-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Webv2nXqlgVNOKMxwloS/23/KPtoWiLxiwWfjDSkwdHErcXp+ddOXZ+FoVQLLwPg 6rvc0aDww1qCm1PnuKo8tw== 0000055805-98-000009.txt : 19980818 0000055805-98-000009.hdr.sgml : 19980818 ACCESSION NUMBER: 0000055805-98-000009 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 SROS: AMEX FILER: COMPANY DATA: COMPANY CONFORMED NAME: KINARK CORP CENTRAL INDEX KEY: 0000055805 STANDARD INDUSTRIAL CLASSIFICATION: COATING, ENGRAVING & ALLIED SERVICES [3470] IRS NUMBER: 710268502 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-03920 FILM NUMBER: 98691790 BUSINESS ADDRESS: STREET 1: 2250 EAST 73RD STREET STREET 2: SUITE 300 CITY: TULSA STATE: OK ZIP: 74136-6832 BUSINESS PHONE: (918)494-0964 MAIL ADDRESS: STREET 1: 2250 EAST 73RD STREET STREET 2: SUITE 300 CITY: TULSA STATE: OK ZIP: 74136-6832 FORMER COMPANY: FORMER CONFORMED NAME: KIN ARK OIL CO DATE OF NAME CHANGE: 19690601 FORMER COMPANY: FORMER CONFORMED NAME: KIN ARK OIL & GAS CO DATE OF NAME CHANGE: 19680906 10-Q 1 =============================================================================== 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 =============================================================================== KINARK CORPORATION AND SUBSIDIARIES INDEX TO QUARTERLY REPORT ON FORM 10-Q
PAGE 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
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 KINARK CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
Unaudited JUNE 30 Dec 31 (Dollars in Thousands) 1998 1997 - ------------------------------------------------------------------------------- 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 ====== ======
See notes to condensed consolidated financial statements. KINARK CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS Unaudited
Three Months Ended Six Months Ended June 30 June 30 ------------------ ---------------- (Dollars in Thousands Except per Share Amounts) 1998 1997 1998 1997 - ------------------------------------------------------------------------------- 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
See notes to condensed consolidated financial statements. KINARK CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Unaudited
Six Months Ended June 30 ----------------- (Dollars in Thousands) 1998 1997 - ------------------------------------------------------------------------------- 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 ====== ======
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 RESULTS OF OPERATIONS REVENUES
Quarter Ended June 30 1998 1997 ------------------ ----------------- % of % of $ (000) Sales $ (000) Sales ------------------------------------------ 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% ======= ===== ======= =====
Six Months Ended June 30 1998 1997 ------------------ ------------------ % of % of $ (000) Sales $ (000) Sales ------------------------------------------ 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% ======= ===== ======= =====
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. COSTS AND EXPENSES
Quarter Ended June 30 1998 1997 ---------------- ---------------- % of % of $ (000) Sales $ (000) Sales ------------------------------------- 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% ====== ==== ====== ====
Six Months Ended June 30 1998 1997 ----------------- ---------------- % of % of $ (000) Sales $ (000) Sales -------------------------------------- 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% ====== ==== ====== ====
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 EX-27 2
5 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. 1,000 U.S. DOLLARS 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 1.0 304 0 7,705 305 4,469 13,617 34,057 19,057 33,473 6,715 8,908 0 0 819 17,850 33,473 25,074 25,074 18,871 23,709 (309) 0 326 1,348 625 723 0 0 0 723 .11 .11
EX-1 3 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. -----END PRIVACY-ENHANCED MESSAGE-----