<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------------------------
FORM 10-Q
[Mark One]
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 1998
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________________ to __________________.
Commission File No. 1-10489
-----------------------------------
KIMMINS CORP.
(Exact name of registrant as specified in its charter)
Delaware 59-2763096
------------------------------- -------------------------------
(State of incorporation) (I.R.S. Employer
Identification Number)
1501 Second Avenue, East, Tampa, Florida 33605
(Address of registrant's principal executive offices,
including zip code)
-----------------------------------
(Registrant's telephone number, including area code): (813) 248-3878
Not applicable
-----------------------------------
(Former name, former address, and former fiscal year,
if changed since last report)
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 [ ]<PAGE>
Applicable Only to Issuers Involved in Bankruptcy
Proceedings During the Preceding Five Years
Indicate by a check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13, or 15(d) of the
Securities Exchange Act of 1934 subsequent to the distribution of
securities under a plan confirmed by a court. Yes [ ] No [ ]
Applicable Only to Corporate Issuers
The number of shares of Common Stock outstanding on
August 14, 1998, was 4,447,397 shares.
The number of shares of Class B Common Stock outstanding on
August 14, 1998, was 2,291,569 shares.<PAGE>
KIMMINS CORP.
FORM 10-Q
INDEX
Page
--------
PART I. FINANCIAL INFORMATION
Item 1. Consolidated balance sheets at
December 31, 1997 and June 30, 1998
(unaudited) . . . . . . . . . . . . . . . . . . 1 - 2
Consolidated statements of operations for the
three and six months ended June 30, 1997
and 1998 (unaudited) . . . . . . . . . . . . . . 3 - 4
Consolidated statements of cash flows for the
six months ended June 30, 1997 and 1998
(unaudited) . . . . . . . . . . . . . . . . . . . . 5
Notes to consolidated financial statements . . 6 - 17
Item 2. Management's discussion and analysis of
financial condition and results of
operations . . . . . . . . . . . . . . . . . 18 - 25
Item 3. Qualitative and quantitative disclosures
about market risk . . . . . . . . . . . . . . . . 25
PART II. OTHER INFORMATION
Item 1. Legal proceedings . . . . . . . . . . . . . . . . . 26
Item 2. Changes in securities . . . . . . . . . . . . . . . 26
Item 3. Defaults upon senior securities . . . . . . . . . . 26
Item 4. Submission of matters to a vote of security holders 26
Item 5. Other information . . . . . . . . . . . . . . . . . 26
Item 6. Exhibits and reports on Form 8-K . . . . . . . . . 26
Signatures . . . . . . . . . . . . . . . . . . . . 27<PAGE>
SECURITIES AND EXCHANGE COMMISSION FORM 10-Q
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
KIMMINS CORP.
CONSOLIDATED BALANCE SHEETS
ASSETS
December 31, June 30,
1997 1998
------------- -------------
(unaudited)
Current assets:
Cash . . . . . . . . . . . . . . . . . . $ 3,674,027 $ 5,174,385
Accounts receivable:
Contract and trade . . . . . . . . . . . 19,906,358 19,021,527
Affiliates . . . . . . . . . . . . . . . 19,628 85,429
Costs and estimated earnings in excess
of billings on uncompleted contracts . . 5,434,123 10,768,168
Income tax refund receivable . . . . . . 247,561 -
Deferred income tax . . . . . . . . . . . 1,980,148 1,980,148
Property held for sale . . . . . . . . . 410,681 475,681
Other current assets . . . . . . . . . . 347,510 369,087
Net assets of discontinued solid
waste management operations . . . . . . 7,265,280 4,696,613
------------- -------------
Total current assets . . . . . . . . 39,285,316 42,571,038
------------- -------------
Property and equipment, net . . . . . . . . 48,028,010 48,097,751
Property held for sale . . . . . . . . . . 1,800,000 1,800,000
Non-current portion of costs and estimated
earnings in excess of billings on
uncompleted contracts . . . . . . . . . . 9,130,090 9,130,090
Accounts receivable - affiliates . . . . . 900,000 900,000
Investment in Apartments . . . . . . . . . 5,862,067 5,569,585
Investment in Cumberland Technologies,
Inc. . . . . . . . . . . . . . . . . . . 4,991,956 5,103,568
Other assets, net . . . . . . . . . . . . . 8,840 613,209
------------- -------------
Total assets . . . . . . . . . . . . $110,006,279 $113,785,241
============= =============
The accompanying notes are an integral part of
these consolidated financial statements.<PAGE>
KIMMINS CORP.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31, June 30,
1997 1998
------------- -------------
(unaudited)
Current liabilities:
Accounts payable - trade . . . . . . . . $ 15,583,606 $ 16,602,368
Income tax payable . . . . . . . . . . . - 1,277,723
Accrued expenses . . . . . . . . . . . . 5,584,209 5,618,804
Billings in excess of costs and estimated
earnings on uncompleted contracts . . . 4,583,533 869,030
Current portion of long-term debt . . . . 12,723,528 12,008,340
Current portion of Employee Stock
Ownership Plan Trust debt . . . . . . . 480,000 480,000
------------- -------------
Total current liabilities . . . . . 38,954,876 36,856,265
------------- -------------
Long-term debt . . . . . . . . . . . . . . 54,271,770 54,680,235
Employee Stock Ownership Plan Trust debt . 960,000 703,063
Deferred income taxes . . . . . . . . . . . 3,527,480 3,527,480
Minority interest in subsidiary . . . . . . 2,898,777 3,803,922
Commitments and contingencies . . . . . . . - -
Stockholders' equity:
Preferred stock, $.001 par value;
1,000,000 shares authorized, none issued
and outstanding . . . . . . . . . . . . - -
Common stock, $.001 par value; 32,500,000
shares authorized; 4,447,397 shares
issued and outstanding . . . . . . . . . 4,447 4,447
Class B common stock, $.001 par value;
10,000,000 shares authorized; 2,291,569
shares issued and outstanding . . . . . 2,292 2,292
Capital in excess of par value . . . . . 18,730,173 18,730,173
Retained earnings . . . . . . . . . . . . (7,290,073) (2,709,173)
Unearned employee compensation from
Employee Stock Ownership Plan Trust . . (1,320,000) (1,080,000)
------------- -------------
Less treasury stock, at cost (150,428 10,126,839 14,947,739
shares) . . . . . . . . . . . . . . . . (733,463) (733,463)
------------- -------------
Total stockholders' equity . . . . . 9,393,376 14,214,276
------------- -------------
Total liabilities and stockholders' $110,006,279 $113,785,241
equity . . . . . . . . . . . . . . ============= =============
The accompanying notes are an integral part of
these consolidated financial statements.<PAGE>
KIMMINS CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three months ended June 30,
---------------------------
1997 1998
------------- -------------
(unaudited) (unaudited)
Revenue . . . . . . . . . . . . . . . . . .
Gross revenue . . . . . . . . . . . . . . $ 28,664,080 $ 23,542,042
Outside services, at cost . . . . . . . . (5,753,102) (2,312,056)
------------- -------------
Net revenue . . . . . . . . . . . . . . . 22,910,978 21,229,986
Costs and Expenses:
Cost of revenue earned . . . . . . . . . 18,877,786 17,268,747
Selling, general, and administrative
expenses . . . . . . . . . . . . . . . . 1,537,709 2,084,593
------------- -------------
Operating income . . . . . . . . . . . . . 2,495,483 1,876,646
Minority interest in net (income) loss of
subsidiary . . . . . . . . . . . . . . . 40,224 (847,099)
Interest expense, net . . . . . . . . . . . (867,614) (1,468,542)
------------- -------------
Income (loss) from continuing operations
before provision for income taxes . . . . 1,668,093 (438,995)
Provision for income taxes (benefit) . . . 380,107 (692,196)
------------- -------------
Income from continuing operations . . . . . 1,287,986 253,201
Discontinued operations:
Income (loss) from discontinued solid
waste division (net of tax provision of
($263,286) and $2,051,315 in 1997 and
1998, respectively) . . . . . . . . . . (411,804) 3,091,044
------------- -------------
Net income . . . . . . . . . . . . . . . . $ 876,182 $ 3,344,245
============= =============
The accompanying notes are an integral part of
these consolidated financial statements.<PAGE>
KIMMINS CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(continued)
Three months ended June 30,
---------------------------
1997 1998
------------- -------------
(unaudited) (unaudited)
Share data:
Basic income per share from continuing
operations . . . . . . . . . . . . . . . $ .30 $ .06
============= =============
Diluted income per share from continuing
operations . . . . . . . . . . . . . . . $ .30 $ .06
============= =============
Basic income (loss) per share from
discontinued operations . . . . . . . . $ (.10) $ .72
============= =============
Diluted income (loss) per share from
discontinued operations . . . . . . . . $ (.10) $ .71
============= =============
Total basic income (loss) per share . . . $ .20 $ .78
============= =============
Total diluted income (loss) per share . . $ .20 $ .77
============= =============
Weighted average number of shares
outstanding used in computations:
Basic . . . . . . . . . . . . . . . . 4,322,134 4,296,969
============= =============
Diluted . . . . . . . . . . . . . . . 4,322,134 4,364,807
============= =============
The accompanying notes are an integral part of
these consolidated financial statements.<PAGE>
KIMMINS CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
Six months ended June 30,
---------------------------
1997 1998
------------- -------------
(unaudited) (unaudited)
Revenue . . . . . . . . . . . . . . . . . .
Gross revenue . . . . . . . . . . . . . . $ 54,108,286 $ 48,140,043
Outside services, at cost . . . . . . . . (10,621,506) (4,880,235)
------------- -------------
Net revenue . . . . . . . . . . . . . . . 43,486,780 43,259,808
Costs and Expenses:
Cost of revenue earned . . . . . . . . . 35,691,637 34,495,943
Selling, general, and administrative
expenses . . . . . . . . . . . . . . . . 3,137,998 3,813,588
------------- -------------
Operating income . . . . . . . . . . . . . 4,657,145 4,950,277
Minority interest in net (income) loss of
subsidiary . . . . . . . . . . . . . . . 34,899 (905,145)
Interest expense, net . . . . . . . . . . . (1,323,758) (2,984,546)
------------- -------------
Income from continuing operations before
provision for income taxes . . . . . . . 3,368,286 1,060,586
Provision for income taxes (benefit) . . . 780,576 (441,594)
------------- -------------
Income from continuing operations . . . . . 2,587,710 1,502,180
Discontinued operations:
Income (loss) from discontinued solid
waste division (net of tax provision of
($570,409) and $2,001,878 in
1997 and 1998, respectively) . . . . . (892,177) 3,078,720
------------- -------------
Net income . . . . . . . . . . . . . . . $ 1,695,533 $ 4,580,900
============= =============
The accompanying notes are an integral part of
these consolidated financial statements.<PAGE>
KIMMINS CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(continued)
Six months ended June 30,
---------------------------
1997 1998
------------- -------------
(unaudited) (unaudited)
Share data:
Basic income (loss) per share from
continuing operations . . . . . . . . . $ .60 $ .35
============= =============
Diluted income (loss) per share from
continuing operations . . . . . . . . . $ .60 $ .34
============= =============
Basic income (loss) per share from
discontinued operations . . . . . . . . $ (.21) $ .72
============= =============
Diluted income (loss) per share from
discontinued operations . . . . . . . . $ (.21) $ .70
============= =============
Total basic income (loss) per share . . . $ .39 $ 1.07
============= =============
Total diluted income (loss) per share . . $ .39 $ 1.04
============= =============
Weighted average number of shares
outstanding used in computations:
Basic . . . . . . . . . . . . . . . . 4,340,350 4,296,969
============= =============
Diluted . . . . . . . . . . . . . . . 4,340,350 4,388,391
============= =============
The accompanying notes are an integral part of
these consolidated financial statements.<PAGE>
KIMMINS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended June 30,
---------------------------
1997 1998
------------- -------------
(unaudited) (unaudited)
Cash flows from operating activities:
Net income from continuing operations . . $ 2,587,710 $ 1,502,180
Adjustments to reconcile net income from
continuing operations to net cash
provided (used) by operating activities:
Depreciation and amortization . . . . . 4,196,391 5,023,315
Minority interest in net loss of
subsidiary . . . . . . . . . . . . . (34,899) 905,145
Gain on disposal of property and
equipment . . . . . . . . . . . . . . (343,382) (80,773)
Accrued interest on term note . . . . . - -
Equity in losses of investment . . . . 96,125 (102,642)
Unearned employee compensation from
Employee Stock Ownership Plan Trust . 240,000 240,000
Changes in operating assets and
liabilities:
Accounts receivable . . . . . . . . . (3,648,898) 819,030
Costs and estimated earnings in excess
of billings on uncompleted
contracts . . . . . . . . . . . . . 453,443 (5,334,045)
Income tax refund receivable and
payable . . . . . . . . . . . . . . 327,281 1,525,284
Other assets . . . . . . . . . . . . (811,981) (625,946)
Accounts payable . . . . . . . . . . (2,749,642) 1,018,762
Accrued expenses . . . . . . . . . . 1,395,669 34,595
Billings in excess of costs and
estimated earnings on uncompleted
contracts . . . . . . . . . . . . . 1,472,581 (3,714,503)
------------- -------------
Total adjustments . . . . . . . . . . . . 592,688 (291,778)
------------- -------------
Net cash provided by continuing
operations . . . . . . . . . . . . . . . 3,180,398 1,210,402
Net loss from discontinued operations . . (892,177) (2,184,536)
Change in net assets of discontinued
operations . . . . . . . . . . . . . . . - 2,979,348
------------- -------------
Net cash provided by operating
activities . . . . . . . . . . . . . . . 2,288,221 2,005,214
------------- -------------
The accompanying notes are an integral part of
these consolidated financial statements.<PAGE>
KIMMINS CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(continued)
Six months ended June 30,
---------------------------
1997 1998
------------- -------------
(unaudited) (unaudited)
Cash flows from investing activities:
Capital expenditures . . . . . . . . . . (17,939,808) (5,807,891)
Proceeds from sale of property and
equipment . . . . . . . . . . . . . . . 1,140,931 603,439
Gain on sale of assets from discontinued
operations . . . . . . . . . . . . . . . - 5,263,256
Net cash provided by (used in) investing ------------- -------------
activities . . . . . . . . . . . . . . . (16,798,877) 58,804
------------- -------------
Cash flows from financing activities:
Proceeds from long-term debt . . . . . . 28,224,521 6,971,116
Repayments of long-term debt . . . . . . (12,518,128) (7,277,839)
Repayments of Employee Stock Ownership
Plan Trust debt . . . . . . . . . . . . (240,000) (256,937)
Purchase of treasury stock . . . . . . . (267,331) -
Net cash provided by (used in) financing ------------- -------------
activities . . . . . . . . . . . . . . . 15,199,062 (563,660)
------------- -------------
Net increase (decrease) in cash . . . . . . 688,406 1,500,358
Cash, beginning of period . . . . . . . . . 968,638 3,674,027
------------- -------------
Cash, end of period . . . . . . . . . . . . $ 1,657,044 $ 5,174,385
============= =============
The accompanying notes are an integral part of
these consolidated financial statements.<PAGE>
KIMMINS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and summary of significant accounting policies
Organization. Kimmins Corp. and its subsidiaries (collectively, the
"Company") operate two business segments: specialty contracting services
and solid waste management services. The Company provides specialty
contracting services, including infrastructure development; underground
construction; road work; mining services, demolition and dismantling of
facilities; and asbestos abatement. The Company provides solid waste
management services to commercial, industrial, residential and, municipal
customers in the state of Florida.
Basis of presentation. The accompanying unaudited condensed
consolidated financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q. Accordingly, they do
not include all of the information and notes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been
included. Operating results for the six-month period ended June 30,
1998, are not necessarily indicative of the results that may be expected
for the year ending December 31, 1998. For further information, refer to
the consolidated financial statements and notes thereto as of and for the
year ended December 31, 1997, included in the Company's Form 10-K dated
December 31, 1997, as filed with the United States Securities and
Exchange Commission.
Certain amounts in the 1997 consolidated financial statements have
been reclassified to conform to the 1998 presentation.
Principles of consolidation. The consolidated financial statements
include the accounts of the Company and its subsidiaries, including
TransCor Waste Services, Inc. ("TransCor"), a 74 percent owned
subsidiary. All material intercompany transactions have been eliminated.
See Note 9 for additional information.
Use of estimates. The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual
results could differ from those estimates.
Intangible assets. Intangible assets consist principally of the
excess of costs over fair market value of the net assets of the acquired
solid waste management business, which will be amortized on a straight-
line basis over twenty years, and customer contracts, which will be
amortized on a straight-line basis over five years. Amortization expense
was approximately $247,000 and $37,000 for the six months ended June 30,
1997 and 1998, respectively. Accumulated amortization was approximately
$245,000 and $0 at December 31, 1997 and June 30, 1998, respectively. The
intangible assets including customer contracts were sold on May 31, 1998,
as part of the sale of the Jacksonville operations to Eastern
Environmental Services of Florida, Inc. See Note 8 for additional
information.<PAGE>
KIMMINS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and summary of significant accounting policies
(continued)
Other assets - Other assets consist primarily of pre-contract costs
associated with residential solid waste management contracts obtained
during 1996 and 1997, which are being amortized on a straight-line basis
over five years, the term of the contracts, and loan costs, which are
amortized over the term of the loans. Amortization expense was $101,000
and $131,000 for the six months ended June 30 1997 and 1998,
respectively. Accumulated amortization was $909,000 and $1,040,000 at
December 31, 1997, and June 30, 1998, respectively. All of the pre-
contract costs capitalized as of December 31, 1997, and June 30, 1998,
are held by the subsidiary, which is being sold effective August 31,
1998. Accordingly, pre-contract costs are included in "net assets of
discontinued operations."
As of June 30, 1998, other assets include approximately $787,000 of
pre-contract costs. As explained above, these costs are currently being
amortized over the terms of the related contracts. However, the American
Institute of Certified Public Accountants ("AICPA") has recently issued
Statement of Position 98-5 ("SOP"), "Reporting on the Costs of Start-up
Activities," which requires all start-up costs, including pre-contract
costs, to be expensed as incurred. The SOP is effective in the first
quarter of 1999 and will require the Company to write off the remaining
unamortized balance of approximately $330,000. If the anticipated sale of
the Company's solid waste subsidiary occurs, the Company will have no
capitalized start-up costs remaining at December 31, 1998.
Investments. The Company's 30 percent investment in Cumberland
Technologies, Inc. ("Cumberland") and 49 percent investment in
Summerbreeze Apartments, Ltd., and Sunshadow Apartments Ltd. (the
"Apartments") are accounted for using the equity method of accounting.
Earnings per share - Net income (loss) per share is computed based on
the weighted average number of shares of capital stock and stock options
outstanding. Diluted earnings per share includes unexercised stock
options assuming an average stock price. The convertible subordinated
debt was not included in the computations because the assumed conversion
would be antidilutive.<PAGE>
KIMMINS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. Costs and estimated earnings on uncompleted contracts
December 31, June 30,
1997 1998
------------- -------------
(unaudited)
Expenditures on uncompleted contracts . $115,708,567 $110,103,356
Estimated earnings on uncompleted
contracts . . . . . . . . . . . . . . 6,141,672 10,035,577
------------- -------------
Less actual and allowable billings on 121,850,239 120,138,933
uncompleted contracts . . . . . . . . 111,869,559 101,109,705
------------- -------------
$ 9,980,680 $ 19,029,228
============= =============
Costs and estimated earnings in excess
of billings on uncompleted
contracts . . . . . . . . . . . . . . $ 14,564,213 $ 19,898,258
Billings in excess of costs and
estimated earnings on uncompleted
contracts . . . . . . . . . . . . . . (4,583,533) (869,030)
------------- -------------
$ 9,980,680 $ 19,029,228
============= =============
As of December 31, 1997, and June 30, 1998, the costs and estimated
earnings in excess of billings on uncompleted contracts includes the
Company's cost associated with unapproved or disputed contract change
orders and costs claimed from customers on completed contracts of
$12,000,000 and $12,000,000, respectively. During the performance of
these contracts, the Company encountered site conditions that differed
from bid specifications. As a result, the Company incurred additional
labor and equipment costs in performing the contract. By their nature,
recovery of these amounts is often subject to negotiation with the
customer and, in certain cases, resolution through litigation. As a
result, the recovery of these amounts may extend beyond one year. The
portions at December 31, 1997, and June 30, 1998, approximately
$9,130,000 for both periods, that are not expected to be collected within
twelve months are classified as non-current assets.
3. Property held for sale
As a result of management's decision to cease operations in the
northeast and to de-emphasize the performance of certain environmental
services within the specialty contracting segment, the Company decided to
sell its thermal incineration unit. This asset has a carrying value of
approximately $1,800,000 and $1,865,000 as of December 31, 1997 and 1996,
respectively. A purchase agreement for the sale of the incinerator for
$1,800,000 is currently pending. The Company wrote down the carrying
value of the asset by $40,000 to reflect the fair market value based on
the purchase agreement. The incinerator is classified as a non-current
asset under the caption, "Property held for sale."<PAGE>
KIMMINS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. Property held for sale (continued)
In addition, as a result of management's review of the Company's
various regional solid waste operating facilities, a decision was made to
dispose of less profitable operating assets. The Company's TransCor
subsidiary sold its residential solid waste services contract with St.
Lucie County to a competitor and ceased operations at its Lantana,
Florida, facility. The Lantana and St. Lucie facilities contributed
losses of approximately $1,111,000 and $476,000, respectively, of the
$2,184,000 operating loss of TransCor for the year ended December 31,
1997. The Company wrote off intangible assets of $183,000 associated with
contracts that were sold. Also, in accordance with SFAS No. 121,
"Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of," TransCor wrote down certain land and buildings that management
believed had carrying amounts higher than their fair market value,
resulting in a $590,000 impairment loss.
TransCor's impairment loss of $590,000 was calculated by comparing
the carrying amount of impaired assets of approximately $2,834,000 with
recent offers on the properties held for sale. The $590,000 impairment
loss is included in selling, general and administrative expenses on the
consolidated statements of operations for the year ended December 31,
1997. The land and buildings that were impaired at December 31, 1997, and
have executed agreements for sale are expected to be sold during 1998.
Accordingly, the carrying value of the land of approximately $476,000 for
the period ended June 30, 1998, net of the impairment loss of $25,000, is
classified as a current asset under the caption, "Property held for sale"
in the consolidated balance sheet. The carrying value of the land and
buildings associated with discontinued operations of approximately
$734,000 for the period ended December 31, 1997, net of the impairment
loss of $90,000, is included in net assets of discontinued solid waste
management operations on the balance sheet. See Note 8 for additional
information on discontinued operations.<PAGE>
KIMMINS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Property and equipment, net
December 31, June 30,
1997 1998
------------- -------------
(unaudited)
Land . . . . . . . . . . . . . . . . . $ 4,323,053 $ 3,265,065
Buildings and improvements . . . . . . 6,235,460 5,330,372
Construction and recycling equipment . 88,087,064 83,668,670
Furniture and fixtures . . . . . . . . 1,503,217 1,297,524
Construction in progress . . . . . . . 48,419 602,608
------------- -------------
100,197,213 94,164,239
Less accumulated depreciation . . . . . (27,420,533) (26,863,117)
------------- -------------
72,776,680 67,301,122
Less net property and equipment
attributable to discontinued
operations . . . . . . . . . . . . . (24,748,670) (19,203,371)
------------- -------------
Net property and equipment attributable
to assets of continuing operations . $ 48,028,010 $ 48,097,751
============= =============
Property and equipment are recorded at cost. Depreciation is
provided using the straight-line method over estimated useful lives
ranging from three to thirty years. Depreciation expense was $3,766,000
and $6,210,000 for the six months ended June 30, 1997 and 1998,
respectively. The increase in depreciation expense at June 30, 1998, is
primarily attributable to the Company's purchases in 1997 of
approximately $41,000,000 of equipment for use in the specialty
contracting segment. For the six months ended June 30, 1998, $4,399,000
of depreciation expense was attributable to continuing operations and
$1,811,000 was attributable to discontinued operations.
On May 31, 1998, the Company sold its Jacksonville area waste
collection and recycling operating assets and certain assets of the Miami
front-end load and rear-load commercial waste and recycling business to
Eastern Environmental Services of Florida, Inc., for $11,600,000 in cash.
The proceeds exceeded the net book value of the underlying assets sold by
approximately $5,263,000. This gain is shown in the Consolidated
Statements of Operations as part of "income from discontinued
operations."
5. Investment in Cumberland Technologies, Inc.
On November 5, 1996, the Company received 1,723,290 shares, or 30
percent of the outstanding common stock of Cumberland in exchange for the
term note from affiliate. The Cumberland common stock had a fair market
value of $3.00 per share on the date of the exchange, based upon the
quoted market price. This investment is accounted for under the equity
method. At July 31, 1998, the market value of the Cumberland common
stock held by the Company was approximately $5,601,000.<PAGE>
KIMMINS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Investment in Cumberland Technologies, Inc. (continued)
The following is a summary of the financial position at June 30,
1998, and results of operations of Cumberland for the six-month period
ending June 30, 1998:
June 30,
1998
-------------
(unaudited)
Cash and cash equivalents . . . . . . . . . . . . . . $ 2,284,720
Investments in various marketable securities . . . . 5,210,233
Accounts receivable - trade, net . . . . . . . . . . 1,919,300
Reinsurance recoverable . . . . . . . . . . . . . . . 1,694,432
Intangibles . . . . . . . . . . . . . . . . . . . . . 1,554,134
Other . . . . . . . . . . . . . . . . . . . . . . . . 2,284,385
-------------
Total assets . . . . . . . . . . . . . . . . . . . $ 14,947,204
=============
Policy liabilities and accruals . . . . . . . . . . . $ 6,654,449
Long-term debt . . . . . . . . . . . . . . . . . . . 1,353,564
Other . . . . . . . . . . . . . . . . . . . . . . . . 434,317
-------------
Total liabilities . . . . . . . . . . . . . . . . . 8,442,330
Stockholders' equity . . . . . . . . . . . . . . . . 6,504,874
-------------
Total liabilities and stockholders' equity . . . . $ 14,947,204
=============
Cumberland's operating results included revenue of $2,384,000 and net
income of $326,000 during the second quarter. The Company's equity in
this net income was approximately $98,000. In addition, approximately
$41,000 of amortization expense was recorded by the Company related to
the investment during the second quarter.
Cumberland's operating results included revenue of $4,511,000 and net
income of $647,000 during the six-month period ending June 30, 1998. The
Company's equity in this net income amounted to approximately $194,000.
In addition, approximately $82,000 of amortization expense was recorded
by the Company related to the investment during the six months ended June
30, 1998. Accumulated amortization was approximately $165,000 and
$247,000 at December 31, 1997, and June 30, 1998, respectively.<PAGE>
KIMMINS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Investment in Cumberland Technologies, Inc. (continued)
On October 22, 1997, the Company contributed its note receivable in
an amount of approximately $3,851,000 from the Apartments and other
receivables of $3,059,000 for a non-controlling 49 percent preferred
limited partnership interest in the Apartments and a receivable of
$900,000 from the Apartments. The amount of $12,066,000 in excess of the
underlying equity was attributed to goodwill and is being amortized over
thirty years. The Company will be allocated 49 percent of operating
income, losses and cash flow. The preference in the Company's equity
interest in the Apartments occurs upon the sale of the underlying
partnership properties. Upon the occurrence of a capital transaction, the
Company would receive cash flows from the sale or refinancing of the
Apartments' assets equal to its capital contribution prior to any other
partner receiving any proceeds. The Company accounts for its investment
in the Apartments using the equity method.
During the quarter ended June 30, 1998, the Apartments recognized
revenue of $1,221,000 and a net loss of $76,000. The Company has
recorded its 49 percent share of the net results of operations. In
addition, approximately $100,000 of amortization expense was recorded by
the Company related to the investments in the Apartments during the
second quarter.
The Apartments recognized revenue of $2,337,000 and a net loss of
$178,000 during the six-month period ended June 30, 1998. The Company's
equity in this net loss was approximately $137,000 for the first six
months of 1998. In addition, approximately $201,000 of amortization
expense was recorded. At June 30, 1998, the Company's balance in its
total investment in the Apartments was approximately $6,470,000, of which
$900,000 is classified as an "accounts receivable - affiliate."<PAGE>
KIMMINS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Investment in Cumberland Technologies, Inc. (continued)
The following is a summary of the financial position of the
Apartments at June 30, 1998:
Total
Investment
-------------
Cash and cash equivalents . . . . . . . . . . . . . . $ 80,000
Accounts receivable - affiliate . . . . . . . . . . . 1,035,000
Land . . . . . . . . . . . . . . . . . . . . . . . . 3,800,000
Buildings, capitalized construction interest, 16,761,000
furniture and equipment, net . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . 915,000
-------------
Total assets . . . . . . . . . . . . . . . . . . . $ 22,591,000
=============
Accounts payable and accrued expenses . . . . . . . . $ 1,120,000
Accounts payable to affiliates . . . . . . . . . . . 1,571,000
Mortgage loan payable . . . . . . . . . . . . . . . . 21,066,000
Note payable to partner - Francis M. Williams . . . . 2,860,000
-------------
Total liabilities . . . . . . . . . . . . . . . . . 26,617,000
Partners' deficit . . . . . . . . . . . . . . . . . . (4,026,000)
-------------
Total liabilities and partners' deficit . . . . . . . $ 22,591,000
=============
The revolving term line of credit of $16,000,000 is secured by a
pledge of the trade receivables of Kimmins Contracting Corp.
The debt agreements contain certain covenants, the most restrictive
of which require maintenance of a consolidated tangible net worth, as
defined, of not less than $6,500,000 and net income of not less than
$1,500,000. In addition, the covenants prohibit the Company from paying
dividends without lender approval. Specifically regarding the revolving
term bank line of credit for $1,939,000, the Company did not meet the
tangible net worth and net income requirements under the credit agreement
with the bank. The Company has obtained waivers for the financial
covenants for all measurement periods during the year ended December 31,
1998.<PAGE>
KIMMINS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Long-term debt (continued)
During 1997, Kimmins Contracting Corp. ("KCC"), a wholly-owned
subsidiary of the Company, entered into four separate debt agreements.
KCC converted equipment previously rented under operating leases into
equipment notes of approximately $13,041,000 in February 1997 and
$28,590,000 in November 1997 under terms similar to the Company's other
equipment notes outstanding. In addition, KCC obtained an $11,000,000
working capital loan, of which $7,000,000 was used to reduce the
Company's outstanding revolving term bank line of credit during March
1997. In November 1997, KCC increased the working capital loan from
$11,000,000 to $16,000,000. As of June 30, 1998, KCC had drawn
$13,700,000 on the line of credit.
The above equipment notes and the working capital loan agreements
contain certain covenants, the most restrictive of which require
maintenance of a total liabilities to adjusted net worth ratio of 8.0 to
1.0 and a current ratio of 1.5 to 1.0. Regarding the revolving term line
of credit for $13,700,000 and outstanding equipment notes for
approximately $40,900,000, KCC and the Company, as guarantor, did not
meet the total liability to net worth ratio, current ratio or net income
requirements under the credit and note agreements. The equipment notes
and working capital loan are guaranteed by the Company and require the
Company to maintain a debt to equity ratio not exceeding 6.5 to 1 and a
current ratio of not less than 1.2 to 1. The Company and KCC have
obtained waivers of these financial covenants for all measurement periods
during the year ended December 31, 1998. In addition, the Company
received a modification of the covenants for the year ended December 31,
1998, with which the Company believes it is in compliance with.
Included in the notes payable of approximately $61,263,000 are
equipment notes of TransCor for $3,500,000 that are due in July 1998.
TransCor has executed a commitment agreement that refinances the
$3,500,000 until January 1, 2000. The $3,500,000 is classified as net
assets from discontinued operations as of June 30, 1998.<PAGE>
KIMMINS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Earnings per share
As required by FASB Statement No. 128, the following table sets forth
the computation of basic and diluted earnings per share:
Three months
ended June 30,
---------------------------
1997 1998
------------- -------------
Numerator:
Net income . . . . . . . . . . . . . . $ 1,287,986 $ 253,201
Adjustment for basic earnings per
share . . . . . . . . . . . . . . . . 0 0
------------- -------------
Numerator for basic earnings per share -
income available to common
stockholders . . . . . . . . . . . . 0 0
Effect of dilutive securities . . . . . 0 0
------------- -------------
Numerator for diluted earnings per
share:
Income from continuing operations . 1,287,986 253,201
Income (loss) from discontinued
operations . . . . . . . . . . . . (411,804) 3,091,044
------------- -------------
Income available to common stockholders
after assumed conversions . . . . . . $ 876,182 $ 3,344,245
============= =============
<PAGE>
KIMMINS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Earnings per share (continued)
Three months
ended June 30,
---------------------------
1997 1998
------------- -------------
Denominator:
Denominator for basic earnings per
share - weighted-average shares . . . 4,322,134 4,296,969
Effective of dilutive securities:
Stock options . . . . . . . . . . . . . 0 67,838
Dilutive potential common shares . . . 0 0
------------- -------------
Denominator for diluted earnings per
share - adjusted weighted-average
shares and assumed conversions . . . 4,322,134 4,364,807
============= =============
Basic income per share from continuing
operations . . . . . . . . . . . . . $ .30 $ .06
============= =============
Diluted income per share from continuing
operations . . . . . . . . . . . . . $ .30 $ .06
============= =============
Basic income (loss) per share from
discontinued operations . . . . . . . $ (.10) $ .72
============= =============
Diluted income (loss) per share from
discontinued operations . . . . . . . $ (.10) $ .71
============= =============
Total basic income (loss) per share . . $ .20 $ .78
============= =============
Total diluted income (loss) per share . $ .20 $ .77
============= =============<PAGE>
KIMMINS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Earnings per share (continued)
Six months
ended June 30,
---------------------------
1997 1998
------------- -------------
Numerator:
Net income . . . . . . . . . . . . . . $ 2,587,710 $ 1,502,180
Adjustment for basic earnings per 0 0
share . . . . . . . . . . . . . . . . ------------- -------------
Numerator for basic earnings per
share - income available to common
stockholders . . . . . . . . . . . . 0 0
Effect of dilutive securities . . . . . 0 0
------------- -------------
Numerator for diluted earnings per
share:
Income from continuing
operations . . . . . . . . . . . . 2,587,710 1,502,180
Income (loss) from discontinued
operations . . . . . . . . . . . . (892,177) 3,078,720
------------- -------------
Income available to common stockholders
after assumed conversions . . . . . . . $ 1,695,533 $ 4,580,900
============= =============<PAGE>
KIMMINS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Earnings per share (continued)
Six months
ended June 30,
---------------------------
1997 1998
------------- -------------
Denominator:
Denominator for basic earnings per
share - weighted-average shares . . . 4,340,350 4,296,969
Effective of dilutive securities:
Stock options . . . . . . . . . . . . . 0 91,422
Dilutive potential common shares . . . 0 0
------------- -------------
Denominator for diluted earnings per
share - adjusted weighted-average
shares and assumed conversions . . . 4,340,350 4,388,391
============= =============
Basic income per share from
continuing operations . . . . . . . . $ .60 $ .35
============= =============
Diluted income per share from
continuing operations . . . . . . . . $ .60 $ .34
============= =============
Basic income (loss) per share from
discontinued operations . . . . . . . $ (.21) $ .72
============= =============
Diluted income (loss) per share from
discontinued operations . . . . . . . $ (.21) $ .70
============= =============
Total basic income (loss) per share . . $ .39 $ 1.07
============= =============
Total diluted income (loss) per share . $ .39 $ 1.04
============= =============
Unexercised options to purchase 154,075 shares of common stock for
1997 were not included in the computations of diluted income per share
because the assumed conversion would be antidilutive.<PAGE>
KIMMINS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Discontinued operations
On July 20, 1998, the Company's subsidiary, TransCor, executed an
agreement to sell all of the common stock of its wholly-owned operating
subsidiary, Kimmins Recycling Corp. ("KRC"), for $51.1 million in cash
and stock to Eastern Environmental Services of Florida, Inc., an
unrelated competitor. This transaction, coupled with the earlier sale
this year of KRC's Jacksonville and Miami operations, results in the
Company's exit from the solid waste industry. The transaction will result
in a gain as the proceeds of $41.1 million in cash and $10 million in
stock of Eastern Environmental Services of Florida, Inc., exceed the
Company's carrying value of the underlying investment in KRC. The
transaction is expected to close by August 31, 1998.
Information related to the discontinued operations of KRC for the
three- and six-month periods ended June 30, 1998, are as follows:
Three months Six months
ended ended
June 30, 1998 June 30, 1998
------------- -------------
Net revenue . . . . . . . . . . . . . . $ 8,099,000 $ 16,693,000
Operating expenses . . . . . . . . . . 6,743,000 13,831,000
Selling, general and administrative
expenses . . . . . . . . . . . . . . 1,178,000 2,352,000
------------- -------------
Operating income . . . . . . . . . . . 178,000 510,000
Non-operating gain on sale of assets . 5,263,000 5,263,000
Interest . . . . . . . . . . . . . . . 299,000 692,000
------------- -------------
Income before provision for income
taxes . . . . . . . . . . . . . . . . 5,142,000 5,081,000
Income taxes . . . . . . . . . . . . . 2,051,000 2,002,000
------------- -------------
Net income . . . . . . . . . . . . . . $ 3,091,000 $ 3,079,000
============= =============<PAGE>
KIMMINS CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Discontinued operations (continued)
The net assets and liabilities of the discontinued operations of KRC
included in the accompanying consolidated balance sheets as of December
31, 1997, and June 30, 1998, respectively, are as follows:
December 31, June 30,
1997 1998
------------- -------------
(unaudited)
Current assets:
Accounts receivable - trade, net . . $ 3,677,670 $ 2,506,482
Property held for sale . . . . . . . 322,978 -
Other current assets . . . . . . . . 265,770 107,895
------------- -------------
Total current assets . . . . . . . . 4,266,418 2,614,377
Property and equipment, net . . . . . . 24,748,670 19,203,371
Property held for sale . . . . . . . . 1,510,723 1,493,311
Intangible assets, net . . . . . . . . 606,975 81,333
Other assets . . . . . . . . . . . . . 1,142,205 895,509
------------- -------------
Total assets . . . . . . . . . . . . 32,274,991 24,287,901
------------- -------------
Current liabilities:
Accounts payable, trade . . . . . . . 3,748,911 2,892,564
Accrued expenses . . . . . . . . . . 2,209,387 2,132,681
Current portion of long-term debt . . 4,662,310 5,220,956
------------- -------------
Total current liabilities . . . . . 10,620,608 10,246,201
Long-term debt . . . . . . . . . . . 14,389,103 9,345,087
------------- -------------
Total liabilities . . . . . . . . . 25,009,711 19,591,288
------------- -------------
Net assets of discontinued
operations . . . . . . . . . . . . . $ 7,265,280 $ 4,696,613
============= =============
9. Subsequent events
On August 14, 1998, the Company, acquired an additional 297,200
shares of common stock in TransCor from Francis M. Williams, President
and Chief Executive Officer. The acquisition increased the Company's
ownership percentage to 81 percent from 74 percent and results in the
ability to consolidate the Company and TransCor for federal income tax
purposes on a prospective basis.<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED JUNE 30, 1998 AND 1997
Net revenue for the three months ended June 30, 1998, decreased by
$1,681,000, or 7 percent, to $21,230,000 from $22,911,000 for the three
months ended June 30, 1997. The decrease is due primarily to certain
decreases in the Company's remediation services ($1,005,000 decrease in
net revenue) caused by the closing of its New York operations. In
addition, demolition services decreased net revenues by $495,000 and
other services, including utility contracting services, decreased net
revenues by $181,000.
Outside services, which largely represent subcontractor costs,
decreased, as a percentage of net revenue, to 11 percent for the three
months ended June 30, 1998, from 25 percent for the same period in 1997.
The Company will use the services of a subcontractor when it determines
that an economic opportunity exists regarding internally providing the
services. The Company utilized the services of subcontractors to a
lesser extent during 1998 than 1997 due to the specific contracts in
progress and the associated work requirements, especially due to the
increase in land reclamation work where little or no subcontractors are
utilized and the decrease in road construction work which requires
significant use of subcontractors.
Cost of revenue earned, as a percentage of net revenue, for the three
months ended June 30, 1998, remained unchanged at 82 percent as compared
to 82 percent for the same period in 1997. As a result, the gross profit
for the three months ended June 30, 1998, was $3,961,000 (18 percent of
net revenue) compared to $4,033,000 (18 percent of net revenue) for the
same period in 1997. The decrease of $72,000 in the dollar amount of
gross margin is primarily associated with the Company's utility
contracting services ($540,000 decrease in gross profit) and additionally
from the Company's demolition services ($180,000 decrease in gross
profit). The decrease is partially offset by increases in the Company's
remediation services ($464,000 increase in gross profit), industrial
demolition services ($97,000 increase in gross profit), and asbestos
abatement services ($87,000 increase in gross profit).
During the three months ended June 30, 1998, selling, general and
administrative expenses increased by $482,000 to $2,020,000 (10 percent
of net revenue) from $1,538,000 (7 percent of net revenue) for the same
period in 1997. The dollar and percentage increase is primarily a result
of costs associated with increases in the number of administrative staff
and professional services. For discontinued operations, selling, general
and administrative expenses for the three months ended June 30, 1998,
were $1,178,000, representing a decrease of $1,038,000, or 47 percent,
from $2,216,000 for the same period in 1997. The dollar and percentage
decrease in selling, general, and administrative expenses is primarily
attributable to reduced overhead costs, such as administrative, sales,
marketing and labor costs that are associated with facilities that have
been closed or sold and from management's actions to reduce overhead
costs.<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED JUNE 30, 1998 AND 1997
(continued)
The Company's subsidiary, TransCor, sold its Jacksonville area waste
collection and recycling operating assets and certain assets of the Miami
front-end load and rear-load commercial waste and recycling business to
Eastern Environmental Services of Florida, Inc., for $11,600,000 in cash.
This transaction, combined with the Company's sale of certain other
vehicles, waste containers, and equipment during the three months ended
June 30, 1998, resulted in a non-operating gain of approximately
$5,263,000. These assets were primarily utilized in the Company's
commercial and residential waste collection services. This gain is
included in the income from discontinued operations for the three- and
six-month periods ended June 30, 1998.
Minority interest in net income of subsidiary was $847,000 for the
three months ended June 30, 1998, compared to a minority interest in net
loss of subsidiary of $40,000 during the same period in 1997. The
minority interest in net income or loss of the subsidiary reflects
approximately 26 percent of TransCor's earnings as a result of the March
25, 1993, initial public offering of TransCor's common stock. The
increase in TransCor's earnings between periods is attributable to
reduced administration and overhead costs at certain solid waste
management facilities, especially the headquarters office.
Interest expense, net of interest income, increased to $1,469,000
during the three months ended June 30, 1998, compared to $868,000 for the
same period in 1997. The increase is primarily attributable to increases
in average borrowings during 1997 from the acquisition of equipment used
in the specialty contracting segment of approximately $40,000,000, most
of which was acquired in the fourth quarter of 1997.
As a result of the foregoing, the loss from continuing operations
before provision for income taxes for the three months ended June 30,
1998, was $439,000 (negative 2 percent of net revenue) compared to net
income before provision for taxes of $1,668,000 (7 percent of net
revenue) during the same period in 1997.
The Company's effective tax rate was (15.7) percent for the three
months ended June 30, 1998, compared to a rate of 23 percent for 1997 tax
benefits. The lower than statutory effective tax rate was primarily due
to the net operating loss generated by the Company during 1997 and the
resulting tax benefits from credit and loss carryforwards. Management
expects to fully utilize these loss and credit carryforwards before they
expire in the year 2012; however, in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes," a
valuation allowance of approximately $2,801,000 was recognized during
1997. Included in the tax benefit, the Company has approximately
$697,000 of alternative minimum tax credit carryforwards available to
offset future federal regular income taxes. This credit does not expire.<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTHS ENDED JUNE 30, 1998 AND 1997
(continued)
The Company generated $253,000 of income from continuing operations
for the three-month period ended June 30, 1998, compared to income of
$1,288,000 for the same period in 1997.
In addition, the Company had income from discontinued solid waste
management operations of $3,091,000 for the three-month period ended June
30, 1998, compared to a net loss of $412,000 from discontinued operations
for the same period in 1997.
As a result of the foregoing, the Company generated net income for
the three months ended June 30, 1998, of $3,344,000 (11 percent of net
revenue) as compared to net income of $876,000 (3 percent of net revenue)
for the same period during 1997.
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1998 AND 1997
Net revenue for the six months ended June 30, 1998, decreased by
$227,000, or 1 percent, to $43,260,000 from $43,487,000 for the same
period in 1997. The decrease is due primarily to decreases in the
Company's demolition services ($2,440,000 decrease in net revenue) and to
decreases in remediation services ($2,360,000 decrease in net revenue)
caused by the closing of its New York operations. The decreases were
partially offset by an increase in the Company's utility contracting
services of $4,318,000 attributable to continued growth in land
reclamation and site work services. In addition, other services increased
net revenues by $254,000.
Outside services, which largely represent subcontractor costs,
decreased, as a percentage of net revenue, to 11 percent for the six
months ended June 30, 1998, from 24 percent for the same period in 1997.
The Company will use the services of a subcontractor when it determines
that an economic opportunity exists regarding internally providing the
services. The Company utilized the services of subcontractors to a
lesser extent during 1998 than 1997 due to the specific contracts in
progress and the associated work requirements, especially due to the
increase in land reclamation work where little or no subcontractors are
utilized and the decrease in road construction work which requires
significant use of subcontractors.<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(continued)
Cost of revenue earned, as a percentage of net revenue, for the six
months ended June 30, 1998, decreased to 80 percent from 82 percent for
the same period in 1997. As a result, the gross profit for the six months
ended June 30, 1998, was $8,764,000 (20 percent of net revenue) compared
to $7,795,000 (18 percent of net revenue) for the same period in 1997.
The increase in the dollar amount ($969,000) and percentage of gross
margin (2 percent) is primarily associated with the growth of the
Company's utility contracting services ($737,000 increase in gross
profit) and additionally from remediation services ($590,000 increase in
gross profit), industrial demolition services ($329,000 increase in gross
profit), and asbestos abatement services ($221,000 increase in gross
profit). This increase is partially offset by decreases in the Company's
other demolition services ($908,000 decrease in gross profit).
During the six months ended June 30, 1998, selling, general and
administrative expenses increased to $3,814,000 (9 percent of net
revenue) from $3,138,000 (7 percent of net revenue) for the same period
in 1997. The dollar and percentage increase is primarily a result of
costs associated with increased administrative staff levels and
professional services. For discontinued operations, selling, general and
administrative expenses for the six months ended June 30, 1998, were
$2,353,000, representing a decrease of $1,611,000, or 41 percent, from
$3,964,000 for the same period in 1997. The dollar and percentage
decrease in selling, general, and administrative expenses is primarily
attributable to reduced overhead costs, such as administrative, sales,
marketing and labor costs that are associated with facilities that have
been closed or sold and from management's actions to reduce overhead
costs.
The Company's subsidiary, TransCor, sold its Jacksonville area waste
collection and recycling operating assets and certain assets of the Miami
front-end load and rear-load commercial waste and recycling business to
Eastern Environmental Services of Florida, Inc., for $11,600,000 in cash.
This transaction, combined with the Company's sale of certain other
vehicles, waste containers, and equipment during the three months ended
June 30, 1998, resulted in a non-operating gain of approximately
$5,263,000. These assets were primarily utilized in the Company's
commercial and residential waste collection services. This gain is
included in income from discontinued operations for the three- and six-
month periods ended June 30, 1998.
Minority interest in net income of subsidiary was $905,000 for the
six months ended June 30, 1998, compared to minority interest in net loss
of subsidiary of $35,000 during the same period in 1997. The minority
interest in net income or net loss of the subsidiary reflects
approximately 26 percent of TransCor's earnings as a result of the March
25, 1993, initial public offering of TransCor's common stock. The
increase in TransCor's earnings between years is attributable to reduced
administration and overhead costs at certain solid waste management
facilities, especially the headquarters office.<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(continued)
Interest expense, net of interest income, increased to $2,985,000
during the six months ended June 30, 1998, compared to $1,324,000 for the
same period in 1997. The increase is primarily attributable to increases
in average borrowings during 1997 from the acquisition of equipment used
in the specialty contracting segment of approximately $40,000,000, most
of which was acquired in the fourth quarter of 1997.
As a result of the foregoing, income before provision for income
taxes for the six months ended June 30, 1998, was $1,061,000 (2 percent
of net revenue) compared to a income before provision for income taxes of
$3,368,000 (8 percent of net revenue) during the same period in 1997.
The Company's effective tax rate was 42 percent for the six months
ended June 30, 1998, compared to a rate of 23 percent for 1997 tax
benefits. The lower than statutory effective tax rate was primarily due
to the net operating loss generated by the Company during 1997 and the
resulting tax benefits from credit and loss carryforwards. Management
expects to fully utilize these loss and credit carryforwards before they
expire in the year 2012; however, in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes," a
valuation allowance of approximately $2,801,000 was recognized during
1997. Included in the tax benefit, the Company has approximately
$697,000 of alternative minimum tax credit carryforwards available to
offset future federal regular income taxes. This credit does not expire.
The Company generated income from continuing operations of $1,502,000
(3 percent of net revenue) for the six months ended June 30, 1998, as
compared with income from continuing operations of $2,588,000 (6 percent
of net revenue) for the same period during 1997.
In addition, the Company generated income of $3,079,000 (7 percent of
net revenue) net of tax of $2,002,000 from discontinued solid waste
management operations for the six months ended June 30, 1998, as compared
with a net loss of $892,000 (negative 2 percent of net revenue), net of a
$570,000 tax benefit from discontinued operations for the same period in
1997.
As a result of the foregoing, the Company reported net income for the
six months ended June 30, 1998, of $4,581,000 (11 percent of net revenue)
as compared with net income of $1,696,000 (4 percent of net revenue) for
the same period during 1997.<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
Cash provided by operating activities was $2,005,000 and $2,288,000
during the six months ended June 30, 1998 and 1997, respectively. Cash
provided includes the Company's discontinued solid waste management
services segment which provided $713,000 for the six months ended June
30, 1998, compared to $892,000 cash used by this segment for the six
months ended June 30, 1997. In addition, $3,330,000 and $1,169,000 of
cash was provided by continuing operations of the solid waste management
services segment for the six months ended June 30, 1998 and 1997,
respectively. Cash used in (provided by) the Company's specialty
contracting segment approximated $2,038,000 and ($2,011,000) for the six
months ended June 30, 1998 and 1997, respectively. Cash was provided by
the solid waste management services operations during the second quarter
of 1998 at expected levels. Cash was used in the specialty contracting
operations during the second quarter of 1998 due to the decrease in costs
and estimated earnings in excess of billings on uncompleted contracts and
billings in excess of costs and estimated earnings on uncompleted
contracts associated with the increase in revenue and significant losses
on the earthmoving contracts.
Net cash provided by investing activities during the six months ended
June 30, 1998, was $59,000 as compared to net cash used in investing
activities of $16,799,000 for the six months ended June 30, 1997. The
increase in cash provided by investing activity is primarily attributable
to a gain of $5,263,000 from the sale of assets of discontinued
operations.
The Company had capital expenditures during the six months ended June
30, 1997 and 1998 of $17,940,000 and $5,808,000, respectively. The 1997
capital expenditures were primarily related to the conversion of
approximately $13,000,000 of construction equipment utilized in the
Company's specialty contracting operations, which was previously rented
under operating leases. Future capital expenditures will be financed by
available cash resources, cash flow from operations, and available credit
resources, as needed.
During 1998 the Company used cash related to financing activities of
$564,000. Borrowings in 1998 related primarily to the acquisition of
approximately $5,808,000 of equipment. These equipment notes require
periodic payments through April 2002. On February 26, 1997, the Company,
through its Kimmins Contracting Corp. subsidiary, entered into a credit
agreement with a financial institution that provides for unrestricted
borrowings up to $11,000,000, of which $7,000,000 was used to reduce the
Company's outstanding revolving term bank line of credit during March
1997. Borrowings on this facility are due in February 1999. The credit
agreement was increased to $16,000,000 in November 1997; and, as of June
30, 1998, borrowings were $13,700,000. The Company made repayments on
long-term debt of $7,535,000 during the first six months of 1998.<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
(continued)
The Company's ratio of debt to equity was 9.16:1.00 and 5.72:1.00 at
December 31, 1997, and June 30, 1998, respectively. The decrease in debt
is primarily due to the debt paydowns exceeding new debt and an increase
in equity resulting from net income generated in the first six months,
especially the gain of $5,263,000.
During the six months ended June 30, 1997 and 1998, the Company's
average contract and trade receivables less retainage were outstanding
for 48 and 50 days, respectively. Management believes that the number of
days outstanding for its current receivables approximates industry norms.
A portion of the Company's contracting operations is subcontracted, and
any delay in collections of receivables relating to primary contracts
will usually result in the ability of the Company to delay payment of
offsetting subcontract payables.
On October 22, 1997, the Company contributed its note receivable in
an amount of approximately $3,851,000 from the Apartments and other
receivables of $3,059,000 for a non-controlling 49 percent preferred
limited partnership interest in the Apartments and a receivable of
$900,000 from the Apartments. The amount of $12,066,000 in excess of the
underlying equity was attributed to goodwill and is being amortized over
thirty years. The Company will be allocated 49 percent of operating
income, losses and cash flow. The preference in the Company's equity
interest in the Apartments occurs upon the sale of the underlying
partnership properties. Upon the occurrence of a capital transaction, the
Company would receive cash flows from the sale or refinancing of the
Apartments' assets equal to its capital contribution prior to any other
partner receiving any proceeds. The Company accounts for its investment
in the Apartments using the equity method.
At December 31, 1997, and June 30, 1998, $1,076,000 and $900,000,
respectively, of the combined accounts receivable - affiliates and note
receivable - affiliates are due from affiliates of the Company's
President. The affiliated receivables relate to contract services
performed and are guaranteed by Mr. Williams.
The Company's current bonding capacity for qualification purposes is
$60 million for an individual project ($120 million aggregate).
Historically, the Company has obtained bonding coverage in amounts up to
$53,000,000. However, bonding coverage is not guaranteed on projects up
to the above limits because each project has its own distinct and
separate bond requirements and it is customary for surety bonding
companies to underwrite each surety obligation individually. Management
believes that bonding coverages are adequate for the size and scope of
projects being performed.<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
New Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 128, "Earnings per
Share" ("SFAS No. 128"). Statement No. 128 replaced the calculation of
primary and fully diluted earnings per share with basic and diluted
earnings per share. The Company adopted the provisions of Statement 128
No. effective December 31, 1997. All earnings per share accounts for all
periods presented have been restated to conform to the Statement No. 128
requirements.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income ("SFAS No. 130"). SFAS
No. 130 requires that total comprehensive income and comprehensive income
per share be disclosed with equal prominence as net income and earnings
per share. Comprehensive income is defined as changes in stockholders'
equity exclusive of transactions with owners such as capital
contributions and dividends. SFAS No. 130 is effective for fiscal years
beginning after December 15, 1997. Management is currently assessing the
impact of SFAS No. 130, but does not expect its effect to be material.
In June 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" ("SFAS No. 131"), which supercedes Financial
Accounting Standards No. 14. SFAS No. 131 uses a management approach to
report financial and descriptive information about a Company's operating
segments. Operating segments are revenue-producing components of the
enterprise for which separate financial information is produced
internally for the Company's management. SFAS No. 131 is effective for
fiscal years beginning after December 31, 1997. Management is currently
assessing the impact of SFAS No. 131, but does not expect its effect to
be material.
The American Institute of Certified Public Accountants recently
issued Statement of Position 98-5, Reporting on the Costs of Start-up
Activities. Start-up costs are defined broadly in the SOP as those one-
time activities related to opening a new facility, introducing a new
product or service, conducting business in a new territory, conducting
business with a new class of customer or beneficiary, initiating a new
process in an existing facility, or commencing some new operation. Start-
up costs, including organizational costs, should be expensed as incurred
under the new SOP. The SOP would be effective for most entities for
fiscal years beginning after December 15, 1998. The SOP will require the
Company, upon adoption, to write off as a cumulative effect of a change
in accounting principle any previously capitalized start-up or
organization costs. Therefore, in the first quarter of 1999, the Company
may have to write off the remaining unamortized balance of contract
start-up costs of approximately $330,000 at December 31, 1998. If the
anticipated sale of the Company's solid waste subsidiary occurs, the
Company will have no capitalized start-up costs remaining at December 31,
1998. At June 30, 1998, the balance of capitalized start-up costs of
$787,000 are reflected in the "net assets of discontinued operations."<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Impact of Year 2000
Some of the Company's older computer programs were written using two
digits rather than four digits to define the applicable year. As a
result, those computer programs have time-sensitive software that
recognize a date using "00" as the year 1900 rather than the year 2000.
This could cause a system failure or miscalculations causing disruptions
of operations, including, among other things, a temporary inability to
process transactions, send invoices, or engage in similar normal business
activities.
The Company has completed an assessment and will have to modify or
replace portions of its software so that its computer systems will
function properly with respect to dates in the year 2000 and thereafter.
The total Year 2000 project is estimated to be immaterial to the
financial statements. To date, the Company's incremental costs for
assessment of the Year 2000 issue, the development of a modification
plan, and the purchase of new software have been insignificant.
The majority of software used by the Company is licensed from various
software providers who are currently updating our programs to be Year
2000 compliant. In-house developed programs comprise a small portion of
the total software utilized, and the majority of these programs are
believed to be Year 2000 compliant.
The project is estimated to be completed not later than December 31,
1998, which is prior to any anticipated impact on its operating system.
The Company believes, with modifications to existing software and
conversions to new software, the Year 2000 issue will not pose
significant operational problems for its computer systems. However, if
such modifications and conversions are not made, or are not completed
timely, the Year 2000 Issue could have a material impact on the
operations of the Company.
The Company has initiated formal communications with all of its
significant suppliers and large customers to determine the extent to
which the Company's interface systems are vulnerable to those third
parties' failure to remediate their own Year 2000 Issues. There is no
guarantee that the systems of other companies on which the Company's
systems rely will be timely converted and would not have an adverse
effect on the Company's systems.
The costs of the project and the date on which the Company believes
it will complete the Year 2000 modifications are based on management's
best estimates, which were derived utilizing numerous assumptions of
future events, including the continued availability of certain resources
and other factors. However, there can be no guarantee that these
estimates will be achieved and actual results could differ materially
from those anticipated. Specific factors that might cause such material
differences include, but are not limited to, the availability and cost of
personnel trained in this area, the ability to locate and correct all
relevant computer codes, and similar uncertainties.<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Forward-Looking Information
The foregoing discussion in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" contains forward-looking
statements that reflect management's current views with respect to future
events and financial performance. Such statements involve risks and
uncertainties, and there are certain important factors that could cause
actual results to differ materially from those anticipated. Some of the
important factors that could cause actual results to differ materially
from those anticipated. Some of the important factors that could cause
actual results to differ materially from those anticipated include, but
are not limited to, economic conditions, competitive factors, and other
uncertainties, all of which are difficult to predict and many of which
are beyond the control of the Company. Due to such uncertainties and
risk, readers are cautioned not to place undue reliance on such forward-
looking statements, which speak only as of the date hereof.
Effect of Inflation
Inflation has not had, and is not expected to have, a material impact
upon the Company's operations. If inflation increases, the Company will
attempt to increase its prices to offset its increased expenses. No
assurance can be given, however, that the Company will be able to
adequately increase its prices in response to inflation.
Item 3. QUALITATIVE AND QUANTITATIVE
DISCLOSURES ABOUT MARKET RISK
Not required pursuant to Item 305, General Instruction 1.<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal proceedings
None
Item 2. Changes in securities
None
Item 3. Defaults upon senior securities
None
Item 4. Submission of matters to a vote of security holders
None
Item 5. Other information
Effective with the close of business on June 10, 1998, TransCor's
stock was delisted from the Nasdaq National Market because TransCor could
not satisfy the market value public float requirement and was delinquent
in filing its 1997 Form 10-K and its 1998 first quarter Form 10-Q.
TransCor recently applied to Nasdaq to initiate listing on the OTC
Bulletin Board Service, which became effective on August 17, 1998.
Item 6. Exhibits and reports on Form 8-K
(a) The following document is filed as an exhibit to this
Quarterly Report on Form 10-Q:
27.1 - Financial Data Schedule - 1998 (for SEC use only)
27.2 - Financial Data Schedule - 1997 (for SEC use only)
(b) No reports on Form 8-K were filed during the quarter for
which this report is filed.<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
KIMMINS CORP.
By: /S/ FRANCIS M. WILLIAMS
-------------------------
Francis M. Williams
President and Chief
Executive Officer
August 19, 1998
Pursuant to the requirements of the Securities and Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities indicated on August 19,
1998.
Date: August 19, 1998 /S/ FRANCIS M. WILLIAMS
------------------- ------------------------------
Francis M. Williams
President and Chief
Executive Officer
(Principle Executive Officer)
Date: August 19, 1998 /S/ NORMAN S. DOMINIAK
------------------- ------------------------------
Norman S. Dominiak
Vice President and
Chief Financial Officer
(Principle Accounting and
Financial Officer<PAGE>
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