- --------------------------------------------------------------------------------
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 March 31, 2005
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 April 29, 2005
- --------------------- -----------------------------
No par value 31,739,852 shares
- --------------------------------------------------------------------------------
XANSER CORPORATION AND SUBSIDIARIES
FORM 10-Q
QUARTER ENDED MARCH 31, 2005
- --------------------------------------------------------------------------------
Page No.
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Income - Three Months
Ended March 31, 2005 and 2004 1
Condensed Consolidated Balance Sheets - March 31, 2005
and December 31, 2004 2
Condensed Consolidated Statements of Cash Flows - Three
Months Ended March 31, 2005 and 2004 3
Notes to Condensed Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosure About Market Risk 18
Item 4. Controls and Procedures 18
Part II. Other Information
Item 6. Exhibits 19
XANSER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In Thousands - Except Per Share Amounts)
(Unaudited)
- --------------------------------------------------------------------------------
Three Months Ended
March 31,
2005 2004
------------ -------------
Revenues:
Services $ 34,391 $ 31,841
Products 780 323
------------ -------------
Total revenues 35,171 32,164
------------ -------------
Costs and expenses:
Operating costs 34,794 29,962
Cost of products sold 572 181
Depreciation and amortization 978 879
General and administrative 791 752
------------ -------------
Total costs and expenses 37,135 31,774
------------ -------------
Operating income (loss) (1,964) 390
Interest income 96 34
Interest expense (282) (239)
------------ -------------
Income (loss) before income taxes (2,150) 185
Income tax expense (155) (75)
------------ -------------
Net income (loss) $ (2,305) $ 110
============ =============
Earnings (loss) per common share - Basic and diluted $ (0.07) $ -
============ =============
See notes to condensed consolidated financial statements.
1
XANSER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
- --------------------------------------------------------------------------------
March 31, December 31,
2005 2004
--------------- ------------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 17,173 $ 21,598
Accounts receivable, trade 35,434 35,470
Receivable from businesses distributed to common
stockholders 6,617 6,699
Inventories 11,084 9,131
Prepaid expenses and other 4,511 5,283
-------------- -------------
Total current assets 74,819 78,181
-------------- -------------
Property and equipment 45,895 46,571
Less accumulated depreciation and amortization 32,134 32,933
-------------- -------------
Net property and equipment 13,761 13,638
-------------- -------------
Excess of cost over fair value of net assets of
acquired businesses 13,802 13,802
Deferred income taxes and other assets 6,190 6,299
-------------- -------------
$ 108,572 $ 111,920
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 501 $ 524
Accounts payable 5,611 5,416
Accrued expenses 22,711 23,416
Accrued income taxes 7,566 7,609
-------------- -------------
Total current liabilities 36,389 36,965
-------------- -------------
Long-term debt, less current portion:
Technical services 12,245 12,250
Information technology services 248 248
Parent company 5,000 5,000
-------------- -------------
Total long-term debt, less current portion 17,493 17,498
-------------- -------------
Other liabilities 1,023 1,567
Commitments and contingencies
Stockholders' equity:
Common stock, without par value 4,341 4,335
Additional paid-in capital 127,065 126,550
Treasury stock, at cost (25,914) (26,180)
Retained earnings (accumulated deficit) (48,604) (46,299)
Accumulated other comprehensive income (loss) (3,221) (2,516)
-------------- -------------
Total stockholders' equity 53,667 55,890
-------------- -------------
$ 108,572 $ 111,920
============== =============
See notes to condensed consolidated financial statements.
2
XANSER CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
- --------------------------------------------------------------------------------
Three Months Ended
March 31,
----------------------------
2005 2004
------------ -------------
Operating activities:
Net income (loss) $ (2,305) $ 110
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating activities:
Depreciation and amortization 978 879
Deferred income taxes (2) (788)
Other 71 7
Changes in working capital components (1,640) 1,846
------------ -------------
Net cash provided by (used in) operating activities (2,898) 2,054
------------ -------------
Investing activities:
Capital expenditures (1,327) (977)
Other, net (160) (228)
------------ -------------
Net cash used in investing activities (1,487) (1,205)
------------ -------------
Financing activities:
Issuance of debt 115 183
Payments on debt (217) (1,077)
Common stock issued 114 44
Increase (decrease) in receivable from businesses
distributed to common stockholders 82 (31)
------------ -------------
Net cash provided by (used) in financing activities 94 (881)
------------ -------------
Effect of exchange rate changes on cash (134) (87)
------------ -------------
Decrease in cash and cash equivalents (4,425) (119)
Cash and cash equivalents at beginning of period 21,598 21,240
------------ -------------
Cash and cash equivalents at end of period $ 17,173 $ 21,121
============ =============
Supplemental cash flow information:
Cash paid for interest $ 499 $ 339
============ =============
Cash paid for income taxes $ 222 $ 1,069
============ =============
See notes to condensed consolidated financial statements.
3
XANSER CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
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1. GENERAL AND 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 month periods ended March 31, 2005 and 2004 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, 2004. 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 March 31, 2005, and the consolidated results
of income and cash flows for the periods ended March 31, 2005 and 2004.
Operating results for the three months ended March 31, 2005 are not
necessarily indicative of the results that may be expected for the year
ending December 31, 2005.
On November 27, 2000, the Board of Directors of the Company authorized the
distribution of its pipeline, terminaling and product marketing businesses
(the "Distribution") to its stockholders in the form of a new limited
liability company, Kaneb Services LLC ("KSL"). On June 29, 2001, the
Distribution was completed, with each shareholder of the Company receiving
one common share of KSL for each three shares of the Company's common stock
held on June 20, 2001, the record date for the Distribution, resulting in
the distribution of 10.85 million KSL common shares. Pursuant to the
Distribution, the Company entered into an agreement (the "Distribution
Agreement") with KSL, whereby, KSL is obligated to pay the Company amounts
equal to certain expenses and tax liabilities incurred by the Company in
connection with the Distribution. The Distribution Agreement also requires
KSL to pay the Company an amount calculated based on any income tax
liability of the Company that, in the sole judgment of the Company, (i) is
attributable to increases in income tax from past years arising out of
adjustments required by federal and state tax authorities, to the extent
that such increases are properly allocable to the businesses that became
part of KSL, or (ii) is attributable to the distribution of KSL's common
shares and the operations of KSL's businesses prior to the Distribution
date. In the event of an examination of the Company by federal or state tax
authorities, the Company will have unfettered control over the examination,
administrative appeal, settlement or litigation that may be involved,
notwithstanding that KSL has agreed to pay any additional tax. At March 31,
2005, $6.5 million was recorded as receivable from businesses distributed
to common stockholders pursuant to the provisions of the Distribution
Agreement.
In December of 2004, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 123
(revised 2004), "Share-Based Payment" ("SFAS No. 123R"), which addresses
the accounting for share-based payment transactions in which an enterprise
receives employee services in exchange for equity instruments of the
enterprise, or liabilities that are based on the fair value of the
enterprise's equity instruments or that may be settled by the issuance of
such equity instruments. SFAS No. 123R eliminates the ability to account
for share-based compensation transactions using the intrinsic value method
under Accounting Principles Board (APB) Opinion 25, "Accounting for Stock
Issued to Employees", and generally requires that such transactions be
accounted for using a fair-value-based method. The Company is currently
evaluating the provisions of SFAS No. 123R to determine which
fair-value-based model and transitional provision to follow upon adoption.
The alternatives for transition include either the modified prospective or
the modified retrospective methods. The modified prospective method
requires that compensation expense be recorded for all unvested stock
options and restricted stock as the requisite service is rendered beginning
with the first quarter of adoption. The modified retrospective method
requires recording compensation expense for stock options and restricted
stock beginning with the first period restated. Under the modified
retrospective method, prior periods may be restated either as of the
beginning of the year of adoption or for all periods presented. SFAS No.
123R will be effective for the Company beginning in the first quarter of
2006. The impact of adoption on the Company's consolidated financial
statements is still being evaluated.
In accordance with the provisions of SFAS No. 123, "Accounting for
Stock-Based Compensation", the Company applies APB Opinion 25 and related
interpretations in accounting for its stock option plans and, accordingly,
does not recognize compensation cost based on the fair value of the options
granted at grant date as prescribed by SFAS No. 123. The Company also
applies the disclosure provisions of SFAS No. 123, as amended by SFAS No.
148, "Accounting for Stock-based Compensation - Transition and Disclosure"
as if the fair-value-based method had been applied in measuring
compensation expense. 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
March 31,
--------------------------------
2005 2004
------------- -------------
(in thousands - except
per share amounts)
Reported net income (loss) $ (2,305) $ 110
Stock-based employee compensation expense determined
under the fair value based method (34) (15)
------------- -------------
Pro forma net income (loss) $ (2,339) $ 95
============= =============
Earnings (loss) per share:
Basic and diluted - as reported $ (0.07) $ -
============= =============
Basic and diluted - pro forma $ (0.07) $ -
============= =============
2. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) for the three months ended March 31, 2005 and
2004 is as follows:
Three Months Ended
March 31,
--------------------------------
2005 2004
------------- -------------
(in thousands)
Net income (loss) $ (2,305) $ 110
Other comprehensive income (loss) - foreign
currency translation adjustment (705) (338)
------------- --------------
Comprehensive income (loss) $ (3,010) $ (228)
============= ==============
At March 31, 2005 and December 31, 2004, accumulated other comprehensive
income (loss) consisted of cumulative foreign currency translation
adjustments of ($2.2) million and ($2.9) million, respectively, and minimum
pension liability adjustments for subsidiaries of $5.4 million and $5.4
million, respectively.
3. EARNINGS (LOSS) PER SHARE
The following is a reconciliation of basic and diluted earnings (loss) per
share (in thousands, except for per share amounts):
Weighted
Average
Net Common Per Share
Income (Loss) Shares Amount
--------------- --------------- ----------------
Three Months Ended March 31, 2005
---------------------------------
Basic earnings (loss) per share -
Net income (loss) $ (2,305) 32,358 $ (0.07)
================
Effect of dilutive securities - -
--------------- ---------------
Diluted earnings (loss) per share -
Net income (loss) $ (2,305) 32,358 $ (0.07)
================ =============== ================
Weighted
Average
Net Common Per Share
Income (Loss) Shares Amount
--------------- --------------- ----------------
Three Months Ended March 31, 2004
---------------------------------
Basic earnings (loss) per share -
Net income (loss) $ 110 32,008 $ -
================
Effect of dilutive securities - 1,056
--------------- ---------------
Diluted earnings (loss) per share -
Net income (loss) $ 110 33,064 $ -
=============== =============== ================
As a result of the net loss for the three months ended March 31, 2005,
3,242,300 stock options at a weighted net average price of $1.88 were
excluded from the computation of diluted earnings per share because the
effect would be anti-dilutive. Options to purchase 216,200 shares of common
stock at a weighted average price of $2.70, were outstanding for the three
month periods ended March 31, 2004, but were not included in the
computation of diluted earnings per share because the options' exercise
prices were greater than the average market prices of the common stock. The
Company's 8.75% convertible subordinated debentures were excluded from the
computation of diluted earnings per share for both three month periods
ended March 31, 2005 and 2004, because the conversion price was greater
than the market price.
4. RETIREMENT PLAN
One of the Company's foreign subsidiaries has a defined benefit pension
plan covering substantially all of its United Kingdom employees (the "U.K.
Plan"). Net pension cost for the U.K. Plan included the following
components:
Three Months Ended
March 31,
--------------------------------
2005 2004
------------- -------------
(in thousands)
Net periodic pension cost:
Service cost $ 126 $ 116
Interest cost 942 861
Expected return on plan assets (1,020) (892)
Amortization of prior service cost (29) (28)
Recognized net loss 140 183
------------- -------------
Net periodic pension cost $ 159 $ 240
============= =============
5. CONTINGENCIES
The Company has contingent liabilities resulting from litigation, claims
and commitments incident to the ordinary course of business. Management
believes, after consulting with counsel, that the ultimate resolution of
such contingencies will not have a materially adverse effect on the
financial position or results of operations or liquidity of the Company.
6. BUSINESS SEGMENT DATA
The Company provides technical 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 healthcare, governmental, insurance and financial institutions.
The Company measures segment profit as operating income. Segment operating
results are reported on the basis that is used internally for evaluating
segment performance and deciding how to allocate resources to segments.
General corporate includes compensation and benefits paid to corporate
officers and employees, certain insurance, legal, tax, financial reporting
and other administrative costs, including costs of maintaining a public
company, which are not related to specific business segments.
Segment assets are those assets, including excess of cost over fair value
of net assets of acquired businesses, controlled by each reportable
segment. General corporate assets include corporate cash balances, deferred
taxes and other assets not related to specific segments. Business segment
data is as follows:
Three Months Ended
March 31,
--------------------------------
2005 2004
------------- -------------
(in thousands)
Business segment revenues:
Technical services $ 30,659 $ 26,982
Information technology services 4,512 5,182
------------- --------------
$ 35,171 $ 32,164
============= ==============
Technical services segment revenues:
Underpressure services $ 12,942 $ 11,485
Turnaround services 12,621 12,874
Other services 5,096 2,623
------------- --------------
$ 30,659 $ 26,982
============= ==============
Business segment profit (loss):
Technical services $ 1,531 $ 1,140
Information technology services (2,704) 2
General corporate (791) (752)
------------- --------------
Operating income (loss) (1,964) 390
Interest income 96 34
Interest expense (282) (239)
------------- --------------
Income (loss) before income taxes $ (2,150) $ 185
============= ==============
March 31, December 31,
2005 2004
------------- --------------
(in thousands)
Total assets:
Technical services $ 69,135 $ 69,962
Information technology services 16,718 16,720
General corporate 22,719 25,238
------------- -------------
$ 108,572 $ 111,920
============= =============
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.
Overview
The Company conducts its principal businesses in two industry segments,
technical services and information technology services.
The Company's technical services business, which is conducted through its
Furmanite group of subsidiaries, offers specialized technical services to
an international base of clients located in the United States, Europe and
Asia-Pacific regions. The technical services business provides on-line
repairs of leaks in valves, pipes and other components of piping systems
and related equipment, typically in the flow-process industries. Other
services provided include on-site machining, bolting and valve testing and
repair on such systems and equipment. In addition, the division provides
hot tapping, fugitive emissions monitoring, passive fire protection,
concrete repair and heat exchanger repair.
The Company's information technology services business, Xtria, provides
services and related products to the healthcare industry, the financial and
insurance industries, and various governmental agencies. The segment's
primary business is information technology services, including application
software, hardware, web hosted data processing, networking, consulting and
support services.
Consolidated Results of Operations
Three Months Ended
March 31,
--------------------------------
2005 2004
------------- -------------
(in thousands - except
per share amounts)
Revenues $ 35,171 $ 32,164
============= =============
Operating income (loss) $ (1,964) $ 390
============= =============
Net income (loss) $ (2,305) $ 110
============= =============
Earnings (loss) per common share - basic and diluted $ (0.07) $ -
============= =============
Capital expenditures $ 1,327 $ 977
============= =============
For the three months ended March 31, 2005, consolidated revenues increased
by $3.0 million, or 9%, when compared to the same 2004 period, due to a
$3.7 million increase in revenues from the technical services business (see
"Technical Services" below), partially offset by a $0.7 million decrease in
revenues from the information technology services business (see
"Information Technology Services" below). Consolidated operating income for
the three months ended March 31, 2005 decreased by $2.4 million, when
compared to the first quarter of 2004, due to a $2.7 million decrease in
operating income from the information technology services business, which
is partially offset by a $0.4 million increase in operating income from the
technical services business. First quarter 2005 net income decreased by
$2.4 million, compared to the same 2004 period, primarily due to the
overall decrease in operating income.
Technical Services
Three Months Ended
March 31,
--------------------------------
2005 2004
------------- -------------
(in thousands)
Revenues:
United States $ 7,108 $ 7,207
Europe 18,355 15,890
Asia-Pacific 5,196 3,885
------------- --------------
Total Revenues $ 30,659 $ 26,982
============= ==============
Operating income (loss):
United States $ (63) $ 107
Europe 1,634 1,027
Asia-Pacific 740 524
Headquarters (780) (518)
------------- --------------
Total operating income $ 1,531 $ 1,140
============= ==============
Capital expenditures $ 781 $ 847
============= ==============
For the three months ended March 31, 2005, revenues for the technical
services business increased by $3.7 million, or 14%, when compared to the
same 2004 period. In the United States, revenues decreased by $0.1 million,
or 1%, when compared to the first quarter of 2004, as increases in
underpressure services were more than offset by decreases in turnaround
services. In Europe, revenues increased by $2.5 million, or 16%, when
compared to the first quarter of 2004, due to increases in underpressure
and product sales, partially offset by decreases in turnaround services. In
Asia-Pacific, revenues increased by $1.3 million, or 34%, when compared to
the first quarter of 2004, due to increases in underpressure, turnaround
and other process plant services. The impact of foreign currency exchange
rates on first quarter 2005 revenues was not significant.
For the three months ended March 31, 2005, technical services operating
income increased by $0.4 million, or 34%, when compared to the same 2004
period. In the United States, operating income decreased by $0.2 million,
when compared to the same period in 2004, due primarily to abnormally high
operating expenses. In Europe operating income increased by $0.6 million,
or 59%, when compared to the same 2004 period, due to overall higher
revenues and higher operating margins. In Asia-Pacific operating income
increased by $0.2 million, or 41%, when compared to the same 2004 period,
due also to higher revenues and operating margins. The impact of foreign
currency exchange rates on first quarter 2005 operating income was not
significant.
Information Technology Services
Three Months Ended
March 31,
--------------------------------
2005 2004
------------- -------------
(in thousands)
Revenues $ 4,512 $ 5,182
============= =============
Operating income (loss) $ (2,704) $ 2
============= =============
Capital expenditures $ 546 $ 130
============= =============
For the three month period ended March 31, 2005, information technology
services revenues decreased by $0.7 million, or 13%, when compared to the
three months ended March 31, 2004, due primarily to decreases in financial
and insurance services revenues, partially offset by increases in
government solutions services revenues.
For the three month period ended March 31, 2005, information technology
services operating income decreased by $2.7 million, when compared to the
three months ended March 31, 2004, due to overall lower service revenue
levels, combined with substantially higher operating and general and
administrative costs resulting from a focus on lower margin equipment sales
with little services work. Revenue efforts have been refocused on higher
margin services offerings.
Income Taxes
The Company maintains a valuation allowance to adjust the basis of net
deferred tax assets in accordance with the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 109 "Accounting for Income
Taxes". As a result, all domestic federal and state income taxes recorded
for the three month periods ended March 31, 2005 and 2004 are fully offset
by a corresponding change in valuation allowance.
Income tax expense differs from the expected tax at statutory rates due
primarily to the change in valuation allowance for deferred tax assets and
different tax rates in the various foreign jurisdictions.
Liquidity and Capital Resources
Cash provided by (used in) operating activities was $(2.9) million and $2.1
million for the three months ended March 31, 2005 and 2004, respectively.
The first quarter 2005 decrease, when compared to the same 2004 period, was
due primarily to decreases in information technology services revenues and
operating income, in addition to normal changes in technical services
working capital resulting from the timing of cash receipts and
disbursements. During the three months ended March 31, 2005, the Company's
working capital requirements for operations and capital expenditures were
funded through the use of internally generated funds.
Capital expenditures were $1.3 million and $1.0 million for the three month
periods ended March 31, 2005 and 2004, respectively. Consolidated capital
expenditures for the year 2005 have been budgeted at $3 million to $5
million, depending on the economic environment and the needs of the
business. Such expenditures, however, will depend on many factors beyond
the Company's control, including demand for services in the technical
services and information services businesses, and local, state and federal
government regulations. No assurance can be given that required capital
expenditures will not exceed anticipated amounts during 2005 or thereafter.
Capital expenditures (excluding acquisitions) during the year are expected
to be funded from existing cash and anticipated cash flows from operations.
At March 31, 2005, $11.5 million was outstanding under a $25 million
amended and restated bank loan agreement that provides working capital for
the technical services segment and is without recourse to the Parent
Company. Borrowings under the loan agreement bear interest at the option of
the borrower at variable rates (3.95% at March 31, 2005), 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 group, including percentage of
tangible assets and revenues related to certain geographical areas, ratios
of debt to cash flow, as defined in the loan agreement, and cash flow to
fixed charges and capital expenditures. At March 31, 2005, the Company was
in compliance with all covenants. The loan agreement matures in January
2009 and is secured by substantially all of the tangible assets of the
technical services group.
The Parent Company's 8.75% subordinated debentures ($5.0 million
outstanding at March 31, 2005) are convertible into shares of the Company's
common stock at the conversion price of $5.26 per share.
The following schedule sets forth, by period, the Company's debt repayment
obligations and material contractual commitments at December 31, 2004.
There were no material changes to the Company's schedule of debt repayment
obligations and material contractual commitments from December 31, 2004 to
March 31, 2005.
Less than After
Total 1 year 1-3 years 4-5 years 5 years
---------- --------- ---------- ---------- -----------
(in thousands)
Debt:
Technical services credit
facility $ 11,532 $ - $ - $ 11,532 $ -
Parent company convertible
subordinated debentures 5,000 - - 5,000 -
---------- --------- ---------- ---------- ----------
16,532 - - 16,532 -
Capital leases 1,490 524 822 142 2
---------- --------- ---------- ---------- ----------
Debt subtotal 18,022 524 822 16,674 2
---------- --------- ---------- ---------- ----------
Interest on debt 3,521 982 1,857 682 -
---------- --------- ---------- ---------- ----------
Debt and interest total 21,543 1,506 2,679 17,356 2
---------- --------- ---------- ---------- ----------
Other contractual commitments:
Pension plan contributions 9,400 940 1,880 1,880 4,700
Operating leases 14,490 4,289 6,255 2,231 1,715
---------- --------- ---------- ---------- ----------
Total $ 45,433 $ 6,735 $ 10,814 $ 21,467 $ 6,417
========== ========= ========== ========== ==========
Interest on debt is calculated based on outstanding balances, using
interest rates in effect at December 31, 2004. Estimated annual pension
plan contributions are assumed to be consistent with current expected
contribution levels.
Additional information related to the sources and uses of cash is presented
in the condensed consolidated financial statements included in this report.
Off-Balance Sheet Transactions
The Company was not a party to any off-balance sheet transactions at March
31, 2005, or for the three month periods ended March 31, 2005 and 2004.
Critical Accounting Policies and Estimates
The preparation of the Company's financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Significant policies are
presented in the Notes to the Consolidated Financial Statements in the
Company's Annual Report on Form 10-K for the year ended December 31, 2004.
Critical accounting policies are those that are most important to the
portrayal of our financial position and results of operations. These
policies require management's most difficult, subjective or complex
judgments, often employing the use of estimates about the effect of matters
that are inherently uncertain. Our most critical accounting policies
pertain to revenue recognition, allowance for doubtful accounts, the
impairment of excess of cost over fair value of net assets of acquired
businesses and income taxes. Critical accounting policies are discussed
regularly (at least quarterly) with the Company's Audit Committee.
The technical services segment's revenues are based primarily on time and
materials and are generally short term in nature. Revenues are recognized
when services to customers have been rendered or when products are shipped
and risk of ownership is passed to the customer. The technical services
business provides limited warranties to customers, depending upon the
service performed. Warranty claim costs were not material during the three
month periods ended March 31, 2005 and 2004.
The Company's information technology services segment includes revenue
recognized under multiple element arrangements with its customers, which
requires the use of significant judgments and estimates by management. The
accounting policies for revenue recognition in the information technology
services segment comply with Emerging Issues Task Force ("EITF") Issue No.
00-21, "Revenue Arrangements with Multiple Deliverables" and with AICPA
Statement of Position ("SOP") No. 97-2 "Software Revenue Recognition". ETIF
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. SOP No. 97-2 requires revenue to be recognized only after
software is delivered, all significant obligations of the Company are
fulfilled, and all significant uncertainties regarding customer acceptance
have expired. In addition, the information technology services segment's
revenues under long-term service contracts are accounted for using a
proportional performance method or on a straight-line basis in accordance
with the Securities and Exchange Commission's Staff Accounting Bulletin
("SAB") No. 101 "Revenue Recognition in Financial Statements", as amended
by SAB No. 104.
The Company's technical services and information technology services
businesses evaluate and adjust allowances for doubtful accounts receivable
through a continuous process of assessing accounts receivable balances on
individual customers and on an overall basis. This process consists of,
among other tasks, a review of historical collection experience, current
aging status and financial condition of customers. As this process involves
a significant amount of judgment and estimation, and sometimes involves
significant dollar amounts, actual write-offs could differ from estimated
amounts, which could have a material effect on the results of operations of
the Company.
The Company follows the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 142, which eliminated 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 March
31, 2005, 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 the Company at
December 31, 2004, no impairment charge was required. Future evaluations of
the fair value of goodwill and other intangible assets are dependent on
many factors, several of which are out of the Company's control, including
the demand for services provided. To the extent that such factors or
conditions change, it is possible that future impairments could occur (up
to the current goodwill carrying value of $13.8 million), which could have
a material effect on the results of operations of the Company.
At March 31, 2005, the Company had a significant amount of net deferred tax
assets, which consisted principally of net operating loss carryforwards,
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 available as of December
31, 2004 expire, if unused, as follows: $1.2 million in 2006; $3.0 million
in 2007; $13.4 million in 2022; $10.9 million in 2023; and, $1.2 million in
2024. The alternative minimum tax credit carryforwards have no expiration
date. Based on evaluations performed by the Company pursuant to SFAS No.
109 in the fourth quarter of 2003, a non-cash valuation allowance of $12.1
million was provided with respect to the Company's federal and state net
deferred tax assets. The utilization of net operating loss carryforwards
and alternative minimum tax credit 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
reductions in the non-cash valuation allowance could occur, which could
have a material effect on the results of operating of the Company.
Recent Accounting Pronouncement
In December of 2004, the Financial Accounting Standards Board issued SFAS
No. 123 (revised 2004), "Share-Based Payment" ("SFAS No. 123R"), which
addresses the accounting for share-based payment transactions in which an
enterprise receives employee services in exchange for equity instruments of
the enterprise, or liabilities that are based on the fair value of the
enterprise's equity instruments or that may be settled by the issuance of
such equity instruments. SFAS No. 123R eliminates the ability to account
for share-based compensation transactions using the intrinsic value method
under Accounting Principles Board Opinion 25, "Accounting for Stock Issued
to Employees", and generally requires that such transactions be accounted
for using a fair-value-based method. The Company is currently evaluating
the provisions of SFAS No. 123R to determine which fair-value-based model
and transitional provision to follow upon adoption. The alternatives for
transition include either the modified prospective or the modified
retrospective methods. The modified prospective method requires that
compensation expense be recorded for all unvested stock options and
restricted stock as the requisite service is rendered beginning with the
first quarter of adoption. The modified retrospective method requires
recording compensation expense for stock options and restricted stock
beginning with the first period restated. Under the modified retrospective
method, prior periods may be restated either as of the beginning of the
year of adoption or for all periods presented. SFAS No. 123R will be
effective for the Company beginning in the first quarter of 2006. The
impact of adoption on the Company's consolidated financial statements is
still being evaluated.
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 $11.5 million at March 31, 2005, a one
percent increase in interest rates would increase annual interest expense by
approximately $0.1 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 - Technical
Services". Based on annual 2004 foreign currency-based revenues and operating
income of $90.6 million and $10.6 million, respectively, a one percent
fluctuation of all applicable foreign currencies would result in an annual
change in revenues and operating income of $0.9 million and $0.1 million,
respectively.
Item 4. Controls and Procedures
The Company's principal executive officer and principal financial officer, after
evaluating as of March 31, 2005, 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.
During the first quarter of 2005, there have been no changes in the Company's
internal controls over financial reporting that have materially affected, or are
reasonably likely to materially affect, those internal controls over financial
reporting subsequent to the date of the evaluation. As a result, no corrective
actions were required or undertaken.
XANSER CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Part II - Other Information
Item 6. Exhibits
(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, as amended and restated March 10,
2005, filed as exhibit 3.8 to Registrant's Form 10-K for the year
ended December 31, 2004, 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 May 12, 2005.
31.2 Certification of Chief Financial Officer, Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002, dated May 12, 2005.
32.1 Certification of Chief Executive Officer, Pursuant to Section
906(a) of the Sarbanes-Oxley Act of 2002, dated May 12, 2005.
32.2 Certification of Chief Financial Officer, Pursuant to Section
906(a) of the Sarbanes-Oxley Act of 2002, dated May 12, 2005.
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: May 12, 2005 //s// HOWARD C. WADSWORTH
--------------------------------------------
Howard C. Wadsworth
Vice President, Treasurer and Secretary
(Principal Financial Officer and
Duly Authorized Officer)
Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, John R. Barnes, Chief Executive Officer of Xanser Corporation, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Xanser Corporation;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly report;
4. The registrant's other certifying officers 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 quarterly report is being prepared;
b) [intentionally omitted pursuant to SEC Release No. 34-47986];
c) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and procedures, as
of the end of the period cover by this quarterly report, based on such
evaluation; and
d) disclosed in this quarterly report any change in the registrant's
internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter 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 officers 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: May 12, 2005
//s// JOHN R. BARNES
--------------------------------------------
John R. Barnes
President and Chief Executive Officer
Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Howard C. Wadsworth, Chief Financial Officer of Xanser Corporation, certify
that:
1. I have reviewed this quarterly report on Form 10-Q of Xanser Corporation;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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
quarterly report;
4. The registrant's other certifying officers 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 quarterly report is being prepared;
b) [intentionally omitted pursuant to SEC Release No. 34-47986];
c) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and procedures, as
of the end of the period cover by this quarterly report, based on such
evaluation; and
d) disclosed in this quarterly report any change in the registrant's
internal control over financial reporting that occurred during the
registrant's most recent fiscal quarter 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 officers 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: May 12, 2005
//s// HOWARD C. WADSWORTH
---------------------------------------------
Howard C. Wadsworth
Vice President, Treasurer and Secretary
(Chief Financial Officer)
Exhibit 32.1
CERTIFICATION 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, to his knowledge, the Company's Quarterly
Report on Form 10-Q for the three months ended March 31, 2005, 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.
This written statement is being furnished to the Securities and Exchange
Commission as an exhibit to such Form 10-Q. A signed original 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.
Date: May 12, 2005
//s// JOHN R. BARNES
---------------------------------------
John R. Barnes
President and Chief Executive Officer
Exhibit 32.2
CERTIFICATION 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, to his knowledge, the Company's Quarterly
Report on Form 10-Q for the three months ended March 31, 2005, 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.
This written statement is being furnished to the Securities and Exchange
Commission as an exhibit to such Form 10-Q. A signed original 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.
Date: May 12, 2005
//s// HOWARD C. WADSWORTH
-------------------------------------------
Howard C. Wadsworth
Vice President, Treasurer and Secretary
(Chief Financial Officer)