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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED JUNE 30, 1998
COMMISSION FILE NO. 1-3920
KINARK CORPORATION
(Exact name of the registrant as specified in its charter)
DELAWARE 71-0268502
(State of Incorporation) (I.R.S. Employer Identification No.)
2250 EAST 73RD STREET
TULSA, OKLAHOMA 74136-6832
(Address of principal executive offices)
Registrant's telephone number: (918) 494-0964
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 and 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of June 30, 1998.
Common Stock $ .10 Par Value . . . . . 6,778,345
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<TABLE>
KINARK CORPORATION AND SUBSIDIARIES
INDEX TO QUARTERLY REPORT ON FORM 10-Q
<CAPTION>
PAGE
<S> <C>
PART I. FINANCIAL INFORMATION
Forward Looking Statements or Information 2
Item 1. Financial Statements
Independent Accountants' Review Report 3
Condensed Consolidated Balance Sheets as
of June 30, 1998 (unaudited), and
December 31, 1997 4
Condensed Consolidated Statements of
Earnings for the three and six months ended
June 30, 1998 and 1997 (unaudited) 5
Condensed Consolidated Statements of
Cash Flows for the six months ended
June 30, 1998 and 1997 (unaudited) 6
Notes to Condensed Consolidated Financial
Statements for the three and six months ended
June 30, 1998 and 1997 (unaudited) 7-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 11-15
Item 3. Quantitative and Qualitative Disclosures
About Market Risks 16
PART II. OTHER INFORMATION 17-18
SIGNATURES 19
</TABLE>
FORWARD LOOKING STATEMENTS OR INFORMATION
Certain statements in this Form 10-Q, including information set forth
under the caption "Management's Discussion and Analysis of Financial Condition
and Results of Operations", constitute "Forward-Looking Statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. The Company
cautions investors that forward-looking statements included in this Form 10-Q,
or hereafter included in other publicly available documents filed with the
Securities and Exchange Commission, reports to the Company's stockholders and
other publically available statements issued or released by the Company
involve significant risks, uncertainties, and other factors which could cause
the Company's actual results, performance (financial or operating) or
achievements to differ materially from the future results, performance
(financial or operating) or achievements expressed or implied by such
forward-looking statements. The Company believes that the important factors
set forth in the Company's cautionary statements at Exhibit 99 to this Form
10-Q could cause such a material difference to occur and investors are
referred to Exhibit 99 for such cautionary statements.
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
To the Board of Directors and Stockholders of
Kinark Corporation:
We have reviewed the accompanying condensed consolidated balance sheet of
Kinark Corporation (the "Company") and subsidiaries as of June 30, 1998, and
the related condensed consolidated statements of earnings for the three and
six-month periods ended June 30, 1998 and 1997, and the condensed consolidated
statements of cash flows for the six months ended June 30, 1998 and 1997.
These financial statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and of making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to such condensed consolidated financial statements for them to
be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Kinark Corporation and
subsidiaries as of December 31, 1997, and the related consolidated statements
of operations, stockholders' equity, and cash flows for the year then ended
(not presented herein); and in our report dated February 20, 1998 (except as
to the first paragraph of the Contingencies footnote, for which the date is
March 6, 1998) we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in the
accompanying condensed consolidated balance sheet as of December 31, 1997 is
fairly stated, in all material respects, in relation to the consolidated
balance sheet from which it has been derived.
/s/Deloitte & Touche LLP
Tulsa, Oklahoma
August 14, 1998
<TABLE>
KINARK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<CAPTION>
Unaudited
JUNE 30 Dec 31
(Dollars in Thousands) 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash $ 304 $ 259
Trade receivables, net 7,400 7,094
Inventories 4,469 3,503
Prepaid expenses and other assets 727 360
Deferred tax asset, net 717 717
------ ------
TOTAL CURRENT ASSETS 13,617 11,933
------ ------
PROPERTY, PLANT AND EQUIPMENT, AT COST
Land 707 707
Chemical storage facilities and
warehousing equipment 11,369 11,253
Galvanizing plants and equipment 21,667 20,793
Other 314 336
------ ------
34,057 33,089
Less: Allowance for depreciation 19,057 18,199
------ ------
TOTAL PROPERTY, PLANT & EQUIPMENT, NET 15,000 14,890
------ ------
DEFERRED TAX ASSET, NET 450 667
GOODWILL, NET 3,921 4,009
OTHER ASSETS 485 456
------ ------
TOTAL ASSETS $ 33,473 $ 31,955
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Trade accounts payable $ 2,014 $ 1,672
Accrued payroll and employee benefits 1,479 1,176
Other taxes 1,122 818
Other accrued liabilities 1,181 1,187
Current maturities of long-term obligations 919 916
------ ------
TOTAL CURRENT LIABILITIES 6,715 5,769
------ ------
PENSION AND RELATED LIABILITIES 846 928
LONG-TERM OBLIGATIONS 8,062 8,131
COMMITMENTS AND CONTINGENCIES --- ---
STOCKHOLDERS' EQUITY
Common stock 819 819
Additional paid-in capital 17,364 17,364
Minimum pension liability (197) (197)
Retained earnings 5,676 4,953
Less: Treasury stock at cost (5,812) (5,812)
------ ------
TOTAL STOCKHOLDERS' EQUITY 17,850 17,127
------ ------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 33,473 $ 31,955
====== ======
</TABLE>
See notes to condensed consolidated financial statements.
<TABLE>
KINARK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
Unaudited
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
(Dollars in Thousands
Except per Share Amounts) 1998 1997 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SALES $12,910 $12,535 $25,074 $24,259
COSTS AND EXPENSES
Cost of sales 9,516 9,697 18,871 18,864
Selling, general & administrative 1,755 1,452 3,400 2,738
Depreciation and amortization 737 691 1,438 1,323
------ ------ ------ ------
TOTAL COSTS AND EXPENSES 12,008 11,840 23,709 22,925
------ ------ ------ ------
OPERATING EARNINGS 902 69 1,365 1,334
OTHER (INCOME) EXPENSE
Interest expense, net 150 211 326 414
Other income --- --- (309) ---
------ ------ ------ ------
TOTAL OTHER (INCOME) EXPENSE 150 211 17 414
EARNINGS BEFORE INCOME TAXES 752 484 1,348 920
Income tax expense 369 201 625 385
------ ------ ------ ------
NET EARNINGS $ 383 $ 283 $ 723 $ 535
====== ====== ====== ======
BASIC EARNINGS PER COMMON SHARE $ .06 $ .04 $ .11 $ 0.08
DILUTED EARNINGS PER COMMON SHARE $ .06 $ .04 $ .11 $ 0.08
</TABLE>
See notes to condensed consolidated financial statements.
<TABLE>
KINARK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
<CAPTION>
Six Months Ended
June 30
-----------------
(Dollars in Thousands) 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net Earnings $ 723 $ 535
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 1,438 1,323
Gain on involuntary conversion of assets (309) ---
Loss on sale of assets 10 ---
Deferred income taxes 217 355
Change in assets and liabilities:
Accounts receivable (306) (98)
Inventories and other (1,362) 235
Accounts payable, accrued liabilities
and other 861 134
------ ------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,272 2,484
INVESTING ACTIVITIES
Capital expenditures (1,490) (1,762)
Proceeds from involuntary conversion of assets 325 ---
Proceeds from sale of assets 4 ---
Acquisition of galvanizing business --- (2,236)
------ ------
NET CASH USED FOR INVESTING ACTIVITIES (1,161) (3,998)
------ ------
FINANCING ACTIVITIES
Proceeds from sale of common stock --- 2
Proceeds from long-term obligations 9,024 9,286
Payments on long-term obligations (9,090) (9,297)
------ ------
NET CASH USED FOR FINANCING ACTIVITIES (66) (9)
------ ------
INCREASE (DECREASE) IN CASH 45 (1,523)
CASH AT BEGINNING OF PERIOD 259 2,041
------ ------
CASH AT END OF PERIOD $ 304 $ 518
====== ======
</TABLE>
See notes to condensed consolidated financial statements.
KINARK CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1998 AND 1997
UNAUDITED
NOTE 1. BASIS OF PRESENTATION
---------------------
The condensed consolidated financial statements included in this
report have been prepared by Kinark Corporation (the "Company")
pursuant to the rules and regulations of the Securities and Exchange
Commission for interim reporting and include all normal and
recurring adjustments which are, in the opinion of management,
necessary for a fair presentation. These financial statements
have not been audited by an independent accountant. The condensed
consolidated financial statements include the accounts of the
Company and its subsidiaries.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to
such rules and regulations for interim reporting. The Company
believes that the disclosures are adequate to make the information
presented not misleading. However, these financial statements
should be read in conjunction with the financial statements and
notes thereto included in the Company's Annual Report on Form 10-K,
for the year ended December 31, 1997. The financial data for the
interim periods presented may not necessarily reflect the results to
be anticipated for the complete year.
NOTE 2. EARNINGS PER COMMON SHARE
-------------------------
Diluted earnings per common share for the periods presented has
been computed based upon the weighted average number of shares
outstanding, adjusted for the dilutive effect of stock options, of
6,816,689 and 6,795,601 for the three months ended June 30, 1998 and
1997 respectively, and 6,810,677 and 6,797,321 for the six months
ended June 30, 1998 and 1997 respectively. Basic earnings per
common share for these same periods has been computed based upon the
average number of shares outstanding of 6,778,345 for each period.
NOTE 3. INVENTORIES
-----------
Inventories consist primarily of raw zinc "pigs," molten zinc in
galvanizing kettles and other chemicals and materials used in the
hot dip galvanizing process. All inventories are stated at the
lower of cost or market with market value based on ultimate
realizable value from the galvanizing process. Zinc cost is
determined on a last-in-first-out (LIFO) basis. Other inventories
are valued primarily on an average cost basis.
NOTE 4. DEBT OBLIGATIONS
----------------
In 1997, the Company entered into a two-year bank credit agreement
which provides a $8,500,000 maximum revolving line of credit, a
$1,250,000 advancing term loan for expansion of galvanizing plants
and a $3,500,000 term loan, that was scheduled to expire May 1999.
In June 1998, the bank extended the expiration date of this
agreement to May 1, 2000, with the credit facility and all other
terms and conditions remaining the same.
Substantially all of the Company's accounts receivable, inventories
and fixed assets are pledged as collateral under the agreement, and
the agreement is secured by a guaranty from each of the Company's
subsidiaries. Amounts borrowed under the agreement bear interest at
prime minus or plus a spread ranging from minus 25 basis points to
plus 50 basis points, determined by a coverage ratio of defined
earnings to debt service.
Term loan payments are based on a five year amortization schedule
with equal monthly payments of principal and interest. The
advancing term loan, once funded, will require equal monthly
payments of principal and interest based on a seven year
amortization schedule.
The revolver may be paid down without penalty, or additional funds may
be borrowed up to the revolver limits. The term loan and 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 June 30, 1998.
NOTE 5. NEW ACCOUNTING STANDARDS
-----------------------
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Comprehensive Income", and
SFAS No. 131, "Disclosure About Segments of an Enterprise", for the
year ending December 31, 1998.
SFAS No. 130 provides for a disclosure of the components of
comprehensive income necessary to reconcile reported net earnings
with the net change in retained earnings for the current reporting
period. At June 30, 1998, there was no difference between net
earnings and comprehensive income. SFAS No. 131 modifies current
segment reporting requirements and established criteria for
reported disclosures about a company's products and services,
geographic areas and major customers in annual and interim financial
statements. The Company does not believe that there will be
significant reporting changes resulting from adoption of SFAS No. 131.
NOTE 6. INVOLUNTARY CONVERSION OF ASSETS
--------------------------------
During the first quarter of 1998, fire destroyed an acid recycling
system at one of the Company's galvanizing plants. Production at
the facility was not significantly affected by the incident and no
personal injuries were sustained. The acid recycling system was
covered by insurance for its current replacement value. As a result
of the expected receipt of insurance proceeds, the Company recorded
a pre-tax gain of $309,000 for the first quarter of 1998, and has
purchased a new acid recovery system for $410,000. Installation of
the new acid recovery system is scheduled for completion during the
third quarter of 1998.
NOTE 7. COMMITMENTS AND CONTINGENCIES
-----------------------------
In 1995 the Company's galvanizing subsidiary participated with the
United States Environmental Protection Agency ("EPA") in the removal
of soil from a former galvanizing site in Philadelphia, PA sold in
1981. In 1995, the Company was notified by the EPA that all
requirements relating to the performance of the Response Action Plan
had been completed. Subsequently in November 1997, the Company was
advised by the EPA that it would seek recovery of response costs of
approximately $480,000 associated with the environmental cleanup
that had been performed at the former Philadelphia site. On March 6,
1998, the Company was informed that the Department of Justice
("DOJ") had filed a lawsuit naming North American Galvanizing
Company ("NAG") and Boyles Galvanizing Company (a former subsidiary
company merged into North American Galvanizing Company in 1997) in a
CERCLA Cost Recovery Action for approximately $480,000, in
connection with the cleanup of the Philadelphia site. The Company
had been holding discussions on the matter with DOJ, and in May
1998, the parties reached an agreement to settle the EPA's claims.
As a result, the Company recorded a charge to cost of sales of
$158,000 for the quarter ended March 31, 1998 for the estimated net
impact of the settlement. The parties are now in the process of
drafting a Consent Decree to finalize agreement on the terms and
conditions of that decree, and expect to file the Consent Decree
with the U.S. District Court in the third quarter of 1998.
NAG received notice on April 21, 1997 from the Illinois Environmental
Protection Agency ("IEPA") that it was a potentially responsible
party under the Comprehensive Environmental Response, Compensation,
and Liability Information System ("CERCLIS") in connection with
cleanup of an abandoned site formerly owned by Sandoval Zinc Co.
Sandoval had operated a secondary zinc smelter at the site until it
closed in 1985. The IEPA notice includes NAG as one of 59
organizations which arranged for the treatment and disposal of
hazardous substances at Sandoval. The Company is in the process of
determining the proportional share of substances that NAG shipped
to Sandoval, and does not believe based on current information that
the ultimate resolution of this matter will have a material adverse
impact on the Company's financial position or results of operations.
Various litigation matters arising in the ordinary course of
business are 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, cleanup or litigation, the recording of
such a liability could have a material impact on the results of
operations for the period involved.
As previously reported, on April 13, 1998, the Company received
notice from the Internal Revenue Service that Rogers Galvanizing
Company and its subsidiaries ("Rogers") for the year ended
September 30, 1996 had been selected for examination. The IRS
examination was completed during the second quarter of 1998, and the
resultant determination of a nominal tax assessment was paid by the
Company in the second quarter. In 1997, Rogers was merged into
NAG.
NOTE 8. UNION CONTRACTS
---------------
On July 18, 1998, NAG signed a new two-year labor agreement with the
United Steelworkers covering approximately 125 production workers at
three of its Tulsa plants. The previous labor agreement had expired
in 1997 and had been extended, without modification, by mutual
agreement between the union and NAG.
NOTE 9. LOSS OF MAJOR GALVANIZING CUSTOMER
----------------------------------
On July 1, 1998, NAG decided to discontinue galvanizing services to
one of its largest customers which accounted for approximately 8% of
NAG's 1997 sales. This action was based on NAG's decision not to
provide galvanizing services to this customer who plans to compete
directly with NAG in the hot dip galvanizing market.
NOTE 10. TREASURY STOCK
--------------
In July 1998, the Board of Directors authorized management to
repurchase up to $1,000,0000 of the Company's common stock in
private or open market transactions. Shares repurchased by the
Company will be recorded as "Treasury Stock" and will result in a
reduction of "Stockholders' Equity." As of August 12, 1998, the
Company has not repurchased any of its common stock, under this
program.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
<TABLE>
RESULTS OF OPERATIONS
REVENUES
<CAPTION>
Quarter Ended June 30 1998 1997
------------------ -----------------
% of % of
$ (000) Sales $ (000) Sales
------------------------------------------
<S> <C> <C> <C> <C>
Galvanizing $ 10,387 80.5% $ 10,022 79.9%
Chemical Storage 1,358 10.5% 1,440 11.5%
Warehousing 1,165 9.0% 1,073 8.6%
------- ----- ------- -----
Total $ 12,910 100.0% $ 12,535 100.0%
======= ===== ======= =====
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30 1998 1997
------------------ ------------------
% of % of
$ (000) Sales $ (000) Sales
------------------------------------------
<S> <C> <C> <C> <C>
Galvanizing $ 20,011 79.8% $ 19,362 79.8%
Chemical Storage 2,781 11.1% 2,852 11.8%
Warehousing 2,282 9.1% 2,045 8.4%
------ ----- ------ -----
Total $ 25,074 100.0% $ 24,259 100.0%
======= ===== ======= =====
</TABLE>
Kinark's consolidated sales for the second quarter of 1998 were
$12,910,000, an increase of 3.0% from the $12,535,000 for the same
quarter in 1997. Consolidated sales for the first six months of 1998
were also higher than the comparable period in 1997, increasing 3.4% to
$25,074,000 compared to $24,259,000 in 1997.
NORTH AMERICAN GALVANIZING COMPANY ("NAG"). Galvanizing sales for the
quarter and year-to-date increased 3.6% and 3.4%, respectively, over the
same periods in 1997. Despite lower order volume from manufacturers of
communications towers, sales increases reflected continued strength in
the central and southwestern markets served by NAG's galvanizing
facilities in Texas, Oklahoma and Missouri. NAG also benefitted from
higher activity in the transportation and highway sector resulting in
sales increases in the second quarter and year-to-date above last year's
levels.
LAKE RIVER CORPORATION ("LAKE RIVER"). Sales declined in both the
second quarter and first six months of 1998 compared to the same periods
last year, as a result of lower activity in bulk liquid storage and
custom drumming of chemicals. Sales of $1,358,000 in the second quarter
of 1998 declined 5.7% from $1,440,000 in the second quarter of 1997.
For the first six months of 1998, sales of $2,781,000 were down 2.5%
from the $2,852,000 for the same period last year. The slowing of bulk
liquid storage throughput primarily reflects an excess of tanks
available in the greater-Chicago area. The downturn in custom drumming
in the second quarter of 1998 resulted from reduced orders from a major
account.
NORTH AMERICAN WAREHOUSE COMPANY ("NAW"). For the second quarter of
1998 warehousing sales increased 8.6% to $1,165,000 compared to
$1,073,000 in the prior year. Year-to-date sales were $2,282,000, an
increase of 11.6% over the $2,045,000 posted in the first half of 1997.
As previously reported, NAW's business will be impacted in the last half
of 1998 due to the loss of its largest customer. In 1997, this
customer's account represented 4.7% of the Company's consolidated sales
and 55% of NAW's sales. The loss of this account reflects a decision by
the customer to realign its distribution network. NAW will not renew a
warehouse lease scheduled to expire August 31, 1998 as part of its
planned cost reduction measures to partially offset the loss of this
major account.
<TABLE>
COSTS AND EXPENSES
<CAPTION>
Quarter Ended June 30 1998 1997
---------------- ----------------
% of % of
$ (000) Sales $ (000) Sales
-------------------------------------
<S> <C> <C> <C> <C>
Cost of sales $ 9,516 73.7% $ 9,697 77.4%
Selling, general &
administrative 1,755 13.6% 1,452 11.6%
Depreciation and amortization 737 5.7% 691 5.5%
------ ---- ------ ----
Total $12,008 93.0% $11,840 94.5%
====== ==== ====== ====
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30 1998 1997
----------------- ----------------
% of % of
$ (000) Sales $ (000) Sales
--------------------------------------
<S> <C> <C> <C> <C>
Cost of sales $18,871 75.3% $18,864 77.7%
Selling, general &
administrative 3,400 13.6% 2,738 11.3%
Depreciation and amortization 1,438 5.7% 1,323 5.5%
------ ---- ------ ----
Total $23,709 94.6% $22,925 94.5%
====== ==== ====== ====
</TABLE>
Consolidated gross profit of $3,394,000 in the second quarter of 1998
increased 19.6% over the $2,838,000 reported for the same quarter of 1997.
Year-to-date, gross profit of $6,203,000 was up 15.0% from $5,395,000 in
1997. Gross profit as a percent of sales also improved in all periods of 1998
compared to 1997. For the second quarter of this year, gross profit was 26.3%
of sales compared to 22.6% in 1997. For the first half of this year, gross
profit was 24.7% compared to 22.2% in 1997. Every subsidiary reported
increases in gross profit and profit margins for the second quarter and first
half of 1998 compared to the same periods in 1997. At NAG's multi-plant
operation, the net improvement in gross profit primarily resulted from higher
sales volume at its larger facilities and improved pricing levels at
virtually every facility. Despite lower sales in 1998, Lake River generated
increased gross profit over 1997 as a result of reductions in the labor force,
real estate taxes and other controllable costs. NAW reported an increase in
gross profit as a result of increased sales and improved space utilization.
Selling, general and administrative ("SG&A") expenses increased to
$1,755,000, or 13.6% of sales, in the second quarter of 1998 from $1,452,000,
or 11.6%, in the second quarter of 1997. SG&A also increased year-to-date to
$3,400,000, or 13.6% of sales, from $2,738,000, or 11.3% of sales, in the same
period of 1997. Increases in recruiting, travel and marketing were the
principal reasons for the higher SG&A in 1998.
Interest expense for the second quarter decreased from $211,000 last year
to $150,000 in 1998. Year-to-date interest expense decreased from $414,000 in
1997 to $326,000 this year. The decrease in interest expense in 1998 is due
to lower average debt levels compared to 1997.
In the first quarter of 1998, the Company reported other income of
$309,000 from expected insurance proceeds covering the loss of an acid
recycling system at one of its galvanizing plants. Production at the facility
was not significantly affected by the incident and the Company is proceeding
to replace the lost system.
The Company's effective income tax rates for the first two quarters of
1998 and 1997 were 46.4% and 41.8%, respectively. Goodwill amortization and
state income taxes resulted in an effective income tax rate greater than the
statutory rate.
The above operating factors and business conditions affecting Kinark's
diverse operations resulted in higher net earnings in 1998 compared to 1997.
Net earnings for the second quarter of 1998 were $383,000 versus $283,000 in
the same period a year ago. For the first six months of 1998, net earnings
were $723,000 versus $535,000 in 1997. Diluted earnings per share were $.06
and $.04 for the second quarter of 1998 and 1997, respectively and $.11 and
$.08 for the first six months of 1998 and 1997, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $1,272,000 for the first
six months of 1998 compared to $2,484,000 for the same period of 1997. During
the first six months of 1998, zinc inventory expenditures for added kettle
capacity and replenishment of floor stock primarily accounted for the net
change in cash provided from operations compared to 1997. Net working
capital on June 30, 1998 was $6,902,000 versus $6,164,000 at December 31, 1997.
Capital expenditures for plant and operating equipment were $1,490,000
for the first six months of 1998 compared to $1,762,000 for the same period
last year. The galvanizing operation accounted for 89% of the capital
expenditures this year. Depreciation and amortization was $1,438,000 for the
first six months of 1998 compared to $1,323,000 in the first half of 1997.
The Company has an available line of credit of $8,500,000 and an
advancing term loan of $1,250,000, of which approximately $5,075,000 was
unused at June 30, 1998. As discussed in Note 4 to the Company's Condensed
Consolidated Financial Statements, the Company entered into a two-year bank
credit agreement in 1997, which provides a $8,500,000 revolving line of
credit, a $1,250,000 advancing term loan and a $3,500,000 term loan. In June
1998, the bank extended the expiration date of this agreement to May 1, 2000,
with the credit facility and all other terms and conditions remaining the
same.
The Company believes that it has the ability to continue to generate cash
from operations and has available borrowing capacity to meet its foreseeable
needs for working capital and planned capital expenditures.
ENVIRONMENTAL MATTERS
As previously reported in 1995, Boyles participated in the final
clean-up of a former galvanizing plant site in Philadelphia, Pennsylvania
(the "Philadelphia site") and received notification from the EPA that it had
demonstrated to the satisfaction of the EPA that all requirements relating to
the performance of the Response Action Plan had been completed. Cleanup of
this site consisted primarily of soil removal at a cost of approximately
$85,000 to Boyles.
In November of 1997, the EPA informed the Company that it would seek to
recover from the Company its costs associated with the 1995 cleanup of the
Philadelphia site, in the amount of $480,000. On March 6, 1998, the Company
was informed that the Department of Justice ("DOJ") had filed a lawsuit naming
NAG and Boyles (a former subsidiary company merged into NAG in 1997) in
a CERCLA Cost Recovery Action for approximately $480,000, in connection with
the cleanup of the Philadelphia site. The Company had been holding
discussions on the matter with DOJ, and in May 1998, the parties reached an
agreement to settle the EPA's claims. As a result, the Company recorded a
pre-tax charge of $158,000 against earnings for the quarter ended March 31,
1998 for the estimated net impact of the settlement. The parties are now in
the process of drafting a Consent Decree to finalize agreement on the terms
and conditions of that decree, and expect to file the Consent Decree with the
U. S. District Court in the third quarter of 1998.
NAG received notice on April 21, 1997 from the Illinois Environmental
Protection Agency ("IEPA") that it was a potentially responsible party under
the comprehensive Environmental Response, Compensation, and Liability
Information System ("CERCLIS") in connection with cleanup of an abandoned site
formerly owned by Sandoval Zinc Co. Sandoval had operated a secondary zinc
smelter at the site until it closed in 1985. The IEPA notice includes NAG as
one of 59 organizations which arranged for the treatment and disposal of
hazardous substances at Sandoval. The Company is in the process of
determining the proportional share of substances that NAG shipped to Sandoval,
and does not believe based on current information that the ultimate resolution
of this matter will have a material impact on the Company's financial position
or results of operations.
The Company's facilities are subject to extensive environmental
legislation and regulations affecting their operations and the discharge of
wastes. The cost of compliance with such regulations during 1997 approximated
$1,000,000 with the disposal and recycling of waste acids generated by the
galvanizing operations representing the major expenditure in this area.
Comparable expenditures for the first six months of 1998 were approximately
$488,000. The Company operates on-site sulphuric acid recovery systems at
three of its galvanizing plants. Recovered acid is returned to production,
thereby eliminating the substantial expense associated with the alternative of
waste treatment and removal to an off-site location. The recovery process
generates a non-hazardous dry ferrous sulphate crystal by-product which the
Company sells commercially.
The Company's other galvanizing plants use hydrochloric acid, which
requires the off-site disposal of waste acids. Due to the increasing cost of
waste disposal and decreasing availability of approved disposal methods,
alternative waste hydrochloric acid recycling methods have been evaluated over
recent years. While it appears that the technology for an economically
feasible system is available, no proven system for the recycling of
hydrochloric acid used in hot dip galvanizing is currently on the market.
Hydrochloric acid recycling systems will be further evaluated as new systems
become available. Future capital expenditures in this area are expected to
increase, but such expenditures should significantly reduce waste acid
disposal expense.
Environmentally related expenditures at Lake River represent a relatively
small percentage of the Company's total costs. The majority of waste disposal
costs at Lake River are incurred on behalf of customers and are reimbursable.
Lake River does not take title to the chemicals stored, blended, drummed or
bagged in its facilities and thus is responsible only for the proper handling
of these materials while under its care, custody, and control. As previously
reported, Kinark has escrowed proceeds from the sale of the assets of Kinpak,
Inc. (a former subsidiary sold in 1996) for some possible environmental
remediation.
The Company is committed to complying with all federal, state and local
environmental laws and regulations and using its best management practices to
anticipate and satisfy future requirements. As is typical in the galvanizing
and chemicals businesses, the Company will have additional environmental
compliance costs associated with past, present, and future operations.
Management has committed resources to discovering and eliminating
environmental issues as they arise. Because of the frequent changes in
environmental technology, laws and regulations management cannot reasonably
attempt to quantify the Company's potential costs in this area. However, such
costs are expected to increase above their current levels as discussed above.
CURRENT DEVELOPMENTS
The Company has determined that its primary computer systems are
structured to accommodate the Year 2000 and beyond, and the operation of these
systems will not be affected by the upcoming change in the millennium. The
Company's operations are highly dependent on the reliable performance of its
computer-based information, control and accounting systems. For this reason,
during 1997 Kinark undertook a review of its company-wide computer support
facilities to assess the extent of Year 2000 issues, if any. Going forward,
in addition to monitoring the Year 2000 compliance readiness of its own
computer systems, the Company will continue to assess the compliance readiness
of its major customers, key suppliers and service providers. The Company
believes that the cost of this ongoing assessment should not exceed $100,000
and will not have a material impact on the results of its operations,
liquidity, and capital resources.
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISKS
Not applicable.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
-----------------
Not applicable.
ITEM 2. CHANGES IN SECURITIES
---------------------
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
-------------------------------
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
The 1998 Annual Meeting of the Company's stockholders was held on
Wednesday, May 8, 1998 in New York City, NY. At the meeting, the
stockholders elected seven directors.
The votes for the election of directors were as follows:
Richard C. Butler 6,152,693 For
99,315 Against
Paul R. Chastain 6,145,368 For
106,640 Against
Michael T. Crimmins 6,129,008 For
123,000 Against
Ronald J. Evans 6,131,108 For
120,900 Against
Joseph J. Morrow 6,152,108 For
99,900 Against
John H. Sununu 6,154,858 For
97,150 Against
Mark E. Walker 6,155,993 For
96,015 Against
ITEM 5. OTHER INFORMATION
-----------------
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits
3.1 The Company's Restated Certificate of Incorporation
(incorporated by reference to Exhibit 3.1 to the Company's
Pre-Effective Amendment No. 1 to Registration Statement on
Form S-3 (Reg. No. 333-4937) filed on June 7, 1996).
3.2 The Company's Amended and Restated Bylaws (incorporated by
reference to Exhibit 3.2 to the Company's Quarterly Report on
Form 10-Q dated March 31, 1996).
27 Financial Data Schedule
99 Cautionary Statements by the Company Related to
Forward-Looking Statements
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the quarter
ended June 30, 1998.
EXHIBIT INDEX
Ex. No. Description
3.1 The Company's Restated Certificate of Incorporation (incorporated by
reference to Exhibit 3.1 to the Company's Pre-Effective Amendment
No. 1 to Registration Satement on Form S-3 (Reg. No. 333-4937) filed
on June 7, 1996).
3.2 The Company's Amended and Restated Bylaws (incorporated by reference
to Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q
dated March 31, 1996).
27 Financial Data Schedule.
99 Cautionary Statements by the Company Related to Forward-Looking
Statements.
SIGNATURES
Pursuant to the requirements of Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized:
KINARK CORPORATION
------------------
Registrant
/S/Paul R. Chastain
--------------------
Paul R. Chastain
Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: August 14, 1998
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ISSUER'S
INTERIM FINANCIAL STATEMENTS DATED JUNE 30, 1998, SET FORTH IN THE ACCOMPANYING
FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
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<CASH> 304
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<RECEIVABLES> 7,705
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<BONDS> 8,908
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<COMMON> 819
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<TOTAL-LIABILITY-AND-EQUITY> 33,473
<SALES> 25,074
<TOTAL-REVENUES> 25,074
<CGS> 18,871
<TOTAL-COSTS> 23,709
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<LOSS-PROVISION> 0
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<INCOME-TAX> 625
<INCOME-CONTINUING> 723
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EXHIBIT 99
CAUTIONARY STATEMENTS BY THE COMPANY REGARDING
FORWARD LOOKING STATEMENTS
Certain statements in this Form 10-Q, including information set forth
under the caption "Management's Discussion and Analysis of Financial Condition
and Results of Operations", constitute "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995 (the "Reform
Act"). The Reform Act provides certain "safe harbor" provisions for
forward-looking statements. The Company desires to take advantage of the
"safe harbor" provisions of the Reform Act and is including these cautionary
statements ("Cautionary Statements") pursuant to the Provisions of the Reform
Act with the intention of obtaining the benefits of the "safe harbor"
provisions. In order to comply with the terms of the "safe harbor" in the
Reform Act, the Company cautions investors that forward-looking statements
included in this Form 10-Q, or hereafter included in other publicly available
documents filed with the Securities and Exchange Commission, reports to the
Company's stockholders and other publicly available statements issued or
released by the Company involve substantial risks, uncertainties, and other
factors which could cause the Company's actual results, performance (financial
or operating) or achievements to differ materially from the future results,
performance (financial or operating) or achievements expressed or implied by
such forward-looking statements. The Company believes the following important
factors could cause such a material difference to occur:
1. The Company's ability to grow through the acquisition and development of
galvanizing, chemical storage and warehousing operations or the
acquisition of ancillary businesses.
2. The Company's ability to identify suitable acquisition candidates, to
consummate or complete construction projects, or to profitably operate or
successfully integrate enterprises into the Company's other operations.
3. The Company's ability to secure the capital and the related cost of such
capital necessary to fund its future growth through acquisition and
development, as well as internal growth.
4. The level of competition in the Company's industries and the possible entry
of new, well-capitalized competitors into the Company's markets.
5. Uncertainties and changes in environmental compliance costs associated with
past, present and future operations.
6. Uncertainties and changes related to federal, state and local regulatory
policies, including environmental laws related to the galvanizing,
chemicals and warehousing industries.
7. The Company's ability to staff its galvanizing, chemical storage and
warehousing operations appropriately with qualified personnel, including in
times of shortages of such personnel and to maintain a satisfactory
relationship with labor unions.
8. The pricing and availability of equipment, materials and inventories,
including zinc "pigs", the major component used in the hot dip galvanizing
industry.
9. Uncertainties and changes in general economic conditions.
10. Uncertainties and changes in several industries to which the company's
businesses are closely tied, such as highway and transportation,
communications and energy.
11. Performance issues with key suppliers and subcontractors.
12. Uncertainties related to the retention of key customers in each of the
Company's business segments.
13. Uncertainties regarding the effect of Year 2000 issues on suppliers and
service providers in each of the Company's business segments.
The words "believe," "expect," "anticipate," "project," "plan" and similar
expressions identify forward-looking statements. Investors are cautioned not
to place undue reliance on these forward-looking statements, which speak only
as of the date the statement was made.
The foregoing review of significant factors should not be construed as
exhaustive or as an admission regarding the adequacy of disclosures previously
made by the Company.
