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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 JUNE 30, 1999
Commission File No. 1-3920
KINARK CORPORATION
(Exact name of the registrant as specified in its charter)
DELAWARE 71-0268502
(State of Incorporation) (I.R.S. Employer Identification No.)
2250 EAST 73RD STREET
TULSA, OKLAHOMA 74136-6832
(Address of principal executive offices)
Registrant's telephone number: (918) 494-0964
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 and 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of June 30, 1999.
Common Stock $ .10 Par Value . . . . . 6,712,159
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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 June 30, 1999 (unaudited), and
December 31, 1998 4
Condensed Consolidated Statements of
Earnings for the three and six months
ended June 30, 1999 and 1998 (unaudited) 5
Condensed Consolidated Statements of
Cash Flows for the six months ended
June 30, 1999 and 1998 (unaudited) 6
Notes to Condensed Consolidated Financial
Statements for the three and six months
ended June 30, 1999 and 1998 (unaudited) 7-13
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 14-18
Item 3. Quantitative and Qualitative
Disclosures About Market Risks 19
PART II. OTHER INFORMATION 20-21
SIGNATURES 22
</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 June 30, 1999, and
the related condensed consolidated statements of earnings for the three and
six-month periods ended June 30, 1999 and 1998 and the condensed consolidated
statements of cash flows for the six months ended June 30, 1999 and 1998.
These financial statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and of making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to such condensed consolidated financial statements for them to
be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Kinark Corporation and
subsidiaries as of December 31, 1998, and the related consolidated statements
of earnings, stockholders' equity, and cash flows for the year then ended (not
presented herein); and in our report dated March 3, 1999, we expressed an
unqualified opinion on those consolidated financial statements. In our
opinion, the information set forth in the accompanying condensed consolidated
balance sheet as of December 31, 1998 is fairly stated, in all material
respects, in relation to the consolidated balance sheet from which it has been
derived.
/s/Deloitte & Touche LLP
Tulsa, Oklahoma
August 16, 1999
3
<TABLE>
KINARK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<CAPTION>
Unaudited
JUNE 30 Dec 31
(Dollars in Thousands) 1999 1998
- -----------------------------------------------------------------------------
<S> <<C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 389 $ 189
Trade receivables, net of reserves of
$360 and $169, respectively 7,317 6,600
Inventories 3,998 4,158
Investments 97 487
Prepaid expenses and other assets 688 984
Deferred tax asset, net 609 735
------ ------
TOTAL CURRENT ASSETS 13,098 13,153
------ ------
PROPERTY, PLANT AND EQUIPMENT, AT COST
Land 776 776
Chemical storage facilities 10,728 10,629
Warehousing equipment 774 750
Galvanizing plants and equipment 22,045 20,006
Other 146 323
------ ------
34,469 32,484
Less: Allowance for depreciation 18,153 16,877
------ ------
TOTAL PROPERTY, PLANT & EQUIPMENT, NET 16,316 15,607
------ ------
DEFERRED TAX ASSET, NET 85 131
GOODWILL, NET OF ACCUMULATED AMORTIZATION 3,858 3,952
OTHER ASSETS 279 265
------ ------
TOTAL ASSETS $ 33,636 $ 33,108
======= ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Trade accounts payable $ 1,609 $ 1,770
Accrued payroll and employee benefits 1,382 1,210
Other taxes 829 979
Other accrued liabilities 1,566 1,194
Current maturities of long-term obligations 963 930
------ ------
TOTAL CURRENT LIABILITIES 6,349 6,083
------ ------
PENSION AND RELATED LIABILITIES 644 652
LONG-TERM OBLIGATIONS 8,481 8,590
COMMITMENTS AND CONTINGENCIES (NOTE 8) --- ---
STOCKHOLDERS' EQUITY
Common stock 819 819
Additional paid-in capital 17,364 17,364
Minimum pension liability (112) (112)
Retained earnings 6,071 5,553
Less: Treasury stock at cost (5,980) (5,841)
------ ------
TOTAL STOCKHOLDERS' EQUITY 18,162 17,783
------ ------
TOTAL LIABILITIES &
STOCKHOLDERS' EQUITY $ 33,636 $ 33,108
====== ======
</TABLE>
See notes to condensed consolidated financial statements.
4
<TABLE>
KINARK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
Unaudited
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
(Dollars in Thousands
Except per Share Amounts) 1999 1998 1999 1998
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SALES $11,893 $12,910 $23,038 $25,074
COSTS AND EXPENSES
Cost of sales 8,926 9,516 16,975 18,688
Selling, general &
administrative 1,570 1,755 3,346 3,583
Depreciation and amortization 734 737 1,457 1,438
------ ------ ------ ------
TOTAL COSTS AND EXPENSES 11,230 12,008 21,778 23,709
------ ------ ------ ------
OPERATING EARNINGS 663 902 1,260 1,365
OTHER (INCOME) EXPENSE
Interest expense, net 176 150 351 326
Other income --- --- --- (309)
------ ------ ------ ------
TOTAL OTHER (INCOME) EXPENSE 176 150 351 17
EARNINGS BEFORE INCOME TAXES 487 752 909 1,348
Income tax expense 210 369 391 625
------ ------ ------ ------
NET EARNINGS $ 277 $ 383 $ 518 $ 723
====== ====== ====== ======
BASIC EARNINGS PER COMMON SHARE $ .04 $ .06 $ .08 $ .11
DILUTED EARNINGS PER COMMON SHARE $ .04 $ .06 $ .08 $ .11
</TABLE>
See notes to condensed consolidated financial statements.
5
<TABLE>
KINARK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
<CAPTION>
Six Months Ended
June 30
------------------------
(Dollars in Thousands) 1999 1998
- ----------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 518 $ 723
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,457 1,438
Gain on involuntary conversion of assets --- (309)
(Gain) loss on disposal of assets (5) 10
Gain on sale of securities (12) ---
Deferred income taxes 172 217
Change in assets and liabilities:
Accounts receivable, net (717) (306)
Inventories and other 442 (1,362)
Accounts payable, accrued liabilities
and other 225 861
------ ------
CASH PROVIDED BY OPERATING ACTIVITIES 2,080 1,272
INVESTING ACTIVITIES
Sale of securities 402 ---
Capital expenditures (2,072) (1,490)
Proceeds from involuntary conversion of assets --- 325
Proceeds from sale of assets 5 4
------ ------
CASH USED FOR INVESTING ACTIVITIES (1,665) (1,161)
------ ------
FINANCING ACTIVITIES
Purchase of common stock for treasury (139) ---
Proceeds from long-term obligations 7,530 9,024
Payments on long-term obligations (7,606) (9,090)
------ ------
CASH USED FOR FINANCING ACTIVITIES (215) (66)
------ ------
INCREASE IN CASH AND CASH EQUIVALENTS 200 45
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 189 259
------ ------
CASH AT END OF PERIOD $ 389 $ 304
====== ======
</TABLE>
See notes to condensed consolidated financial statements.
6
KINARK CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998
UNAUDITED
NOTE 1. BASIS OF PRESENTATION
---------------------
The condensed consolidated financial statements included in this
report have been prepared by Kinark Corporation (the "Company")
pursuant to the rules and regulations of the Securities and Exchange
Commission for interim reporting and include all normal and
recurring adjustments which are, in the opinion of management,
necessary for a fair presentation. These financial statements
have not been audited by an independent accountant. The condensed
consolidated financial statements include the accounts of the
Company and its subsidiaries.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such
rules and regulations for interim reporting. The Company believes
that the disclosures are adequate to make the information presented
not misleading. However, these financial statements should be read
in conjunction with the financial statements and notes thereto
included in the Company's Annual Report on Form 10-K, for the year
ended December 31, 1998. The financial data for the interim periods
presented may not necessarily reflect the results to be anticipated
for the complete year.
NOTE 2. EARNINGS PER COMMON SHARE
-------------------------
Diluted earnings per common share for the periods presented has been
computed based upon the weighted average number of shares outstanding,
adjusted for the dilutive effect of stock options, of 6,720,034 and
6,816,689 for the three months ended June 30, 1999 and 1998
respectively, and 6,735,810 and 6,810,677 for the six months ended
June 30, 1999 and 1998 respectively. Basic earnings per common
share has been computed based upon the average number of shares
outstanding of 6,720,034 and 6,778,345 for the three months ended
June 30, 1999 and 1998 respectively, and 6,735,810 and 6,778,345 for
the six months ended June 30, 1999 and 1998 respectively. The
number of options excluded from the calculation of diluted earnings
per share due to the option price being higher than the share value
are 407,125 and 76,750 at June 30, 1999 and 1998, respectively.
NOTE 3. INVENTORIES
-----------
Inventories consist primarily of raw zinc "pigs," molten zinc in
galvanizing kettles and other chemicals and materials used in the hot
dip galvanizing process. All such inventories are stated at the
lower of cost or market with market value based on ultimate
realizable value from the galvanizing process. Zinc cost is
determined on a last-in-first-out (LIFO) basis. Other inventories
are valued primarily on an average cost basis.
7
For the six months ended June 30, 1999, the Company incurred a
temporary reduction in zinc inventory of approximately 350,000
pounds, or 6%, from the base period inventory at December 31, 1998.
The reduction reflected a realignment of planned purchase
commitments with projected requirements for 1999. The Company was
not required to give effect to the liquidated LIFO base, valued at
approximately $33,000, because it replaced this inventory reduction
in July, 1999 and expects the zinc level at the end of 1999 to
exceed levels at the beginning of the year.
NOTE 4. INVESTMENT SECURITIES
---------------------
The Company accounts for investment securities under the provisions
of Statement of Financial Accounting Standards ("SAFS") No. 115,
"Accounting for Certain Instruments in Debt and Equity
Securities." Accordingly, the Company has classified its marketable
equity securities as available-for-sale. Securities classified as
available-for-sale securities are reported at fair value. At
June 30, 1999, the securities carrying value approximated fair
value. The Company's unrealized gains or losses for the six
months ended June 30, 1999 are immaterial. Realized gains and
losses and declines in value of securities judged to be
other-than-temporary are included in income. During the six months
ended June 30, 1999, the Company sold investments for proceeds of
$402,000 and realized a $12,000 gain. Subsequent to June 30, 1999,
the Company sold all investments classified as available-for-sale
securities and realized a nominal gain.
NOTE 5. DEBT OBLIGATIONS
----------------
In 1997, the Company entered into a two-year bank credit agreement
which provides a $8,500,000 maximum revolving line of credit, a
$1,250,000 advancing term loan for expansion of galvanizing plants
and a $3,500,000 term loan, that was scheduled to expire in May 1999.
In June 1998, the bank extended the expiration date of this
agreement to May 1, 2000, with all other terms and conditions
remaining the same.
Substantially all of the Company's accounts receivable, inventories
and fixed assets are pledged as collateral under the agreement, and
the credit agreement is secured by a guaranty from each of the
Company's subsidiaries. Amounts borrowed under the agreement bear
interest at the prime rate of Chase Manhattan Bank minus or plus a
spread ranging from minus 25 basis points to plus 50 basis points,
determined by a coverage ratio of defined earnings to debt service.
Term loan payments are based on a five year amortization schedule
with equal monthly payments of principal and interest. The
advancing term loan was funded in April 1999 and requires equal
monthly payments of principal and interest based on a six year
amortization schedule.
The revolver may be paid down without penalty, or additional funds
may be borrowed up to the revolver limit. The term loan and
advancing term loan may be pre-paid without penalty. The credit
agreement provides for capital expenditures related to a minimum
8
coverage ratio of defined earnings to debt service plus capital
expenditures, limits the pledging of assets for new debt, and
requires the Company to maintain a minimum net worth. The Company
was in compliance with such covenants at June 30, 1999.
In July 1999, the Company accepted a proposal from a bank to
replace all of its existing bank debt with a new credit agreement with
extended terms. The expanded credit facilities are planned to
insure adequate funds for working capital and provide funding to
expand the Company's galvanizing operations and plants. The
Company will enter into the new credit agreement during the third
quarter of 1999.
NOTE 6. NEW ACCOUNTING STANDARDS
------------------------
In June 1998, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities". SFAS No. 133 requires fair value accounting
for all stand-alone derivatives and for many derivatives embedded
in other instruments and contracts. The Company will be required
to adopt SFAS No. 133 effective January 1, 2001, and is in the
process of evaluating the effect of this standard on its financial
reporting.
NOTE 7. INVOLUNTARY CONVERSION OF ASSETS
--------------------------------
During the first quarter of 1998, fire destroyed an acid recycling
system at one of the Company's galvanizing plants. The acid recycling
system was covered by insurance for its current replacement value. As
a result of the expected receipt of insurance proceeds, the Company
recorded a pre-tax gain of $309,000 for the first quarter of 1998,
and purchased a new acid recovery system for $410,000. Installation
of the new acid recovery system was completed during the third
quarter of 1998. All expected insurance proceeds have been received.
NOTE 8. COMMITMENTS AND CONTINGENCIES
-----------------------------
The Company recorded a charge to selling, general and administrative
("SG&A") expense of $183,000 for the quarter ended March 31, 1998
primarily for the estimated net impact of a settlement with the
United States Environmental Protection Agency ("EPA"). As
previously reported in 1995, the settlement concerned the cost of
soil removal from a former galvanizing site in Philadelphia, PA
sold in 1981. During the third quarter of 1998, the Company
executed a Consent Decree that resolved all of the claims brought
by the EPA.
North American Galvanizing Company ("NAG") received notice on
April 21, 1997 from the Illinois Environmental Protection Agency
("IEPA") that it was a potentially responsible party under the
Comprehensive Environmental Response, Compensation, and Liability
Information System ("CERCLIS") in connection with clean-up of an
abandoned site formerly owned by Sandoval Zinc Co. Sandoval
had operated a secondary zinc smelter at the site until it closed in
1985. The IEPA notice includes NAG as one of 59 organizations which
9
arranged for the treatment and disposal of hazardous substances at
Sandoval. The Company is in the process of determining the
proportional share of substances that NAG shipped to Sandoval, and
does not believe based on current information that the ultimate
resolution of this matter will have a material adverse impact on
the Company's financial position or results of operations.
The Company will continue to have additional environmental
compliance costs associated with operations in the galvanizing and
chemicals businesses. The Company is committed to complying with
the environmental legislation and regulations affecting its
operations. Due to the uncertainties associated with future
environmental technologies, regulatory interpretations, and
prospective legislative activity, management cannot reasonably
attempt to quantify potential costs in this area.
The Company expenses or capitalizes, where appropriate, environmental
expenditures that relate to current operations as they are incurred.
Such expenditures are expensed when they are attributable to past
operations and are not expected to contribute to current or future
revenue generation. The Company records liabilities when
remediation or other environmental assessment or clean-up efforts
are probable and the cost can be reasonably estimated. Management
believes this policy complies with SOP 96-1.
NAG enters into purchase commitments with domestic and foreign zinc
producers to purchase certain of its zinc requirements for its hot dip
galvanizing operations. Commitments for the future delivery of zinc
reflect rates quoted on the London Metals Exchange which are not
subject to future price adjustment. At June 30, 1999, the aggregate
commitments for the procurement of zinc were approximately $5
million, to cover NAG's estimated requirements through the first
quarter of 2000. Management believes this zinc procurement program
ensures adequate supplies of zinc and stable gross margins from its
galvanizing operations. With respect to the zinc purchase
commitments, a potential decrease of 10% in the market price of zinc
from the June 30, 1999 level would cause a lost gross margin
opportunity of approximately $500,000. However, a favorable impact
of a similar amount would result from the same hypothetical price
movement in the short-term spot purchases of zinc.
During the second quarter of 1999, NAG exercised an option to renew
the existing lease of a 52,000 square foot manufacturing facility
located at the Port of Catoosa in Catoosa, Oklahoma. Effective
July 1, 1999, the lease was extended for two (2) years with all other
terms and conditions of the lease unchanged.
NAG began construction on a major facilities expansion and addition
of a 51-foot galvanizing kettle at its Nashville plant in the first
quarter of 1999 and expects to place the kettle in operation during
August 1999.
North American Warehousing Company ("NAW") leases 201,000 square
feet of public warehousing space located in southwest Chicago. In
the second quarter of 1999, NAW renegotiated the existing warehouse
lease to extend through December, 2001. The lease provides an
option and right of first refusal for NAW to purchase the warehouse
10
facility at a predetermined price at any time during the current
term of the lease.
Various litigation arising in the ordinary course of business is
pending against the Company.
Management believes that resolution of the Company's litigation and
environmental matters should not materially affect the Company's
consolidated financial position or liquidity. Should future
developments cause the Company to record an additional liability for
environmental evaluation, clean-up or litigation, the recording of
such a liability could have a material impact on the results of
operations for the period involved.
NOTE 9. LOSS OF MAJOR CUSTOMERS
-----------------------
On July 1, 1998, NAG decided to discontinue galvanizing services to
one of its largest customers which accounted for approximately 7% of
NAG's first-half 1998 sales and 6% of Kinark's first-half 1998
sales. This action was based on NAG's decision not to provide
galvanizing services to this customer who plans to compete directly
with NAG in the hot dip galvanizing market.
In the third quarter of 1998, NAW's largest customer terminated its
account. This account represented approximately 4% of Kinark's
first-half 1998 consolidated sales and 46% of NAW's 1998 first-half
sales.
NOTE 10. TREASURY STOCK
--------------
In July 1998, the Board of Directors authorized the Company to
repurchase up to $1,000,000 of its common stock in open market
transactions. Shares repurchased by the Company are recorded as
"Treasury Stock" and result in a reduction of "Stockholders'
Equity." As of June 30, 1999, the Company had purchased 66,000
shares of its common stock for an aggregate cost of approximately
$168,000 under this program.
NOTE 11. ESTIMATES
---------
The preparation of financial statements requires estimates to be made
by management. During the first quarter of 1999, management revised
various accounting estimates based on changes in circumstances, trend
analysis and the results of established methodologies used as a basis
for certain estimates. Significant changes to estimates included a
reduction in Lake River Corporation real estate taxes of $178,000 due
to the successful appeal of original assessed values and an additional
provision of $182,000 for estimated uncollectible accounts receivable.
NOTE 12. PROPERTIES
----------
As reported previously, Lake River Corporation ("Lake River") has
operating facilities located on approximately 50 acres situated on the
Chicago Ship Canal in Cook County, Illinois, which are leased as
multiple parcels from the Metropolitan Water Reclamation District of
11
Greater Chicago ("MWRD"), a municipal corporation. These multiple
leases have various terms with the earliest expiring in 1999. Lake
River and MWRD have agreed to renegotiate certain of these leases
and under procedures required by MWRD, the renegotiation process
will be opened to competitive bid. While it cannot be known with
certainty, Lake River believes that it is likely to be the
successful bidder for all of the parcels required for the continuing
conduct of its terminal storage business.
NOTE 13. SEGMENT DISCLOSURES
-------------------
The Company is engaged principally in hot dip galvanizing and also
conducts business in bulk liquid chemical storage and public
warehousing. The services provided by the Company's wholly-owned
subsidiaries are classified into the following industry segments:
Galvanizing, Chemical Storage and Warehousing. Operating
performance is measured by segment sales and operating earnings
which includes operating costs, selling and administrative expenses,
depreciation and amortization. All of the Company's revenues are
derived from sales to customers located within the United States and
there are no inter-segment sales. The galvanizing segment provides
corrosion protection for customers' fabricated iron and steel
structures through the process of immersing the structure into a
bath of molten zinc. The chemical storage segment operates a bulk
liquid terminal for the storage of customers' products and also
provides specialty chemical bagging and drumming services. The
warehousing segment provides public warehousing space, primarily for
commercial and industrial dry good products. Corporate headquarters
expenses were primarily for insurance premiums, audit and legal fees,
investor relations, travel, voice and data communications and
salaries. The corporate headquarters staff is comprised of six
persons, including the officers of the Company. In the first
quarter of 1998, other deductions of $183,000 were incurred for
environmental settlements.
12
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
-------------------------- ----------------------------
(Dollars in Thousands) 1999 1998 1999 1998
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SALES
Galvanizing $10,050 84.5% $10,387 80.5% $19,330 83.9% $20,011 79.8%
Chemical storage 1,324 11.1% 1,358 10.5% 2,645 11.5% 2,781 11.1%
Warehousing 519 4.4% 1,165 9.0% 1,063 4.6% 2,282 9.1%
- ----------------------------------------------------------------------------------
11,893 100.0% 12,910 100.0% 23,038 100.0% 25,074 100.0%
- ----------------------------------------------------------------------------------
OPERATING INCOME
Galvanizing $ 874 $ 969 $ 1,628 $ 1,811
Chemical storage 117 169 388 192
Warehousing 36 220 (8) 410
Corporate headquarters
expense (364) (456) (748) (865)
Other deductions,
net ---- --- --- (183)
- ----------------------------------------------------------------------------------
663 902 1,260 1,365
- ----------------------------------------------------------------------------------
Interest expense 176 150 351 326
Other income ---- --- --- (309)
- ----------------------------------------------------------------------------------
176 150 351 17
- ----------------------------------------------------------------------------------
Income tax expense 210 369 391 625
- ----------------------------------------------------------------------------------
NET INCOME $ 277 $ 383 $ 518 $ 723
- ----------------------------------------------------------------------------------
CAPITAL EXPENDITURES
Galvanizing $ 1,179 $ 898 $ 1,946 $ 1,332
Chemical storage 38 89 99 115
Warehousing 10 --- 24 1
General corporate 1 29 3 42
- ----------------------------------------------------------------------------------
$ 1,228 $ 1,016 $ 2,072 $ 1,490
- ----------------------------------------------------------------------------------
DEPRECIATION AND AMORTIZATION EXPENSE
Galvanizing $ 614 $ 569 $ 1,219 $ 1,120
Chemical storage 94 130 188 251
Warehousing 17 24 34 39
General corporate 9 14 16 28
- ----------------------------------------------------------------------------------
$ 734 $ 737 $ 1,457 $ 1,438
- ----------------------------------------------------------------------------------
June 30, 1999 December 31, 1998
------------- -----------------
TOTAL ASSETS
Galvanizing $29,338 $28,380
Chemical storage 2,436 2,516
Warehousing 535 680
General corporate 1,327 1,532
- ----------------------------------------------------------------------------------
$33,636 $33,108
- ----------------------------------------------------------------------------------
</TABLE>
13
KINARK CORPORATION AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
CONSOLIDATED
Sales for the second quarter of 1999 were $11,893,000, a decrease of 7.9%
from $12,910,000 for the same period in 1998. For the six months ended June
30, 1999, sales decreased 8.1% to $23,038,000 from $25,074,000 a year ago.
The decrease in the second quarter of 1999 was attributable primarily to lower
sales in the warehousing segment, while sales in the galvanizing and chemical
storage segments decreased slightly.
Gross profit margin was 24.9% for the second quarter ended June 30, 1999
compared to 26.3% for the same period last year. For the first six months of
1999, gross profit margin was 26.3% compared to 25.5% for the same period last
year. The decrease in the second quarter of 1999 was primarily the result of
lower margins in the warehousing segment that offset improved margins in the
chemical storage segment, while margins in the galvanizing segment were
approximately the same. The increase for the first half of 1999 was
attributable to lower indirect costs and improved margins in the chemical
storage segment. Selling, general and administrative expenses ("SG&A") for
the second quarter of 1999 decreased 10.5% to $1,570,000 from $1,755,000 in the
same period a year ago, as a result of expense reductions achieved in all of
the business segments and the corporate office. SG&A expense of $3,346,000
for the first six months of 1999 was down $237,000 from $3,583,000 in 1998,
primarily due to the expense of an environmental settlement recorded in the
first half of 1998. Operating earnings for the second quarter of 1999 were
$663,000, down from $902,000 for the same period in 1998. For the six months
ended June 30, 1999, operating earnings were $1,260,000 compared to
$1,365,000 for the same period in 1998.
Net interest expense was $351,000 for the six months ended June 30, 1999
compared to $326,000 for the first six months of 1998, reflecting increased
average borrowings as a result of increased working capital and capital
expenditures. The effective income tax rate for the first half of 1999 was
43.0% compared to 46.4% for the same period in 1998. The rates were higher
than federal statutory rates primarily due to non-deductible goodwill
amortization and state income taxes.
GALVANIZING SEGMENT
NORTH AMERICAN GALVANIZING COMPANY ("NAG"). Galvanizing sales of
$10,050,000 for the second quarter of 1999 decreased 3.2% from $10,387,000 in
the second quarter of 1998. For the first six months of 1999, sales of
$19,330,000 decreased 3.4% over the same period in 1998. The decreases
reflected lower order volume and pricing pressures. However, for both the
second quarter and first half of 1999, increased sales were achieved at those
NAG plants serving manufacturers of tubular steel products and steel
structures for telecommunications, utility and highway transportation
markets. These gains were offset by lower sales at NAG's central region
14
plants, as a result of increased competition and an overall reduction of 1.2%
in average selling prices. Operating income for the second quarter of 1999
was $874,000 compared to $969,000 in 1998. For the first half of 1999,
operating income was $1,628,000 compared to $1,811,000 a year ago.
CHEMICAL STORAGE SEGMENT
LAKE RIVER CORPORATION ("LAKE RIVER"). Sales declined slightly in both
the second quarter and first six months of 1999 compared to the same periods
last year, as a result of lower activity in custom drumming of specialty
chemicals. Sales in the second quarter were $1,324,000 compared to $1,358,000
in 1998. For the first half of 1999, sales were $2,645,000 compared to
$2,781,000 for the same period last year. For 1999 year-to-date, a decrease
of 30.5% in drumming volume from the same period in 1998 reflected lower
exports due to the weakness in Asian markets and the decision of a major
account to undertake its own drumming activities. Despite the sharp decline
in drumming, Lake River's bulk liquid storage volume rose 17.5% in the first
half of 1999 due to new accounts and general increases in throughput of
products handled for its customers. Operating income for the second quarter
of 1999 was $117,000 compared to $169,000 in 1998. For the first half of
1999, operating income was $388,000 compared to $192,000 in 1998.
WAREHOUSING SEGMENT
NORTH AMERICAN WAREHOUSING COMPANY ("NAW"). Sales for the second quarter
in the warehousing segment decreased 55.5% to $519,000 in 1999 from $1,165,000
in 1998. In the first half of 1999, sales decreased 53.4% to $1,063,000 from
$2,282,000 in the same period of 1998. As previously reported, the decrease
in sales primarily reflects the Company's decision in 1998 not to expand this
business geographically and the expiration of a contract with a major customer
that relocated its warehousing outside of NAW's Chicago regional service area.
Operating income for the second quarter of 1999 was $36,000 compared to
$220,000 in 1998. For the first half of 1999, an operating loss of $8,000
compared to operating income of $410,000 in 1998.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $2,080,000 for the first
half of 1999 compared to $1,272,000 for the first half of 1998. The primary
increase in cash generated was due to a reduction of zinc inventories in the
first half of 1999 to bring floor stock in line with projected requirements,
as compared to an increase a year earlier, for a net benefit of $1,804,000.
Other changes in net working capital required the use of $1,047,000 in cash.
Net working capital was $6,749,000 at June 30, 1999 compared to $7,070,000
at December 31, 1998.
During the first half of 1999, proceeds from operating activities were
used to fund capital expenditures of $2,072,000. Included in these
expenditures were initial outlays for a facilities expansion at NAG's Nashville,
Tennessee plant, including a larger 51-foot galvanizing kettle that will be
activated during the third quarter of 1999. Depreciation of plant, property
and equipment, plus amortization of goodwill, was $1,457,000 in the first half
of 1999 and $1,438,000 a year ago. In the first half of 1999, the Company
purchased approximately 52,000 shares of its common stock, costing $139,000.
Sales of securities classified as available for sale generated cash of
$402,000 in the first half of 1999.
15
During the first half of 1999, the Company made debt repayments of
$494,000 and increased borrowings $418,000 under a revolving line of credit
for a net reduction of $76,000 in total debt. The Company's current credit
facility consists of an $8,500,000 revolving line of credit, and term notes of
$3,500,000 and $1,026,000, under a two-year bank credit agreement that expires
May 1, 2000. The Company's availability under the revolving line of credit
was $1,879,000 at June 30, 1999. As discussed in Note 5 to the Company's
Condensed Consolidated Financial Statements, the Company is restructuring its
credit facilities with a bank under a new credit agreement that will become
effective during the third quarter of 1999. Under the new credit agreement,
the Company will have credit facilities available up to $23,700,000. The
Company believes cash flow from operations and available credit facilities,
currently in effect and proposed, are sufficient to meet its foreseeable needs
for working capital and planned capital expenditures.
ENVIRONMENTAL MATTERS
The Company recorded a charge to SG&A of $158,000 for the quarter ended
March 31, 1998 for the estimated net impact of a settlement with the United
States Environmental Protection Agency ("EPA"). As previously reported in
1995, the settlement concerned the cost of soil removal from a former
galvanizing site in Philadelphia, PA sold in 1981. During the third quarter
of 1998, the Company executed a Consent Decree that resolved all of the claims
brought by the EPA.
NAG received notice on April 21, 1997 from the Illinois Environmental
Protection Agency ("IEPA") that it was a potentially responsible party under
the Comprehensive Environmental Response, Compensation, and Liability
Information System ("CERCLIS") in connection with cleanup of an abandoned site
formerly owned by Sandoval Zinc Co. Sandoval had operated a secondary zinc
smelter at the site until it closed in 1985. The IEPA notice includes NAG as
one of 59 organizations which arranged for the treatment and disposal of
hazardous substances at Sandoval. The Company is in the process of
determining the proportional share of substances that NAG shipped to Sandoval,
and does not believe based on current information that the ultimate resolution
of this matter will have a material adverse impact on the Company's financial
position or results of operations.
The Company's facilities are subject to extensive environmental
legislation and regulations affecting their operations and the discharge of
wastes. The cost of compliance with such regulations in the first six months
of 1999 and 1998 was $427,000 and $491,000, respectively. The disposal and
recycling of waste acids generated by the galvanizing operations represents
the major expenditure in this area. The Company operates on-site sulphuric
acid recovery systems at three of its galvanizing plants.
The Company's other galvanizing plants use hydrochloric acid, which
requires the off-site disposal of waste acids. Due to the increasing cost of
waste disposal and decreasing availability of approved disposal methods, NAG
is continuing to evaluate alternative waste hydrochloric acid recycling
methods. Future capital expenditures in this area are expected to increase,
but such expenditures should significantly reduce waste acid disposal expense.
Environmentally related expenditures at Lake River represent a relatively
small percentage of the Company's total costs. The majority of waste disposal
costs at Lake River are incurred on behalf of customers and are reimbursable.
Lake River does not take title to the chemicals stored, blended, drummed or
16
bagged in its facilities and thus is responsible only for the proper handling
of these materials while under its care, custody, and control. As previously
reported, Kinark has escrowed proceeds of $18,000 from the sale of the assets
of Kinpak, Inc. (a former subsidiary sold in 1996) for possible environmental
remediation.
The Company is committed to complying with all federal, state and local
environmental laws and regulations and using its best management practices to
anticipate and satisfy future requirements. As is typical in the galvanizing
and chemicals businesses, the Company will have additional environmental
compliance costs associated with past, present, and future operations.
Management has committed resources to discovering and eliminating
environmental issues as they arise. Because of the frequent changes in
environmental technology, laws and regulations management cannot reasonably
attempt to quantify the Company's potential costs in this area. However, such
costs are expected to increase above their current levels as discussed above.
YEAR 2000 READINESS
STATE OF READINESS. Like many companies that rely on computer
technology, Kinark is preparing for the year 2000 by taking steps to insure
that its computers can recognize and use years after 1999 correctly. If
such a situation were to exist and not be corrected, Year 2000 errors could
affect the Company's ability to invoice customers and pay vendors in a
timely manner and to maintain accurate financial records. The Company
has been working on the resolution of Year 2000 issues since 1996. The
Company believes that its primary computer systems serving the corporate
headquarters and its galvanizing operations are structured to accommodate the
Year 2000 and beyond, and the operation of these systems should not be
affected by the millennium change. Galvanizing contributes approximately 84%
of Kinark's consolidated sales. Computer systems serving Kinark's chemical
storage and warehousing operations are in the process of being upgraded to be
Year 2000 compliant during the fourth quarter of 1999.
COST OF ADDRESSING YEAR 2000 ISSUES. Kinark's cost to date of addressing
Year 2000 issues is approximately $120,000, and the on-going assessment and
resolution of such issues should not exceed an additional $100,000. Future
expenditures to make Kinark's computer systems Year 2000 compliant are not
expected to have a material impact on the results of the Company's operations,
liquidity, and capital resources.
RISKS OF YEAR 2000 ISSUES. Kinark has not fully determined the state of
Year 2000 compliance by its key suppliers of zinc, the primary commodity
required for its hot dip galvanizing operations. Kinark historically has not
relied on a sole-source supply for its zinc requirements and expects to
continue that practice. In addition, Kinark's operations are dependent on
reliable supplies of electricity and natural gas. Going forward, Kinark will
be monitoring the progress of its key vendors, as well as its major customers,
service providers and utilities in addressing their Year 2000 issues, and
expects this assessment to be completed during the fourth quarter of 1999. As
assessment of the "most reasonably likely worst case Year 2000 scenarios" for
Kinark would consider (a) the failure of the Company's computer systems and
(b) disruption of production operations due to computer failures encountered
by a customer, supplier or utility. With respect to failure of the Company's
computers, the worst case impact would be the additional cost to manually
process daily business operations and attendant delays in completing those
17
operations. Kinark does not believe such additional costs would have a
material impact on its operations. With respect to a disruption of Kinark's
production operations due to a customer's, supplier's or utility's failure to
be Year 2000 compliant, the extent of such disruption is not reasonably
estimable. Kinark's operations are conducted in widely-disbursed facilities,
serving more than 2,000 commercial and industrial accounts, and the Company
believes this diversity of its operations will help mitigate the risk of a
customer's, supplier's or utility's Year 2000 failure.
CONTINGENCY PLANS. Kinark expects to complete a contingency plan in the
third quarter of 1999 to handle "the most reasonably likely worst case
scenarios" as discussed above. The plan will involve independent
verification by information technology consultants and computer service
providers.
18
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Kinark's operations include managing market risks related to changes in
interest rates, zinc commodity prices and an investment in marketable equity
securities.
INTEREST RATE RISK. Kinark is exposed to financial market risk related
to changing interest rates. Changing interest rates will affect interest paid
on Kinark's variable rate revolving and term debt (see Note 5 to Condensed
Consolidated Financial Statements). Amounts borrowed under this agreement
bear interest at prime minus or plus a spread ranging from minus 25 basis
points to plus 50 basis points, determined by a coverage ratio of defined
earnings to debt service. At June 30, 1999, $8,930,000 was outstanding under
the agreement with an effective rate of 7.5%. The borrowings are due as
follows: $475,000 in 1999 and $8,455,000 in 2000. Each increase of 10 basis
points in the effective interest rate would result in an increase in interest
charges of approximately $8,900 based on June 30, 1999 outstanding
borrowings. The actual effect of changes in interest rates is dependent on
actual amounts outstanding which vary under the revolving credit facility.
The Company monitors interest rates and has sufficient flexibility to
renegotiate the loan agreement, without penalty, in the event market
conditions and interest rates change.
ZINC PRICE RISK. NAG enters into purchase commitments with domestic and
foreign zinc producers to purchase certain of its zinc requirements for its
hot dip galvanizing operations. Commitments for the future delivery of zinc
reflect rates quoted on the London Metals Exchange which are not subject to
future price adjustment. At June 30, 1999, the aggregate commitments for the
procurement of zinc were approximately $5 million, primarily to cover NAG's
requirements for the remainder of 1999. Management believes this zinc
procurement program ensures adequate supplies of zinc and stable gross margins
from its galvanizing operations. With respect to the zinc purchase
commitments, a potential decrease of 10% in the market price of zinc from the
June 30, 1999 level would cause a lost gross margin opportunity of
approximately $500,000. However, a favorable impact of a similar amount would
result from the same hypothetical price movement on the short-term spot
purchases of zinc.
MARKETABLE SECURITIES MARKET VALUE RISK. At June 30, 1999, the Company
held an investment in marketable equity securities of $97,000. The Company
sold all of these securities during the third quarter of 1999 and realized a
nominal gain on the transaction.
19
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
-----------------
Not applicable.
ITEM 2. CHANGES IN SECURITIES
---------------------
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
-------------------------------
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
The 1999 Annual Meeting of the Company's stockholders was held on
Wednesday, May 12, 1999 in Tulsa, OK. At the meeting, the
stockholders elected seven directors.
The votes for the election of directors were as follows:
Richard C. Butler 5,780,885 For
536,660 Against
Paul R. Chastain 5,772,495 For
545,050 Against
Michael T. Crimmins 5,774,365 For
543,180 Against
Ronald J. Evans 5,789,465 For
528,080 Against
Joseph J. Morrow 5,795,345 For
522,200 Against
John H. Sununu 5,799,105 For
518,440 Against
Mark E. Walker 5,799,165 For
518,380 Against
20
ITEM 5. OTHER INFORMATION
-----------------
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits
3.1 The Company's Restated Certificate of Incorporation
(incorporated by reference to Exhibit 3.1 to the Company's
Pre-Effective Amendment No. 1 to Registration Statement on
Form S-3 (Reg. No. 333-4937) filed on June 7, 1996).
3.2 The Company's Amended and Restated Bylaws (incorporated by
reference to Exhibit 3.2 to the Company's Quarterly Report
on Form 10-Q dated March 31, 1996).
27 Financial Data Schedule
99 Cautionary Statements by the Company Related to Forward-
Looking Statements
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the
quarter ended June 30, 1999.
21
SIGNATURES
Pursuant to the requirements of Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized:
KINARK CORPORATION
--------------------
Registrant
/S/Paul R. Chastain
----------------------
Paul R. Chastain
Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: August 16, 1999
---------------
22
EXHIBIT INDEX
Ex. No. Description
3.1 The Company's Restated Certificate of Incorporation (incorporated
by reference to Exhibit 3.1 to the Company's Pre-Effective
Amendment No. 1 to Registration Statement on Form S-3 (Reg. No.
333-4937) filed on June 7, 1996).
3.2 The Company's Amended and Restated Bylaws (incorporated by
reference to Exhibit 3.2 to the Company's Quarterly Report on
Form 10-Q dated March 31, 1996).
27 Financial Data Schedule
99 Cautionary Statements by the Company Related to Forward-Looking
Statements.
<TABLE> <S> <C>
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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ISSUER'S
INTERIM FINANCIAL STATEMENTS DATED JUNE 30, 1999, SET FORTH IN THE ACCOMPANYING
FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U. S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<EXCHANGE-RATE> 1.0
<CASH> 389
<SECURITIES> 97
<RECEIVABLES> 7,677
<ALLOWANCES> 360
<INVENTORY> 3,998
<CURRENT-ASSETS> 13,098
<PP&E> 34,469
<DEPRECIATION> 18,153
<TOTAL-ASSETS> 33,636
<CURRENT-LIABILITIES> 6,349
<BONDS> 9,125
0
0
<COMMON> 819
<OTHER-SE> 18,162
<TOTAL-LIABILITY-AND-EQUITY> 33,636
<SALES> 23,038
<TOTAL-REVENUES> 23,038
<CGS> 16,975
<TOTAL-COSTS> 21,778
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 351
<INCOME-PRETAX> 909
<INCOME-TAX> 391
<INCOME-CONTINUING> 518
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 518
<EPS-BASIC> .08
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</TABLE>
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.
