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 March 31, 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 April 30, 2000
No par value 31,158,052 shares
<PAGE>
KANEB SERVICES, INC. AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MARCH 31, 2000
- --------------------------------------------------------------------------------
Page No.
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Consolidated Statements of Income - Three Months Ended
March 31, 2000 and 1999 1
Condensed Consolidated Balance Sheets - March 31, 2000
and December 31, 1999 2
Condensed Consolidated Statements of Cash Flows - Three
Months Ended March 31, 2000 and 1999 3
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 16
<PAGE>
KANEB SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands -- Except Per Share Amounts)
(Unaudited)
- --------------------------------------------------------------------------------
Three Months Ended
March 31,
----------------------
2000 1999
--------- ---------
Revenues:
Services $ 63,686 $ 63,238
Products 84,677 36,118
--------- ---------
Total revenues 148,363 99,356
--------- ---------
Costs and expenses:
Operating costs 44,182 43,842
Cost of sales 82,934 34,676
Depreciation and amortization 4,806 4,502
General and administrative 1,355 1,124
--------- ---------
Total costs and expenses 133,277 84,144
--------- ---------
Operating income 15,086 15,212
Other income 196 284
Interest expense (4,183) (4,535)
Amortization of excess of cost over fair
value of net assets of acquired businesses (546) (511)
--------- ---------
Income before income taxes and interest of outside
non-controlling partners in KPP's net income 10,553 10,450
Income tax expense (1,668) (777)
Interest of outside non-controlling partners in KPP's
net income (6,834) (7,364)
--------- ---------
Net income 2,051 2,309
Dividends applicable to preferred stock 130 114
--------- ---------
Net income applicable to common stock $ 1,921 $ 2,195
========= =========
Earnings per common share - Basic and Diluted $ .06 $ .07
========= =========
See notes to consolidated financial statements.
1
<PAGE>
KANEB SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
--------- ---------
(Unaudited)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 23,668 $ 20,766
Accounts receivable, trade 67,140 66,991
Inventories 14,255 18,063
Prepaid expenses and other current assets 13,402 14,957
--------- ---------
Total current assets 118,465 120,777
--------- ---------
Property and equipment 471,984 470,351
Less accumulated depreciation and amortization 145,744 142,207
--------- ---------
Net property and equipment 326,240 328,144
--------- ---------
Investment in affiliate 20,571 21,978
Excess of cost over fair value of net assets
of acquired businesses 62,110 62,657
Deferred tax assets 21,418 22,754
Other assets 3,940 4,005
--------- ---------
$ 552,744 $ 560,315
========= =========
LIABILITIES AND EQUITY
Current liabilities:
Current portion of long-term debt $ 4,447 $ 2,471
Accounts payable 18,853 20,146
Accrued expenses 40,598 41,170
--------- ---------
Total current liabilities 63,898 63,787
--------- ---------
Long-term debt, less current portion:
Pipeline and terminaling services 154,005 155,987
Product marketing services 7,688 11,041
Industrial services 19,862 20,557
Parent company 23,666 23,666
--------- ---------
Total long-term debt, less current portion 205,221 211,251
--------- ---------
Deferred income taxes and other liabilities 10,511 10,791
Interest of outside non-controlling partners in KPP 122,515 124,820
Commitments and contingencies
Stockholders' equity:
Preferred stock, without par value 5,792 5,792
Common stock, without par value 4,247 4,249
Additional paid-in-capital 197,242 197,454
Treasury stock, at cost (31,017) (30,278)
Other (133) (141)
Accumulated deficit (23,217) (25,138)
Accumulated other comprehensive income (loss) -
foreign currency translation adjustment (2,315) (2,272)
--------- ---------
Total stockholders' equity 150,599 149,666
--------- ---------
$ 552,744 $ 560,315
========= =========
</TABLE>
See notes to consolidated financial statements
2
<PAGE>
KANEB SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Three Months Ended
March 31,
--------------------
2000 1999
-------- --------
<S> <C> <C>
Operating activities:
Net income $ 2,051 $ 2,309
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 4,806 4,502
Interest of outside non-controlling partners in KPP 6,834 7,364
Amortization of excess of cost over fair value
of net assets of acquired businesses 546 511
Deferred income taxes 1,370 404
Equity earnings of affiliate, net of distributions 1,175 --
Changes in current assets and liabilities 3,349 169
-------- --------
Net cash provided by operating activities 20,131 15,259
-------- --------
Investing activities:
Capital expenditures (2,990) (2,651)
Acquisitions, net of cash acquired -- (41,807)
Change in other assets, net 148 68
-------- --------
Net cash used in investing activities (2,842) (44,390)
-------- --------
Financing activities:
Issuance of debt 2,158 51,450
Payments on debt and capital leases (6,212) (953)
Distributions to outside non-controlling partners in KPP (9,250) (7,675)
Preferred stock dividends paid (130) (114)
Common stock issued 139 39
Purchase of treasury stock (1,092) --
-------- --------
Net cash provided by (used in) financing activities (14,387) 42,747
-------- --------
Increase in cash and cash equivalents 2,902 13,616
Cash and cash equivalents at beginning of period 20,766 9,134
-------- --------
Cash and cash equivalents at end of period $ 23,668 $ 22,750
======== ========
Supplemental cash flow information:
Cash paid for interest $ 3,716 $ 2,934
======== ========
Cash paid for income taxes $ 393 $ 204
======== ========
</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 month
periods ended March 31, 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 and its
subsidiaries are disclosed in the notes to the consolidated financial
statements included in the Company's Annual Report on Form 10-K for the
year ended December 31, 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 and its
consolidated subsidiaries at March 31, 2000 and the consolidated results of
their operations and cash flows for the periods ended March 31, 2000 and
1999. Operating results for the three months ended March 31, 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 $65.6 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, 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 months ended March 31, 2000 and 1999 is
as follows:
Three Months Ended
March 31,
------------------
2000 1999
------- -------
(in thousands)
Net income $ 2,051 $ 2,309
Other comprehensive income (loss) - foreign
currency translation adjustment (43) (560)
------- -------
Comprehensive income $ 2,008 $ 1,749
======= =======
<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 March 31, 2000
Net income $ 2,051
Dividends applicable to preferred stock (130)
-------------
Basic earnings per share -
Net income applicable to common stock 1,921 31,261 $ .06
==========
Effect of dilutive securities -
Common stock options and DSUs -- 1,214
------------- -----------
Diluted earnings per share -
Net income applicable to common stock,
DSUs and assumed options exercised $ 1,921 32,475 $ .06
============= ========== ==========
Three Months Ended March 31, 1999
Net income $ 2,309
Dividends applicable to preferred stock (114)
-------------
Basic earnings per share -
Net income applicable to common stock 2,195 31,414 $ .07
===========
Effect of dilutive securities -
Common stock options and DSUs -- 1,011
------------- -----------
Diluted earnings per share -
Net income applicable to common stock,
DSUs and assumed options exercised $ 2,195 32,425 $ .07
============= ========== ===========
</TABLE>
Options to purchase 158,897 and 106,232 shares of common stock at weighted
average prices of $5.43 and $4.26, were outstanding at March 31, 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
The operations of the Company are subject to Federal, state and local laws
and regulations relating to protection of the environment. Although the
Company believes that its operations are in general compliance with
applicable environmental regulations, risks of additional costs and
liabilities are inherent in its operations, and there can be no assurance
that significant costs and liabilities will not be incurred by the Company.
Moreover, it is possible that other developments, such as increasingly
stringent environmental laws, regulations, enforcement policies thereunder,
and claims for damages to property or persons resulting from the operations
of the Company, could result in substantial costs and liabilities to the
Company.
Certain subsidiaries of KPP are defendants in a lawsuit filed in a Texas
state court in 1997 by Grace Energy Corporation ("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.
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.
Three Months Ended
March 31,
----------------------
2000 1999
--------- ---------
(in thousands)
Business segment revenues:
Pipeline and terminaling services $ 36,680 $ 36,845
Product marketing services 80,389 31,367
Information technology services 8,335 7,028
Industrial services 22,959 24,116
--------- ---------
$ 148,363 $ 99,356
========= =========
Pipeline and terminaling services segment revenues:
Pipeline operations $ 15,248 $ 15,164
Terminaling operations 21,432 21,681
--------- ---------
$ 36,680 $ 36,845
========= =========
Industrial services segment revenues:
Underpressure services $ 9,374 $ 9,725
Turnaround services 10,868 10,616
Other services 2,717 3,775
--------- ---------
$ 22,959 $ 24,116
========= =========
Business segment profit:
Pipeline and terminaling services $ 12,900 $ 14,924
Product marketing services 968 365
Information technology services 1,154 924
Industrial services 1,419 123
General corporate (1,355) (1,124)
--------- ---------
Operating income 15,086 15,212
Other income 196 284
Interest expense (4,183) (4,535)
Amortization of excess of cost
over fair value of net assets
of acquired businesses (546) (511)
--------- ---------
Income before income taxes and
interest of outside non-controlling
partners of KPP's net income $ 10,553 $ 10,450
========= =========
March 31, December 31
2000 1999
--------- -----------
Total assets:
Pipeline and terminaling services $ 366,030 $ 366,935
Product marketing services 26,789 28,101
Information technology services 17,621 17,911
Industrial services 103,892 108,094
General corporate 38,412 39,274
--------- ---------
$ 552,744 $ 560,315
========= =========
<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% (as of March 31,
2000) limited partner interest in the partnership.
Three Months Ended
March 31,
------------------------
2000 1999
--------- ---------
(in thousands)
Revenues $ 36,680 $ 36,845
========= =========
Operating income $ 12,900 $ 14,924
========= =========
Capital expenditures,
excluding acquisitions $ 2,336 $ 2,258
========= =========
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, 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.
For the three months ended March 31, 2000, revenues for the Pipeline and
Terminaling business were flat when compared to 1999, due to a $0.2 million
decrease in revenues in the terminaling business and $0.1 million increase
in pipeline revenues. For the three months ended March 31, 2000,
terminaling revenue increases resulting from the United Kingdom and other
1999 terminal acquisitions were more than offset by decreases in tank
utilization resulting from unfavorable market conditions. Average annual
tankage utilized for the three months ended March 31, 2000 decreased to
21.0 million barrels from 21.9 barrels for the comparable prior year
period, primarily the result of unusually high utilization at KPP's largest
petroleum storage facility in 1999. For the three months ended March 31,
2000, average annualized revenues per barrel of tankage utilized increased
to $4.09 per barrel, compared to $3.95 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 barrel miles shipped totaled 4.0 billion for
each of the three month periods ended March 31, 2000 and 1999.
The $2.0 million decrease in operating income for the quarter ended March
31, 2000, compared to 1999, is due to a $1.9 million decrease in
terminaling operating income and a $0.1 million decrease in pipeline
operating income. The decrease in terminaling operating income is a result
of the decrease in tank utilization.
The interest of outside non-controlling partners in KPP's net income was
$6.8 million and $7.4 million for the three months ended March 31, 2000 and
1999, respectively. Distributions paid to the outside non-controlling
unitholders of KPP aggregated approximately $9.3 million and $7.7 million
for the three month periods ended March 31, 2000 and 1999, respectively.
Capital expenditures of $2.3 million for each of the three month periods
ended March 31, 2000 and 1999 relate to the maintenance of existing
operations. Routine maintenance capital expenditures for 2000 are currently
estimated to be between $12 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.
Three Months Ended
March 31,
------------------------
2000 1999
--------- ---------
(in thousands)
Revenues $ 80,389 $ 31,367
========= =========
Operating income $ 968 $ 365
========= =========
For the three months ended March 31, 2000, revenues increased by $49.0
million, or 156%, and operating income increased by $0.6 million, or 165%,
when compared to the same 1999 period, primarily a result of an increase in
both sales volumes and sales price. Total gallons sold increased to 95
million in the first quarter of 2000, compared to 68 million in the first
quarter of 1999, 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 $0.85 in the first quarter of 2000, compared to $0.46 for the same
period in 1999.
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.
Three Months Ended
March 31,
------------------------
2000 1999
--------- ---------
(in thousands)
Revenues $ 8,335 $ 7,028
========= =========
Operating income $ 1,154 $ 924
========= =========
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 March 31, 2000, revenues increased by $1.3
million, or 19%, and operating income increased by $0.2 million, or 25%,
when compared to the same 1999 period, primarily the result of the
Ellsworth acquisition and increased consulting services and computer
hardware sales 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.
Three Months Ended
March 31,
------------------------
2000 1999
--------- ---------
(in thousands)
Revenues:
United States $ 7,844 $ 7,469
Europe 12,563 13,820
Asia-Pacific 2,552 2,827
--------- ---------
Total Revenues $ 22,959 $ 24,116
========= =========
Operating income:
United States $ 487 $ 39
Europe 950 110
Asia-Pacific 263 319
Headquarters (281) (345)
--------- ---------
Total operating income $ 1,419 $ 123
========= =========
Capital expenditures,
excluding acquisitions $ 407 $ 357
========= =========
For the three ended March 31, 2000, revenues for the Industrial Services
segment decreased by $1.2 million, or 5%, when compared to the same 1999
period, due to overall decreases in underpressure and other services,
primarily in Continental Europe. In the United States, revenues increased
by 5%, compared to the same period in 1999, due to increases in turnaround
services resulting from improved market conditions. In Europe, revenues
decreased by 9%, due primarily to the decrease in underpressure and other
services in Continental Europe. Asia-Pacific revenues decreased by 10% in
the first quarter of 2000, compared to the same period in 1999, due to a
decline in turnaround services and product sales throughout the
Asia-Pacific region.
Overall, Industrial Services operating income increased by $1.3 million for
the three months ended March 31, 2000, when compared to the same 1999
period, 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.
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 first quarter
of 2000 reflects (and subsequent periods will reflect) a full effective tax
rate provision.
Liquidity and Capital Resources
During the first three months of 2000, the Company's working capital
requirements for operations and capital expenditures were funded through
the use of internally generated funds.
Cash provided by operations was $20.1 million and $15.3 million for the
three months ended March 31, 2000 and 1999, respectively. Capital
expenditures (excluding acquisitions) were $3.0 million for the three
months ended March 31, 2000, compared to $2.7 million in 1999. Routine
maintenance capital expenditures in 2000 have been funded by internally
generated funds.
In July 1999, KPP issued 2.25 million limited partnership units in a public
offering at $30.75 per unit, generating approximately $65.6 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: May 5, 2000 //s//
Michael R. Bakke
Controller
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-mos
<FISCAL-YEAR-END> Dec-31-2000
<PERIOD-START> Jan-1-2000
<PERIOD-END> Mar-31-2000
<CASH> 23,668
<SECURITIES> 0
<RECEIVABLES> 68,271
<ALLOWANCES> 1,131
<INVENTORY> 14,255
<CURRENT-ASSETS> 118,465
<PP&E> 471,984
<DEPRECIATION> 145,744
<TOTAL-ASSETS> 552,744
<CURRENT-LIABILITIES> 63,898
<BONDS> 205,221
0
5,792
<COMMON> 4,247
<OTHER-SE> 140,560
<TOTAL-LIABILITY-AND-EQUITY> 552,744
<SALES> 0
<TOTAL-REVENUES> 148,363
<CGS> 82,934
<TOTAL-COSTS> 133,277
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,183
<INCOME-PRETAX> 3,719
<INCOME-TAX> 1,668
<INCOME-CONTINUING> 2,051
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,051
<EPS-BASIC> 0.06
<EPS-DILUTED> 0.06
</TABLE>
