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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
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<TABLE>
KINARK CORPORATION AND SUBSIDIARIES
INDEX TO QUARTERLY REPORT ON FORM 10-Q
<CAPTION>
PAGE
<S> <C>
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
</TABLE>
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-
<TABLE>
KINARK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<CAPTION>
Unaudited
SEPTEMBER 30 DEC 31
(Dollars in Thousands) 1999 1998
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<S> <C> <C>
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
====== ======
</TABLE>
See notes to condensed consolidated financial statements.
-4-
<TABLE>
KINARK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
Unaudited
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
(Dollars in Thousands ------------------ -----------------
Except per Share Amounts) 1999 1998 1999 1998
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<S> <C> <C> <C> <C>
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
</TABLE>
See notes to condensed consolidated financial statements.
-5-
<TABLE>
KINARK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
<CAPTION>
Nine Months Ended
September 30
------------------
(Dollars in Thousands) 1999 1998
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<S> <C> <C>
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
====== ======
</TABLE>
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-
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
-------------------------- -----------------------------
(Dollars in Thousands) 1999 1998 1999 1998
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<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
- -----------------------------------------------------------------------------------------
</TABLE>
-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.
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ISSUER'S
INTERIM FINANCIAL STATEMENTS DATED SEPTEMBER 30, 1999, SET FORTH IN THE
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0
<COMMON> 819
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<TOTAL-LIABILITY-AND-EQUITY> 34,726
<SALES> 34,542
<TOTAL-REVENUES> 34,542
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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.
