-----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, E14Z1Ah8Z+AwILGRrYkbyHxka77GPXNbL5k7Xm/C7sdcmmGmqWyI+JAHfIA2K8B6 HfjljKbNDF96pGCo6tj6/w== 0000055805-99-000003.txt : 19990402 0000055805-99-000003.hdr.sgml : 19990402 ACCESSION NUMBER: 0000055805-99-000003 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 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-K405 SEC ACT: SEC FILE NUMBER: 001-03920 FILM NUMBER: 99583052 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-K405 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (Mark One) [ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED ] FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 1-3920 KINARK CORPORATION (Exact name of registrant as specified in its charter) DELAWARE (State or other jurisdiction of incorporation or organization) 71-0268502 (I.R.S. Employer Identification No.) 2250 EAST 73RD STREET, TULSA, OKLAHOMA 74136-6832 (Address of principal executive offices)(Zip Code) Registrant's telephone number, including area code (918) 494-0964 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED ------------------- ----------------------------------------- COMMON STOCK, $.10 PAR VALUE AMERICAN STOCK EXCHANGE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K. [ X ] The aggregate market value of Common Stock held by non-affiliates on March 15, 1999 was approximately $8.1 million. As of March 15, 1999, there were 6,746,215 shares of Kinark Corporation Common Stock $.10 par value outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's definitive proxy statement to be filed not later than 120 days after the end of the fiscal year covered by this report are incorporated by reference in Part III. KINARK CORPORATION Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Fiscal Year Ended December 31, 1998 TABLE OF CONTENTS Page ---- FORWARD LOOKING STATEMENTS OR INFORMATION . . . . . . . . . . . 3 PART I Item 1. Business . . . . . . . . . . . . . . . . . . . . . . 4 Item 2. Properties . . . . . . . . . . . . . . . . . . . . . 6 Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . 6 Item 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . 6 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters . . . . . . . . . . 7 Item 6. Selected Financial Data. . . . . . . . . . . . . . . 7 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . 7 Item 7A. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . 7 Item 8. Financial Statements and Supplementary Data . . . . 7 Item 9. Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . . . . . 8 PART III Item 10. Directors and Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . . 9 Item 11. Executive Compensation . . . . . . . . . . . . . . . 10 Item 12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . . . 10 Item 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . 10 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K . . . . . . . . . . . . . . 11 FORWARD LOOKING STATEMENTS OR INFORMATION This Annual Report on Form 10-K contains forward looking statements. Such statements are typically punctuated by words or phrases such as "anticipates," "estimate," "should," "may," "management believes," and words or phrases of similar import. Such statements are subject to certain risks, uncertainties or assumptions. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual events and results may materially differ from results anticipated, estimated or projected in such statements. Factors that could cause or contribute to such differences could include, but are not limited to, changes in demand, prices, and the raw materials cost of steel and zinc; galvanizing segment; changes in the economic conditions of the various markets the Company serves, year 2000 issues, as well as the other risks detailed herein and in the Company's reports filed with the Securities and Exchange Commission. PART I ITEM 1. BUSINESS Kinark Corporation is a diversified company conducting business in Galvanizing and Chemical Storage and Distribution which are further discussed below. As used in this report, the terms "Kinark" and "Company" mean Kinark Corporation (the Registrant) and its operating subsidiaries unless the context requires otherwise. Kinark was incorporated under the laws of the State of Delaware in 1955. The current operating subsidiaries consist of Lake River Corporation ("Lake River"), acquired in 1968, North American Warehousing Company ("NAW"), formed in 1997, and North American Galvanizing Company ("NAG"), formed in 1996. NAG merged with Rogers Galvanizing Company ("Rogers") in 1996 and Boyles Galvanizing Company ("Boyles") in 1997, with NAG as the survivor company. Rogers was acquired by the Company during 1996 and Boyles was acquired in 1969. Financial information for each 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 NAG subsidiary. NAG is principally engaged in hot dip galvanizing of metal products. NAG galvanizes iron and steel products by immersing them in molten zinc. This process produces an alloyed metal surface which can endure for up to 50 years with no oxidation or corrosion from exposure to the elements. The galvanizing process provides effective corrosion protection of fabricated steel which is used in numerous markets such as petrochemical, highway and transportation, energy, utilities, communications, irrigation, pulp and paper, waste water treatment, food processing, recreation and the manufacture of original equipment. NAG galvanizes products for over 2,000 such customers nationwide. Based on the number of its operating plants, NAG is one of the largest independent hot dip galvanizing companies in the United States. NAG operates eleven galvanizing plants in six states. These strategically located plants enable NAG to compete effectively by providing galvanized metal products to manufacturers serving a broad range of basic industries throughout the mid and south-central United States, and beyond. Its galvanizing plants are located in Tulsa, Oklahoma; Kansas City, Missouri; St. Louis, Missouri; Nashville, Tennessee; Louisville, Kentucky; Denver, Colorado; Hurst, Texas; and Houston, Texas. Zinc, the primary raw material in the galvanizing process, is a widely available commodity in the open market. The London Metal Exchange price of zinc for three month delivery was $.50 per pound at the beginning of 1998, the high for the year, and closed the year at $.42 per pound. To reduce the impact of zinc price fluctuations, the Company periodically utilizes forward purchase contracts up to one year. NAG has a broad customer base with its five largest customers, on a combined basis, accounting for approximately 27% of the Company's consolidated sales in 1998. The backlog of orders at NAG is generally nominal due to the short time requirement involved in the galvanizing process. Inventory and working capital requirements increased in 1998 commensurate with the growth in sales. The galvanizing business is highly competitive. NAG competes with other independent galvanizing companies, captive galvanizing facilities operated by manufacturers, and alternative forms of corrosion protection such as paint. Competition is driven primarily by price, turn-around service time, and the quality of the finished galvanized product. The strategic location of NAG's plants and the consistent quality of its service has enabled NAG to compete on a favorable basis. In the second quarter of 1998, NAG discontinued galvanizing services to one of its largest customers which accounted for approximately 7% of Kinark's consolidated sales and 8% of NAG's sales in both 1998 and 1997. 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. During the second quarter of 1998, NAG signed a new 2-year labor agreement with the United Steel Workers covering approximately 110 production workers at its Tulsa galvanizing plants. NAG employed 395 persons at December 31, 1998. CHEMICAL STORAGE AND WAREHOUSING The Company conducts its chemical storage and public warehousing operations through its Lake River and NAW subsidiaries. During 1997, the Company formed NAW as a separate subsidiary to operate the public warehousing business previously conducted by Lake River. Lake River, located in Chicago, is a bulk liquid terminal operation with 177 tanks providing 21 million gallons of on-site bulk liquid storage capacity; another 58 tanks with an aggregate storage capacity of 23 million gallons are considered in a decommissioned status due to low demand for large capacity tanks. During 1998, Lake River employees handled 22 barges, 851 rail cars, and 8,033 transport trucks to service approximately 37 million gallons of product throughput for its customers. Throughput volume decreased 28% from 1997. Lake River also operates two bag filling lines used for bulk chemical bagging and three drum filling lines which handle flammables, caustics, food grade products, and miscellaneous specialty chemicals. Bulk liquid storage facilities are leased to customers for various terms generally ranging from six months to one year. These contracts are typically renewed or replaced with other customers upon expiration. Lake River's facilities provide integrated storage, formulating, packaging, and distribution services. Most competitors do not offer this breadth of services although numerous companies compete aggressively in one or more of these areas. Lake River's service-based bulk liquid storage business does not require it to take title to any of the customer's products that it handles. Steel drums and bag containers used in Lake River's production operations are available in adequate quantities from a number of regional suppliers. Location of facilities, quality of service, and price are important factors enabling Lake River to compete effectively. Lake River employed 50 persons at December 31, 1998. During the first quarter of 1998, the union members at Lake River voted to accept the terms of a newly negotiated 3-year labor agreement with the Teamsters. Revenue from bulk liquid storage customers is derived from fixed storage rentals and from throughput handling fees. Existing tank capacity is adequate to support anticipated business growth from new rentals and/or increased product throughput. The Company will consider alternatives to increase the capacity of its drumming and bagging operations should future growth warrant expansion in these areas. NAW, located in Chicago, provides 201,000 square feet of public warehousing space to facilitate the distribution of customers' products in the Chicago-Midwest region. NAW handles dry and liquid general merchandise and chemicals and its services include container loading for export shipment. During the third quarter of 1998, leases for 209,000 square feet of warehouse space expired and the space was not replaced. The reduction in storage facilities coincided with the Company's decision not to geographically expand, and the resultant expiration of a contract with a major customer that relocated its warehousing needs outside of NAW's regional service area. In 1998, this customer accounted for 34% of NAW's total sales and 2.6% of the Company's consolidated sales. Excluding this customer, NAW's 5 largest customers accounted for 43% of its 1998 sales. At the end of 1998, NAW operated with 21 persons. ITEM 2. PROPERTIES NAG operates eleven hot dip galvanizing plants located in Oklahoma, Missouri, Texas, Colorado, Tennessee and Kentucky. Three of the plants are leased: One of these plants is leased under terms which gives NAG the option to extend the lease for up to 16 years, or to acquire that plant in 1999. Two plants are leased under terms with options to extend the lease to 2015 and 2017, respectively. The galvanizing plants average 20,000 square feet in size and operate zinc kettles ranging in length from 33 to 55 feet. Lake River has operating facilities located on approximately 50 acres located on the Chicago Ship Canal in Cook County, Illinois, which are leased as five parcels from the Metropolitan Water Reclamation District of Greater Chicago ("MWRD"), a municipal corporation. These multiple land leases have terms ranging from 35-75 years, with the earliest expiring in 1999 and the latest expiring in 2045. Lake River and MWRD have agreed to renegotiate certain of these land leases during 1999. Lake River will not renew the lease on one of the five parcels that is excess of its current and foreseeable needs, and is negotiating to convert one parcel into an easement. Under procedures required by MWRD, the renegotiation process will be opened to competitive bid. While it cannot be known with certainty, Lake River believes that it is likely to be the successful bidder for all of the parcels required for the continuing conduct of its terminal storage business. The operating facilities owned by Lake River include an office and quality control laboratory of brick masonry construction containing an area of approximately 5,100 square feet, 235 specialized tanks with a total capacity of approximately 44 million gallons of liquid chemicals and 190,000 square feet of on-site warehouse space. NAW leases 201,000 square feet of public warehousing space located in southwest Chicago. In the first quarter of 1999, NAW renegotiated the existing warehouse lease to extend through June, 2001. The lease provides an option and right of first refusal for NAW to purchase the warehouse facility at a predetermined price at any time during the current term of the lease. The headquarters offices of Kinark and NAG are located in Tulsa, Oklahoma, in approximately 5,700 square feet of office space leased through June, 2002. 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. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of stockholders during the fourth quarter of 1998. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS STOCK INFORMATION The principal trading market for the common stock of Kinark Corporation is the American Stock Exchange. The Company's common stock trades under the symbol "KIN". The Company has continued a long-term policy of not paying dividends in order to reinvest earnings to support and expand its business operations. The board of directors may review the dividend policy in the future, recognizing that dividends may be a desirable form of return on the investment made by many of its stockholders. In addition, the payment and amount of future dividends, if any, may be limited by the Company's credit agreement. Stockholders of record at March 15, 1999 numbered approximately 2,400. QUARTERLY STOCK PRICES - ----------------------------------------------------------------- FIRST SECOND THIRD FOURTH - ------------------------------------------------------------------ 1998-High $ 3 1/8 $ 3 3/4 $ 3 5/16 $ 3 1/8 Low 2 5/8 2 11/16 2 11/16 2 1/8 1997-High 3 15/16 3 3/4 3 11/16 3 1/2 Low 3 1/8 3 1/16 3 2 3/4 ITEM 6. SELECTED FINANCIAL DATA The selected financial data for years 1994 through 1998 are presented on page FS-24 of this Annual Report on Form 10-K. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The index to Management's Discussion and Analysis of Financial Condition, Results of Operations, Financial Statements and Supplementary Data is presented on page 15 of this Annual Report on Form 10-K. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Management's discussion of quantitative and qualitative disclosures about market risk is presented on page FS-7. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The index to Management's Discussion and Analysis of Financial Condition and Results of Operations, Financial Statements and Supplementary Data is presented on page 15 of this Annual Report on Form 10-K. ITEM 9. DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING and FINANCIAL DISCLOSURE There have been no disagreements with the Company's independent accountants on any matter of accounting principles or practices, financial statement disclosure, or auditing scope. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT DIRECTORS The information required by this item with respect to the Directors of the Company appears in the Proxy Statement for the Company's 1999 Annual Meeting 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 59 Chairman of the Board since May 1995 and Chief Executive Officer of the Company since February 1996. From 1989-1995, Vice President and General Counsel of Northbridge Holdings, Inc. and Deltech Corporation. Vice President and General Counsel from 1988 until 1989 of the Advanced Technology Group of Hoechst Celanese Corporation. From 1976 until 1987, Assistant Secretary and Associate General Counsel of American Hoechst Corporation. Director of Kinark Corporation since 1993. RONALD J. EVANS 49 President of the Company since February 1996. From May 1995 through January 1996, private investor. From 1989-1995, Vice President- General Manager of Deltech Corporation. Mr. Evans' previous experience includes 13 years with Hoechst Celanese Corporation. Director of Kinark Corporation since 1995. PAUL R. CHASTAIN 64 Vice President and Chief Financial Officer since February 1996. From July 1993 through January 1996, President and Chief Executive Officer of the Company. From June 1991- July 1993, Chairman and Chief Executive Officer. Co-Chairman and Co-Chief Executive Officer of the Company from June 1990-June 1991. From 1976, Executive Vice President and Treasurer. From 1973 through 1976, Vice President of Finance and Secretary of the Company. Mr. Chastain's previous experience includes six years with Allis-Chalmers and nine years with Litton Industries. Director of Kinark Corporation since 1975. RICHARD C. BUTLER 89 Director of Kinark Corporation since 1974. Former Chairman of the Board of Peoples Savings & Loan Association in Little Rock, Arkansas. From 1963 until 1980, Chairman of the Board and President of Commercial National Bank in Little Rock. Prior to 1963, Partner in the Little Rock law firm of House, Holmes, Butler and Jewell. Served on the Board of Directors of Coca-Cola Bottling Co. of Arkansas, Advisory Board Member of Arkansas Power & Light Co. and past President of First Arkansas Development Finance Corporation. JOSEPH J. MORROW 59 Director of Kinark Corporation since 1996. Chief Executive Officer of Morrow & Co., Inc. since 1972. Chief Executive Officer of Proxy Services Corporation from 1972 to 1992. Chairman of Proxy Services Corporation from 1992 to present. Currently a Director of U.S. Agents Holding Corp. JOHN H. SUNUNU 59 Director of Kinark Corporation since 1996. President of JHS Associates, Ltd. since June 1992 and a partner in Trinity International Partners, a private financial firm, since June 1993. Co-host of CNN's "Crossfire", a news/public affairs discussion program, from March 1992 until February 1998. From January 1989 until March 1992, Chief of Staff to the President of the United States. From January 1983 to January 1989, Governor of the State of New Hampshire. From 1963 until his election as Governor, President of JHS Engineering Company and Thermal Research Inc. Helped establish and served as chief engineer for Astro Dynamics Inc. from 1960 until 1965. From 1968 until 1973, Governor Sununu was Associate Dean of the College of Engineering at Tufts University and Associate Professor of Mechanical Engineering. Served on the Advisory Board of the Technology and Policy Program at MIT from 1984 until 1989. A member of the National Academy of Engineering and the Board of Trustees for the George Bush Presidential Library Foundation. MARK E. WALKER 43 Director of Kinark Corporation since 1993. President and Director since 1991 of Ocean's Window, Inc. President and Director of Ocean's Window Travel Services since 1995. Manager from 1985 until 1992 for DSC Communications Corporation. Manager from 1978 until 1984 for Texas Instruments Incorporated. ITEM 11. EXECUTIVE COMPENSATION The information required by this item appears in the 1999 Proxy Statement under the heading "Executive Compensation" and is incorporated by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item concerning security ownership of certain beneficial owners and management appears in the 1999 Proxy Statement under the heading "Security Ownership of Principal Stockholders and Management" and is incorporated by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Joseph J. Morrow, a director of the Company and a nominee for reelection to the Company's Board of Directors in 1999 for a one-year term, purchased 1,759,083 shares of Common Stock at $2.50 per share in the Company's private placement in January 1996. Mr. Morrow is the chief executive officer of Morrow & Co., Inc., which provides proxy solicitation and other stockholder related services to the Company. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (A) THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS REPORT: (1)FINANCIAL STATEMENTS Page ------------------------------------------------------------ Independent Auditors' Report FS-9 ------------------------------------------------------------ Consolidated Balance Sheets at December 31, 1998 and 1997 FS-10 ------------------------------------------------------------ Consolidated Statements of Earnings for the years ended December 31, 1998, 1997 and 1996 FS-11 ------------------------------------------------------------ Consolidated Statements of Stockholders' Equity for the years ended December 31, 1998, 1997 and 1996 FS-12 ------------------------------------------------------------ Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996 FS-13 ------------------------------------------------------------ Notes to Consolidated Financial Statements FS-14 ------------------------------------------------------------ (2)FINANCIAL STATEMENT SCHEDULES: ------------------------------------------------------------ Schedule II - Valuation and Qualifying Accounts 13 ------------------------------------------------------------ All schedules omitted are inapplicable or the information required is included in either the consolidated financial statements or the related notes to the consolidated financial statements. (3)EXHIBITS: The Exhibits filed with or incorporated into this report are listed in the following Index to Exhibits. EXHIBIT INDEX EXHIBIT NO. DESCRIPTION - ------- ---------------------------------------------------------------------- 3.1 Restated Certificate of Incorporation of Kinark Corporation, as amended on June 6, 1996 (incorporated by reference to Exhibit 3.1 of the Company's Pre-Effective Amendment No. 1 to Registration Statement on Form S-3, Registration No. 333-4937, filed with the Commission on June 7, 1996). 3.2 Amended and Restated Bylaws of Kinark Corporation (incorporated by reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q dated March 31, 1996). 10.1 Revolving Credit and Term Loan Agreement, dated April 30, 1997, between Kinark Corporation, a Delaware corporation, and the Bank of Oklahoma, National Association, a national banking association (incorporated by reference to Exhibit (a)10 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1997. 21. Subsidiaries of the Registrant. 23. Independent Auditors' Consent. 24.01 Power of attorney from Richard C. Butler. 24.02 Power of attorney from Michael T. Crimmins. 24.03 Power of attorney from Ronald J. Evans. 24.04 Power of attorney from Joseph J. Morrow. 24.05 Power of attorney from John H. Sununu. 24.06 Power of attorney from Mark E. Walker. (b) REPORTS ON FORM 8-K. There were no reports filed on Form 8-K for the quarter ended December 31, 1998. SCHEDULE II KINARK CORPORATION VALUATION AND QUALIFYING ACCOUNTS YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
Additions Balance at Additions charged to Balance at beginning from costs and end of Description of year Acquisition expenses Deductions year - ---------------------------------------------------------------------------- Allowance for doubtful receivables (deducted from accounts receivable) - ---------------------------------- 1998 $287,000 $ ---- $290,000 $408,000 $169,000 - ---------------------------------------------------------------------------- 1997 $427,000 $ ---- $116,000 $256,000 $287,000 - ---------------------------------------------------------------------------- 1996 $162,000 $ 72,000 $252,000 $ 59,000 $427,000 - ----------------------------------------------------------------------------
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, 1999 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, 1999, 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 Officer) John H. Sununu, Director /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-8 Independent Auditors' Report . . . . . . . . . . . . . . . . . . FS-9 Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . FS-10 Consolidated Statements of Earnings . . . . . . . . . . . . . . . FS-11 Consolidated Statements of Stockholders' Equity . . . . . . . . . FS-12 Consolidated Statements of Cash Flows . . . . . . . . . . . . . . FS-13 Notes to Consolidated Financial Statements . . . . . . . . . . . FS-14 to FS-23 Selected Financial Data . . . . . . . . . . . . . . . . . . . . . FS-24 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The consolidated statements of earnings provide an overview of Kinark's operating results for 1996 through 1998. This section of Management's Discussion and Analysis summarizes the major factors which influenced operating results during the three-year period presented. On July 1, 1997, the Company formed North American Warehousing Company ("NAW") as a separate subsidiary to operate the public warehousing business previously conducted by Lake River. The revenues of Lake River and NAW are presented for the full year beginning January 1, 1996. REVENUES
1998 1997 1996 -------------- --------------- -------------- $(000) % $(000) % $(000) % - ------------------------------------------------------------------------------- < C> Galvanizing $39,049 81.3% $38,633 79.6% $38,498 80.9% Chemical Storage 5,224 10.9% 5,792 11.9% 5,289 11.1% Warehousing 3,731 7.8% 4,131 8.5% 3,812 8.0% - -------------------------------------------------------------------------------- Total $48,004 100.0% $48,556 100.0% $47,599 100.0% - -------------------------------------------------------------------------------
1998 COMPARED WITH 1997 Sales for 1998 totaled $48,004,000, for a decrease of $552,000 or 1.1% compared with the 1997 total of $48,556,000. Sales by the Chemical Storage and Warehousing segments were down a combined $968,000 or 9.8% compared with 1997. Galvanizing sales were higher for the second consecutive year, with an increase of $416,000 or 1.1% over 1997. NAG's sales were a record $39,049,000 in 1998, reflecting year-to-year tonnage growth at several of its regional operating facilities and improved average selling prices. Galvanizing sales were adversely affected in the second half of 1998, compared to the same period of 1997, following the decision by a major customer to galvanize its own product in-house, and to compete directly with NAG by acquiring a galvanizing facility in the Tulsa market. Among the numerous basic industries that require galvanized structures, fabricators of steel poles and towers, industrial grating and highway/transportation related products continue to provide good growth opportunities for NAG. At Lake River, the loss of two large accounts and lower export related business primarily resulted in a net sales decline of $568,000 or 9.8% from 1997. One account constructed its own distribution facilities and the second account consolidated its bulk liquid storage with one of its customers. The weak Asian market negatively impacted exports for one of Lake River's customers, causing drum filling sales to decline 30.2% compared with 1997. Slightly more than half of the business lost in 1998 was offset by moderate growth from new and existing accounts. Sales for NAW were down $400,000 or 9.7% from 1997, and this was the direct result of the contract termination by NAW's largest account. 1997 COMPARED WITH 1996 Sales for 1997 were $48,556,000, an increase of $957,000 or 2.0% over 1996. Chemical storage and warehousing accounted for $822,000, or approximately 86%, of the sales increase and the remainder was achieved in galvanizing. In 1997, the off-site warehousing operations of Lake River were separated into a newly formed subsidiary, North American Warehousing Company. In 1997, excluding the separation of the warehousing business in mid-year, Lake River's sales of $9,923,000 increased 9.0% over comparable sales of $9,101,000 in 1996. Approximately 61% of this sales increase was due to growth in the chemical storage operations, with gains in the volume of bulk liquid storage and drum filling, and the remainder was due to volume growth in existing warehousing accounts. NAG's sales of $38,633,000 increased moderately from a record $38,498,000 in 1996, reflecting a full year of galvanizing operations following the acquisition of Rogers in the first quarter of 1996, and slight price increases. Sales of galvanized steel poles used for communications and power transmission and galvanized grating for industrial and transportation markets reflected continued solid demand from these basic industries. COST AND EXPENSES
1998 1997 1996 ------------ ------------ ------------ % of % of % of $(000) Sales $(000) Sales $(000) Sales - --------------------------------------------------------------------- Cost of sales $36,587 76.2% $37,9797 8.2% $36,953 77.7% Selling, general & administrative 7,042 14.7% 6,027 12.4% 5,198 10.9% Depreciation & amortization 2,923 6.1% 2,712 5.6% 2,347 4.9% - --------------------------------------------------------------------- Total $46,552 97.0% $46,718 96.2% $44,498 93.5% - ---------------------------------------------------------------------
1998 COMPARED WITH 1997 In 1998, cost of sales decreased 3.7% to $36,587,000, compared with $37,979,000 in 1997, primarily due to lower sales in the chemical storage and warehousing segments. Cost of sales as a percent of sales was 76.2% in 1998 and 78.2% in 1997. This improvement in the gross profit margin resulted from increased labor productivity in the galvanizing segment and higher sales per square foot in warehousing. Selling, general and administrative expenses were $7,042,000 in 1998 and $6,027,000 in 1997. As a percent of sales, SG&A expenses were 14.7% in 1998 and 12.4% in 1997. The increase in SG&A expenses reflects the cost of settling environmental and medical claims related to prior periods, increased marketing expenses in galvanizing and additions to the reserves for collection of doubtful accounts. 1997 COMPARED WITH 1996 Cost of sales for 1997 increased 2.8% to $37,979,000, due primarily to increased price of zinc used by galvanizing and increased sales volume. At the beginning of 1997, the price of zinc for three-month delivery was quoted on the London Metal Exchange at $.48 per pound; it reached a high of $.76 per pound in the third quarter of 1997 and closed the year at $.50 per pound. In 1996, cost of sales was $36,953,000. Cost of sales as a percent of sales increased to 78.2% in 1997 compared to 77.7% in 1996, primarily due to the higher zinc costs in galvanizing. Gross profit margins in chemical storage and warehousing improved as a result of increases in volume and productivity improvements, and a reduction of approximately $302,000 in property taxes applicable to prior years. Selling, general and administrative (SG&A) expenses were $6,027,000 in 1997 and $5,198,000 in 1996. As a percent of sales, SG&A was 12.4% in 1997 and 10.9% in 1996. The increase in SG&A expenses in 1997 primarily reflects the acquisition of Rogers in the prior year and additional investment in developing an expanded sales organization at NAG. Depreciation and amortization expenses increased in 1997 due to the Company's ongoing program of capital investment to improve its operating facilities, plus the amortization of goodwill costs incurred in the acquisition of Rogers. Depreciation and amortization are non-cash charges against current income that reflect a reasonable estimate of the rate the Company is using its productive assets to generate revenues. OTHER (INCOME) EXPENSE 1998 1997 1996 ----------- ---------- ---------- % of % of % of $(000) Sales $(000) Sales $(000) Sales - ---------------------------------------------------------------------------- Interest $ 631 1.3 % $ 781 1.6% $ 867 1.8% Other (309) (0.6)% ---- ---- (98) (0.2)% - ---------------------------------------------------------------------------- Total $ 322 0.7 % $ 781 1.6% $ 769 1.6% - ---------------------------------------------------------------------------- Interest expense decreased to $631,000 in 1998 from $781,000 in 1997, reflecting a lower average debt and lower interest rates. In 1997, interest expense decreased from $867,000 in 1996 due to restructuring the Company's bank loan agreements and lower interest rates. In 1998, the Company recorded a gain of $309,000 from insurance proceeds that covered operating equipment destroyed in a fire in March. INCOME BEFORE INCOME TAXES Income before income taxes for 1998 was $1,130,000 compared with $1,057,000 in 1997. Underlying this increase, operating income from the business segments was $3,386,000 in 1998 compared with $3,540,000 in 1997. The decrease of $154,000, or 4.3%, in operating segment earnings reflects lower sales in chemical storage and increased marketing expenses in galvanizing that were partially offset by improved earnings in warehousing. In 1998, the Company settled certain environmental and medical claims related to prior periods. Lower interest expense and a gain from insurance proceeds more than offset these settlements and the lower segment earnings. In 1997, income before income taxes was $1,057,000 compared with $2,332,000 in 1996. The decrease in income was attributable primarily to lower gross profit margins and higher selling expenses at NAG, partially offset by improved operating margins from the Company's chemical storage and warehousing businesses. The moderate sales growth experienced in 1997 by galvanizing reflected, in part, market resistance to accepting a pass through of unusually rapid price increases for zinc. As a result of these opposing cost and revenue conditions in the galvanizing segment, the Company's operating earnings before tax were 2.2% of sales in 1997 compared with 4.9% in 1996. INCOME TAXES The Company's effective income tax rates for 1998, 1997, and 1996 were 46.9%, 44.3%, and 38.3%, respectively. Income tax expense in 1998 and 1997 included a full year of non-deductible goodwill amortization related to the acquisition of a galvanizing company in 1996. Income tax expense was $894,000 in 1996. CASH FLOWS The Company generated operating cash flow of $3,158,000 in 1998, an increase of 18% compared with $2,682,000 in 1997. The improvement in operating cash flow in 1998 reflects changes in operating working capital, and increases from higher depreciation and deferred income tax benefits. Operating working capital was approximately 15% of sales in 1998 and 13% of sales in 1997. The Company generated operating cash flow of $2,682,000 in 1997, compared with $3,612,000 in 1996. The reduction in operating cash flow primarily reflected a decrease in net income in 1997, accompanied by an increase in operating working capital. Accounts receivable, the Company's primary current asset, increased $905,000 in 1997 due to moderately higher sales and slower turnover of accounts as compared to 1996. The increase in accounts receivable was offset substantially by a planned reduction of $635,000 in inventory stocks. Capital expenditures were $3,542,000 in 1998, up 14% from $3,103,000 in 1997. In 1997, capital expenditures increased 11% from $2,790,000 in 1996. These funds enable the Company to increase capacity and productivity and to compete effectively in the galvanizing and chemical storage industries. The Company allocated approximately 89% of the funds to galvanizing in 1998 and 1997, and 75% to galvanizing in 1996. In 1998 and 1997, major upgrading and capacity expansions were completed at the Company's galvanizing plants located in Hurst, Texas, in Nashville, Tennessee and Louisville, Kentucky. In 1996, the Company paid cash of $5,579,000 in connection with the acquisition of 73.1% of the common stock of Rogers. In 1997, the Company made a final cash payment of $2,236,500 to acquire all of the remaining shares of Rogers' outstanding common stock. Cash proceeds from other non-operating activities were $325,000 in 1998 from insurance covering the loss of equipment destroyed by fire; and in 1996, $193,000 from the sale of an undeveloped parcel of land and $807,000 for the sale of the Company's Kinpak subsidiary. Total debt (current and long-term obligations) increased $473,000 to $9,520,000 in 1998, due in part to the Company's investment of $487,000 in equity securities. In 1997, total debt increased $881,000 to $9,047,000 from $8,166,000 in 1996. More than half of the debt increase was attributable to capital expenditures for renovation and expansion of galvanizing plants. The balance of the debt increase represented borrowings under the revolving line of credit to support increased working capital. The Company raised $7,296,000 (net of $580,000 of issuance costs) in new equity capital in 1996 through the issuance of 3,011,888 shares of its common stock in private placement transactions and a rights offering to its stockholders. In 1996, the Company made net payments of $1,146,000 on long-term obligations. The Company's total debt ratio to equity at the end of 1998 was 86.2%, compared with 86.6% in 1997 and 99.8% in 1996. LIQUIDITY AND FINANCIAL CONDITION In the second quarter of 1997, the Company restructured and consolidated all of its credit lines and bank term loans into a new $13,250,000 loan agreement with a bank. Under the agreement, a revolving line of credit was increased to $8,500,000 from the existing $6,250,000, with term loans totaling $4,750,000 of which $1,250,000 was provided for the planned expansion of galvanizing facilities. Stockholders' equity increased to $17,783,000, or $2.63 per share, at December 31, 1998, compared with $17,127,000 and $2.53 per share at the end of 1997. The equity increase was attributable to an addition of $600,000 from net income, an addition of $85,000 to reduce the minimum pension liability and a reduction of $29,000 for repurchase of the Company's shares. At the end of 1998, the Company had additional borrowing capacity of $1,731,000 under its revolving line of credit that reflected the underlying value of its accounts receivable and inventories. Based on beginning-of-the-year projections, the Company believes that it has an adequate line of credit to support its growth and capital expenditure plans for 1999. ENVIRONMENTAL MATTERS In November 1997, the EPA informed the Company that it would seek to recover from the Company its costs associated with the 1995 clean-up of a former galvanizing plant site in Philadelphia, Pennsylvania 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 this former galvanizing 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 for approximately $264,000. As previously reported, the Company and the EPA jointly participated in the successful cleanup of the Philadelphia site in 1995. 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. 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 1998 was $979,000, with the disposal and recycling of waste acids generated by the galvanizing operations representing the major expenditure in this area. The Company operates on-site sulphuric acid recovery systems at three of its galvanizing plants. Recovered acid is returned to production, thereby eliminating the substantial expense associated with the alternative of waste treatment and removal to an off-site location. The recovery process generates a non-hazardous dry ferrous sulphate crystal by-product which the Company sells commercially. The Company's other galvanizing plants use hydrochloric acid, which requires the off-site disposal of waste acids. Due to the increasing cost of waste disposal and decreasing availability of approved disposal methods, alternative waste hydrochloric acid recycling methods have been evaluated over recent years. While it appears that the technology for an economically feasible system is available, no proven system for the recycling of hydrochloric acid utilized in hot dip galvanizing is currently on the market. Hydrochloric acid recycling systems will be further evaluated as new systems become available. Future capital expenditures in this area are expected to increase, but such expenditures should significantly reduce waste acid disposal expense. Environmentally related expenditures at Lake River represented a relatively small percentage of the Company's total cost. The majority of waste disposal costs at Lake River are incurred on behalf of customers and are reimbursable. Lake River does not take title to the chemicals stored, blended, or bagged in its facilities and thus is responsible only for the proper handling of these materials while under its care, custody, and control. As previously reported, the Company has escrowed proceeds of $18,000 from the sale of the assets of Kinpak, Inc. (A former subsidiary sold in 1996) for possible environmental remediation. The Company is committed to complying with all federal, state and local environmental laws and regulations and using its best management practices to anticipate and satisfy future requirements. As is typical in the galvanizing and chemicals businesses, the Company will have additional environmental compliance costs associated with past, present, and future operations. Management has committed resources to discovering and eliminating environmental issues as they arise. Because of the frequent changes in environmental technology, laws and regulations management cannot reasonably attempt to quantify the Company's potential costs in this area. However, such costs are expected to increase above their current levels as discussed above. NEW ACCOUNTING STANDARDS Effective January 1, 1998, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income", SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information", and SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits", for the year ended December 31, 1998, as reflected in the accompanying financial statements. 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. 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. SFAS No. 132 revises employers' disclosures about pensions and post-retirem ent benefits, standardizes the disclosure requirements, and requires information on changes in the benefit obligation and fair value of plan assets. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133 requires fair value accounting for all stand-alone derivatives, and for many derivatives embedded in other instruments and contracts. The Company will be required to adopt SFAS No. 133 effective January 1, 2000, and is in the process of evaluating the effect of this standard on its financial reporting. YEAR 2000 READINESS STATE OF READINESS. Like many companies that rely on computer technology, Kinark Corporation is preparing for the year 2000 by taking steps to insure that its computers can recognize and use years after 1999 correctly. If such a situation were to exist and not be corrected, Year 2000 errors could affect the Company's ability to invoice customers and pay vendors in a timely manner and to maintain accurate financial records. The Company has been working on the resolution of Year 2000 issues since 1996. The Company has determined that its primary computer systems serving the corporate headquarters and its galvanizing operations are structured to accommodate the Year 2000 and beyond, and the operation of these systems should not be affected by the millennium change. Galvanizing contributes approximately 81% of Kinark's consolidated sales. Computer systems serving Kinark's chemical storage and warehousing operations are not Year 2000 compliant and these systems are scheduled to be renovated during the first half of 1999. COST OF ADDRESSING YEAR 2000 ISSUES. Kinark's cost to date of addressing Year 2000 issues is approximately $120,000, and the on-going assessment and resolution of such issues should not exceed an additional $100,000. Future expenditures to make Kinark's computer systems Year 2000 compliant are not expected to have a material impact on the results of the Company's operations, liquidity, and capital resources. RISKS OF YEAR 2000 ISSUES. Kinark has not fully determined the state of Year 2000 compliance by its key suppliers of zinc, the primary commodity required for its hot dip galvanizing operations. Kinark historically has not relied on a sole-source supply for its zinc requirements and expects to continue that practice. In addition, Kinark's operations are dependent on reliable supplies of electricity and natural gas. Going forward, Kinark will be monitoring the progress of its key vendors, as well as its major customers, service providers and utilities in addressing their Year 2000 issues, and expects this assessment to be completed by June 1999. An assessment of the "most reasonably likely worst case Year 2000 scenarios" for Kinark would consider (a) the failure of the Company's computer systems and (b) disruption of production operations due to computer failures encountered by a customer, supplier or utility. With respect to failure of the Company's computers, the worst case impact would be the additional cost to manually process daily business operations and attendant delays in completing those operations. Kinark does not believe such additional costs would have a material impact on its operations. With respect to a disruption of Kinark's production operations due to a customer's, supplier's or utility's failure to be Year 2000 compliant, the extent of such disruption is not reasonably estimable. Kinark's operations are conducted in widely-disbursed facilities, serving more than 1,500 commercial and industrial accounts, and the Company believes this diversity of its operations will help mitigate the risk of a customer's, supplier's or utility's Year 2000 failure. CONTINGENCY PLANS. Kinark expects to establish a contingency plan to handle "the most reasonably likely worst case scenarios" as discussed above. The anticipated date for completing the contingency plan is April 1999, and will involve independent verification by information technology consultants and computer service providers. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Kinark's operations include managing market risks related to changes in interest rates, zinc commodity prices and investment in marketable equity securities. INTEREST RATE RISK. Kinark is exposed to financial market risk related to changing interest rates. Changing interest rates will affect interest paid on Kinark's variable rate revolving and term debt (see Note 2 to consolidated financial statements). Amounts borrowed under this 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. At December 31, 1998, $8,887,000 was outstanding under the agreement with an effective rate of 8.1%. The borrowings are due as follows: $785,000 in 1999 and $8,102,000 in 2000. At December 31, 1997, $8,133,000 was outstanding with an effective rate of 8.6%. Each increase of 10 basis points in the effective interest rate would result in an increase in interest charges of approximately $9,000 based on December 31, 1998 outstanding borrowings. The actual effect of changes in interest rates is dependent on actual amounts outstanding which vary under the revolving credit facility. The Company monitors interest rates and has sufficient flexibility to renegotiate the loan agreement, without penalty, in the event market conditions and interest rates change. ZINC PRICE RISK. NAG enters into purchase commitments with domestic and foreign zinc producers to purchase certain of its zinc requirements for its hot dip galvanizing operations. Commitments for the future delivery of zinc reflect rates quoted on the London Metals Exchange which are not subject to future price adjustment. At December 31, 1998, the aggregate commitments for the procurement of zinc were approximately $4.8 million in 1999, which represents approximately 52% of 1999 estimated requirements (see Note 3 to consolidated financial statements). Management believes this zinc procurement program ensures adequate supplies of zinc and stable gross margins from its galvanizing operations. With respect to the zinc purchase commitments, a potential decrease in price of 10% in the market price of zinc from the December 31, 1998 level would cause a lost gross margin opportunity of approximately $500,000. However, a favorable impact of a similar amount would result from the same hypothetical price movement on a short-term spot purchases of zinc. MARKETABLE SECURITIES MARKET VALUE RISK. At December 31, 1998, the Company held an investment in marketable equity securities of $487,000. At December 31, 1998, the securities' carrying value approximated fair market value. A potential adverse price movement of 10% in the market price of these securities from the December 31, 1998 market price would cause a loss in value of approximately $49,000. Management is continuing to evaluate its plans with respect to this investment. 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, 1998 and 1997, and the related consolidated statements of earnings, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1998. 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, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998 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 March 3, 1999 CONSOLIDATED BALANCE SHEETS December 31 ---------------------- (Thousands of Dollars, Except Per Share Amounts) 1998 1997 - ------------------------------------------------------------------------------- ASSETS Current Assets Cash and cash equivalents $ 189 $ 259 Trade receivables, less allowances of $169 for 1998 and $287 for 1997 6,600 7,094 Inventories 4,158 3,503 Investments 487 ---- Prepaid expenses and other assets 984 360 Deferred tax asset, net 735 717 - ------------------------------------------------------------------------------- TOTAL CURRENT ASSETS 13,153 11,933 - ------------------------------------------------------------------------------ PROPERTY, PLANT AND EQUIPMENT, AT COST Land 776 707 Chemical storage facilities 10,629 10,566 Warehousing equipment 750 687 Galvanizing plants and equipment 20,006 20,793 Other 323 336 - ------------------------------------------------------------------------------ 32,484 33,089 Less: Allowance for depreciation 16,877 18,199 - ------------------------------------------------------------------------------ TOTAL PROPERTY, PLANT AND EQUIPMENT, NET 15,607 14,890 - ------------------------------------------------------------------------------ DEFERRED TAX ASSET, NET 131 667 GOODWILL, NET OF ACCUMULATED AMORTIZATION OF $489 FOR 1998 AND $302 FOR 1997 3,952 4,140 OTHER ASSETS 265 325 - ------------------------------------------------------------------------------ TOTAL ASSETS $ 33,108 $ 31,955 - ------------------------------------------------------------------------------ LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Current maturities of long-term obligations $ 930 $ 916 Trade accounts payable 1,770 1,672 Accrued payroll and employee benefits 1,210 1,176 Other taxes 979 818 Other accrued liabilities 1,194 1,187 - ------------------------------------------------------------------------------ TOTAL CURRENT LIABILITIES 6,083 5,769 - ------------------------------------------------------------------------------ PENSION AND RELATED LIABILITIES 652 928 LONG-TERM OBLIGATIONS 8,590 8,131 COMMITMENTS AND CONTINGENCIES (NOTES 3 & 4) STOCKHOLDERS' EQUITY Common stock - $.10 par value: authorized - 18,000,000 shares issued - 8,191,409 shares in 1998 and 1997 819 819 Additional paid-in capital 17,364 17,364 Minimum pension liability (112) (197) Retained earnings 5,553 4,953 Common shares in treasury at cost: 1,423,869 in 1998 and 1,413,064 in 1997 (5,841) (5,812) - ------------------------------------------------------------------------------ TOTAL STOCKHOLDERS' EQUITY 17,783 17,127 - ------------------------------------------------------------------------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 33,108 $ 31,955 - ------------------------------------------------------------------------------ See notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF EARNINGS
Year Ended December 31 ------------------------------ (Dollars in Thousands Except Per Share Amounts) 1998 1997 1996 - ----------------------------------------------------------------------------- SALES $48,004 $48,556 $47,599 COSTS AND EXPENSES Cost of sales 36,587 37,979 36,953 Selling, general and administrative expenses 7,042 6,027 5,198 Depreciation and amortization 2,923 2,712 2,347 - ----------------------------------------------------------------------------- TOTAL COSTS AND EXPENSES 46,552 46,718 44,498 - ----------------------------------------------------------------------------- OPERATING INCOME 1,452 1,838 3,101 - ----------------------------------------------------------------------------- OTHER EXPENSE Interest expense, net 631 781 867 Other (income) expense, net (309) --- (98) - ----------------------------------------------------------------------------- TOTAL OTHER EXPENSE 322 781 769 - ----------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES AND MINORITY INTEREST 1,130 1,057 2,332 Income tax expense 530 468 894 - ----------------------------------------------------------------------------- INCOME BEFORE MINORITY INTEREST 600 589 1,438 Minority Interest --- --- 164 - ----------------------------------------------------------------------------- NET INCOME $ 600 $ 589 $ 1,274 - ----------------------------------------------------------------------------- NET EARNINGS PER COMMON SHARE Basic $ .09 $ .09 $ .21 Diluted $ .09 $ .09 $ .21 - ----------------------------------------------------------------------------- See notes to consolidated financial statements.
Consolidated Statements of Stockholders' Equity (Dollars in Thousands Except Per Share Amount)
- ------------------------------------------------------------------------------ Common Additional Minimum Shares Stock($.10 Paid-in Retained Pension Treasury Comprehensive Outstanding Par Value) Capital Earnings Liability Stock Income Total - --------------------------------------------------------------------------------------------------------- January 1, 1996 3,747,498 $ 520 $ 10,531 $ 3,090 ---- $(5,976) $ 8,165 Net income ---- ---- ---- 1,274 ---- ---- 1,274 Issued from treasury 40,000 ---- (64) ---- ---- 164 100 Issued for private placement 2,279,038 228 5,396 ---- ---- ---- 5,624 Issued for rights offering 692,850 69 1,503 ---- ---- ---- 1,572 - ---------------------------------------------------------------------------------------------------------- December 31, 1996 6,759,386 817 17,366 4,364 ---- (5,812) 16,735 Comprehensive Income Net income ---- ---- ---- 589 ---- ---- 589 589 Minimum pension liability adjustment, net of tax ---- ---- ---- ---- $ (197) ---- (197) (197) Total Comprehensive Income ---- ---- ---- ---- ---- ---- 392 ---- Shares outstanding adjustment 18,959 2 (2) ---- ---- ---- ---- - ----------------------------------------------------------------------------------------------------------- December 31, 1997 6,778,345 819 17,364 4,953 (197) (5,812) 17,127 Comprehensive Income Net income ---- ---- ---- 600 ---- ---- 600 600 Minimum pension liability adjustment, net of tax ---- ---- ---- ---- 85 ---- 85 85 Total Comprehensive Income ---- ---- ---- ---- ---- ---- 685 ---- Common stock purchases (10,805) ---- ---- ---- ---- (29) (29) - ----------------------------------------------------------------------------------------------------------- December 31, 1998 6,767,540 $ 819 $ 17,364 $ 5,553 $ (112) (5,841) $ 17,783 - -----------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements. CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31 ------------------------------- (Dollars in Thousands) 1998 1997 1996 - ------------------------------------------------------------------------------ OPERATING ACTIVITIES Net income $ 600 $ 589 $ 1,274 Depreciation and amortization 2,923 2,712 2,347 Gain on involuntary conversion of assets (309) ---- ---- Deferred income taxes 518 389 499 Loss on asset sale 42 ---- (71) Changes in assets and liabilities (net of acquisition of galvanizing business): Accounts receivable, net 494 (905) (195) Inventories and other (1,219) 615 (121) Accounts payable, accrued liabilities and other 109 (718) (121) - ------------------------------------------------------------------------------- Cash Provided by Continuing Operations 3,158 2,682 3,612 Cash Used for Discontinued Operation ---- ---- (416) - ------------------------------------------------------------------------------- CASH PROVIDED BY OPERATING ACTIVITIES 3,158 2,682 3,196 - ------------------------------------------------------------------------------- INVESTING ACTIVITIES Capital expenditures (3,542) (3,103 (2,790) Proceeds from sale of assets 32 (6) 227 Proceeds from involuntary conversion of assets 325 ---- ---- Proceeds from sale of discontinued operation ---- ---- 807 Purchase of investments (487) ---- ---- Acquisition of galvanizing business ---- (2,236) (5,579) - ------------------------------------------------------------------------------- CASH USED FOR INVESTING ACTIVITIES (3,672) (5,345) (7,335) - ------------------------------------------------------------------------------- FINANCING ACTIVITIES Purchase of common stock (29) ---- ---- Proceeds from issuing common stock ---- ---- 7,296 Proceeds of long-term debt 18,580 19,207 12,173 Payment of long-term debt (18,107) (18,326) (13,319) - ------------------------------------------------------------------------------- CASH PROVIDED BY FINANCING ACTIVITIES 444 881 6,150 - ------------------------------------------------------------------------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (70) (1,782) 2,011 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 259 2,041 30 - ------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 189 $ 259 $ 2,041 - ------------------------------------------------------------------------------- SUPPLEMENTAL DISCLOSURE Interest paid $ 631 $ 781 $ 867 Income taxes paid $ 212 $ 325 $ 502 Fully depreciated assets written off $ 3,526 $ 1,260 $ 6,395 See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 1998, 1997, and 1996 DESCRIPTION OF BUSINESS Kinark Corporation ("Kinark" and the "Company") is engaged in galvanizing, chemical storage and public warehousing through its wholly owned subsidiaries. In the galvanizing segment, North American Galvanizing Company ("NAG") provides metals corrosion protection with eleven regionally located galvanizing plants. Kinark operates chemical storage facilities through Lake River Corporation ("Lake River") and public warehousing through North American Warehousing Company ("NAW"). 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 13.2%, 12.1%, and 13.2% of consolidated sales for the years 1998, 1997 and 1996, respectively. (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries NAG (formerly Rogers Galvanizing Company ("Rogers") and Boyles Galvanizing Company ("Boyles"), Lake River, NAW and for 1996, 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. INVESTMENT SECURITIES. The Company accounts for investment securities under the provisions of Statement of Financial Accounting Standards ("SFAS"), No. 115, "Accounting for Certain Instruments in Debt and Equity Securities." Accordingly, the Company has classified its marketable equity securities as available-for-sale. Securities classified as available-for-sale securities are reported at fair market value. At December 31, 1998, the securities carrying value approximated fair market value and the Company's unrealized or realized gains or losses were immaterial. Realized gains and losses and declines in the value of securities judged to be other-than-temporary are included in income. INVENTORIES. Inventories consist primarily of raw zinc "pigs," molten zinc in galvanizing kettles and other chemicals and materials used in the galvanizing process. All inventories are stated at the lower of cost or market with market value based on ultimate realizable value from the galvanizing process. Zinc cost is determined on a last-in first-out (LIFO) basis. Other inventories are valued primarily on an average cost basis. Inventories consist of the following: (Dollars in Thousands) 1998 1997 - ----------------------------------------------------------------- Zinc - LIFO $3,645 $3,007 Other Raw Materials 513 496 - ----------------------------------------------------------------- $4,158 $3,503 - ----------------------------------------------------------------- The approximate raw material replacement cost based on year-end market prices of zinc was $2,839,000 and $2,600,000 at December 31, 1998 and 1997, respectively. Management estimates the cost of zinc inventories will be recovered from sales of galvanizing services in the normal course of business. GOODWILL. Goodwill is amortized over 25 years using the straight-line method. On a periodic basis, the Company estimates the future undiscounted cash flows of the operations to which goodwill relates to ensure that the carrying value of goodwill has not been impaired. DEPRECIATION AND AMORTIZATION. Plant and equipment, including assets under capital leases, are depreciated on the straight-line basis over their estimated useful lives, generally at rates of 2% to 6% for buildings and 10% to 20% for equipment, furnishings, and fixtures. LONG-LIVED ASSETS. SFAS No. 121 requires that long-lived assets and certain identifiable intangibles to be held and used or disposed of including related goodwill, if any, be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company has determined that no impairment loss need be recognized for the years ended December 31, 1998 or 1997. 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 estimates of the expected ultimate claims and losses using appropriate development factors, historical trends and related methodologies; however, the actual results may vary from these estimates since the evaluation of losses is inherently subjective and susceptible to significant changing factors. REVENUE RECOGNITION. The Company recognizes revenue through the sale of hot dip galvanizing as the galvanizing process is completed; revenue for bulk liquid terminal and warehousing operations is recognized each month from the rental of tanks and storage space, and related fees for handling of customers' products. NEW ACCOUNTING STANDARD. Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting Comprehensive Income", SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information", and SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits". 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. 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. SFAS No. 132 revises employers' disclosures about pensions and postretirement benefits, standardizes the disclosure requirements, and requires information on changes in the benefit obligation and fair value of plan assets. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133 requires fair value accounting for all stand-alone derivatives, and for many derivatives embedded in other instruments and contracts. The Company will be required to adopt SFAS No. 133 effective January 1, 2000, and is in the process of evaluating the effect of this standard on its financial reporting. INCOME TAXES. The Company calculates income taxes according to SFAS No. 109, "Accounting for Income Taxes." Net deferred income tax assets on the consolidated balance sheet reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes and the benefit of net operating loss and other tax credit carryforwards. Valuation allowances are established against deferred tax assets to the extent management believes it is more likely than not that the assets will not be realized. RECLASSIFICATION. Certain reclassifications have been made to the 1997 consolidated financial statements to conform with classifications used in 1998. (2) LONG-TERM OBLIGATIONS December 31 --------------------- (Dollars in Thousands) 1998 1997 - ----------------------------------------------------------------- Revolving lines of credit $5,326 $4,342 Term loans 3,561 3,791 8.0% note due 1998 --- 6 10.0% note due 2000 382 418 9.5% note due 2015 29 30 Capital leases 222 460 - ----------------------------------------------------------------- 9,520 9,047 Less current portion (930) (916) - ----------------------------------------------------------------- $8,590 $8,131 - ----------------------------------------------------------------- LONG-TERM DEBT. The Company has a bank credit agreement which provides a $8,500,000 maximum revolving line of credit, a $1,250,000 advancing term loan for expansion of galvanizing plants, and a $3,500,000 term loan, all of which expire May 2000. As of December 31, 1998, the Company had additional borrowing capacity of $1,731,000 under its revolving line of credit. Substantially all of the Company's accounts receivable, inventories and fixed assets are pledged as collateral under the agreement, and the agreement is secured by a guaranty from each of the Company's subsidiaries. Amounts borrowed under the agreement bear interest at prime minus or plus a spread ranging from minus 25 basis points to plus 50 basis points, determined by a coverage ratio of defined earnings to debt service. Amounts borrowed on the revolver and term loans bore interest at prime during 1998 and ranging from prime to 1% over prime during 1997, resulting in effective rates of 8.1% at December 31, 1998 and 8.6% at December 31, 1997. Term loan payments are based on a five-year amortization schedule with equal monthly payments of principal and interest. The advancing term loan, once funded, will require equal monthly payments of principal and interest based on a seven-year amortization schedule. The revolver may be paid down without penalty, or additional funds may be borrowed up to the revolver limits. The term loan and the advancing term loan may be pre-paid without penalty. The agreement provides for capital expenditures related to a minimum coverage ratio of defined earnings to debt service plus capital expenditures, limits the pledging of assets for new debt, and requires the Company to maintain a minimum net worth. The Company was in compliance with such covenants at December 31, 1998 and 1997. Aggregate maturities of long-term debt, exclusive of capital lease obligations for 1999 and each of the five years thereafter are $827,500, $8,443,500, $1,000, $1,000, $1,000 and $24,000. CAPITAL LEASES. Capital leases with an aggregate maturity of $222,000 consist of computers, a manufacturing building and material handling equipment used in the subsidiary operations. (3) COMMITMENTS The Company leases land, office, warehouse facilities, a manufacturing building and certain equipment under noncancelable leases. The operating leases generally provide for renewal options and periodic rate increases based on specified economic indicators and are typically renewed in the normal course of business. Rent expense was $1,586,000 in 1998, $1,768,000 in 1997, and $1,609,000 in 1996. Minimum annual rental commitments at December 31, 1998 are as follows: Capital Operating (Dollars in Thousands) Leases Leases - ---------------------------------------------------------------- 1999 $ 144 $ 474 2000 44 122 2001 26 125 2002 18 83 2003 3 39 Thereafter 34 259 - ---------------------------------------------------------------- $ 269 $1,102 ===== Less: Portion representing interest (47) ---- Net capitalized lease obligation $ 222 ==== The Company has major commitments with domestic and foreign zinc producers to purchase zinc used in its hot dip galvanizing operations. Commitments for the future delivery of zinc reflect rates then quoted on the London Metals Exchange which are not subject to price adjustment. At December 31, 1998, the aggregate commitments for the procurement of zinc were $4,828,991 in 1999. (4) 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, Pennsylvania 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 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 charges to earnings of $125,000 in the quarter ended December 31, 1997 and $139,000 for the quarter ended March 31, 1998 for the estimated net impact of the settlement. During the third quarter of 1998, the parties executed a Consent Decree that resolves all of the claims brought by the EPA against NAG. 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. The Company will continue to have additional environmental compliance costs associated with operations in the galvanizing and chemicals businesses. The Company is committed to complying with the environmental legislation and regulations affecting its operations. Due to the uncertainties associated with future environmental technologies, regulatory interpretations, and prospective legislative activity, management cannot reasonably attempt to quantify potential costs in this area. The Company expenses or capitalizes, where appropriate, environmental expenditures that relate to current operations as they are incurred. Such expenditures are expensed when they are attributable to past operations and are not expected to contribute to current or future revenue generation. The Company records liabilities when remediation or other environmental assessment or clean-up efforts are probable and the cost can be reasonably estimated. Management believes this policy complies with SOP 96-1. Various litigation arising in the ordinary course of business is pending against the Company. Management believes that resolution of the Company's litigation and environmental matters should not materially affect the Company's consolidated financial position or liquidity. Should future developments cause the Company to record an additional liability for environmental evaluation, clean up or litigation, the recording of such a liability could have a material impact on the results of operations for the period involved. (5) INCOME TAXES The provision (benefit) for income taxes consists of the following: Year Ended December 31, ------------------------ (Dollars in Thousands) 1998 1997 1996 - ---------------------------------------------------------------- Current $ 44 $(37) $127 Deferred 486 505 767 - ---------------------------------------------------------------- Income tax expense $530 $468 $894 - ---------------------------------------------------------------- The reconciliation of income taxes at the federal statutory rate to the Company's effective tax rate is as follows: Year Ended December 31, ------------------------- (Dollars in Thousands) 1998 1997 1996 - ----------------------------------------------------------------- Taxes at statutory rate $384 $359 $793 State tax net of federal benefit 23 23 72 Goodwill amortization 71 71 42 Other 52 15 (13) - ----------------------------------------------------------------- Taxes at effective tax rate $530 $468 $894 - ----------------------------------------------------------------- At December 31, 1998, the Company has approximately $2,873,700 of net operating loss carryforwards available to offset future taxable income. Investment tax credits of $138,000 and alternative minimum tax credit carryforwards of $188,000 are also available as carryforwards to future years. The net operating loss carryforwards expire in varying amounts during the years 2006 through 2011 and the investment tax credits expire in 1999. The tax effects of significant items comprising the Company's net deferred tax asset consist of the following: December 31, ------------------- (Dollars in Thousands) 1998 1997 - ------------------------------------------------------------------ Deferred tax assets: Alternative minimum tax $ 188 $ 170 Reserves not currently deductible 735 717 Operating loss carryforwards 1,092 1,144 Tax credit carryforwards 138 99 Pension minimum funding 84 116 Other ---- 107 - ------------------------------------------------------------------ 2,237 2,353 Deferred tax liabilities: Differences between book and tax basis of property 1,371 969 - ------------------------------------------------------------------ $ 866 $1,384 - ------------------------------------------------------------------ Management believes that future taxable income of the Company will more likely than not be sufficient to realize the net deferred tax asset. (6) STOCK OPTION PLANS At December 31, 1998 and 1997, 1,050,500 and 1,088,500 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 value as of the date the option is granted. Options generally become exercisable in installments specified by the applicable plan and must be exercised within ten years of the grant date. Number Weighted-Avg. Under Option of Shares Exercise Price - ----------------------------------------------------------------- Balance at Jan. 1, 1996 101,250 4.07 Granted 370,000 2.86 Expired (25,000) 3.19 Cancelled (13,250) 4.19 - ----------------------------------------------------------------- Balance at Dec. 31, 1996 433,000 3.57 Granted 80,000 3.44 Cancelled (7,500) 4.58 - ----------------------------------------------------------------- Balance at Dec. 31, 1997 505,500 3.12 Granted 20,000 3.06 Cancelled (38,000) 4.37 - ----------------------------------------------------------------- Balance at Dec. 31, 1998 487,500 3.02 - ----------------------------------------------------------------- At December 31, 1998, 1997, and 1996, options for 372,125, 282,375, and 109,500 shares, respectively, were exercisable. Information about stock options as of December 31, 1998: Options Outstanding - ----------------------------------------------------------------- Weighted-Avg. Range of Number Remaining Weighted-Avg. Exercise Prices Outstanding Contractual Life Exercise Price - ----------------------------------------------------------------- $2.50 to $3.00 234,500 7.25 years $2.50 $3.06 to $3.50 237,000 7.94 3.43 $4.50 to $4.75 16,000 5.06 4.52 ------- 487,500 ======= Options Exercisable - ----------------------------------------------------------------- Weighted-Avg. Number Exercise Price Exercisable -------------- ----------- $2.50 233,000 3.00 1,125 3.25 20,000 3.38 20,000 3.50 82,000 4.50 15,000 4.75 1,000 ------ 372,125 ======= The estimated weighted average fair value of options granted during 1998, 1997 and 1996 was $1.40 $1.55, and $1.51 per option, respectively. The Company accounts for its stock option plans in accordance with Accounting Principles Board Opinion No. 25, under which no compensation cost has been recognized for stock option awards. Had compensation cost for the Company's stock option plans been determined according to the methodology of SFAS No.123, the Company's pro forma net earnings and earnings per share for 1998, 1997 and 1996 would have been approximately $538,000 and $.08, $400,000 and $.06, and $1,086,824 and $.18, respectively. The fair value of options granted under the Company's stock option plans was estimated using the Black-Scholes option-pricing model with the following weighted-average assumptions used: no dividend yield, expected volatility of 44%, 42%, and 53% for 1998, 1997 and 1996 respectively, risk free interest rate of 4.9% in 1998 and 6.0% in 1997 and 1996; and expected lives of 5 years. The effects of applying SFAS No.123 in this pro forma disclosure are not necessarily indicative of future amounts. (7) EARNINGS PER SHARE RECONCILIATION Per For the Year Ended Income Shares Share December 31 (Numerator) (Denominator) Amount - ------------------ ---------- ---------- ------ 1996 Net earnings $1,274,000 --- --- Basic EPS --- 6,172,011 $ .21 Effect of dilutive stock options --- 30,752 --- Diluted EPS $1,274,000 6,202,763 $ .21 - ----------------------------------------------------------------- 1997 Net earnings $ 589,000 --- --- Basic EPS --- 6,778,345 $ .09 Effect of dilutive stock options --- 34,723 --- Diluted EPS $ 589,000 6,813,068 $ .09 - ----------------------------------------------------------------- 1998 Net earnings $ 600,000 --- --- Basic EPS --- 6,767,540 $ .09 Effect of dilutive stock options --- 22,057 --- Diluted EPS $ 600,000 6,789,597 $ .09 - ----------------------------------------------------------------- The number of options excluded from the calculation of diluted earnings per share due to the option price being higher than the share value are 254,500, 272,500 and 177,000 at December 31, 1998, 1997 and 1996, respectively. (8) EMPLOYEE BENEFIT PLANS Substantially all of the Company's employees are covered by defined contribution plans, except for certain 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 Dec. 31 --------------------------- (Dollars in Thousands) 1998 1997 1996 - ----------------------------------------------------------------- Pension plan $ 189 $ 68 $ 66 Defined contribution plans 302 292 196 - ----------------------------------------------------------------- $ 491 $360 $ 262 - ----------------------------------------------------------------- In 1998 and 1997, there were no changes in the nature of or rate of the Company's contributions to the defined contribution plans. During 1998, the Company restructured the portfolio of pension plan assets, which historically had been invested in group annuity insurance contracts. At the end of 1998, assets of the pension plan and the defined contribution plans consisted of short-term investments, intermediate bonds, long-term bonds and listed stocks. Pension costs are funded in accordance with the Employee Retirement Income Security Act of 1974 (ERISA). The funded status of the Company's defined benefit pension plan is as follows: December 31 --------------------------- (Dollars in Thousands) 1998 1997 1996 - ----------------------------------------------------------------- CHANGE IN BENEFIT OBLIGATION Benefit obligation beginning of year $1,644 $1,359 $1,088 Service cost 49 45 33 Interest cost 109 100 80 Amendments --- --- 146 Actuarial loss (gain) (125) 179 43 Benefits paid (59) (39) (31) - ----------------------------------------------------------------- Benefit obligation end of year 1,618 1,644 1,359 - ----------------------------------------------------------------- CHANGE IN PLAN ASSETS Fair value of plan assets beginning of year 726 648 572 Actual return on plan assets 148 49 41 Employer contribution 189 68 66 Benefits paid (59) (39) (31) - ----------------------------------------------------------------- Fair value of plan assets end of year 1,004 726 648 - ----------------------------------------------------------------- Funded status (614) (918) (711) Unrecognized actuarial loss 229 476 316 Unrecognized prior service cost 150 168 186 - ----------------------------------------------------------------- Net amount recognized $ (235) $ (274) $ (209) - ----------------------------------------------------------------- Amounts recognized in the statement of financial position consist of: Accrued benefit liability $ (607) $ (778) $ (209) Intangible asset 260 307 --- Minimum pension liability 112 197 --- - ----------------------------------------------------------------- Net amount recognized $ (235) $ (274) $ (209) - ----------------------------------------------------------------- The accumulated benefit obligation was approximately $1,611,000, $1,504,000 and $1,198,000 at December 31, 1998, 1997 and 1996 respectively. In 1998 and 1997, a portion of the minimum liability adjustment was recorded as an adjustment to stockholders' equity of $112,000 and $197,000, net of deferred tax benefits of $84,000 and $116,000, respectively. Weighted-average assumptions used in determining the actuarial value of the projected benefit obligation are as follows: 1998 1997 1996 --------------------------- Discount rate* 6.75% 6.75% 7.5% Rate of compensation increase* 5.0% 5.0% 6.0% Expected return on plan assets 7.0% 7.0% 7.5% - ----------------------------------------------------------------- *Used in determining the actuarial value of the projected benefit obligation. The net periodic benefit cost of the Company's defined benefit pension plan included the following: Year Ended Dec. 31 ------------------------ (Dollars in Thousands) 1998 1997 1996 - ----------------------------------------------------------------- Service cost $ 49 $ 44 $ 33 Interest cost 110 101 80 Expected return on assets (55) (50) (43) Amortization of unrecognized net transition obligations 8 8 8 Amortization of prior service cost 18 18 18 Amortization of loss 21 11 10 - ----------------------------------------------------------------- Net periodic benefit cost $ 151 $ 132 $ 106 - ----------------------------------------------------------------- On February 26, 1998, the union membership covered by the defined benefit pension plan at Lake River agreed to freeze maximum retirement benefits at their current level and to close the pension plan to further enrollments. The results of the freeze will be reflected through the future benefit obligations of the plan. Lake River established a 401(k) defined contribution plan for its union employees in the third quarter of 1998. (9) STOCKHOLDERS' EQUITY On June 15, 1996, the Company's stockholders approved an amendment to the Restated Certificate of Incorporation that increased the authorized common shares to 18,000,000 shares. In January 1996, the Company sold approximately 2.28 million shares of its common stock in a private placement at a price of $2.50 per share. In October 1996, the Company sold approximately 693,000 shares of its common stock in a Rights Offering at a price of $3.00 per share. Proceeds from these sales of stock (net of issuance costs) were used to fund the acquisition of Rogers (see Acquisition of Rogers Galvanizing Company). In August 1998, the Board of Directors authorized the Company to repurchase up to $1,000,000 of its common stock in open market transactions. As of December 31, 1998, repurchases of the Company's common stock were not significant. (10) 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. (11) SUPPLEMENTAL CASH FLOW INFORMATION ACQUISITION OF ROGERS BUSINESS Fair Value: Assets acquired, not including cash $9,620 Liabilities assumed (5,591) Goodwill 4,293 ----- Purchase price $8,322 ----- Acquisition costs paid in: 1995 $ 507 1996 5,579 1997 2,236 ----- Net cash paid for acquisition $8,322 ----- (12) 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 its Board of Directors. The purchase price of $4.3 million in cash was paid to two Trusts that held the common stock. Under the purchase agreement with the Trusts, the Company agreed to offer to purchase the remaining outstanding shares of common stock of Rogers from its minority stockholders for cash at a price per share equivalent to that paid to the Trusts. In separate transactions in February, March and November 1996, the Company acquired an additional 21.9% of the outstanding common stock of Rogers at a purchase price of $1.8 million in cash. Effective December 31, 1996, the Company acquired the remaining 26.9% of the outstanding common shares of Rogers for $2.2 million in cash that was paid on January 3, 1997. The acquisition was accounted for using the purchase method of accounting, and the purchase price was allocated to Rogers' assets and liabilities based upon estimates of their fair value at the acquisition dates. Goodwill recorded in the acquisition was $4.3 million. Operating results of Rogers are included in the consolidated financial statements from February 1, 1996, with applicable minority interest allocations included in the 1996 results of operations. The following unaudited pro forma results of the Company's operations assume the acquisition of 100% of Rogers common stock occurred as of January 1, 1996. Weighted average common shares used to compute net earnings (loss) per share include the approximately 3.0 million shares issued in the Private Placement and Rights Offering. (Dollars in Thousands) Year Ended December 31, 1996 - ------------------------------------------------------------------ Sales $48,855 Net earnings $ 1,483 Net earnings per common share $ .25 - ----------------------------------------------------------------- The pro forma results include the operating results of Rogers for its fiscal years ended September 30. The pro forma amounts include an adjustment to reflect the amortization of the goodwill recorded in the Rogers acquisition using a straight-line method over 25 years. The pro forma financial information is not necessarily indicative of the operating results that would have occurred had the Rogers acquisition actually been consummated as of January 1, 1996, nor is the pro forma information necessarily indicative of future operating results. (13) UNION CONTRACTS On July 18, 1998, NAG signed a new 2-year labor agreement with the United Steel Workers covering approximately 125 production workers at three of its Tulsa plants. In the first quarter of 1998, the union members at Lake River voted to accept the terms of a new 3-year labor agreement with the Teamsters. (14) SEGMENT DISCLOSURES The Company is engaged principally in hot dip galvanizing and also conducts business in bulk liquid chemical storage and public warehousing. The services provided by the Company's wholly-owned subsidiaries are classified into the following industry segments: Galvanizing, Chemical Storage and Warehousing. Operating performance is measured by segment sales and operating earnings which includes operating costs, selling and administrative expenses, depreciation and amortization. All of the Company's revenues are derived from sales to customers located within the United States and there are no inter-segment sales. The galvanizing segment provides corrosion protection for customers' fabricated iron and steel structures through the process of immersing the structure into a bath of molten zinc. The chemical storage segment operates a bulk liquid terminal for the storage of customers' products and also provides specialty chemical bagging and drumming services. The warehousing segment provides public warehousing space, primarily for commercial and industrial dry good products. In 1998, galvanizing represented 81% of the Company's sales, chemical storage 11% and warehousing 8%. These respective contribution rates essentially have been unchanged for each of the past three years, including 1998. Corporate headquarters expenses were primarily for insurance premiums, audit and legal fees, investor relations, travel, voice and data communications and salaries. The corporate headquarters staff is comprised of six persons, including the officers of the Company. In 1998 and 1997, other deductions of $305,000 and $125,000, respectively, were incurred for environmental and litigation settlements. Year Ended December 31 --------------------------- (Dollars in Thousands) 1998 1997 1996 - ----------------------------------------------------------------- SALES Galvanizing $39,049 $38,633 $38,498 Chemical storage 5,224 5,792 5,289 Warehousing 3,731 4,131 3,812 - ----------------------------------------------------------------- 48,004 48,556 47,599 - ----------------------------------------------------------------- OPERATING INCOME Galvanizing $ 2,575 $ 2,647 $ 4,738 Chemical storage 269 466 (196) Warehousing 542 427 453 Corporate headquarters expense (1,629) (1,577) (1,894) Other deductions, net (305) (125) ---- - ----------------------------------------------------------------- 1,452 1,838 3,101 - ----------------------------------------------------------------- Interest expense 631 781 867 other income (309) ---- (98) - ----------------------------------------------------------------- 1,130 1,057 2,332 Income Tax Expense 530 468 894 Minority Interest ---- ---- 164 - ----------------------------------------------------------------- NET INCOME $ 600 $ 589 $ 1,274 - ----------------------------------------------------------------- Year Ended December 31 --------------------------- (Dollars in Thousands) 1998 1997 1996 - ----------------------------------------------------------------- TOTAL ASSETS Galvanizing $28,380 $26,124 $25,636 Chemical storage 2,516 3,137 2,776 Warehousing 680 903 821 General corporate 1,532 1,791 4,206 - ----------------------------------------------------------------- $33,108 $31,955 $33,439 - ----------------------------------------------------------------- CAPITAL EXPENDITURES Galvanizing $ 3,155 $ 2,738 $ 2,118 Chemical storage 217 179 538 Warehousing 76 34 124 General corporate 94 152 10 - ----------------------------------------------------------------- $ 3,542 $ 3,103 $ 2,790 - ----------------------------------------------------------------- DEPRECIATION AND AMORTIZATION EXPENSE Galvanizing $ 2,331 $ 2,093 $ 1,718 Chemical storage 450 503 518 Warehousing 87 76 65 General corporate 55 40 46 $ 2,923 $ 2,712 $ 2,347 - ----------------------------------------------------------------- QUARTERLY RESULTS (UNAUDITED) Quarterly Results of Operations for the Years Ended December 31, 1998 and 1997 Were:
1998 --------------------------------------- (Dollars in Thousands Except per Share Amounts) Mar 31 Jun 30 Sep 30 Dec 31(1) Total - ----------------------------------------------------------------------------- SALES $12,164 $12,910 $12,206 $10,724 $48,004 GROSS PROFIT $ 2,809 $ 3,394 $ 2,695 $ 2,519 $11,417 - ----------------------------------------------------------------------------- NET INCOME (LOSS) $ 340 $ 383 $ 52 $ (175) $ 600 - ----------------------------------------------------------------------------- BASIC EARNINGS (LOSS) PER COMMON SHARE $ .05 $ .06 $ .01 $ (.03) $ .09 DILUTED EARNINGS (LSS) PER COMMON SHARE $ .05 $ .06 $ .01 $ (.03) $ .09 1997 -------------------------------------- (Dollars in Thousands Except per Share Amounts) Mar 31 Jun 30 Sep 30 Dec 31 Total - ----------------------------------------------------------------------- SALES $11,724 $12,535 $12,206 $12,091 $48,556 GROSS PROFIT $ 2,557 $ 2,838 $ 2,440 $ 2,742 $10,577 - ----------------------------------------------------------------------- NET INCOME $ 252 $ 283 $ 2 $ 52 $ 589 - ----------------------------------------------------------------------- Basic Earnings per Common Share $ .04 $ .04 $ ---- $ .01 $ .09 DILUTED EARNINGS PER COMMON SHARE $ .04 $ .04 $ ---- $ .01 $ .09 > (1) Income before income taxes includes a gain of $66,000 from insurance proceeds and charge of $208,000 to increase the Allowance for Doubtful Receivables.
SELECTED FINANCIAL HIGHLIGHTS The following is a summary of selected financial data of the Company (Dollars in Thousands, Except per Share Data)
For The Years Ended December 31, 1998 1997 1996 (1) 1995 (2) 1994 (2) - -------------------------------------------------------------------------------- Sales $48,004 $48,556 $47,599 $25,246 $26,223 Earnings (Loss) from continuing operations before effect of minority interest $ 600 $ 589 $ 1,438 $ (703) $ 1,011 Net Earnings (Loss) $ 600 $ 589 $ 1,274 $(1,879) $ 410 Basic Earnings (Loss) per common share from continuing operations $ .09 $ .09 $ .21 $ (.19) $ .27 Diluted Earnings (Loss) per common share from continuing operations $ .09 $ .09 $ .21 $ (.19) $ .27 Basic Earnings (Loss) per common share $ .09 $ .09 $ .21 $ (.50) $ .11 Diluted Earnings (Loss) per common share $ .09 $ .09 $ .21 $ (.50) $ .11 Capital Expenditures $ 3,542 $ 3,103 $ 2,790 $ 1,055 $ 1,410 Depreciation & Amortization $ 2,923 $ 2,712 $ 2,347 1,471 $ 1,469 Weighted average shares outstanding* (3) 6,789,597 6,813,068 6,202,763 3,747,134 3,751,979 At December 31, 1998 1997 1996 1995 1994 - -------------------------------------------------------------------------------- Working Capital $ 7,070 $ 6,164 $ 3,640 $ 2,875 $ 2,761 Current Ratio 2.2 2.1 1.4 1.7 1.6 Total Assets $33,108 $31,955 $33,439 $18,375 $20,954 Long-Term Debt $ 8,590 $ 8,131 $ 7,172 $ 5,932 $ 6,009 Stockholders' Equity $17,783 $17,127 $16,735 $ 8,165 $10,044 Per Share $ 2.63 $ 2.53 $ 2.48 $ 2.18 $ 2.68 Common Shares Outstanding 6,767,540 6,778,345 6,759,386 3,747,498 3,746,410 *Weighted average shares outstanding include the dilutive effect of stock options, if applicable. (1) Includes results of operations of acquired Rogers Galvanizing business from February 1, 1996. (2) Net earnings (loss) and per share results include discontinued operations of Kinpak. (3) Reflects stock issued in private placement and rights offering in 1996.
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