ITEM 1. BUSINESS
Kinark Corporation is a diversified company conducting business in Galvanizing and Chemical Storage and Distribution which are further discussed below. As used in this report, the terms "Kinark" and "Company" mean Kinark Corporation (the Registrant) and its operating subsidiaries unless the context requires otherwise. Kinark was incorporated under the laws of the State of Delaware in 1955. The current operating subsidiaries consist of Boyles Galvanizing Company ("Boyles"), acquired in 1969, Lake River Corporation ("Lake River"), acquired in 1968,and North American Galvanizing Company ("NAGC"), formed in 1996, and the successor by merger to Rogers Galvarizing Company ("Rogers"). Rogers was acquired by the Company during 1996 and subsequently merged into NAGC. See "Notes to Consolidated Financial Statements--Acquisition of Rogers Galvanizing Company."
In August 1995, the Company adopted a plan to divest its Kinpak, Inc. ("Kinpak") packaging subsidiary. Kinpak produced proprietary household cleaning products and provided contract packaging of private label antifreeze and windshield washer fluid. Substantially all the Kinpak assets were sold and certain liabilities assumed by the buyer on February 27, 1996. See "Management's Discussion and Analysis of Financial Condition and Results of Operations."
Financial information for each continuing business segment including sales, operating earnings, identifiable assets, capital expenditures, and depreciation expense for the most recent three fiscal years is presented in the notes to the consolidated financial statements included in Item 8.
GALVANIZING
The Company conducts its galvanizing operations through its Boyles and NAGC operating subsidiaries and is currently conducting all such galvanizing operations under the tradename "North American Galvanizing Company." Accordingly, all references to the galvanizing operations of NAGC in this report include the combined galvanizing operations of NAGC and Boyles. The Company plans to merge Boyles into NAGC during 1997 to consolidate its galvanizing operating subsidiaries.
NAGC is principally engaged in hot dip galvanizing of metal products. This process provides effective corrosion protection of fabricated steel which is used in numerous markets such as petrochemical, highway and transportation, energy, utilities, communications, irrigation, pulp and paper, waste water treatment, food processing, recreation and original equipment manufacturers. NAGC galvanizes products for over 2,000 customers nationwide.
Based on the number of its operating plants, NAGC is one of the largest independent hot dip galvanizing companies in the United States. NAGC galvanizes iron and steel products by immersing them in molten zinc. This process produces an alloyed metal surface which can endure for up to 50 years with no oxidation or corrosion from exposure to the elements.
NAGC utilizes a strategically located network of plants to capitalize on market opportunities and optimize turn-around service to its customers. Its galvanizing plants are located in Tulsa, Oklahoma; Kansas City, Missouri; St. Louis, Missouri; Nashville, Tennessee; Louisville, Kentucky; Denver, Colorado; Hurst, Texas; and Houston, Texas. Zinc, the primary raw material in the galvanizing process, is a widely available commodity in the open market. Worldwide spot prices at the beginning of 1996 were $.46 per pound and increased to $.51 per pound by the end of 1996. To reduce the impact of zinc price fluctuations, the Company periodically utilizes long-term fixed price purchase contracts. NAGC has a broad customer base with its five largest customers, on a combined basis, accounting for 24% of the Company's consolidated sales in 1996. The backlog of orders at NAGC is generally nominal due to the short time requirement involved in the galvanizing process. Inventory and working capital requirements have remained relatively stable.
The galvanizing business is highly competitive. NAGC competes with other independent galvanizing companies, captive galvanizing facilities operated by manufacturers, and alternative forms of corrosion protection such as paint. Competition is based primarily on quality of corrosion protection, price and service. The strategic location of NAGC's plants and the consistent quality of its service enable NAGC to compete on a favorable basis. NAGC employed 453 persons at December 31, 1996.
CHEMICAL STORAGE AND DISTRIBUTION
Lake River, located in Chicago, is a bulk storage operation with 197 tanks providing 21 million gallons of on-site bulk liquid storage capacity; another 36 tanks with an aggregate storage capacity of 23 million gallons are classified in a decommissioned status due to low demand for large capacity tanks. In addition, Lake River provides approximately 600,000 square feet of warehouse capacity and serves as an important link in the chemical distribution system for various Midwestern markets. During 1996, Lake River employees handled 26 barges, 1,326 rail cars, and over 100 transport trucks daily. Lake River also operates two bag filling lines used for bulk chemical bagging and three drum filling lines which handle flammables, caustics, food grade products, and miscellaneous specialty chemicals.
Bulk liquid storage facilities are leased to customers for various terms generally ranging from one to five years. These contracts are typically renewed or replaced with other customers upon expiration. Lake River's storage contract with its largest customer expired in 1994. In 1994, this customer accounted for 13.2% of the Company's consolidated sales and 32.2% of Lake River's sales. Subsequently, Lake River replaced 4.5% of the lost business in 1995 and another 6.4% in 1996. At the end of 1996, approximately 96% of the warehouse facilities were committed on multi-year and month-to-month contracts.
Lake River's facilities provide integrated storage, formulating, packaging, and distribution services. Most competitors do not offer this breadth of services although numerous companies compete aggressively in one or more of these areas. Lake River's service-based bulk liquid storage business does not require it to take title to any of the customer's products that it handles. Steel drums and bag containers used in Lake River's production operations are available in adequate quantities from a number of regional suppliers. Location of facilities, quality of service, and price are important factors enabling Lake River to compete effectively. Lake River employed 84 persons at December 31, 1996.
Revenue from bulk liquid storage customers is derived from fixed storage rentals and from throughput handling fees. Existing tank capacity is adequate to support anticipated business growth from new rentals and/or increased product throughput. The Company will consider alternatives to increase the capacity of warehousing, drumming and bagging operations should future growth warrant expansion in these areas.
ITEM 2.
ITEM 2. PROPERTIES
The Company's executive offices are in Tulsa, Oklahoma, with approximately 3,500 square feet of office space leased through June 30, 1997.
NAGC owns and operates eleven hot dip galvanizing plants located in Oklahoma, Missouri, Texas, Colorado, Tennessee and Kentucky. These plants average 20,000 square feet in size and operate zinc kettles ranging in length from 33 to 56 feet.
Lake River has operating facilities located on approximately 50 acres located on the Chicago Ship Canal in Cook County, Illinois, which is leased from the Metropolitan Sanitary District of Chicago, a municipal corporation. These multiple land leases have terms ranging from 35-75 years, with the earliest expiring in 1999. The operating facilities include an office and quality control laboratory of brick masonry construction containing an area of approximately 5,100 square feet, 233 specialized tanks with a total capacity of approximately 44 million gallons of liquid chemicals. In addition, Lake River operates 600,000 square feet of public warehousing storage in six southwest Chicago locations. Approximately 410,000 square feet of warehouse space is leased at three locations utilizing multi-year leases which are typically renewed upon expiration. Lake River owns the facilities which comprise the remaining 190,000 square feet of warehouse space.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to, nor is any of its property subject to, any material legal proceedings, other than routine litigation incidental to the business.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of stockholders during the fourth quarter of 1996.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
STOCK INFORMATION
The principal trading market for the common stock of Kinark Corporation is the American Stock Exchange. The Company's common stock trades under the symbol "KIN". The Company has continued a long-term policy of not paying dividends in order to reinvest earnings to expand its business operations. The board of directors may review the dividend policy in the future, recognizing that dividends may be a desirable form of return on the investment made by many of its stockholders. Stockholders of record at March 15, 1997 numbered approximately 2,400.
QUARTERLY STOCK PRICES FIRST SECOND THIRD FOURTH
1996-High $ 3 5/16 $ 4 3/4 $ 4 1/4 $ 3 7/8 Low 2 7/16 2 3/8 2 3/4 2 11/16
1995-High 4 3 15/16 3 7/16 3 1/4 Low 3 2 7/8 2 7/8 2 1/4
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data for years 1992 through 1996 are presented on page FS-21 of this Annual Report on Form 10-K.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Indexes to Management's Discussion and Analysis of Financial Condition, Results of Operations, Financial Statements and Supplementary Data are presented on page 10 of this Annual Report on Form 10-K.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Indexes to Management's Discussion and Analysis of Financial Condition and Results of Operations, Financial Statements and Supplementary Data are presented on page 10 of this Annual Report on Form 10-K.
ITEM 9.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There have been no disagreements with the Company's independent accountants on any matter of accounting principles or practices, financial statement disclosure, or auditing scope and procedure within the twenty-four months prior to December 31, 1996.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT DIRECTORS
The information required by this item with respect to the Directors of the Company appears in the 1997 Proxy Statement under the headings "Election of Directors" and "Compliance with Section 16(a) of the Securities Exchange Act of 1934" and is incorporated by reference.
NAME AGE OFFICE AND BUSINESS EXPERIENCE
MICHAEL T. CRIMMINS 57 Chairman of the Board since May 1995 and Chief Executive Officer of the Company since February 1996. From 1989-1995, Vice President and General Counsel of Northbridge Holdings, Inc. And Deltech Corporation. Vice President and General Counsel from 1988 until 1989 of the Advanced Technology Group of Hoechst Celanese Corporation. From 1976 until 1987, Assistant Secretary and Associate General Counsel of American Hoechst Corporation.
RONALD J. EVANS 47 President of the Company since February 1996. From May 1995 through January 1996, private investor. From 1989-1995, Vice President-General Manager of Deltech Corporation. Mr. Evans' previous experience includes 13 years with Hoechst Celanese Corporation.
PAUL R. CHASTAIN 62 Vice President and Chief Financial Officer since February 1996. From July 1993 through January 1996, President and Chief Executive Officer of the Company. From June 1991-July 1993, Chairman and Chief Executive Officer. Co-Chairman and Co-Chief Executive Officer of the Company from June 1990-June 1991. From 1976 to 1990, Executive Vice President and Treasurer of the Company. From 1973 through 1976, Vice President of Finance and Secretary of the Company. Mr. Chastain's previous experience includes six years with Allis- Chalmers and nine years with Litton Industries.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item appears in the 1997 Proxy Statement under the heading "Executive Compensation" and is incorporated by reference
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item concerning security ownership of certain beneficial owners and management appears in the 1997 Proxy Statement under the heading "Security Ownership of Principal Stockholders and Management" and is incorporated by reference.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Joseph J. Morrow, a director of the Company and a nominee for reelection to the Company's Board of Directors in 1997 for a one-year term, purchased 1,759,083 shares of Common Stock in the Company's private placement in January 1996. See "Notes to Consolidated Financial Statements--Stockholders' Equity." Mr. Morrow is the chief executive officer of Morrow & Co., Inc., which provides proxy solicitation and other stockholder related services to the Company.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS REPORT:
(1) FINANCIAL STATEMENTS PAGE
Independent Auditors' Report FS-7 Consolidated Balance Sheets at December 31, 1996 and 1995 FS-8 Consolidated Statements of Earnings for the years ended December 31, 1996, 1995 and 1994 FS-9 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1996, 1995 and 1994 FS-10 Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994 FS-11 Notes to Consolidated Financial Statements FS-12
(2) FINANCIAL STATEMENT SCHEDULES:
Schedule II - Valuation and Qualifying Accounts 8
All schedules omitted are inapplicable or the information required is included in either the consolidated financial statements or the related notes to the consolidated financial statements.
(3) EXHIBITS:
The Exhibits filed with or incorporated into this report are listed in the following Index to Exhibits.
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
3.1 Restated Certificate of Incorporation of Kinark Corporation, as amended on June 6, 1996 (incorporated by reference to Exhibit 3.1 of the Company's Pre-Effective Amendment No. 1 to Registration Statement on Form S-3, Registration No. 333-4937, filed with the Commission on June 7, 1996).
3.2 Amended and Restated Bylaws of Kinark Corporation (incorporated by reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q dated March 31, 1996).
10.1 Revolving Credit and Term Loan Agreement dated as of March 24, 1992, as amended on October 16, 1992; March 31, 1993; March 31, 1994; March 31, 1995; and April 1, 1996 by and between Bank of Oklahoma, N.A. and Kinark Corporation and subsidiaries (incorporated by reference to Exhibit 10.2 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993).
21. Subsidiaries of the Registrant.
23. Independent Auditors' Consent.
24.01 Power of attorney from Richard C. Butler.
24.02 Power of attorney from Michael T. Crimmins.
24.03 Power of attorney from Ronald J. Evans.
24.04 Power of attorney from Joseph J. Morrow.
24.05 Power of attorney from John H. Sununu.
24.06 Power of attorney from Mark E. Walker.
27 Financial Data Schedule.
(B) REPORTS ON FORM 8-K.
The Company filed a Current Report on Form 8-K dated October 28, 1996 to report, under Item 5 of such report, that the Company had reached an agreement to purchase 49 shares of Rogers common stock and to clarify certain conditions to the Company's rights offering.
SCHEDULE II
SIGNATURES
Pursuant to the requirements of Section 13 and 15(d) of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, as duly authorized.
KINARK CORPORATION (Registrant)
Date: March 31, 1997 By: /s/Paul R. Chastain Paul R. Chastain Vice President and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on March 31, 1997, by the following persons on behalf of the Registrant and in the capacities indicated.
/s/Michael T. Crimmins* /s/Ronald J. Evans* Michael T. Crimmins, Chairman Ronald J. Evans, President of the Board and Chief Executive and Director Officer (Principal Executive Officer)
/s/Paul R. Chastain /s/Richard C. Butler* Paul R. Chastain, Vice President, Richard C. Butler, Director Chief Financial Officer and Director /s/John H. Sununu* (Principal Financial and Accounting John H. Sununu, Director Officer)
/s/Joseph J. Morrow* /s/Mark E. Walker* Joseph J. Morrow, Director Mark E. Walker, Director
*Paul R. Chastain, by signing his name hereto, does hereby sign this Annual Report on Form 10-K on behalf of each of the directors and officers of the Registrant after whose typed names asterisks appear pursuant to powers of attorney duly executed by such directors and officers and filed with the Securities and Exchange Commission as exhibits to this report.
By: /s/ Paul R. Chastain Paul R. Chastain Attorney-in-fact
INDEX TO MANAGEMENT'S DISCUSSION AND ANALYSIS, CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page(s)
Management's Discussion and Analysis FS-1 to FS-6
Independent Auditors' Report FS-7
Consolidated Balance Sheets FS-8
Consolidated Statements of Earnings FS-9
Consolidated Statements of Stockholders' Equity FS-10
Consolidated Statements of Cash Flows FS-11
Notes to Consolidated Financial Statements FS-12 to FS-17
Segments of Business FS-18
Quarterly Results FS-19
Five-Year Financial Summary FS-20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS OR INFORMATION
Certain statements contained in this Management Discussion and Analysis are not based on historical facts, but are forward-looking statements that are based upon numerous assumptions about future conditions that may ultimately prove to be inaccurate. Actual events and results may materially differ from anticipated results described in such statements. The Company's ability to achieve such results is subject to certain risks and uncertainties. Such risks and uncertainties include, but are not limited to, product prices, continued availability of capital and financing, and other factors affecting the Company's business that may be beyond its control.
RESULTS OF OPERATIONS
The consolidated statements of earnings provide an overview of Kinark's operating results for 1994 through 1996. This section of Management's Discussion and Analysis summarizes the major factors which influenced operating results during the three-year period presented. Revenues and expenses associated with the Company's previously owned Kinpak packaging subsidiary, which are presented as discontinued operations, are not included in the continuing operations analyzed below (see Discontinued Operations Note to the Consolidated Financial Statements).
REVENUES 1996 1995 1994
$(000) % $(000) % $(000) %
Galvanizing $38,498 80.9% $16,984 67.3% $15,476 59.0% Chemical Storage & Distribution 9,101 19.1% 8,262 32.7% 10,747 41.0% Total $47,599 100.0% $25,246 100.0% $26,223 100.0%
1996 COMPARED WITH 1995
Sales for 1996 were a record $47,599,000, an increase of $22,353,000 or 88.5% from 1995. Approximately 90% of the sales increase was attributable to the acquisition of Rogers Galvanizing Company ("Rogers") in the first quarter of 1996, with the remainder due to increased demand experienced by the galvanizing and chemicals operations.
Excluding the impact of new sales contributed by Rogers, sales increased 8.6% at the Company's Boyles Galvanizing plants, as they benefitted from a record volume of galvanized steel structures for the second consecutive year and another year of slightly improved average selling prices. New sales from Rogers more than doubled the Company's 1996 galvanizing sales to $38,498,000, for an increase of 126.7% over sales of $16,984,000 in 1995. Measured on a pro forma basis, the combined galvanizing companies, now operating as North American Galvanizing Company ("NAGC"), experienced a same plant increase in sales in 1996 of $5,085,000 or 14.5% from 1995. The strongest sales gains were recorded for galvanizing shipments to customers serving the transportation and communications industries.
Lake River's sales of $9,101,000 increased 10.2% from 1995 on increased activity in its three main chemical service sectors. Bulk liquid storage revenues increased 10.4% from 1995, due to a 48.6% increase in throughput to volume of 41,933,000 gallons. Drum filling revenues increased 2.5% over 1995 on the strength of price increases that offset slightly lower volume. Warehousing operations, consisting of 600,000 square feet, increased revenues 13.6% as capacity utilization rose to 96% compared with 85% in 1995.
1995 COMPARED WITH 1994
Consolidated sales for 1995 decreased $977,000, or 3.7%, from 1994 due to lower sales at Lake River.
Lake River's sales of $8,262,000 were down $2,485,000, or 23.1%, from 1994 due to the loss of its largest customer for bulk liquid storage. Revenues from drumming and warehousing increased 15% over 1994, partially offsetting the decline in storage. The drumming and warehousing operations accounted for 76% of Lake River's total sales in 1995, and it is expected to maintain that relative share for the foreseeable future.
Boyles' sales increased $1,508,000, or 9.7%, in 1995 on record volume and higher pricing. Boyles galvanized a total of 70,363 tons of steel in 1995, representing a 9.5% increase in volume over the prior year. Volume increased in five of the six regions where Boyles plants are located, with the largest increase being recorded in the Texas market. The sales trend has been up at Boyles for the past two years.
COST AND EXPENSES
1996 1995 1994
% of % of % of $(000) Sales $(000) Sales $(000) Sales
Cost of sales $36,953 77.7% $20,524 81.3% $18,999 72.5% Selling, general & administrative 5,198 10.9% 3,766 14.9% 3,619 13.8% Depreciation & amortization 2,347 4.9% 1,471 5.8% 1,469 5.6% Total $44,498 93.5% $25,761 102.0% $24,087 91.9%
1996 COMPARED WITH 1995
Cost of sales for 1996 was $36,953,000, an increase of 80%, due to the increased sales volume from operations and the acquisition of Rogers. Cost of sales as a percent of total sales was 77.7% in 1996, compared to 81.3% in 1995. Gross profit margins increased primarily as a result of improvement in labor productivity and the beneficial impact of specialty market segments served by Rogers. At Lake River, cost of sales as a percent of sales were unchanged from 1995.
Selling, general and administrative (SG&A) expenses were $5,198,000 in 1996, an increase of 38% attributable to the acquisition of Rogers. Excluding Rogers, SG&A expenses decreased 11.6% to $3,331,000 compared to $3,766,000 in 1995. SG&A expenses at Lake River were 6.5% of sales compared to 7.1% in 1995. As a percent of total sales, SG&A expenses were 10.9% in 1996 compared to 14.9% and 13.8% in 1995 and 1994, respectively. Depreciation expense of $2,347,000 in 1996 increased approximately 60% compared with 1995 and 1994, due to the acquisition of Rogers.
1995 COMPARED WITH 1994
Cost of sales, as a percentage of sales, increased 8.8% in 1995 at Lake River. There has been a continuing shift in service mix to lower margin warehousing which accounted for 57% of Lake River's activity in 1995. Lake River's cost of sales were 84.3% in 1995, up from 65.6% in 1994 due to a reduction in high margin terminal throughput following the loss of its largest customer. Cost of sales at Boyles increased to 80%, up 3% from 1994 on higher direct material costs. In 1995, zinc usage per ton of production rose 3.7% with most of the increase concentrated in three plants that had a strong increase in volume. Direct labor per ton of steel galvanized decreased 1.9% in 1995, partially offsetting the higher material costs.
Selling, general and administrative expenses increased $147,000, or 4.1%, in 1995 to $3,766,000. One-time severance costs associated with closing and transferring the Boyles accounting office to the corporate headquarters, and additional legal expenses accounted for this increase. Depreciation expense was $1,471,000, essentially unchanged from 1994.
OTHER (INCOME) EXPENSE
1996 1995 1994
% of % of % of $(000) Sales $(000) Sales $(000) Sales
Interest $ 867 1.8 % $ 634 2.5% $ 502 1.9% Other ( 98) (0.2)% ---- ---- 95 0.4% Total $ 769 1.6 % $ 634 2.5% $ 597 2.3%
1996 COMPARED WITH 1995
Interest expense increased to $867,000 in 1996 from $634,000 in 1995 due to the acquisition of Rogers. Excluding the outstanding debt of Rogers when acquired and its short-term borrowings for working capital, the Company's interest expense declined 7.6% to $586,000 in 1996 due to scheduled re-payments of long-term obligations and a reduction in short-term borrowings for working capital requirements. As a percent of total sales, interest expense was 1.8% in 1996 compared to 2.5% in 1995. Other income of $98,000 in 1996 came from the sale of an undeveloped tract of land considered excess to the Company's future galvanizing operations.
1995 COMPARED WITH 1994
Interest expense increased to $634,000 in 1995, up $132,000 from 1994 due to increased borrowings primarily used in operating the discontinued Kinpak subsidiary. In 1994, other expense consisted primarily of expenses associated with an early retirement program offered to certain employees at Lake River and a provision for environmental expenses attributable to Boyles' Philadelphia plant which was sold approximately fifteen years ago. Environmental matters are discussed below.
INCOME TAXES
The Company's effective income tax rates for 1996, 1995 and 1994 were 38.3%, 38.8% and 34.3%, respectively. Income tax expense was $894,000 in 1996. The Company recorded an income tax benefit of $446,000 in 1995 as a result of incurring a loss of $1,149,000 from continuing operations. Income tax expense for 1994 was $527,000.
EARNINGS FROM CONTINUING OPERATIONS
Earnings were restored in 1996 on the strength of increased sales, improved margins, lower SG&A expenses and lower interest expense for the Company's continuing operations, and increased further by the acquisition of Rogers.
Earnings from continuing operations for 1996, after a deduction for the minority owner's interest in the net income of Rogers, were $1,274,000 compared to a loss of $703,000 in 1995. Earnings from continuing operations before minority interest for 1996 were $1,438,000. As discussed elsewhere in this annual report, the Company's acquisition of all of the common shares of Rogers occurred in a series of transactions during 1996. As a result, the Company's 1996 reported earnings from continuing operations reflect a deduction of $164,000 for the minority shareholders' share of Rogers' net income during 1996. Effective December 31, 1996, the Company had acquired 100% of Rogers common stock and future earnings will not be reduced by the prior minority owners' interest.
DISCONTINUED OPERATION
In August 1995, the Company adopted a plan to divest its Kinpak packaging subsidiary and recorded a charge to discontinued operations of $1,525,000 in the third quarter. With this charge, the Company wrote off certain inventories and prepaid expenses of $260,000 and goodwill of $550,000; and, provided $715,000 for estimated operating losses and losses on the disposal of fixed assets and other expenses associated with final disposition of the Kinpak subsidiary.
On January 5, 1996, the Company signed a letter of intent with a subsidiary of Ocean Bio-Chem, Inc., a Florida corporation for the sale of substantially all of the assets and assumption of certain liabilities of Kinpak and the parties closed the transaction on February 27, 1996. The purchase price was $1,840,000, which included the buyer's assumption of $990,000 of indebtedness under First Mortgage Industrial Revenue Bonds and the balance paid in cash at closing.
In 1995, Kinpak recorded a net loss from discontinued operations of $1,176,000, which included operating losses of $307,000 through August 1995 and a loss of $869,000 (including operating losses through February 27, 1996) on disposal of the assets. Kinpak's sales were $6,083,000 in 1995. At December 31, 1995 the Company's consolidated balance sheet reflects Net Assets of Discontinued Operations of $434,000 which were realized upon recording the sale of Kinpak and liquidation of retained assets and liabilities in 1996. The Company has no further liabilities with respect to the operations of its Kinpak subsidiary, except as guarantor of the facilities Lease Agreement with The Industrial Development Board of The City of Montgomery ("the Lease"), dated September 1, 1979, that has been assigned to Ocean Bio-Chem, and some possible environmental remediation issues for which a portion of the cash proceeds has been escrowed. Ocean Bio-Chem is required to make rent payments under the Lease, and the full amount of such payments apply to retire the revenue bond debt. At March 1, 1997, the balance remaining on the bonds was $770,000 which is payable in annual installments through September 1, 1999.
CASH FLOWS
OPERATING ACTIVITIES
Kinark generated an operating cash flow from continuing operations of $3,612,000 in 1996, for a significant improvement from the negative operating cash flow of $344,000 in 1995. Cash flows from operations increased due to stronger operations and the acquisition of Rogers. Accounts receivable and inventories of zinc used in galvanizing increased, also due to the improvement in operations in 1996 and the acquisition of Rogers. Operating cash flow from continuing operations was $4,054,000 in 1994.
INVESTING ACTIVITIES
Capital expenditures were $2,790,000 in 1996, up 164% from $1,055,000 in 1995. Approximately 75% of 1996 capital expenditures were invested in the galvanizing plants to replace material handling equipment and process tanks and to increase operating capacity. In 1996, galvanizing operations represented approximately 81% of Kinark's consolidated sales. Capital expenditures of $1,410,000 in 1994 were budgeted approximately equal between the Company's galvanizing and chemical businesses for normal replacement of operating equipment.
Kinark paid cash of $5,579,000 in connection with the acquisition of 73.1% of the common stock of Rogers Galvanizing Company in 1996. On January 3, 1997, Kinark made a final cash payment of $2,236,500 to acquire all of the remaining shares of Rogers' outstanding common stock which was effective December 31, 1996. In unrelated transactions, Kinark received net proceeds of $193,000 from the sale of an undeveloped parcel of land and $807,000 for the sale of Kinpak in 1996.
FINANCING ACTIVITIES
Total debt increased to $8,166,000 from $6,560,000 in 1995, primarily related to the existing debt of the Rogers business acquired in 1996. Kinark raised $7,296,000 (net of $580,000 of issuance costs) in new equity capital in 1996 through the issuance of 3,011,888 shares of its common stock in private placement transactions and a rights offering to its stockholders. Total debt ratio to capital (current and long-term obligations plus stockholders' equity) at the end of 1996 was 50%, compared to 44.6% in 1995. In 1996, Kinark made net payments of $1,146,000 on long-term obligations, reflecting the strength of the Company's improved operating cash flow. The Company's total debt increased $964,000 in 1995 from additional borrowings on the revolving credit facility for working capital.
Effective with the disposal of the assets of Kinpak in February 1996, the revenue bond obligation of $990,000 remaining for the years 1996 through 1999 was assigned to the buyer. The Company remains as the guarantor of the facilities lease underlying the revenue bonds, as discussed in the Discontinued Operation sections of Management's Discussion and the Notes To Consolidated Financial Statements.
LIQUIDITY AND FINANCIAL CONDITION
During 1996, bank revolving credit facilities maintained by the Company and its subsidiaries were adequate to support seasonal working capital requirements, and to provide short-term funding of certain transaction costs associated with the acquisition of Rogers. In the first quarter of 1997, the Company received a commitment from a bank to restructure and consolidate all of its credit lines and bank term loans into a new $13.2 million loan agreement. Under the agreement, a two-year revolver will be increased to $8,500,00 from the existing $6,250,000, and a five-year term loan will provide additional funds for the planned expansion of galvanizing facilities.
Stockholders' equity increased to $16,735,000, or $2.48 per share, at December 31, 1996, compared to $8,165,000 and $2.18 per share at the end of 1995, attributable to additions from net earnings and the issuance of additional common shares.
ENVIRONMENTAL MATTERS
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 1996 approximated $1,059,000 with the disposal and recycling of waste acids generated by the galvanizing operations representing the major expenditure in this area. The Company operates on-site sulfuric acid recovery systems at certain of its galvanizing plants. Recovered acid is returned to production, thereby eliminating the substantial expense associated with the alternative of waste treatment and removal to an off-site location. The recovery process generates a non-hazardous dry ferrous sulphate crystal by-product which the Company sells commercially.
The Company's other galvanizing plants use hydrochloric acid, which requires the off-site disposal of waste acids. Due to the increasing cost of waste disposal and decreasing availability of approved disposal methods, alternative waste hydrochloric acid recycling methods have been evaluated over recent years. While it appears that the technology for an economically feasible system is available, no proven system for the recycling of hydrochloric acid utilized in hot dip galvanizing is currently on the market. Hydrochloric acid recycling systems will be further evaluated as new systems become available. Future capital expenditures in this area are expected to increase, but such expenditures should significantly reduce waste acid disposal expense.
Environmentally related expenditures at Lake River represented a relatively small percentage of the Company's total cost in this area. The majority of waste disposal costs at Lake River are incurred on behalf of customers and are reimbursable. Lake River does not take title to the chemicals stored, blended, or bagged in its facilities and thus is responsible only for the proper handling of these materials while under its care, custody, and control. As described above, Kinark has escrowed proceeds from the sale of Kinpak's assets for some possible environmental remediation.
In 1995, Boyles participated in the final clean-up of a former galvanizing plant site in Philadelphia, Pennsylvania and received notification from the EPA that it had demonstrated to the satisfaction of the EPA that all requirements relating to the performance of the Response Action Plan had been completed. Clean-up of this site consisted primarily of soil removal at a cost of approximately $85,000 to Boyles.
The Company is committed to complying with all federal, state and local environmental laws and regulations and using its best management practices to anticipate and satisfy future requirements. As is typical in the galvanizing and chemicals businesses, the Company will have additional environmental compliance costs associated with past, present, and future operations. Management has committed resources to discovering and eliminating environmental issues as they arise. Because of the frequent changes in environmental technology, laws and regulations management cannot reasonably attempt to quantify the Company's potential costs in this area. However, such costs are expected to increase above their current levels as discussed above.
NEW ACCOUNTING STANDARDS
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share" and SFAS No. 129, "Disclosure of Information about Capital Structure".
SFAS No. 128 establishes standards for computing and presenting earnings per share ("EPS"). This Statement revises the standards for computing earnings per share previously found in APB Opinion No. 15, Earnings per Share, and makes them comparable to international EPS standards. SFAS No. 129 establishes standards for disclosing information about an entity's capital structure.
The Company will be required to adopt these statements effective December 31, 1997. For SFAS No. 128, earlier application is not permitted and the statement will require restatement of all prior-period EPS data presented. INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF KINARK CORPORATION:
We have audited the accompanying consolidated balance sheets of Kinark Corporation and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of earnings, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1996. Our audits also included the financial statement schedule listed in the Index at Item 14. These financial statements and the financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and the financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Kinark Corporation and subsidiaries at December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
Deloitte & Touche LLP Tulsa, Oklahoma February 14, 1997 (except as to the second paragraph of the Long-Term Debt footnote for which the date is March 11, 1997)
CONSOLIDATED BALANCE SHEETS
Kinark Corporation and Subsidiaries December 31 Thousands of dollars, except per share amounts 1996 1995
ASSETS Cash and cash equivalents $ 2,041 $ 30 Trade receivables, less allowances of $427 for 1996 and $162 for 1995 6,189 3,508 Inventories 4,138 2,615 Prepaid expenses and other assets 580 566 Net assets of discontinued operation ---- 434 TOTAL CURRENT ASSETS 12,948 7,153
PROPERTY, PLANT AND EQUIPMENT, AT COST Land 658 483 Chemical facilities and equipment 12,319 18,051 Galvanizing plants and equipment 18,175 11,730 Other 191 191 31,343 30,455 Less: Allowance for depreciation 17,038 21,448 TOTAL PROPERTY, PLANT AND EQUIPMENT, NET 14,305 9,007
DEFERRED INCOME TAXES, NET 1,773 2,070 GOODWILL 4,183 --- OTHER ASSETS 230 145
TOTAL ASSETS $ 33,439 $ 18,375
LIABILITIES AND STOCKHOLDERS' EQUITY Current Maturities of long-term debt $ 994 $ 628 Trade accounts payable and bank overdraft 2,356 1,593 Other accrued liabilities 6,182 2,057 TOTAL CURRENT LIABILITIES 9,532 4,278
LONG-TERM DEBT 7,172 5,932 COMMITMENTS AND CONTINGENCIES --- ---
STOCKHOLDERS' EQUITY Common stock - $.10 par value: authorized - 18,000,000 shares issued - 8,172,450 shares in 1996; 5,200,562 shares in 1995 817 520 Additional paid-in capital 17,366 10,531 Retained earnings 4,364 3,090 Common shares in treasury at cost: 1996 - 1,413,064; 1995 - 1,453,064 (5,812) (5,976) TOTAL STOCKHOLDERS' EQUITY 16,735 8,165
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 33,439 $ 18,375
See notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF EARNINGS
Kinark Corporation and Subsidiaries Year Ended December 31 Thousands of dollars, except per share amounts 1996 1995 1994
SALES $ 47,599 $ 25,246 $ 26,223
COSTS AND EXPENSES Cost of sales 36,953 20,524 18,999 Selling, general and administrative expenses 5,198 3,766 3,619 Depreciation and amortization 2,347 1,471 1,469 TOTAL COSTS AND EXPENSES 44,498 25,761 24,087 OPERATING EARNINGS (LOSS) 3,101 (515) 2,136
OTHER EXPENSE Interest expense, net 867 634 503 Other (income) expense, net (98) --- 95 TOTAL OTHER EXPENSE 769 634 598 EARNINGS (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND MINORITY INTEREST 2,332 (1,149) 1,538
Income tax expense (benefit) 894 (446) 527
EARNINGS (LOSS) FROM CONTINUING OPERATIONS BEFORE MINORITY INTEREST 1,438 (703) 1,011
Minority Interest 164 --- ---
EARNINGS (LOSS) FROM CONTINUING OPERATIONS 1,274 (703) 1,011
Loss from Discontinued Operation, net of Income Taxes --- (1,176) (601)
NET EARNINGS (LOSS) $ 1,274 $ (1,879) $ 410
NET EARNINGS (LOSS) PER COMMON SHARE Continuing Operations $ .21 $ (.19) $ .27 Discontinued Operation --- (.31) (.16)
NET EARNINGS (LOSS) PER COMMON SHARE $ .21 $ (.50) $ .11
WEIGHTED AVERAGE SHARES OUTSTANDING 5,924,354 3,747,134 3,751,979
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Kinark Corporation and Subsidiaries Years Ended December 31 Thousands of dollars 1996 1995 1994
OPERATIONS Net earnings (loss) $ 1,274 $ (1,879) $ 410 Loss of discontinued operation ---- 1,176 601 Depreciation and amortization 2,347 1,471 1,469 Deferred income taxes 499 (763) 412 Gain on asset sale (71) ---- ---- Changes in assets and liabilities (net of acquisition of galvanizing business): Accounts receivable (195) (286) 205 Inventories and other (121) (79) (111) Accounts payable and accrued liabilities (121) 16 1,068
Cash Provided by (Used for) 3,612 (344) 4,054 Continuing Operations Cash Provided by (Used for) (416) 433 (1,352) Discontinued Operation CASH PROVIDED BY OPERATIONS 3,196 89 2,702
INVESTING Capital expenditures (2,790) (1,055) (1,410) Proceeds from sale of land 227 ---- ---- Proceeds from sale of discontinued operation 807 ---- ---- Acquisition of galvanizing business (5,579) ---- ----
CASH PROVIDED (USED FOR) INVESTING (7,335) (1,055) (1,410)
FINANCING Proceeds from issuing common stock 7,296 ---- ---- Proceeds of long-term debt 12,173 14,462 12,969 Payment of long-term debt (13,319) (13,498) (14,415)
CASH PROVIDED BY (USED FOR) FINANCING 6,150 964 (1,446)
INCREASE (DECREASE) IN CASH AND CASH 2,011 (2) (154) EQUIVALENTS CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 30 32 186
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 2,041 $ 30 $ 32
SUPPLEMENTAL DISCLOSURE Interest paid $ 867 $ 634 $ 503 Income taxes paid $ 502 $ ---- $ ---- Fully depreciated assets written off $ 6,395 $ ---- $ ----
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1996, 1995, and 1994
DESCRIPTION OF BUSINESS
Kinark Corporation (the Company) is engaged in galvanizing and chemical storage and distribution. In the galvanizing segment, North American Galvanizing Company provides metals corrosion protection with eleven regionally located galvanizing plants. Kinark operates chemical storage facilities through Lake River Corporation in Chicago. The Company grants credit to its customers on terms standard for these industries, typically net 30 to 45 days. The Company's largest customer accounted for 12.1%, 13.2% and 15.4% of consolidated sales for the years 1996, 1995 and 1994, respectively.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries North American Galvanizing Company (formerly Rogers Galvanizing Company), Boyles Galvanizing Company, Lake River Corporation and Kinpak, Inc., (a discontinued subsidiary). All intercompany transactions are eliminated in consolidation.
ESTIMATES. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the balance sheet dates and the reported amounts of revenues and expenses for each of the years. Actual results will be determined based on the outcome of future events and could differ from the estimates.
CASH AND CASH EQUIVALENTS. Cash and cash equivalents include interest bearing deposits with original maturities of three months or less.
INVENTORIES. Inventories consist primarily of raw zinc "pigs," molten zinc in galvanizing kettles and other chemicals and materials used in the galvanizing process. All inventories are stated at the lower of cost or market with zinc valued on a last-in-first-out (LIFO) basis. Other inventories are valued primarily on an average cost basis. Inventories consist of the following:
(Dollars in Thousands) 1996 1995
Zinc - LIFO $2,786 $2,374 Other Raw Materials 1,352 241 $4,138 $2,615
The approximate replacement cost of raw material valued on a LIFO basis was $2,984,000 and $2,085,000 at December 31, 1996 and 1995, respectively.
GOODWILL. Goodwill is amortized over 25 years by the straight line method. On a periodic basis, the Company estimates the future undiscounted cash flows of the operations to which goodwill relates to ensure that the carrying value of goodwill has not been impaired.
DEPRECIATION AND AMORTIZATION. Plant and equipment, including assets under capital leases, are depreciated on the straight-line basis over their estimated useful lives, generally at rates of 2% to 6% for buildings and 10% to 20% for equipment, furnishings, and fixtures.
LONG-LIVED ASSETS. In March 1995, Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," was issued. SFAS No. 121 requires that long-lived assets and certain identifiable intangibles to be held and used or disposed of including related goodwill, if any, be reviewed for impairment whenever events or change in circumstances indicate that the carrying amount of an asset may not be recoverable. Effective January 1, 1996 the Company adopted this statement and determined that no impairment loss need be recognized.
SELF-INSURANCE. The Company is self-insured for workers' compensation and certain health care claims for its active employees. The Company carries excess insurance providing statutory workers' compensation coverage for claims exceeding $125,000 per occurrence, subject to an aggregate limit on losses. The workers' compensation policy contains a variable dividend plan that could result in decreased premium costs if claims are contained within targeted limits. The reserves for workers' compensation benefits and health care claims represent estimates for reported claims and for claims incurred but not reported. Such estimates are generally based on actuarially determined estimates of the expected values; however, the actual results may vary from these values since the evaluation of losses is inherently subjective and susceptible to significant changing factors.
EARNINGS (LOSS) PER COMMON SHARE. Earnings (loss) per common share is calculated by dividing the weighted average number of shares outstanding during the applicable periods including the effect of stock options, when applicable using the treasury stock method.
INCOME TAXES. The Company calculates income taxes according to SFAS No. 109, "Accounting for Income Taxes." Net deferred income tax assets on the consolidated balance sheet reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes and the benefit of net operating loss and other tax credit carryforwards.
LONG-TERM DEBT
December 31 (Dollars in Thousands) 1996 1995
Revolving lines of credit $ 3,807 $ 2,893 Term loans 3,151 3,297 3.5% note due 1997 23 ---- 8.0% note due 1998 42 ---- 10.0% note due 2000 452 ---- 6.8% note due 2015 30 ---- Capital leases 661 370 8,166 6,560 Less current portion 994 628 $ 7,172 $ 5,932
LONG-TERM DEBT. During 1996 the Company and its subsidiaries operated under bank credit agreements which provided revolving lines of credit amounting to $6,250,000 and term loans, all of which expire in April and October 1997. Amounts borrowed on the revolvers and term loans bore interest ranging from 1/2% to 1% over prime during 1996 and 1% over prime during 1995, resulting in effective rates ranging from 8 3/4% to 9 1/4% at December 31, 1996 and 9 1/4% at December 31, 1995. The revolvers can be paid down without penalty, or additional funds can be borrowed up to the revolver limits. The term loan payments are based on various amortization schedules up to ten years with equal monthly payments of principal and interest. Substantially all of the Company's accounts receivable, as well as the inventories and fixed assets of North American Galvanizing Company were pledged as collateral under the agreements. The bank credit agreements placed certain restrictions on capital expenditures, amount of debt, and pledging of assets. In addition, the agreement required the Company to maintain a specified minimum net worth. The Company was in compliance with all such provisions of the credit agreements at December 31, 1996.
On March 11, 1997, the Company received a firm commitment from a bank to consolidate its current multiple bank lines of credit and term loans into a new two year agreement. As set forth in the bank's commitment letter dated March 11, 1997, the new agreement will provide a $8,500,000 revolving line of credit, a $1,250,000 advancing term loan for expansion of galvanizing plants, and a $3,500,000 term loan. Substantially all of the Company's accounts receivable, inventories and fixed assets will be pledged as collateral under the agreement, and the agreement will be secured by a guaranty from each of the Company's operating subsidiary companies. Amounts borrowed under the agreement will 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 will be based on a five year amortization schedule with equal monthly payments of principal and interest. The advancing term loan, once funded, will require equal monthly payments of principal and interest based on a seven year amortization schedule. The revolver may be paid down without penalty, or additional funds may be borrowed up to the revolver limits. The term loan and the advancing term loan may be pre-paid without penalty. The agreement will provide for capital expenditures related to a minimum coverage ratio of defined earnings to debt service plus capital expenditures, limit the pledging of assets for new debt, and require the Company to maintain a minimum net worth.
Aggregate maturities of long-term debt, exclusive of capital lease obligations for each of the five years following 1996 are $617,000, $620,000, $5,901,000, $340,000 and $1 after giving effect to the March 11, 1997 bank commitment for a new credit agreement.
CAPITAL LEASES. Capital leases with an aggregate maturity of $661,000 consist of computers, a manufacturing building and material handling equipment used in the subsidiary operations.
COMMITMENTS
The Company leases land, office, warehouse facilities, a manufacturing building and certain equipment under noncancellable operating leases. The leases generally provide for renewal options and periodic rate increases based on specified economic indicators and are typically renewed in the normal course of business. Rent expense was $1,609,000 in 1996, $1,288,000 in 1995, and $1,186,000 in 1994.
Minimum annual rental commitments at December 31, 1996 are as follows:
(Dollars in Thousands) Capital Leases Operating Leases 1997 $ 271 $ 1,285 1998 258 789 1999 189 550 2000 33 21 2001 28 20 $ 779 $ 2,665
Less: Portion representing interest 118 Net capitalized lease obligation $ 661
CONTINGENCIES
As discussed in the Discontinued Operation note, on February 27, 1996, the Company sold substantially all of the assets of its Kinpak subsidiary and the buyer assumed the capital lease for the plant facility which was financed by a $3,000,000 industrial revenue bond issue. Lease payments equal bond principal and interest at a fixed rate of interest which averages 6 7/8% annually. The Company remains contingently liable on the capital lease which requires principal payments aggregating $770,000 through 1999.
The Company will continue to have additional environmental compliance costs associated with operations in the galvanizing and chemicals businesses. The Company is committed to complying with the environmental legislation and regulations affecting its operations. Due to the uncertainties associated with future environmental technologies, regulatory interpretations, and prospective legislative activity management cannot reasonably attempt to quantify potential costs in this area.
The Company expenses or capitalizes, where appropriate, environmental expenditures that relate to current operations as they are incurred. Such expenditures are expensed when they are attributable to past operations and are not expected to contribute to current or future revenue generation. The Company records liabilities when remediation or other environmental assessment or clean-up efforts are probable and the cost can be reasonably estimated.
Various litigation arising in the ordinary course of business is pending against the Company.
Management believes that resolution of the Company's litigation and environmental matters should not materially affect the Company's consolidated financial position. Should future developments cause the Company to record an additional liability for environmental evaluation, clean up or litigation, the recording of such a liability could have a material impact on the results of operations for the period involved.
INCOME TAXES
The provision (benefit) for income taxes consists of the following:
December 31, (Dollars in Thousands) 1996 1995 1994
Current $ 127 $ (125) $ 304 Deferred 767 (321) 223 Income tax expense (benefit) $ 894 $ (446) $ 527
The reconciliation of income taxes at the federal statutory rate to the Company's effective tax rate is as follows:
Taxes at statutory rate $ 793 $ (391) $ 523 State tax net of federal benefit 72 (15) (8) Other 29 (40) 12 Taxes at effective tax rate $ 894 $ (446) $ 527
At December 31, 1996, the Company has approximately $3,276,000 of net operating loss carryforwards available to offset future taxable income. Investment tax credits of $118,000 and alternative minimum tax credit carryforwards of $167,000 are also available as carryforwards to future years. The net operating loss carryforwards expire in varying amounts during the years 2002 through 2010 and the investment tax credits expire in 1999.
The tax effects of significant items comprising the Company's net deferred tax asset consist of the following:
December 31, (Dollars in Thousands) 1996 1995 Deferred tax liabilities: Differences between book and tax basis of property $ 324 $ 304 Other state income tax -- 7 Deferred tax liability 324 311
Deferred tax assets: Alternative Minimum Tax Credit 167 65 Reserves not currently deductible 579 232 Operating loss carryforwards 1,233 1,856 Tax credit carryforwards 118 157 Other -- 71 Deferred tax asset 2,097 2,381 Net deferred tax asset $ 1,773 $ 2,070
Management believes that future taxable income of the Company will more likely than not be sufficient to realize the net deferred tax asset.
STOCK OPTION PLANS
At December 31, 1996 and 1995, 1,096,000 and 335,000 shares, respectively, of the Company's common stock were reserved for issuance under the terms of the stock option plans for key employees and directors. The plans generally provide options to purchase Company stock at fair market value as of the date the option is granted. Options generally become exercisable in installments specified by the applicable plan and must be exercised within ten years of the grant date.
Number Under Option of Shares Option Price
Balance at January 1, 1994 72,250 $3.19 to $4.75 Granted 34,500 $4.50 Cancelled (1,500) $4.50 Balance at December 31, 1994 105,250 $3.19 to $4.75 Granted 32,613 $3.00 to $3.88 Expired (5,500) $4.50 Cancelled (31,113) $3.06 to $4.50 Balance at December 31, 1995 101,250 $3.00 to $4.75 Granted 370,000 $2.50 to $3.50 Expired (25,000) $3.1875 Cancelled (13,250) $3.25 to $4.625 Balance at December 31, 1996 433,000 $2.50 to $4.75
Weighted average exercise price $3.09
At December 31, 1996, 1995, and 1994, options for 109,500, 76,125, and 68,000 shares, respectively, were exercisable.
The estimated weighted average fair value of options granted during 1996 and 1995 was $3.70 and $3.38 per share. The Company accounts for its stock option plans in accordance with Accounting Principles Board Opinion No. 25, under which no compensation cost has been recognized for stock option awards. Had compensation cost for the Company's stock option plans been determined according to the methodology of SFAS No. 123, the Company's pro forma net earnings (loss) and earnings (loss) per share for 1996 would have been $1,086,824 and $.18, respectively, and for 1995 would have been $(1,892,000) and $(.50), respectively. The fair value of operations granted under the Company's stock option plans was estimated using the Black-Scholes option- pricing model with the following weighted-average assumptions used: no dividend yield, expected volatility of 53% and 48%, risk free interest rate of 6.0% and 6.7% in 1996 and 1995, respectively; and expected lives of 5 years. The effects of applying SFAS No. 123 in this pro forma disclosure are not indicative of future amounts.
DISCONTINUED OPERATION
During August 1995, the Company finalized a formal plan to discontinue the operations of its Kinpak subsidiary, comprising the Company's chemical packaging business. Substantially all of the assets of Kinpak were subsequently sold on February 27, 1996 for $1,840,000 consisting of $850,000 cash and the assumption of the capital lease on its plant facilities which was financed by a $3,000,000 industrial revenue bond issue. In 1995, the Company recorded a $1,264,000 loss on disposal (before income taxes of $395,000) including $460,000 of operating losses incurred during the third and fourth quarter of 1995 and the period through February 27, 1996, the closing date, and a $804,000 loss on the sale of assets. Revenues from Kinpak were $6,346,236 (including revenues of $263,110 for the period through the closing date) in 1995 and, $8,559,000 in 1994. The income tax expense (benefit) on the operating results of Kinpak was ($176,000), and ($346,000), for the years ended December 31, 1995 and 1994, respectively.
EMPLOYEE BENEFIT PLANS
Substantially all of the Company's employees are covered by a thrift plan, except for union employees of Lake River Corporation who are covered by a defined benefit pension plan. Company contributions to these benefit plans are as follows:
Year Ended December 31 (Dollars in Thousands) 1996 1995 1994
Pension Plan $ 81 $ 42 $ 53 Thrift Plan 196 204 260 $ 277 $ 246 $ 313
Pension plan assets consist of group annuity insurance contracts. Thrift plan assets consist of short-term investments, intermediate bonds, and listed stock. Pension costs are funded in accordance with the Employee Retirement Income Security Act of 1974 (ERISA). The funded status of the Company's defined benefit pension plan is as follows:
December 31 (Dollars in Thousands) 1996 1995 1994 Accumulated benefit obligation Vested $ 1,189 $ 1,023 $ 916 Nonvested 9 25 5 Total $ 1,198 $ 1,048 $ 921
Projected benefit obligation $ 1,359 $ 1,087 $ 962 Less fair value of plan assets (648) (572) (551) Unfunded projected benefit obligation 711 515 411 Unrecognized net transition obligation (502) (347) (256)
Pension liability recognized in the consolidated balance sheet $ 209 $ 168 $ 155
Applicable rates used in determining the actuarial value of the projected benefit are as follows:
1996 1995 1994
Discount rate* 7.5% 7.5% 8.0% Rate of increase in future compensation levels* 6.0% 6.0% 6.0% Expected long-term rate of return on plan assets 7.5% 7.5% 8.5%
* Used in determining the actuarial value of the projected benefit.
The periodic net pension cost of the Company's defined benefit pension plan included the following:
Year Ended December 31 (Dollars in Thousands) 1996 1995 1994
Service cost benefits earned during the period $ 33 $ 27 $ 27 Interest cost on projected benefit obligations 80 70 84 Return on assets (43) (41) (53) Amortization of unrecognized net transition obligations 8 8 8 Amortization of prior service cost 18 7 7 Amortization of loss 10 3 9 Net periodic pension cost $ 106 $ 74 $ 83
STOCKHOLDERS' EQUITY
On June 15, 1996, the Company's stockholders approved an amendment to the Restated Certificate of Incorporation that increased the authorized common shares to 18,000,000 shares.
In January 1996, the Company sold approximately 2.28 million shares of its common stock in a private placement at a price of $2.50 per share (the "Private Placement"). In October 1996, the Company sold approximately 693,000 shares of its common stock in a rights offering at a price of $3.00 per share (the "Rights Offering"). Proceeds from these sales of stock (net of issuance costs) were used to fund the acquisition of Rogers (see Acquisition of Rogers Galvanizing Company).
ACQUISITION OF ROGERS GALVANIZING COMPANY
On February 5, 1996, the Company acquired 51.2% of the outstanding common stock of Rogers, and assumed control of the Board of Directors. Rogers was a galvanizing company located in Oklahoma. The purchase price of the common stock was $4.3 million in cash paid to two trusts (the "Trusts") that held the common stock. Under the purchase agreement with the Trusts, the Company agreed to offer to purchase the remaining outstanding shares of common stock of Rogers from its minority stockholders for cash at a price per share equivalent to that paid to the Trusts. In separate transactions completed in February, March and November 1996, the Company acquired an additional 21.9% of the outstanding common stock of Rogers. The purchase price of this common stock was approximately $1.8 million in cash.
On December 19, 1996, the Company merged Rogers with and into NAGC (the "Merger") under the terms of that certain Agreement and Plan of Merger dated November 27, 1996, by and between NAGC and Rogers (the "Merger Agreement"). Under the terms of the Merger Agreement, the minority stockholders received cash in the approximate amount of $2.2 million for the remaining 26.9% of the outstanding common stock of Rogers. By virtue of the Merger, the Company became the sole stockholder of NAGC, the successor-by-merger to Rogers.
The acquisition of Rogers was accounted for using the purchase method of accounting, and the purchase price was allocated to Rogers' assets and liabilities based upon estimates of their fair value. Goodwill recorded in the acquisition was $4.3 million. Operating results of Rogers are included in the consolidated financial statements from the date of acquisition.
The following unaudited pro forma results of operations assume the acquisition of 100% of Rogers common stock occurred as of January 1, 1995. Weighted average common shares used to compute net earnings (loss) per share include the approximate 3.0 million shares issued in the Private Placement and Rights Offering.
December 31 (Dollars in Thousands) 1996 1995
Sales $ 48,855 $ 42,860 Earnings from continuing operations $ 1,483 $ 117 Loss from discontinued operation, net of taxes $ ---- $ (1,176) Net Earnings $ 1,483 $ (1,059) Net Earnings per common share $ .25 $ (.16)
The pro forma results include the operating results of Rogers for its fiscal years ended September 30. The pro forma amounts include an adjustment to reflect the amortization of the goodwill recorded in the Rogers acquisition using a straight-line method over 25 years.
The pro forma financial information is not necessarily indicative of the operating results that would have occurred had the Rogers acquisition been consummated as of January 1, 1995, nor are they necessarily indicative of future operating results.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of financial instruments included in current assets and liabilities approximates fair value. The fair value of the Company's long-term debt is estimated to approximate carrying value based on the borrowing rates currently available to the Company for bank loans with similar terms and average maturities.
SUPPLEMENTAL CASH FLOW INFORMATION
ACQUISITION OF GALVANIZING BUSINESS
Fair Value: Assets acquired, not including cash $ 9,620 Liabilities assumed (5,591) Goodwill 4,293 Purchase price 8,322 Acquisition costs paid in: 1995 $ 507 1997 $ 2,236 (2,743) Net cash paid for acquisition in 1996 $ 5,579 SEGMENTS OF BUSINESS
Year Ended December 31 (Dollars in Thousands) 1996 1995 1994 SALES Galvanizing $ 38,498 $ 16,984 $ 15,476 Chemical storage and distribution 9,101 8,262 10,747 47,599 25,246 26,223 OPERATING EARNINGS Galvanizing 4,738 1,414 1,305 Chemical storage and distribution 257 174 2,363 4,995 1,588 3,668
Interest expense 867 634 503 Other (income) expense (98) ---- 95 Corporate headquarters expense 1,894 2,103 1,532 2,332 (1,149) 1,538 INCOME TAX EXPENSE (BENEFIT) 894 (446) 527
EARNINGS (LOSS) FROM CONTINUING OPERATIONS BEFORE MINORITY INTEREST $ 1,438 $ (703) $ 1,011
Year Ended December 31 (Dollars in Thousands) 1996 1995 1994
IDENTIFIABLE ASSETS Galvanizing $ 25,636 $ 11,790 $ 12,079 Chemical storage 3,597 3,555 3,604 Chemical packaging ---- ---- 3,681 Net assets of discontinued operations --- 434 ---- General corporate 4,206 2,596 1,590 $ 33,439 $ 18,375 $ 20,954
CAPITAL EXPENDITURES Galvanizing $ 2,118 $ 544 $ 678 Chemical storage 662 461 712 General corporate 10 50 20 $ 2,790 $ 1,055 $ 1,410
DEPRECIATION AND AMORTIZATION EXPENSE Galvanizing $ 1,718 $ 879 $ 866 Chemical storage 583 558 573 General corporate 46 34 30 $ 2,347 $ 1,471 $ 1,469
QUARTERLY RESULTS (UNAUDITED)
Quarterly Results of Operations for the Years Ended December 31, 1996 and 1995 Were:
SELECTED FINANCIAL DATA
The following is a summary of selected financial data of the Company (dollars in thousands, except for per share data):
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION PAGE
3.1 Restated Certificate of Incorporation of Kinark Corporation, as amended on June 6, 1996 (incorporated by reference to Exhibit 3.1 of the Company's Pre-Effective Amendment No. 1 to Registration Statement on Form S-3, Registration No. 333-4937, filed with the Commission on June 7, 1996). *
3.2 Amended and Restated Bylaws of Kinark Corporation (incorporated by reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q dated March 31, 1996). *
10.1 Revolving Credit and Term Loan Agreement dated as of March 24, 1992, as amended on October 16, 1992; March 31, 1993; March 31, 1994; March 31, 1995; and April 1, 1996 by and between Bank of Oklahoma, N.A. and Kinark Corporation and subsidiaries (incorporated by reference to Exhibit 10.2 to the Company's Annual Report on Form 10-K for the year ended December 31, 1993). *
21. Subsidiaries of the Registrant.
23. Independent Auditors' Consent.
24.01 Power of attorney from Richard C. Butler.
24.02 Power of attorney from Michael T. Crimmins.
24.03 Power of attorney from Ronald J. Evans.
24.04 Power of attorney from Joseph J. Morrow.
24.05 Power of attorney from John H. Sununu.
24.06 Power of attorney from Mark E. Walker.
27 Financial Data Schedule.
* Incorporated by reference.