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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED MARCH 31, 1998
COMMISSION FILE NO. 1-3920
KINARK CORPORATION
(Exact name of the registrant as specified in its charter)
DELAWARE 71-0268502
(State of Incorporation) (I.R.S. Employer Identification No.)
2250 EAST 73RD STREET
TULSA, OKLAHOMA 74136
(Address of principal executive offices)
Registrant's telephone number: (918) 494-0964
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 and 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of March 31, 1998.
Common Stock $ .10 Par Value . . . . . 6,778,345
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<TABLE>
KINARK CORPORATION AND SUBSIDIARIES
INDEX TO QUARTERLY REPORT ON FORM 10-Q
<CAPTION>
PAGE
<S> <C>
PART I. FINANCIAL INFORMATION
Forward Looking Statements or Information
Item 1. Financial Statements
Independent Accountants' Review Report
Condensed Consolidated Balance Sheets as
of March 31, 1998 (unaudited), and
December 31, 1997
Condensed Consolidated Statements of
Earnings for the three months ended
March 31, 1998 and 1997 (unaudited)
Condensed Consolidated Statements of
Cash Flows for the three months ended
March 31, 1998 and 1997 (unaudited)
Notes to Condensed Consolidated Financial
Statements for the three months ended
March 31, 1998 and 1997 (unaudited)
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations
Item 3. Quantitative and Qualitative Disclosure
About Market Risks
PART II. OTHER INFORMATION
SIGNATURES
</TABLE>
FORWARD LOOKING STATEMENTS OR INFORMATION
Certain statements in this Form 10-Q, including information set forth under
the caption "Management's Discussion and Analysis of Financial Condition and
Results of Operations", constitute "Forward-Looking Statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. The Company
cautions investors that forward-looking statements included in this Form 10-Q,
or hereafter included in other pubicly available documents filed with the
Securities and Exchange Commission, reports to the Company's stockholders and
other pubically available statements issued or released by the Company involve
significant risks, uncertainties, and other factors which could cause the
Company's actual results, performance (financial or operating) or
achievements to differ materially from the future results, performance
(financial or operating) or achievements expressed or implied by such forward-
looking statements. The Company believes that the important factors set forth
in the Company's cautionary statements at Exhibit 99 to this Form 10-Q could
cause such a material difference to occur and investors are referred to
Exhibit 99 for such cautionary statements.
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
To the Board of Directors and Stockholders of
Kinark Corporation:
We have reviewed the accompanying condensed consolidated balance sheet of
Kinark Corporation and subsidiaries (the "Company") as of March 31, 1998,
and the related condensed consolidated statements of earnings and of cash flows
for the three month periods ended March 31, 1998 and 1997. These financial
statements are the responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and of making inquiries of persons responsible for
financial and accounting matters. It is substantially less in scope than
an audit conducted in accordance with generally accepted auditing standards,
the objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to such condensed consolidated financial statements for them
to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Kinark Corporation and
subsidiaries as of December 31, 1997, and the related consolidated statements
of operations, stockholders' equity, and cash flows for the year then ended
(not presented herein); and in our report dated February 20, 1998 (except as
to the first paragraph of the Contingencies footnote, for which the date is
March 6, 1998) we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in the
accompanying condensed consolidated balance sheet as of December 31, 1997 is
fairly stated, in all material respects, in relation to the consolidated
balance sheet from which it has been derived.
/s/Deloitte & Touche LLP
Tulsa, Oklahoma
May 13, 1998
<TABLE>
KINARK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<CAPTION>
Unaudited
MARCH 31 Dec 31
(Dollars in Thousands) 1998 1997
- -------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash $ 87 $ 259
Trade receivables, net 7,017 7,094
Inventories 4,175 3,503
Prepaid expenses and other assets 770 360
Deferred tax asset, net 717 717
------ ------
TOTAL CURRENT ASSETS 12,766 11,933
------ ------
PROPERTY, PLANT AND EQUIPMENT, AT COST
Land 707 707
Chemical storage facilities and
warehousing equipment 11,280 11,253
Galvanizing plants and equipment 20,812 20,793
Other 285 336
------ ------
33,084 33,089
Less: Allowance for depreciation 18,393 18,199
------ ------
TOTAL PROPERTY, PLANT & EQUIPMENT, NET 14,691 14,890
------ ------
DEFERRED TAX ASSET, NET 606 667
GOODWILL, NET 3,965 4,009
OTHER ASSETS 464 456
------ ------
TOTAL ASSETS $ 32,492 $ 31,955
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Trade accounts payable $ 1,735 $ 1,672
Accrued payroll and employee benefits 753 1,176
Other taxes 942 818
Other accrued liabilities 1,841 1,187
Current maturities of
long-term obligations 878 916
------ ------
TOTAL CURRENT LIABILITIES 6,149 5,769
------ ------
PENSION AND RELATED LIABILITIES 863 928
LONG-TERM OBLIGATIONS 8,013 8,131
COMMITMENTS AND CONTINGENCIES --- ---
STOCKHOLDERS' EQUITY
Common stock 819 819
Additional paid-in capital 17,364 17,364
Minimum pension liability (197) (197)
Retained earnings 5,293 4,953
Less: Treasury stock at cost (5,812) (5,812)
------ ------
TOTAL STOCKHOLDERS' EQUITY 17,467 17,127
------ ------
TOTAL LIABILITIES &
STOCKHOLDERS' EQUITY $ 32,492 $ 31,955
====== ======
</TABLE>
See notes to condensed consolidated financial statements.
<TABLE>
KINARK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
Unaudited
<CAPTION>
Three Months Ended
March 31
(Dollars in Thousands ------------------------
Except per Share Amounts) 1998 1997
- ------------------------------------------------------------------------
<S> <C> <C>
SALES $ 12,164 $ 11,724
COSTS AND EXPENSES
Cost of sales 9,355 9,167
Selling, general & administrative 1,645 1,286
Depreciation and amortization 701 632
------ ------
TOTAL COSTS AND EXPENSES 11,701 11,085
------ ------
OPERATING EARNINGS 463 639
OTHER (INCOME) EXPENSE
Interest expense, net 176 203
Other income (309) ---
------ ------
TOTAL OTHER (INCOME) EXPENSE (133) 203
EARNINGS BEFORE INCOME TAXES 596 436
Income tax expense 256 184
------ ------
NET EARNINGS $ 340 $ 252
====== ======
BASIC EARNINGS PER COMMON SHARE $ .05 $ .04
DILUTED EARNINGS PER COMMON SHARE $ .05 $ .04
</TABLE>
See notes to condensed consolidated financial statements.
<TABLE>
KINARK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
<CAPTION>
Three Months Ended
March 31
--------------------
(Dollars in Thousands) 1998 1997
- -----------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net earnings $ 340 $ 252
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 701 632
Gain on involuntary conversion of assets (309) ---
Deferred income taxes 61 240
Change in assets and liabilities:
Accounts receivable 77 (316)
Inventories and other (1,090) 283
Accounts payable, accrued liabilities and other 353 (231)
------ ------
NET CASH PROVIDED BY OPERATING ACTIVITIES 133 860
INVESTING ACTIVITIES
Capital expenditures (474) (573)
Proceeds from involuntary conversion of assets 325 ---
Acquisition of galvanizing business --- (2,236)
------ ------
NET CASH USED FOR INVESTING ACTIVITIES (149) (2,809)
FINANCING ACTIVITIES
Proceeds from long-term obligations 4,071 2,810
Payments on long-term obligations (4,227) (2,624)
------ ------
NET CASH PROVIDED BY (USED FOR)
FINANCING ACTIVITIES (156) 186
------ ------
DECREASE IN CASH (172) (1,763)
CASH AT BEGINNING OF PERIOD 259 2,041
------ ------
CASH AT END OF PERIOD $ 87 $ 278
====== ======
</TABLE>
See notes to condensed consolidated financial statements.
KINARK CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
UNAUDITED
NOTE 1. BASIS OF PRESENTATION
---------------------
The condensed consolidated financial statements included in this report
have been prepared by Kinark Corporation (the "Company") pursuant to the
rules and regulations of the Securities and Exchange Commission for interim
reporting and include all normal and recurring adjustments which are, in the
opinion of management, necessary for a fair presentation. These financial
statements have not been audited by an independent accountant. The condensed
consolidated financial statements include the accounts of the Company and its
subsidiaries.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations for interim reporting. The Company believes that the disclosures
are adequate to make the information presented not misleading. However,
these financial statements should be read in conjunction with the financial
statements and notes thereto included in the Company's Annual Report on
Form 10-K, for the year ended December 31, 1997. The financial data for the
interim periods presented may not necessarily reflect the results to be
anticipated for the complete year.
NOTE 2. EARNINGS PER COMMON SHARE
-------------------------
Diluted earnings per common share for the periods presented has been
computed based upon the weighted average number of shares outstanding adjusted
for the dilutive effect of stock options of 6,793,832 and 6,799,526 for the
three months ended March 31, 1998 and 1997 respectively. Basic earnings per
common share for these same periods has been computed based upon the average
number of shares outstanding of 6,778,345 for each period.
NOTE 3. INVENTORIES
-----------
Inventories consist primarily of raw zinc "pigs," molten zinc in
galvanizing kettles and other chemicals and materials used in the hot dip
galvanizing process. All inventories are stated at the lower of cost or
market with market value based on ultimate realizable value from the
galvanizing process. Zinc cost is determined on a last-in- first-out (LIFO)
basis. Other inventories are valued primarily on an average cost basis.
NOTE 4. DEBT OBLIGATIONS
----------------
In 1997, the Company entered into a two-year bank credit agreement which
provides a $8,500,000 maximum revolving line of credit, a $1,250,000
advancing term loan for expansion of galvanizing plants, and a $3,500,000
term loan, all of which expire May 1999.
Substantially all of the Company's accounts receivable, inventories and
fixed assets are pledged as collateral under the agreement, and the agreement
is secured by a guaranty from each of the Company's subsidiaries. Amounts
borrowed under the agreement bear interest at prime minus or plus a spread
ranging from minus 25 basis points to plus 50 basis points, determined by a
coverage ratio of defined earnings to debt service.
Term loan payments are based on a five year amortization schedule with
equal monthly payments of principal and interest. The advancing term loan,
once funded, will require equal monthly payments of principal and interest
based on a seven year amortization schedule.
The revolver may be paid down without penalty, or additional funds may be
borrowed up to the revolver limits. The term loan and the advancing term
loan may be pre-paid without penalty. The agreement provides for capital
expenditures related to a minimum coverage ratio of defined earnings to debt
service plus capital expenditures, limits the pledging of assets for new
debt, and requires the Company to maintain a minimum net worth. The Company
was in compliance with such covenants at March 31, 1998.
NOTE 5. NEW ACCOUNTING STANDARDS
------------------------
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Comprehensive Income", and SFAS
No. 131, "Disclosure About Segments of an Enterprise", for the year ending
December 31, 1998.
SFAS No. 130 provides for a disclosure of the components of comprehensive
income necessary to reconcile reported net earnings with the net change in
retained earnings for the current reporting period. At March 31, 1998, there
was no difference between net earnings and comprehensive income. SFAS
No. 131 modifies current segment reporting requirements and establishes
criteria for reported disclosures about a company's products and services,
geographic areas and major customers in annual and interim financial
statements. The Company does not believe that there will be significant
reporting changes resulting from adoption of SFAS No. 131.
NOTE 6. INVOLUNTARY CONVERSION OF ASSETS
--------------------------------
During the first quarter of 1998, fire destroyed an acid recycling system
at one of the Company's galvanizing plants. Production at the facility was not
significantly affected by the incident and no personal injuries were sustained.
The acid recycling system was covered by insurance for its current replacement
value. As a result of the expected receipt of insurance proceeds, the Company
recorded a pre-tax gain of $309,000 for the first quarter of 1998, and has
committed to purchase a new acid recovery system for $410,000.
NOTE 7. COMMITMENTS AND CONTINGENCIES
-----------------------------
In 1995 the Company's galvanizing subsidiary participated with the United
States Environmental Protection Agency ("EPA") in the removal of soil from a
former galvanizing site in Philadelphia, PA sold in 1981. In 1995, the
Company was notified by the EPA that all requirements relating to the
performance of the Response Action Plan had been completed. Subsequently in
November 1997, the Company was advised by the EPA that it would seek recovery
of response costs of approximately $480,000 associated with the environmental
cleanup that had been performed at the former Philadelphia site. On March 6,
1998, the Company was informed that the Department of Justice ("DOJ") had
filed a lawsuit naming North American Galvanizing Company and Boyles
Galvanizing Company (a former subsidiary company merged into North American
Galvanizing Company in 1997) in a CERCLA Cost Recovery Action for
approximately $480,000, in connection with the cleanup of the Philadelphia
site. The Company had been holding discussions on the matter with DOJ, and
in May 1998, the parties reached an agreement to settle the EPA's claims. As
a result, the Company recorded a pre-tax charge to cost of sales of $158,000
for the quarter ended March 31, 1998 for the estimated net impact of the
settlement. The parties are now in the process of drafting a Consent Decree
to finalize agreement on the terms and conditions of that decree.
NAG received notice on April 21, 1997 from the Illinois Environmental
Protection Agency ("IEPA") that it was a potentially responsible party under
the Comprehensive Environmental Response, Compensation, and Liability
Information System ("CERCLIS") in connection with cleanup of an abandoned
site formerly owned by Sandoval Zinc Co. Sandoval had operated a secondary
zinc smelter at the site until it closed in 1985. The IEPA notice includes
NAG as one of 59 organizations which arranged for the treatment and disposal
of hazardous substances at Sandoval. The Company is in the process of
determining the proportional share of substances that NAG shipped to
Sandoval, and does not believe based on current information that the ultimate
resolution of this matter will have a material adverse impact on the
Company's final position or results of operations.
Various litigation arising in the ordinary course of business is pending
against the Company.
Management believes that resolution to the Company's litigation and
environmental matters should not materially affect the Company's consolidated
financial position or liquidity. Should future developments cause the
Company to record an additional liability for environmental evaluation,
cleanup or litigation, the recording of such a liability could have a material
impact on the results of operations for the period involved.
On April 13, 1998, the Company received notice from the Internal Revenue
Service that Rogers Galvanizing Company and its subsidiaries ("Rogers") for the
year ended September 30, 1996 had been selected for examination. Management
does not believe that the results of the examination, which is underway, will
result in any significant determination of tax liability for the Company. In
1997, Rogers was merged into North American Galvanizing Company, a newly
formed subsidiary of the Company.
NOTE 8. UNION CONTRACTS
---------------
North American Galvanizing Company ("NAG") currently is negotiating a new
labor contract covering approximately 125 production workers at three of its
Tulsa plants that operate under a bargaining agreement with the United
Steelworkers. The present labor contract expired in 1997 and has been
extended, without modification, by mutual agreement between the union and NAG.
Historically, NAG has renewed its labor contract for a new 3 to 4-year term
without interruption.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
<TABLE>
RESULTS OF OPERATIONS
REVENUES
<CAPTION>
Quarter Ended March 31 1998 1997
--------------- ---------------
% of % of
$ (000) Sales $ (000) Sales
---------------------------------
<S> <C> <C> <C> <C>
Galvanizing $ 9,624 79.1% $ 9,340 79.7%
Chemical Storage 1,423 11.7% 1,412 12.0%
Warehousing 1,117 9.2% 972 8.3%
------ ----- ------ -----
Total $ 12,164 100.0% $11,724 100.0%
====== ===== ====== =====
</TABLE>
Kinark's consolidated sales for the first quarter of 1998 increased
$440,000, or 3.8%, in comparison to the first quarter of 1997, due to higher
revenues at all of its business units.
NORTH AMERICAN GALVANIZING COMPANY ("NAG"). Galvanizing sales were up
$284,000, or 3%, for the first quarter of 1998 in comparison to the first
quarter of 1997, due to improved price levels and continued good demand for
galvanized steel structures from industrial and communications tower
manufacturers that serve the construction markets. While total shipments in
the first quarter of 1998 were down 4% from the tonnage level shipped during
the first quarter of 1997, NAG's plants serving the southwestern region of the
country increased production to support strong construction activity in that
area. NAG operates eleven galvanizing plants located in six states throughout
the mid and south-central United States.
LAKE RIVER CORPORATION ("LAKE RIVER"). First quarter 1998 sales at Lake
River's chemical storage operation were slightly higher than the sales level
recorded in the comparable period for 1997. Bulk liquid storage throughput
remained even with 1997, but drum filling activities increased significantly
during the first quarter of 1998 with the consolidation of a major account's
business into Lake River. Lake River's bulk liquid storage and specialty
chemicals blending and drumming facilities serve the greater Chicago area.
NORTH AMERICAN WAREHOUSE COMPANY ("NAW"). Warehousing operated at record
levels during the first quarter of 1998 as sales increased $145,000, or 14.9%,
from the first quarter of 1997. Warehousing sales increased from the
addition of new accounts and expanded inventories from existing customers.
Chicago based NAW is operating at near-capacity with 410,000 square feet of
public warehousing space for general merchandise, food grade and chemical
products. NAW's business will be impacted in 1998 due to the expected loss
of its largest customer during the third quarter of 1998. In 1997, this
customer's account represented 4.7% of the Company's consolidated sales and
55% of NAW's sales. The loss of this customer reflects a decision by the
customer to realign its marketing distribution network. NAW will not renew
a warehouse lease scheduled to expire July 1, 1998 as part of its planned cost
reduction measures to partially offset the loss of this major account.
<TABLE>
COSTS AND EXPENSES
<CAPTION>
Quarter Ended March 31 1998 1997
-------------- ---------------
% of % of
$ (000 ) Sales $ (000) Sales
----------------------------------
<S> <C> <C> <C> <C>
Cost of sales $ 9,355 76.9% $ 9,167 78.1%
Selling, general &
administrative 1,645 13.5% 1,286 11.0%
Depreciation and
amortization 701 5.8% 632 5.4%
------ ---- ------ ----
Total $11,701 96.2% $11,085 94.5%
====== ==== ====== ====
</TABLE>
The Company's cost of sales, as a percentage of sales, decreased 1.2% for
the first quarter of 1998 in comparison to the first quarter of 1997, through
a combination of productivity improvements and higher revenues. In the
galvanizing unit, emphasis on specialty niche new business is generating
increasing margins. In both the chemical storage and warehousing units, the
relatively fixed component of labor provides leverage opportunities from
added business volume. Cost of sales for the first quarter of 1998 includes a
charge for the estimated cost to settle the EPA's claim to recover its
cleanup costs at a former galvanizing site, as discussed under Environmental
Matters in this section. Excluding this settlement, the Company's cost of
sales would have been 75.6% of sales, representing a decrease of 2.5% and an
excellent improvement from the first quarter of 1997.
The Company's total SG&A expenses for the first quarter of 1998 increased
$359,000 to $1,645,000, compared to $1,286,000 in the first quarter of 1997.
During the first quarter of 1997, the Company benefitted from a refund of
real estate taxes related to prior years in the amount of $172,000. This
refund represented approximately 48% of the increase in SG&A expenses for the
first quarter of 1998 over the first quarter of last year. The balance of
the increase in SG&A expenses for 1998 primarily reflected salaries and related
cost to expand the galvanizing sales function. Depreciation expense
increased $69,000 for the first quarter of 1998 primarily as a result of the
Company's capital improvement programs ongoing at the galvanizing plants.
INTEREST EXPENSE
Interest expense of $176,000 in the first quarter of 1998 was down $27,000
from interest expense of $203,000 for the first quarter of 1997 due to a
reduction in long-term debt and lower average interest rates under the
Company's loan agreement with a bank. Interest expense during the first
quarter of 1998 was 1.4% of sales compared to 1.7% of sales for the same
period in 1997.
OTHER INCOME
In the first quarter of 1998, the Company reported other income of $309,000
from expected insurance proceeds covering the loss of an acid recycling
system at one of its galvanizing plants. Production at the facility was not
significantly affected by the incident and the Company is proceeding to
replace the lost system.
INCOME TAXES
Income tax expense for the first quarter of 1998 was $256,000 compared to
$184,000 for the first quarter of 1997. Income tax expense includes current
and deferred Federal and state income tax recorded at current rates. The
Company's effective tax rate on earnings was 43% and 42.2% for the first
quarters of 1998 and 1997, respectively.
EARNINGS
The Company's net earnings were $340,000 for the first quarter of 1998, an
increase of 34.9% over net earnings of $252,000 for the first quarter of
1997. Basic and diluted earnings per share for the three months ended
March 31, 1998 were $.05 per share, compared to basic and diluted earnings
per share of $.04 for the same period a year ago.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operating activities generated net cash of $133,000 in the
first quarter of 1998, compared to net cash of $860,000 generated in the
first quarter of 1997. The net reduction in cash flow for the first quarter
of 1998 was due primarily to the Company's decision to capitalize on
relatively improved commodity prices and increase zinc inventories to
support projected galvanizing requirements in the current year. Cash
totaled $87,000 at March 31, 1998, as compared to $259,000 at the beginning
of 1998. The Company strives to maintain minimum cash balances through its
centralized treasury function that anticipates funding requirements on a
daily basis.
Capital expenditures were $474,000 in the first quarter of 1998, compared
to $573,000 in the first quarter of 1997. Capital expenditures in both
periods were primarily for facilities improvements and replacement of
operating equipment and process tanks to support the Company's core
galvanizing business. The Company anticipates that its investment in
capital additions for all of 1998 will be approximately even with 1997
capital expenditures of $3,100,000.
Financing activities in the first quarter of 1998 consisted of scheduled
payments to reduce term loans and lease obligations, and borrowings or
repayments on a revolving line of credit used for working capital. For the
three months ended March 31, 1998, the Company paid down its debt a net of
$156,000 as a result of cash generated from its operations and available
cash balances.
As discussed in Note 4 to the Company's condensed Consolidated Financial
Statements, the Company entered into a new two year bank credit agreement on
April 30, 1997, which provides a $8,500,000 revolving line of credit, a
$1,250,000 advancing term loan and a $3,500,000 term loan.
The Company believes that it has the ability to continue to generate cash
from operations and has available borrowing capacity to meet its foreseeable
needs for working capital and planned capital expenditures.
ENVIRONMENTAL MATTERS
As previously reported in 1995, Boyles Galvanizing participated in the
final clean-up of a former galvanizing plant site in Philadelphia,
Pennsylvania (the "Philadelphia site") and received notification from the
EPA that it had demonstrated to the satisfaction of the EPA that all
requirements relating to the performance of the Response Action Plan had
been completed. Cleanup of this site consisted primarily of soil removal
at a cost of approximately $85,000 to Boyles.
In November of 1997, the EPA informed the Company that it would seek to
recover from the Company its costs associated with the 1995 cleanup of the
Philadelphia site, in the amount of $480,000. On March 6, 1998, the Company
was informed that the Department of Justice ("DOJ") had filed a lawsuit
naming North American Galvanizing Company and Boyles Galvanizing Company
(a former subsidiary company merged into North American Galvanizing Company
in 1997) in a CERCLA Cost Recovery Action for approximately $480,000, in
connection with the cleanup of the Philadelphia site. The Company had been
holding discussions on the matter with DOJ, and in May 1998, the parties
reached an agreement to settle the EPA's claims. As a result, the Company
recorded a pre-tax charge of $158,000 against earnings for the quarter ended
March 31, 1998 for the estimated net impact of the settlement. The parties
are now in the process of drafting a Consent Decree to finalize agreement on
the terms and conditions of that decree.
NAG received notice on April 21, 1997 from the Illinois Environmental
Protection Agency ("IEPA") that it was a potentially responsible party
under the comprehensive Environmental Response, Compensation, and Liability
Information System ("CERCLIS") in connection with cleanup of an abandoned site
formerly owned by Sandoval Zinc Co. Sandoval had operated a secondary zinc
smelter at the site until it closed in 1985. The IEPA notice includes NAG
as one of 59 organizations which arranged for the treatment and disposal of
hazardous substances at Sandoval. The Company is in the process of
determining the proportional share of substances that NAG shipped to
Sandoval, and does not believe based on current information that the
ultimate resolution of this matter will have a material impact on the
Company's financial position or results of operations.
The Company's facilities are subject to extensive environmental legislation
and regulations affecting their operations and the discharge of wastes. The
cost of compliance with such regulations during 1997 approximated $1,000,000
with the disposal and recycling of waste acids generated by the galvanizing
operations representing the major expenditure in this area. The Company
operates on-site sulphuric acid recovery systems at three of its galvanizing
plants. Recovered acid is returned to production, thereby eliminating the
substantial expense associated with the alternative of waste treatment and
removal to an off-site location. The recovery process generates a
non-hazardous dry ferrous sulphate crystal by-product which the Company
sells commercially.
The Company's other galvanizing plants use hydrochloric acid, which
requires the off-site disposal of waste acids. Due to the increasing
cost of waste disposal and decreasing availability of approved disposal
methods, alternative waste hydrochloric acid recycling methods have been
evaluated over recent years. While it appears that the technology for an
economically feasible system is available, no proven system for the
recycling of hydrochloric acid used in hot dip galvanizing is currently
on the market. Hydrochloric acid recycling systems will be further
evaluated as new systems become available. Future capital expenditures
in this area are expected to increase, but such expenditures should
significantly reduce waste acid disposal expense.
Environmentally related expenditures at Lake River represent a relatively
small percentage of the Company's total costs. The majority of waste
disposal costs at Lake River are incurred on behalf of customers and are
reimbursable. Lake River does not take title to the chemicals stored,
blended, drummed or bagged in its facilities and thus is responsible only
for the proper handling of these materials while under its care, custody,
and control. As previously reported, Kinark has escrowed proceeds from the
sale of the assets of Kinpak, Inc. (a former subsidiary sold in 1996) for
some possible environmental remediation.
The Company is committed to complying with all federal, state and local
environmental laws and regulations and using its best management practices
to anticipate and satisfy future requirements. As is typical in the
galvanizing and chemicals businesses, the Company will have additional
environmental compliance costs associated with past, present, and future
operations. Management has committed resources to discovering and
eliminating environmental issues as they arise. Because of the frequent
changes in environmental technology, laws and regulations management
cannot reasonably attempt to quantify the Company's potential costs in
this area. However, such costs are expected to increase above their
current levels as discussed above.
CURRENT DEVELOPMENTS
The Company has determined that its primary computer systems are structured
to accommodate the year 2000 and beyond, and the operation of these systems
will not be affected by the upcoming change in the millennium. The Company's
operations are highly dependent on the reliable performance of its
computer-based information, control and accounting systems. For this
reason, during 1997 Kinark undertook a review of its company-wide computer
support facilities to assess the extent of Year 2000 issues, if any. Going
forward, in addition to monitoring the Year 2000 compliance readiness of its
own computer systems, the Company will continue to assess the compliance
readiness of its major customers, key suppliers and service providers. The
Company believes that the cost of this ongoing assessment should not exceed
$100,000 and will not have a material impact on the results of its
operations, liquidity, and capital resources.
QUANTITATIVE AND QUALITATIVE
DISCLOSURE ABOUT MARKET RISKS
Not Applicable.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
-----------------
Not applicable.
ITEM 2. CHANGES IN SECURITIES
---------------------
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
-------------------------------
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
Not applicable.
ITEM 5. OTHER INFORMATION.
-----------------
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a)Exhibits
27 Financial Data Schedule
99 Cautionary Statements by the Company Related to
Forward-Looking Statements
(b)Reports on Form 8-K
The Company did not file any reports on Form 8-K during
the quarter ended March 31, 1998.
SIGNATURES
Pursuant to the requirements of Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized:
KINARK CORPORATION
-----------------------------
Registrant
/S/Paul R. Chastain
---------------------
Paul R. Chastain
Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: May 14, 1998
-------------
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
ISSUER'S INTERIM FINANCIAL STATEMENTS DATED MARCH 31, 1998, SET FORTH IN THE
ACCOMPANYING FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<EXCHANGE-RATE> 1.0
<CASH> 87
<SECURITIES> 0
<RECEIVABLES> 7,017
<ALLOWANCES> 284
<INVENTORY> 4,175
<CURRENT-ASSETS> 12,766
<PP&E> 33,084
<DEPRECIATION> 18,393
<TOTAL-ASSETS> 32,492
<CURRENT-LIABILITIES> 6,149
<BONDS> 8,876
0
0
<COMMON> 819
<OTHER-SE> 17,467
<TOTAL-LIABILITY-AND-EQUITY> 32,492
<SALES> 12,164
<TOTAL-REVENUES> 12,164
<CGS> 9,355
<TOTAL-COSTS> 11,701
<OTHER-EXPENSES> 309
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 176
<INCOME-PRETAX> 596
<INCOME-TAX> 256
<INCOME-CONTINUING> 340
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 340
<EPS-PRIMARY> .05
<EPS-DILUTED> .05
</TABLE>
EXHIBIT 99
CAUTIONARY STATEMENTS BY THE COMPANY REGARDING
FORWARD LOOKING STATEMENTS
Certain statements in this Form 10-Q, including information set forth
under the caption "Management's Discussion and Analysis of Financial Condition
and Results of Operations", constitute "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995 (the "Reform
Act"). The Reform Act provides certain "safe harbor" provisions for
forward-looking statements. The Company desires to take advantage of the
"safe harbor" provisions of the Reform Act and is including these cautionary
statements ("Cautionary Statements") pursuant to the Provisions of the Reform
Act with the intention of obtaining the benefits of the "safe harbor"
provisions. In order to comply with the terms of the "safe harbor" in the
Reform Act, the Company cautions investors that forward-looking statements
included in this Form 10-Q, or hereafter included in other publicly available
documents filed with the Securities and Exchange Commission, reports to the
Company's stockholders and other publicly available statements issued or
released by the Company involve substantial risks, uncertainties, and other
factors which could cause the Company's actual results, performance (financial
or operating) or achievements to differ materially from the future results,
performance (financial or operating) or achievements expressed or implied by
such forward-looking statements. The Company believes the following important
factors could cause such a material difference to occur:
1.The Company's ability to grow through the acquisition and development of
galvanizing, chemical storage and warehousing operations or the acquisition of
ancillary businesses.
2.The Company's ability to identify suitable acquisition candidates, to
consummate or complete construction projects, or to profitably operate or
successfully integrate enterprises into the Company's other operations.
3.The Company's ability to secure the capital and the related cost of such
capital necessary to fund its future growth through acquisition and
development, as well as internal growth.
4.The level of competition in the Company's industries and the possible entry
of new, well-capitalized competitors into the Company's markets.
5.Uncertainties and changes in environmental compliance costs associated with
past, present and future operations.
6.Uncertainties and changes related to federal, state and local regulatory
policies, including environmental laws related to the galvanizing, chemicals
and warehousing industries.
7.The Company's ability to staff its galvanizing, chemical storage and
warehousing operations appropriately with qualified personnel, including in
times of shortages of such personnel and to maintain a satisfactory
relationship with labor unions.
8.The pricing and availability of equipment, materials and inventories,
including zinc "pigs", the major component used in the hot dip galvanizing
industry.
9.Uncertainties and changes in general economic conditions.
10.Uncertainties and changes in several industries to which the company's
businesses are closely tied, such as highway and transportation,
communications and energy.
11.Performance issues with key suppliers and subcontractors.
12.Uncertainties related to the retention of key customers in each of the
Company's business segments.
The words "believe," "expect," "anticipate," "project," "plan" and similar
expressions identify forward-looking statements. Investors are cautioned not
to place undue reliance on these forward-looking statements, which speak only
as of the date the statement was made.
The foregoing review of significant factors should not be construed as
exhaustive or as an admission regarding the adequacy of disclosures previously
made by the Company.
