-----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, M+C2K5//JU8hCutsB2kUVqzF/wD+x8t0FUmsgWyQVSJogDUplaUgWJCyu8f54xpa T6Uhp93nmX83hOCoQJ8hRw== 0000055805-99-000014.txt : 19991115 0000055805-99-000014.hdr.sgml : 19991115 ACCESSION NUMBER: 0000055805-99-000014 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991112 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: 99749743 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 SEPTEMBER 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 September 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 September 30, 1999 (unaudited), and December 31, 1998 4 Condensed Consolidated Statements of Earnings for the three and nine months ended September 30, 1999 and 1998 (unaudited) 5 Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 1999 and 1998 (unaudited) 6 Notes to Condensed Consolidated Financial Statements for the three and nine months ended September 30, 1999 and 1998 (unaudited) 7-11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12-16 Item 3. Quantitative and Qualitative Disclosures About Market Risks 17 PART II. OTHER INFORMATION 18-19 SIGNATURES 20
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 September 30, 1999, and the related condensed consolidated statements of earnings for the three and nine-month periods ended September 30, 1999 and 1998 and the condensed consolidated statements of cash flows for the nine months ended September 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 November 12, 1999 -3- KINARK CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
Unaudited SEPTEMBER 30 DEC 31 (Dollars in Thousands) 1999 1998 - ------------------------------------------------------------------------------ ASSETS Current Assets Cash and cash equivalents $ 132 $ 189 Trade receivables, net of reserves of $339 and $169, respectively 7,043 6,600 Inventories 4,686 4,158 Investments --- 487 Prepaid expenses and other assets 714 984 Deferred tax asset, net 501 735 ------ ------ TOTAL CURRENT ASSETS 13,076 13,153 ------ ------ PROPERTY, PLANT AND EQUIPMENT, AT COST Land 776 776 Chemical storage facilities 10,683 10,629 Warehousing equipment 779 750 Galvanizing plants and equipment 23,859 20,006 Other 167 323 ------ ------ 36,264 32,484 Less: Allowance for depreciation 18,764 16,877 ------ ------ TOTAL PROPERTY, PLANT & EQUIPMENT, NET 17,500 15,607 ------ ------ DEFERRED TAX ASSET, NET 85 131 GOODWILL, NET OF ACCUMULATED AMORTIZATION 3,811 3,952 OTHER ASSETS 254 265 ------ ------ TOTAL ASSETS $34,726 $33,108 ====== ====== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities Trade accounts payable $ 1,902 $ 1,770 Accrued payroll and employee benefits 1,046 1,210 Other taxes 980 979 Other accrued liabilities 1,507 1,194 Current maturities of long-term obligations 819 930 ------ ------ TOTAL CURRENT LIABILITIES 6,254 6,083 ------ ------ PENSION AND RELATED LIABILITIES 637 652 LONG-TERM OBLIGATIONS 9,311 8,590 COMMITMENTS AND CONTINGENCIES (NOTE 6) --- --- STOCKHOLDERS' EQUITY Common stock 819 819 Additional paid-in capital 17,364 17,364 Minimum pension liability (112) (112) Retained earnings 6,433 5,553 Less: Treasury stock at cost (5,980) (5,841) ------ ------ TOTAL STOCKHOLDERS' EQUITY 18,524 17,783 ------ ------ TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $34,726 $33,108 ====== ======
See notes to condensed consolidated financial statements. -4- KINARK CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS Unaudited
Three Months Ended Nine Months Ended September 30 September 30 (Dollars in Thousands ------------------ ----------------- Except per Share Amounts) 1999 1998 1999 1998 ============================================================================== SALES $11,504 $12,206 $34,542 $37,280 COSTS AND EXPENSES Cost of sales 8,424 9,511 25,399 28,199 Selling, general & administrative 1,512 1,665 4,858 5,248 Depreciation and amortization 764 779 2,221 2,217 ----- ----- ------ ------ TOTAL COSTS AND EXPENSES 10,700 11,955 32,478 35,664 ------ ------ ------ ------ OPERATING EARNINGS 804 251 2,064 1,616 OTHER (INCOME) EXPENSE Interest expense, net 171 159 522 485 Other income --- --- --- (309) TOTAL OTHER EXPENSE 171 159 522 176 EARNINGS BEFORE INCOME TAXES 633 92 1,542 1,440 Income tax expense 271 40 662 665 ------ ------ ------ ------ NET EARNINGS $ 362 $ 52 $ 880 $ 775 ====== ====== ====== ====== BASIC EARNINGS PER COMMON SHARE $ .05 $ .01 $ .13 $ .11 DILUTED EARNINGS PER COMMON SHARE $ .05 $ .01 $ .13 $ .11
See notes to condensed consolidated financial statements. -5- KINARK CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Unaudited
Nine Months Ended September 30 ------------------ (Dollars in Thousands) 1999 1998 ==================================================================== OPERATING ACTIVITIES Net earnings $ 880 $ 775 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 2,221 2,217 Gain on involuntary conversion of assets --- (309) (Gain) loss on disposal of assets (11) 4 Deferred income taxes 280 242 Gain on sale of securities (23) --- Change in assets and liabilities: Accounts receivable, net (443) (612) Inventories and other (247) (853) Accounts payable, accrued liabilities and other 267 797 ----- ----- CASH PROVIDED BY OPERATING ACTIVITIES 2,924 2,261 ----- ----- INVESTING ACTIVITIES Capital expenditures (3,973) (2,493) Proceeds from involuntary conversion of assets --- 325 Proceeds from sale of assets 11 14 Sale (purchase) of securities 510 (443) ----- ----- NET CASH USED FOR INVESTING ACTIVITIES (3,452) (2,597) ----- ----- FINANCING ACTIVITIES Purchase of common stock for treasury (139) --- Proceeds from long-term obligations 21,971 13,995 Payments on long-term obligations (21,361) (13,766) ------ ------ CASH PROVIDED BY FINANCING ACTIVITIES 471 229 ------ ------ DECREASE IN CASH AND CASH EQUIVALENTS (57) (107) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 189 259 ------ ------ CASH AT END OF PERIOD $ 132 $ 152 ====== ======
See notes to condensed consolidated financial statements. -6- KINARK CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 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 6,712,159 and 6,790,751 for the three months ended September 30, 1999 and 1998 respectively, and 6,727,840 and 6,807,756 for the nine months ended September 30, 1999 and 1998 respectively. Basic earnings per common share has been computed based upon the average number of shares outstanding of 6,712,159 and 6,778,345 for the nine months ended September 30, 1999 and 1998 respectively, and 6,727,840 and 6,778,345 for the nine months ended September 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 328,000 and 138,000 at September 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. 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- NOTE 4. INVESTMENT SECURITIES --------------------- During the nine months ended September 30, 1999, the Company sold all of its investment for proceeds of $510,000 and realized a $23,000 gain. NOTE 5. DEBT OBLIGATIONS ---------------- In September 1999, the Company entered into a new three-year bank credit agreement with total credit facilities of $23,700,000 that replaced a previous loan agreement of $13,250,000 scheduled to expire in May 2000. The new agreement provides (i) a $9,000,000 maximum revolving line of credit for working capital and general corporate purposes, (ii) a $1,500,000 revolving capital expenditures facility, (iii) a $4,200,000 term loan and (iv) a $9,000,000 maximum bridge loan facility. The new agreement is scheduled to expire September 30, 2002. The Company's accounts receivable, inventories, fixed assets and the stock of its subsidiaries 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 Bank One, Oklahoma or the LIBOR rate, at the option of the Company, subject to a rate margin adjustment determined by the Company's consolidated debt service ratio. The prime rate margin adjustment ranges from minus 50 basis points (0.50%) to plus 25 basis points (0.25%). The LIBOR rate margin adjustment ranges from plus 225 basis points (2.25%) to plus 300 basis points (3.00%). Term loan payments are based on a five-year amortization schedule with equal monthly payments of principal and interest, and the loan may be prepaid without penalty. The revolving line of credit may be paid down without penalty, or additional funds may be borrowed up to the revolver limit. The credit agreement requires the Company to maintain compliance with covenant limits for current ratio, debt to tangible net worth ratio, debt service coverage ratio and a capital expenditures ratio. The Company was in compliance with such covenants at September 30, 1999. NOTE 6. COMMITMENTS AND CONTINGENCIES ------------------------------ As previously reported, North American Galvanizing Company ("NAG") received notice in 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 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. -8- The Company will continue to have 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 September 30, 1999, the aggregate commitments for the procurement of zinc were approximately $2.5 million, to cover 100% of NAG's estimated requirements through 1999 and 33% of the estimated requirements for 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 September 30, 1999 level would cause a lost gross margin opportunity of approximately $250,000. However, a favorable impact of a similar amount would result from the same hypothetical price movement in the short-term spot purchases of zinc. On October 12, 1999, Lake River Corporation ("Lake River") received notice from a customer of a claim for a material amount to recover costs arising from Lake River's alleged shipment of the wrong product in May of 1999. The Company maintains insurance for claims of this nature. The Company and its insurance carrier have not made a final determination of the amount of the claim, nor assessed the potential joint responsibility of the parties involved. Accordingly, the ultimate amount of the claim is not determinable at this time; however, the Company's insurance should cover any such loss. 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. -9- NOTE 7. TREASURY STOCK -------------- In 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 September 30, 1999, the Company had purchased 66,000 shares of its common stock for an aggregate cost of approximately $168,000 under this program, including 55,300 shares for $139,000 in 1999. NOTE 8. PROPERTIES ---------- As reported previously, 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 Greater Chicago ("MWRD"), a municipal corporation. These multiple leases have various terms with the earliest expiring at the end of 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 9. 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 in the galvanizing segment. -10-
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 -------------------------- ----------------------------- (Dollars in Thousands) 1999 1998 1999 1998 - ---------------------------------------------------------------------------------------- Sales Galvanizing $ 9,800 85.2% $10,091 82.7% $29,130 84.3% $30,102 80.8% Chemical storage 1,210 10.5% 1,222 10.0% 3,855 11.2% 4,003 10.7% Warehousing 494 4.3% 893 7.3% 1,557 4.5% 3,175 8.5% - ----------------------------------------------------------------------------------------- $11,504 100.0% $12,206 100.0% $34,542 100.0% $37,280 100.0% - ----------------------------------------------------------------------------------------- OPERATING EARNINGS Galvanizing $ 1,121 $ 604 $ 2,74 $ 2,415 Chemical storage 88 13 476 205 Warehousing (69) 122 (77) 532 Corporate headquarters expense (336) (488) (1,084) (1,353) Other deductions, net ---- --- --- (183) - ----------------------------------------------------------------------------------------- 804 251 2,064 1,616 - ----------------------------------------------------------------------------------------- Interest expense 171 159 522 485 Other income ---- --- --- (309) - ----------------------------------------------------------------------------------------- 171 159 522 176 - ----------------------------------------------------------------------------------------- Income tax expense 271 40 662 665 - ----------------------------------------------------------------------------------------- NET EARNINGS $ 362 $ 52 $ 880 $ 775 - ----------------------------------------------------------------------------------------- Capital Expenditures Galvanizing $ 1,838 $ 966 $ 3,784 $ 2,298 Chemical storage 58 12 157 127 Warehousing 5 2 29 3 General corporate ---- 23 3 65 - ----------------------------------------------------------------------------------------- $ 1,901 $ 1,003 $ 3,973 $ 2,493 - ----------------------------------------------------------------------------------------- DEPRECIATION AND AMORTIZATION EXPENSE Galvanizing $ 645 $ 588 $ 1,864 $ 1,708 Chemical storage 88 145 276 396 Warehousing 21 30 55 69 General corporate 10 16 26 44 - ----------------------------------------------------------------------------------------- $ 764 $ 779 $ 2,221 $ 2,217 - ----------------------------------------------------------------------------------------- September 30, 1999 December 31, 1998 ------------------ ----------------- TOTAL ASSETS Galvanizing $30,357 $28,380 Chemical storage 2,280 2,516 Warehousing 494 680 General corporate 1,595 1,532 - ---------------------------------------------------------------------------------------- $34,726 $33,108 - -----------------------------------------------------------------------------------------
-11- KINARK CORPORATION AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS CONSOLIDATED Kinark's net earnings improved in the third quarter of 1999 despite lower sales in all of its business segments. Net earnings for the third quarter of 1999 were $362,000, or $.05 per share, compared to net earnings of $52,000, or $.01 per share in the third quarter of 1999. For the nine month period ended September 30, net earnings were $880,000, or $.13 per share, in 1999 versus $775,000, or $.11 per share, in 1998. Operating earnings for the third quarter of 1999 increased 220% to $804,000 compared to $251,000 for the same period in 1998. For the nine months ended September 30, 1999, operating earnings increased 28% to $2,064,000 compared to $1,616,000 for the first nine months of 1998. Sales for the third quarter of 1999 were $11,504,000, a decrease of 5.8% from $12,206,000 for the same period in 1998. For the first nine months of 1999, sales decreased 7.3% to $34,542,000 form $37,280,000 for the comparable period a year ago. The decrease in 1999 sales results primarily from a reduction of the customer base for the warehousing segment; while sales in the chemical storage and galvanizing segments are down from 1998, both segments narrowed the year-to-year sales difference in the third quarter of 1999. Gross profit margin increased to 26.8% for the third quarter ended September 30, 1999 compared to 22.1% for the same period of 1998. For the first nine months of 1999, gross profit margin was 26.5% compared to 24.3% a year ago. The third-quarter 1999 increase in gross profit margin was driven by solid profit improvement in the galvanizing segment over 1998 results. For the nine months, galvanizing and chemical storage achieved higher gross profit margins over 1998 through improvements in productivity and lower indirect costs. Selling, general and administrative expenses ("SG&A") for the third quarter of 1999 decreased 9.2% to $1,512,000 from $1,665,000 in the same period a year ago, reflecting the company's continuing efforts to reduce overhead in all of the business segments and corporate office. SG&A expenses of $4,858,000 for the first nine months of 1999 were down 7.4% from $5,248,000 in 1998. Net interest expense was $522,000 for the nine months ended September 30, 1999 compared to $485,000 for the same period of 1998, reflecting higher average borrowings for working capital and capital expenditure programs. The company's effective income tax rate for the first nine months of 1999 was 42.9% compared to 46.2% for the same period in 1998. The rates were higher than federal statutory rates primarily due to non-deductible amortization of goodwill and state income taxes. -12- GALVANIZING SEGMENT NORTH AMERICAN GALVANIZING COMPANY ("NAG"). Operating income of $1,121,000 for the third quarter of 1999 increased 85.6% from $604,000 in the third quarter of 1998. Improvements in labor productivity and zinc-use efficiency primarily accounted for the increase in operating income, and reflect NAG's on-going programs for improving underlying profit margins. For the first nine months of 1999, operating income was $2,749,000 compared to $2,415,000 a year ago. Galvanizing sales of $9,800,000 for the third quarter of 1999 were down 2.9% from $10,091,000 in the third quarter of 1998. For the first nine months of 1999, sales of $29,130,000 were down 3.2% from $30,102,000 in 1998. During the third quarter of 1999, increased business activity drove production tonnage ahead of 1998 for the first time this year but competitive pricing pressures more than offset the gains in volume. NAG's multi-plant operation continues to benefit from market strength in tubular steel products, steel structures for telecommunications, and infrastructure projects involving utilities and highway transportation. In August 1999, NAG completed a major facilities expansion at its Nashville plant, adding a larger 51-foot kettle to increase capacity and meet the requirements of the market in the Southeast. CHEMICAL STORAGE SEGMENT LAKE RIVER CORPORATION ("LAKE RIVER"). Operating income for the third quarter of 1999 was $88,000 versus $13,000 in the third quarter of 1998. For the first nine months of 1999, operating income was $476,000 compared to $205,000 for the same period a year ago. Third-quarter 1999 sales of $1,210,000 were approximately even with 1998 sales of $1,222,000. For the first nine months of 1999, sales of $3,855,000 were down 3.7% from $4,003,000 for the same period of 1998 as a result of lower drumming activity for domestic and Asian markets. Strength in bulk liquid storage, up 17.1% in volume over the first nine months of 1998, and reductions in SG&A expenses have contributed to this segment's profit improvement over 1998. WAREHOUSING SEGMENT NORTH AMERICAN WAREHOUSING COMPANY ("NAW"). Declining sales in the third quarter of 1999 were reflected in this segment's operating loss of $69,000 compared to operating income of $122,000 in the third quarter of 1998. For the first nine months of 1999, NAW incurred an operating loss of $77,000 compared to operating income of $532,000 in the first nine months of 1998. Sales in the third quarter of 1999 were $494,000 compared to $893,000 for the third quarter of 1998. For the first nine months of 1999, warehousing sales were $1,557,000 compared to $3,175,000 for the same period in 1998. As previously reported, the decrease in sales commencing mid-1998 primarily reflects the loss of a major customer that relocated its warehousing outside of NAW's regional service area. The company is exploring ways to increase sales to improve the performance of this segment, including adding regional distribution services, but cannot predict when and to what extent these efforts will be successful. -13- LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities improved to $2,924,000 for the first nine months of 1999, up 29.3% from $2,261,000 for the same period in 1998. The improvement in cash generated in 1999 reflected the combination of stronger operating earnings, a reduction in net working capital requirements and the utilization of deferred tax benefits arising from prior periods. The Company's operations required net working capital of $6,822,000 at September 30, 1999, virtually unchanged from the second quarter of 1999 and reduced 3.5% from $7,070,000 at the beginning of the year. During the first nine months of 1999, proceeds from operating activities and the sale of investment securities were used to fund the majority of the Company's capital expenditures of $3,973,000. A substantial portion of these expenditures were made in the third quarter to complete the facilities expansion at NAG's Nashville, Tennessee plant. Other uses of cash in the first nine months of 1999 included the purchase of approximately 52,000 shares of the Company's common stock for $139,000. Separately, during the same period, the company sold all of its investment securities and realized cash of $510,000. During the first nine months of 1999, the Company made payments on long-term obligations of $21,361,000 and received proceeds from long-term obligations of $21,971,000 for a net increase of $610,000 in total long-term obligations. The Company's current credit facility consists of a $9,000,000 revolving line of credit, a term note of $4,200,000, a $1,500,000 capital expenditures revolver and a $9,000,000 bridge loan facility, under a three-year bank credit agreement that expires September 30, 2002. The Company's availability under the revolving line of credit was $1,768,000 at September 30, 1999. The Company believes cash flow from operations and available credit facilities is sufficient to meet its foreseeable needs for working capital and planned capital expenditures. ENVIRONMENTAL MATTERS NAG received notice in 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 nine months of 1999 and 1998 was $601,000 and $736,000, 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. -14- 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 continue to represent a relatively small percentage of the Company's total costs. The majority of waste disposal costs at Lake River are incurred on behalf of customers and are reimbursable. Lake River does not take title to the chemicals stored, blended, drummed or bagged in its facilities and thus is responsible only for the proper handling of these materials while under its care, custody, and control. 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 sale s. 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 $200,000, and the on-going assessment and resolution of such issues should not exceed an additional $50,000. 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 substantially 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 -15- 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. 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 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 fourth quarter of 1999 to handle "the most reasonably likely worst case scenarios" as discussed above. With respect to a computer failure that might affect administrative and production operations, the plan (a) will identify key functions, such as production scheduling, customer billing, payroll, and accounts payable; (b) will determine the availability of and provide for alternative equipment necessary to manually handle those functions; (c) identify staff personnel qualified for temporary re-assignment to assist in the manual operations and where necessary, (d) authorize the hiring of temporary personnel. In the event of the loss of availability of natural gas, electricity or zinc supplies required for production operations, the plan will address contingency measures for each of its operating plants. Such measures will include steps to minimize heat loss from kettles containing molten zinc; time lines for pumping out kettles to maintain kettle structural integrity and facilitate rapid start-up of the kettle when utilities are re-established and, designation of alternative sister-plants for the transfer of production to maintain continuity of deliveries to customers. The plan will address alternate methods of receiving delivery of zinc used in the galvanizing process, including use of Company trucks, in the event normal delivery services are disrupted. Guidelines for stock levels of zinc inventory will be reviewed. For those operations requiring regulation of temperature for storage of bulk liquid products, stock levels of fuel used in company-operated steam boilers will be reviewed. -16- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Kinark's current operations include managing market risks related to changes in interest rates and zinc commodity prices. 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. Amounts borrowed under this agreement bear interest at prime or LIBOR, at the option of the Company, subject to rate margin adjustments (see Note 5 to Condensed Consolidated Financial Statements). At September 30, 1999, $9,481,000 was outstanding under the agreement with an effective rate of 8.25%. The borrowings are due as follows: $171,000 in 1999 and $723,000 in 2000, $784,000 in 2001 and $7,803,000 in 2002. Each increase of 10 basis points in the effective interest rate would result in an annual increase in interest charges of approximately $9,500 based on September 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 September 30, 1999, the aggregate commitments for the procurement of zinc were approximately $2.5 million, primarily to cover 100% of NAG's estimated requirements for the remainder of 1999 and 33% of the estimated requirements for 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 September 30, 1999 level would cause a lost gross margin opportunity of approximately $250,000. However, a favorable impact of a similar amount would result from the same hypothetical price movement on the short-term spot purchases of zinc. -17- 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 --------------------------------------------------- Not applicable. 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 -18- (b) Reports on Form 8-K The Company did not file any reports on Form 8-K during the quarter ended September 30, 1999. -19- 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: November 12, 1999 ----------------- -20- 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 SEPTEMBER 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 9-MOS DEC-31-1999 JAN-01-1999 SEP-30-1999 1.0 132 0 7,382 339 4,686 13,076 36,264 18,764 34,726 6,254 9,948 0 0 819 18,524 34,726 34,542 34,542 25,399 32,478 0 0 522 1,542 662 880 0 0 0 880 .13 .13
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-----