##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
  þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2006
 OR
 o
    
    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
  DELAWARE
    
    74-1191271(State or other jurisdiction of Incorporation or Organization)
    
    (I.R.S. Employer Identification No.)2435 North Central Expressway, Richardson, Texas
    
    75080(Address of principal executive offices)
    
    (Zip Code)
 (972) 699-4000  (Registrants telephone number, including area code)
 þ o
  o o þ
 o þ
   Class of Common Stock
    
    Outstanding at October 31, 2006No Par Value
    
    34,900,662 shares




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##### Table of Contents



XANSER CORPORATION AND SUBSIDIARIES
 FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2006
 Page No.Part I. Financial InformationItem 1.
    
    Financial Statements (Unaudited)Condensed Consolidated Statements of Operations  Three
and Nine Months Ended September 30, 2006 and 2005
    
    
    1Condensed Consolidated Balance Sheets  September 30,
2006 and December 31, 2005
    
    
    2Condensed Consolidated Statements of Cash Flows 
Nine Months Ended September 30, 2006 and 2005
    
    
    3Condensed Consolidated Statements of Changes in Stockholders
Equity  September 30, 2006 and December 31, 2005
    
    
    4Notes to Condensed Consolidated Financial Statements
    
    
    5Item 2.
    
    Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    16Item 3.
    
    Quantitative and Qualitative Disclosure About Market Risk
    
    
    24Item 4.
    
    Controls and Procedures
    
    
    24Part II. Other InformationItem 1A.
    
    Risk Factors
    
    
    25Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    25Item 6.
    
    Exhibits
    
    
    25Amended and Restated BylawsChange in Control Agreement - John R. BarnesChange in Control Agreement - Max A. ElghandourChange in Control Agreement - Joseph E. MillironChange in Control Agreement - Michael L. RoseChange in Control Agreement - Howard C. WadsworthCertification of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 302Certification of CEO Pursuant to Section 906Certification of CFO Pursuant to Section 906




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XANSER CORPORATION AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (In Thousands  Except Per Share Amounts)
 (Unaudited)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenues:Services
    
    $
    60,211
    
    
    $
    39,883
    
    
    $
    179,085
    
    
    $
    113,116Products
    
    
    49
    
    
    
    518
    
    
    
    513
    
    
    
    5,925Total revenues
    
    
    60,260
    
    
    
    40,401
    
    
    
    179,598
    
    
    
    119,041Costs and expenses:Operating costs
    
    
    60,440
    
    
    
    36,705
    
    
    
    172,154
    
    
    
    108,721Cost of products sold
    
    
    12
    
    
    
    526
    
    
    
    276
    
    
    
    6,369Depreciation and amortization
    
    
    808
    
    
    
    900
    
    
    
    2,661
    
    
    
    2,729General and administrative
    
    
    944
    
    
    
    891
    
    
    
    3,085
    
    
    
    2,327Total costs and expenses
    
    
    62,204
    
    
    
    39,022
    
    
    
    178,176
    
    
    
    120,146Operating income (loss)
    
    
    (1,944
    )
    
    
    1,379
    
    
    
    1,422
    
    
    
    (1,105
    )Interest income
    
    
    243
    
    
    
    213
    
    
    
    655
    
    
    
    487Interest expense
    
    
    (955
    )
    
    
    (256
    )
    
    
    (1,981
    )
    
    
    (792
    )Income (loss) before income taxes
    
    
    (2,656
    )
    
    
    1,336
    
    
    
    96
    
    
    
    (1,410
    )Income tax (expense)
    
    
    (652
    )
    
    
    (1,295
    )
    
    
    (2,684
    )
    
    
    (2,557
    )Net income (loss)
    
    $
    (3,308
    )
    
    $
    41
    
    
    $
    (2,588
    )
    
    $
    (3,967
    )Earnings (loss) per common share:Basic
    
    $
    (.10
    )
    
    $
    .00
    
    
    $
    (.08
    )
    
    $
    (.12
    )Diluted
    
    $
    (.10
    )
    
    $
    .00
    
    
    $
    (.08
    )
    
    $
    (.12
    )
  1




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XANSER CORPORATION AND SUBSIDIARIES
 
 CONDENSED
CONSOLIDATED BALANCE SHEETS
 (In Thousands)
 (Unaudited)
 September 30,
    
    
    December 31,2006
    
    
    2005(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    21,946
    
    
    $
    21,526Accounts receivable, trade
    
    
    59,239
    
    
    
    50,396Receivable from businesses distributed to common stockholders
    
    
    1,882
    
    
    
    6,484Inventories
    
    
    20,463
    
    
    
    17,290Prepaid expenses and other
    
    
    5,582
    
    
    
    5,513Total current assets
    
    
    109,112
    
    
    
    101,209Property and equipment
    
    
    47,213
    
    
    
    41,748Less accumulated depreciation and amortization
    
    
    27,137
    
    
    
    24,628Net property and equipment
    
    
    20,076
    
    
    
    17,120Excess of cost over fair value of net assets of acquired businesses
    
    
    13,802
    
    
    
    13,802Deferred income taxes and other assets
    
    
    5,111
    
    
    
    4,347$
    148,101
    
    
    $
    136,478LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Current portion of long-term debt
    
    $
    755
    
    
    $
    478Accounts payable
    
    
    14,343
    
    
    
    14,672Accrued expenses
    
    
    26,457
    
    
    
    21,673Accrued income taxes
    
    
    3,461
    
    
    
    7,232Total current liabilities
    
    
    45,016
    
    
    
    44,055Long-term debt, less current portion:Technical services
    
    
    36,429
    
    
    
    26,561Information technology and government services
    
    
    133
    
    
    
    178Parent company
    
    
    5,000
    
    
    
    5,000Total long-term debt, less current portion
    
    
    41,562
    
    
    
    31,739Other liabilities
    
    
    11,026
    
    
    
    9,380Commitments and contingenciesStockholders equity:Common stock, without par value
    
    
    4,522
    
    
    
    4,507Additional paid-in capital
    
    
    124,025
    
    
    
    124,481Treasury stock, at cost
    
    
    (18,452
    )
    
    
    (20,028
    )Retained earnings (accumulated deficit)
    
    
    (53,153
    )
    
    
    (50,565
    )Accumulated other comprehensive income (loss)
    
    
    (6,445
    )
    
    
    (7,091
    )Total stockholders equity
    
    
    50,497
    
    
    
    51,304$
    148,101
    
    
    $
    136,478
  2




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XANSER CORPORATION AND SUBSIDIARIES
 
 CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In Thousands)
 (Unaudited)
 Nine Months EndedSeptember 30,2006
    
    
    2005Operating activities:Net income (loss)
    
    $
    (2,588
    )
    
    $
    (3,967
    )Adjustments to reconcile net income (loss) to net
cash provided by operating activities:Depreciation and amortization
    
    
    2,661
    
    
    
    2,729Provision for doubtful accounts
    
    
    1,895
    
    
    
    800Gain on sale of assets
    
    
    
    
    
    
    (2,102
    )Non-recurring expenses
    
    
    
    
    
    
    1,333Deferred income taxes
    
    
    79
    
    
    
    385Stock option expense
    
    
    132
    
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    (10,738
    )
    
    
    (7,047
    )Inventories
    
    
    (3,173
    )
    
    
    (1,494
    )Prepaid expenses and other
    
    
    (69
    )
    
    
    1,556Accounts payable and accrued expenses
    
    
    5,284
    
    
    
    3,291Net cash
used in (provided by) operating activities
    
    
    (6,517
    )
    
    
    (4,516
    )Investing activities:Capital expenditures
    
    
    (4,019
    )
    
    
    (3,210
    )Proceeds from sale of assets
    
    
    
    
    
    
    5,400Other, net
    
    
    (758
    )
    
    
    777Net cash used in investing activities
    
    
    (4,777
    )
    
    
    2,967Financing activities:Issuance of debt
    
    
    19,489
    
    
    
    448Payments on debt
    
    
    (9,066
    )
    
    
    (1,739
    )Common stock issued and other
    
    
    1,003
    
    
    
    2,313Decrease in receivable from businesses
distributed to common stockholders
    
    
    2
    
    
    
    130Net cash provided by financing activities
    
    
    11,428
    
    
    
    1,152Effect of exchange rate changes on cash
    
    
    286
    
    
    
    (305
    )Increase (decrease) in cash and cash equivalents
    
    
    420
    
    
    
    (702
    )Cash and cash equivalents at beginning of period
    
    
    21,526
    
    
    
    21,598Cash and cash equivalents at end of period
    
    $
    21,946
    
    
    $
    20,896Supplemental cash flow information:Cash paid for interest
    
    $
    1,757
    
    
    $
    863Cash paid for income taxes
    
    $
    1,855
    
    
    $
    1,476
  3




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XANSER CORPORATION AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS EQUITY
 (In Thousands)
 (Unaudited)
 AccumulatedAdditional
    
    
    
    
    
    
    Accumulated
    
    
    OtherCommon
    
    
    Paid-in
    
    
    Treasury
    
    
    Income
    
    
    ComprehensiveStock
    
    
    Capital
    
    
    Stock
    
    
    (Deficit)
    
    
    (Loss)Balance at December
31, 2005
    
    $
    4,507
    
    
    $
    124,481
    
    
    $
    (20,028
    )
    
    $
    (50,565
    )
    
    $
    (7,091
    )Net (loss) for the
period
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,588
    )Foreign currency
translation
adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    646Stock option
expense
    
    
    
    
    
    
    132
    
    
    
    
    
    
    
    
    
    
    
    Stock options
exercised
    
    
    15
    
    
    
    (588
    )
    
    
    1,576
    
    
    
    Balance at
September 30, 2006
    
    $
    4,522
    
    
    $
    124,025
    
    
    $
    (18,452
    )
    
    $
    (53,153
    )
    
    $
    (6,445
    )
  4




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##### Table of Contents



XANSER CORPORATION AND SUBSIDIARIES
 
 Notes to Condensed Consolidated Financial Statements
(Unaudited)
 1.
    
    GENERAL AND SIGNIFICANT ACCOUNTING POLICIESThe condensed consolidated financial statements include the accounts of Xanser Corporation
(Parent Company) and its subsidiaries (collectively, the Company). 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, 2006 and 2005 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, 2005. 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 at September 30, 2006, and the consolidated
results of income and cash flows for the periods ended September 30, 2006 and 2005. Operating
results for the three and nine months ended September 30, 2006 are not necessarily indicative of
the results that may be expected for the year ending December 31, 2006.Certain prior year condensed consolidated financial statement information in the condensed
consolidated statements of cash flows have been reclassified to conform with the year 2005 and
2006 presentations.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. In the quarter ended September 30,
2006, accrued income taxes and the receivable from businesses distributed to common stockholders were both
 reduced by $4.6 million related to the statutes for previously provided tax exposures. At
September 30, 2006, $1.9 million was recorded as receivable from businesses distributed to
common stockholders pursuant to the provisions of the Distribution Agreement. On July 1, 2005,
KSL was purchased by Valero L.P., and Valero L.P. affirmatively assumed the obligations of KSL
under the Distribution Agreement.2.
    
    ACQUISITIONOn December 31, 2005, Xanser Corporations (Xanser) wholly owned subsidiary, Furmanite
Worldwide, Inc. (together with certain of its affiliates, Furmanite), entered into an Asset
Purchase Agreement (Acquisition Agreement) with Flowserve US Inc. (together with its
affiliates IPSCO
 5




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XANSER CORPORATION AND SUBSIDIARIES
 Notes to Condensed Consolidated Financial Statements  (Unaudited)
 (UK) Limited, Flowserve Repair & Services B.V., Flowserve Management Company
and Flowserve Belgium N.V., Flowserve), pursuant to which Furmanite acquired substantially all
of the material operating assets of Flowserves General Services Group (GSG), including
certain working capital, and agreed to assume certain GSG liabilities, including certain
environmental liabilities pertaining to GSG, for a total net consideration of approximately
$17.4 million, subject to certain adjustments (which have not been finalized) based upon a
post-closing determination of GSGs working capital that was transferred to Furmanite (the
Acquisition). GSG provided maintenance, repair and distribution services for a broad array of
valves, piping systems and other process-system components with operating locations in North
America and Europe, and Furmanite has integrated the purchased assets and related business
activity with its existing technical services business. The transaction was consummated as of
the close of business on December 31, 2005.As of the period ending September 30, 2006, post
closing determination of the acquired working capital was still in process, and it is
anticipated that additional procedures will be performed prior to the finalization of the
process.3.
    
    STOCK-BASED COMPENSATIONPrior to January 1, 2006, the Company accounted for stock-based employee compensation under the
intrinsic value method as outlined in the provisions of APB Opinion No. 25, Accounting for
Stock Issued to Employees, and related interpretations while disclosing pro-forma net income
and net income per share as if the fair value method had been applied in accordance with
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based
Compensation. Under the intrinsic value method, no compensation expense was recognized if the
exercise price of the Companys employee stock options equaled or exceeded the market price of
the underlying stock on the date of grant. Since the Company had issued all stock option grants
with exercise prices equal to, or greater than, the market value of the common stock on the date
of grant, through December 31, 2005, no compensation cost was recognized in the consolidated
statements of income.Effective January 1, 2006, the Company adopted SFAS No. 123(R), Share-Based Payment. SFAS No.
123(R) replaces SFAS No. 123 and supersedes APB Opinion No.25. SFAS 123(R) requires that all
stock-based compensation be recognized as an expense in the financial statements and that such
costs be measured at the fair value of the award. This statement was adopted by the Company
using the modified prospective method, which requires the Company to recognize compensation
expense on a prospective basis. Therefore, prior period financial statements have not been
restated. Under this method, in addition to reflecting compensation expense for new share-based
payment awards, expense is also recognized to reflect the remaining vesting period of awards
that had been included in pro-forma disclosures in prior periods. Effective June 3, 2005, the
Company vested all outstanding options to give the option holders the opportunity to become
owners of the Companys common stock sooner than they could have under their original grants.
Shares issued upon exercise of the previously unvested portion of those options must be held and
not sold until the date on which they would have otherwise vested under the terms of the
original option grant and the plan. The impact of early vesting of the options on the net loss
for 2005 was not significant. Compensation expense recognized in the consolidated statements of
operations for the period ended September 30, 2006 includes options issued after June 3, 2005. The
Company issued stock option grants that vest evenly over a five-year period for 105,000 shares
for the nine months ended September 30, 2006. The Company issued stock option grants for 80,000
shares during the nine months ended September 30, 2005, at which time they were all vested.
 All options were granted at prices
greater than or equal to the market price at the date of grant. The weighted average fair
market value of options granted during the nine months ended September 30, 2006 and 2005 was
$1.55 and $0.97 per share, respectively. The maximum contractual term of the stock options is
10 years. The Company uses authorized but unissued shares of common stock for stock option
exercises
 6




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XANSER CORPORATION AND SUBSIDIARIES
 Notes to Condensed Consolidated Financial Statements  (Unaudited)
    After June 3, 2005Expected volatility
    
    
    34.1% to 37.6
    %Risk-free interest rate
    
    
    4.1% to 5.1
    %Expected dividends
    
    
    0
    %Expected term in years
    
    
    3.5
  Three months ended
    
    
    Nine months endedSeptember 30, 2005
    
    
    September 30, 2005Pro forma
    
    
    Pro formaNet income (loss)
    
    $
    41
    
    
    $
    (3,967
    )Stock-based employee compensation expense
determined under the fair value based method
(1)
    
    
    (49
    )
    
    
    (509
    )Pro forma net income (loss)
    
    $
    (8
    )
    
    $
    (4,476
    )Earnings (loss) per share:Basic and diluted, as reported (2)
    
    $
    (.00
    )
    
    $
    (.12
    )Basic and diluted, pro forma (2)
    
    $
    (.00
    )
    
    $
    (.14
    )
 7




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##### Table of Contents



XANSER CORPORATION AND SUBSIDIARIES
 Notes to Condensed Consolidated Financial Statements  (Unaudited)
 
 (1)
    
    Stock-based compensation expense for periods prior to year 2006 was calculated
based on the pro forma application of SFAS 123.(2)
    
    Earnings per share for periods prior to year 2006 represent pro forma information
based on SFAS 123.   Outstanding
    
    Average PriceShares
    
    Per ShareOutstanding at December 31, 2005
    
    
    1,611,694
    
    
    $
    2.47Granted
    
    
    105,000
    
    
    $
    4.73Exercised
    
    
    (470,488
    )
    
    $
    2.17Forfeited
    
    
    (171,000
    )
    
    $
    2.76Outstanding at September 30, 2006
    
    
    1,075,206
    
    
    $
    2.78Exercisable at September 30, 2006
    
    
    610,206
    
    
    $
    2.23
 WeightedAverageGrant DateOutstanding
    
    Fair ValueShares
    
    Per ShareNonvested at December 31, 2005
    
    
    525,000
    
    
    $
    .96Granted
    
    
    105,000
    
    
    $
    1.55Vested
    
    
    (90,000
    )
    
    $
    1.04Forfeited
    
    
    (75,000
    )
    
    $
    1.04Nonvested at September 30, 2006
    
    
    465,000
    
    
    $
    1.16
  8




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XANSER CORPORATION AND SUBSIDIARIES
 Notes to Condensed Consolidated Financial Statements  (Unaudited)
  AverageAverage Price per
    
    RemainingRange of Exercise
    
    Options
    
    Outstanding
    
    Exercisable
    
    ContractualPrice
    
    Outstanding
    
    Exercisable
    
    Option
    
    Option
    
    Life (years)$0.82 - $1.23
    
    
    20,000
    
    
    
    20,000
    
    
    $
    1.16
    
    
    $
    1.16
    
    
    
    0.4$1.24 - $1.86
    
    
    158,928
    
    
    
    158,928
    
    
    $
    1.59
    
    
    $
    1.59
    
    
    
    2.7$1.87 - $2.81
    
    
    373,778
    
    
    
    373,778
    
    
    $
    2.42
    
    
    $
    2.42
    
    
    
    6.9$2.82 - $5.34
    
    
    522,500
    
    
    
    57,500
    
    
    $
    3.46
    
    
    $
    3.14
    
    
    
    5.21,075,206
    
    
    
    610,206
    
    
    $
    2.78
    
    
    $
    2.23
    
    
    
    5.9
 4.
    
    COMPREHENSIVE INCOME (LOSS)Comprehensive income (loss) for the three and nine months ended September 30, 2006 and 2005 is
as follows:
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(in thousands)Net income (loss)
    
    $
    (3,308
    )
    
    $
    41
    
    
    $
    (2,588
    )
    
    $
    (3,967
    )Foreign currency
translation adjustment
    
    
    (711
    )
    
    
    134
    
    
    
    646
    
    
    
    (2,015
    )Comprehensive income (loss)
    
    $
    (4,019
    )
    
    $
    175
    
    
    $
    (1,942
    )
    
    $
    (5,982
    )
  9




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##### Table of Contents



XANSER CORPORATION AND SUBSIDIARIES
 Notes to Condensed Consolidated Financial Statements  (Unaudited)
 5.
    
    EARNINGS (LOSS) PER SHAREThe following is a reconciliation of basic and diluted earnings (loss) per share (in thousands,
except for per share amounts):
 WeightedNet
    
    
    Average
    
    
    PerIncome
    
    
    Common
    
    
    Share(Loss)
    
    
    Shares
    
    
    AmountThree Months Ended September 30, 2006Basic earnings (loss) per share Net income (loss)
    
    $
    (3,308
    )
    
    
    34,801
    
    
    $
    (.10
    )Effect of dilutive securities
    
    
    
    
    
    
    Diluted earnings (loss) per share Net income (loss)
    
    $
    (3,308
    )
    
    
    34,801
    
    
    $
    (.10
    )Three Months Ended September 30, 2005Basic earnings (loss) per share Net income (loss)
    
    $
    41
    
    
    
    33,844
    
    
    $
    .00Effect of dilutive securities
    
    
    
    
    
    
    351Diluted earnings (loss) per share Net income (loss)
    
    $
    41
    
    
    
    34,195
    
    
    $
    .00Nine Months Ended September 30, 2006Basic earnings (loss) per share Net income (loss)
    
    $
    (2,588
    )
    
    
    34,666
    
    
    $
    (.08
    )Effect of dilutive securities
    
    
    
    
    
    
    Diluted earnings (loss) per share Net income (loss)
    
    $
    (2,588
    )
    
    
    34,666
    
    
    $
    (.08
    )Nine Months Ended September 30, 2005Basic earnings (loss) per share Net income (loss)
    
    $
    (3,967
    )
    
    
    32,420
    
    
    $
    (.12
    )Effect of dilutive securities
    
    
    
    
    
    
    Diluted earnings (loss) per share Net income (loss)
    
    $
    (3,967
    )
    
    
    32,420
    
    
    $
    (.12
    )
 10




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XANSER CORPORATION AND SUBSIDIARIES
 Notes to Condensed Consolidated Financial Statements  (Unaudited)
 As a result of the net loss for the three months and nine months ended September 30, 2006,
1,154,315 and 1,299,831 stock options at the weighted average
exercise prices of $2.77 and
$2.64, respectively, were excluded from the computation of diluted earnings per share because
the effect would be anti-dilutive. As a result of the net loss for the nine months ended
September 30, 2005, 2,619,379 stock options at a weighted net average price of $1.92 were
excluded from the computation of diluted earnings per share because the effect would be
anti-dilutive. Options to purchase 133,500 and 30,432 shares of common stock at a weighted
average price of $2.79 and $3.07, respectively, were outstanding for the three and nine month
periods ended September 30, 2005, 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 the three and nine month periods ended September
30, 2006 and 2005, because the effect of assumed conversion would be anti-dilutive.6.
    
    INCOME TAXESIncome (loss) before income taxes is comprised of the following components:
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(in thousands)Domestic operations
    
    $
    (6,671
    )
    
    $
    (1,838
    )
    
    $
    (9,724
    )
    
    $
    (8,597
    )Foreign operations
    
    
    4,015
    
    
    
    3,174
    
    
    
    9,820
    
    
    
    7,187Income (loss) before income taxes
    
    $
    (2,656
    )
    
    $
    1,336
    
    
    $
    96
    
    
    $
    (1,410
    )
 11




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##### Table of Contents



XANSER CORPORATION AND SUBSIDIARIES
 Notes to Condensed Consolidated Financial Statements  (Unaudited)
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(in thousands)Expected tax expense (benefit) at statutory rates
    
    $
    (903
    )
    
    $
    454
    
    
    $
    33
    
    
    $
    (479
    )Increase (decrease) in taxes resulting from:Change in valuation allowance
    
    
    2,390
    
    
    
    735
    
    
    
    3,441
    
    
    
    3,182State income taxes, net
    
    
    (211
    )
    
    
    (65
    )
    
    
    (305
    )
    
    
    (282
    )Foreign tax rate differences
    
    
    (556
    )
    
    
    131
    
    
    
    (655
    )
    
    
    126Permanent differences
    
    
    90
    
    
    
    (46
    )
    
    
    170
    
    
    
    21Resolution of state and foreign tax issues
    
    
    (157
    )
    
    
    85
    
    
    
    
    
    
    
    (13
    )Other
    
    
    (1
    )
    
    
    1
    
    
    
    
    
    
    
    2Income tax expense
    
    $
    652
    
    
    $
    1,295
    
    
    $
    2,684
    
    
    $
    2,557
 7.
    
    RETIREMENT PLANOne 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
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(in thousands)Net periodic pension cost:Service cost
    
    $
    128
    
    
    $
    119
    
    
    $
    384
    
    
    $
    367Interest cost
    
    
    888
    
    
    
    890
    
    
    
    2,664
    
    
    
    2,740Expected return on plan assets
    
    
    (960
    )
    
    
    (963
    )
    
    
    (2,880
    )
    
    
    (2,966
    )Amortization of prior service cost
    
    
    (27
    )
    
    
    (27
    )
    
    
    (81
    )
    
    
    (84
    )Recognized net gain
    
    
    175
    
    
    
    132
    
    
    
    525
    
    
    
    406Net periodic pension cost
    
    $
    204
    
    
    $
    151
    
    
    $
    612
    
    
    $
    463
  12




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XANSER CORPORATION AND SUBSIDIARIES
 Notes to Condensed Consolidated Financial Statements  (Unaudited)
 Company to bring the unfunded position of the U.K. Plan to the Companys balance
sheet. As of December 31, 2005, the U.K. Plan reported a Net Pension Liability of $8,149,000.8.
    
    CONTINGENCIESThe 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.9.
    
    BUSINESS SEGMENT DATAThe 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 and government services segment has provided
consulting services, hardware sales and other related information management and processing
services to healthcare customers and governmental agencies. After the end of the quarter ended
June 30, 2006, management determined that it would complete the existing contracts with current
healthcare customers but would not pursue new healthcare business and that it would build its
information technology business in the government sector.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
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(in thousands)Business segment revenues:Technical services
    
    $
    57,588
    
    
    $
    35,403
    
    
    $
    170,764
    
    
    $
    100,911Information technology and
government services
    
    
    2,672
    
    
    
    4,998
    
    
    
    8,834
    
    
    
    18,130$
    60,260
    
    
    $
    40,401
    
    
    $
    179,598
    
    
    $
    119,041Technical services segment revenues:Underpressure services
    
    $
    19,950
    
    
    $
    12,774
    
    
    $
    57,853
    
    
    $
    38,049Turnaround and valve repair services
    
    
    25,322
    
    
    
    16,307
    
    
    
    78,681
    
    
    
    45,605Other services
    
    
    12,316
    
    
    
    6,322
    
    
    
    34,230
    
    
    
    17,257$
    57,588
    
    
    $
    35,403
    
    
    $
    170,764
    
    
    $
    100,911Business segment profit (loss):Technical services
    
    $
    1,677
    
    
    $
    3,542
    
    
    $
    9,589
    
    
    $
    7,986Information technology and
government services
    
    
    (2,677
    )
    
    
    (1,272
    )
    
    
    (5,082
    )
    
    
    (6,764
    )General corporate
    
    
    (944
    )
    
    
    (891
    )
    
    
    (3,085
    )
    
    
    (2,327
    )Operating income (loss)
    
    
    (1,944
    )
    
    
    1,379
    
    
    
    1,422
    
    
    
    (1,105
    )Interest income
    
    
    243
    
    
    
    213
    
    
    
    655
    
    
    
    487Interest expense
    
    
    (955
    )
    
    
    (256
    )
    
    
    (1,981
    )
    
    
    (792
    )Income (loss) before income taxes
    
    $
    (2,656
    )
    
    $
    1,336
    
    
    $
    96
    
    
    $
    (1,410
    )
 September 30,
    
    
    December 31,2006
    
    
    2005(in thousands)Total assets:Technical services (a)
    
    $
    120,610
    
    
    $
    100,299Information technology and government services
    
    
    9,197
    
    
    
    16,506General corporate
    
    
    18,294
    
    
    
    19,673$
    148,101
    
    
    $
    136,478
 
 (a)
    
    Technical services assets increased mainly due to additional working capital
required as a result of the acquisition of the operating assets of GSG. 10.
    
    NEW ACCOUNTING STANDARDSIn June 2006, the Financial Accounting Standards Board, or FASB, issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, or FIN 48, an interpretation of FASB No. 109,
Accounting for Income Taxes. FIN 48 clarifies the accounting for uncertainty in income taxes
recognized in an enterprises financial statements in accordance with FASB Statement No. 109,
Accounting for Income Taxes and prescribes a recognition threshold and measurement attribute for
the financial statement recognition and measurement of a tax position taken or expected to be
taken in a tax return. FIN 48 also provides guidance on de-recognition, classification,
interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is
effective for fiscal years beginning after December 15, 2006. The Company is in the process of
determining the impact of the adoption of this Interpretation on its consolidated financial
statements.
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XANSER CORPORATION AND SUBSIDIARIES
 Notes to Condensed Consolidated Financial Statements  (Unaudited)
 Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements.
  Fair Value Measurements
 14




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XANSER CORPORATION AND SUBSIDIARIES
 Notes to Condensed Consolidated Financial Statements  (Unaudited)
 15




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##### Table of Contents



XANSER CORPORATION AND SUBSIDIARIES
 
 Item 2.
    
    Managements Discussion and Analysis of FinancialCondition and Results of Operations
  Overview
  Consolidated Results of Operations
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(in thousands  except per share amounts)Revenues
    
    $
    60,260
    
    
    $
    40,401
    
    
    $
    179,598
    
    
    $
    119,041Operating income (loss)
    
    $
    (1,944
    )
    
    $
    1,379
    
    
    $
    1,422
    
    
    $
    (1,105
    )Net income (loss)
    
    $
    (3,308
    )
    
    $
    41
    
    
    $
    (2,588
    )
    
    $
    (3,967
    )Earnings (loss) per common share  basic and diluted
    
    $
    (.10
    )
    
    $
    
    
    
    $
    (.08
    )
    
    $
    (.12
    )Capital expenditures
    
    $
    1,167
    
    
    $
    532
    
    
    $
    4,019
    
    
    $
    3,210
   16




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##### Table of Contents



XANSER CORPORATION AND SUBSIDIARIES
 Item 2.
    
    Managements Discussion and Analysis of FinancialCondition and Results of Operations
  Technical Services
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(in thousands)Revenues:United States
    
    $
    22,106
    
    
    $
    7,176
    
    
    $
    70,568
    
    
    $
    21,499Europe
    
    
    29,644
    
    
    
    21,836
    
    
    
    83,718
    
    
    
    61,741Asia-Pacific
    
    
    5,838
    
    
    
    6,391
    
    
    
    16,478
    
    
    
    17,671Total revenues
    
    $
    57,588
    
    
    $
    35,403
    
    
    $
    170,764
    
    
    $
    100,911Operating income:United States
    
    $
    (2,873
    )
    
    $
    (23
    )
    
    $
    (1,474
    )
    
    $
    (31
    )Europe
    
    
    4,458
    
    
    
    3,493
    
    
    
    11,255
    
    
    
    7,878Asia-Pacific
    
    
    997
    
    
    
    1,032
    
    
    
    2,931
    
    
    
    2,852Headquarters
    
    
    (905
    )
    
    
    (960
    )
    
    
    (3,123
    )
    
    
    (2,713
    )Total operating income
    
    $
    1,677
    
    
    $
    3,542
    
    
    $
    9,589
    
    
    $
    7,986Capital expenditures
    
    $
    797
    
    
    $
    352
    
    
    $
    3,619
    
    
    $
    1,863
   17




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##### Table of Contents



XANSER CORPORATION AND SUBSIDIARIES
 Item 2.
    
    Managements Discussion and Analysis of FinancialCondition and Results of Operations
    Information Technology and Government Services
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(in thousands)Revenues
    
    $
    2,672
    
    
    $
    4,998
    
    
    $
    8,834
    
    
    $
    18,130Operating income (loss)
    
    $
    (2,677
    )
    
    $
    (1,272
    )
    
    $
    (5,082
    )
    
    $
    (6,764
    )Capital expenditures
    
    $
    12
    
    
    $
    180
    
    
    $
    42
    
    
    $
    1,347
   18




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##### Table of Contents



XANSER CORPORATION AND SUBSIDIARIES
 Item 2.
    
    Managements Discussion and Analysis of FinancialCondition and Results of Operations
    Income Taxes
   Liquidity and Capital Resources
    19




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XANSER CORPORATION AND SUBSIDIARIES
 Item 2.
    
    Managements Discussion and Analysis of FinancialCondition and Results of Operations
    Off-Balance Sheet Transactions
  Critical Accounting Policies and Estimates
   20




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XANSER CORPORATION AND SUBSIDIARIES
 Item 2.
    
    Managements Discussion and Analysis of FinancialCondition and Results of Operations
      21




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##### Table of Contents



XANSER CORPORATION AND SUBSIDIARIES
 Item 2.
    
    Managements Discussion and Analysis of FinancialCondition and Results of Operations
   New Accounting Standards
 Accounting for Uncertainty in Income Taxes Accounting for Income Taxes
 Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements.
 22




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XANSER CORPORATION AND SUBSIDIARIES
 Item 2.
    
    Managements Discussion and Analysis of FinancialCondition and Results of Operations
  Fair Value Measurements
  23




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XANSER CORPORATION AND SUBSIDIARIES
 
 Item 3. Quantitative and Qualitative Disclosure About Market Risk
 i.e.,
   
 Item 4. Controls and Procedures
   24




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##### Table of Contents



XANSER CORPORATION AND SUBSIDIARIES
 
 Part II  Other Information
 
 Item 1 A. Risk Factors
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 6. Exhibits
 (a)
    
    Exhibits.2.1
    
    Asset Purchase Agreement, dated December 31, 2005, among Flowserve US Inc., IPSCO (UK)
Limited, Flowserve Repair & Services B.V., Flowserve Management Company, Flowserve Belgium
N.V., Furmanite US GSG LLC, Furmanite GSG Limited, Furmanite GSG BVBA, Furmanite Worldwide,
Inc. and Furmanite GSG B.V., filed as Exhibit 2.1 of the exhibits to the Registrants
Current Report on Form 8-K filed on January 6, 2006, which exhibit is hereby incorporated
by reference.3.1
    
    Amended and Restated Xanser Corporation Bylaws as of September 14, 2006 filed herewith
as exhibit 3.1.3.2
    
    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.3.3
    
    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.3.4
    
    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.3.5
    
    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.3.6
    
    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.
 25




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##### Table of Contents



XANSER CORPORATION AND SUBSIDIARIES
 3.7
    
    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.3.8
    
    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.3.9
    
    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.10.1
    
    Change in Control Agreement effective August 31, 2006, which exhibit is filed herewith.10.2
    
    Change in Control Agreement effective August 31, 2006, which exhibit is filed herewith.10.3
    
    Change in Control Agreement effective August 31, 2006, which exhibit is filed herewith.10.4
    
    Change in Control Agreement effective August 31, 2006, which exhibit is filed herewith.10.5
    
    Change in Control Agreement effective August 31, 2006, which exhibit is filed herewith.31.1
    
    Certification of Chief Executive Officer, Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002, dated August 14, 2006.31.2
    
    Certification of Chief Financial Officer, Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002, dated August 14, 2006.32.1
    
    Certification of Chief Executive Officer, Pursuant to Section 906(a) of the
Sarbanes-Oxley Act of 2002, dated August 14, 2006.32.2
    
    Certification of Chief Financial Officer, Pursuant to Section 906(a) of the
Sarbanes-Oxley Act of 2002, dated August 14, 2006.
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XANSER CORPORATION AND SUBSIDIARIES
 
 Signature
  XANSER CORPORATION
(Registrant)Date:  November 14, 2006
    /s/  HOWARD C. WADSWORTHHoward C. WadsworthChief Accounting Officer(Duly Authorized Officer) 27