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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 MARCH 31, 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
(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 March 31, 1999.
Common Stock $ .10 Par Value . . . . . 6,741,315
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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 March 31, 1999 (unaudited), and
December 31, 1998 4
Condensed Consolidated Statements of
Earnings for the three months ended
March 31, 1999 and 1998 (unaudited) 5
Condensed Consolidated Statements of
Cash Flows for the three months ended
March 31, 1999 and 1998 (unaudited) 6
Notes to Condensed Consolidated Financial
Statements for the three months ended
March 31, 1999 and 1998 (unaudited) 7-12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 13-18
Item 3. Quantitative and Qualitative Disclosure
About Market Risks 19
PART II. OTHER INFORMATION 20
SIGNATURES 21
</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.
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 March 31, 1999, and
the related condensed consolidated statements of earnings and of cash flows
for the three month periods ended March 31, 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
May 10, 1999
<TABLE>
KINARK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<CAPTION>
Unaudited
MARCH 31 Dec 31
(Dollars in Thousands) 1999 1998
- --------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS
Current Assets
Cash and cash equivalents $ 227 $ 189
Trade receivables, net 6,791 6,600
Inventories 3,879 4,158
Investments 97 487
Prepaid expenses and other assets 638 984
Deferred tax asset, net 702 735
------- -------
TOTAL CURRENT ASSETS 12,334 13,153
------- -------
PROPERTY, PLANT AND EQUIPMENT, AT COST
Land 776 776
Chemical storage facilities 10,690 10,629
Warehousing equipment 764 750
Galvanizing plants and equipment 20,910 20,006
Other 145 323
------- -------
33,285 32,484
Less: Allowance for depreciation 17,516 16,877
------- -------
TOTAL PROPERTY, PLANT &
EQUIPMENT, NET 15,769 15,607
------- -------
DEFERRED TAX ASSET, NET 85 131
GOODWILL, NET OF ACCUMULATED
AMORTIZATION 3,905 3,952
OTHER ASSETS 319 265
------- -------
TOTAL ASSETS $32,412 $33,108
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Trade accounts payable $ 1,686 $ 1,770
Accrued payroll and employee benefits 1,321 1,210
Other taxes 546 979
Other accrued liabilities 1,476 1,194
Current maturities of
long-term obligations 934 930
------- -------
TOTAL CURRENT LIABILITIES 5,963 6,083
------- -------
PENSION AND RELATED LIABILITIES 647 652
LONG-TERM OBLIGATIONS 7,849 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 5,794 5,553
Less: Treasury stock at cost (5,912) (5,841)
------- -------
TOTAL STOCKHOLDERS' EQUITY 17,953 17,783
------- -------
TOTAL LIABILITIES &
STOCKHOLDERS' EQUITY $32,412 $33,108
======= =======
</TABLE>
See notes to condensed consolidated financial statements.
<TABLE>
KINARK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
Unaudited
<CAPTION>
Three Months Ended
March 31
--------------------
(Dollars in Thousands Except per Share Amounts) 1999 1998
- -------------------------------------------------------------------------
<S> <C> <C>
SALES $11,145 $12,164
COSTS AND EXPENSES
Cost of sales 8,049 9,172
Selling, general and
administrative expenses 1,776 1,828
Depreciation and amortization 723 701
------- ------
TOTAL COSTS AND EXPENSES 10,548 11,701
------- ------
OPERATING INCOME 597 463
OTHER (INCOME) EXPENSE
Interest expense, net 175 176
Other income --- (309)
------- ------
TOTAL OTHER (INCOME) EXPENSE 175 (133)
INCOME BEFORE INCOME TAXES 422 596
Income tax expense 181 256
------- ------
NET INCOME $ 241 $ 340
====== ======
NET EARNINGS PER COMMON SHARE
Basic $ .04 $ .05
Diluted $ .04 $ .05
</TABLE>
See notes to condensed consolidated financial statements.
<TABLE>
KINARK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
<CAPTION>
Three Months Ended
March 31
-----------------------
(Dollars in Thousands) 1999 1998
- -------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 241 $ 340
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 723 701
Gain on involuntary conversion of assets --- (309)
Loss on disposal of assets 6 ---
Gain on sale of securities (12) ---
Deferred income taxes 79 61
Change in assets and liabilities:
Accounts receivable, net (191) 77
Inventories and other 571 (1,090)
Accounts payable, accrued liabilities
and other (129) 353
------ ------
CASH PROVIDED BY OPERATING ACTIVITIES 1,288 133
INVESTING ACTIVITIES
Sale of securities 402 ---
Capital expenditures (844) (474)
Proceeds from involuntary
conversion of assets --- 325
------ ------
CASH USED FOR INVESTING ACTIVITIES (442) (149)
FINANCING ACTIVITIES
Purchase of common stock (71) ---
Proceeds from long-term obligations 4,012 4,071
Payments on long-term obligations (4,749) (4,227)
------ ------
CASH USED FOR FINANCING ACTIVITIES (808) (156)
------ ------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 38 (172)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 189 259
------ ------
CASH AT END OF PERIOD $ 227 $ 87
====== ======
</TABLE>
See notes to condensed consolidated financial statements.
KINARK CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 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
6,762,208 and 6,793,832 for the three months ended March 31, 1999
and 1998, respectively. Basic earnings per common share for these
same periods has been computed based upon the average number
of shares outstanding of 6,751,754 and 6,778,345, respectively for
each period. The number of options excluded from the calculation of
diluted earnings per share due to the option price being higher than
the share value are 254,500 and 271,000 at March 31, 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 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. For the quarter
ended March 31, 1999, the Company incurred a temporary reduction in
its zinc inventory of approximately 400,000 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 $39,000,
because it expects to replace this inventory reduction by the end of
1999.
NOTE 4. INVESTMENT SECURITIES
---------------------
The Company accounts for investment securities under the provisions
of Statement of Financial Accounting Standards No. 115 ("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
March 31, 1999, the securities carrying value approximated fair value.
The Company's unrealized or realized gains or losses for the quarter
ended March 31, 1999 are immaterial. Realized gains and losses and
declines in value of securities judged to be other-than-temporary
are included in income.
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 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 credit
agreement, and the credit agreement is secured by a guaranty from
each of the Company's subsidiaries. Amounts borrowed under the
credit 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, once funded, will require equal monthly
payments of principal and interest based on a seven year
amortization schedule.
The revolver may be paid down without penalty, or additional funds
may be borrowed up to the revolver 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
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 all such covenants at March 31, 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, 2000, 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 has purchased a new acid recovery system
for $410,000. Installation of the new acid recovery system was
completed during the third quarter of 1998. The remaining insurance
proceeds were collected in the first quarter of 1999.
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 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 March 31, 1999, the
aggregate commitments for the procurement of zinc were approximately
$4.4 million in 1999, which represents approximately 57% of
estimated 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 March 31, 1999 level would
cause a lost gross margin opportunity of approximately $440,000.
However, a favorable impact of a similar amount would result from
the same hypothetical price movement on the short-term spot
purchases of zinc.
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, in connection with this project, entered into
contract commitments of approximately $538,000.
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 8% of
NAG's first-quarter 1998 sales and 7% of Kinark's first-quarter 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, North American Warehousing Company's
("NAW") largest customer terminated its account. This account
represented approximately 4% of Kinark's first-quarter 1998
consolidated sales and 45% of NAW's 1998 first-quarter sales.
NOTE 10. TREASURY STOCK
--------------
In July 1998, the Board of Directors authorized the Company to
repurchase up to $1,000,0000 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 March 31, 1999, the Company had purchased 37,000
shares of its common stock for an aggregate cost of approximately
$103,000 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. 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.
<TABLE>
<CAPTION>
Quarter Ended March 31
------------------------------------
(Dollars in Thousands) 1999 1998
==================================================================
<S> <C> <C> <C> <C>
SALES
Galvanizing $ 9,280 83.3% $ 9,624 79.1%
Chemical storage 1,321 11.8% 1,423 11.7%
Warehousing 544 4.9% 1,117 9.2%
- -------------------------------------------------------------------
11,145 100.0% 12,164 100.0%
- -------------------------------------------------------------------
OPERATING INCOME
Galvanizing $ 754 $ 842
Chemical storage 271 23
Warehousing (44) 190
Corporate headquarters
expense (384) (409)
Other deductions, net ---- (183)
- -------------------------------------------------------------------
597 463
- -------------------------------------------------------------------
Interest expense 175 176
Other income ---- (309)
- -------------------------------------------------------------------
175 (133)
- -------------------------------------------------------------------
Income tax expense 181 256
- -------------------------------------------------------------------
NET INCOME $ 241 $ 340
===================================================================
CAPITAL EXPENDITURES
Galvanizing $ 767 $ 434
Chemical storage 61 26
Warehousing 14 1
General corporate 2 13
- -------------------------------------------------------------------
$ 844 $ 474
- -------------------------------------------------------------------
DEPRECIATION AND AMORTIZATION EXPENSE
Galvanizing $ 605 $ 551
Chemical storage 94 121
Warehousing 17 15
General corporate 7 14
- -------------------------------------------------------------------
$ 723 $ 701
- -------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
-------------- -----------------
<S> <C> <C>
TOTAL ASSETS
Galvanizing $27,563 $28,380
Chemical storage 2,603 2,516
Warehousing 610 680
General corporate 1,636 1,532
- -------------------------------------------------------------------
$32,412 $33,108
===================================================================
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
<TABLE>
RESULTS OF OPERATIONS
REVENUES
<CAPTION>
Quarter Ended March 31 1999 1998
------------------ ------------------
% of % of
$ (000) Sales $ (000) Sales
--------------------------------------------
<S> <C> <C> <C> <C>
Galvanizing $ 9,280 83.3% $ 9,624 79.1%
Chemical Storage 1,321 11.8% 1,423 11.7%
Warehousing 544 4.9% 1,117 9.2%
------ ----- ------ -----
Total $ 11,145 100.0% $ 12,164 100.0%
====== ===== ====== =====
</TABLE>
Kinark's consolidated sales of $11,145,00 for the first quarter of 1999
decreased 8.4% compared to sales of $12,164,000 for the first quarter of 1998,
due to lower revenues at all of its business units. Lower than expected
galvanizing activity at the beginning of 1999, combined with weather-related
disruptions at the storage and warehousing operations in Chicago, contributed
to the year-to-year decline in sales. However, all business units
reported a progressive rise in activity in February and March that essentially
brought the Company in line with its profit plan for the first quarter of
1999. The Company is continuing to focus on opportunities to achieve
significant, long-term growth in its core hot dip galvanizing subsidiary,
which contributed 83.3% of total sales for the first quarter of 1999. As
previously reported, Kinark concurrently is exploring strategic realignments
at its chemical storage and warehousing subsidiaries to enhance the value of
these operations.
NORTH AMERICAN GALVANIZING COMPANY ("NAG"). Galvanizing sales of
$9,280,000 for the first quarter of 1999 were down 3.6% compared to sales of
$9,624,000 for the first quarter of 1998. All of NAG's eleven galvanizing
plants, located in six states throughout the mid and south-central United
States, were profitable for the first quarter of 1999. The reduction in
first-quarter sales primarily followed the decision by a major customer to
galvanize its own product in-house and to compete directly with NAG.
Excluding the region impacted by this action, NAG's regional groups reported
production tonnage for the first quarter of 1999 increased 11.7% over the
first quarter of 1998. During the first quarter of 1999, NAG began
construction on a major facilities expansion and addition of a 51-foot
galvanizing kettle that will add needed capacity at its Nashville plant. The
project is scheduled for completion in the third quarter of 1999 and NAG does
not expect any measurable interruption when production transitions into the
new facility. If required, NAG will provide continuing service to customers
from its regional galvanizing plants located in St. Louis and Louisville.
LAKE RIVER CORPORATION ("LRC"). First quarter 1999 sales were negatively
impacted by severe weather in January that temporarily curtailed terminal
operations and limited the movement of customers' products. Sales of
$1,321,000 were down 7.2% from sales of $1,423,000 for the first quarter of
1998. Following the reduction in terminal activity at the beginning of this
year, LRC's sales increased and were up 11.7% from plan for the first quarter
of 1999. In March 1999, bulk liquid terminal sales reached a five-year high
mark due to additional tank leases and increased throughput. Drum filling of
specialty chemicals also increased during the first quarter of 1999. However,
the weakness in the Asian market continues to negatively impact LRC's drum
filling exports on a yearly comparison.
NORTH AMERICAN WAREHOUSE COMPANY ("NAW"). Warehousing sales of $544,000
for the first quarter of 1999 were down by half compared to sales of
$1,117,000 for the first quarter of 1998. The reduction in sales reflects the
Company's decision not to expand this business geographically and the
expiration of a contract with a major customer that relocated its warehousing
outside of NAW's regional service area. Severe weather also slowed
warehousing activity in January, resulting in sales for the first quarter of
1999 down 2.8% from plan. NAW provides 201,000 square feet of public
warehousing space to facilitate the distribution of customers' products in the
Chicago-Midwest regions.
<TABLE>
COSTS AND EXPENSES
<CAPTION>
Quarter Ended March 31 1999 1998
----------------- -----------------
% of % of
$ (000) Sales $ (000) Sales
--------------------------------------
<S> <C> <C> <C> <C>
Cost of sales $ 8,049 72.2% $ 9,172 75.4%
Selling, general &
administrative 1,776 15.9% 1,828 15.0%
Depreciation and amortization 723 6.5% 701 5.8%
------ ---- ------ ----
Total $ 10,548 94.6% $ 11,701 96.2%
====== ==== ====== ====
</TABLE>
The Company's cost of sales, as percentage of sales, were 72.2% for the
first quarter of 1999 compared to 75.4% for the first quarter of 1998. This
significant improvement of 3.2% on first quarter 1999 sales primarily
reflected lower overhead costs for medical and workers' compensation claims in
the galvanizing unit and a reduction of real estate taxes at the chemical
storage unit. Setting aside these overhead reductions, the Company's cost of
sales were 75.1% of sales for the first quarter of 1999.
Selling, general and administrative expenses were $1,776,000, or 15.9%
of sales, for the first quarter of 1999 versus $1,828,000, or 15.0% of
sales, for the same quarter a year ago. SG&A expenses for the first quarter
of 1999 included an additional provision of $182,000 for estimated
uncollectible accounts receivable in the galvanizing unit; SG&A expenses for
the first quarter of 1998 included a charge for settlement of an
environmental claim, as discussed in Note 8 to the Company's Condensed
Consolidated Financial Statements. Prior to these charges, SG&A expenses for
the first quarter of 1999 were down 3.1% from the first quarter of 1998. The
Company is continuing to evaluate its administrative functions and services
to identify additional opportunities to reduce its SG&A expenses.
Interest expense was virtually unchanged year-to-year at $175,000 for the
first quarter of 1999 and $176,000 for the same quarter in 1998. The
Company's debt structure primarily consists of term loans and a revolving line
of credit under a bank loan agreement. Although the Company's average debt
outstanding increased in the first quarter of 1999 compared to the first
quarter of 1998 due to increased borrowings on the revolver, interest expense
remained constant due to lower average interest rates under the loan
agreement.
In the first quarter of 1998, the Company reported other income of
$309,000 from insurance proceeds covering the loss of an acid recycling
system at one of its galvanizing plants. Efficient acid recycling is both
cost effective and contributes to an improved quality of galvanized product.
The lost unit was upgraded and replaced during the third quarter of 1998.
The Company's effective income tax rates for the first three months of
1999 and 1998 were 42.9% and 43.0%, respectively. The rates were higher than
federal statutory rates primarily due to non-deductible goodwill amortization
and state income taxes.
The Company's operating income, before interest, other income and taxes,
was $597,000 for the first quarter of 1999. This was an increase of 28.9%
over operating income of $463,000 reported for the first quarter of 1998, with
the improvement primarily the result of lower operating overhead previously
discussed. For the first quarter of 1999, operating income was 5.4% of sales
compared to 3.8% of sales for the first quarter of 1998. Net earnings were
$241,000 for the first quarter of 1999 compared to net earnings of $340,000
for the first quarter of 1998 which included a one-time pretax gain of
$309,000 from the casualty claim previously discussed.
LIQUIDITY AND CAPITAL RESOURCES
Cash increased from $189,000 at the end of 1998 to $227,000 at March 31,
1999. As a matter of operating policy, the Company maintains minimum cash
balances through its centralized treasury function that anticipates funding
requirements on a daily basis. For the first quarter of 1999, cash flow
sources and uses as compared to 1998 consisted of the following:
OPERATING ACTIVITIES generated net cash of $1,288,000 in the first
quarter of 1999, compared to net cash of $133,000 generated in the first
quarter of 1998. Year-to-year shifts in working capital components and
non-operating other income accounted for most of the increase in cash
generated. The primary increase in cash generated resulted from a reduction
of zinc inventories in the first quarter of 1999 as compared to an increase in
those inventories a year earlier, for a net benefit of $1,661,000; also, the
absence of the gain from the casualty loss incurred in 1998 represented a
year-to-year cash improvement of $309,000 in 1999. These increases in cash
generated for 1999 were offset by $750,000 for increases in accounts
receivable and reductions in accounts payable and other current liabilities.
INVESTING ACTIVITIES used $448,000 cash in the first quarter of 1999,
compared to $149,000 in the same quarter of 1998. Increased expenditures for
capital equipment used by the galvanizing unit primarily accounted for the net
increase in investing outlays for the first quarter of 1999. Capital
expenditures were $844,000 in the first quarter of 1999, compared to $474,000
in 1998. Depreciation and amortization was $723,000 for the first three
months of 1999 compared to $701,000 for the same period in 1998. Sales of
securities classified as available for sale generated cash of $402,000 in the
first quarter of 1999.
FINANCING ACTIVITIES used $808,000 in the first quarter of 1999, compared
to $156,000 in the first quarter of 1998. As a result of the improvement in
cash generated in the first quarter of 1999, the Company paid down its debt a
net of $737,000. Debt reduction consisted of scheduled payments for term
loans and lease obligations, plus net repayments on a revolving line of credit
used for working capital. Other financing activities in the first quarter of
1999 included $71,000 for the purchase of the Company's common stock, as
discussed in Note 10 to the Company's Condensed Consolidated Financial
Statements.
As discussed in Note 5 to the Company's Condensed Consolidated Financial
Statements, the Company's bank credit agreement was extended to May 1, 2000.
The credit agreement, entered into on April 30, 1997, provides a $8,500,000
revolving line of credit, a $1,250,000 advancing term loan and a $3,500,000
term loan. At March 31, 1999, the Company had additional borrowing capacity
of $1,925,000 under its revolving line of credit that reflected the underlying
value of its accounts receivable and inventories, an increase from $1,731,000
borrowing capacity at December 31, 1998.
Based on its beginning-of-the-year business projections, the Company
believes it has the ability to continue to generate cash from operations and
has an adequate line of credit to support its growth and capital expenditure
plans for 1999.
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 three
months of 1999 and 1998 were $228,000 and $250,000, 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. Recovered acid is
returned to production, thereby eliminating the substantial expense associated
with the alternative of waste treatment and removal to an off-site location.
The recovery process generates a non-hazardous dry ferrous sulphate crystal
by-product which the Company sells commercially.
The Company's other galvanizing plants use hydrochloric acid, which
requires the off-site disposal of waste acids. Due to the increasing cost of
waste disposal and decreasing availability of approved disposal methods,
alternative waste hydrochloric acid recycling methods have been evaluated over
recent years. While it appears that the technology for an economically
feasible system is available, no proven system for the recycling of
hydrochloric acid used in hot dip galvanizing is currently on the market.
Hydrochloric acid recycling systems will be further evaluated as new systems
become available. Future capital expenditures in this area are expected to
increase, but such expenditures should significantly reduce waste acid
disposal expense.
Environmentally related expenditures at Lake River 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. 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 some possible
environmental remediation.
The Company is committed to complying with all federal, state and local
environmental laws and regulations 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 Corporation is preparing for the year 2000 by taking steps
to insure that its computers can recognize and use years after 1999
correctly. If such a situation were to exist and not be corrected, Year 2000
errors could affect the Company's ability to invoice customers and pay vendors
in a timely manner and to maintain accurate financial records. The Company
has been working on the resolution of Year 2000 issues since 1996. The
Company has determined that its primary computer systems serving the corporate
headquarters and its galvanizing operations are structured to accommodate the
Year 2000 and beyond, and the operation of these systems should not be
affected by the millennium change. Galvanizing contributes approximately 83%
of Kinark's consolidated sales. Computer systems serving Kinark's chemical
storage and warehousing operations are not Year 2000 compliant and these
systems are scheduled to be renovated during the first half of 1999.
COST OF ADDRESSING YEAR 2000 ISSUES. Kinark's cost to date of addressing
Year 2000 issues is approximately $120,000, and the on-going assessment and
resolution of such issues should not exceed an additional $100,000. Future
expenditures to make Kinark's computer systems Year 2000 compliant are not
expected to have a material impact on the results of the Company's operations,
liquidity, and capital resources.
RISKS OF YEAR 2000 ISSUES. Kinark has not fully determined the state of
Year 2000 compliance by its key suppliers of zinc, the primary commodity
required for its hot dip galvanizing operations. Kinark historically has not
relied on a sole-source supply for its zinc requirements and expects to
continue that practice. In addition, Kinark's operations are dependent on
reliable supplies of electricity and natural gas. Going forward, Kinark will
be monitoring the progress of its key vendors, as well as its major customers,
service providers and utilities in addressing their Year 2000 issues, and
expects this assessment to be completed by June 1999. An assessment of the
"most reasonably likely worst case Year 2000 scenarios" for Kinark would
consider (a) the failure of the Company's computer systems and (b) disruption
of production operations due to computer failures encountered by a customer,
supplier or utility. With respect to failure of the Company's computers, the
worst case impact would be the additional cost to manually process daily
business operations and attendant delays in completing those operations.
Kinark does not believe such additional costs would have a material impact on
its operations. With respect to a disruption of Kinark's production
operations due to a customer's, supplier's or utility's failure to be Year
2000 compliant, the extent of such disruption is not reasonably estimable.
Kinark's operations are conducted in widely-disbursed facilities, serving more
than 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 establish a contingency plan in
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.
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 March 31, 1999, $8,203,000 was outstanding under
the agreement with an effective rate of 7.5%. The borrowings are due as
follows: $591,000 in 1999 and $7,612,000 in 2000. Each increase of 10 basis
points in the effective interest rate would result in an increase in interest
charges of approximately $8,000 based on March 31, 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 March 31, 1999, the aggregate commitments for the
procurement of zinc were approximately $4.4 million in 1999, which represents
approximately 57% of estimated 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 March 31, 1999 level would cause a lost gross margin
opportunity of approximately $440,000. 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 March 31, 1999, the Company
held an investment in marketable equity securities of $97,000. At March 31,
1999, the securities' carrying value approximated fair value. A potential
adverse price movement of 10% in the market price of these securities from
the March 31, 1999 market price would cause a loss in value of approximately
$10,000. Management is continuing to evaluate its plans with respect to this
investment.
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
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the
quarter ended March 31, 1999.
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: May 6, 1999
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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<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ISSUER'S
INTERIM FINANCIAL STATEMENTS DATED MARCH 31, 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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1.0
<CASH> 227
<SECURITIES> 97
<RECEIVABLES> 7,184
<ALLOWANCES> 393
<INVENTORY> 3,879
<CURRENT-ASSETS> 12,334
<PP&E> 33,285
<DEPRECIATION> 17,516
<TOTAL-ASSETS> 32,412
<CURRENT-LIABILITIES> 5,867
<BONDS> 8,592
0
0
<COMMON> 819
<OTHER-SE> 17,953
<TOTAL-LIABILITY-AND-EQUITY> 32,412
<SALES> 11,145
<TOTAL-REVENUES> 11,145
<CGS> 8,049
<TOTAL-COSTS> 10,548
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 175
<INCOME-PRETAX> 422
<INCOME-TAX> 181
<INCOME-CONTINUING> 241
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 241
<EPS-PRIMARY> .04
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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.
<PAGE>
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.
