SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED ]
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-3920
KINARK CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
71-0268502
(I.R.S. Employer Identification No.)
2250 East 73rd Street, Tulsa, Oklahoma 74136-6832
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code
(918) 494-0964
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
Common Stock, $.10 par value American Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K. [ X ]
The aggregate market value of Common Stock held by non-affiliates on March
15, 1998 was approximately $11.0 million. As of March 15, 1998, there were
6,778,345 shares of Kinark Corporation Common Stock $.10 par value outstanding.
Documents Incorporated by Reference
Portions of the registrant's definitive proxy statement to be filed not
later than 120 days after the end of the fiscal year covered by this report
are incorporated by reference in Part III.
<PAGE>
KINARK CORPORATION
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 1997
TABLE OF CONTENTS
Page
FORWARD LOOKING STATEMENTS OR INFORMATION . . . . . . . . . . . . 5
PART I
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . 6
Item 2. Properties .. . . . . . . . . . . . . . . . . . . . . 8
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . 9
Item 4. Submission of Matters to a Vote of Security Holders. . 9
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters. . . . . . . . . . . . . . . . .10
Item 6. Selected Financial Data. . . . . . . . . . . . . . . .10
Item 7. Management's Discussion and Analysis of Financial
Conditions and Results of Operations . . . . . . . .10
Item 8. Financial Statements and Supplementary Data. . . . . .10
Item 9. Disagreements with Accountants on Accounting
And Financial Disclosure . . . . . . . . . . . . . .10
PART III
Item 10. Directors and Executive Officers of the Registrant. . 11
Item 11. Executive Compensation . . . . . . . . . . . . . . . 12
Item 12. Security Ownership of Certain Beneficial Owners
And Management . . . . . . . . . . . . . . . . . . 12
Item 13. Certain Relationships and Related Transactions . . . 13
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K . . . . . . . . . . . . . . . . . . . . . 14
<PAGE>
FORWARD LOOKING STATEMENTS OR INFORMATION
Certain statements contained in this Annual Report on Form 10-K are
not based on historical facts, but are forward-looking statements that are
based upon numerous assumptions about future conditions that may ultimately
prove to be inaccurate. Actual events and results may materially differ
from anticipated results described in such statements. The Company's
ability to achieve such results is subject to certain risks and
uncertainties. Such risks and uncertainties include, but are not limited
to, product prices, continued availability of capital and financing, and
other factors affecting the Company's business that may be beyond its
control.
<PAGE>
PART I
ITEM 1. Business
Kinark Corporation is a diversified company conducting business in
Galvanizing and Chemical Storage and Distribution which are further
discussed below. As used in this report, the terms "Kinark" and "Company"
mean Kinark Corporation (the Registrant) and its operating subsidiaries
unless the context requires otherwise. Kinark was incorporated under the
laws of the State of Delaware in 1955. The current operating subsidiaries
consist of Lake River Corporation ("Lake River"), acquired in 1968, North
American Warehousing Company ("NAWC"), formed in 1997, and North American
Galvanizing Company ("NAGC"), formed in 1996. NAGC merged with Rogers
Galvanizing Company ("Rogers") in 1996 and Boyles Galvanizing Company
("Boyles") in 1997, with NAGC as the survivor company. Rogers was acquired
by the Company during 1996 and Boyles was acquired in 1969.
In August 1995, the Company adopted a plan to divest its Kinpak, Inc.
("Kinpak") packaging subsidiary. Kinpak produced proprietary household
cleaning products and provided contract packaging of private label
antifreeze and windshield washer fluid. Substantially all the Kinpak
assets were sold and certain liabilities assumed by the buyer on February
27, 1996. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
Financial information for each continuing business segment including
sales, operating earnings, identifiable assets, capital expenditures, and
depreciation expense for the most recent three fiscal years is presented
in the notes to the consolidated financial statements included in Item 8.
GALVANIZING
The Company conducts its galvanizing operations through its NAGC
operating subsidiary. NAGC is principally engaged in hot dip galvanizing
of metal products. NAGC galvanizes iron and steel products by immersing
them in molten zinc. This process produces an alloyed metal surface which
can endure for up to 50 years with no oxidation or corrosion from exposure
to the elements.
The galvanizing process provides effective corrosion protection of
fabricated steel which is used in numerous markets such as petrochemical,
highway and transportation, energy, utilities, communications, irrigation,
pulp and paper, waste water treatment, food processing, recreation and
original equipment manufacturers. NAGC galvanizes products for over 2,000
such customers nationwide. Based on the number of its operating plants,
NAGC is one of the largest independent hot dip galvanizing companies in the
United States.
NAGC operates eleven galvanizing plants in six states. These
strategically located plants enable NAGC to compete effectively by
providing galvanized metal products to manufacturers serving a broad range
of basic industries throughout the mid and south-central United States, and
beyond. Its galvanizing plants are located in Tulsa, Oklahoma; Kansas
City, Missouri; St. Louis, Missouri; Nashville, Tennessee; Louisville,
Kentucky; Denver, Colorado; Hurst, Texas; and Houston, Texas.
Zinc, the primary raw material in the galvanizing process, is a widely
available commodity in the open market. The London Metal Exchange price of
zinc for three month delivery was $.48 per pound at the beginning of 1997;
it reached a high of $.76 per pound in the 3rd quarter, and closed the year
at $.50 per pound. To reduce the impact of zinc price fluctuations, the
Company periodically utilizes long-term fixed price purchase contracts.
NAGC has a broad customer base with its five largest customers, on a
combined basis, accounting for approximately 25% of the Company's
consolidated sales in 1997. The backlog of orders at NAGC is generally
nominal due to the short time requirement involved in the galvanizing
process. Inventory and working capital requirements have remained
relatively stable.
The galvanizing business is highly competitive. NAGC competes with
other independent galvanizing companies, captive galvanizing facilities
operated by manufacturers, and alternative forms of corrosion protection
such as paint. Competition is driven primarily by price, turn-around
service time, and the quality of the finished galvanized product. The
strategic location of NAGC's plants and the consistent quality of its
service has enabled NAGC to compete on a favorable basis.
NAGC 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 was extended to April 8, 1998,
without modification, by mutual agreement between the union and NAGC.
Historically, NAGC has renewed its labor contract for a new 3 to 4-year
term without interruption to its business. NAGC employed 410 persons at
December 31, 1997.
CHEMICAL STORAGE AND WAREHOUSING
The Company conducts its chemical storage and public warehousing
operations through its Lake River and North American Warehousing operating
subsidiaries. During 1997, the Company formed North American Warehousing
Company ("NAWC") as a separate subsidiary to operate the public warehousing
business previously conducted by Lake River.
Lake River, located in Chicago, is a bulk liquid terminal operation with
197 tanks providing 21 million gallons of on-site bulk liquid storage
capacity; another 36 tanks with an aggregate storage capacity of 23 million
gallons are considered in a decommissioned status due to low demand for
large capacity tanks. During 1997, Lake River employees handled 29
barges, 1,422 rail cars, and 8,521 transport trucks to service over 49
million gallons of product throughput for its customers. Throughput volume
increased 18.3% over 1996. Lake River also operates two bag filling lines
used for bulk chemical bagging and three drum filling lines which handle
flammables, caustics, food grade products, and miscellaneous specialty
chemicals.
Bulk liquid storage facilities are leased to customers for various terms
generally ranging from six months to three years. These contracts are
typically renewed or replaced with other customers upon expiration.
Lake River's facilities provide integrated storage, formulating,
packaging, and distribution services. Most competitors do not offer this
breadth of services although numerous companies compete aggressively in one
or more of these areas. Lake River's service-based bulk liquid storage
business does not require it to take title to any of the customer's
products that it handles. Steel drums and bag containers used in Lake
River's production operations are available in adequate quantities from a
number of regional suppliers. Location of facilities, quality of service,
and price are important factors enabling Lake River to compete effectively.
Lake River employed 83 persons at December 31, 1997. During the first
quarter 1998, the union members at Lake River voted to accept the terms of
a newly negotiated 3-year labor agreement.
Revenue from bulk liquid storage customers is derived from fixed storage
rentals and from throughput handling fees. Existing tank capacity is
adequate to support anticipated business growth from new rentals and/or
increased product throughput. The Company will consider alternatives to
increase the capacity of its drumming and bagging operations should future
growth warrant expansion in these areas.
North American Warehousing, located in Chicago, provides 410,000 square
feet of public warehousing space that facilitates the distribution of
customers' products in the Chicago-Midwest region. NAWC handles dry and
liquid general merchandise and chemicals and its services include container
loading for export shipment. One customer accounted for 55% of NAWC's
total sales in 1997. NAWC's business will be impacted in 1998 due to the
expected loss of its largest account during the third quarter of 1998. In
1997, this account represented 4.7% of the Company's consolidated sales and
55% of NAWC's sales. The loss of this key account reflects a decision by
the customer to realign its marketing distribution network. The Company
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.
ITEM 2. Properties
NAGC operates eleven hot dip galvanizing plants located in Oklahoma,
Missouri, Texas, Colorado, Tennessee and Kentucky. Three of the plants are
leased: One of these plants is leased under terms which gives NAGC the
option to extend the lease for up to 15 years, or to acquire that plant in
2002. Two plants are leased under terms with options to extend the lease
to 2015 and 2017, respectively. The galvanizing plants average 20,000
square feet in size and operate zinc kettles ranging in length from 33 to
56 feet.
Lake River has operating facilities located on approximately 50 acres
located on the Chicago Ship Canal in Cook County, Illinois, which are
leased as five parcels from the Metropolitan Water Reclamation District of
Greater Chicago ("MWRD"), a municipal corporation. These multiple land
leases have terms ranging from 35-75 years, with the earliest expiring in
1999 and the latest expiring in 2045. Lake River and MWRD have agreed to
renegotiate certain of these land leases during 1998. Lake River will not
renew the lease on one of the five parcels that is excess to its current
and foreseeable needs. Under procedures required by MWRD, the
renegotiation process will be opened to competitive bid. While it cannot
be known with certainty, Lake River expects to be the successful bidder for
all of the parcels required for the continuing conduct of its terminal
storage business. The operating facilities owned by Lake River include an
office and quality control laboratory of brick masonry construction
containing an area of approximately 5,100 square feet, 233 specialized
tanks with a total capacity of approximately 44 million gallons of liquid
chemicals and 190,000 square feet of on-site warehouse space.
NAWC leases 410,000 square feet of public warehousing space in three
southwest Chicago locations. Two of these leases expire in 1998 and it is
likely the Company will not renew these leases.
The Company's executive offices and the headquarters offices of NAGC are
located in Tulsa, Oklahoma, in approximately 5,700 square feet of office
space leased through June, 2002.
ITEM 3. Legal Proceedings
Other than the matter described below, the Company is not a party to,
nor is any of its property subject to, any material legal proceedings,
other than routine litigation incidental to the business.
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 that
merged into North American Galvanizing Company in 1997) in a CERCLA Cost
Recovery Action for approximately $480,000, in connection with the cleanup
of a former galvanizing site in Philadelphia, PA. The Company had been
holding discussions on the matter with DOJ, and expects to continue those
discussions in an effort to negotiate an acceptable settlement of the EPA's
claim. As previously reported, the Company and the EPA jointly
participated in the successful cleanup of the Philadelphia site in 1995.
ITEM 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of stockholders during the fourth
quarter of 1997.
PART II
ITEM 5. Market for Registrant's Common Equity and Related Stockholder
Matters
STOCK INFORMATION
The principal trading market for the common stock of Kinark Corporation
is the American Stock Exchange. The Company's common stock trades under
the symbol "KIN". The Company has continued a long-term policy of not
paying dividends in order to reinvest earnings to support and expand its
business operations. The board of directors may review the dividend policy
in the future, recognizing that dividends may be a desirable form of return
on the investment made by many of its stockholders. In addition, the
payment and amount of future dividends, if any, may be limited by the
Company's credit agreement. Stockholders of record at March 15, 1998
numbered approximately 2,400.
Quarterly Stock Prices
First Second Third Fourth
1997-High $ 3 15/16 $ 3 3/4 $ 3 11/16 $ 3 1/2
Low 3 1/8 3 1/16 3 2 3/4
1996-High 3 5/16 4 3/4 4 1/4 3 7/8
Low 2 7/16 2 3/8 2 3/4 2 11/16
ITEM 6. Selected Financial Data
The selected financial data for years 1993 through 1997 are presented
on page 48 of this Annual Report on Form 10-K.
ITEM 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The index to Management's Discussion and Analysis of Financial
Condition, Results of Operations, Financial Statements and Supplementary
Data is presented on page 18 of this Annual Report on Form 10-K.
ITEM 8. Financial Statements and Supplementary Data
The index to Management's Discussion and Analysis of Financial Condition
and Results of Operations, Financial Statements and Supplementary Data is
presented on page 18 of this Annual Report on Form 10-K.
ITEM 9. Disagreements with Accountants on Accounting and Financial
Disclosure
There have been no disagreements with the Company's independent
accountants on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope.<PAGE>
PART III
ITEM 10. Directors and Executive Officers of the Registrant
Directors
The information required by this item with respect to the Directors of the
Company appears in the 1997 Proxy Statement under the headings "Election of
Directors" and "Compliance with Section 16(a) of the Securities Exchange Act
of 1934" and is incorporated by reference.
Name Age Office and Business Experience
MICHAEL T. CRIMMINS 58 Chairman of the Board since May 1995 and Chief
Executive Officer of the Company since February
1996. From 1989-1995, Vice President and General
Counsel of Northbridge Holdings, Inc. and Deltech
Corporation. Vice President and General Counsel
from 1988 until 1989 of the Advanced Technology
Group of Hoechst Celanese Corporation. From 1976
until 1987, Assistant Secretary and Associate
General Counsel of American Hoechst Corporation.
Director of Kinark Corporation since 1993.
RONALD J. EVANS 48 President of the Company since February 1996. From
May 1995 through January 1996, private investor.
From 1989-1995, Vice President-General Manager of
Deltech Corporation. Mr. Evans' previous
experience includes 13 years with Hoechst Celanese
Corporation. Director of Kinark Corporation since
1995.
PAUL R. CHASTAIN 63 Vice President and Chief Financial Officer since
February 1996. From July 1993 through January
1996, President and Chief Executive Officer of the
Company. From June 1991- July 1993, Chairman and
Chief Executive Officer. Co-Chairman and Co-Chief
Executive Officer of the Company from June 1990-
June 1991. From 1976, Executive Vice President and
Treasurer. From 1973 through 1976, Vice President
of Finance and Secretary of the Company. Mr.
Chastain's previous experience includes six years
with Allis-Chalmers and nine years with Litton
Industries. Director of Kinark Corporation since
1975.
RICHARD C. BUTLER 88 Director of Kinark Corporation since 1974. Former
Chairman of the Board of Peoples Savings & Loan
Association in Little Rock, Arkansas. From 1963
until 1980, Chairman of the Board and President of
Commercial National Bank in Little Rock. Prior to
1963, Partner in the Little Rock law firm of House,
Holmes, Butler and Jewell. Served on the Board of
Directors of Coca-Cola Bottling Co. of Arkansas,
Advisory Board Member of Arkansas Power & Light Co.
and past President of First Arkansas Development
Finance Corporation.
JOSEPH J. MORROW 58 Director of Kinark Corporation since 1996. Chief
Executive Officer of Morrow & Co., Inc. since 1972.
Chief Executive Officer of Proxy Services
Corporation from 1972 to 1992. Chairman of Proxy
Services Corporation from 1992 to present.
Currently a Director of U.S. Agents Holding Corp.
JOHN H. SUNUNU 58 Director of Kinark Corporation since 1996.
President of JHS Associates, Ltd. since June 1992
and a partner in Trinity International Partners, a
private financial firm, since June 1993. Co-host
of CNN's "Crossfire", a news/public affairs
discussion program, from March 1992 until February
1998. From January 1989 until March 1992, Chief of
Staff to the President of the United States. From
January 1983 to January 1989, Governor of the State
of New Hampshire. From 1963 until his election as
Governor, President of JHS Engineering Company and
Thermal Research Inc. Helped establish and served
as chief engineer for Astro Dynamics Inc. from 1960
until 1965. From 1968 until 1973, Governor Sununu
was Associate Dean of the College of Engineering at
Tufts University and Associate Professor of
Mechanical Engineering. Served on the Advisory
Board of the Technology and Policy Program at MIT
from 1984 until 1989. A member of the National
Academy of Engineering and the Board of Trustees
for the George Bush Presidential Library
Foundation.
MARK E. WALKER 42 Director of Kinark Corporation since 1993.
President and Director since 1991 of Ocean's
Window, Inc. President and Director of Ocean's
Window Travel Services since 1995. Manager from
1985 until 1992 for DSC Communications Corporation.
Manager from 1978 until 1984 for Texas Instruments
Incorporated.
ITEM 11. Executive Compensation
The information required by this item appears in the 1998 Proxy Statement
under the heading "Executive Compensation" and is incorporated by reference.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item concerning security ownership of
certain beneficial owners and management appears in the 1998 Proxy Statement
under the heading "Security Ownership of Principal Stockholders and
Management" and is incorporated by reference.
ITEM 13. Certain Relationships and Related Transactions
Joseph J. Morrow, a director of the Company and a nominee for reelection
to the Company's Board of Directors in 1998 for a one-year term, purchased
1,759,083 shares of Common Stock in the Company's private placement in
January 1996. Mr. Morrow is the chief executive officer of Morrow & Co.,
Inc., which provides proxy solicitation and other stockholder related
services to the Company.<PAGE>
PART IV
ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) The following documents are filed as part of this report:
(1) Financial Statements Page
Independent Auditors' Report 28
Consolidated Balance Sheets at December 31, 1997 and 1996 29
Consolidated Statements of Operations for the years ended
December 31, 1997, 1996 and 1995 30
Consolidated Statements of Stockholders' Equity for the
years ended December 31, 1997, 1996 and 1995 31
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995 32
Notes to Consolidated Financial Statements 33
(2) Financial Statement Schedules:
Schedule II - Valuation and Qualifying Accounts 16
All schedules omitted are inapplicable or the information required
is included in either the consolidated financial statements or the
related notes to the consolidated financial statements.
(3) Exhibits:
The Exhibits filed with or incorporated into this report are listed
in the following Index to Exhibits.
EXHIBIT INDEX
Exhibit
No. Description
3.1 Restated Certificate of Incorporation of Kinark Corporation, as
amended on June 6, 1996 (incorporated by reference to Exhibit 3.1
of the Company's Pre-Effective Amendment No. 1 to Registration
Statement on Form S-3, Registration No. 333-4937, filed with the
Commission on June 7, 1996).
3.2 Amended and Restated Bylaws of Kinark Corporation (incorporated by
reference to Exhibit 3.1 to the Company's Quarterly Report on Form
10-Q dated March 31, 1996).
10.1 Revolving Credit and Term Loan Agreement, dated April 30, 1997,
between Kinark Corporation, a Delaware corporation, and the Bank of
Oklahoma, National Association, a national banking association
(incorporated by reference to Exhibit (a)10 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1997.
21. Subsidiaries of the Registrant.
23. Independent Auditors' Consent.
24.01 Power of attorney from Richard C. Butler.
24.02 Power of attorney from Michael T. Crimmins.
24.03 Power of attorney from Ronald J. Evans.
24.04 Power of attorney from Joseph J. Morrow.
24.05 Power of attorney from John H. Sununu.
24.06 Power of attorney from Mark E. Walker.
(b) Reports on Form 8-K.
There were no reports filed on Form 8-K for the quarter ended December
31, 1997.
<PAGE>
<TABLE>
SCHEDULE II
KINARK CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<CAPTION>
Additions
Balance at Additions charged to Balance at
beginning from costs and end of
Description of year Acquisition expenses Deductions year
Allowance for doubtful receivables
(deducted from accounts receivable)
<S> <C> <C> <C> <C> <C>
1997 $ 427,000 $ ---- $ 116,000 $ 256,000 $ 287,000
1996 $ 162,000 $ 72,000 $ 252,000 $ 59,000 $ 427,000
1995 $ 77,000 ---- $ 140,000 $ 55,000 $ 162,000
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 and 15(d) of the Securities
and Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, as duly authorized.
KINARK CORPORATION
(Registrant)
Date: March 31, 1998 By:/s/Paul R. Chastain
Paul R. Chastain
Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below on March 31, 1998, by the following
persons on behalf of the Registrant and in the capacities indicated.
/s/Michael T. Crimmins* /s/Ronald J. Evans*
Michael T. Crimmins, Chairman Ronald J. Evans, President
of the Board and Chief Executive and Director
Officer
(Principal Executive Officer)
/s/Paul R. Chastain /s/Richard C. Butler*
Paul R. Chastain, Vice President, Richard C. Butler, Director
Chief Financial Officer and
Director /s/John H. Sununu*
(Principal Financial and Accounting John H. Sununu, Director
Officer)
/s/Joseph J. Morrow* /s/Mark E. Walker*
Joseph J. Morrow, Director Mark E. Walker, Director
*Paul R. Chastain, by signing his name hereto, does hereby sign this Annual
Report on Form 10-K on behalf of each of the directors and officers of the
Registrant after whose typed names asterisks appear pursuant to powers of
attorney duly executed by such directors and officers and filed with the
Securities and Exchange Commission as exhibits to this report.
By: /s/ Paul R. Chastain
Paul R. Chastain
Attorney-in-fact
<PAGE>
INDEX TO MANAGEMENT'S DISCUSSION AND ANALYSIS,
CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page(s)
Management's Discussion and Analysis . . . . . . . . . . . . . . 19 to 27
Independent Auditors' Report . . . . . . . . . . . . . . . . . . 28
Consolidated Balance Sheets. . . . . . . . . . . . . . . . . . . 29
Consolidated Statements of Operations. . . . . . . . . . . . . . 30
Consolidated Statements of Stockholders' Equity. . . . . . . . . 31
Consolidated Statements of Cash Flows. . . . . . . . . . . . . . 32
Notes to Consolidated Financial Statements . . . . . . . . . . . 33 to 45
Segments of Business . . . . . . . . . . . . . . . . . . . . . . 46
Quarterly Results. . . . . . . . . . . . . . . . . . . . . . . . 47
Five-Year Financial Summary. . . . . . . . . . . . . . . . . . . 48
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
RESULTS OF OPERATIONS
The consolidated statements of earnings provide an overview of Kinark's
operating results for 1995 through 1997. This section of Management's
Discussion and Analysis summarizes the major factors which influenced
operating results during the three-year period presented. On July 1, 1997,
the Company formed North American Warehousing Company ("NAWC") as a separate
subsidiary to operate the public warehousing business previously conducted
by Lake River. The revenues of Lake River and NAWC are presented
separately for 1997, 1996 and 1995. Revenues and expenses associated with
the Company's previously owned Kinpak packaging subsidiary, which are
presented as discontinued operations, are not included in the continuing
operations analyzed below (see Discontinued Operation Note to the
Consolidated Financial Statements).
<TABLE>
REVENUES
<CAPTION>
1997 1996 1995
------------------- ------------------ -----------------
$(000) % $(000) % $(000) %
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Galvanizing $38,633 79.6% $38,498 80.9% $16,984 67.3%
Chemical Storage 5,792 11.9% 5,289 11.1% 4,919 19.5%
Warehousing 4,131 8.5% 3,812 8.0% 3,343 13.2%
- -----------------------------------------------------------------------------------------------
Total $48,556 100.0% $47,599 100.0% $25,246 100.0%
- -----------------------------------------------------------------------------------------------
</TABLE>
1997 COMPARED WITH 1996
Sales for 1997 were $48,556,000, an increase of $957,000 or 2.0% over
1996. Chemical storage and warehousing accounted for $822,000, or
approximately 86%, of the sales increase and the remainder was achieved in
galvanizing.
In 1997, the off-site warehousing operations of Lake River Corporation
were separated into a newly formed subsidiary, North American Warehousing
Company. In 1997, excluding the separation of the warehousing business in
mid-year, Lake River's sales of $9,923,000 increased 9.0% over comparable
sales of $9,101,000 in 1996. Approximately 61% of this sales increase was
due to growth in the chemical storage operations, with gains in the volume
of bulk liquid storage and drum filling, and the remainder was due to
volume growth in existing warehousing accounts.
North American Warehousing's business will be impacted in 1998 due to
the expected loss of its largest account during the third quarter of 1998.
In 1997, this account represented 4.7% of the Company's consolidated sales
and 55% of NAWC's sales. The loss of this key account reflects a decision
by the customer to realign its marketing distribution network. The Company
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.
North American Galvanizing's sales of $38,633,000 increased moderately
from a record $38,498,000 in 1996, reflecting a full year of galvanizing
operations following the acquisition of Rogers Galvanizing Company
("Rogers") in the first quarter of 1996, and slight price increases. Sales
of galvanized steel poles used for communications and power transmission
and galvanized grating for industrial and transportation markets reflected
continued solid demand from these basic industries.
1996 COMPARED WITH 1995
Sales for 1996 were $47,599,000, an increase of $22,353,000 or 88.5%
from 1995. Approximately 90% of the sales increase was attributable to the
acquisition of Rogers in the first quarter of 1996, with the remainder due
to increased demand experienced by the galvanizing and chemicals
operations.
Excluding the impact of new sales contributed by Rogers, sales increased
8.6% at the Company's Boyles Galvanizing plants, as they benefitted from
a record volume of galvanized steel structures for the second consecutive
year and another year of slightly improved average selling prices. New
sales from Rogers more than doubled the Company's 1996 galvanizing sales
to $38,498,000, for an increase of 126.7% over sales of $16,984,000 in
1995. Measured on a pro forma basis, the combined galvanizing companies,
now operating as North American Galvanizing Company ("NAGC"), experienced
a same plant increase in sales in 1996 of $5,085,000 or 14.5% from 1995.
The strongest sales gains were recorded for galvanizing shipments to
customers serving the transportation and communications industries.
Lake River's sales of $9,101,000 increased 10.2% from 1995 on increased
activity in its three main chemical service sectors. Bulk liquid storage
revenues increased 10.4% from 1995, due to a 48.6% increase in throughput
to volume of 41,933,000 gallons. Drum filling revenues increased 2.5% over
1995 on the strength of price increases that offset slightly lower volume.
Warehousing operations, consisting of 600,000 square feet, increased
revenues 13.6% as capacity utilization rose to 96% compared with 85% in
1995.
<TABLE>
COST AND EXPENSES
<CAPTION>
1997 1996 1995
------------------ ------------------ ------------------
% of % of % of
$(000) Sales $(000) Sales $(000) Sales
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Cost of sales $37,979 78.2% $36,953 77.7% $20,524 81.3%
Selling, general &
administrative 6,027 12.4% 5,198 10.9% 3,766 14.9%
Depreciation &
amortization 2,712 5.6% 2,347 4.9% 1,471 5.8%
- --------------------------------------------------------------------------------------------------
Total $46,718 96.2% $44,498 93.5% $25,761 102.0%
- --------------------------------------------------------------------------------------------------
</TABLE>
1997 COMPARED WITH 1996
Cost of sales for 1997 increased 2.8% to $37,979,000, due primarily to
increased price of zinc used by galvanizing and increased sales volume.
At the beginning of 1997, the price of zinc for three-month delivery was
quoted on the London Metal Exchange at $.48 per pound; it reached a high
of $.76 per pound in the third quarter of 1997 and closed the year at $.50
per pound. In 1996, cost of sales was $36,953,000. Cost of sales as a
percent of sales increased to 78.2% in 1997 compared to 77.7% in 1996,
primarily due to the higher zinc costs in galvanizing. Gross profit
margins in chemical storage and warehousing improved as a result of
increases in volume and productivity improvements, and a reduction of
approximately $302,000 in property taxes applicable to prior years.
Selling, general and administrative (SG&A) expenses were $6,027,000 in
1997 and $5,198,000 in 1996. As a percent of sales, SG&A was 12.4% in 1997
and 10.9% in 1996. The increase in SG&A expenses in 1997 primarily
reflects the acquisition of Rogers Galvanizing in the prior year and
additional investment in developing an expanded sales organization at North
American Galvanizing. Depreciation and amortization expenses increased in
1997 due to the Company's ongoing program of capital investment to improve
its operating facilities, plus the amortization of goodwill costs incurred
in the acquisition of Rogers Galvanizing. Depreciation and amortization
are non-cash charges against current income that reflect a reasonable
estimate of the rate the Company is using its productive assets to generate
revenues.
1996 COMPARED WITH 1995
Cost of sales for 1996 was $36,953,000, an increase of 80%, due to the
increased sales volume from operations and the acquisition of Rogers. Cost
of sales as a percent of total sales was 77.7% in 1996, compared to 81.3%
in 1995. Gross profit margins increased primarily as a result of
improvement in labor productivity and the beneficial impact of specialty
market segments served by Rogers. At Lake River, cost of sales as a
percent of sales were unchanged from 1995.
Selling, general and administrative (SG&A) expenses were $5,198,000 in
1996, an increase of 38% attributable to the acquisition of Rogers.
Excluding Rogers, SG&A expenses decreased 11.6% to $3,331,000 compared to
$3,766,000 in 1995. SG&A expenses at Lake River were 6.5% of sales
compared to 7.1% in 1995. As a percent of total sales, SG&A expenses were
10.9% in 1996 compared to 14.9% in 1995. Depreciation expense of
$2,347,000 in 1996 increased approximately 60% compared with 1995, due to
the acquisition of Rogers.
OTHER (INCOME) EXPENSE
1997 1996 1995
----------------- ----------------- ---------------
% of % of % of
$(000) Sales $(000) Sales $(000) Sales
- -----------------------------------------------------------------------------
Interest $ 781 1.6% $ 867 1.8 % $ 634 2.5%
Other ---- ---- (98) (0.2)% ---- ----
- -----------------------------------------------------------------------------
Total $ 781 1.6% $ 769 1.6 % $ 634 2.5%
- -----------------------------------------------------------------------------
1997 COMPARED WITH 1996
Interest expense decreased to $781,000 in 1997 from $867,000 in 1996,
reflecting the restructuring of the Company's bank loan agreements and
lower interest rates. In 1997, interest expense was 1.6% of sales,
compared with 1.8% of sales in 1996.
1996 COMPARED WITH 1995
Interest expense increased to $867,000 in 1996 from $634,000 in 1995 due
to the acquisition of Rogers. Excluding the outstanding debt of Rogers
when acquired and its short-term borrowings for working capital, the
Company's interest expense declined 7.6% to $586,000 in 1996 due to
scheduled re-payments of long-term obligations and a reduction in
short-term borrowings for working capital requirements. As a percent of
total sales, interest expense was 1.8% in 1996 compared to 2.5% in 1995.
Other income of $98,000 in 1996 came from the sale of an undeveloped tract
of land considered excess to the Company's future galvanizing operations.
EARNINGS FROM CONTINUING OPERATIONS
In 1997, earnings from continuing operations were $589,000 compared with
$1,274,000 in 1996. The decrease in earnings was attributable primarily
to lower gross profit margins and higher selling expenses at North American
Galvanizing, partially offset by improved operating margins from the
Company's chemical storage and warehousing businesses. The moderate sales
growth experienced in 1997 by galvanizing reflected, in part, market
resistance to accepting a pass through of unusually rapid price increases
for zinc. As a result of these opposing cost and revenue conditions in the
galvanizing segment, the Company's operating earnings before tax were 2.2%
of sales in 1997 compared with 4.9% in 1996.
Earnings from continuing operations for 1996, after a deduction for the
minority owners' interest in the net income of Rogers, were $1,274,000
compared to a loss of $703,000 in 1995. Earnings from continuing
operations before minority interest for 1996 were $1,438,000. As discussed
elsewhere in this annual report, the Company's acquisition of all of the
outstanding stock of Rogers occurred in a series of transactions during
1996. As a result, the Company's 1996 reported earnings from continuing
operations reflect a deduction of $164,000 for the minority shareholders'
share of Rogers' net income during 1996. Effective December 31, 1996, the
Company had acquired 100% of Rogers outstanding stock and future earnings
will not be reduced by the prior minority owners' interest.
INCOME TAXES
The Company's effective income tax rates for 1997, 1996, and 1995 were
44.3%, 38.3%, and 38.8%, respectively. Income tax expense of $468,000 in
1997 included a full year of non-deductible goodwill amortization related
to Rogers. Income tax expense was $894,000 in 1996. The Company recorded
an income tax benefit of $446,000 in 1995 as a result of incurring a loss
of $1,149,000 from continuing operations.
DISCONTINUED OPERATION
In August 1995, the Company adopted a plan to divest its Kinpak
packaging subsidiary and recorded a charge to discontinued operations of
$1,525,000 in the third quarter. With this charge, the Company wrote off
certain inventories and prepaid expenses of $260,000 and goodwill of
$550,000; and, provided $715,000 for estimated operating losses and losses
on the disposal of fixed assets and other expenses associated with final
disposition of the Kinpak subsidiary.
On January 5, 1996, the Company signed a letter of intent with a
subsidiary of Ocean Bio-Chem, Inc., a Florida corporation for the sale of
substantially all of the assets and assumption of certain liabilities of
Kinpak and the parties closed the transaction on February 27, 1996. The
purchase price was $1,840,000, which included the buyer's assumption of
$990,000 of indebtedness under First Mortgage Industrial Revenue Bonds and
the balance paid in cash at closing.
In 1995, Kinpak recorded a net loss from discontinued operations of
$1,176,000, which included operating losses of $307,000 through August 1995
and a loss of $869,000 (including operating losses through February 27,
1996) on disposal of the assets. Kinpak's sales were $6,083,000 in 1995.
At December 31, 1995 the Company's consolidated balance sheet reflects Net
Assets of Discontinued Operations of $434,000 which were realized upon
recording the sale of Kinpak and liquidation of retained assets and
liabilities in 1996. The Company has no further liabilities with respect
to the operations of its Kinpak subsidiary, except as to some possible
environmental remediation issues for which a portion of the cash proceeds
has been escrowed. In 1997, the Company was released as guarantor of the
facilities Lease Agreement with the Industrial Development Board of the
City of Montgomery, dated September 1, 1979, that was assigned to Ocean
Bio-Chem in 1996.
CASH FLOWS
The Company generated operating cash flow from continuing operations of
$2,682,000 in 1997, compared with $3,612,000 in 1996. The reduction in
operating cash flow primarily reflected a decrease in net earnings in 1997,
accompanied by an increase in operating working capital. Accounts
receivable, the Company's primary current asset, increased $905,000 in 1997
due to moderately higher sales and slower turnover of accounts as compared
to 1996. The increase in accounts receivable was offset substantially by
a planned reduction of $635,000 in inventory stocks.
Kinark generated an operating cash flow from continuing operations of
$3,612,000 in 1996, for a significant improvement from the negative
operating cash flow of $344,000 in 1995. Cash flows from operations
increased due to stronger operations and the acquisition of Rogers.
Accounts receivable and inventories of zinc used in galvanizing increased,
also due to the improvement in operations in 1996 and the acquisition of
Rogers.
Capital expenditures of $3,103,000 in 1997 increased 11.2% from
$2,790,000 in 1996. North American Galvanizing spent 88% of these funds
in 1997 and 75% in 1996 to improve its galvanizing capacity and
productivity. A $500,000 project to rebuild the galvanizing plant in
Nashville, Tennessee was completed in 1997. In addition, in 1997 the
Company started a $600,000 project to expand capacity at the galvanizing
plant in Hurst, Texas. Kinark paid cash of $5,579,000 in connection with
the acquisition of 73.1% of the common stock of Rogers Galvanizing Company
in 1996. On January 3, 1997, Kinark made a final cash payment of
$2,236,500 to acquire all of the remaining shares of Rogers' outstanding
common stock. In an unrelated transaction, Kinark received net proceeds
of $193,000 from the sale of an undeveloped parcel of land and $807,000 for
the sale of Kinpak in 1996.
Capital expenditures were $2,790,000 in 1996, up 164% from $1,055,000
in 1995. Approximately 75% of 1996 capital expenditures were invested in
the galvanizing plants to replace material handling equipment and process
tanks and to increase operating capacity.
In 1997, total debt (current and long-term obligations) increased
$881,000 to $9,047,000 from $8,166,000 in 1996. More than half of the debt
increase was attributable to capital expenditures for renovation and
expansion of the Nashville and Hurst galvanizing plants. The balance of
the debt increase represented borrowings under the revolving line of credit
to support increased working capital.
Total debt increased to $8,166,000 from $6,560,000 in 1995, primarily
related to the existing debt of the Rogers business acquired in 1996.
Kinark raised $7,296,000 (net of $580,000 of issuance costs) in new equity
capital in 1996 through the issuance of 3,011,888 shares of its common
stock in private placement transactions and a rights offering to its
stockholders. In 1996, Kinark made net payments of $1,146,000 on long-term
obligations. Total debt ratio to capital at the end of 1997 was 46.4%,
compared to 50% in 1996.
LIQUIDITY AND FINANCIAL CONDITION
In the second quarter of 1997, the Company restructured and consolidated
all of its credit lines and bank term loans into a new $13,250,000 loan
agreement with a bank. Under the agreement, a two-year revolver was
increased to $8,500,000 from the existing $6,250,000, with two-year term
loans totaling $4,750,000 of which $1,250,000 is available for the planned
expansion of galvanizing facilities.
Stockholders' equity increased to $17,127,000, or $2.53 per share, at
December 31, 1997, compared with $16,735,000 and $2.48 per share at the end
of 1996. The equity increase was attributable to additions of $589,000
from net earnings, partially offset by an accounting charge of $197,000 to
recognize a minimum pension liability. At the end of 1997, the Company had
additional borrowing capacity under its revolving line of credit that
reflected the underlying value of its accounts receivable and inventories.
Based on beginning-of-the-year projections, the Company believes that it
has an adequate line of credit to support its growth and capital
expenditure plans for 1998.
ENVIRONMENTAL MATTERS
In 1995, Boyles participated in the final clean-up of a former
galvanizing plant site in Philadelphia, Pennsylvania 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. Clean-up of this site consisted primarily
of soil removal at a cost of approximately $85,000 to Boyles.
In November 1997, the EPA informed the Company that it would seek to
recover from the Company its costs associated with the 1995 clean-up 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 a former galvanizing site in
Philadelphia, PA. The Company had been holding discussions on the matter
with DOJ, and expects to continue those discussions in an effort to
negotiate an acceptable settlement of the EPA's claim. As previously
reported, the Company and the EPA jointly participated in the successful
cleanup of the Philadelphia site in 1995.
NAGC 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
NAGC 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 NAGC
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 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 utilized 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 represented a
relatively small percentage of the Company's total cost. 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, 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 described above, Kinark has escrowed proceeds from the sale
of Kinpak's assets 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.
NEW ACCOUNTING STANDARDS
In 1997, the Company adopted Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings per Share", SFAS No. 129, "Disclosure of
Information about Capital Structure" and Statement of Position ("SOP") 96-1,
"Environmental Remediation Liabilities".
SFAS No. 128 establishes standards for computing and presenting earnings
per share ("EPS"). This Statement revises the standards for computing
earnings per share previously found in APB Opinion No. 15, Earnings per
Share, and makes them comparable to international EPS standards. SFAS No.
129 establishes standards for disclosing information about an entity's
capital structure. SOP 96-1 provides guidance on specific circumstances
of recognizing, measuring, and disclosing environmental remediation
liabilities.
YEAR 2000 COMPUTER ISSUES
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 plans 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.
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF
KINARK CORPORATION:
We have audited the accompanying consolidated balance sheets of Kinark
Corporation and subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended December 31,
1997. Our audits also included the financial statement schedule listed in
the Index at Item 14. These financial statements and the financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statements and the
financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of Kinark Corporation and
subsidiaries at December 31, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1997 in conformity with generally accepted accounting
principles. Also, in our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken
as a whole, presents fairly, in all material respects, the information set
forth therein.
Deloitte & Touche LLP
Tulsa, Oklahoma
February 20, 1998
(except as to the first paragraph
of the Contingencies footnote
for which the date is March 6, 1998)
<PAGE>
Consolidated Balance Sheets
December 31
------------------------
(Thousands of Dollars, Except Per Share Amounts) 1997 1996
Assets
Cash and cash equivalents $ 259 $ 2,041
Trade receivables, less allowances
of $287 for 1997 and $427 for 1996 7,094 6,189
Inventories 3,503 4,138
Prepaid expenses and other assets 360 580
Deferred tax asset, net 717 ----
- ------------------------------------------------------------------------------
Total Current Assets 11,933 12,948
- ------------------------------------------------------------------------------
Property, Plant and Equipment, at Cost
Land 707 658
Chemical storage facilities and
warehousing equipment 11,253 12,319
Galvanizing plants and equipment 20,793 18,175
Other 336 191
- ------------------------------------------------------------------------------
33,089 31,343
Less: Allowance for depreciation 18,199 17,038
- ------------------------------------------------------------------------------
Total Property, Plant and Equipment, Net 14,890 14,305
- ------------------------------------------------------------------------------
Deferred Tax Asset, Net 667 1,773
Goodwill, net of accumulated amortization of
$174,000 for 1997 and $110,000 for 1996 4,009 4,183
Other Assets 456 230
- ------------------------------------------------------------------------------
TOTAL ASSETS $ 31,955 $ 33,439
- ------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current maturities of long-term obligations $ 916 $ 994
Trade accounts payable 1,672 2,356
Accrued payroll and employee benefits 1,176 1,632
Other taxes 818 1,040
Other accrued liabilities 1,187 1,050
Payable for business acquisition ---- 2,236
- ------------------------------------------------------------------------------
Total Current Liabilities 5,769 9,308
- ------------------------------------------------------------------------------
Pension and Related Liabilities 928 224
Long-Term Obligations 8,131 7,172
Commitments and Contingencies --- ---
Stockholders' Equity
Common stock - $.10 par value:
authorized - 18,000,000 shares
issued - 8,191,409 shares in 1997
8,172,450 shares in 1996 819 817
Additional paid-in capital 17,364 17,366
Minimum pension liability (197) ----
Retained earnings 4,953 4,364
Common shares in treasury at cost:
1997 and 1996 - 1,413,064 (5,812) (5,812)
- ------------------------------------------------------------------------------
Total Stockholders' Equity 17,127 16,735
- ------------------------------------------------------------------------------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 31,955 $ 33,439
- ------------------------------------------------------------------------------
See notes to consolidated financial statements.
<PAGE>
<TABLE>
Consolidated Statements of Operations
<CAPTION>
Year Ended December 31
----------------------------------------
(Dollars in Thousands Except Per Share Amounts) 1997 1996 1995
___________________________________________________________________________________________________
<S> <C> <C> <C>
Sales $ 48,556 $ 47,599 $ 25,246
Costs and Expenses
Cost of sales 37,979 36,953 20,524
Selling, general and administrative expenses 6,027 5,198 3,766
Depreciation and amortization 2,712 2,347 1,471
- ---------------------------------------------------------------------------------------------------
Total Costs and Expenses 46,718 44,498 25,761
- ---------------------------------------------------------------------------------------------------
Operating Earnings (Loss) 1,838 3,101 (515)
- ---------------------------------------------------------------------------------------------------
Other Expense
Interest expense, net 781 867 634
Other (income) expense, net --- (98) ---
- ---------------------------------------------------------------------------------------------------
Total Other Expense 781 769 634
- ---------------------------------------------------------------------------------------------------
Earnings (Loss) from Continuing Operations
before Income Taxes and Minority Interest 1,057 2,332 (1,149)
Income tax expense (benefit) 468 894 (446)
- ---------------------------------------------------------------------------------------------------
Earnings (Loss) from Continuing Operations
before Minority Interest 589 1,438 (703)
Minority Interest --- 164 ---
- ---------------------------------------------------------------------------------------------------
Earnings (Loss) From Continuing Operations 589 1,274 (703)
Loss from Discontinued Operation, net of Income Taxes --- --- (1,176)
- ---------------------------------------------------------------------------------------------------
NET EARNINGS (LOSS) $ 589 $ 1,274 $ (1,879)
- ---------------------------------------------------------------------------------------------------
Net Earnings (Loss) Per Common Share
Basic - Continuing Operations $ .09 $ .21 $ (.19)
Discontinued Operations --- --- (.31)
- ---------------------------------------------------------------------------------------------------
Net Earnings (Loss) Per Common Share $ .09 $ .21 $ (.50)
- ---------------------------------------------------------------------------------------------------
Diluted - Continuing Operations $ .09 $ .21 $ (.19)
Discontinued Operations --- --- (.31)
- ---------------------------------------------------------------------------------------------------
Net Earnings (Loss) Per Common Share $ .09 $ .21 $ (.50)
- ---------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
Consolidated Statements of Stockholders' Equity
(Dollars in Thousands Except Per Share Amount)
<CAPTION>
___________________________________________________________________________________________________________________________________
Common Additional Minimum
Shares Stock ($.10 Paid-in Retained Pension Treasury
Outstanding Par Value) Capital Earnings Liability Stock Total
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
December 31, 1994 3,746,410 $ 520 $ 10,535 $ 4,969 ---- $ (5,980) $ 10,044
Net loss ---- ---- ---- (1,879) ---- ---- (1,879)
Issued from treasury 1,088 ---- (4) ---- ---- 4 ----
- -----------------------------------------------------------------------------------------------------------------------------------
December 31, 1995 3,747,498 520 10,531 3,090 ---- (5,976) 8,165
Net earnings ---- ---- ---- 1,274 ---- ---- 1,274
Issued from treasury 40,000 ---- (64) ---- ---- 164 100
Issued for private placement 2,279,038 228 5,396 ---- ---- ---- 5,624
Issued for rights offering 692,850 69 1,503 ---- ---- ---- 1,572
- -----------------------------------------------------------------------------------------------------------------------------------
December 31, 1996 6,759,386 817 17,366 4,364 ---- (5,812) 16,735
Net earnings ---- ---- ---- 589 ---- ---- 589
Shares outstanding
adjustment 18,959 2 (2) ---- ---- ---- ----
Minimum pension
liability adjustment ---- ---- ---- ---- $ (197) ---- (197)
- -----------------------------------------------------------------------------------------------------------------------------------
December 31, 1997 6,778,345 $ 819 $ 17,364 $ 4,953 $ (197) $ (5,812) $ 17,127
___________________________________________________________________________________________________________________________________
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
Consolidated Statements of Cash Flows
<CAPTION>
Years Ended December 31
---------------------------------------
(Dollars in Thousands) 1997 1996 1995
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating
Net earnings (loss) $ 589 $ 1,274 $ (1,879)
Loss from discontinued operation ---- ---- 1,176
Depreciation and amortization 2,712 2,347 1,471
Deferred income taxes 389 499 (763)
Gain on asset sale ---- (71) ----
Changes in assets and liabilities (net of
acquisition of galvanizing business):
Accounts receivable, net (905) (195) (286)
Inventories and other 615 (121) (79)
Accounts payable, accrued liabilities and other (718) (121) 16
- -----------------------------------------------------------------------------------------------
Cash Provided by (Used for) Continuing Operations 2,682 3,612 (344)
Cash Provided by (Used for) Discontinued Operation ---- (416) 433
- -----------------------------------------------------------------------------------------------
Cash Provided by Operations 2,682 3,196 89
- -----------------------------------------------------------------------------------------------
Investing
Capital expenditures (3,103) (2,790) (1,055)
Proceeds from sale of assets (6) 227 ----
Proceeds from sale of discontinued operation ---- 807 ----
Acquisition of galvanizing business (2,236) (5,579) ----
- -----------------------------------------------------------------------------------------------
Cash (Used for) Investing (5,345) (7,335) (1,055)
- -----------------------------------------------------------------------------------------------
Financing
Proceeds from issuing common stock ---- 7,296 ----
Proceeds of long-term debt 19,207 12,173 14,462
Payment of long-term debt (18,326) (13,319) (13,498)
- -----------------------------------------------------------------------------------------------
Cash Provided by Financing 881 6,150 964
- -----------------------------------------------------------------------------------------------
Increase (Decrease) in Cash and Cash Equivalents (1,782) 2,011 (2)
Cash and Cash Equivalents at Beginning of Year 2,041 30 32
- -----------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of Year $ 259 $ 2,041 $ 30
- -----------------------------------------------------------------------------------------------
Supplemental Disclosure
Interest paid $ 781 $ 867 $ 634
Income taxes paid $ 325 $ 502 $ ----
Fully depreciated assets written off $ 1,260 $ 6,395 $ ----
See notes to consolidated financial statements.
</TABLE>
<PAGE>
Notes to Consolidated Financial Statements
Years Ended December 31, 1997, 1996, and 1995
DESCRIPTION OF BUSINESS
Kinark Corporation (the "Company") is engaged in galvanizing, chemical
storage and public warehousing through its wholly-owned subsidiaries. In
the galvanizing segment, North American Galvanizing Company provides
metals corrosion protection with eleven regionally located galvanizing
plants. Kinark operates chemical storage facilities through Lake River
Corporation and public warehousing through North American Warehousing
Company. The Company grants credit to its customers on terms standard
for these industries, typically net 30 to 45 days. The Company's largest
customer accounted for 9.6%, 12.1%, and 13.2% of consolidated sales for
the years 1997, 1996 and 1995, respectively.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation. The consolidated financial statements
include the accounts of the Company and its wholly-owned subsidiaries:
North American Galvanizing Company (formerly Rogers Galvanizing Company
and Boyles Galvanizing Company), Lake River Corporation, North American
Warehousing Company and for 1996 and 1995, Kinpak, Inc., (a discontinued
subsidiary). All intercompany transactions are eliminated in
consolidation.
Estimates. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
balance sheet dates and the reported amounts of revenues and expenses for
each of the years. Actual results will be determined based on the
outcome of future events and could differ from the estimates.
Cash and Cash Equivalents. Cash and cash equivalents include interest
bearing deposits with original maturities of three months or less.
Inventories. Inventories consist primarily of raw zinc "pigs," molten
zinc in galvanizing kettles and other chemicals and materials used in the
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. Inventories consist of the following:
(Dollars in Thousands) 1997 1996
- --------------------------------------------------------
Zinc - LIFO $ 3,007 $ 3,285
Other Raw Materials 496 853
- --------------------------------------------------------
$ 3,503 $ 4,138
- --------------------------------------------------------
The approximate replacement cost based on year-end market prices of
zinc was $2,600,000 and $2,746,000 at December 31, 1997 and 1996,
respectively. Management estimates the cost of zinc inventories will be
recovered from sales of galvanizing services in the normal course of
business.
Goodwill. Goodwill is amortized over 25 years by the straight-line
method. On a periodic basis, the Company estimates the future
undiscounted cash flows of the operations to which goodwill relates to
ensure that the carrying value of goodwill has not been impaired.
Depreciation and Amortization. Plant and equipment, including assets
under capital leases, are depreciated on the straight-line basis over
their estimated useful lives, generally at rates of 2% to 6% for
buildings and 10% to 20% for equipment, furnishings, and fixtures.
Long-Lived Assets. SFAS No. 121 requires that long-lived assets and
certain identifiable intangibles to be held and used or disposed of
including related goodwill, if any, be reviewed for impairment whenever
events or change in circumstances indicate that the carrying amount of an
asset may not be recoverable. Effective January 1, 1996 the Company
adopted this statement and determined that no impairment loss need be
recognized for the years ended December 31, 1997 or 1996.
Self-Insurance. The Company is self-insured for workers' compensation
and certain health care claims for its active employees. The Company
carries excess insurance providing statutory workers' compensation
coverage for claims exceeding $125,000 per occurrence, subject to an
aggregate limit on losses. The workers' compensation policy contains a
variable dividend plan that could result in decreased premium costs if
claims are contained within targeted limits. The reserves for workers'
compensation benefits and health care claims represent estimates for
reported claims and for claims incurred but not reported. Such
estimates are generally based on actuarially determined estimates of the
expected values; however, the actual results may vary from these values
since the evaluation of losses is inherently subjective and susceptible
to significant changing factors.
Revenue Recognition. The Company recognizes revenue through the sale
of hot dip galvanizing as the galvanizing process is completed; revenue
for bulk liquid terminal and warehousing operations is recognized each
month from the rental of tanks and storage space, and related fees for
handling of customers' products.
New Accounting Standard. In February 1997, the Financial Accounting
Standards Board (the "FASB") issued Statement of Financial Accounting
Standards ("SFAS") No. 128, "Earnings Per Share", which was adopted by the
Company for annual and interim periods ending after December 15, 1997.
Based on the methodology of SFAS No. 128, earnings per share for 1996
and 1995 were the same as that previously reported.
Income Taxes. The Company calculates income taxes according to SFAS
No. 109, "Accounting for Income Taxes." Net deferred income tax assets
on the consolidated balance sheet reflect the net tax effects of
temporary differences between the carrying amounts of assets and
liabilities for financial reporting purposes and the amounts used for
income tax purposes and the benefit of net operating loss and other tax
credit carryforwards. Valuation allowances are established against
deferred tax assets to the extent management believes it is more likely
than not that the assets will not be realized.
Reclassifications. Certain reclassifications have been made to the 1996
consolidated financial statements to conform with classifications used in
1997.
LONG-TERM OBLIGATIONS
December 31
------------------------
(Dollars in Thousands) 1997 1996
- ----------------------------------------------------------
Revolving lines of credit $ 4,342 $ 3,807
Term loans 3,791 3,151
3.5% note due 1997 ---- 23
8.0% note due 1998 6 42
10.0% note due 2000 418 452
9.5% note due 2015 30 30
Capital leases 460 661
- ----------------------------------------------------------
9,047 8,166
Less current portion 916 994
- ----------------------------------------------------------
$ 8,131 $ 7,172
- ----------------------------------------------------------
Long-Term Debt. 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. Amounts borrowed on the revolver and term loans bore
interest ranging from prime to 1% over prime during 1997 and ranging from
1/2% to 1% over prime during 1996, resulting in effective rates of 8.6%
at December 31, 1997 and 9.25% at December 31, 1996.
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 December 31, 1997 and
1996.
Aggregate maturities of long-term debt, exclusive of capital lease
obligations for each of the five years following 1997 and thereafter are
$664,000, $7,557,000, $47,000, $51,000, $57,000 and $211,000.
Capital Leases. Capital leases with an aggregate maturity of $460,000
consist of computers, a manufacturing building and material handling
equipment used in the subsidiary operations.
COMMITMENTS
The Company leases land, office, warehouse facilities, a manufacturing
building and certain equipment under noncancellable leases. The
operating leases generally provide for renewal options and periodic rate
increases based on specified economic indicators and are typically
renewed in the normal course of business. Rent expense was $1,768,000 in
1997, $1,609,000 in 1996, and $1,288,000 in 1995.
Minimum annual rental commitments at December 31, 1997 are as follows:
Capital Operating
(Dollars in Thousands) Leases Leases
- -------------------------------------------------------------
1998 $ 284 $ 1,222
1999 145 440
2000 41 78
2001 23 83
2002 17 3
Thereafter -- 179
- -------------------------------------------------------------
$ 510 $ 2,005
Less: Portion representing interest 50 --------
-------
Net capitalized lease obligation $ 460
=======
The Company has major commitments with domestic and foreign zinc
producers to purchase zinc used in its hot dip galvanizing operations.
Commitments for the future delivery of zinc reflect rates then quoted on
the London Metals Exchange which are not subject to price adjustment. At
December 31, 1997, the aggregate commitments for the procurement of zinc
were $3,311,000 in 1998 and $432,000 in 1999.
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 expects
to continue those discussions in an effort to negotiate an acceptable
settlement of the EPA's claim. While the Company believes that it has
met all of its obligations by acting as a voluntary participant in the
site cleanup in 1995, it has elected to establish a contingency reserve
which represents management's best estimate of the anticipated loss.
NAGC 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 NAGC 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 NAGC 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 financial position or results of
operations.
The Company will continue to have additional environmental compliance
costs associated with operations in the galvanizing and chemicals
businesses. The Company is committed to complying with the environmental
legislation and regulations affecting its operations. Due to the
uncertainties associated with future environmental technologies,
regulatory interpretations, and prospective legislative activity,
management cannot reasonably attempt to quantify potential costs in this
area.
The Company expenses or capitalizes, where appropriate, environmental
expenditures that relate to current operations as they are incurred.
Such expenditures are expensed when they are attributable to past
operations and are not expected to contribute to current or future
revenue generation. The Company records liabilities when remediation or
other environmental assessment or clean-up efforts are probable and the
cost can be reasonably estimated. Management believes this policy
complies with SOP 96-1.
Various litigation arising in the ordinary course of business is
pending against the Company.
Management believes that resolution of 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, clean up or litigation, the recording of such a liability
could have a material impact on the results of operations for the period
involved.
INCOME TAXES
The provision (benefit) for income taxes consists of the following:
Year Ended December 31,
--------------------------------
(Dollars in Thousands) 1997 1996 1995
- ----------------------------------------------------------------
Current $ (37) $ 127 $ (125)
Deferred 505 767 (321)
- ----------------------------------------------------------------
Income tax expense (benefit) $ 468 $ 894 $ (446)
- ----------------------------------------------------------------
The reconciliation of income taxes at the federal statutory rate to the
Company's effective tax rate is as follows:
Year Ended December 31,
-------------------------------
(Dollars in Thousands) 1997 1996 1995
- ---------------------------------------------------------------------
Taxes at statutory rate $ 359 $ 793 $ (391)
State tax net of federal benefit 23 72 (15)
Goodwill amortization 71 42 ---
Other 15 (13) (40)
- ---------------------------------------------------------------------
Taxes at effective tax rate $ 468 $ 894 $ (446)
- ---------------------------------------------------------------------
At December 31, 1997, the Company has approximately $3,011,000 of net
operating loss carryforwards available to offset future taxable income.
Investment tax credits of $99,000 and alternative minimum tax credit
carryforwards of $170,000 are also available as carryforwards to future
years. The net operating loss carryforwards expire in varying amounts
during the years 2006 through 2011 and the investment tax credits expire
in 1999.
The tax effects of significant items comprising the Company's net
deferred tax asset consist of the following:
December 31,
---------------------
(Dollars in Thousands) 1997 1996
- -----------------------------------------------------------
Deferred tax assets:
Alternative minimum tax credit $ 170 $ 167
Reserves not currently deductible 717 579
Operating loss carryforwards 1,144 1,233
Tax credit carryforwards 99 118
Pension minimum funding 116 ----
Other 107 ----
- -----------------------------------------------------------
Deferred tax asset 2,353 2,097
Deferred tax liabilities:
Differences between book and
tax basis of property 969 324
- -----------------------------------------------------------
Net deferred tax asset $ 1,384 $ 1,773
- -----------------------------------------------------------
Management believes that future taxable income of the Company will more
likely than not be sufficient to realize the net deferred tax asset.
STOCK OPTION PLANS
At December 31, 1997 and 1996, 1,088,500 and 1,096,000 shares,
respectively, of the Company's common stock were reserved for issuance
under the terms of the stock option plans for key employees and
directors. The plans generally provide options to purchase Company stock
at fair market value as of the date the option is granted. Options
generally become exercisable in installments specified by the applicable
plan and must be exercised within ten years of the grant date.
Number Weighted-Avg.
Under Option of Shares Exercise Price
- ---------------------------------------------------------------------
Balance at January 1, 1995 105,250 $4.17
Granted 32,613 3.14
Expired (5,500) 4.50
Cancelled (31,113) 3.35
- ---------------------------------------------------------------------
Balance at December 31, 1995 101,250 4.07
Granted 370,000 2.86
Expired (25,000) 3.19
Cancelled (13,250) 4.19
- ---------------------------------------------------------------------
Balance at December 31, 1996 433,000 3.57
Granted 80,000 3.44
Cancelled (7,500) 4.58
- ---------------------------------------------------------------------
Balance at December 31, 1997 505,500 3.12
At December 31, 1997, 1996, and 1995, options for 282,375, 109,500, and
76,125 shares, respectively, were exercisable.
Information about stock options as of December 31, 1997:
Options Outstanding
- ------------------------------------------------------------------------
Weighted-Avg.
Range of Number Remaining Weighted-Avg.
Exercise Prices Outstanding Contractual Life Exercise Price
- --------------- ----------- ---------------- --------------
$2.50 to $3.00 234,500 7.9 years $2.50
$3.25 to $3.50 218,500 8.0 3.45
$3.88 to $4.00 1,500 7.2 3.88
$4.43 to $4.50 50,000 4.8 4.46
$4.75 to $5.00 1,000 5.0 4.75
-------
505,500
=======
Options Exercisable
-------------------------------
Weighted-Avg. Number
Exercise Price Exercisable
-------------- -----------
$2.50 175,500
3.45 58,875
3.88 750
4.45 46,250
4.75 1,000
-------
282,375
=======
The estimated weighted average fair value of options granted during
1997, 1996 and 1995 was $1.55, $1.51 and $1.71 per option. The Company
accounts for its stock option plans in accordance with Accounting
Principles Board Opinion No. 25, under which no compensation cost has
been recognized for stock option awards. Had compensation cost for the
Company's stock option plans been determined according to the methodology
of SFAS No.123, the Company's pro forma net earnings and earnings per
share for 1997, 1996 and 1995 would have been approximately $400,000 and
$.06, $1,086,824 and $.18, and $(1,892,000) and (.50), respectively. The
fair value of options granted under the Company's stock option plans was
estimated using the Black-Scholes option-pricing model with the following
weighted-average assumptions used: no dividend yield, expected volatility
of 42%, 53% and 48% for 1997, 1996 and 1995 respectively, risk free
interest rate of 6.0% in 1997 and 1996 and 6.7% in 1995; and expected
lives of 5 years. The effects of applying SFAS No.123 in this pro forma
disclosure are not indicative of future amounts.
EARNINGS PER SHARE RECONCILIATION
For the Year Ended Income (Loss) Shares Per Share
December 31 (Numerator) (Denominator) Amount
- --------------------- -------------- ------------- ------------
1995
Net loss $ (1,879,000) --- ---
Basic EPS --- 3,747,134 $ (.50)
Effect of dilutive
stock options --- --- ---
Diluted EPS $ (1,879,000) 3,747,134 $ (.50)
- --------------------------------------------------------------------------
1996
Net earnings $ 1,274,000 --- ---
Basic EPS --- 6,172,011 $ .21
Effect of dilutive
stock options --- 30,752 ---
----------
Diluted EPS $ 1,274,000 6,202,763 $ .21
- --------------------------------------------------------------------------
1997
Net earnings $ 589,000 --- ---
Basic EPS --- 6,778,345 $ .09
Effect of dilutive
stock options --- 34,723 ---
---------
Diluted EPS $ 589,000 6,813,068 $ .09
- -------------------------------------------------------------------------
EMPLOYEE BENEFIT PLANS
Substantially all of the Company's employees are covered by a thrift
plan, except for union employees of Lake River Corporation who are
covered by a defined benefit pension plan. Company contributions to
these benefit plans are as follows:
Year Ended December 31
--------------------------------
(Dollars in Thousands) 1997 1996 1995
- ----------------------------------------------------------
Pension Plan $ 68 $ 81 $ 42
Thrift Plan 292 196 204
------ ------ -------
$ 360 $ 277 $ 246
- ----------------------------------------------------------
Pension plan assets consist of group annuity insurance contracts.
Thrift plan assets consist of short-term investments, intermediate bonds,
and listed stocks. Pension costs are funded in accordance with the
Employee Retirement Income Security Act of 1974 (ERISA). The funded
status of the Company's defined benefit pension plan is as follows:
December 31
------------------------------------
(Dollars in Thousands) 1997 1996 1995
- ----------------------------------------------------------------------
Accumulated benefit obligation
Vested $ 1,491 $ 1,189 $ 1,023
Nonvested 13 9 25
- ----------------------------------------------------------------------
Total $ 1,504 $ 1,198 $ 1,048
- ----------------------------------------------------------------------
Projected benefit obligation $ 1,644 $ 1,359 $ 1,087
Less fair value of plan assets (726) (648) (572)
- ----------------------------------------------------------------------
Unfunded projected benefit
obligation 918 711 515
Unrecognized prior service
cost (168) (187) (194)
Unrecognized net transition
loss (34) (42) (50)
Unrecognized net loss from
actuarial experience (442) (273) (103)
Adjustment to recognize
minimum liability 504 ---- ----
- ----------------------------------------------------------------------
Pension liability recognized
in the consolidated
balance sheets $ 778 $ 209 $ 168
- ----------------------------------------------------------------------
A portion of the minimum liability adjustment was recorded as an
adjustment to stockholders' equity of $197,000, net of deferred tax
benefits of $116,000.
Applicable rates used in determining the actuarial value of the
projected benefit obligation are as follows:
1997 1996 1995
- -------------------------------------------------------------------
Discount rate* 6.75% 7.5% 7.5%
Rate of increase in future
compensation levels* 5.0% 6.0% 6.0%
Expected long-term rate of
return on plan assets 7.0% 7.5% 7.5%
- -------------------------------------------------------------------
* Used in determining the actuarial value of the projected benefit
obligation.
The periodic net pension cost of the Company's defined benefit pension
plan included the following:
Year Ended December 31
-------------------------------
(Dollars in Thousands) 1997 1996 1995
- ---------------------------------------------------------------------
Service cost benefits earned
during the period $ 44 $ 33 $ 27
Interest cost on projected
benefit obligations 101 80 70
Return on assets (50) (43) (41)
Amortization of unrecognized
net transition obligations 8 8 8
Amortization of prior service cost 18 18 7
Amortization of loss 11 10 3
- ---------------------------------------------------------------------
Net periodic pension cost $ 132 $ 106 $ 74
- ---------------------------------------------------------------------
On February 26, 1998, the union members covered by the defined
benefit pension plan at Lake River agreed to freeze maximum retirement
benefits at their current level and to close the pension plan to further
enrollments. Lake River has agreed to establish a 401(k) defined
contribution thrift plan for its union employees in the third quarter of
1998.
STOCKHOLDERS' EQUITY
On June 15, 1996, the Company's stockholders approved an amendment to
the Restated Certificate of Incorporation that increased the authorized
common shares to 18,000,000 shares.
In January 1996, the Company sold approximately 2.28 million shares of
its common stock in a private placement at a price of $2.50 per share.
In October 1996, the Company sold approximately 693,000 shares of its
common stock in a Rights Offering at a price of $3.00 per share.
Proceeds from these sales of stock (net of issuance costs) were used to
fund the acquisition of Rogers Galvanizing Company (see Acquisition of
Rogers Galvanizing Company).
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of financial instruments included in current assets
and liabilities approximates fair value. The fair value of the Company's
long-term debt is estimated to approximate carrying value based on the
borrowing rates currently available to the Company for bank loans with
similar terms and average maturities.
SUPPLEMENTAL CASH FLOW INFORMATION
Acquisition of Rogers Business
Fair Value:
Assets acquired, not including cash $ 9,620
Liabilities assumed (5,591)
Goodwill 4,293
-----------
Purchase price $ 8,322
-----------
Acquisition costs paid in:
1995 $ 507
1996 5,579
1997 2,236
--------
Net cash paid for acquisition $ 8,322
--------
ACQUISITION OF ROGERS GALVANIZING COMPANY
On February 5, 1996, the Company acquired 51.2% of the outstanding
common stock of Rogers Galvanizing Company ("Rogers"), and assumed control
of its Board of Directors. The purchase price of $4.3 million in cash
was paid to two Trusts that held the common stock. Under the purchase
agreement with the Trusts, the Company agreed to offer to purchase the
remaining outstanding shares of common stock of Rogers from its minority
stockholders for cash at a price per share equivalent to that paid to the
Trusts. In separate transactions in February, March and November 1996,
the Company acquired an additional 21.9% of the outstanding common stock
of Rogers at a purchase price of $1.8 million in cash. Effective
December 31, 1996, the Company acquired the remaining 26.9% of the
outstanding common shares of Rogers for $2.2 million in cash that was
paid on January 3, 1997.
The acquisition was accounted for using the purchase method of
accounting, and the purchase price was allocated to Rogers' assets and
liabilities based upon estimates of their fair value at the acquisition
dates. Goodwill recorded in the acquisition was $4.3 million. Operating
results of Rogers are included in the consolidated financial statements
from February 1, 1996, with applicable minority interest allocations
included in the 1996 results of operations.
The following unaudited pro forma results of the Company's operations
assume the acquisition of 100% of Rogers common stock occurred as of
January 1, 1995. Weighted average common shares used to compute net
earnings (loss) per share include the approximately 3.0 million shares
issued in the Private Placement and Rights Offering.
Year Ended December 31
--------------------------
(Dollars in Thousands) 1996 1995
- ----------------------------------------------------------
Sales $ 48,855 $ 42,860
Earnings from continuing
operations $ 1,483 $ 117
Loss from discontinued
operation, net of taxes $ ---- $ (1,176)
Net earnings $ 1,483 $ (1,059)
Net earnings per common
share $ .25 $ (.16)
- -----------------------------------------------------------
The pro forma results include the operating results of Rogers for its
fiscal years ended September 30. The pro forma amounts include an
adjustment to reflect the amortization of the goodwill recorded in the
Rogers acquisition using a straight-line method over 25 years.
The pro forma financial information is not necessarily indicative of
the operating results that would have occurred had the Rogers acquisition
actually been consummated as of January 1, 1995, nor is the pro forma
information necessarily indicative of future operating results.
UNION CONTRACTS
Approximately 185 of the Company's 550 employees are covered under
labor union agreements. NAGC 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 was
extended to April 8, 1998, without modification, by mutual agreement
between the union and NAGC. Historically, NAGC has renewed its labor
contract for a new 3 to 4-year term without interruption. During the
first quarter of 1998, the union members at Lake River voted to accept
the terms of a newly negotiated 3-year labor agreement with the
Teamsters.
DISCONTINUED OPERATION
During August 1995, the Company finalized a formal plan to discontinue
the operations of its Kinpak subsidiary, comprising the Company's
chemical packaging business. Substantially all of the assets of Kinpak
were subsequently sold on February 27, 1996 for $1,840,000, consisting of
$850,000 cash and the assumption of the capital lease on its plant
facilities which was financed by a $3,000,000 industrial revenue bond
issue. In 1995, the Company recorded a $1,264,000 loss on disposal
(before income taxes of $395,000), including $460,000 of operating losses
incurred during the third and fourth quarter of 1995 and the period
through February 27, 1996, the closing date, and a $804,000 loss on the
sale of assets. Revenues from Kinpak were $6,346,236 (including revenues
of $263,110 for the period through the closing date) in 1995. The
income tax expense (benefit) on the operating results of Kinpak was
($176,000) for the year ended December 31, 1995.
<PAGE>
Segments of Business
Year Ended December 31
---------------------------------
(Dollars in Thousands) 1997 1996 1995
- ----------------------------------------------------------------------------
Sales
Galvanizing $ 38,633 $ 38,498 $ 16,984
Chemical storage 5,792 5,289 4,919
Warehousing 4,131 3,812 3,343
- ----------------------------------------------------------------------------
48,556 47,599 25,246
- ----------------------------------------------------------------------------
Operating Earnings
Galvanizing 2,647 4,738 1,414
Chemical storage 466 (196) (281)
Warehousing 427 453 455
- ----------------------------------------------------------------------------
3,540 4,995 1,588
- ----------------------------------------------------------------------------
Interest expense 781 867 634
Other (income) expense ---- (98) ----
Corporate headquarters expense 1,702 1,894 2,103
- ----------------------------------------------------------------------------
1,057 2,332 (1,149)
Income Tax Expense (Benefit) 468 894 (446)
- ----------------------------------------------------------------------------
Earnings (loss) from Continuing
Operations before Minority Interest $ 589 $ 1,438 $ (703)
- ----------------------------------------------------------------------------
Year Ended December 31
---------------------------------
(Dollars in Thousands) 1997 1996 1995
- ------------------------------------------------------------------------------
Identifiable Assets
Galvanizing $ 26,124 $ 25,636 $ 11,790
Chemical storage 3,137 2,776 2,690
Warehousing 903 821 865
Net assets of discontinued operations --- ---- 434
General corporate 1,791 4,206 2,596
- ------------------------------------------------------------------------------
$ 31,955 $ 33,439 $ 18,375
- ------------------------------------------------------------------------------
Capital Expenditures
Galvanizing $ 2,738 $ 2,118 $ 544
Chemical storage 179 538 265
Warehousing 34 124 196
General corporate 152 10 50
- ------------------------------------------------------------------------------
$ 3,103 $ 2,790 $ 1,055
- ------------------------------------------------------------------------------
Depreciation and Amortization Expense
Galvanizing $ 2,093 $ 1,718 $ 879
Chemical storage 503 518 504
Warehousing 76 65 54
General corporate 40 46 34
- ------------------------------------------------------------------------------
$ 2,712 $ 2,347 $ 1,471
- ------------------------------------------------------------------------------
<PAGE>
<TABLE>
Quarterly Results (Unaudited)
Quarterly Results of Operations for the Years Ended December 31, 1997 and 1996 Were:
<CAPTION>
1997
--------------------------------------------------------------
(Dollars in Thousands Except per Share Amounts) Mar 31 Jun 30 Sep 30 Dec 31 Total
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales $ 11,724 $ 12,535 $ 12,206 $ 12,091 $ 48,556
Gross Profit $ 2,557 $ 2,838 $ 2,440 $ 2,742 $ 10,577
- -----------------------------------------------------------------------------------------------------------------
Net Earnings $ 252 $ 283 $ 2 $ 52 $ 589
- -----------------------------------------------------------------------------------------------------------------
Basic Earnings per Common Share $ .04 $ .04 $ ---- $ .01 $ .09
Diluted Earnings per Common Share $ .04 $ .04 $ ---- $ .01 $ .09
<CAPTION>
1996
--------------------------------------------------------------
(Dollars in Thousands Except per Share Amounts) Mar 31 Jun 30 Sep 30 Dec 31 Total
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales $ 10,417 $ 13,337 $ 12,375 $ 11,470 $ 47,599
Gross Profit $ 2,263 $ 3,265 $ 2,864 $ 2,254 $ 10,646
Earnings (Loss) from
Continuing operations before minority interest 207 678 302 251 1,438
Minority interest (83) (145) 28 36 (164)
- -----------------------------------------------------------------------------------------------------------------
Net Earnings $ 124 $ 533 $ 330 $ 287 $ 1,274
- -----------------------------------------------------------------------------------------------------------------
Basic Earnings per Common Share $ .02 $ .09 $ .05 $ .05 $ .21
Diluted Earnings per Common Share $ .02 $ .09 $ .05 $ .05 $ .21
</TABLE>
<PAGE>
<TABLE>
SELECTED FINANCIAL HIGHLIGHTS
The following is a summary of selected financial data of the Company
(Dollars in Thousands, Except per Share Data)
<CAPTION>
For The Years Ended December 31, 1997 1996 (1) 1995 (2) 1994 (2) 1993 (3)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Sales $ 48,556 $ 47,599 $ 25,246 $ 26,223 $ 25,542
Earnings (Loss) from continuing
operations before cumulative
effect of change in accounting
method and minority interest $ 589 $ 1,438 $ (703) $ 1,011 $ 765
Net Earnings (Loss) $ 589 $ 1,274 $ (1,879) $ 410 $ 2,582
Basic Earnings (Loss) per common share
from continuing operations
before cumulative effect of
change in accounting method $ .09 $ .21 $ (.19) $ .27 $ .20
Net Earnings (Loss) per common share $ .09 $ .21 $ (.50) $ .11 $ .68
Weighted average shares
outstanding* (4) 6,813,068 6,202,763 3,747,134 3,751,979 3,754,854
<CAPTION>
At December 31, 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Working Capital $ 6,164 $ 3,640 $ 2,875 $ 2,761 $ 3,961
Current Ratio 2.1 1.4 1.7 1.6 2.1
Total Assets $ 31,955 $ 33,439 $ 18,375 $ 20,954 $ 20,931
Capital Expenditures $ 3,103 $ 2,790 $ 1,055 $ 1,410 $ 2,459
Depreciation & Amortization $ 2,712 $ 2,347 $ 1,471 $ 1,469 $ 1,304
Long-Term Debt $ 8,131 $ 7,172 $ 5,932 $ 6,009 $ 7,720
Stockholders' Equity $ 17,127 $ 16,735 $ 8,165 $ 10,044 $ 9,634
Per Share $ 2.53 $ 2.48 $ 2.18 $ 2.68 $ 2.57
Common Shares Outstanding 6,778,345 6,759,386 3,747,498 3,746,410 3,746,425
* Weighted average shares outstanding include the dilutive effect of stock
options, if applicable.
(1) Includes results of operations of acquired Rogers Galvanizing business from
February 1, 1996.
(2) Results include discontinued operations of Kinpak.
(3) Includes cumulative effect of Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," adopted January 1, 1993. This change in accounting
method increased 1993 net earnings by $1,802,000, or $.48 per share.
(4) Reflects stock issued in private placement and rights offering in 1996.
</TABLE>
EXHIBIT 21 - SUBSIDIARIES OF THE REGISTRANT
North American Galvanizing Company
Lake River Corporation
North American Warehousing Company
INDEPENDENT AUDITOR'S CONSENT
We consent to the incorporation by reference in Registration Statements
Nos. 2-89135; 33-13618; and 33-28533 of Kinark Corporation on Forms S-8
of our report dated February 20, 1998 (except as to the first paragraph
of the Contingencies footnote for which the date is March 6, 1998),
appearing in this Annual Report on Form 10-K of Kinark Corporation
for the year ended December 31, 1997.
/s/ Deloitte & Touche LLP
Deloitte & Touche LLP
Tulsa, Oklahoma
March 27, 1998
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned Director and/or
officer of Kinark Corporation, a Delaware corporation (the "Company"),
hereby constitutes and appoints Paul R. Chastain the true and lawful
agent and attorney-in-fact of the undersigned with full power of substitution
and authority to sign for the undersigned, as Director or an officer of the
Company, or as both, the Company's Form 10-K Annual Report for the period
ended December 31, 1997, and any and all exhibits and amendments thereto
to be filed with the Securities and Exchange Commission, Washington, D.C.
pursuant to Section 13 or Section 15(d) of the Securities Exchange Act
of 1934; hereby ratifying and confirming all acts taken by such agent
and attorney-in-fact as herein authorized.
Dated: March 23, 1998 /s/ Richard C. Butler
Richard C. Butler
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned Director and/or
officer of Kinark Corporation, a Delaware corporation (the "Company"),
hereby constitutes and appoints Paul R. Chastain the true and lawful
agent and attorney-in-fact of the undersigned with full power of substitution
and authority to sign for the undersigned, as Director or an officer of the
Company, or as both, the Company's Form 10-K Annual Report for the period
ended December 31, 1997, and any and all exhibits and amendments thereto
to be filed with the Securities and Exchange Commission, Washington, D.C.
pursuant to Section 13 or Section 15(d) of the Securities Exchange Act
of 1934; hereby ratifying and confirming all acts taken by such agent
and attorney-in-fact as herein authorized.
Dated: March 23, 1998 /s/ Michael T. Crimmins
Michael T. Crimmins
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned Director and/or
officer of Kinark Corporation, a Delaware corporation (the "Company"),
hereby constitutes and appoints Paul R. Chastain the true and lawful
agent and attorney-in-fact of the undersigned with full power of substitution
and authority to sign for the undersigned, as Director or an officer of the
Company, or as both, the Company's Form 10-K Annual Report for the period
ended December 31, 1997, and any and all exhibits and amendments thereto
to be filed with the Securities and Exchange Commission, Washington, D.C.
pursuant to Section 13 or Section 15(d) of the Securities Exchange Act
of 1934; hereby ratifying and confirming all acts taken by such agent
and attorney-in-fact as herein authorized.
Dated: March 23, 1998 /s/ Ronald J. Evans
Ronald J. Evans
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned Director and/or
officer of Kinark Corporation, a Delaware corporation (the "Company"),
hereby constitutes and appoints Paul R. Chastain the true and lawful
agent and attorney-in-fact of the undersigned with full power of substitution
and authority to sign for the undersigned, as Director or an officer of the
Company, or as both, the Company's Form 10-K Annual Report for the period
ended December 31, 1997, and any and all exhibits and amendments thereto
to be filed with the Securities and Exchange Commission, Washington, D.C.
pursuant to Section 13 or Section 15(d) of the Securities Exchange Act
of 1934; hereby ratifying and confirming all acts taken by such agent
and attorney-in-fact as herein authorized.
Dated: March 23, 1998 /s/ Joseph J. Morrow
Joseph J. Morrow
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned Director and/or
officer of Kinark Corporation, a Delaware corporation (the "Company"),
hereby constitutes and appoints Paul R. Chastain the true and lawful
agent and attorney-in-fact of the undersigned with full power of substitution
and authority to sign for the undersigned, as Director or an officer of the
Company, or as both, the Company's Form 10-K Annual Report for the period
ended December 31, 1997, and any and all exhibits and amendments thereto
to be filed with the Securities and Exchange Commission, Washington, D.C.
pursuant to Section 13 or Section 15(d) of the Securities Exchange Act
of 1934; hereby ratifying and confirming all acts taken by such agent
and attorney-in-fact as herein authorized.
Dated: March 23, 1998 /s/ John H. Sununu
John H. Sununu
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned Director and/or
officer of Kinark Corporation, a Delaware corporation (the "Company"),
hereby constitutes and appoints Paul R. Chastain the true and lawful
agent and attorney-in-fact of the undersigned with full power of substitution
and authority to sign for the undersigned, as Director or an officer of the
Company, or as both, the Company's Form 10-K Annual Report for the period
ended December 31, 1997, and any and all exhibits and amendments thereto
to be filed with the Securities and Exchange Commission, Washington, D.C.
pursuant to Section 13 or Section 15(d) of the Securities Exchange Act
of 1934; hereby ratifying and confirming all acts taken by such agent
and attorney-in-fact as herein authorized.
Dated: March 23, 1998 /s/ Mark E. Walker
Mark E. Walker
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 259
<SECURITIES> 0
<RECEIVABLES> 7,381
<ALLOWANCES> 287
<INVENTORY> 3,503
<CURRENT-ASSETS> 11,933
<PP&E> 33,089
<DEPRECIATION> 18,199
<TOTAL-ASSETS> 31,955
<CURRENT-LIABILITIES> 5,769
<BONDS> 9,059
0
0
<COMMON> 819
<OTHER-SE> 17,127
<TOTAL-LIABILITY-AND-EQUITY> 31,955
<SALES> 48,556
<TOTAL-REVENUES> 48,556
<CGS> 37,979
<TOTAL-COSTS> 46,718
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 781
<INCOME-PRETAX> 1,057
<INCOME-TAX> 468
<INCOME-CONTINUING> 589
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 589
<EPS-PRIMARY> .09
<EPS-DILUTED> .09
</TABLE>
