- -------------------------------------------------------------------------------- UNITED STATES 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 For the Quarterly Period Ended September 30, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number 001-05083 XANSER CORPORATION (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 principal 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 by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes No x ------- ------ 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 October 31, 2003 - --------------------- ------------------------------- No par value 31,578,869 shares - -------------------------------------------------------------------------------- XANSER CORPORATION AND SUBSIDIARIES FORM 10-Q QUARTER ENDED SEPTEMBER 30, 2003 - -------------------------------------------------------------------------------- Page No. Part I. Financial Information Item 1. Financial Statements (Unaudited) Consolidated Statements of Operations - Three and Nine Months Ended September 30, 2003 and 2002 1 Condensed Consolidated Balance Sheets - September 30, 2003 and December 31, 2002 2 Condensed Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2003 and 2002 3 Notes to Consolidated Financial Statements 4 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Item 3. Quantitative and Qualitative Disclosure About Market Risk 17 Item 4. Controls and Procedures 17 Part II. Other Information Item 6. Exhibits and Reports on Form 8-K 18 XANSER CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (In Thousands - Except Per Share Amounts) (Unaudited) - -------------------------------------------------------------------------------- Three Months Ended Nine Months Ended September 30, September 30, ----------------------------- ----------------------------- 2003 2002 2003 2002 ------------- ------------- ------------- -------------- Revenues: Services $ 30,683 $ 27,921 $ 89,524 $ 83,248 Products 7,059 3,963 13,675 9,217 ------------- ------------- ------------- -------------- Total revenues 37,742 31,884 103,199 92,465 ------------- ------------- ------------- -------------- Costs and expenses: Operating costs 28,776 27,444 84,002 81,721 Cost of products sold 6,831 3,918 12,424 8,982 Depreciation and amortization 1,019 804 3,118 2,707 General and administrative 878 962 2,502 2,850 ------------- ------------- ------------- -------------- Total costs and expenses 37,504 33,128 102,046 96,260 ------------- ------------- ------------- -------------- Operating income (loss) 238 (1,244) 1,153 (3,795) Interest and other income, net 58 103 188 352 Interest expense (263) (435) (1,013) (1,353) ------------- ------------- ------------- -------------- Income (loss) before income taxes and cumulative effect of change in accounting principle 33 (1,576) 328 (4,796) Income tax benefit 334 1,145 602 2,878 ------------- ------------- ------------- -------------- Income (loss) before cumulative effect of change in accounting principle 367 (431) 930 (1,918) Cumulative effect of change in accounting principle - adoption of new accounting standard for goodwill, net of income taxes - - - (45,269) ------------- ------------- ------------- -------------- Net income (loss) $ 367 $ (431) $ 930 $ (47,187) ============= ============= ============= ============== Earnings (loss) per common share - Basic and diluted: Before cumulative effect of change in accounting principle $ .01 $ (.01) $ .03 $ (.06) Cumulative effect of change in accounting principle - - - (1.37) ------------- ------------ ------------- -------------- $ .01 $ (.01) $ .03 $ (1.43) ============= ============ ============= ============== See notes to consolidated financial statements. 1 XANSER CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In Thousands) - -------------------------------------------------------------------------------- September 30, December 31, 2003 2002 --------------- --------------- (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 19,878 $ 25,624 Accounts receivable, trade 37,239 36,208 Receivable from businesses distributed to common shareholders 7,699 7,412 Inventories 8,266 8,424 Prepaid expenses and other 3,009 5,264 -------------- ------------- Total current assets 76,091 82,932 -------------- ------------- Property and equipment 42,368 38,830 Less accumulated depreciation and amortization 28,458 24,875 -------------- ------------- Net property and equipment 13,910 13,955 -------------- ------------- Excess of cost over fair value of net assets of acquired businesses 13,802 13,802 Deferred income taxes and other assets 20,278 16,958 -------------- ------------- $ 124,081 $ 127,647 ============== ============= LIABILITIES AND EQUITY Current liabilities: Current portion of long-term debt $ 771 $ 747 Accounts payable 3,877 3,919 Accrued expenses 20,191 21,419 Accrued income taxes 11,592 9,792 -------------- ------------- Total current liabilities 36,431 35,877 -------------- ------------- Long-term debt, less current portion: Technical services 16,765 18,479 Parent company 5,000 9,930 -------------- ------------- Total long-term debt, less current portion 21,765 28,409 -------------- ------------- Other liabilities 2,212 1,812 Commitments and contingencies Stockholders' equity: Common stock, without par value 4,333 4,333 Additional paid-in capital 126,561 126,675 Treasury stock, at cost (26,275) (26,390) Accumulated deficit (34,660) (35,590) Accumulated other comprehensive income (loss) (6,286) (7,479) -------------- ------------- Total stockholders' equity 63,673 61,549 -------------- ------------- $ 124,081 $ 127,647 ============== ============= See notes to consolidated financial statements. 2 XANSER CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands) (Unaudited) - -------------------------------------------------------------------------------- Nine Months Ended September 30, --------------------------------- 2003 2002 ------------- -------------- Operating activities: Net income (loss) $ 930 $ (47,187) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 3,118 2,707 Deferred income taxes (2,684) (2,827) Cumulative effect of change in accounting principle - 45,269 Other 414 564 Changes in working capital components 1,141 5,545 ------------- -------------- Net cash provided by operating activities 2,919 4,071 ------------- -------------- Investing activities: Capital expenditures (2,770) (3,555) Other 995 347 ------------- -------------- Net cash used in investing activities (1,775) (3,208) ------------- -------------- Financing activities: Issuance of debt and capital leases 302 2,303 Payments on debt and capital leases (6,892) (12,829) Purchase of treasury stock - (3,007) Decrease (increase) in receivable from businesses distributed to common shareholders (287) 10,179 Common stock issued and other (13) 540 ------------- -------------- Net cash used in financing activities (6,890) (2,814) ------------- -------------- Decrease in cash and cash equivalents (5,746) (1,951) Cash and cash equivalents at beginning of period 25,624 29,545 ------------- -------------- Cash and cash equivalents at end of period $ 19,878 $ 27,594 ============= ============== Supplemental cash flow information: Cash paid for interest $ 1,362 $ 2,091 ============= ============== Cash paid for income taxes $ 924 $ 693 ============= ============== See notes to consolidated financial statements. 3 XANSER CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements (Unaudited) - -------------------------------------------------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES The condensed consolidated financial statements include the accounts of Xanser Corporation (the "Company") and its subsidiaries. All significant intercompany transactions and balances are eliminated in consolidation. The unaudited condensed consolidated financial statements of the Company for the three and nine month periods ended September 30, 2003 and 2002, have been prepared in accordance with accounting principles generally accepted in the United States of America. 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, 2002. In the opinion of the Company's management, the accompanying condensed consolidated financial statements contain all of the adjustments, consisting of normal recurring accruals, necessary to present fairly the consolidated financial position of the Company and its consolidated subsidiaries at September 30, 2003 and the consolidated results of their operations and cash flows for the periods ended September 30, 2003 and 2002. Operating results for the nine months ended September 30, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003. In December of 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure." SFAS No. 148, which amends SFAS No. 123, provides for alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation and requires additional disclosures in annual and interim financial statements regarding the method of accounting for stock-based employee compensation and the effect of the method used on financial results. In accordance with the provisions of SFAS No. 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 the grant date as prescribed by SFAS 123. The Black-Scholes option pricing model has been used to estimate the value of stock options issued. The following illustrates the effect on net income (loss) and basic and diluted earnings (loss) per share if the fair value based method had been applied: Three Months Ended Nine Months Ended September 30, September 30, ----------------------------- ----------------------------- 2003 2002 2003 2002 ------------- ------------- ------------- -------------- (in thousands - except per share amounts) Reported net income (loss) $ 367 $ (431) $ 930 $ (47,187) Stock-based employee compensation expense determined under the fair value based method, net of income taxes (47) (66) (106) (295) ------------- ------------- ------------- -------------- Pro forma net income (loss) $ 320 $ (497) $ 824 $ (47,482) ============= ============= ============= ============== Earnings (loss) per share: As Reported: Basic $ .01 $ (.01) $ .03 $ (1.43) ============= ============= ============= ============== Diluted $ .01 $ (.01) $ .03 $ (1.43) ============= ============= ============= ============== Pro forma: Basic $ .01 $ (.02) $ .03 $ (1.44) ============= ============= ============= ============== Diluted $ .01 $ (.02) $ .03 $ (1.44) ============= ============= ============= ============== 2. COMPREHENSIVE INCOME Comprehensive income for the three and nine month periods ended September 30, 2003 and 2002 is as follows: Three Months Ended Nine Months Ended September 30, September 30, ----------------------------- ----------------------------- 2003 2002 2003 2002 ------------- ------------- ------------- -------------- (in thousands) Net income (loss) $ 367 $ (431) $ 930 $ (47,187) Foreign currency translation adjustment 230 129 1,193 1,020 ------------- ------------- ------------- -------------- Comprehensive income (loss) $ 597 $ (302) $ 2,123 $ (46,167) ============= ============= ============= ============== At September 30, 2003 and December 31, 2002, accumulated other comprehensive loss consisted of cumulative foreign currency translation adjustments of $0.1 million and $1.3 million, respectively, and minimum pension liability adjustments for subsidiaries of $6.2 million and $6.2 million, respectively. 3. EARNINGS PER SHARE The following is a reconciliation of basic and diluted earnings (loss) per share before cumulative effect of change in accounting principle (in thousands, except for per share amounts): Weighted Average Common Per-Share Income (loss) Shares Amount --------------- --------------- ---------------- Three Months Ended September 30, 2003 ------------------------------------- Basic earnings per share - Income before cumulative effect of change in accounting principle $ 367 31,992 $ .01 ============ Effect of dilutive securities - 1,027 --------------- --------------- Diluted earnings per share - Income before cumulative effect of change in accounting principle $ 367 33,019 $ .01 =============== =============== ============ Three Months Ended September 30, 2002 ------------------------------------- Basic earnings per share - Income (loss) before cumulative effect of change in accounting principle $ (431) 32,249 $ (.01) ============ Effect of dilutive securities - - --------------- --------------- Diluted earnings per share - Income (loss) before cumulative effect of change in accounting principle $ (431) 32,249 $ (.01) =============== =============== ============ Weighted Average Common Per-Share Income (loss) Shares Amount --------------- --------------- ---------------- Nine Months Ended September 30, 2003 ------------------------------------ Basic earnings per share - Income before cumulative effect of change in accounting principle $ 930 31,990 $ .03 ============ Effect of dilutive securities - 843 --------------- --------------- Diluted earnings per share - Income before cumulative effect of change in accounting principle $ 930 32,833 $ .03 =============== =============== ============ Nine Months Ended September 30, 2002 ------------------------------------ Basic earnings per share - Income (loss) before cumulative effect of change in accounting principle $ (1,918) 32,976 $ (.06) ============ Effect of dilutive securities - - --------------- --------------- Diluted earnings per share - Income (loss) before cumulative effect of change in accounting principle $ (1,918) 32,976 $ (.06) =============== =============== ============ The Company's 8.75% convertible subordinated debentures were excluded from the computation of diluted earnings (loss) per share for the three and nine month periods ended September 30, 2003 and 2002, because the effects of assumed conversion would be anti-dilutive. Options to purchase 619,000 and 1,406,751 shares of common stock at weighted average prices of $2.66 and $2.45, respectively, were outstanding for the three and nine month periods ended September 30, 2003, but were not included in the computation of diluted earnings (loss) per share because the options' exercise prices were greater than the average market prices of the common stock. As a result of the losses applicable to common stock for the three and nine month periods ended September 30, 2002, all stock options were excluded from the computation of diluted earnings (loss) per share because the effects would be anti-dilutive. 4. CONTINGENCIES The Company has 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. 5. BUSINESS SEGMENT DATA The Company's technical services segment provides 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. Additionally, the Company's information technology services segment provides consulting services, hardware sales and other related information management and processing services to governmental, healthcare, insurance and financial institutions. 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. General corporate assets include cash, deferred taxes and other assets not related to the Company's segments. The Company measures segment profit as operating income. Total assets are those assets, including excess of cost over fair value of acquired businesses, controlled by each reportable segment. Business segment data is as follows: Three Months Ended Nine Months Ended September 30, September 30, ----------------------------- ----------------------------- 2003 2002 2003 2002 ------------- ------------- ------------- -------------- (in thousands) Business segment revenues: Technical services $ 25,763 $ 22,576 $ 73,882 $ 65,216 Information technology 11,979 9,308 29,317 27,249 ------------- ------------- ------------- -------------- $ 37,742 $ 31,884 $ 103,199 $ 92,465 ============= ============= ============= ============== Technical services segment revenues: Underpressure services $ 10,204 $ 10,254 $ 31,482 $ 30,236 Turnaround services 13,366 10,662 35,586 29,656 Other services 2,193 1,660 6,814 5,324 ------------- ------------- ------------- -------------- $ 25,763 $ 22,576 $ 73,882 $ 65,216 ============= ============= ============= ============== Three Months Ended Nine Months Ended September 30, September 30, ----------------------------- ----------------------------- 2003 2002 2003 2002 ------------- ------------- ------------- -------------- (in thousands) Business segment profit: Technical services $ 1,835 $ 1,062 $ 5,133 $ 2,249 Information technology services (719) (1,344) (1,478) (3,194) General corporate (878) (962) (2,502) (2,850) ------------- ------------- ------------- -------------- Operating income (loss) 238 (1,244) 1,153 (3,795) Interest and other income, net 58 103 188 352 Interest expense (263) (435) (1,013) (1,353) ------------- -------------- ------------- -------------- Income (loss) before income taxes and cumulative effect of change in accounting principle $ 33 $ (1,576) $ 328 $ (4,796) ============= ============= ============= ============== September 30, December 31, 2003 2002 ------------- -------------- (in thousands) Total assets: Technical services $ 64,115 $ 63,319 Information technology services 22,531 26,956 General corporate 37,435 37,372 ------------- -------------- $ 124,081 $ 127,647 ============= ============== 6. EXCESS OF COST OVER FAIR VALUE OF NET ASSETS OF ACQUIRED BUSINESSES Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets", which eliminates the amortization for goodwill (excess of cost over fair value of net assets of acquired businesses) and other intangible assets with indefinite lives. Under SFAS No. 142, intangible assets with lives restricted by contractual, legal, or other means will continue to be amortized over their useful lives. As of September 30, 2003, the Company had no intangible assets subject to amortization under SFAS No. 142. Goodwill and other intangible assets not subject to amortization are tested for impairment annually or more frequently if events or changes in circumstances indicate that the assets might be impaired. SFAS No. 142 requires a two-step process for testing impairment. First, the fair value of each reporting unit is compared to its carrying value to determine whether an indication of impairment exists. If an impairment is indicated, then second, the implied fair value of the reporting unit's goodwill is determined by allocating the unit's fair value to its assets and liabilities (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination. The amount of impairment for goodwill and other intangible assets is measured as the excess of its carrying value over its implied fair value. Based on valuations and analysis performed by independent valuation consultants and the Company in the first quarter of 2002, the Company determined that the carrying value of its goodwill exceeded implied fair value, and therefore, the Company recorded a non-cash charge, after income taxes, of $45.3 million as the cumulative effect of a change in accounting principle. No impairment charge was appropriate under the previous goodwill impairment standard (SFAS No. 121), which was based on undiscounted cash flows. Based on valuations and analysis performed by the Company at December 31, 2002 (the annual evaluation date), no additional impairment charge was required. The changes in the carrying amount of excess of cost over fair value of net assets of acquired businesses is as follows (in thousands): Excess of cost over fair value of net assets of acquired businesses at December 31, 2001 $ 61,054 Cumulative effect of change in accounting principle recorded in the first quarter of 2002 (47,252) ------------- Excess of cost over fair value of net assets of acquired businesses at September 30, 2003 and December 31, 2002 $ 13,802 ============= 7. ADOPTION OF RECENT ACCOUNTING PRONOUNCEMENTS Effective January 1, 2003, the Company adopted SFAS No. 143, "Accounting for Asset Retirement Obligations", which establishes requirements for the removal-type costs associated with asset retirements. The initial adoption of SFAS No. 143 had no effect on the consolidated financial statements of the Company. Effective January 1, 2003, the Company adopted SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities", which requires that all restructurings initiated after December 31, 2002 be recorded when they are incurred and can be measured at fair value. The initial adoption of SFAS No. 146 had no effect on the consolidated financial statements of the Company. The Company has adopted the provisions of FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements of Guarantees, Including Indirect Guarantees of Indebtedness to Others, an interpretation of FASB Statements No. 5, 57, and 107, and a rescission of FASB Interpretation No. 34." This interpretation elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under guarantees issued. The interpretation also clarifies that a guarantor is required to recognize, at inception of a guarantee, a liability for the fair value of the obligation undertaken. The initial recognition and measurement provisions of the interpretation are applicable to guarantees issued or modified after December 31, 2002. The initial application of this interpretation had no effect on the consolidated financial statements of the Company. The Company has adopted the provisions of FASB Interpretation No. 46, "Consolidation of Variable Interest Entities, an interpretation of ARB No. 51." This interpretation addresses the consolidation by business enterprises of variable interest entities as defined in the interpretation. The interpretation applies immediately to variable interests in variable interest entities created after January 31, 2003, and to variable interests in variable interest entities obtained after January 31, 2003. The interpretation requires certain disclosures in financial statements issued after January 31, 2003. The initial application of this interpretation had no effect on the consolidated financial statements of the Company. The Company has adopted SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity", which requires certain financial instruments, which were previously accounted for as equity, to be classified as liabilities. The adoption of SFAS No. 150 had no effect on the consolidated financial statements of the Company. The Company has adopted the provisions of EITF Issue No. 00-21, "Revenue Arrangements with Multiple Deliverables". EITF Issue No. 00-21 provides guidance on how to account for arrangements that involve the delivery or performance of multiple products, services, and/or rights to use assets. The adoption of EITF Issue No. 00-21, which applies to revenue arrangements entered into in fiscal periods beginning after September 15, 2003, did not have a material effect on the financial statements of the Company. XANSER CORPORATION AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - -------------------------------------------------------------------------------- This discussion should be read in conjunction with the condensed consolidated financial statements of Xanser Corporation (the "Company") and notes thereto included elsewhere in this report. Operating Results: Technical Services The technical services segment, Furmanite, provides specialized services, including leak sealing underpressure, on-site machining, safety and relief valve testing and repair, passive fire protection and fugitive emissions inspections to the process and power industries worldwide. Three Months Ended Nine Months Ended September 30, September 30, --------------------------- ------------------------------ 2003 2002 2003 2002 ----------- ----------- ------------- -------------- (in thousands) Revenues: United States $ 5,275 $ 5,333 $ 17,229 $ 18,775 Europe 16,375 14,332 45,870 38,449 Asia-Pacific 4,113 2,911 10,783 7,992 ----------- ----------- ------------- -------------- Total Revenues $ 25,763 $ 22,576 $ 73,882 $ 65,216 =========== =========== ============= ============== Operating income: United States $ (569) $ (755) $ (952) $ (1,346) Europe 2,297 1,885 6,024 4,291 Asia-Pacific 780 377 1,617 600 Headquarters (673) (445) (1,556) (1,296) ----------- ----------- ------------- -------------- Total operating income $ 1,835 $ 1,062 $ 5,133 $ 2,249 =========== =========== ============= ============== Capital expenditures $ 440 $ 584 $ 1,599 $ 1,436 =========== =========== ============= ============== For the three months ended September 30, 2003, revenues for the technical services business increased by $3.2 million, or 14%, when compared to the same 2002 period. In Europe, revenues increased by $2.0 million, or 14%, when compared to the third quarter of 2002, due to increases in turnaround services, product sales and foreign currency exchange differences, partially offset by decreases in underpressure services. In Asia-Pacific, revenues increased by $1.2 million, or 41%, when compared to the third quarter of 2002, due to increases in turnaround services and foreign currency exchange differences. In the United States, third quarter revenues decreased slightly compared to the same period in 2002. For the nine months ended September 30, 2003, technical services revenues increased by $8.7 million, or 13%, when compared to the same period in 2002. Revenues in the United States decreased by $1.5 million, or 8%, when compared to 2002, due primarily to decreases in underpressure services resulting from unfavorable market conditions and decisions to exit non-performing contracts which did not meet current requirements for generating favorable returns. In Europe, revenues increased by $7.4 million, or 19%, when compared to 2002, due to increases in underpressure and turnaround services, product sales and foreign currency exchange differences, partially offset by decreases in other process plant services. Asia-Pacific revenues increased by $2.8 million, or 35%, when compared to 2002, due to increases in turnaround services and foreign currency exchange differences. For the three months ended September 30, 2003, technical services operating income increased by $0.8 million, or 73%, when compared to the same 2002 period. In the United States, the operating loss decreased by $0.2 million, or 25%, compared to the same period in 2002, due to higher operating margins and lower general and administrative costs. In Europe and Asia, operating income increased by $0.4 million, or 22%, and $0.4 million, or 107%, respectively, when compared to the same 2002 period, due to the overall higher revenue levels. For the nine months ended September 30, 2003, technical services operating income increased by $2.9 million, or 128%, when compared to the same 2002 period. In the United States, the operating loss decreased by $0.4 million, or 29%, compared to the same period in 2002, due to higher operating margins and lower general and administrative costs, which more than offset lower revenue levels. In Europe and Asia, operating income increased by $1.7 million, or 40%, and $1.0 million, or 170%, respectively, when compared to the same 2002 period, due to the overall higher revenue levels. Information Technology Services The information technology services segment, Xtria, offers products and services that include application software, computer hardware, web hosted data processing, networking, consulting, and support services to the healthcare, financial, and insurance industries, and to governmental agencies. The healthcare group provides integration and consulting services to healthcare organizations implementing digital radiology imaging systems and software solutions to assist healthcare organizations with compliance with the Health Insurance Portability and Accountability Act and other accreditation and training requirements. Three Months Ended Nine Months Ended September 30, September 30, --------------------------- ------------------------------ 2003 2002 2003 2002 ----------- ----------- ------------- -------------- (in thousands) Revenues $ 11,979 $ 9,308 $ 29,317 $ 27,249 =========== =========== ============ ============== Operating income (loss) $ (719) $ (1,344) $ (1,478) $ (3,194) =========== =========== ============ ============== Capital expenditures $ 98 $ 790 $ 1,171 $ 2,119 =========== =========== ============ ============== For the three and nine month periods ended September 30, 2003, information technology revenues increased by $2.7 million, or 29%, and $2.1 million, or 8%, respectively, when compared to the same 2002 periods. Service revenues decreased in the third quarter and first nine months of 2003, compared to the same 2002 periods, due primarily to the group's decision to shed lower margin business and focus on selectively increasing revenue for higher margin business. Revenues from equipment sales, furnished at the request of selected customers, increased in the third quarter and first nine months of 2003, compared to the same 2002 periods, due to normal fluctuations in customer needs. Information technology services operating loss decreased by $0.6 million and $1.7 million for the three and nine month periods ended September 30, 2003, respectively, compared to the same 2002 periods, due primarily to the segment's strategic focus on higher margin service business. Additionally, operating income (loss) for the nine months ended September 30, 2003 includes income of $0.4 million relating to favorable developments pertaining to a contingent liability. Interest Expense Interest expense decreased by $0.2 million and $0.3 million during the three and nine months ended September 30, 2003, respectively, compared to the same 2002 periods, due to reductions in parent company debt (see "Liquidity and Capital Resources") and lower interest rates on variable rate borrowings. Income Taxes Income tax benefit for the periods presented differs from the expected tax at statutory rates due primarily to different tax rates in the various state and foreign jurisdictions. At September 30, 2003, the Company had a significant amount of net deferred tax assets, which consisted principally of net operating loss and alternative minimum tax credit carryforwards and temporary differences resulting from differences in the tax and book basis of certain assets and liabilities. The net operating loss carryforwards expire, if unused, in varying amounts and dates from 2006 to 2023, and the alternative minimum tax credit carryforwards have no expiration date. Under Statement of Financial Accounting Standards No. 109, the Company periodically evaluates the realizability of its deferred tax assets from future operations. Such evaluations must consider various factors, including estimates of future taxable income growth and the expiration periods of net operating loss carryforwards, and conclude that it is more likely than not that the Company will realize the benefit of its net deferred tax assets. Additionally, the utilization of net operating loss carryforwards could be subject to limitation in the event of a change in ownership, as defined in the tax laws. To the extent that factors or conditions change, it is possible that a valuation allowance against the net deferred tax asset might be required, which could have a material effect on the results of operations of the Company. Liquidity and Capital Resources Cash provided by operating activities was $2.9 million and $4.1 million for the nine months ended September 30, 2003 and 2002, respectively. The decrease was due to normal changes in working capital components resulting from the timing of cash receipts and disbursements, partially offset by increases in revenues and operating income. During the nine months ended September 30, 2003, the Company's working capital requirements for operations and capital expenditures were funded through the use of internally generated funds. Capital expenditures were $2.8 million and $3.6 million for the nine month periods ended September 30, 2003 and 2002, respectively. Consolidated capital expenditures for the year 2003 have been budgeted at $4 million to $6 million, depending on the economic environment and the needs of the business. The Company expects to fund maintenance capital expenditures with existing cash and anticipated cash flows from operations. At September 30, 2003, $15.3 million was outstanding under a $25 million bank loan agreement that provides working capital for the technical services segment and is without recourse to the Company. Borrowings under the loan agreement bear interest at the option of the borrower at variable rates (2.875% at September 30, 2003), based on either the LIBOR rate or prime rate, have a commitment fee on the unused portion of the facility and contain certain financial and operational covenants with respect to the technical services segment. At September 30, 2003, the Company was in compliance with all covenants. The loan agreement, which matures in January 2009, is secured by substantially all of the tangible assets of the technical services segment. The Parent Company's 8.75% subordinated debentures ($5.0 million outstanding at September 30, 2003) are convertible into shares of the Company's common stock at the conversion price of $5.26 per share. On March 1, 2002, the Company purchased $10.0 million of subordinated debentures at par value, plus accrued interest, which satisfies all its sinking fund requirements on these subordinated debentures until their maturity in 2008. On September 30, 2003, the Company purchased an additional $4.9 million of subordinated debentures at par value, plus accrued interest. Additional information related to the sources and uses of cash is presented in the condensed consolidated financial statements included in this report. Information regarding the Company's Critical Accounting Policies is included in Item 7 of the Company's Annual Report on Form 10-K for the year ended December 31, 2002. XANSER CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- Item 3. Quantitative and Qualitative Disclosure About Market Risk The principal market risks pursuant to this Item (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 and fluctuations in foreign currency. 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 variable rate debt of $15.8 million at September 30, 2003, a one percent increase in interest rates would increase interest expense by approximately $0.2 million. A significant portion of the technical services business is exposed to fluctuations in foreign currency exchange rates. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Operating Results - Technical Services." Item 4. Controls and Procedures. The Company's principal executive officer and principal financial officer, after evaluating as of September 30, 2003, the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934), have concluded that, as of such date, the Company's disclosure controls and procedures are adequate and effective to ensure that material information relating to the Company and its consolidated subsidiaries would be made known to them by others within those entities. There have been no changes in the Company's internal controls or in other factors known to management that could significantly affect those internal controls subsequent to the date of the evaluation, nor were there any significant deficiencies or material weaknesses in the Company's internal controls. As a result, no corrective actions were required or undertaken. XANSER CORPORATION AND SUBSIDIARIES - -------------------------------------------------------------------------------- Part II - Other Information Item 6. Exhibits and Reports on Form 8-K (a) 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, 1985, 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 Certificate of Amendment to the Restated Certificate of Incorporation of the Registrant, dated August 8, 2001, filed as Exhibit 3.1 to the Registrant's Current Report on Form 8-K filed on August 22, 2001, which exhibit is hereby incorporated by reference. 3.8 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. 31.1 Certification of Chief Executive Officer, Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated as of November 13, 2003. 31.2 Certification of Chief Financial Officer, Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated as of November 13, 2003. 32.1 Certification of Chief Executive Officer, Pursuant to Section 906(a) of the Sarbanes-Oxley Act of 2002, dated as of November 13, 2003. 32.2 Certification of Chief Financial Officer, Pursuant to Section 906(a) of the Sarbanes-Oxley Act of 2002, dated as of November 13, 2003. (b) Reports on Form 8-K Current Report on Form 8-K, filed August 1, 2003. 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 thereunto duly authorized. XANSER CORPORATION (Registrant) Date: November 13, 2003 //s// ---------------------------------------- Michael R. Bakke Controller Exhibit 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER I, John R. Barnes, Chief Executive Officer of Xanser Corporation certify that: 1. I have reviewed this report on Form 10-Q of Xanser Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 13, 2003 //s// ---------------------------------------- John R. Barnes Chief Executive Officer Exhibit 31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER I, Howard C. Wadsworth, Chief Financial Officer of Xanser Corporation certify that: 1. I have reviewed this report on Form 10-Q of Xanser Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 13, 2003 //s// ---------------------------------------- Howard C. Wadsworth Chief Financial Officer Exhibit 32.1 CERTIFICATE OF CHIEF EXECUTIVE OFFICER Pursuant to Section 906(a) of the Sarbanes-Oxley Act of 2002 The undersigned, being the Chief Executive Officer of Xanser Corporation (the "Company"), hereby certifies that the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2003, filed with the United States Securities and Exchange Commission pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: November 13, 2003 //s// -------------------------------------- John R. Barnes Chief Executive Officer A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Xanser Corporation and will be retained by Xanser Corporation and furnished to the Securities and Exchange Commission or its staff upon request. Exhibit 32.2 CERTIFICATE OF CHIEF FINANCIAL OFFICER Pursuant to Section 906(a) of the Sarbanes-Oxley Act of 2002 The undersigned, being the Chief Financial Officer of Xanser Corporation (the "Company"), hereby certifies that the Company's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2003, filed with the United States Securities and Exchange Commission pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m or 78o(d)), fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that information contained in such Quarterly Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: November 13, 2003 //s// --------------------------------------- Howard C. Wadsworth Vice President, Treasurer and Secretary (Chief Financial Officer) A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Xanser Corporation and will be retained by Xanser Corporation and furnished to the Securities and Exchange Commission or its staff upon request.