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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (Date of earliest event reported): OCTOBER 30, 1998
KANEB SERVICES, INC.
(Exact name of registrant as specified in charter)
DELAWARE 001-05083 74-1191271
(State of Organization) (Commission File No.) (I.R.S. Employer
Identification No.)
2435 NORTH CENTRAL EXPRESSWAY
RICHARDSON, TEXAS 75080
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (972) 699-4000
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ITEM 4. CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANT.
PricewaterhouseCoopers LLP ("PricewaterhouseCoopers") served as the
Registrant's independent accountant to audit the consolidated financial
statements of the Registrant for each of its two most recent years ended
December 31, 1997 and December 31, 1996. In September 1998, the Audit Committee
of the Board of Directors of the Registrant sought proposals from four
accounting firms, including PricewaterhouseCoopers and KPMG Peat Marwick LLP
("KPMG Peat Marwick"), with respect to the audit of the Registrant's
consolidated financial statements for the year ending December 31, 1998. At its
meeting on October 30, 1998, the Audit Committee reviewed such proposals,
selected KPMG Peat Marwick to audit such financial statements and thereafter
notified those four firms of its decision. This change in accountants may be
construed as a "dismissal" of PricewaterhouseCoopers within the meaning of Item
304(a)(1)(i) of Regulation S-K of the Securities and Exchange Commission. As of
the date of this report KPMG Peat Marwick is in the process of its standard
prospective client evaluation procedures and has not accepted the engagement.
The reports of PricewaterhouseCoopers on the financial statements of
the Registrant for the years ended December 31, 1997 and December 31, 1996 do
not contain an adverse opinion or a disclaimer of opinion, and were not
qualified or modified as to uncertainty, audit scope or accounting principles.
However, the Registrant believes that a disagreement existed as of October 30,
1998, between the Registrant and PricewaterhouseCoopers involving the timing of
an adjustment to the financial statements of the Registrant to increase the
carrying value of its investment in units of limited partnership interests of
Kaneb Pipe Line Partners, L.P. (the "Partnership"), of which a subsidiary of the
Registrant serves as the general partner. On August 14, 1998, pursuant to the
terms of the partnership agreement of the Partnership, the subordination
provisions of the Partnership ended (effective July 1, 1998), and all
differences and distinctions between the three classes of limited partnership
interests in the Partnership then outstanding automatically ceased. The
Registrant believes that as of July 1, 1998, a difference of approximately $5.9
million exists between the capital attributable to the Registrant's limited
partnership interests at such date and the carrying value on the books of the
Registrant of its investment in such interests. Such difference arose during the
period when the Registrant's interests were subordinated to senior interests.
Pursuant to the allocation provisions of the partnership agreement of the
Partnership, such subordination resulted in a disproportionate allocation of
income and distributions to the senior interests and a disproportionate increase
in the capital accounts attributable to the senior interests.
Prior to October 30, 1998, PricewaterhouseCoopers had advised the
Registrant that, subject to further discussion and analysis, it was of the view
that the full amount of the adjustment should be recorded in income as of the
termination of the subordination period. After considering appropriate
alternatives, however, the Registrant believed as of October 30, 1998, that it
was appropriate to amortize the differential using the straight-line method over
a period of six years. Neither the Audit Committee nor the Board of Directors of
the Registrant discussed these issues with PricewaterhouseCoopers. Had the
entire differential been recorded in the third quarter of 1998, in accordance
with the advice of PricewaterhouseCoopers, Registrant's net income for such
quarter would have increased by approximately $5.7 million and its net income in
each of the subsequent 23 quarters would not include approximately $0.25 million
attributable
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to the adjustment. Other than as described above, during the Registrant's two
most recent fiscal years and the subsequent period through October 30, 1998,
there were no disagreements with PricewaterhouseCoopers on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure as defined by Item 304(a)(1)(iv) of Regulation S-K, nor did
any of the reportable events listed in Item 304(a)(1)(v) of Regulation S-K occur
between the Registrant and PricewaterhouseCoopers.
Prior to the selection of KPMG Peat Marwick for the Registrant's 1998
audit, the Registrant discussed with KPMG Peat Marwick certain significant
accounting matters of which the Registrant was aware, including the issue
described in the preceding paragraphs. However, prior to such selection, the
Registrant did not seek the opinion or recommendation of KPMG Peat Marwick as to
the issue described herein or any other accounting matters. Although
representatives of KPMG Peat Marwick discussed these matters with the
Registrant, they did not express an opinion or recommendation on them or the
application of accounting principles to any specified transaction, either
completed or proposed, or the type of audit opinion that might be rendered on
the Registrant's financial statements. KPMG Peat Marwick currently is
considering the issue described herein, but has not advised the Registrant of
its conclusion with respect thereto as of the date of this report. The issue is
expected to be resolved prior to the filing of the Registrant's Quarterly Report
on Form 10-Q for the third quarter of 1998.
The Registrant has requested of KPMG Peat Marwick that it review the
disclosure contained in this report and has provided it with the opportunity to
furnish the Registrant with a letter addressed to the Commission containing any
new information, clarification of the Registrant's expression of its views, or
the respects in which it does not agree with the statements made herein by the
Registrant with respect to it. The Registrant has authorized
PricewaterhouseCoopers to respond fully to any inquiries of KPMG Peat Marwick
concerning the matters referred to herein.
The Registrant has provided PricewaterhouseCoopers with a copy of this
report and has requested PricewaterhouseCoopers to furnish the Registrant with a
letter addressed to the Commission stating whether it agrees with the statements
made by the Registrant herein in response to Item 304(a) of Regulation S-K, and,
if not, stating the respects in which it does not agree. The letter of
PricewaterhouseCoopers is included as Exhibit 16.1 to this report.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(c) Exhibits.
16.1 - Letter of PricewaterhouseCoopers LLP dated November 6, 1998.
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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 hereunto duly authorized.
KANEB SERVICES, INC.
By: MICHAEL R. BAKKE
Michael R. Bakke, Controller
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INDEX TO EXHIBITS
Number Exhibit
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16.1 Letter of PricewaterhouseCoopers LLP dated November 6, 1998.
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