SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
For the Quarterly Period Commission File
Ended June 30, 2000 Number 001-05083
KANEB SERVICES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 74-1191271
(State or other jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
2435 North Central Expressway
Richardson, Texas 75080
(Address of principle executive offices, including zip code)
(972) 699-4000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class of Common Stock Outstanding at July 31, 2000
No par value 31,136,660 shares
<PAGE>
KANEB SERVICES, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED JUNE 30, 2000
Page No.
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Income - Three and Six Months
Ended June 30, 2000 and 1999 1
Condensed Consolidated Balance Sheets - June 30, 2000
and December 31, 1999 2
Condensed Consolidated Statements of Cash Flows - Six
Months Ended June 30, 2000 and 1999 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 17
<PAGE>
KANEB SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands - Except Per Share Amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues:
Services $ 67,171 $ 69,032 $ 130,857 $ 132,270
Products 101,744 53,919 186,421 90,037
--------- --------- --------- ---------
168,915 122,951 317,278 222,307
--------- --------- --------- ---------
Costs and expenses:
Operating costs 44,943 48,212 89,125 92,054
Cost of sales 99,179 52,798 182,113 87,474
Depreciation and amortization 4,541 4,561 9,347 9,063
General and administrative 1,411 1,261 2,766 2,385
--------- --------- --------- ---------
Total costs and expenses 150,074 106,832 283,351 190,976
--------- --------- --------- ---------
Operating income 18,841 16,119 33,927 31,331
Other income 249 163 445 447
Interest expense (4,169) (4,789) (8,352) (9,324)
Amortization of excess of cost over fair
value of net assets of acquired businesses (550) (555) (1,096) (1,066)
--------- --------- --------- ---------
Income before income taxes and interest
of outside non-controlling partners in
KPP's net income 14,371 10,938 24,924 21,388
Income tax benefit (expense) (2,221) 412 (3,889) (365)
Interest of outside non-controlling
partners in KPP's net income (8,490) (7,338) (15,324) (14,702)
--------- --------- --------- ---------
Net income 3,660 4,012 5,711 6,321
Dividends applicable to preferred stock 136 108 266 222
--------- --------- --------- ---------
Net income applicable to common stock $ 3,524 $ 3,904 $ 5,445 $ 6,099
========= ========= ========= =========
Earnings per common share -
Basic and Diluted $ .11 $ .12 $ .17 $ .19
========= ========= ========= =========
</TABLE>
See notes to consolidated financial statements.
1
<PAGE>
KANEB SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
June 30, December 31,
2000 1999
----------- -----------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 28,349 $ 20,766
Accounts receivable, trade 76,518 66,991
Inventories 17,270 18,063
Prepaid expenses and other current assets 12,442 14,957
--------- ---------
Total current assets 134,579 120,777
--------- ---------
Property and equipment 472,261 470,351
Less accumulated depreciation and amortization 149,497 142,207
--------- ---------
Net property and equipment 322,764 328,144
--------- ---------
Investment in affiliate 21,008 21,978
Excess of cost over fair value of net assets
of acquired businesses 61,836 62,657
Deferred tax assets 19,765 22,754
Other assets 3,711 4,005
--------- ---------
$ 563,663 $ 560,315
========= =========
LIABILITIES AND EQUITY
Current liabilities:
Current portion of long-term debt (including
$39,500 of KPP debt at June 30, 2000) $ 41,457 $ 2,471
Accounts payable 25,270 20,146
Accrued expenses 40,328 41,170
--------- ---------
Total current liabilities 107,055 63,787
--------- ---------
Long-term debt, less current portion:
Pipeline and terminaling services 117,678 155,987
Product marketing services 12,001 11,041
Industrial services 19,186 20,557
Parent company 23,666 23,666
--------- ---------
Total long-term debt, less current portion 172,531 211,251
--------- ---------
Deferred income taxes and other liabilities 9,904 10,791
Interest of outside non-controlling partners in KPP 120,989 124,820
Commitments and contingencies
Stockholders' equity:
Preferred stock, without par value 5,792 5,792
Common stock, without par value 4,248 4,249
Additional paid-in-capital 197,268 197,454
Treasury stock, at cost (31,455) (30,278)
Other (121) (141)
Accumulated deficit (19,693) (25,138)
Accumulated other comprehensive income (loss) -
foreign currency translation adjustment (2,855) (2,272)
--------- ---------
Total stockholders' equity 153,184 149,666
--------- ---------
$ 563,663 $ 560,315
========= =========
See notes to consolidated financial statements.
2
<PAGE>
KANEB SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
2000 1999
-------- --------
<S> <C> <C>
Operating activities:
Net income $ 5,711 $ 6,321
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in earnings of affiliate, net of distributions 663 (1,556)
Interest of outside non-controlling partners in KPP 15,324 14,702
Amortization of excess of cost over fair
value of net assets of acquired businesses 1,096 1,066
Deferred income taxes 3,147 596
Depreciation and amortization 9,347 9,063
Changes in working capital components (1,937) (6,140)
-------- --------
Net cash provided by operating activities 33,351 24,052
-------- --------
Investing activities:
Capital expenditures (4,157) (5,171)
Acquisitions, net of cash acquired (280) (41,255)
Change in other assets, net (1,467) (995)
-------- --------
Net cash used in investing activities (5,904) (47,421)
-------- --------
Financing activities:
Issuance of debt 9,347 51,490
Payments on debt (9,081) (1,311)
Distributions to outside non-controlling partners in KPP (18,500) (15,350)
Preferred stock dividends (266) (222)
Common stock issued 166 92
Purchase of treasury stock (1,530) --
-------- --------
Net cash provided by (used in) financing activities (19,864) 34,699
-------- --------
Increase in cash and cash equivalents 7,583 11,330
Cash and cash equivalents at beginning of period 20,766 9,134
-------- --------
Cash and cash equivalents at end of period $ 28,349 $ 20,464
======== ========
Supplemental cash flow information:
Cash paid for interest $ 8,636 $ 8,940
======== ========
Cash paid for income taxes $ 986 $ 615
======== ========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
KANEB SERVICES, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES
The unaudited condensed consolidated financial statements of Kaneb
Services, Inc. and its subsidiaries (the "Company") for the three and six
month periods ended June 30, 2000 and 1999, have been prepared in
accordance with generally accepted accounting principles applied on a
consistent basis. Significant accounting policies followed by the Company
are disclosed in the notes to the consolidated financial statements
included in the Company's Annual Report on Form 10-K for the year ended
December 31, 1999. In the opinion of the Company's management, the
accompanying condensed consolidated financial statements contain the
adjustments, consisting of normal recurring accruals, necessary to present
fairly the consolidated financial position of the Company at June 30, 2000
and the consolidated results of its' operations and cash flows for the
periods ended June 30, 2000 and 1999. Operating results for the three and
six months ended June 30, 2000 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2000.
2. ACQUISITION BY KPP
On February 1, 1999, Kaneb Pipe Line Partners, L.P. ("KPP") acquired six
terminals in the United Kingdom from GATX Terminals Limited for (pound)22.6
million (approximately $37.2 million) plus transaction costs and the
assumption of certain liabilities. The acquisition, which was initially
financed by 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 offering of KPP units (see
Note 3). The remaining portion ($25.9 million) is due in January 2002.
3. PUBLIC OFFERING OF KPP UNITS
In July 1999, KPP issued 2.25 million limited partnership units in a public
offering at $30.75 per unit, generating approximately $65.7 million in net
proceeds. A portion of the proceeds was used to repay in full KPP's $15.0
million promissory note, KPP's $25.0 million revolving credit facility and
$18.3 million of KPP's term loans (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, in the third quarter of 1999, the Company recognized
a $16.8 million gain before deferred income taxes of $6.4 million. The
transaction reduced the Company's limited partner interest in KPP from 31%
to 28%.
4. COMPREHENSIVE INCOME
Comprehensive income for the three and six months ended June 30, 2000 and
1999 is as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
2000 1999 2000 1999
------------- ------------- ------------- --------------
(in thousands)
<S> <C> <C> <C> <C>
Net income $ 3,660 $ 4,012 $ 5,711 $ 6,321
Other comprehensive income (loss)
- foreign currency translation
adjustment (540) 35 (583) (525)
------------- ------------- ------------- --------------
Comprehensive income $ 3,120 $ 4,047 $ 5,128 $ 5,796
============= ============= ============= ==============
</TABLE>
<PAGE>
5. EARNINGS PER SHARE
The following is a reconciliation of Basic and Diluted earnings per share
(in thousands, except for per share amounts):
<TABLE>
<CAPTION>
Weighted
Average
Net Common Per-Share
Income Shares Amount
--------------- --------------- -------------
<S> <C> <C> <C>
Three Months Ended June 30, 2000
--------------------------------
Net income $ 3,660
Dividends applicable to preferred stock (136)
---------------
Basic earnings per share -
Income applicable to common stock 3,524 31,151 $ .11
============
Effect of dilutive securities -
Common stock options and DSUs - 1,291
--------------- --------------
Diluted earnings per share -
Income applicable to common stock,
DSUs and assumed options exercised $ 3,524 32,442 $ .11
=============== ============== ============
Three Months Ended June 30, 1999
--------------------------------
Net income $ 4,012
Dividends applicable to preferred stock (108)
---------------
Basic earnings per share -
Income applicable to common stock 3,904 31,436 $ .12
============
Effect of dilutive securities -
Common stock options and DSUs - 1,084
--------------- --------------
Diluted earnings per share -
Income applicable to common stock,
DSUs and assumed options exercised $ 3,904 32,520 $ .12
=============== ============== ============
Six Months Ended June 30, 2000
------------------------------
Net income $ 5,711
Dividends applicable to preferred stock (266)
---------------
Basic earnings per share -
Income applicable to common stock 5,445 31,206 $ .17
============
Effect of dilutive securities -
Common stock options and DSUs - 1,253
--------------- --------------
Diluted earnings per share -
Income applicable to common stock,
DSUs and assumed options exercised $ 5,445 32,459 $ .17
============== ============== ============
Six Months Ended June 30, 1999
------------------------------
Net income $ 6,321
Dividends applicable to preferred stock (222)
---------------
Basic earnings per share -
Income applicable to common stock 6,099 31,425 $ .19
============
Effect of dilutive securities -
Common stock options and DSUs - 1,069
--------------- --------------
Diluted earnings per share -
Income applicable to common stock,
DSUs and assumed options exercised $ 6,099 32,494 $ .19
=============== ============== ============
</TABLE>
Options to purchase 131,557 and 94,553 shares of common stock at weighted
average prices of $5.56 and $5.20, were outstanding at June 30, 2000 and
1999, respectively, but were not included in the computation of diluted
earnings per share because the options' exercise price was greater than the
average market price of the common stock. Additionally, the Company's 8.75%
convertible subordinated debentures were excluded from the computation of
diluted earnings per share because the effect of assumed conversion is
anti-dilutive.
6. CONTINGENCIES
Certain operations of the Company are subject to Federal, state and local
laws and regulations relating to protection of the environment. Although
the Company believes that its operations are in general compliance with
applicable environmental regulation, risks of additional costs and
liabilities are inherent in its operations, and there can be no assurance
that significant costs and liabilities will not be incurred by the Company.
It is possible that other developments could result in substantial costs
and liabilities to the Company. These include but are not limited to
increasingly stringent environmental laws, regulations, enforcement
policies thereunder, and claims for damages to property or persons
resulting from the operations of the Company.
Certain subsidiaries of KPP were sued 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 in Massachusetts, was abandoned in 1976, when the
connecting terminal was sold to an unrelated entity.
The lawsuit involves environmental response and remediation required by the
State of Massachusetts. Grace alleged that subsidiaries of KPP acquired the
abandoned pipeline, as part of the acquisition of ST Services in 1993, and
assumed responsibility for environmental damages allegedly caused by the
jet fuel leaks. Grace sought 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.
In the lawsuit, Grace also sought indemnification for expenses that it has
incurred since 1996 of approximately $3.5 million for response and
remediation required by the State of Massachusetts and for additional
expenses that it expects to incur in the future. The consistent position of
KPP's subsidiaries is that they did not acquire the abandoned pipeline as
part of the 1993 ST transaction, and therefore did not assume any
responsibility for the environmental damage nor any liability to Grace for
the pipeline.
At the end of the trial on May 19, 2000, the jury returned a verdict
including findings that Grace had breached a provision of the 1993
acquisition agreement and that the pipeline was abandoned prior to 1978. On
July 17, 2000, the Judge entered judgment, which is not yet final, in the
case that Grace take nothing from the subsidiaries on its claims, including
claims for future expenses. Although KPP's subsidiaries have not incurred
any expenses in connection with the remediation, the court also ruled, in
effect, that the subsidiaries would not be entitled to an indemnification
from Grace if any such expenses were incurred in the future. However, the
Judge let stand a prior summary judgment ruling that the pipeline was an
asset of the company acquired as part of the 1993 ST transaction. The Judge
also awarded attorney fees to Grace.
While the judgment means that the subsidiaries have no obligation to
reimburse Grace for the approximately $3.5 million it has incurred, as
required by the State of Massachusetts, KPP's subsidiaries intend to appeal
the judgment finding that the Otis Pipeline was transferred to them and the
award of attorney fees.
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, have 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.
The Government has made no claims against KPP or any other person on
account of this matter. KPP believes that if any such claims were made, its
subsidiaries would have substantial defenses to such claims. Under
Massachusetts law, the party responsible for remediation of a facility is
the last owner before the abandonment, which was a Grace company. KPP does
not believe that either the Grace litigation or any claims that may be made
by the Government will adversely affect its ability to make cash
distributions to its unitholders, but there can be no assurances in that
regard.
The Company has other contingent liabilities resulting from litigation,
claims and commitments incident to the ordinary course of business.
Management believes, based on the advice of counsel, that the ultimate
resolution of such contingencies will not have a materially adverse effect
on the financial position or results of operations of the Company.
7. BUSINESS SEGMENT DATA
The Pipeline and Terminaling Segment includes the pipeline and terminaling
operations of KPP which consist of the transportation of refined petroleum
products in the Midwestern states as a common carrier and the storage of
petroleum products, specialty chemicals and other liquids. The Company's
Product Marketing Segment provides wholesale motor fuel marketing services
throughout the Midwest and Rocky Mountain regions, as well as California.
The Company's Information Technology 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 Parent Company, insurance premiums, general and administrative
costs, tax and financial reporting costs, legal and audit fees not
reasonably allocable to specific business segments.
The Company measures segment profit as operating income. Total assets are
those controlled by each reportable segment.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
2000 1999 2000 1999
------------- ------------- ------------- --------------
(in thousands)
<S> <C> <C> <C> <C>
Business segment revenues:
Pipeline and terminaling services $ 38,438 $ 39,171 $ 75,118 $ 76,016
Product marketing services 97,097 51,173 177,486 82,540
Information technology services 9,029 7,542 17,364 14,570
Industrial services 24,351 25,065 47,310 49,181
------------- ------------- ------------- --------------
$ 168,915 $ 122,951 $ 317,278 $ 222,307
============= ============= ============= ==============
Pipeline and terminaling services segment
revenues:
Pipeline operations $ 17,483 $ 16,182 $ 32,731 $ 31,346
Terminaling operations 20,955 22,989 42,387 44,670
------------- ------------- ------------- --------------
$ 38,438 $ 39,171 $ 75,118 $ 76,016
============= ============= ============= ==============
Industrial services segment
revenues:
Underpressure services $ 10,243 $ 9,500 $ 19,617 $ 19,225
Turnaround services 11,923 12,909 22,791 23,525
Other services 2,185 2,656 4,902 6,431
------------- ------------- ------------- --------------
$ 24,351 $ 25,065 $ 47,310 $ 49,181
============= ============= ============= ==============
<PAGE>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- -----------------------------
2000 1999 2000 1999
------------- ------------- ------------- --------------
(in thousands)
Business segment profit:
Pipeline and terminaling services $ 14,930 $ 15,642 $ 27,830 $ 30,566
Product marketing services 1,671 327 2,639 692
Information technology services 1,184 1,154 2,338 2,078
Industrial services 2,467 257 3,886 380
General corporate (1,411) (1,261) (2,766) (2,385)
------------- ------------- ------------- --------------
Operating income 18,841 16,119 33,927 31,331
Other income 249 163 445 447
Interest expense (4,169) (4,789) (8,352) (9,324)
Amortization of excess of cost
over fair value of net assets
of acquired businesses (550) (555) (1,096) (1,066)
------------- ------------- ------------- --------------
Income before income taxes and
interest of outside non-controlling
partners of KPP's net income $ 14,371 $ 10,938 $ 24,924 $ 21,388
============= ============= ============= ==============
June 30, December 31,
2000 1999
Total assets:
Pipeline and terminaling services $ 362,744 $ 366,935
Product marketing services 39,815 28,101
Information technology services 15,269 17,911
Industrial services 104,468 108,094
General corporate 41,367 39,274
------------- --------------
$ 563,663 $ 560,315
============= ==============
</TABLE>
<PAGE>
KANEB SERVICES, INC. AND SUBSIDIARIES
Management's Discussion and Analysis of Financial Condition
and Results of Operations
This discussion should be read in conjunction with the consolidated
financial statements of Kaneb Services, Inc. (the "Company") and notes
thereto included elsewhere in this report.
Operating Results:
Pipeline and Terminaling Services
This business segment includes the operations of Kaneb Pipe Line Partners,
L.P. ("KPP"). KPP provides transportation services of refined petroleum
products through a pipeline system that extends through the Midwestern
states as a common carrier and provides terminaling and storage services
for petroleum products, specialty chemicals and other liquids. The Company
operates, manages and controls the pipeline and terminaling operations of
KPP through its 2% general partner interest and a 28% limited partner
interest in the partnership.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ----------------------------
2000 1999 2000 1999
----------- ----------- ------------- ------------
(in thousands)
<S> <C> <C> <C> <C>
Revenues $ 38,438 $ 39,171 $ 75,118 $ 76,016
=========== ============ ============= ============
Operating income $ 14,930 $ 15,642 $ 27,830 $ 30,566
=========== =========== ============= ============
Capital expenditures,
excluding acquisitions $ 547 $ 2,392 $ 2,883 $ 4,074
=========== =========== ============= ============
</TABLE>
On February 1, 1999, KPP acquired six terminals in the United Kingdom from
GATX Terminals Limited for 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 initially financed by term loans from a bank. $13.3 million of the term
loans were repaid in July 1999 with the proceeds from a public unit
offering (See Liquidity and Capital Resources). Three of the terminals,
handling petroleum products, chemical 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.
For the three months ended June 30, 2000, revenues for the Pipeline and
Terminaling business decreased by $0.7 million, or 2%, when compared to
1999, due to a $2.0 million decrease in revenues in the terminaling
business, partially offset by a $1.3 million increase in pipeline revenues,
when compared to the same 1999 period. The $0.9 million, or 1%, decrease in
Pipeline and Terminaling revenues for the six month period ended June 30,
2000 is due to a $2.3 million decrease in revenues in the terminaling
business, partially offset by a $1.4 million increase in the pipeline
revenues, when compared to 1999. For the three and six month periods ended
June 30, 2000, terminaling revenue increases resulting from the United
Kingdom and other 1999 acquisitions were more than offset by decreases in
tank utilization due to unfavorable domestic market conditions. Average
annual tankage utilized for the six months ended June 30, 2000 decreased to
20.8 million barrels, down from 22.3 million barrels for the comparable
prior year period, primarily the result of unusually high utilization at
the Partnership's largest petroleum storage facility in 1999. For the six
months ended June 30, 2000, average annualized revenues per barrel of
tankage utilized increased to $4.10 per barrel, compared to $4.00 per
barrel for the same prior year period, the result of the storage of a
higher proportionate volume of specialty chemicals, which are historically
at higher per barrel rates than petroleum products. Pipeline revenue
increases for the three and six month periods ended June 30, 2000 are due
to an overall increase in short-haul volumes shipped. Barrel miles totaled
4.5 billion and 4.6 billion for the three months ended June 30, 2000 and
1999, respectively, and 8.4 billion and 8.6 billion for the six months
ended June 30, 2000 and 1999, respectively.
The $0.7 million decrease in Pipeline and Terminaling operating income for
the quarter ended June 30, 2000, compared to 1999, is due to a $1.2 million
decrease in terminaling operating income, partially offset by a $0.5
million increase in pipeline operating income. For the six month period
ended June 30, 2000, operating income decreased by $2.7 million, compared
to 1999, due to a $3.1 million decrease in terminaling operating income and
a $0.4 million increase in pipeline operating income. The decrease in
terminaling operating income for the three and six month periods, is a
result of the decrease in tank utilization. The increase in pipeline
operating income for the three and six month periods is due to the increase
in short-haul volumes shipped.
The interest of outside non-controlling partners in KPP's net income was
$8.5 million and $7.3 million for the three month periods ended June 30,
2000 and 1999, respectively, and $15.3 million and $14.7 million for the
six month periods ended June 30, 2000 and 1999, respectively. Distributions
paid to the outside non-controlling unitholders of KPP aggregated
approximately $18.5 million and $15.4 million for the six month periods
ended June 30, 2000 and 1999, respectively.
Capital expenditures of $0.5 million and $2.9 million for the three and six
months ended June 30, 2000, relate to the maintenance of existing
operations. Routine maintenance capital expenditures for 2000 are currently
estimated to be between $10 million and $15 million.
Product Marketing Services
The Company's petroleum products marketing business provides wholesale
motor fuel marketing services throughout the Great Lakes and Rocky Mountain
regions, as well as California.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ----------------------------
2000 1999 2000 1999
----------- ----------- ------------- ------------
(in thousands)
<S> <C> <C> <C> <C>
Revenues $ 97,097 $ 51,173 $ 177,486 $ 82,540
=========== ============ ============= ============
Operating income $ 1,671 $ 327 $ 2,639 $ 692
=========== ============ ============= ============
</TABLE>
For the three months ended June 30, 2000, revenues increased by $45.9
million, or 90%, and operating income increased by $1.3 million, or 411%,
when compared to the same 1999 period. For the six months ended June 30,
2000, revenues increased by $94.9 million, or 115%, and operating income
increased by $1.9 million, or 281%, when compared to 1999. The increase in
revenues and operating income for the three and six month periods is a
result of an increase in both sales volumes and sales price, when compared
to 1999. Total gallons sold increased to 102 million for the three months
ended June 30, 2000, compared to 92 million in 1999, and to 197 million for
the six month period ended June 30, 2000, compared to 160 million in 1999,
due to a combination of increasing the number of terminals through which
products are sold and increasing volumes at existing locations. The average
price realized per gallon of product sold totaled $0.95 and $0.56 for the
three months ended June 30, 2000 and 1999, respectively, and $0.90 and
$0.52 for the six months ended June 30, 2000 and 1999, respectively, due to
favorable market conditions resulting from sharp price increases in the
segment's operating area.
<PAGE>
Information Technology Services
The Company's information technology services business is conducted through
a variety of wholly-owned subsidiaries. The information technology 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 system 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.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- -----------------------------
2000 1999 2000 1999
----------- ----------- ------------- -------------
(in thousands)
<S> <C> <C> <C> <C>
Revenues $ 9,029 $ 7,542 $ 17,364 $ 14,570
=========== =========== ============= ==============
Operating income $ 1,184 $ 1,154 $ 2,338 $ 2,078
=========== =========== ============= ==============
</TABLE>
On March 23, 1999, the Company, through a wholly-owned subsidiary, acquired
the capital stock of Ellsworth Associates, Inc. ("Ellsworth"). Ellsworth
provides information technology services, including network, database and
systems design, and application programming, primarily to government
agencies.
For the three months ended June 30, 2000, revenues increased by $1.5
million, or 20%, and operating income increased by 3%, when compared to the
same 1999 period. For the six months ended June 30, 2000, revenues
increased by $2.8 million, or 19%, and operating income increased by $0.3
million, or 13%, when compared to 1999. The increase in revenues for the
three month period ended June 30, 2000 is the result of increases in
computer hardware sales. The increases in revenues and operating income for
the six month period ended June 30, 2000 is a result of the Ellsworth
acquisition and increases in both computer hardware sales and consulting
services provided to various national government agencies and the private
sector.
<PAGE>
Industrial Services
This business segment provides specialized industrial services, including
underpressure leak sealing, on-site machining, safety and relief valve
testing and repair, passive fire protection and fugitive emissions
inspections to the process and power industry worldwide.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- ------------------------------
2000 1999 2000 1999
----------- ----------- ----------- --------------
(in thousands)
<S> <C> <C> <C> <C>
Revenues:
United States $ 8,888 $ 8,037 $ 16,732 $ 15,506
Europe 13,059 14,091 25,622 27,911
Asia-Pacific 2,404 2,937 4,956 5,764
----------- ----------- ----------- --------------
Total revenues $ 24,351 $ 25,065 $ 47,310 $ 49,181
=========== =========== =========== ==============
Operating income:
United States $ 997 $ 409 $ 1,484 $ 448
Europe 1,547 1,204 2,497 1,314
Asia-Pacific 232 100 495 419
Headquarters (309) (398) (590) (743)
----------- ---------- ----------- --------------
Operating income before
severance and other costs 2,467 1,315 3,886 1,438
Severance and other costs - (1,058) - (1,058)
----------- ---------- ----------- -------------
Total operating income $ 2,467 $ 257 $ 3,886 $ 380
=========== ========== =========== ==============
Capital expenditures,
excluding acquisitions $ 536 $ 616 $ 943 $ 971
=========== ========== =========== ==============
</TABLE>
For the three and six month periods ended June 30, 2000, revenues for the
Industrial Services segment decreased by 3% and 4%, respectively, when
compared to the same 1999 periods, due to overall decreases in turnaround
and other services, primarily in Continental Europe. In the United States,
revenues increased by 11% and 8%, respectively, for the three and six month
periods ended June 30, 2000, compared to the same periods in 1999, due to
improvements in underpressure and turnaround services. In Europe, revenues
decreased by 7% and 8%, respectively, for the three and six month periods
ended June 30, 2000, due to the decrease in turnaround and other services
in Continental Europe. Asia-Pacific revenues decreased by 18% and 14%,
respectively, for the three and six month periods ended June 30, 2000, when
compared to 1999, due to decreases in turnaround services.
Overall, Industrial Services operating income, before severance and other
costs, increased by $1.2 million and $2.4 million for the three and six
months ended June 30, 2000, respectively, when compared to the same 1999
periods, due to improved market conditions in the United States and overall
operating efficiencies realized as a result of streamlining the segment's
workforce in 1999 to match the market conditions in each of the operating
regions. Severance and other costs incurred and paid in 1999 were the
result of the streamlining effort.
Income Taxes
In the fourth quarter of 1999, the Company recognized $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, the results of operations for the three and six
month periods ended June 30, 2000 reflects (and subsequent periods will
reflect) a full effective tax rate provision.
Income tax expense for the three and six months ended June 30, 1999
includes a $0.9 million benefit related to favorable developments
pertaining to the resolution of certain foreign income tax issues.
Liquidity and Capital Resources
During the first six months of 2000, the Company's working capital
requirements for operations and capital expenditures (excluding
acquisitions) were funded through the use of internally generated funds.
Cash provided by operations was $33.4 million and $24.1 million for the six
months ended June 30, 2000 and 1999, respectively. Capital expenditures
(excluding acquisitions) were $4.2 million for the six months ended June
30, 2000, compared to $5.2 million in 1999. Routine maintenance capital
expenditures in 2000 are expected to be funded by internally generated
funds. At June 30, 2000, current liabilities include $35.0 million of KPP
mortgage notes due in June 2001. KPP management expects to refinance the
mortgage notes prior to maturity with long-term bank financing or through a
public unit offering.
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).
Additional information related to the sources and uses of cash is presented
in the financial statements included in this report.
<PAGE>
PART II - Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
27. Financial Data Schedule
(b) Reports on Form 8-K
None.
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned.
KANEB SERVICES, INC.
(Registrant)
Date: August 14, 2000 //s//
-----------------------------------------
Michael R. Bakke
Controller
