-----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, SC62x/hd6uQ2bBQeqOw1y7kiokocVBLX3324DhLLPyChEBsdzknzlx81kzxYvTqN N+SrG4V41mnThPhmZwQG3Q== 0000055805-99-000008.txt : 19990817 0000055805-99-000008.hdr.sgml : 19990817 ACCESSION NUMBER: 0000055805-99-000008 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990816 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KINARK CORP CENTRAL INDEX KEY: 0000055805 STANDARD INDUSTRIAL CLASSIFICATION: COATING, ENGRAVING & ALLIED SERVICES [3470] IRS NUMBER: 710268502 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-03920 FILM NUMBER: 99693492 BUSINESS ADDRESS: STREET 1: 2250 EAST 73RD STREET STREET 2: SUITE 300 CITY: TULSA STATE: OK ZIP: 74136-6832 BUSINESS PHONE: (918)494-0964 MAIL ADDRESS: STREET 1: 2250 EAST 73RD STREET STREET 2: SUITE 300 CITY: TULSA STATE: OK ZIP: 74136-6832 FORMER COMPANY: FORMER CONFORMED NAME: KIN ARK OIL CO DATE OF NAME CHANGE: 19690601 FORMER COMPANY: FORMER CONFORMED NAME: KIN ARK OIL & GAS CO DATE OF NAME CHANGE: 19680906 10-Q 1 ============================================================================== SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR QUARTER ENDED JUNE 30, 1999 Commission File No. 1-3920 KINARK CORPORATION (Exact name of the registrant as specified in its charter) DELAWARE 71-0268502 (State of Incorporation) (I.R.S. Employer Identification No.) 2250 EAST 73RD STREET TULSA, OKLAHOMA 74136-6832 (Address of principal executive offices) Registrant's telephone number: (918) 494-0964 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 and 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of June 30, 1999. Common Stock $ .10 Par Value . . . . . 6,712,159 ============================================================================== KINARK CORPORATION AND SUBSIDIARIES INDEX TO QUARTERLY REPORT ON FORM 10-Q
PAGE PART I. FINANCIAL INFORMATION Forward Looking Statements or Information 2 Item 1. Financial Statements Independent Accountants' Review Report 3 Condensed Consolidated Balance Sheets as of June 30, 1999 (unaudited), and December 31, 1998 4 Condensed Consolidated Statements of Earnings for the three and six months ended June 30, 1999 and 1998 (unaudited) 5 Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 1999 and 1998 (unaudited) 6 Notes to Condensed Consolidated Financial Statements for the three and six months ended June 30, 1999 and 1998 (unaudited) 7-13 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 14-18 Item 3. Quantitative and Qualitative Disclosures About Market Risks 19 PART II. OTHER INFORMATION 20-21 SIGNATURES 22
FORWARD LOOKING STATEMENTS OR INFORMATION Certain statements in this Form 10-Q, including information set forth under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations", constitute "Forward-Looking Statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements are typically punctuated by words or phrases such as "anticipates," "estimate," "should," "may," "management believes," and words or phrases of similar import. The Company cautions investors that such forward-looking statements included in this Form 10-Q, or hereafter included in other publicly available documents filed with the Securities and Exchange Commission, reports to the Company's stockholders and other publically available statements issued or released by the Company involve significant risks, uncertainties, and other factors which could cause the Company's actual results, performance (financial or operating) or achievements to differ materially from the future results, performance (financial or operating) or achievements expressed or implied by such forward-looking statements. 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; changes in 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. The Company believes that the important factors set forth in the Company's cautionary statements at Exhibit 99 to this Form 10-Q could cause such a material difference to occur and investors are referred to Exhibit 99 for such cautionary statements. 2 INDEPENDENT ACCOUNTANTS' REVIEW REPORT To the Board of Directors and Stockholders of Kinark Corporation: We have reviewed the accompanying condensed consolidated balance sheet of Kinark Corporation and subsidiaries (the "Company") as of June 30, 1999, and the related condensed consolidated statements of earnings for the three and six-month periods ended June 30, 1999 and 1998 and the condensed consolidated statements of cash flows for the six months ended June 30, 1999 and 1998. These financial statements are the responsibility of the Company's management. We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and of making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our reviews, we are not aware of any material modifications that should be made to such condensed consolidated financial statements for them to be in conformity with generally accepted accounting principles. We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of Kinark Corporation and subsidiaries as of December 31, 1998, and the related consolidated statements of earnings, stockholders' equity, and cash flows for the year then ended (not presented herein); and in our report dated March 3, 1999, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 1998 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived. /s/Deloitte & Touche LLP Tulsa, Oklahoma August 16, 1999 3 KINARK CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
Unaudited JUNE 30 Dec 31 (Dollars in Thousands) 1999 1998 - ----------------------------------------------------------------------------- < ASSETS Current Assets Cash and cash equivalents $ 389 $ 189 Trade receivables, net of reserves of $360 and $169, respectively 7,317 6,600 Inventories 3,998 4,158 Investments 97 487 Prepaid expenses and other assets 688 984 Deferred tax asset, net 609 735 ------ ------ TOTAL CURRENT ASSETS 13,098 13,153 ------ ------ PROPERTY, PLANT AND EQUIPMENT, AT COST Land 776 776 Chemical storage facilities 10,728 10,629 Warehousing equipment 774 750 Galvanizing plants and equipment 22,045 20,006 Other 146 323 ------ ------ 34,469 32,484 Less: Allowance for depreciation 18,153 16,877 ------ ------ TOTAL PROPERTY, PLANT & EQUIPMENT, NET 16,316 15,607 ------ ------ DEFERRED TAX ASSET, NET 85 131 GOODWILL, NET OF ACCUMULATED AMORTIZATION 3,858 3,952 OTHER ASSETS 279 265 ------ ------ TOTAL ASSETS $ 33,636 $ 33,108 ======= ====== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Trade accounts payable $ 1,609 $ 1,770 Accrued payroll and employee benefits 1,382 1,210 Other taxes 829 979 Other accrued liabilities 1,566 1,194 Current maturities of long-term obligations 963 930 ------ ------ TOTAL CURRENT LIABILITIES 6,349 6,083 ------ ------ PENSION AND RELATED LIABILITIES 644 652 LONG-TERM OBLIGATIONS 8,481 8,590 COMMITMENTS AND CONTINGENCIES (NOTE 8) --- --- STOCKHOLDERS' EQUITY Common stock 819 819 Additional paid-in capital 17,364 17,364 Minimum pension liability (112) (112) Retained earnings 6,071 5,553 Less: Treasury stock at cost (5,980) (5,841) ------ ------ TOTAL STOCKHOLDERS' EQUITY 18,162 17,783 ------ ------ TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 33,636 $ 33,108 ====== ======
See notes to condensed consolidated financial statements. 4 KINARK CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS Unaudited
Three Months Ended Six Months Ended June 30 June 30 ------------------ ---------------- (Dollars in Thousands Except per Share Amounts) 1999 1998 1999 1998 - ------------------------------------------------------------------------------ SALES $11,893 $12,910 $23,038 $25,074 COSTS AND EXPENSES Cost of sales 8,926 9,516 16,975 18,688 Selling, general & administrative 1,570 1,755 3,346 3,583 Depreciation and amortization 734 737 1,457 1,438 ------ ------ ------ ------ TOTAL COSTS AND EXPENSES 11,230 12,008 21,778 23,709 ------ ------ ------ ------ OPERATING EARNINGS 663 902 1,260 1,365 OTHER (INCOME) EXPENSE Interest expense, net 176 150 351 326 Other income --- --- --- (309) ------ ------ ------ ------ TOTAL OTHER (INCOME) EXPENSE 176 150 351 17 EARNINGS BEFORE INCOME TAXES 487 752 909 1,348 Income tax expense 210 369 391 625 ------ ------ ------ ------ NET EARNINGS $ 277 $ 383 $ 518 $ 723 ====== ====== ====== ====== BASIC EARNINGS PER COMMON SHARE $ .04 $ .06 $ .08 $ .11 DILUTED EARNINGS PER COMMON SHARE $ .04 $ .06 $ .08 $ .11
See notes to condensed consolidated financial statements. 5 KINARK CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Unaudited
Six Months Ended June 30 ------------------------ (Dollars in Thousands) 1999 1998 - ---------------------------------------------------------------------------- OPERATING ACTIVITIES Net income $ 518 $ 723 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 1,457 1,438 Gain on involuntary conversion of assets --- (309) (Gain) loss on disposal of assets (5) 10 Gain on sale of securities (12) --- Deferred income taxes 172 217 Change in assets and liabilities: Accounts receivable, net (717) (306) Inventories and other 442 (1,362) Accounts payable, accrued liabilities and other 225 861 ------ ------ CASH PROVIDED BY OPERATING ACTIVITIES 2,080 1,272 INVESTING ACTIVITIES Sale of securities 402 --- Capital expenditures (2,072) (1,490) Proceeds from involuntary conversion of assets --- 325 Proceeds from sale of assets 5 4 ------ ------ CASH USED FOR INVESTING ACTIVITIES (1,665) (1,161) ------ ------ FINANCING ACTIVITIES Purchase of common stock for treasury (139) --- Proceeds from long-term obligations 7,530 9,024 Payments on long-term obligations (7,606) (9,090) ------ ------ CASH USED FOR FINANCING ACTIVITIES (215) (66) ------ ------ INCREASE IN CASH AND CASH EQUIVALENTS 200 45 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 189 259 ------ ------ CASH AT END OF PERIOD $ 389 $ 304 ====== ======
See notes to condensed consolidated financial statements. 6 KINARK CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998 UNAUDITED NOTE 1. BASIS OF PRESENTATION --------------------- The condensed consolidated financial statements included in this report have been prepared by Kinark Corporation (the "Company") pursuant to the rules and regulations of the Securities and Exchange Commission for interim reporting and include all normal and recurring adjustments which are, in the opinion of management, necessary for a fair presentation. These financial statements have not been audited by an independent accountant. The condensed consolidated financial statements include the accounts of the Company and its subsidiaries. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations for interim reporting. The Company believes that the disclosures are adequate to make the information presented not misleading. However, these financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K, for the year ended December 31, 1998. The financial data for the interim periods presented may not necessarily reflect the results to be anticipated for the complete year. NOTE 2. EARNINGS PER COMMON SHARE ------------------------- Diluted earnings per common share for the periods presented has been computed based upon the weighted average number of shares outstanding, adjusted for the dilutive effect of stock options, of 6,720,034 and 6,816,689 for the three months ended June 30, 1999 and 1998 respectively, and 6,735,810 and 6,810,677 for the six months ended June 30, 1999 and 1998 respectively. Basic earnings per common share has been computed based upon the average number of shares outstanding of 6,720,034 and 6,778,345 for the three months ended June 30, 1999 and 1998 respectively, and 6,735,810 and 6,778,345 for the six months ended June 30, 1999 and 1998 respectively. 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 407,125 and 76,750 at June 30, 1999 and 1998, respectively. NOTE 3. INVENTORIES ----------- Inventories consist primarily of raw zinc "pigs," molten zinc in galvanizing kettles and other chemicals and materials used in the hot dip galvanizing process. All such 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. 7 For the six months ended June 30, 1999, the Company incurred a temporary reduction in zinc inventory of approximately 350,000 pounds, or 6%, from the base period inventory at December 31, 1998. The reduction reflected a realignment of planned purchase commitments with projected requirements for 1999. The Company was not required to give effect to the liquidated LIFO base, valued at approximately $33,000, because it replaced this inventory reduction in July, 1999 and expects the zinc level at the end of 1999 to exceed levels at the beginning of the year. NOTE 4. INVESTMENT SECURITIES --------------------- The Company accounts for investment securities under the provisions of Statement of Financial Accounting Standards ("SAFS") 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 value. At June 30, 1999, the securities carrying value approximated fair value. The Company's unrealized gains or losses for the six months ended June 30, 1999 are immaterial. Realized gains and losses and declines in value of securities judged to be other-than-temporary are included in income. During the six months ended June 30, 1999, the Company sold investments for proceeds of $402,000 and realized a $12,000 gain. Subsequent to June 30, 1999, the Company sold all investments classified as available-for-sale securities and realized a nominal gain. NOTE 5. DEBT OBLIGATIONS ---------------- In 1997, the Company entered into a two-year bank credit agreement which provides a $8,500,000 maximum revolving line of credit, a $1,250,000 advancing term loan for expansion of galvanizing plants and a $3,500,000 term loan, that was scheduled to expire in May 1999. In June 1998, the bank extended the expiration date of this agreement to May 1, 2000, with all other terms and conditions remaining the same. Substantially all of the Company's accounts receivable, inventories and fixed assets are pledged as collateral under the agreement, and the credit agreement is secured by a guaranty from each of the Company's subsidiaries. Amounts borrowed under the agreement bear interest at the prime rate of Chase Manhattan Bank minus or plus a spread ranging from minus 25 basis points to plus 50 basis points, determined by a coverage ratio of defined earnings to debt service. Term loan payments are based on a five year amortization schedule with equal monthly payments of principal and interest. The advancing term loan was funded in April 1999 and requires equal monthly payments of principal and interest based on a six year amortization schedule. The revolver may be paid down without penalty, or additional funds may be borrowed up to the revolver limit. The term loan and advancing term loan may be pre-paid without penalty. The credit agreement provides for capital expenditures related to a minimum 8 coverage ratio of defined earnings to debt service plus capital expenditures, limits the pledging of assets for new debt, and requires the Company to maintain a minimum net worth. The Company was in compliance with such covenants at June 30, 1999. In July 1999, the Company accepted a proposal from a bank to replace all of its existing bank debt with a new credit agreement with extended terms. The expanded credit facilities are planned to insure adequate funds for working capital and provide funding to expand the Company's galvanizing operations and plants. The Company will enter into the new credit agreement during the third quarter of 1999. NOTE 6. NEW ACCOUNTING STANDARDS ------------------------ In June 1998, the Financial Accounting Standards Board ("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, 2001, and is in the process of evaluating the effect of this standard on its financial reporting. NOTE 7. INVOLUNTARY CONVERSION OF ASSETS -------------------------------- During the first quarter of 1998, fire destroyed an acid recycling system at one of the Company's galvanizing plants. The acid recycling system was covered by insurance for its current replacement value. As a result of the expected receipt of insurance proceeds, the Company recorded a pre-tax gain of $309,000 for the first quarter of 1998, and purchased a new acid recovery system for $410,000. Installation of the new acid recovery system was completed during the third quarter of 1998. All expected insurance proceeds have been received. NOTE 8. COMMITMENTS AND CONTINGENCIES ----------------------------- The Company recorded a charge to selling, general and administrative ("SG&A") expense of $183,000 for the quarter ended March 31, 1998 primarily for the estimated net impact of a settlement with the United States Environmental Protection Agency ("EPA"). As previously reported in 1995, the settlement concerned the cost of soil removal from a former galvanizing site in Philadelphia, PA sold in 1981. During the third quarter of 1998, the Company executed a Consent Decree that resolved all of the claims brought by the EPA. North American Galvanizing Company ("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 clean-up 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 9 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. 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 June 30, 1999, the aggregate commitments for the procurement of zinc were approximately $5 million, to cover NAG's estimated requirements through the first quarter of 2000. 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 of 10% in the market price of zinc from the June 30, 1999 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 in the short-term spot purchases of zinc. During the second quarter of 1999, NAG exercised an option to renew the existing lease of a 52,000 square foot manufacturing facility located at the Port of Catoosa in Catoosa, Oklahoma. Effective July 1, 1999, the lease was extended for two (2) years with all other terms and conditions of the lease unchanged. NAG began construction on a major facilities expansion and addition of a 51-foot galvanizing kettle at its Nashville plant in the first quarter of 1999 and expects to place the kettle in operation during August 1999. North American Warehousing Company ("NAW") leases 201,000 square feet of public warehousing space located in southwest Chicago. In the second quarter of 1999, NAW renegotiated the existing warehouse lease to extend through December, 2001. The lease provides an option and right of first refusal for NAW to purchase the warehouse 10 facility at a predetermined price at any time during the current term of the lease. 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. NOTE 9. LOSS OF MAJOR CUSTOMERS ----------------------- On July 1, 1998, NAG decided to discontinue galvanizing services to one of its largest customers which accounted for approximately 7% of NAG's first-half 1998 sales and 6% of Kinark's first-half 1998 sales. This action was based on NAG's decision not to provide galvanizing services to this customer who plans to compete directly with NAG in the hot dip galvanizing market. In the third quarter of 1998, NAW's largest customer terminated its account. This account represented approximately 4% of Kinark's first-half 1998 consolidated sales and 46% of NAW's 1998 first-half sales. NOTE 10. TREASURY STOCK -------------- In July 1998, the Board of Directors authorized the Company to repurchase up to $1,000,000 of its common stock in open market transactions. Shares repurchased by the Company are recorded as "Treasury Stock" and result in a reduction of "Stockholders' Equity." As of June 30, 1999, the Company had purchased 66,000 shares of its common stock for an aggregate cost of approximately $168,000 under this program. NOTE 11. ESTIMATES --------- The preparation of financial statements requires estimates to be made by management. During the first quarter of 1999, management revised various accounting estimates based on changes in circumstances, trend analysis and the results of established methodologies used as a basis for certain estimates. Significant changes to estimates included a reduction in Lake River Corporation real estate taxes of $178,000 due to the successful appeal of original assessed values and an additional provision of $182,000 for estimated uncollectible accounts receivable. NOTE 12. PROPERTIES ---------- As reported previously, Lake River Corporation ("Lake River") has operating facilities located on approximately 50 acres situated on the Chicago Ship Canal in Cook County, Illinois, which are leased as multiple parcels from the Metropolitan Water Reclamation District of 11 Greater Chicago ("MWRD"), a municipal corporation. These multiple leases have various terms with the earliest expiring in 1999. Lake River and MWRD have agreed to renegotiate certain of these leases and 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. NOTE 13. 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. 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 the first quarter of 1998, other deductions of $183,000 were incurred for environmental settlements. 12
Three Months Ended Six Months Ended June 30 June 30 -------------------------- ---------------------------- (Dollars in Thousands) 1999 1998 1999 1998 - ---------------------------------------------------------------------------------- SALES Galvanizing $10,050 84.5% $10,387 80.5% $19,330 83.9% $20,011 79.8% Chemical storage 1,324 11.1% 1,358 10.5% 2,645 11.5% 2,781 11.1% Warehousing 519 4.4% 1,165 9.0% 1,063 4.6% 2,282 9.1% - ---------------------------------------------------------------------------------- 11,893 100.0% 12,910 100.0% 23,038 100.0% 25,074 100.0% - ---------------------------------------------------------------------------------- OPERATING INCOME Galvanizing $ 874 $ 969 $ 1,628 $ 1,811 Chemical storage 117 169 388 192 Warehousing 36 220 (8) 410 Corporate headquarters expense (364) (456) (748) (865) Other deductions, net ---- --- --- (183) - ---------------------------------------------------------------------------------- 663 902 1,260 1,365 - ---------------------------------------------------------------------------------- Interest expense 176 150 351 326 Other income ---- --- --- (309) - ---------------------------------------------------------------------------------- 176 150 351 17 - ---------------------------------------------------------------------------------- Income tax expense 210 369 391 625 - ---------------------------------------------------------------------------------- NET INCOME $ 277 $ 383 $ 518 $ 723 - ---------------------------------------------------------------------------------- CAPITAL EXPENDITURES Galvanizing $ 1,179 $ 898 $ 1,946 $ 1,332 Chemical storage 38 89 99 115 Warehousing 10 --- 24 1 General corporate 1 29 3 42 - ---------------------------------------------------------------------------------- $ 1,228 $ 1,016 $ 2,072 $ 1,490 - ---------------------------------------------------------------------------------- DEPRECIATION AND AMORTIZATION EXPENSE Galvanizing $ 614 $ 569 $ 1,219 $ 1,120 Chemical storage 94 130 188 251 Warehousing 17 24 34 39 General corporate 9 14 16 28 - ---------------------------------------------------------------------------------- $ 734 $ 737 $ 1,457 $ 1,438 - ---------------------------------------------------------------------------------- June 30, 1999 December 31, 1998 ------------- ----------------- TOTAL ASSETS Galvanizing $29,338 $28,380 Chemical storage 2,436 2,516 Warehousing 535 680 General corporate 1,327 1,532 - ---------------------------------------------------------------------------------- $33,636 $33,108 - ----------------------------------------------------------------------------------
13 KINARK CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS CONSOLIDATED Sales for the second quarter of 1999 were $11,893,000, a decrease of 7.9% from $12,910,000 for the same period in 1998. For the six months ended June 30, 1999, sales decreased 8.1% to $23,038,000 from $25,074,000 a year ago. The decrease in the second quarter of 1999 was attributable primarily to lower sales in the warehousing segment, while sales in the galvanizing and chemical storage segments decreased slightly. Gross profit margin was 24.9% for the second quarter ended June 30, 1999 compared to 26.3% for the same period last year. For the first six months of 1999, gross profit margin was 26.3% compared to 25.5% for the same period last year. The decrease in the second quarter of 1999 was primarily the result of lower margins in the warehousing segment that offset improved margins in the chemical storage segment, while margins in the galvanizing segment were approximately the same. The increase for the first half of 1999 was attributable to lower indirect costs and improved margins in the chemical storage segment. Selling, general and administrative expenses ("SG&A") for the second quarter of 1999 decreased 10.5% to $1,570,000 from $1,755,000 in the same period a year ago, as a result of expense reductions achieved in all of the business segments and the corporate office. SG&A expense of $3,346,000 for the first six months of 1999 was down $237,000 from $3,583,000 in 1998, primarily due to the expense of an environmental settlement recorded in the first half of 1998. Operating earnings for the second quarter of 1999 were $663,000, down from $902,000 for the same period in 1998. For the six months ended June 30, 1999, operating earnings were $1,260,000 compared to $1,365,000 for the same period in 1998. Net interest expense was $351,000 for the six months ended June 30, 1999 compared to $326,000 for the first six months of 1998, reflecting increased average borrowings as a result of increased working capital and capital expenditures. The effective income tax rate for the first half of 1999 was 43.0% compared to 46.4% for the same period in 1998. The rates were higher than federal statutory rates primarily due to non-deductible goodwill amortization and state income taxes. GALVANIZING SEGMENT NORTH AMERICAN GALVANIZING COMPANY ("NAG"). Galvanizing sales of $10,050,000 for the second quarter of 1999 decreased 3.2% from $10,387,000 in the second quarter of 1998. For the first six months of 1999, sales of $19,330,000 decreased 3.4% over the same period in 1998. The decreases reflected lower order volume and pricing pressures. However, for both the second quarter and first half of 1999, increased sales were achieved at those NAG plants serving manufacturers of tubular steel products and steel structures for telecommunications, utility and highway transportation markets. These gains were offset by lower sales at NAG's central region 14 plants, as a result of increased competition and an overall reduction of 1.2% in average selling prices. Operating income for the second quarter of 1999 was $874,000 compared to $969,000 in 1998. For the first half of 1999, operating income was $1,628,000 compared to $1,811,000 a year ago. CHEMICAL STORAGE SEGMENT LAKE RIVER CORPORATION ("LAKE RIVER"). Sales declined slightly in both the second quarter and first six months of 1999 compared to the same periods last year, as a result of lower activity in custom drumming of specialty chemicals. Sales in the second quarter were $1,324,000 compared to $1,358,000 in 1998. For the first half of 1999, sales were $2,645,000 compared to $2,781,000 for the same period last year. For 1999 year-to-date, a decrease of 30.5% in drumming volume from the same period in 1998 reflected lower exports due to the weakness in Asian markets and the decision of a major account to undertake its own drumming activities. Despite the sharp decline in drumming, Lake River's bulk liquid storage volume rose 17.5% in the first half of 1999 due to new accounts and general increases in throughput of products handled for its customers. Operating income for the second quarter of 1999 was $117,000 compared to $169,000 in 1998. For the first half of 1999, operating income was $388,000 compared to $192,000 in 1998. WAREHOUSING SEGMENT NORTH AMERICAN WAREHOUSING COMPANY ("NAW"). Sales for the second quarter in the warehousing segment decreased 55.5% to $519,000 in 1999 from $1,165,000 in 1998. In the first half of 1999, sales decreased 53.4% to $1,063,000 from $2,282,000 in the same period of 1998. As previously reported, the decrease in sales primarily reflects the Company's decision in 1998 not to expand this business geographically and the expiration of a contract with a major customer that relocated its warehousing outside of NAW's Chicago regional service area. Operating income for the second quarter of 1999 was $36,000 compared to $220,000 in 1998. For the first half of 1999, an operating loss of $8,000 compared to operating income of $410,000 in 1998. LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities was $2,080,000 for the first half of 1999 compared to $1,272,000 for the first half of 1998. The primary increase in cash generated was due to a reduction of zinc inventories in the first half of 1999 to bring floor stock in line with projected requirements, as compared to an increase a year earlier, for a net benefit of $1,804,000. Other changes in net working capital required the use of $1,047,000 in cash. Net working capital was $6,749,000 at June 30, 1999 compared to $7,070,000 at December 31, 1998. During the first half of 1999, proceeds from operating activities were used to fund capital expenditures of $2,072,000. Included in these expenditures were initial outlays for a facilities expansion at NAG's Nashville, Tennessee plant, including a larger 51-foot galvanizing kettle that will be activated during the third quarter of 1999. Depreciation of plant, property and equipment, plus amortization of goodwill, was $1,457,000 in the first half of 1999 and $1,438,000 a year ago. In the first half of 1999, the Company purchased approximately 52,000 shares of its common stock, costing $139,000. Sales of securities classified as available for sale generated cash of $402,000 in the first half of 1999. 15 During the first half of 1999, the Company made debt repayments of $494,000 and increased borrowings $418,000 under a revolving line of credit for a net reduction of $76,000 in total debt. The Company's current credit facility consists of an $8,500,000 revolving line of credit, and term notes of $3,500,000 and $1,026,000, under a two-year bank credit agreement that expires May 1, 2000. The Company's availability under the revolving line of credit was $1,879,000 at June 30, 1999. As discussed in Note 5 to the Company's Condensed Consolidated Financial Statements, the Company is restructuring its credit facilities with a bank under a new credit agreement that will become effective during the third quarter of 1999. Under the new credit agreement, the Company will have credit facilities available up to $23,700,000. The Company believes cash flow from operations and available credit facilities, currently in effect and proposed, are sufficient to meet its foreseeable needs for working capital and planned capital expenditures. ENVIRONMENTAL MATTERS The Company recorded a charge to SG&A of $158,000 for the quarter ended March 31, 1998 for the estimated net impact of a settlement with the United States Environmental Protection Agency ("EPA"). As previously reported in 1995, the settlement concerned the cost of soil removal from a former galvanizing site in Philadelphia, PA sold in 1981. During the third quarter of 1998, the Company executed a Consent Decree that resolved all of the claims brought by the EPA. 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 in the first six months of 1999 and 1998 was $427,000 and $491,000, respectively. The disposal and recycling of waste acids generated by the galvanizing operations represents the major expenditure in this area. The Company operates on-site sulphuric acid recovery systems at three of its galvanizing plants. 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, NAG is continuing to evaluate alternative waste hydrochloric acid recycling methods. Future capital expenditures in this area are expected to increase, but such expenditures should significantly reduce waste acid disposal expense. Environmentally related expenditures at Lake River represent a relatively small percentage of the Company's total costs. The majority of waste disposal costs at Lake River are incurred on behalf of customers and are reimbursable. Lake River does not take title to the chemicals stored, blended, drummed or 16 bagged in its facilities and thus is responsible only for the proper handling of these materials while under its care, custody, and control. As previously reported, Kinark has escrowed proceeds 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. YEAR 2000 READINESS STATE OF READINESS. Like many companies that rely on computer technology, Kinark 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 believes 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 84% of Kinark's consolidated sales. Computer systems serving Kinark's chemical storage and warehousing operations are in the process of being upgraded to be Year 2000 compliant during the fourth quarter 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 during the fourth quarter of 1999. As 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 17 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 2,000 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 complete a contingency plan in the third quarter of 1999 to handle "the most reasonably likely worst case scenarios" as discussed above. The plan will involve independent verification by information technology consultants and computer service providers. 18 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Kinark's operations include managing market risks related to changes in interest rates, zinc commodity prices and an 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 5 to Condensed 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 June 30, 1999, $8,930,000 was outstanding under the agreement with an effective rate of 7.5%. The borrowings are due as follows: $475,000 in 1999 and $8,455,000 in 2000. Each increase of 10 basis points in the effective interest rate would result in an increase in interest charges of approximately $8,900 based on June 30, 1999 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 June 30, 1999, the aggregate commitments for the procurement of zinc were approximately $5 million, primarily to cover NAG's requirements for the remainder of 1999. 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 of 10% in the market price of zinc from the June 30, 1999 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 the short-term spot purchases of zinc. MARKETABLE SECURITIES MARKET VALUE RISK. At June 30, 1999, the Company held an investment in marketable equity securities of $97,000. The Company sold all of these securities during the third quarter of 1999 and realized a nominal gain on the transaction. 19 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS ----------------- Not applicable. ITEM 2. CHANGES IN SECURITIES --------------------- Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES ------------------------------- Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS --------------------------------------------------- The 1999 Annual Meeting of the Company's stockholders was held on Wednesday, May 12, 1999 in Tulsa, OK. At the meeting, the stockholders elected seven directors. The votes for the election of directors were as follows: Richard C. Butler 5,780,885 For 536,660 Against Paul R. Chastain 5,772,495 For 545,050 Against Michael T. Crimmins 5,774,365 For 543,180 Against Ronald J. Evans 5,789,465 For 528,080 Against Joseph J. Morrow 5,795,345 For 522,200 Against John H. Sununu 5,799,105 For 518,440 Against Mark E. Walker 5,799,165 For 518,380 Against 20 ITEM 5. OTHER INFORMATION ----------------- Not applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K -------------------------------- (a) Exhibits 3.1 The Company's Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Company's Pre-Effective Amendment No. 1 to Registration Statement on Form S-3 (Reg. No. 333-4937) filed on June 7, 1996). 3.2 The Company's Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q dated March 31, 1996). 27 Financial Data Schedule 99 Cautionary Statements by the Company Related to Forward- Looking Statements (b) Reports on Form 8-K The Company did not file any reports on Form 8-K during the quarter ended June 30, 1999. 21 SIGNATURES Pursuant to the requirements of Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized: KINARK CORPORATION -------------------- Registrant /S/Paul R. Chastain ---------------------- Paul R. Chastain Vice President and Chief Financial Officer (Principal Financial Officer) Date: August 16, 1999 --------------- 22 EXHIBIT INDEX Ex. No. Description 3.1 The Company's Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Company's Pre-Effective Amendment No. 1 to Registration Statement on Form S-3 (Reg. No. 333-4937) filed on June 7, 1996). 3.2 The Company's Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q dated March 31, 1996). 27 Financial Data Schedule 99 Cautionary Statements by the Company Related to Forward-Looking Statements. EX-27 2
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ISSUER'S INTERIM FINANCIAL STATEMENTS DATED JUNE 30, 1999, SET FORTH IN THE ACCOMPANYING FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 U. S. DOLLARS 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 1.0 389 97 7,677 360 3,998 13,098 34,469 18,153 33,636 6,349 9,125 0 0 819 18,162 33,636 23,038 23,038 16,975 21,778 0 0 351 909 391 518 0 0 0 518 .08 .08
EX-99 3 EXHIBIT 99 CAUTIONARY STATEMENTS BY THE COMPANY REGARDING FORWARD LOOKING STATEMENTS Certain statements in this Form 10-Q, including information set forth under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations", constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended (together, the "Securities Acts"). The Securities Acts provide certain "safe harbor" provisions for forward-looking statements. The Company desires to take advantage of the "safe harbor" provisions of the Securities Acts and is including these cautionary statements ("Cautionary Statements") pursuant to the Provisions of the Securities Acts with the intention of obtaining the benefits of the "safe harbor" provisions. In order to comply with the terms of the "safe harbor" in the Securities Acts, the Company cautions investors that forward-looking statements included in this Form 10-Q, or hereafter included in other publicly available documents filed with the Securities and Exchange Commission, reports to the Company's stockholders and other publicly available statements issued or released by the Company involve substantial risks, uncertainties, and other factors which could cause the Company's actual results, performance (financial or operating) or achievements to differ materially from the future results, performance (financial or operating) or achievements expressed or implied by such forward-looking statements. The Company believes the following important factors could cause such a material difference to occur: 1. The Company's ability to grow through the acquisition and development of galvanizing, chemical storage and warehousing operations or the acquisition of ancillary businesses. 2. The Company's ability to identify suitable acquisition candidates, to consummate or complete construction projects, or to profitably operate or successfully integrate enterprises into the Company's other operations. 3. The Company's ability to secure the capital and the related cost of such capital necessary to fund its future growth through acquisition and development, as well as internal growth. 4. The level of competition in the Company's industries and the possible entry of new, well-capitalized competitors into the Company's markets. 5. Uncertainties and changes in environmental compliance costs associated with past, present and future operations. 6. Uncertainties and changes related to federal, state and local regulatory policies, including environmental laws related to the galvanizing, chemicals and warehousing industries. 7. The Company's ability to staff its galvanizing, chemical storage and warehousing operations appropriately with qualified personnel, including in times of shortages of such personnel and to maintain a satisfactory relationship with labor unions. 8. The pricing and availability of equipment, materials and inventories, including zinc "pigs", the major component used in the hot dip galvanizing industry. 9. Uncertainties and changes in general economic conditions. 10. Uncertainties and changes in several industries to which the company's businesses are closely tied, such as highway and transportation, communications and energy. 11. Performance issues with key suppliers and subcontractors. 12. Uncertainties related to the retention of key customers in each of the Company's business segments. 13. Uncertainties regarding the effect of Year 2000 issues on suppliers and service providers in each of the Company's business segments. The words "believe," "expect," "anticipate," "project," "plan" and similar expressions identify forward-looking statements. Investors are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statement was made. The foregoing review of significant factors should not be construed as exhaustive or as an admission regarding the adequacy of disclosures previously made by the Company. -----END PRIVACY-ENHANCED MESSAGE-----