##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 (Mark One)
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 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 August 10, 2006No Par Value
    
    34,693,133 shares




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##### 



XANSER CORPORATION AND SUBSIDIARIES
 FORM 10-Q
QUARTER ENDED JUNE 30, 2006
 Page No.Part I. Financial InformationItem 1.
    
    Financial Statements (Unaudited)Condensed Consolidated Statements of Operations  Three
and Six Months Ended June 30, 2006 and 2005
    
    
    1Condensed Consolidated Balance Sheets  June 30, 2006
and December 31, 2005
    
    
    2Condensed Consolidated Statements of Cash Flows 
Six Months Ended June 30, 2006 and 2005
    
    
    3Notes to Condensed Consolidated Financial Statements
    
    
    4Item 2.
    
    Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    13Item 3.
    
    Quantitative and Qualitative Disclosure About Market Risk
    
    
    20Item 4.
    
    Controls and Procedures
    
    
    20Part II. Other InformationItem 1A.
    
    Risk Factors
    
    
    21Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    21Item 6.
    
    Exhibits
    
    
    21Certification 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
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenues:Services
    
    $
    64,291
    
    
    $
    38,842
    
    
    $
    118,874
    
    
    $
    73,233Products
    
    
    253
    
    
    
    4,627
    
    
    
    464
    
    
    
    5,407Total revenues
    
    
    64,544
    
    
    
    43,469
    
    
    
    119,338
    
    
    
    78,640Costs and expenses:Operating costs
    
    
    60,071
    
    
    
    37,221
    
    
    
    111,714
    
    
    
    72,015Cost of products sold
    
    
    42
    
    
    
    5,271
    
    
    
    264
    
    
    
    5,843Depreciation and amortization
    
    
    968
    
    
    
    851
    
    
    
    1,853
    
    
    
    1,829General and administrative
    
    
    1,102
    
    
    
    646
    
    
    
    2,141
    
    
    
    1,437Total costs and expenses
    
    
    62,183
    
    
    
    43,989
    
    
    
    115,972
    
    
    
    81,124Operating income (loss)
    
    
    2,361
    
    
    
    (520
    )
    
    
    3,366
    
    
    
    (2,484
    )Interest income
    
    
    193
    
    
    
    178
    
    
    
    412
    
    
    
    274Interest expense
    
    
    (469
    )
    
    
    (254
    )
    
    
    (1,026
    )
    
    
    (536
    )Income (loss) before income taxes
    
    
    2,085
    
    
    
    (596
    )
    
    
    2,752
    
    
    
    (2,746
    )Income tax (expense)
    
    
    (1,329
    )
    
    
    (1,107
    )
    
    
    (2,032
    )
    
    
    (1,262
    )Net income (loss)
    
    $
    756
    
    
    $
    (1,703
    )
    
    $
    720
    
    
    $
    (4,008
    )Earnings (loss) per common share:Basic
    
    $
    .02
    
    
    $
    (.05
    )
    
    $
    .02
    
    
    $
    (.12
    )Diluted
    
    $
    .02
    
    
    $
    (.05
    )
    
    $
    .02
    
    
    $
    (.12
    )
  1




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##### Table of Contents



XANSER CORPORATION AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
(Unaudited)
 June 30,
    
    
    December 31,2006
    
    
    2005(Unaudited)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    23,512
    
    
    $
    21,526Accounts receivable, trade
    
    
    59,880
    
    
    
    50,396Receivable from businesses distributed to
common stockholders
    
    
    6,487
    
    
    
    6,484Inventories
    
    
    19,732
    
    
    
    17,290Prepaid expenses and other
    
    
    4,981
    
    
    
    5,513Total current assets
    
    
    114,592
    
    
    
    101,209Property and equipment
    
    
    46,004
    
    
    
    41,748Less accumulated depreciation and amortization
    
    
    27,166
    
    
    
    24,628Net property and equipment
    
    
    18,838
    
    
    
    17,120Excess of cost over fair value of net assets of
acquired businesses
    
    
    13,802
    
    
    
    13,802Deferred income taxes and other assets
    
    
    5,389
    
    
    
    4,347$
    152,621
    
    
    $
    136,478LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Current portion of long-term debt
    
    $
    908
    
    
    $
    478Accounts payable
    
    
    14,507
    
    
    
    14,672Accrued expenses
    
    
    23,462
    
    
    
    21,673Accrued income taxes
    
    
    8,248
    
    
    
    7,232Total current liabilities
    
    
    47,125
    
    
    
    44,055Long-term debt, less current portion:Technical services
    
    
    36,404
    
    
    
    26,561Information technology and government services
    
    
    148
    
    
    
    178Parent company
    
    
    5,000
    
    
    
    5,000Total long-term debt, less current portion
    
    
    41,552
    
    
    
    31,739Other liabilities
    
    
    9,661
    
    
    
    9,380Commitments and contingenciesStockholders equity:Common stock, without par value
    
    
    4,515
    
    
    
    4,507Additional paid-in capital
    
    
    123,982
    
    
    
    124,481Treasury stock, at cost
    
    
    (18,635
    )
    
    
    (20,028
    )Retained earnings (accumulated deficit)
    
    
    (49,845
    )
    
    
    (50,565
    )Accumulated other comprehensive income (loss)
    
    
    (5,734
    )
    
    
    (7,091
    )Total stockholders equity
    
    
    54,283
    
    
    
    51,304$
    152,621
    
    
    $
    136,478
  2




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##### Table of Contents



XANSER CORPORATION AND SUBSIDIARIES
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (In Thousands)
(Unaudited)
 Six Months EndedJune 30,2006
    
    
    2005Operating activities:Net income (loss)
    
    $
    720
    
    
    $
    (4,008
    )Adjustments to reconcile net income (loss) to
net cash provided by operating activities:Depreciation and amortization
    
    
    1,853
    
    
    
    1,829Provision for doubtful accounts
    
    
    1,379
    
    
    
    46Deferred income taxes
    
    
    (402
    )
    
    
    375Stock option expense
    
    
    122
    
    
    
    Changes in operating assets and liabilities:Accounts receivable
    
    
    (10,863
    )
    
    
    (6,706
    )Inventories
    
    
    (2,442
    )
    
    
    (2,441
    )Prepaid expenses and other
    
    
    532
    
    
    
    1,617Accounts payable and accrued expenses
    
    
    3,739
    
    
    
    6,290Net cash used in operating activities
    
    
    (5,362
    )
    
    
    (2,998
    )Investing activities:Capital expenditures
    
    
    (2,852
    )
    
    
    (2,678
    )Other liabilities
    
    
    281
    
    
    
    149Other, net
    
    
    (861
    )
    
    
    (2,455
    )Net cash used in investing activities
    
    
    (3,432
    )
    
    
    (4,984
    )Financing activities:Issuance of debt
    
    
    18,000
    
    
    
    Payments on debt
    
    
    (8,336
    )
    
    
    (472
    )Common stock issued and other
    
    
    780
    
    
    
    139Increase (decrease) in receivable from businesses distributed
to common stockholders
    
    
    (3
    )
    
    
    218Net cash provided by (used in) financing activities
    
    
    10,441
    
    
    
    (115
    )Effect of exchange rate changes on cash
    
    
    339
    
    
    
    (283
    )Increase in cash and cash equivalents
    
    
    1,986
    
    
    
    (8,380
    )Cash and cash equivalents at beginning of period
    
    
    21,526
    
    
    
    21,598Cash and cash equivalents at end of period
    
    $
    23,512
    
    
    $
    13,218Supplemental cash flow information:Cash paid for interest
    
    $
    1,005
    
    
    $
    512Cash paid for income taxes
    
    $
    825
    
    
    $
    1,126
  3




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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 six month periods ended June
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 June 30, 2006, and the consolidated results of
income and cash flows for the periods ended June 30, 2006 and 2005. Operating results for the
three and six months ended June 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 flow
have been reclassified to conform with the year 2005 and the 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. At June 30,
2006, $6.5 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 (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
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XANSER CORPORATION AND SUBSIDIARIES
 Notes to Condensed Consolidated Financial Statements
(Unaudited)
 that was transferred to Furmanite (the Acquisition). GSG provides 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 will integrate
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 June 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
income for the quarter ended June 30, 2006 includes options issued after June 3, 2005. The
Company issued stock option grants that vest evenly over a five-year period for 70,000 shares
during the second quarter of 2006. 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 six months ended June 30, 2006 was $1.40 per share. The Company uses
authorized but unissued shares of common stock for stock option exercises pursuant to the
Companys stock option plans and treasury stock for issuances outside of the plan. The impact of
the adoption of Statement 123(R) on the unvested options outstanding at June 30, 2006 will
result in approximately $446,000 in expense over the remaining vesting period of approximately
five years.The Company used the Black-Scholes option-pricing model (Black-Scholes) as its method of
valuation under SFAS 123(R) in fiscal year 2006 and a single option award approach. This fair
value is then amortized on a straight-line basis over the requisite service periods of the
awards, which is generally the vesting period. Black-Scholes was also previously used for the
Companys pro forma
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##### Table of Contents



XANSER CORPORATION AND SUBSIDIARIES
 Notes to Condensed Consolidated Financial Statements
(Unaudited)
 information required under SFAS 123 for periods prior to fiscal year 2006. The fair value of
share-based payment awards on the date of grant as determined by the Black-Scholes model is
affected by the Companys stock price as well as other assumptions. These assumptions include,
but are not limited to, the expected stock price volatility over the term of the awards and
actual and projected employee stock option exercise behaviors.The weighted-average estimated value of employee stock options granted after June 3, 2005 was
estimated using the Black-Scholes model with the following weighted-average assumptions:
 After June 3, 2005Expected volatility
    
    
    37.8
    %Risk-free interest rate
    
    
    4.2
    %Expected dividends
    
    
    0
    %Expected term in years
    
    
    3.5
  Three months ended
    
    Six months endedJune 30, 2005
    
June 30, 2005Pro
    
    Proforma
    
    forma(In thousands, except per share data)Net income (loss)
    
    $
    (1,703
    )
    
    $
    (4,008
    )Stock-based employee compensation expense
determined under the fair value based method
(1)
    
    
    (426
    )
    
    
    (460
    )Pro forma net income (loss)
    
    $
    (2,129
    )
    
    $
    (4,468
    )Earnings (loss) per share:Basic and diluted, as reported (2)
    
    $
    (.05
    )
    
    $
    (.12
    )Basic and diluted, pro forma (2)
    
    $
    (.06
    )
    
    $
    (.13
    )
 
 (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.  6




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##### Table of Contents



XANSER CORPORATION AND SUBSIDIARIES
 Notes to Condensed Consolidated Financial Statements
(Unaudited)
  Outstanding
    
    Average PriceShares
    
    Per ShareOutstanding at December 31, 2005
    
    
    1,611,694
    
    
    $
    2.47Granted
    
    
    70,000
    
    
    $
    4.43Exercised
    
    
    (365,850
    )
    
    $
    2.03Forfeited
    
    
    (92,000
    )
    
    $
    2.47Outstanding at June 30, 2006
    
    
    1,223,844
    
    
    $
    2.70Exercisable at June 30, 2006
    
    
    628,844
    
    
    $
    2.17
 Weighted AverageGrant Date FairOutstanding
    
    ValueShares
    
    Per ShareNonvested at December 31, 2005
    
    
    525,000
    
    
    $
    .96Granted
    
    
    70,000
    
    
    $
    1.40Vested
    
    
    
    
    
    $
    Forfeited
    
    
    
    
    
    $
    Nonvested at June 30, 2006
    
    
    595,000
    
    
    $
    1.08
   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
    
    
    
    0.9$1.24 - $1.86
    
    
    171,749
    
    
    
    171,749
    
    
    $
    1.60
    
    
    $
    1.59
    
    
    
    3.1$1.87 - $2.81
    
    
    411,595
    
    
    
    405,595
    
    
    $
    2.39
    
    
    $
    2.39
    
    
    
    6.9$2.82 - $3.45
    
    
    620,500
    
    
    
    31,500
    
    
    $
    3.28
    
    
    $
    3.12
    
    
    
    5.51,223,844
    
    
    
    628,844
    
    
    $
    2.70
    
    
    $
    2.17
    
    
    
    5.9
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##### Table of Contents



XANSER CORPORATION AND SUBSIDIARIES
 Notes to Condensed Consolidated Financial Statements
(Unaudited)
 4.
    
    COMPREHENSIVE INCOME (LOSS)Comprehensive income (loss) for the three and six months ended June 30, 2006 and 2005 is as
follows:
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(in thousands)Net income (loss)
    
    $
    756
    
    
    $
    (1,703
    )
    
    $
    720
    
    
    $
    (4,008
    )Foreign currency
translation adjustment
    
    
    486
    
    
    
    (1,444
    )
    
    
    1,357
    
    
    
    (2,149
    )Comprehensive income (loss)
    
    $
    1,242
    
    
    $
    (3,147
    )
    
    $
    2,077
    
    
    $
    (6,157
    )
  8




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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 June 30, 2006Basic earnings (loss) per share 
    
    $
    756
    
    
    
    34,725
    
    
    $
    .02Net income (loss)Effect of dilutive securities
    
    
    
    
    
    
    528Diluted earnings (loss) per share Net income (loss)
    
    $
    756
    
    
    
    35,253
    
    
    $
    .02Three Months Ended June 30, 2005Basic earnings (loss) per share 
    
    $
    (1,703
    )
    
    
    32,430
    
    
    $
    (.05
    )Net income (loss)Effect of dilutive securities
    
    
    
    
    
    
    Diluted earnings (loss) per share Net income (loss)
    
    $
    (1,703
    )
    
    
    32,430
    
    
    $
    (.05
    )Six Months Ended June 30, 2006Basic earnings (loss) per share Net income (loss)
    
    $
    720
    
    
    
    34,591
    
    
    $
    .02Effect of dilutive securities
    
    
    
    
    
    
    591Diluted earnings (loss) per share Net income (loss)
    
    $
    720
    
    
    
    35,182
    
    
    $
    .02Six Months Ended June 30, 2005Basic earnings (loss) per share Net income (loss)
    
    $
    (4,008
    )
    
    
    32,394
    
    
    $
    (.12
    )Effect of dilutive securities
    
    
    
    
    
    
    Diluted earnings (loss) per share Net income (loss)
    
    $
    (4,008
    )
    
    
    32,394
    
    
    $
    (.12
    )
 9




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##### Table of Contents



XANSER CORPORATION AND SUBSIDIARIES
 Notes to Condensed Consolidated Financial Statements
(Unaudited)
 As a result of the net loss for the three months and six months ended June 30, 2005, 3,106,000
and 3,173,000 stock options at a weighted net average price of $1.89 and $1.88, respectively,
were excluded from the computation of diluted earnings per share because the effect would be
anti-dilutive. Options to purchase 160,000 and 29,000 shares of common stock at a weighted
average price of $2.76 and $3.05, respectively, were outstanding for the three and six month
periods ended June 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 six month periods ended June 30,
2006 and 2005, because the effects of assumed conversion would be anti-dilutive.6.
    
    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
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(in thousands)Net periodic pension cost:Service cost
    
    $
    126
    
    
    $
    122
    
    
    $
    256
    
    
    $
    248Interest cost
    
    
    875
    
    
    
    908
    
    
    
    1,776
    
    
    
    1,850Expected return on plan assets
    
    
    (946
    )
    
    
    (983
    )
    
    
    (1,920
    )
    
    
    (2,003
    )Amortization of prior service
cost
    
    
    (26
    )
    
    
    (28
    )
    
    
    (54
    )
    
    
    (57
    )Recognized net gain
    
    
    173
    
    
    
    134
    
    
    
    350
    
    
    
    274Net periodic pension cost
    
    $
    202
    
    
    $
    153
    
    
    $
    408
    
    
    $
    312
 In March of 2006, the Financial Accounting Standards Board issued an exposure draft which would
amend the disclosure requirements of FASB No. 87 regarding how employers account for their
pension and other postretirement obligations for the fiscal years ending after December 15,
2006. The Company is currently evaluating the provisions of the exposure draft and the impact
to the Companys financial statements upon adoption of the amendment. The amendment will
require the 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 $8,149,000.7.
    
    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.
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##### Table of Contents



XANSER CORPORATION AND SUBSIDIARIES
 Notes to Condensed Consolidated Financial Statements
(Unaudited)
 8.
    
    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 provides
consulting services, hardware sales and other related information management and processing
services to healthcare, governmental, insurance and financial institutions. 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.
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##### Table of Contents



XANSER CORPORATION AND SUBSIDIARIES
 Notes to Condensed Consolidated Financial Statements
(Unaudited)
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(in thousands)Business segment revenues:Technical services
    
    $
    61,364
    
    
    $
    34,849
    
    
    $
    113,176
    
    
    $
    65,508Information technology and
government services
    
    
    3,180
    
    
    
    8,620
    
    
    
    6,162
    
    
    
    13,132$
    64,544
    
    
    $
    43,469
    
    
    $
    119,338
    
    
    $
    78,640Technical services segment
revenues:Underpressure services
    
    $
    19,403
    
    
    $
    12,333
    
    
    $
    37,903
    
    
    $
    25,275Turnaround and valve
repair services
    
    
    30,099
    
    
    
    16,677
    
    
    
    53,359
    
    
    
    29,298Other services
    
    
    11,862
    
    
    
    5,839
    
    
    
    21,914
    
    
    
    10,935$
    61,364
    
    
    $
    34,849
    
    
    $
    113,176
    
    
    $
    65,508Business segment profit (loss):Technical services
    
    $
    4,997
    
    
    $
    2,913
    
    
    $
    7,912
    
    
    $
    4,444Information technology and
government services
    
    
    (1,534
    )
    
    
    (2,788
    )
    
    
    (2,405
    )
    
    
    (5,492
    )General corporate
    
    
    (1,102
    )
    
    
    (645
    )
    
    
    (2,141
    )
    
    
    (1,436
    )Operating income (loss)
    
    
    2,361
    
    
    
    (520
    )
    
    
    3,366
    
    
    
    (2,484
    )Interest income
    
    
    193
    
    
    
    178
    
    
    
    412
    
    
    
    274Interest expense
    
    
    (469
    )
    
    
    (254
    )
    
    
    (1,026
    )
    
    
    (536
    )Income (loss) before
income taxes
    
    $
    2,085
    
    
    $
    (596
    )
    
    $
    2,752
    
    
    $
    (2,746
    )
 June 30,
    
    
    December 31,2006
    
    
    2005(in thousands)Total assets:Technical
services (a)
    
    $
    118,788
    
    
    $
    100,299Information technology and government
services
    
    
    11,030
    
    
    
    16,506General corporate
    
    
    22,803
    
    
    
    19,673$
    152,621
    
    
    $
    136,478
 (a)
   Technical services assets increased due to additional working
capital required as a result of the acquisition of the operating
assets of GSG.
 9.
    
    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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##### Table of Contents



XANSER CORPORATION AND SUBSIDIARIES
 
 Item 2.
Managements Discussion and Analysis of Financial Condition and Results of Operations
  Overview
  Consolidated Results of Operations
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(in thousandsexcept per share amounts)Revenues
    
    $
    64,544
    
    
    $
    43,469
    
    
    $
    119,338
    
    
    $
    78,640Operating income (loss)
    
    $
    2,361
    
    
    $
    (520
    )
    
    $
    3,366
    
    
    $
    (2,484
    )Net income (loss)
    
    $
    756
    
    
    $
    (1,703
    )
    
    $
    720
    
    
    $
    (4,008
    )Earnings (loss) per
common share  basic
and diluted
    
    $
    .02
    
    
    $
    (.05
    )
    
    $
    .02
    
    
    $
    (.12
    )Capital expenditures
    
    $
    1,481
    
    
    $
    1,351
    
    
    $
    2,852
    
    
    $
    2,678
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XANSER CORPORATION AND SUBSIDIARIES
 Item 2.
    
    Managements Discussion and Analysis of FinancialCondition and Results of Operations
  Technical Services
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(in thousands)Revenues:United States
    
    $
    25,674
    
    
    $
    7,215
    
    
    $
    48,462
    
    
    $
    14,323Europe
    
    
    30,271
    
    
    
    21,550
    
    
    
    54,074
    
    
    
    39,905Asia-Pacific
    
    
    5,419
    
    
    
    6,084
    
    
    
    10,640
    
    
    
    11,280Total revenues
    
    $
    61,364
    
    
    $
    34,849
    
    
    $
    113,176
    
    
    $
    65,508Operating income:United States
    
    $
    499
    
    
    $
    55
    
    
    $
    1,398
    
    
    $
    (8
    )Europe
    
    
    4,822
    
    
    
    2,651
    
    
    
    6,842
    
    
    
    4,285Asia-Pacific
    
    
    1,104
    
    
    
    1,080
    
    
    
    1,933
    
    
    
    1,820Headquarters
    
    
    (1,428
    )
    
    
    (873
    )
    
    
    (2,261
    )
    
    
    (1,653
    )Total operating income
    
    $
    4,997
    
    
    $
    2,913
    
    
    $
    7,912
    
    
    $
    4,444Capital expenditures
    
    $
    1,472
    
    
    $
    730
    
    
    $
    2,822
    
    
    $
    1,511
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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
    
    
    Six Months EndedJune 30,
    
    
    June 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(in thousands)Revenues
    
    $
    3,180
    
    
    $
    8,620
    
    
    $
    6,162
    
    
    $
    13,132Operating income (loss)
    
    $
    (1,534
    )
    
    $
    (2,788
    )
    
    $
    (2,405
    )
    
    $
    (5,492
    )Capital expenditures
    
    $
    9
    
    
    $
    621
    
    
    $
    30
    
    
    $
    1,167
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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
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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
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XANSER CORPORATION AND SUBSIDIARIES
 Item 2.
    
    Managements Discussion and Analysis of FinancialCondition and Results of Operations
       18




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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
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##### Table of Contents



XANSER CORPORATION AND SUBSIDIARIES
 
 Item 3.
    
    Quantitative and Qualitative Disclosure About Market Risk
 i.e.,
   
 Item 4.
    
    Controls and Procedures
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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
    
    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.
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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 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.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: August 14, 2006
    
    /s/ HOWARD C. WADSWORTH

Howard C. WadsworthChief Accounting Officer(Duly Authorized Officer)
 23