time for deliver of certain agreements and other documents
required to be delivered pursuant to the Consent and Amendment dated as of
December 22, 1997 (the "December 1997 Consent") and, on and subject to the terms
hereof, the Agent and the Banks are willing to so extend such time for delivery;
NOW, THEREFORE, it is agreed:
1. Definitions. All terms used herein which are defined in the Loan
Agreement (including, to the extent any such terms are to be amended by this
Amendment, as if such terms were already amended by this Amendment, unless the
context shall indicate otherwise) shall have the same meanings when used herein
unless otherwise defined herein. All references to Sections in this Amendment
shall be deemed references to Sections in the Loan Agreement unless otherwise
specified.
2. Effect of Amendment - As used in the Loan Agreement (including all
Exhibit thereto), the Notes and the other Loan Documents and all other
instruments and documents executed in connection with any of the foregoing, on
and subsequent to the applicable effectiveness date set forth herein any
reference to the Loan Agreement shall mean the Loan Agreement as amended hereby.
3. Defined Terms.
(a) Annex I to the Loan Agreement is hereby amended by adding the following
paragraphs thereto in the appropriate alphabetical place:
(i) "May 1999 Cost Schedule" shall mean the schedule of cost items
entitled "Furmanite Worldwide, Inc. Estimated 1999 Restructuring
Costs" sent by Holding to the Agent by telecopy on May 10, 1999,
(ii) "New Sixth Amendment" shall mean the amendment to the Agreement (as
then in effect) designated as Amendment No. 6 to Amended and Restated
Loan Agreement and Waiver and dated as of March 31, 1999,
(iii)"New Sixth Amendment Date" shall have the same meaning as the term
"Amendment Closing Date" in the New Sixth Amendment.
(iv) "NSTAD" shall mean the New Sixth Amendment Date.
(b) The following defined term in Annex I is hereby amended to read in its
entirety as follows:
"EBITDA" for any Person for any period shall mean the EBIT of such
Person and its consolidated Subsidiaries for such period plus (A) (to the extent
deducted in computing EBIT for such period) depreciation, amortization and other
non-cash items plus (B) (to the extent deducted in computing EBIT for such
quarter and without duplication of any cost added to EBIT for such quarter or
any preceding quarter pursuant to clause (A)), for any quarter ending in 1999,
any cost identified on the May 1999 Cost Schedule; provided that no such cost
shall be added to EBIT if such cost or the taking of the action or entering into
of the transaction to which such cost applies is prohibited by the Loan
Agreement or any other Loan Document".
4. Section 8.22 is amended by restating subsection (b) thereof in its
entirety as follows;
"(b) Neither Holding nor the Borrower will permit the ratio of (x)
Long-Term Debt of the Consolidated Group at the end of any fiscal quarter to (y)
EBITDA of the Consolidated Group for the period of four fiscal quarters ending
on the date of such fiscal quarter to exceed:
(A) 4.0:1 at the end of any fiscal quarter ending on or after September
30, 1994 until and including the last day of the fiscal quarter ending
on September 30, 1996; or
(B)3.5:1 at the end of the fiscal quarter ending December 31, 1996 or at
the end of any fiscal quarter thereafter. "
5. Section 7.1 Section 7. 1 (a) of the Loan Agreement is amended by
restating clause (i) thereof in its entire as follows:
"(i) As soon as practicable and in any event within 35 days after the
close of each of the first two calendar months of each fiscal
quarters of Holding and its Subsidiaries, the monthly management
reports prepared by Holding and its Subsidiaries, which reports
shall (among other things) unaudited consolidated statement(s) of
income of (x) FAI and its Subsidiaries, (y) Borrower and its
Subsidiaries, and (z) the Combined Group, in each case for the
Fiscal Year to date, and such other material as the Agent shall
request"
6. Waivers: Extensions of Time.
(a) In reliance on the agreements and the accuracy of the representations
and warranties of Borrower and Holding contained elsewhere in this Amendment,
the Agent and the Banks hereby waive the Events of Default arising from the
Borrower's failure to deliver the financial statements required by Section 7.1
(a)(i) of the Loan Agreement in respect of months ending prior to the date
hereof.
(b) In reliance on the agreements and the accuracy of the representations
and warranties of the Borrower and Holding contained elsewhere in this
Amendment, effective as of January 15, 1998, the Agent and the Banks hereby
agree that the December 1997 Consent is amended by changing the deadlines set
forth in Sections II(c), II(d), II(e) and II(l) f such consent from the time or
date set forth in such Sections to June 15, 1999 (or such later date (if any) as
may be spccified in writing by the Agent).
7. Agreement of Holding to the Borrower
(a) To induce the Agent and the Banks to enter into this Amendment and
grant the waivers contained herein, the Borrower and Holding hereby jointly and
severally agree for the benefit of the Agent and the Banks that on or prior to
June 15, 1999 (or such later date, if any, as may be specified in writing by the
Agent), each of Holding and the Borrower, at the expense of the Borrower, will
fully perform each obligation applicable to it set forth in Section II(c),
Section II(d), Section II(e) and Section II(1) of the December 1997 Consent. Any
breach of the foregoing agreement shall constitute an Event of Default under
Section 9.3 of the Loan Agreement as fully as if said agreement was specifically
referred to therein.
(b) The Borrower affirms and acknowledges its obligations under Section
7.l(a)(i) of the Loan Agreement (as amended hereby).
8. Representations. To induce the Agent and the Banks to enter into this
Amendment and grant the waivers contained herein, Holding and the Borrower
hereby jointly and severally represent and warrant to the Banks and the Agent as
follows (which representations and warranties are made as of the date hereof and
as of the Amendment Closing Date, shall survive the execution, delivery and
effectiveness of this Amendment and for purposes of Section 9 of the Loan
Agreement shall constitute representations and warranties made under the Loan
Agreement as fully as if the same were set forth in full in the Loan Agreement):
(a) The execution and delivery by each Credit Party (to the extent it is
party thereto) of this Amendment, and all other amendments and agreements being
delivered on the NSTAD or pursuant thereto and such Person's performance of such
Loan Documents and the Agreement as amended by this Amendment and the
consummation of the transactions contemplated under this Amendment and such
other Loan Documents have been duly authorized by all necessary corporate and
stockholder action.
(b) This Amendment and the Loan Agreement as amended by this Amendment are
the legal, valid and binding obligations of the Credit Parties party thereto,
enforceable in accordance with their respective terms subject, as to
enforceability, to applicable bankruptcy, insolvency, reorganization and similar
laws affecting the enforcement of creditors' rights generally and to general
principles of equity (regardless of whether such enforcement is considered in a
proceeding in equity or at law).
(c) The Security Documents secure or guarantee, as the case may be, all
Loans and Letters of Credit, whether made or issued before, on or after the
NSTAD). No amendments need to be made in any of the Security Documents, nor does
any action need to be taken, to effectuate the provisions of the preceding
sentence.
(d) The priority of all Liens in favor of the Agent and the Banks under the
Security Documents (whether in respect of Loans or Letters of Credit made or
issued before, on or after the NSTAD) shall be the same as the priority of all
Liens immediately prior to the NSTAD with respect to Loans and Letters of Credit
outstanding immediately prior to the NSTAD.
(e) No Default or Event of Default exists.
(f) All representations and warranties contained in the Loan Agreement and
in the other Loan Documents or otherwise made by the Borrower or any other
Credit Party in connection with any of the foregoing are true and correct in all
material respects with the same effect as though such representations and
warranties were now being made.
(g) The May 1999 Cost Schedule is Holdings and the Borrower's goodfaith
estimate of certain costs that the Borrower expects to incur in 1999. Each of
the Borrower and Holding acknowledges and agrees that the inclusion of any cost
on such Schedule does not constitute any agreement of the Agent or any Bank that
such cost or the action or transaction to which such cost applies is permitted
under the Loan Agreement or any other Loan Document. Each of the Borrower and
Holding further agrees that unless it has obtained the prior written consent of
the Agent and the Banks thereto (which consent may be withheld in the Agent and
the Banks' sole discretion), it will not incur any such cost or take any action
or enter into any transaction to which any such cost applies (or permit any
Subsidiary so to do) if the incurring of such cost or the taking or entering
into of such action or transaction is prohibited by the Loan Agreement or any
other Loan Document,
9. Effectiveness. This Amendment shall become effective (in the case of
Section 6(b) hereof, as of January 15, 1998 and, in the case of all other
Sections hereof, as of the date hereof) when each of the following conditions
have been fulfilled to the satisfaction of the Agent (or waived by the Agent).
The first date on which all of the following conditions have been so satisfied
(or so waived) is herein referred to as the "Amendment Closing Date." If the
Amendment Closing Date shall not have occurred by the close of business (New
York time) on May 19, 1999 (or such later date as tiny be specified to by the
Agent in writing), this Amendment shall be deemed rescinded, null and void.
(a) The Borrower, Holding and the Banks shall have executed a copy hereof
and delivered the same to the Agent at 565 Fifth Avenue, New York, New York
10017 (Attention W. Andrew Chamberlain) or, in the case of the Banks, shall have
given the Agent written notice (actually received) that the same has been signed
and is being sent to the Agent.
(b) There shall have been delivered to the Agent a certificate of an
authorized officer and of the secretary of each of the Borrower and Holding,
with respect to this Amendment, along with resolutions authorizing, the same.
(c) Holding and the Borrower shall have delivered or caused to be delivered
such other agreements, instruments and documents as are reasonably requested by
the Agent. All agreements, documents, and other instruments required to be
delivered to the Agent pursuant to this Section 9 shall be in form and substance
satisfactory to the Agent.
10. Limited Nature of Amendments. The amendment and waivers set forth
herein are limited precisely as written and shall not be deemed to (a) be a
consent to any waiver of, or modification of, any other term or condition of the
Loan Agreement or any of the documents referred to therein or (b) prejudice any
right or rights which the Banks or the Agent may now have or may have in the
future under or in connection with the Loan Agreement or any of the documents
referred to therein. Except as expressly amended hereby, the terms and
provisions of the Loan Agreement or any of the documents referred to therein
shall remain in full force and effect.
11. Integration.
(a) THIS AMENDMENT, THE LOAN AGREEMENT (AS AMENDED BY THIS AMENDMENT) AND
THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES HERETO
WITH RESPECT TO THE MATTERS COVERED HEREBY AND THEREBY AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS
OF THE PARTIES.
(b) THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
12. Governing Law. THIS AMENDMENT, INCLUDING THE VALIDITY THEREOF AND THE
RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY AND
CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
13. Counterparts. This Amendment may be executed in any number of
counterparts by the different parties hereto on separate counterparts, each of
which when so executed and delivered shall be an original, but all the
counterparts shall together constitute one and the same instrument. Telecopied
signatures hereto shall be of the same force and effect as an original of a
manually signed copy.
14. Headings. The descriptive headings of the various provisions of this
Amendment are inserted for convenience of reference only and shall not be deemed
to affect the meaning or construction of any of the provisions hereof.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed and delivered by their respective duly authorized officers as of
the dtae first above written.
BANK OF SCOTLAND FURMANITE PLC
Individually and as Agent (formerly KANEB UK plc)
By: By:
Name: Name:
Title: Title:
FURMANITE WORLDWIDE, INC.
(formerly KANEB INTERNATIONAL INC.)
By:
Name:
Title:
AMENDMENT NO. 7 (Restated Agreement)
AMENDMENT (this "Amendment") dated as of November 10, 1999 among
FURMANITE PLC (formerly KANEB UK PLC), a company incorporated under the laws of
England and Wales (registered number 2530049) (the "Borrower"), FURMANITE
WORLDWIDE INC. (formerly KANEB INTERNATIONAL INC.), a Delaware corporation
("Holding"), the financial institutions which are party to the Loan Agreement
hereinafter referred to (each a "Bank" and collectively, the "Banks"), and BANK
OF SCOTLAND, as agent for the Banks under such Loan Agreement (in such capacity,
the "Agent"), to the AMENDED AND RESTATED LOAN AGREEMENT dated as of May 3, 1991
(as amended by an amendments thereto dated as of December 7, 1994, July 15,
1996, June 27, 1997, December 15, 1997, December 22, 1997 and March 31, 1999,
the "Loan Agreement") among the Borrower, Holding, the Banks and the Agent.
W I T N E S S E T H :
WHEREAS, the Borrower and Holding have advised the Agent and the Banks that
they desire that certain provisions of the Loan Agreement regarding intercompany
advances be amended; and
WHEREAS, on and subject to the terms hereof, the Agent and the Banks are
willing to amend the Loan Agreement;
NOW, THEREFORE, it is agreed:
1. Definitions. All the terms used herein which are defined in the Loan
Agreement (including, to the extent any such terms are to be amended by this
Amendment, as if such terms were already amended by this Amendment, unless the
context shall indicate otherwise) shall have the same meanings when used herein
unless otherwise defined herein. All references to Sections in this Amendment
shall be deemed references to Sections in the Loan Agreement unless otherwise
specified.
2. Effect of Amendment. As used in the Loan Agreement (including all
Exhibits thereto), the Notes and the other Loan Documents and all other
instruments and documents executed in connection with any of the foregoing, on
and subsequent to the applicable effectiveness date set forth herein any
reference to the Loan Agreement shall mean the Loan Agreement as amended hereby.
3. Defined Terms.
(a) Annex I to the Loan Agreement is hereby amended by adding
the following paragraphs thereto in the appropriate alphabetical place:
(i) "Foreign Intercompany Borrowings"-- Section 8.5.
(ii) "Net Aggregate Foreign Guarantor Debt", at any time, means the
aggregate amount of the Net FG Debt of all Foreign Guarantors at
such time;
(iii)"Net FG Debt" with respect to any Foreign Guarantor at any time
means the amount determined by subtracting the aggregate amount
of loans and advances constituting Foreign Intercompany
Borrowings outstanding to (i.e. borrowed by) such Foreign
Guarantor at such time from the aggregate amount of Foreign
Intercompany Borrowings outstanding by (i.e. loaned by) such
Foreign Guarantor at such time.
(iv) "Net Intercompany Amount" at any time means the sum of (i) the
Net Aggregate Foreign Guarantor Debt at such time plus (ii) the
aggregate principal amount of all loans and advances made by
Holding, the Borrower, FOSI and F-Australia to Furmanite, the
other UK Guarantors and to Foreign Guarantors which are
outstanding at such time.
(v) "New Seventh Amendment" shall mean the amendment to the Loan
Agreement (as then in effect) designated as Amendment No. 7
(Restated Agreement) dated as of September 30, 1999.
(vi) "New Seventh Amendment Date" shall have the same meaning as the
term Amendment Closing Date in the New Seventh Amendment.
(vii) "NSVAD" shall mean the New Seventh Amendment Date.
(viii) "Satisfactory Subordinated Note" shall mean a note
substantially in the form of Exhibit 1 to the New Seventh
Amendment.
(b) The following defined terms in Annex I are hereby amended as follows:
(i) "Subordination Agreements" to add the following immediately
before the period at the end of such definition: "and each other
subordination agreement as well as the subordination provisions
contained in any note or other agreement (including, without
limitation, the New Seventh Amendment) pursuant to which (in any
such case) any obligation of any Credit Party or any obligation
running in favor of any Credit Party is subordinated to any
obligation owed by Holding, the Borrower or any other Credit
Party to the Banks."
(ii) "US Guarantors" to add the words "and FOSI" immediately before
the period at the end of such definition.
(c) The following defined term in Annex I is hereby restated in its
entirety as follows:
"Foreign Guarantor" shall mean each of the following Subsidiaries of FOSI:
Furmeta Holding BV Furmanite BV Metaholding BV Metalock BV Furmanite
NV Furmanite SA Furmanite East Asia Limited Furmanite Singapore PTE
Ltd Furmanite Australia Pty Limited Furmanite V&P Engineering Ltd
and, provided that such other Subsidiary has executed and delivered to the
Agent, subsequent to the New Seventh Amendment Date, a Guarantee Agreement in
form and substance satisfactory to the Agent, each other Subsidiary of Furmanite
or FOSI not incorporated in the US or UK; provided, that upon any company
ceasing to be a Subsidiary, such company shall cease to constitute a "Foreign
Guarantor."
(c) The following defined terms are hereby deleted from Annex I:
"CMA Account"
"CMA Bank"
4. Section 7.1 (Amendment)
Section 7.1 of the Loan Agreement is amended by replacing the period at the
end of clause (i) thereto with a semi-colon and adding a new clause (j) thereto
(immediately after clause (i)) as follows:
"(j) As soon as practicable and in any event within 45 days after the close
of each month of each Fiscal Year of Holding and its Subsidiaries, a schedule
setting forth all loans and advances between members of the Consolidated Group
as at the end of such month."
5. Section 8.3 (Amendment)
Section 8.3(xi) of the Loan Agreement is amended by deleting clause (B)
thereof, and inserting the following in lieu of said clause:
"(B) no such loan is borrowed from a Credit Party;"
6. Section 8.5 (Amendment)
Section 8.5 of the Loan Agreement is hereby amended and restated to read in
its entirety as follows:
"8.5 Advances and Loans. Neither Holding nor the Borrower will lend
money or credit, or make advances to any Person or permit any of their
respective Subsidiaries so to do, except the sale of services and products
by members of the Consolidated Group on credit in the ordinary course of
business on terms not more favorable than those used by other Persons
similarly situated and engaged in the same or similar business; provided
however that :
(i) any Foreign Guarantor may lend money and make advances to
any other Foreign Guarantor (any such loan or advance, a
"Foreign Intercompany Borrowing") if after giving effect
thereto
(a) the Net FG Debt of such Foreign Guarantor does not
exceed $2,000,000;
(b) the Net Aggregate Foreign Guarantor Debt does not
exceed $4,000,000;
(c) the Net Intercompany Amount does not exceed $9,000,000;
(d) such Foreign Intercompany Borrowing is evidenced by a
Satisfactory Subordinated Note, which note is endorsed
in blank, pledged to the Banks pursuant to the US
Pledge Agreement, as amended if and to the extent
required by the Agent to give effect to such pledge,
and delivered to and held by the Agent;
(e) each Foreign Intercompany Borrowing is made and
accepted only for the ordinary business needs of the
borrowing Foreign Subsidiary; and
(f) all such loans and advances are made and accepted at
normal commercial rates of interest for such credits;
(ii) the Borrower may make loans to FAI if
(a) each such loan is evidenced by the FAI Intercompany
Note or by a note substantially in the form of the FAI
Intercompany Note, endorsed in blank, pledged to the
Banks pursuant to the US Pledge Agreement, as amended
if and to the extent required by the Agent to give
effect to such pledge, and delivered to and held by the
Agent;
(b) such loan is made and accepted solely for ordinary
business needs of FAI;
(c) the aggregate principal amount of all such loans
outstanding at any one time is not more than:
(i) [intentionally deleted]; and
(ii) such amount as is agreed upon in writing by the Agent,
the Required Banks and the Borrower from time to time
(and only for such period(s) as are agreed upon by the
Borrower and the Agent in writing) but, in any case,
not less than $5,000,000;
(d) such loans are made and accepted at normal commercial
rates of interest for such credits;
(e) [intentionally deleted];
(f) such loans are secured by the Intercompany Security
Documents executed on the Closing Date (or by security
agreements, pledge agreements, mortgages and other
security documents substantially in the form of such
Intercompany Security Documents) covering all real and
personal property of FAI; and
(g) all of the Liens granted or purported to be granted by
the documentation referred to in the preceding clause
(f) shall be fully perfected and (i) constitute valid
and enforceable Liens under the UCC (as to personalty)
and the applicable Recording Act (as to realty), (ii)
be entitled to all of the rights, benefits and
priorities provided by the UCC and the Recording Act,
as applicable, and (iii) be superior and prior to the
rights of all third Persons then existing or thereafter
arising under the laws of the US, the UK and any
subdivision of either (based on the laws then in
effect, and any laws already passed but not yet in
effect) except for Permitted Liens and the other Liens
referred to in Section 8.2(g), Liens to the Agent and
the Banks in connection with the Loan Documents and
such other Liens as the Agent or the Required Banks
consent to;
(iii)each of the Borrower and Holding may lend money and make
advances to Furmanite and the other UK Guarantors and
Foreign Guarantors incorporated in the Netherlands (and to
the limited extent set forth, also to Foreign Guarantors
incorporated elsewhere) if after giving effect thereto
(a) the Net Intercompany Amount does not any time exceed
$9,000,000;
(b) each loan and advance made pursuant to this proviso
(iii) is evidenced by a Satisfactory Subordinated Note,
which note is endorsed in blank, pledged to the Banks
pursuant to the US Pledge Agreement, as amended if and
to the extent required by the Agent to give effect to
such pledge, and delivered to and held by the Agent;
(c) each loan and advance made pursuant to this proviso
(iii) is made and accepted only for the ordinary
business needs of the borrowing Foreign Subsidiary;
(d) all such loans and advances are made and accepted at
normal commercial rates of interest for such credits;
and
(e) (to the extent that such loans are made to Foreign
Guarantors not incorporated in the Netherlands) the
aggregate principal amount of all such loans
outstanding at any one time is not more than $500,000;
the foregoing amount is included in, and not additional
to, that specified in clause (a) above; and
(iv) the loans and advances specified on Exhibit 2 to the New
Seventh Amendment shall be permitted to remain outstanding
until their respective scheduled maturity dates.
All amounts expressed in Dollars in this Section include equivalent
amounts in other currencies at the Spot Rate.
7. New Term Loans (Sections 2.4(b)and 8.15 and Annex I) (Amendment)
(i)Reference in Section 8.15(b) to Section 2.4 shall be deemed to include
reference to Section 2.4A; (ii) reference in the definition of "Fixed Charges"
in Annex I to the Loan Agreement to Section 2.4(a) shall be deemed to include
reference to Section 2.4A(e); and (iii) reference in Section 2.4(b) to Section
2.4(a) shall be deemed to include reference to Section 2.4A(e).
8. [Intentionally deleted]
9. Representations and Warranties.
To induce the Agent and the Banks to enter into this Amendment, the
Borrower and Holding hereby jointly and severally represent and warrant to the
Agent and the Banks, and covenant and agree for the benefit of the Agent and the
Banks (which representations, warranties, covenants and agreements shall survive
the execution, delivery and effectiveness of this Amendment and, for purposes of
Section 9 of the Loan Agreement, shall constitute representations and warranties
made under a Loan Document, and agreements and covenants made under the Loan
Agreement, as fully as if the same were set forth in full in the Loan
Agreement):
(a) [Intentionally deleted].
(b) [Intentionally deleted].
(c) [Intentionally deleted].
(d) The execution and delivery by each Credit Party party to
this Amendment and such Credit Party's performance of each
of its agreements hereunder have been duly authorized by all
necessary corporate and stockholder action on the part of
each such Credit Party.
(e) The execution and delivery by each Credit Party (to the
extent it is party thereto) of this Amendment, and all other
agreements being delivered on the NSVAD or pursuant thereto
and such Person's performance of the Loan Documents and the
Loan Agreement as amended by this Amendment and the
consummation of the transactions contemplated under this
Amendment and such other Loan Documents have been duly
authorized by all necessary corporate and stockholder
action. This Amendment has been duly executed and delivered
by each Credit Party party hereto.
(f) Both before and after giving effect to this Amendment and
the transactions contemplated by this Amendment, no Default
or Event of Default exists.
(g) All representations and warranties contained in the Loan
Agreement and in the other Loan Documents or otherwise made
by the Borrower or any other Credit Party in connection with
any of the foregoing are true and correct in all material
respects with the same effect as though such representations
and warranties were now being made.
(h) This Amendment, the Loan Agreement as amended by this
Amendment, and all other amendments and agreements delivered
on the NSVAD or pursuant thereto are the legal, valid and
binding obligations of the Credit Parties party thereto,
enforceable in accordance with their respective terms
subject, as to enforceability, to applicable bankruptcy,
insolvency, reorganization and similar laws affecting the
enforcement of creditors' rights generally and to general
principles of equity (regardless of whether such enforcement
is considered in a proceeding in equity or at law).
(i) The Security Documents secure or guarantee, as the case may
be, all Loans and other extensions of credit, whether made
before, on or after the effectiveness of this Amendment, to
the same extent that the Security Documents secured or
guaranteed, as the case may be, all Loans and other
extensions of Credit immediately prior to the effectiveness
of this Amendment. No amendments need to be made in any of
the Security Documents, nor does any action need to be
taken, to effectuate the provisions of the preceding
sentence.
(j) If requested by the Agent, Holding will execute and deliver
to the Agent, and cause each of its Subsidiaries to execute
and deliver to the Agent, a confirming consent with respect
to the transactions contemplated by this Amendment, in form
and substance satisfactory to the Agent, within two weeks of
the Agent's request therefor.
(k) Exhibit 3 hereto constitutes a true and complete list of all
loans and advances between Credit Parties and the amounts
thereof outstanding as of the date hereof (except to the
extent that the principal amount of any such loan or advance
(x) may have increased as a result of the capitalization of
accrued interest thereon or (y) may have decreased as a
result of one or more payments of the principal thereof).
(l) On or prior to November 19, 1999, Holding and each
applicable Subsidiary will make, and provide a copy to the
Agent of, all filings in the British Patent Office (or other
analogous UK filing office) necessary to evidence or give
notice of the transfer to Holding of the patents and
trademarks listed on Schedule 1 hereto and to perfect the
security interest of the Agent therein; and on or prior to
February 15, 2000 the Borrower will deliver to the Agent
evidence of the recordation of such filings and an opinion
of counsel of Urquhart Dykes & Lord as to such transfers and
the perfection and priority of the Banks security interests,
in form and substance satisfactory to the Agent.
(m) UK patent no. 2544835 is not owned by Holding or any
Subsidiary; neither Holding nor any Subsidiary owns UK
patent application number GB 90/01412 or any patent issued
thereon; UK patent no. 2240834 was issued in respect of UK
patent application number GB/01824.
10. Effectiveness. This Amendment shall become effective when each of the
following conditions have been fulfilled to the satisfaction of the Agent (or
waived by the Agent). The first date on which all of the following conditions
have been so satisfied (or so waived) is herein referred to as the "Amendment
Closing Date". If the Amendment Closing Date shall not have occurred by the
close of business (New York time) on November 19, 1999 (or such later date as
may be specified by the Agent in writing), this Amendment shall be deemed
rescinded, null and void.
(a) The Borrower, Holding and the Banks shall have executed a copy
hereof and delivered the same to the Agent at 565 Fifth Avenue, New York,
New York 10017 (Attention W. Andrew Chamberlain) or, in the case of the
Banks, shall have given the Agent written notice (actually received) that
the same has been signed and is being sent to the Agent.
(b) There shall have been delivered to the Agent a certificate of an
authorized officer and of the secretary of each of the Borrower and
Holding, with respect to this Amendment, along with resolutions authorizing
the same.
(c) Holding and the Borrower shall have delivered to the Agent
Amendment No. 5 to Pledge Agreement in the form previously sent by the
Agent to the Borrower, duly executed by Holding, the Borrower and each
other Credit Party whose name appears on the signature page thereof.
(d) Holding shall have delivered to the Agent an opinion of counsel of
Urquhart Dykes & Lord in form and substance acceptable to the Agent.
(e) Holding shall have executed and delivered to the Agent an
Intellectual Property Mortgage in the form previously sent by the Agent to
Holding.
(f) Holding and the Borrower shall have delivered or caused to be
delivered such other agreements, instruments and documents as are
reasonably requested by the Agent.
All agreements, documents, and other instruments required to be
delivered to the Agent pursuant to this Section 10 shall be in form and
substance satisfactory to the Agent.
11. Limited Nature of Amendments. The amendments and consents (if any) set
forth herein are limited precisely as written and shall not be deemed to (a) be
a consent to any waiver of, or modification of, any other term or condition of
the Loan Agreement or any of the documents referred to therein or (b) prejudice
any right or rights which the Banks or the Agent may now have or may have in the
future under or in connection with the Loan Agreement or any of the documents
referred to therein. Except as expressly amended hereby, the terms and
provisions of the Loan Agreement shall remain in full force and effect.
12. Subordination.
(a) Each of KSI and each KSI Borrower hereby confirms to the Agent and
the Banks that (i) as of the date hereof, the only loans or advances made
by KSI to any member of the Consolidated Group are loans or advances (each
such loan or advance being referred to for purposes of this Section 12(a)
as a "KSI Advance") to FOSI, FEAL, FIL and Holding (each such company being
referred to for purposes of this Section 12(a) as a "KSI Borrower"); and
(ii) all obligations and liabilities of each KSI Borrower, now or hereafter
existing, with respect to any KSI Advance (each such obligation and
liability being referred to for purposes of this Section 12(a) as an
"Obligation") are subordinated to the prior payment in full of all
obligations and liabilities (including, without limitation, all interest
which may be payable thereon prior to or during the pendency of any
insolvency or similar proceeding relating to the Borrower or any KSI
Borrower) of each KSI Borrower and of the Borrower to the Banks, now or
hereafter existing (all such obligations and liabilities of the KSI
Borrowers being collectively referred to in this Section 12(a) as "Superior
Indebtedness"). In furtherance and not in limitation of the foregoing, each
of KSI and each KSI Borrower agrees for the benefit of the Agent and the
Banks that the provisions set forth in the second sentence of Section 1(b)
and in Sections 3-14 of Subordination Agreement (the "Payor Agreement")
dated as of August 31, 1992, made by Holding, KSI and the Borrower and
accepted by the Agent are hereby incorporated herein by reference, shall
survive any termination of that agreement and shall apply to KSI, the KSI
Borrowers and the Obligations as fully as if each KSI Borrower were a Payor
thereunder, the Obligations were Subordinated Indebtedness thereunder and
the Superior Indebtedness were Superior Indebtedness thereunder.
(b) Each of Holding, KSI and the Borrower hereby confirms to the Agent
and the Banks, and agrees for the benefit of the Agent and the Banks, that
all obligations and liabilities of the Borrower to Holding with respect to
each loan or advance made by Holding to the Borrower, now or hereafter
existing (each such obligation and liability being referred to in this
Section 12(b) as an "Obligation"), constitute Subordinated Indebtedness
under the Payor Agreement and that, to the extent for any reason the Payor
Agreement would not otherwise include an Obligation as Subordinated
Indebtedness the Payor Agreement is hereby amended to the extent necessary
so that each Obligation is included as Subordinated Indebtedness
thereunder.
(c) Each of FOSI, Holding, FEAL, FIL, Furmanite BV, Furmanite AS, FAI
and F Singapore hereby confirms to the Agent and the Banks, and agrees for
the benefit of the Agent and the Banks, that all obligations and
liabilities, now or hereafter existing (each such obligation and liability
being referred to for purposes of this Section 12(c) as an "Obligation"),
of any of the foregoing companies with respect to the loans and advances
referred to in items 1(b), 2(a), 2(b), 3(a), 3(b), 5, 6, 7 and 8 of Exhibit
2 to this Amendment are subordinated to the Superior Indebtedness (as
defined below). For purposes of this Section 12(c), each of the foregoing
companies which has made any such loan or advance is referred to as a
"Creditor", each company which has borrowed any such loan or advance is
referred to as a "Subordinated Borrower", the Obligations are referred to
collectively as "Subordinated Indebtedness" and the obligations and
liabilities (including, without limitation, all interest which may be
payable thereon prior to or during the pendency of any insolvency or
similar proceeding with respect to the Borrower or any Subordinated
Borrower) of each Subordinated Borrower to the Banks and of the Borrower to
the Banks are referred to collectively as the "Superior Indebtedness". Each
Creditor and Subordinated Borrower hereby further agrees for the benefit of
the Agent and the Banks that (i) the Subordinated Indebtedness is not to be
payable, and no payment on account thereof whether by way of loan or
otherwise nor any security thereof, shall be made or given by a
Subordinated Borrower or received, accepted or retained by a Creditor until
all Superior Indebtedness is paid in full, unless the Agent otherwise
consents in writing; and (ii) the provisions set forth in the second
sentence of Section 1(b) and in Sections 3-14 of the Subordination
Agreement (Intercompany) (the "Intercompany Agreement") dated as of August
31, 1992 made by the Borrower, accepted by the Agent and consented to by
various then-existing Subsidiaries are hereby incorporated herein by
reference, shall survive any termination of that agreement and shall apply
to the Creditors, the Subordinated Borrowers and the Subordinated
Indebtedness as fully as if the Subordinated Indebtedness were Subordinated
Indebtedness thereunder, each Creditor were the Creditor thereunder, each
Subordinated Borrower were a Guarantor thereunder and the Superior
Indebtedness were Superior Indebtedness thereunder.
(d) Each of FOSI, Holding, KSI and Furmanite NV hereby confirms to the
Agent and the Banks, and agrees for the benefit of the Agent and the Banks,
that all obligations and liabilities, now or hereafter existing (each such
obligation and liability being referred to for purposes of this Section
12(d) as an "Obligation"), of any of the foregoing companies with respect
to the loans and advances referred to in items 1(a),4(a) and 4(b) of
Exhibit 2 to this Amendment are subordinated to the Superior Indebtedness
(as defined below) as set forth in this Section 12(d). For purposes of this
Section 12(d), each of the foregoing companies which has made any such loan
or advance is referred to as a "Creditor", each company which has borrowed
any such loan or advance is referred to as a "Subordinated Borrower" and
the obligations and liabilities (including, without limitation, all
interest which may be payable thereon prior to or during the pendency of
any insolvency or similar proceeding with respect to the Borrower or any
Subordinated Borrower) of each Subordinated Borrower to the Banks and of
the Borrower to the Banks are referred to collectively as the "Superior
Indebtedness". Each Creditor and Subordinated Borrower hereby further
agrees for the benefit of the Agent and the Banks that the provisions set
forth in the second sentence of Section 1(b) and in Sections 3-14 of the
Intercompany Agreement are hereby incorporated herein by reference, shall
survive any termination of that agreement and shall apply to the Creditors,
the Subordinated Borrowers and the Obligations as fully as if the
Obligations were Subordinated Indebtedness thereunder, each Creditor were
the Creditor thereunder, each Subordinated Borrower were a Guarantor
thereunder and the Superior Indebtedness were Superior Indebtedness
thereunder.
13. Integration. THIS AMENDMENT, THE LOAN AGREEMENT (AS AMENDED BY THIS
AMENDMENT) AND THE OTHER LOAN DOCUMENTS REPRESENT THE FINAL AGREEMENT AMONG THE
PARTIES HERETO WITH RESPECT TO THE MATTERS COVERED HEREBY AND THEREBY AND MAY
NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE
PARTIES.
14. Governing Law. THIS AMENDMENT, INCLUDING THE VALIDITY THEREOF AND THE
RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER, SHALL BE GOVERNED BY AND
CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
15. Counterparts. This Amendment may be executed in any number of
counterparts by the different parties hereto on separate counterparts, each of
which when so executed and delivered shall be an original, but all the
counterparts shall together constitute one and the same instrument. Telecopied
signatures hereto shall be of the same force and effect as an original of a
manually signed copy.
16. Headings. The descriptive headings of the various provisions of this
Amendment are inserted for convenience of reference only and shall not be deemed
to affect the meaning or construction of any of the provisions hereof.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed and delivered by their respective duly authorized officers as of
the date first above written.
BANK OF SCOTLAND, FURMANITE PLC
individually and as Agent (formerly KANEB UK plc)
By__________________________ By_______________________
Name: Name:
Title: Title:
FURMANITE WORLDWIDE, INC.
(formerly KANEB INTERNATIONAL INC.)
By_______________________
Name:
Title:
Each of the undersigned hereby confirms and agrees to be bound by the provisions
of Section 12 KANEB SERVICES INC.
By_______________________
Name:
Title:
FURMANITE OFFSHORE SERVICES INC.
By_______________________
Name:
Title:
FURMANITE EAST ASIA LIMITED
By_______________________
Name:
Title:
FURMANITE BV
By_______________________
Name:
Title:
FURMANITE AS
By_______________________
Name:
Title:
FURMANITE AMERICA INC.
By_______________________
Name:
Title:
FURMANITE SINGAPORE PTE LTD
By_______________________
Name:
Title:
FURMANITE NV
By_______________________
Name:
Title:
FURMANITE INTERNATIONAL
LIMITED
By_______________________
Name:
Title:
Exhibit 21
LIST OF SUBSIDIARIES
KANEB SERVICES, INC.
CORPORATE
INSURERS LTD
KANEB INVESTMENT MANAGEMENT, INC.
Kaneb Investment, L.L.C.
KANEB (BVI) CORP.
FURMANITE GERMANY, INC.
Management Services Furmanite Holding GmbH
Furmanite Technische Dienstleisfungen GmbH (formerly Zweipack GmbH)
Furmanite Industrie Service GmbH
KANEB EQUIPMENT LEASING COMPANY, INC.
Furmanite Equipment Leasing Company, Inc.
KANEB INFORMATION SERVICES, INC.
Kaneb Information Technologies, Inc.
InformaTech, Inc.
GreenTree Software and Services, Inc.
Ellsworth Associates, Inc.
Ellsworth Medical Services, Inc.
National Asset Acceptance, Inc.
Asset Based Lenders, Inc.
National Asset Information Services, Inc.
Fields Financial Services, Inc. (formerly Kaneb Metering Corp.)
Fields Data Management
CPIA, Inc.
Viata Corporation
FURMANITE WORLDWIDE, INC. (formerly Kaneb International, Inc.)
Furmanite America Inc.
Kaneb Energy Canada, Ltd.
Furmanite Offshore Services, Inc.
Furmanite Australia Pty Ltd (formerly Denon Pty Ltd)
Furmanite V & P Engineering Ltd (formerly V & P Engineering Ltd)
Furmanite Holding AS
Furmanite AS (Norway)
CMS: Corrision Monitoring Services AS
Furmanite SA
Furmanite NV
Metalock NV (Belgium)
Furmeta Holding BV
Metaholding BV
Metalock BV
Furmanite BV
Furmanite East Asia Ltd (Hong Kong)
Furmanite Singapore PTE Ltd.
Furmanite plc (formerly Kaneb UK plc)
Furmanite 1986 LTD
Furmanite International LTD
KANEB PIPE LINE COMPANY
Kaneb Pipe Line Partners, L.P.
Kaneb Pipe Line Operating Partnership, L.P.
Support Terminal Operating Partnership, L.P.
ST Services Ltd
ST Eastham Ltd.
ST Linden Terminal, LLC
Support Terminal Services, Inc.
StanTrans, Inc.
StanTrans Holding, Inc.
StanTrans Partners, L.P.
Kaneb Management Company, Inc.
Diamond K Limited
Kaneb Management, L.L.C.
Martin Oil Corporation
TEXAS ENERGY SERVICES, INC.
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Kaneb Services, Inc.
We consent to the incorporation by reference in registration statements numbers
333-60195, 333-22109, 333-14071, 333-14069, 333-14067, 333-08727, 333-08725,
333-08723, 33-58981, 33-54027 and 33-41295 on Form S-8 of Kaneb Services, Inc.
of our report dated February 25, 2000, relating to the consolidated balance
sheets of Kaneb Services, Inc. and subsidiaries as of December 31, 1999 and
1998, and the related consolidated statements of income, changes in
stockholders' equity and cash flows for the years then ended, and related
schedules, which report is included on page F-1 of this Form 10-K.
KPMG LLP
Dallas, Texas
March 24, 2000
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in Registration Statements
on Form S-8 (No. 333-60195), (No. 333-22109), (No. 333-14071), (No. 333-14069),
(No. 333-14067), (No. 333-08727), (No. 333-08725), (No. 333-08723), (No.
33-58981), (No. 33-54027) and (No. 33-41295) of Kaneb Services, Inc. of our
report dated February 19, 1998, appearing on page F-2 of this Form 10-K.
PRICEWATERHOUSECOOPERS LLP
Dallas, Texas
March 24, 2000
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<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jan-01-1999
<PERIOD-END> Dec-31-1999
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<DEPRECIATION> 142,207
<TOTAL-ASSETS> 560,315
<CURRENT-LIABILITIES> 63,787
<BONDS> 211,251
0
5,792
<COMMON> 4,249
<OTHER-SE> 139,625
<TOTAL-LIABILITY-AND-EQUITY> 560,315
<SALES> 0
<TOTAL-REVENUES> 505,759
<CGS> 228,383
<TOTAL-COSTS> 437,520
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,695
<INCOME-PRETAX> 32,428
<INCOME-TAX> 31,344
<INCOME-CONTINUING> 63,772
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 63,772
<EPS-BASIC> 2.01
<EPS-DILUTED> 1.94
</TABLE>
