SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED ]
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-3920
KINARK CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
71-0268502
(I.R.S. Employer Identification No.)
2250 EAST 73RD STREET, TULSA, OKLAHOMA 74136-6832
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code
(918) 494-0964
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
COMMON STOCK, AMERICAN STOCK EXCHANGE
$.10 PAR VALUE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K. [ X ]
The aggregate market value of Common Stock held by non-affiliates on
March 22, 2000 was approximately $5.3 million. As of March 22, 2000, there
were 6,712,219 shares of Kinark Corporation Common Stock $.10 par value
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement to be filed not
later than 120 days after the end of the fiscal year covered by this report
are incorporated by reference in Part III.
<PAGE>
KINARK CORPORATION
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Fiscal Year Ended December 31, 1999
TABLE OF CONTENTS
Page
----
FORWARD LOOKING STATEMENTS OR INFORMATION 3
PART I
Item 1. Business 4
Item 2. Properties 4
Item 3. Legal Proceedings 4
Item 4. Submission of Matters to a Vote of
Security Holders 4
PART II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters 5
Item 6. Selected Financial Data 5
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 5
Item 7A. Quantitative and Qualitative Disclosures
About Market Risk 5
Item 8. Financial Statements and Supplementary
Data 5
Item 9. Disagreements with Accountants on
Accounting and Financial Disclosure 5
PART III
Item 10. Directors and Executive Officers of the
Registrant 6
Item 11. Executive Compensation 7
Item 12. Security Ownership of Certain Beneficial
Owners and Management 7
Item 13. Certain Relationships and Related
Transactions 7
PART IV
Item 14. Exhibits, Financial Statement
Schedules, and Reports on Form 8-K 8
FORWARD LOOKING STATEMENTS OR INFORMATION
This Annual Report on Form 10-K contains forward looking statements.
Such statements are typically punctuated by words or phrases such as
"anticipates," "estimate," "should," "may," "management believes," and words
or phrases of similar import. Such statements are subject to certain risks,
uncertainties or assumptions. Should one or more of these risks or
uncertainties materialize, or should underlying assumptions prove incorrect,
actual events and results may materially differ from results anticipated,
estimated or projected in such 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, as well as the
other risks detailed herein and in the Company's reports filed with the
Securities and Exchange Commission.
<PAGE>
PART I
ITEM 1. BUSINESS
Kinark Corporation is a diversified company conducting business in
Galvanizing and Chemical Storage and Distribution which are further discussed
below. As used in this report, the terms "Kinark" and "Company" mean Kinark
Corporation (the Registrant) and its operating subsidiaries unless the context
requires otherwise. Kinark was incorporated under the laws of the State of
Delaware in 1955. The current operating subsidiaries consist of Lake River
Corporation ("Lake River"), acquired in 1968, North American Warehousing
Company ("NAW"), formed in 1997, and North American Galvanizing Company
("NAG"), formed in 1996. NAG merged with Rogers Galvanizing Company
("Rogers") in 1996 and Boyles Galvanizing Company ("Boyles") in 1997, with NAG
as the survivor company. Rogers was acquired by the Company during 1996 and
Boyles was acquired in 1969.
Financial information for each business segment including sales,
operating earnings, identifiable assets, capital expenditures, and
depreciation expense for the most recent three fiscal years is presented in
the notes to the consolidated financial statements included in Item 8.
GALVANIZING
The Company conducts galvanizing operations through its NAG subsidiary.
NAG is principally engaged in hot dip galvanizing of metal products. NAG
galvanizes iron and steel products by immersing them in molten zinc. This
process produces an alloyed metal surface which can endure for up to 50 years
with no oxidation or corrosion from exposure to the elements.
The galvanizing process provides effective corrosion protection of
fabricated steel which is used in numerous markets such as petrochemical,
highway and transportation, energy, utilities, communications, irrigation,
pulp and paper, waste water treatment, food processing, recreation and the
manufacture of original equipment. NAG galvanizes products for over 2,000
such customers nationwide. Based on the number of its operating plants, NAG
is one of the largest independent hot dip galvanizing companies in the United
States.
NAG operates eleven galvanizing plants in six states. These
strategically located plants enable NAG to compete effectively by providing
galvanized metal products to manufacturers serving a broad range of basic
industries throughout the mid and south-central United States, and beyond.
Its galvanizing plants are located in Tulsa, Oklahoma; Kansas City, Missouri;
St. Louis, Missouri; Nashville, Tennessee; Louisville, Kentucky; Denver,
Colorado; Hurst, Texas; and Houston, Texas.
In the first quarter of 2000, the Company announced a major expansion of
its galvanizing operations was underway with the construction of a new
galvanizing plant in Houston, Texas. This state-of-the-art facility will
include a 62-foot galvanizing kettle with capabilities to process large poles
for the wireless communication and electric transmission markets. The new
facility will be NAG's twelfth plant and is expected to be in operation in the
fourth quarter of 2000.
Zinc, the primary raw material in the galvanizing process, is a widely
available commodity in the open market. The London Metal Exchange price of
zinc for three month delivery was $.42 per pound at the beginning of 1999 and
closed the year at $.56 per pound. To reduce the impact of zinc price
fluctuations, the Company periodically enters into forward purchase
commitments for up to one year. NAG has a broad customer base with its
five largest customers, on a combined basis, accounting for approximately
24% of the Company's consolidated sales in 1999, one of whom accounts for
14.3%. The backlog of orders at NAG is generally nominal due to the short
turn-around time requirement typical in the galvanizing industry.
Hot dip galvanizing is highly competitive. NAG competes with other
independent galvanizing companies, captive galvanizing facilities operated by
manufacturers, and alternative forms of corrosion protection such as paint.
Competition is driven primarily by price, rapid turn-around service time, and
the quality of the finished galvanized product. The broad geographic
disbursement of NAG's plants and the consistent quality of its service has
enabled NAG to compete on a favorable basis.
NAG's 2-year labor agreement with the United Steel Workers Union covering
approximately 110 production workers at its Tulsa galvanizing plants expired
in the first quarter of 2000 and was extended for approximately two weeks to
facilitate on-going discussions between management and the union
representatives. While there can be no assurance, NAG anticipates that a
mutually acceptable agreement will result from these discussions. NAG
employed 406 persons at December 31, 1999.
CHEMICAL STORAGE AND WAREHOUSING
The Company conducts its chemical storage and public warehousing
operations through its Lake River and NAW subsidiaries, respectively.
Lake River, located in Chicago, is a bulk liquid terminal operation with
177 tanks providing 21 million gallons of on-site bulk liquid storage
capacity; another 58 tanks with an aggregate storage capacity of 23 million
gallons are considered in a decommissioned status due to low demand for large
capacity tanks. During 1999, Lake River employees handled 38 barges, 925
rail cars, and 8,700 transport trucks to service approximately 43 million
gallons of product throughput for its customers. Throughput volume increased
22% from 1998. Lake River also operates two bag filling lines used for bulk
chemical bagging and three drum filling lines which handle flammables,
caustics, food grade products, and miscellaneous specialty chemicals.
Bulk liquid storage tanks are leased to customers for various terms
generally ranging from six months to one year. These contracts are typically
renewed or replaced with other customers upon expiration.
Lake River's facilities provide integrated storage, formulating,
packaging, and distribution services. Most competitors do not offer this
breadth of services although numerous companies compete aggressively in one or
more of these areas. Lake River's service-based bulk liquid storage business
does not require it to take title to any of the customer's products that it
handles. Steel drums and bag containers used in Lake River's production
operations are available in adequate quantities from a number of regional
<PAGE>
suppliers. Location of facilities, quality of service, and price are
important factors enabling Lake River to compete effectively. Lake River
employed 49 persons at December 31, 1999, most of whom are covered by a 3-year
labor agreement with the Teamsters that expires in 2001.
Revenue from bulk liquid storage customers is derived from fixed storage
rentals and from throughput handling fees. Existing tank and service
facilities have adequate capacity to support anticipated business growth from
new rentals and/or increased product throughput.
NAW, located in Chicago, provides 201,000 square feet of public
warehousing space to service the distribution of customers' products primarily
in the Chicago-Midwest region. NAW handles dry and liquid general merchandise
and chemicals and its services include container loading for export shipment.
At the end of 1999, NAW operated with 19 persons.
ITEM 2. PROPERTIES
NAG operates eleven hot dip galvanizing plants located in Oklahoma,
Missouri, Texas, Colorado, Tennessee and Kentucky. Three of the plants are
leased: One of these plants is leased under terms which gives NAG the option
to extend the lease for up to 16 years, or to acquire the plant. Two plants
are leased under terms with options to extend the lease to 2015 and 2017,
respectively. The galvanizing plants average 20,000 square feet in size and
operate zinc kettles ranging in length from 33 to 55 feet.
Lake River has operating facilities on approximately 50 acres
located on the Chicago Ship Canal in Cook County, Illinois, which are leased
as five parcels from the Metropolitan Water Reclamation District of Greater
Chicago ("MWRD"), a municipal corporation. These multiple land leases have
terms ranging from 35-75 years, with the latest expiring in 2045. Two of the
leases expired in 1999, and Lake River expects to bid for their renewal during
2000. Lake River will not renew the lease on one of the five parcels that is
excess of its current and foreseeable needs, and expects to convert one parcel
into an easement. 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. The operating facilities owned by Lake River include an office and
quality control laboratory of brick masonry construction containing an area of
approximately 5,100 square feet, 235 specialized tanks with a total capacity
of approximately 44 million gallons of liquid chemicals and 190,000 square
feet of on-site warehouse space.
NAW operates a 201,000 square foot public warehouse facility located in
southwest Chicago under a lease through June 2001. The lease provides an
option and right of first refusal for NAW to purchase the warehouse facility
at a predetermined price at any time during the current term of the lease.
The headquarters offices of Kinark and NAG are located in Tulsa,
Oklahoma, in approximately 5,700 square feet of office space leased through
June, 2002.
ITEM 3. LEGAL PROCEEDINGS
The Company is not a party to, nor is any of its property subject to, any
material legal proceedings, other than routine litigation incidental to the
business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of stockholders during the fourth
quarter of 1999.
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
STOCK INFORMATION
The principal trading market for the common stock of Kinark Corporation
is the American Stock Exchange. The Company's common stock trades under the
symbol "KIN". The Company does not pay a dividend and expects to continue
that policy in order to reinvest earnings to support and expand its business
operations. The board of directors may review the dividend policy in the
future, recognizing that dividends may be a desirable form of return on the
investment made by many of its stockholders. In addition, the payment and
amount of future dividends, if any, may be limited by the Company's credit
agreement. Stockholders of record at March 22, 2000 numbered approximately
2,400.
QUARTERLY STOCK PRICES
- -----------------------------------------------------------------
FIRST SECOND THIRD FOURTH
- -----------------------------------------------------------------
1998-High $3.125 $3.75 $3.3125 $3.125
Low $2.625 $2.688 $2.688 $2.125
1999-High $3.375 $2.438 $2.313 $1.875
Low $2.125 $2.00 $1.50 $1.00
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data for years 1995 through 1999 are presented on
page FS-17 of this Annual Report on Form 10-K.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The index to Management's Discussion and Analysis of Financial Condition,
Results of Operations, Financial Statements and Supplementary Data is
presented on page 10 of this Annual Report on Form 10-K.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Management's discussion of quantitative and qualitative disclosures about
market risk is presented on page FS-4.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The index to Management's Discussion and Analysis of Financial Condition
and Results of Operations, Financial Statements and Supplementary Data is
presented on page 10 of this Annual Report on Form 10-K.
ITEM 9. DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no disagreements with the Company's independent
accountants on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope.
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
The information required by this item with respect to the Directors of
the Company appears in the Proxy Statement for the Company's 2000 Annual
Meeting under the headings "Election of Directors" and "Compliance with
Section 16(a) of the Securities Exchange Act of 1934" and is incorporated by
reference.
NAME AGE OFFICE AND BUSINESS EXPERIENCE
PAUL R. CHASTAIN 65 Vice President and Chief Financial
Officer since February 1996, and
Secretary of the Company since January
2000 to present. From July 1993 through
January 1996, President and Chief
Executive Officer of the Company. From
June 1991- July 1993, Chairman and Chief
Executive Officer. Co-Chairman and Co-
Chief Executive Officer of the Company
from June 1990-June 1991. From 1976,
Executive Vice President and Treasurer.
From 1973 through 1976, Vice President
of Finance and Secretary of the Company.
Director of Kinark Corporation since
1975.
MICHAEL T. CRIMMINS 60 Private Investor. Chairman of the Board
from May 1995 and Chief Executive
Officer of the Company from February
1996 to November 1999. From 1989-1995,
Vice President and General Counsel of
Northbridge Holdings, Inc. and Deltech
Corporation. Vice President and General
Counsel from 1988 until 1989 of the
Advanced Technology Group of Hoechst
Celanese Corporation. From 1976 until
1987, Assistant Secretary and Associate
General Counsel of American Hoechst
Corporation. Director of Kinark
Corporation since 1993.
RONALD J. EVANS 50 President of the Company since February
1996 and appointed Chief Executive
Officer November 1999 to present. From
May 1995 through January 1996, private
investor. From 1989-1995, Vice
President-General Manager of Deltech
Corporation. Mr. Evans' previous
experience includes 13 years with
Hoechst Celanese Corporation. Director
of Kinark Corporation since 1995.
JOSEPH J. MORROW 60 Non-Executive Chairman of the Board of
the Company from November 1999 to
present. Chief Executive Officer of
Morrow & Co., Inc. since 1972. Chief
Executive Officer of Proxy Services
Corporation from 1972 to 1992. Chairman
of Proxy Services Corporation from 1992
to present. Currently a Director of
U.S. Agents Holding Corp. Director of
Kinark Corporation since 1996.
JOHN H. SUNUNU 60 President of JHS Associates, Ltd. since
June 1992 and a former partner in
Trinity International Partners, a
private financial firm and served as co-
host of CNN's "Crossfire", a news/public
affairs discussion program, from March
1992 until February 1998. From January
1989 until March 1992, Chief of Staff to
the President of the United States.
From January 1983 to January 1989,
Governor of the State of New Hampshire.
From 1963 until his election as
Governor, President of JHS Engineering
Company and Thermal Research Inc.
Helped establish and served as chief
engineer for Astro Dynamics Inc. from
1960 until 1965. From 1968 until 1973,
Governor Sununu was Associate Dean of
the College of Engineering at Tufts
University and Associate Professor of
Mechanical Engineering. Served on the
Advisory Board of the Technology and
Policy Program at MIT from 1984 until
1989. A member of the National Academy
of Engineering and the Board of Trustees
for the George Bush Presidential Library
Foundation. Director of Kinark
Corporation since 1996.
<PAGE>
MARK E. WALKER 44 President and Director since 1991 of
Ocean's Window, Inc. President and
Director of Ocean's Window Travel
Services since 1995. Manager from 1985
until 1992 for DSC Communications
Corporation. Manager from 1978 until
1984 for Texas Instruments Incorporated.
Director of Kinark Corporation since
1993.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item appears in the 2000 Proxy Statement
under the heading "Executive Compensation" and is incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required by this item concerning security ownership of
certain beneficial owners and management appears in the 2000 Proxy Statement
under the heading "Security Ownership of Principal Stockholders and
Management" and is incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Joseph J. Morrow, a director of the Company and a nominee for reelection
to the Company's Board of Directors in 2000 for a one-year term, purchased
1,759,083 shares of Common Stock at $2.50 per share in the Company's private
placement in January 1996. Mr. Morrow is the chief executive officer of
Morrow & Co., Inc., which has provided proxy solicitation and other
stockholder related services to the Company since 1994.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS REPORT:
(1) FINANCIAL STATEMENTS PAGE
-----------------------------------------------------------
Independent Auditors' Report FS-5
-----------------------------------------------------------
Consolidated Balance Sheets at December 31, 1999
and 1998 FS-6
-----------------------------------------------------------
Consolidated Statements of Earnings for the years
ended December 31, 1999, 1998 and 1997 FS-7
-----------------------------------------------------------
Consolidated Statements of Stockholders' Equity
and Comprehensive Income for the years ended
December 31, 1999, 1998 and 1997 FS-8
-----------------------------------------------------------
Consolidated Statements of Cash Flows for the
years ended December 31, 1999, 1998 and 1997 FS-9
-----------------------------------------------------------
Notes to Consolidated Financial Statements FS-10
-----------------------------------------------------------
(2) FINANCIAL STATEMENT SCHEDULES:
Schedule II - Valuation and Qualifying Accounts 9
-----------------------------------------------------------
All schedules omitted are inapplicable or the information
required is included in either the consolidated financial
statements or the related notes to the consolidated financial
statements.
(3) EXHIBITS:
The Exhibits filed with or incorporated by reference into this report are
listed in the following Index to Exhibits.
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
- ------- -------------------------------------------------------
3.1 Restated Certificate of Incorporation of Kinark
Corporation, as amended on June 6, 1996 (incorporated by
reference to Exhibit 3.1 of the Company's Pre-Effective
Amendment No. 1 to Registration Statement on Form S-3,
Registration No. 333-4937, filed with the Commission on
June 7, 1996).
3.2 Amended and Restated Bylaws of Kinark Corporation
(incorporated by reference to Exhibit 3.1 to the
Company's Quarterly Report on Form 10-Q dated March 31,
1996).
10.1 Credit Agreement, dated September 24, 1999, between
Kinark Corporation, a Delaware corporation, and Bank
One, Oklahoma, N.A., National Association, a national
banking association.
21. Subsidiaries of the Registrant.
<PAGE>
23. Independent Auditors' Consent.
24.01 Power of attorney from Michael T. Crimmins.
24.02 Power of attorney from Ronald J. Evans.
24.03 Power of attorney from Joseph J. Morrow.
24.04 Power of attorney from John H. Sununu.
24.05 Power of attorney from Mark E. Walker.
(b) REPORTS ON FORM 8-K.
The Company filed a Current Report on Form 8-K dated
December 3, 1999 in connection with its announcement of the appointment of
Kinark Director Joseph J. Morrow as Non-Executive Chairman of the Board of the
Company, the appointment of Ronald J. Evans, President of the Company, to the
additional post of Chief Executive Officer, and the death of Richard C.
Butler, a Director of the Company since 1974.
<PAGE>
<TABLE>
SCHEDULE II
KINARK CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<CAPTION>
Additions
Balance at charged to Balance at
beginning costs and end of
Description of year expenses Deductions year
======================================================================
Allowance for doubtful receivables
(deducted from accounts receivable)
---------------------------------
<S> <C> <C> <C> <C>
1999 $169,000 $288,000 $140,000 $317,000
- -----------------------------------------------------------------------
1998 $287,000 $290,000 $408,000 $169,000
- -----------------------------------------------------------------------
1997 $427,000 $116,000 $256,000 $287,000
- -----------------------------------------------------------------------
</TABLE>
SIGNATURES
Pursuant to the requirements of Section 13 and 15(d) of the Securities
and Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, as duly authorized.
KINARK CORPORATION
(Registrant)
Date: April 5, 2000 By: /s/Paul R. Chastain
-----------------------
Paul R. Chastain
Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below on March 30, 2000, by the following persons on
behalf of the Registrant and in the capacities indicated.
/s/Joseph J. Morrow* /s/Michael T. Crimmins*
-------------------------- -----------------------------
Joseph J. Morrow, Non- Michael T. Crimmins, Director
executive Chairman of
the Board
/s/Ronald J. Evans* /s/John H. Sununu*
--------------------------- -----------------------------
Ronald J. Evans, President John H. Sununu, Director
and Chief Executive Officer
(Principal Executive Officer),
and Director
/s/Paul R. Chastain /s/Mark E. Walker*
--------------------------- -----------------------------
Paul R. Chastain, Vice Mark E. Walker, Director
President, Chief Financial
Officer and Director
(Principal Financial and
Accounting Officer)
*Paul R. Chastain, by signing his name hereto, does hereby sign this Annual
Report on Form 10-K on behalf of each of the directors and officers of the
Registrant after whose typed names asterisks appear pursuant to powers of
attorney duly executed by such directors and officers and filed with the
Securities and Exchange Commission as exhibits to this report.
By: /s/ Paul R. Chastain
-----------------------
Paul R. Chastain
Attorney-in-fact
<PAGE>
INDEX TO MANAGEMENT'S DISCUSSION AND ANALYSIS,
CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page(s)
------
Management's Discussion and Analysis FS-1 to FS-4
Independent Auditors' Report FS-5
Consolidated Balance Sheets FS-6
Consolidated Statements of Earnings FS-7
Consolidated Statements of Stockholders' Equity
and Comprehensive Income FS-8
Consolidated Statements of Cash Flows FS-9
Notes to Consolidated Financial Statements FS-10 to FS-15
Quarterly Results FS-16
Selected Financial Data FS-17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The consolidated statements of earnings provide an overview of Kinark's
operating results for 1997 through 1999. This section of Management's
Discussion and Analysis summarizes the major factors which influenced
operating results during the three-year period presented.
REVENUES
1999 1998 1997
------------ ------------ -------------
$(000) % $(000) % $(000) %
===========================================================================
Galvanizing $37,841 84.0% $39,049 81.3% $38,633 79.6%
Chemical Storage 5,187 11.5% 5,224 10.9% 5,792 11.9%
Warehousing 2,030 4.5% 3,731 7.8% 4,131 8.5%
- ----------------------------------------------------------------------------
Total $45,058 100.0% $48,004 100.0% $48,556 100.0%
============================================================================
1999 COMPARED WITH 1998
1999 consolidated sales of $45,058,000 were down 6.1% from sales of
$48,004,000 in 1998, primarily due to a decline in business activity in the
warehousing segment and competitive pricing pressures experienced in the
galvanizing segment.
Galvanizing sales of $37,841,000 in 1999 were down 3.1% from $39,049,000
in 1998. In 1999, NAG's average selling price per ton fell 4.1%,
substantially offsetting a modest increase in year-to-year tonnage growth.
This down-turn in pricing reverses a 2-year upward trend, and in part reflects
increased pricing pressures from the entry of new galvanizing competitors in a
number of the regions served by NAG.
Galvanizing of large poles for the wireless and communications and
electric transmission markets represents a long-term growth opportunity for
NAG. In the first quarter of 2000, NAG began construction of a new
galvanizing plant in Houston, Texas to support this growing market. The new
plant will include a 62-foot galvanizing kettle and is expected to be in
operation in the fourth quarter of 2000. NAG will continue to operate its
existing plant in Houston to galvanize a variety of structural steel products
for the steel fabricating industry.
During the third quarter of 1999, NAG experienced a kettle failure at one
of its Oklahoma facilities dedicated to galvanizing specialty bar steel. NAG
continued to meet scheduled deliveries to its largest customer by shifting
production to another of its plants, and is in the process of replacing the
damaged galvanizing line. At December 31, 1999, the Company and the insurance
carrier were evaluating the extent of the property loss and additional
business costs that may be covered by insurance. Based on the uncertainty of
the amount of future insurance recoveries, if any, NAG took a charge to other
expense of $176,000 in the fourth quarter of 1999 representing property losses
and costs incurred in 1999, net of interim insurance proceeds received.
During the first quarter of 2000, NAG incurred additional costs of
approximately $145,000 related to first quarter 2000 production sales due to
this kettle failure, the recovery of which are subject to a final loss
determination currently underway with the insurance company.
The contract for NAG to provide galvanized earth-bar to its largest
customer expires in the third quarter of 2000, and NAG expects to renew the
contract for an extended period. Sales to this customer totaled 14.3%
of consolidated sales in 1999.
In 1999, NAG initiated cost-effective programs that increased gross
profits and the operating income margin compared to 1998. For 1999, NAG
generated an operating income margin of 9.3% vs 6.6% for 1998. The benefits
achieved were measured in terms of year-to-year higher tonnage processed per
man-hour, increased zinc-usage efficiency, a lower average cost for zinc raw
material, and lower administrative expenses. The pay-back generated from this
company-wide effort to improve the efficiency of operations and reduce costs
more than offset the impact of lower average selling prices for 1999. NAG
reported operating income of $3,533,000 in 1999 compared to $2,575,000 in
1998.
Chemical storage sales were $5,187,000 in 1999, virtually even with sales
of $5,224,000 in 1998. Lake River's core bulk liquid storage activity grew in
1999 with the number of tanks under lease increasing by 12.5% to a three-year
high of 90, and throughput up 22.2% to 40,300,000 gallons. This growth in
bulk liquid storage was offset by lower sales from drumming and bagging of
specialty chemicals, generally due to softer demand to support Asian markets.
In 1999, Lake River continued to pare costs and improve gross profit margins.
Lake River reported operating income of $569,000 in 1999 compared to $269,000
in 1998.
Warehousing sales declined 45.6% in 1999 as North American Warehousing
continued to experience a shrinking customer base. Sales were $2,030,000 in
1999 compared to $3,731,000 in 1998. Since mid-1998, NAW has lost a number of
major accounts that have either relocated regional distribution to another
state or have consolidated distribution to take advantage of centralized
services. As a direct result of these changes, the volume of customers'
product handled by NAW in 1999 was down by half to 174,000,000 pounds and
warehousing operations have been consolidated from three locations into one.
NAW reported an operating loss of $153,000 in 1999 compared to an operating
income of $542,000 in 1998.
FS-1
1998 COMPARED WITH 1997
Sales for 1998 totaled $48,004,000, for a decrease of $552,000 or 1.1%
compared with the 1997 total of $48,556,000. Sales by the Chemical Storage
and Warehousing segments were down a combined $968,000 or 9.8% compared with
1997. Galvanizing sales were higher for the second consecutive year, with an
increase of $416,000 or 1.1% over 1997.
NAG's sales were a record $39,049,000 in 1998, reflecting year-to-year
tonnage growth at several of its regional operating facilities and improved
average selling prices. Galvanizing sales were adversely affected in the
second half of 1998, compared to the same period of 1997, following the
decision by a major customer to galvanize its own product in-house, and to
compete directly with NAG by acquiring a galvanizing facility in the Tulsa
market. Among the numerous basic industries that require galvanized
structures, fabricators of steel poles and towers, industrial grating and
highway/transportation related products continue to provide good growth
opportunities for NAG.
At Lake River, the loss of two large accounts and lower export related
business primarily resulted in a net chemical storage sales decline of
$568,000 or 9.8% from 1997. One account constructed its own distribution
facilities and the second account consolidated its bulk liquid storage with
one of its customers. The weak Asian market negatively impacted exports for
one of Lake River's customers, causing drum filling sales to decline 30.2%
compared with 1997. Slightly more than half of the business lost in 1998
was offset by moderate growth from new and existing accounts.
Sales for NAW were down $400,000 or 9.7% from 1997, and this was the
direct result of the contract termination by NAW's largest warehousing account.
COST AND EXPENSES
1999 1998 1997
-------------- --------------- --------------
% of % of % of
$(000) Sales $(000) Sales $(000) Sales
========================================================================
Cost of sales $33,185 73.6% $36,587 76.2% $37,979 78.2%
Selling, general
& administrative 6,459 14.3% 7,042 14.7% 6,027 12.4%
Depreciation &
amortization 3,045 6.8% 2,923 6.1% 2,712 5.6%
- ------------------------------------------------------------------------
Total $42,689 94.7% $46,552 97.0% $46,718 96.2%
========================================================================
1999 COMPARED WITH 1998
Cost of sales in 1999 was $33,185,000, a decrease of 9.3% due primarily to
lower warehousing and galvanizing sales and cost reductions in chemical
storage. Cost of sales as a percent of sales was 73.6% compared to 76.2% in
1998. The continuing improvement in the Company's gross profit margin
reflects cumulative improvements in labor and process productivity achieved in
its core galvanizing business in 1999, and lower service costs for chemical
storage. Selling, general and administrative expenses decreased 8.2% to
$6,459,000 in 1999 compared to $7,042,000 in 1998. Decreases in charges for
environmental and medical claim settlements and bad debts accounted for the
majority of SG&A expense reductions for 1999. In 1999, charges against
income for depreciation of property, plant and equipment and amortization of
goodwill totaled $3,045,000 compared to $2,923,000 in 1998.
1998 COMPARED WITH 1997
In 1998, cost of sales decreased 3.7% to $36,587,000, compared with
$37,979,000 in 1997, primarily due to lower sales in the chemical storage and
warehousing segments. Cost of sales as a percent of sales was 76.2% in 1998
and 78.2% in 1997. This improvement in the gross profit margin resulted from
increased labor productivity in the galvanizing segment and higher sales per
square foot in warehousing.
Selling, general and administrative expenses were $7,042,000 in 1998 and
$6,027,000 in 1997. As a percent of sales, SG&A expenses were 14.7% in 1998
and 12.4% in 1997. The increase in SG&A expenses reflects the cost of
settling environmental and medical claims related to prior periods, increased
marketing expenses in galvanizing and additions to the reserves for collection
of doubtful accounts.
OTHER (INCOME) EXPENSE
1999 1998 1997
------------ ------------- -----------
% of % of % of
$(000) Sales $(000) Sales $(000) Sales
===========================================================================
Interest $ 729 1.6 % $ 631 1.3 % $ 781 1.6%
Other 208 0.5 % (309) (0.6)% --- ---
- ---------------------------------------------------------------------------
Total $ 937 2.1 % $ 322 0.7% $ 781 1.6%
===========================================================================
Interest expense increased to $729,000 in 1999 from $631,000 in 1998,
reflecting higher average borrowings to supplement NAG's expenditures program,
and the purchase of land for a new galvanizing plant. In 1999, the Company
recorded a loss of $176,000 from a kettle loss. In 1998, the Company recorded
a gain of $309,000 from a fire loss covered by insurance.
FS-2
INCOME BEFORE INCOME TAXES
Income before income taxes increased 26.7% to $1,432,000 in 1999,
reflecting improvement in gross margins and lower SG&A expenses, partially
offset by lower sales, higher interest expense and the casualty loss.
Income before income taxes for 1998 was $1,130,000 compared with
$1,057,000 in 1997. Underlying this increase, operating income from the
business segments was $3,386,000 in 1998 compared with $3,540,000 in 1997.
The decrease of $154,000, or 4.3%, in operating segment earnings reflects
lower sales in chemical storage and increased marketing expenses in
galvanizing that were partially offset by improved earnings in warehousing.
In 1998, the Company settled certain environmental and medical claims related
to prior periods. Lower interest expense and a gain from insurance proceeds
more than offset these settlements and the lower segment earnings.
INCOME TAXES
The Company's effective income tax rates for 1999, 1998 and 1997 were
44.3%, 46.9%, and 44.3%, respectively. These rates are higher than federal
statutory rates primarily due to nondeductible goodwill amortization and
state income taxes, and other nondeductible items.
CASH FLOWS
The Company generated operating cash flow of $3,594,000 in 1999, an
increase of 13.7% compared with $3,158,000 in 1998. The improvement in 1999
operating cash flow was due primarily to higher operating earnings and the
utilization of deferred tax benefits. Operating working capital was 16.0% of
sales in 1999 and 14.7% 1998.
Capital expenditures were $5,511,000 in 1999, up 55.6% from $3,542,000 in
1998. In 1998, capital expenditures increased 14% from $3,103,000 in 1997.
The Company allocated approximately 95% of the 1999 capital budget to upgrade
galvanizing facilities; approximately 89% of the 1998 capital budget was
allocated to galvanizing. For the three years ended December 31, 1999, NAG
has completed major capital improvement projects at its galvanizing plants
located in Louisville, Kentucky, Nashville, Tennessee and Hurst, Texas. The
most recent of these expansion projects, completed mid-1999, positioned the
Nashville plant to compete effectively in new markets for large-size steel
fabrication business. In 1999, NAG purchased a land site in Houston, Texas
for the construction of a state-of-the-art galvanizing plant to provide
custom galvanizing for large poles used in the communication and electric
transmission markets.
Cash proceeds of $325,000 in 1998 from other non-operating activities
resulted from insurance covering business interruption costs and the loss of
equipment destroyed by fire.
Total debt (current and long-term obligations) increased $1,597,000 to
$11,117,000 in 1999, primarily to supplement funding for the Company's capital
expansion program for upgrading the galvanizing facilities and expanding into
new galvanizing markets. Also in 1999, the Company purchased 55,321 shares of
its common stock for treasury at a cost of $139,000. In 1998, total debt
increased $473,000 to $9,520,000, primarily due to the Company's investment in
equity securities. The Company sold these securities in 1999 and realized a
slight gain.
The Company's total debt ratio to equity at the end of 1999 was 87.1%,
compared with 86.2% in 1998 and 86.6% in 1997.
LIQUIDITY AND FINANCIAL CONDITION
In the third quarter of 1999, the Company restructured all of its
outstanding debt into a new $23,700,000 credit agreement with a bank. Under
the 3-year agreement, a revolving line of credit was increased to $9,000,000
from $8,500,000; a term loan of $5,700,000 was put in place, with $1,500,000
reserved for future capital expenditures; and, a credit enhancement facility
of $9,000,000 was made available for construction of new galvanizing
facilities.
On March 14, 2000, NAG utilized this credit enhancement to close a
$9,050,000 funding of tax-exempt adjustable rate industrial development
revenue bonds issued by the Harris County Industrial Development Corporation
("HCIDC"), pursuant to a loan agreement dated March 1, 2000 between NAG and
HCIDC. The applicable interest rate on March 14, 2000 was 5.25%. Bond
proceeds, which are held in trust by Bank One Trust Company, N.A. ("Trustee"),
will be used by NAG for the purchase of land and construction of a hot dip
galvanizing plant in Harris County, Texas. Under terms of the loan agreement,
NAG's commitment to repay the Trustee is fully secured by an irrevocable
letter of credit issued by Bank One, Oklahoma, N.A. in favor of the Trustee.
Kinark will amortize the bond indebtedness over twelve (12) years with level
principal payments to a sinking fund beginning April 2000. Among other
conditions set forth in the underlying loan agreement and trust indenture,
Kinark has entered into a guarantee agreement dated March 1, 2000 with the
Trustee, under which it has an unconditional obligation to repay the bond
principal to the Trustee.
At the end of 1999, the Company had additional borrowing capacity of
$1,081,000 under its revolving line of credit that reflected the underlying
value of its accounts receivable and inventories. In addition, the Company
had $1,500,000 under the term loan available for capital expenditures. Based
on the Company's continuing ability to generate cash from operations, an
expanded line of credit and bank credit facilities, the Company believes it
has adequate capital resources and liquidity to support operations and capital
expenditure plans for 2000.
ENVIRONMENTAL MATTERS
As previously reported, NAG was notified in 1997 by 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. The IEPA notice includes
NAG as one of 59 organizations which arranged for the treatment and disposal
of hazardous substances at Sandoval. Based on current information and the
preliminary stage of investigation, NAG's share of any probable future costs
cannot be estimated at this time.
In November 1997, the EPA informed the Company that it would seek to recover
from the Company its costs associated with the 1995 clean-up of a former
galvanizing plant site in Philadelphia, Pennsylvania in the amount of $480,000.
In May 1998, the parties reached an agreement to settle the EPA's claims for
approximately $264,000. The Company recorded charges to income of $125,000 in
the fourth quarter of 1997 and $139,000 for the quarter ended March 31, 1998.
As previously reported, the Company and the EPA jointly participated in the
successful cleanup of the Philadelphia site in 1995.
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 was approximately
$809,000, $979,000 and $1,000,000 in 1999, 1998 and 1997, respectively, with
FS-3
the disposal and recycling of waste acids generated by the galvanizing
operations representing the major expenditure in this area. NAG operates
on-site sulphuric acid recovery systems at three of its galvanizing plants.
Recovered acid is returned to production, thereby reducing the substantial
expense associated with the alternative of waste treatment and removal to an
off-site location. NAG plans to continue using hydrochloric acid at its other
galvanizing plants.
Environmentally related expenditures at Lake River represented a
relatively small percentage of the Company's total cost. The majority of
waste disposal costs at Lake River are incurred on behalf of its customers and
are reimbursable. Lake River does not take title to the chemicals stored at
its facilities and thus is responsible only for the proper handling of these
materials while under its care, custody, and control.
The Company is committed to complying with all federal, state and local
environmental laws and regulations and using its best management practices to
anticipate and satisfy future requirements. As is typical in the galvanizing
and chemicals businesses, the Company will have additional environmental
compliance costs associated with past, present, and future operations.
Management has committed resources to discovering and eliminating
environmental issues as they arise. Because of the frequent changes in
environmental technology, laws and regulations management cannot reasonably
attempt to quantify the Company's potential costs in this area.
OTHER MATTERS
In October 1999, Lake River received notice from a customer of a claim for
approximately $972,000 to recover costs arising from Lake River's alleged
shipment of the wrong product in May 1999. At December 31, 1999, the Company
and its insurance carrier had not made a final determination of the amount of
the claim, nor assessed the potential joint responsibility of the several
parties involved. Although the ultimate amount of the claim and
apportionment of responsibility is not determinable at this time, Lake River
recorded a reserve of $25,000 in 1999 for the self-insurance retention under
its insurance policy.
NAG's 2-year labor agreement with the United Steel Workers Union covering
approximately 110 production workers at its Tulsa galvanizng plants expired in
the first quarter of 2000, and was extended for approximately two weeks to
facilitate on-going discussions between management and the union
representatives. While there can be no assurance, NAG anticipates that a
mutually acceptable agreement will result from these discussions.
NEW ACCOUNTING STANDARDS
The Company will be required to adopt Statement of Financial Accounting
Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities", effective January 1, 2001, and is in the process of evaluating
the effect of this standard on its financial reporting. SFAS No. 133 requires
fair value accounting for all stand-alone derivatives, and for many
derivatives embedded in other instruments and contracts.
YEAR 2000 READINESS
During 1999, Kinark completed a comprehensive assessment and upgrading of
internal computer operations and information systems to achieve year 2000
compliance. Management believes these efforts have been successful and that
any potential systems failure would have a minimal impact on the Company's
operations. The costs incurred in 1999 to achieve year 2000 compliance were
not material to the Company's operating results.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Kinark's operations include managing market risks related to changes in
interest rates and zinc commodity prices.
INTEREST RATE RISK. Kinark is exposed to financial market risk related to
changing interest rates. Changing interest rates will affect interest paid on
Kinark's variable rate revolving and term debt (see Note 2 to consolidated
financial statements). Amounts borrowed under a credit agreement bear
interest at the prime rate of Bank One, Oklahoma, NA or the LIBOR rate, at
the option of the Company, subject to a rate margin adjustment determined by
the Company's consolidated debt service ratio. The prime rate margin
adjustment ranges from minus 50 basis points (0.50%) to plus 25 basis points
(0.25%). The LIBOR rate margin adjustment ranges from plus 225 basis points
(2.25%) to plus 300 basis points (3.00%). At December 31, 1999, $10,682,000
was outstanding under the agreement with an effective rate of 7.8%. The
borrowings are due as follows: $761,000 in 2000 and $831,000 in 2001. At
December 31, 1998, $8,887,000 was outstanding with an effective rate of
8.1%. Each increase of 10 basis points in the effective interest rate would
result in an increase in interest charges of approximately $10,000 based on
December 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 zinc required 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 December 31, 1999, the aggregate commitments for the
procurement of zinc were approximately $2,700,000 in 2000, which represents
approximately 28% of 2000 estimated requirements (see Note 3 to consolidated
financial statements). At December 31, 1998, the aggregate commitments for
the procurement of zinc in 1999 were approximately $4,800,000. 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 in price of 10% in the market
price of zinc from the December 31, 1999 level would cause a lost gross margin
opportunity of approximately $270,000. However, a favorable impact of a
similar amount would result from the same hypothetical price movement on the
short-term spot purchases of zinc.
The Company's financial strategy for 2000, and beyond, includes evaluating
the selective use of derivative financial instruments to manage interest costs.
As part of its inventory management strategy, the Company is evaluating
hedging instruments to minimize the impact of zinc price fluctuations.
FS-4
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF
KINARK CORPORATION:
We have audited the accompanying consolidated balance sheets of Kinark
Corporation and subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of earnings, stockholders' equity and comprehensive
income and cash flows for each of the three years in the period ended December
31, 1999. Our audits also included the financial statement schedule listed in
the Index at Item 14. These financial statements and the financial statement
schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statements and the
financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Kinark Corporation and
subsidiaries at December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1999 in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, such
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
Deloitte & Touche LLP
Tulsa, Oklahoma
February 18, 2000
(Except as to Note 12
for which the date is
March 14, 2000)
FS-5
CONSOLIDATED BALANCE SHEETS
December 31
--------------------
(Thousands of Dollars, Except Per Share Amounts) 1999 1998
=========================================================================
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 253 $ 189
Trade receivables, less allowances
of $317 for 1999 and $169 for 1998 6,229 6,600
Inventories 4,799 4,158
Investments --- 487
Prepaid expenses and other assets 629 984
Deferred tax asset, net 693 735
- --------------------------------------------------------------------------
TOTAL CURRENT ASSETS 12,603 13,153
- --------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT, AT COST
Land 1,571 776
Chemical storage facilities 10,734 10,629
Warehousing equipment 789 750
Galvanizing plants and equipment 24,430 20,006
Other 146 323
- --------------------------------------------------------------------------
37,670 32,484
Less: Allowance for depreciation 19,510 16,877
- --------------------------------------------------------------------------
TOTAL PROPERTY, PLANT AND
EQUIPMENT, NET 18,160 15,607
- --------------------------------------------------------------------------
DEFERRED TAX ASSET, NET --- 131
GOODWILL, NET OF ACCUMULATED AMORTIZATION OF
$676 for 1999 and $489 for 1998 3,765 3,952
OTHER ASSETS 181 265
- --------------------------------------------------------------------------
TOTAL ASSETS $34,709 $33,108
==========================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term obligations $ 1,131 $ 930
Trade accounts payable 1,404 1,770
Accrued payroll and employee benefits 1,116 1,210
Other taxes 1,018 979
Other accrued liabilities 734 1,194
- --------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 5,403 6,083
==========================================================================
DEFERRED TAX LIABILITY, LONG-TERM 458 ---
PENSION AND RELATED LIABILITIES 309 652
LONG-TERM OBLIGATIONS 9,986 8,590
COMMITMENTS AND CONTINGENCIES (NOTES 3 & 4)
STOCKHOLDERS' EQUITY
Common stock - $.10 par value:
authorized - 18,000,000 shares
issued - 8,191,409 shares in 1999
and 1998 819 819
Additional paid-in capital 17,364 17,364
Minimum pension liability --- (112)
Retained earnings 6,350 5,553
Common shares in treasury at cost:
1,479,190 in 1999 and 1,423,869 in 1998 (5,980) (5,841)
- --------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 18,553 17,783
- --------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $34,709 $33,108
==========================================================================
See notes to consolidated financial statements.
FS-6
CONSOLIDATED STATEMENTS OF EARNINGS
Years Ended December 31
---------------------------
(Dollars in Thousands Except Per Share Amounts) 1999 1998 1997
=============================================================================
SALES $45,058 $48,004 $48,556
COSTS AND EXPENSES
Cost of sales 33,185 36,587 37,979
Selling, general and
administrative expenses 6,459 7,042 6,027
Depreciation and amortization 3,045 2,923 2,712
- -----------------------------------------------------------------------------
TOTAL COSTS AND EXPENSES 42,689 46,552 46,718
- -----------------------------------------------------------------------------
OPERATING INCOME 2,369 1,452 1,838
- -----------------------------------------------------------------------------
OTHER EXPENSE (INCOME)
Interest expense, net 729 631 781
Other (income) expense, net 208 (309) ---
- -----------------------------------------------------------------------------
TOTAL OTHER EXPENSE 937 322 781
- -----------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 1,432 1,130 1,057
Income tax expense 635 530 468
- -----------------------------------------------------------------------------
NET INCOME $ 797 $ 600 $ 589
=============================================================================
NET EARNINGS PER COMMON SHARE
Basic $ .12 $ .09 $ .09
Diluted $ .12 $ .09 $ .09
=============================================================================
See notes to consolidated financial statements.
FS-7
<TABLE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME
<CAPTION>
(Dollars in Thousands Except Per Share Amount)
================================================================================
Common
Stock Addit-
($.10 ional Minimum Compre-
Shares Par paid-in Retained Pension Treasury hensive
Outstanding Value) Capital Earnings Liability Stock Income Total
================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
January 1,
1997 6,759,386 $ 817 $17,366 $4,364 ---- $(5,812) $16,735
Comprehensive income
Net
income ---- ---- ---- 589 ---- ---- $ 589 589
Minimum pension
liability
adjustment,
net of tax ---- ---- ---- ---- $(197) ---- (197) (197)
---
Total comprehensive
income ---- ---- ---- ---- ---- ---- $ 392 ----
===
Shares outstanding
adjustment 18,959 2 (2) ---- ---- ---- ----
- ------------------------------------------------------------------------------
December 31,
1997 6,778,345 819 17,364 4,953 (197) (5,812) 17,127
Comprehensive income
Net
income ---- ---- ---- 600 ---- ---- $ 600 600
Minimum pension
liability
adjustment,
net of tax ---- ---- ---- ---- 85 ---- 85 85
---
Total comprehensive
income ---- ---- ---- ---- ---- ---- $ 685 ----
===
Common stock
purchases (10,805) ---- ---- ---- ---- (29) (29)
- -------------------------------------------------------------------------------
December 31,
1998 6,767,540 819 17,364 5,553 (112) (5,841) 17,783
Comprehensive income
Net
income ---- ---- ---- 797 ---- ---- $ 797 797
Minimum pension
liability
adjustment,
net of tax ---- ---- ---- ---- 112 ---- 112 112
---
Total
comprehensive
income ---- ---- ---- ---- ---- ---- $ 909 ----
===
Common stock
purchases (55,321) ---- ---- ---- ---- (139) (139)
- -------------------------------------------------------------------------------
December 31,
1999 6,712,219 $ 819 $17,364 $6,350 ---- $(5,980) $18,553
================================================================================
</TABLE>
See notes to consolidated financial statements.
FS-8
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31
--------------------------------
(Dollars in Thousands) 1999 1998 1997
======================================================================
OPERATING ACTIVITIES
Net income $ 797 $ 600 $ 589
Depreciation and amortization 3,045 2,923 2,712
Loss (gain) on involuntary
conversion of assets 100 (309) ----
Deferred income taxes 631 518 389
Loss (gain) on asset sale (13) 42 ----
Gain on sale of investments (23) ---- ----
Changes in assets and liabilities:
Accounts receivable, net 371 494 (905)
Inventories and other assets (202) (1,219) 615
Accounts payable, accrued
liabilities and other (1,112) 109 (718)
- ----------------------------------------------------------------------
CASH PROVIDED BY
OPERATING ACTIVITIES 3,594 3,158 2,682
- ----------------------------------------------------------------------
INVESTING ACTIVITIES
Capital expenditures (5,511) (3,542) (3,103)
Proceeds from sale of assets 13 32 (6)
Proceeds from involuntary
conversion of assets ---- 325 ----
Sale (purchase) of investments 510 (487) ----
Final payment for purchase
of galvanizing business ---- ---- (2,236)
- ----------------------------------------------------------------------
CASH USED FOR INVESTING
ACTIVITIES (4,988) (3,672) (5,345)
- ----------------------------------------------------------------------
FINANCING ACTIVITIES
Purchase of treasury stock (139) (29) ----
Proceeds from long-term debt 24,333 18,580 19,207
Payment on long-term debt (22,736) (18,107) (18,326)
- ----------------------------------------------------------------------
CASH PROVIDED BY FINANCING
ACTIVITIES 1,458 444 881
- ----------------------------------------------------------------------
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 64 (70) (1,782)
CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 189 259 2,041
- ----------------------------------------------------------------------
CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 253 $ 189 $ 259
======================================================================
SUPPLEMENTAL DISCLOSURE
Interest paid $ 781 $ 631 $ 781
Income taxes paid $ 120 $ 121 $ 325
Fully depreciated assets
written off $ 146 $ 3,526 $ 1,260
See notes to consolidated financial statements.
FS-9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1999, 1998, and 1997
DESCRIPTION OF BUSINESS
Kinark Corporation ("Kinark" and the "Company") is engaged in
galvanizing, chemical storage and public warehousing through its wholly owned
subsidiaries. In the galvanizing segment, North American Galvanizing Company
("NAG") provides metals corrosion protection with eleven regionally located
galvanizing plants. Kinark operates chemical storage facilities through Lake
River Corporation ("Lake River") and public warehousing through North American
Warehousing Company ("NAW"). The Company grants unsecured credit to its
customers on terms standard for these industries, typically net 30 to 45
days. The Company's largest customer is in the galvanizing segment and
accounted for 14.3%, 13.2%, and 12.1% of consolidated sales for the years
1999, 1998 and 1997, respectively. The Company expects to renew this
customer's current contract which is scheduled to expire in the third
quarter of 2000.
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements
include the accounts of the Company and its wholly owned subsidiaries. All
intercompany transactions are eliminated in consolidation.
ESTIMATES. The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the balance sheet dates and the reported amounts
of revenues and expenses for each of the years. Actual results will be
determined based on the outcome of future events and could differ from the
estimates.
CASH AND CASH EQUIVALENTS. Cash and cash equivalents include interest
bearing deposits with original maturities of three months or less.
INVESTMENT SECURITIES. The Company accounts for investment securities
under the provisions of Statement of Financial Accounting Standards ("SFAS")
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 market value. At December 31, 1998, the securities
carrying value approximated fair market value and the Company's unrealized or
realized gains or losses were immaterial. During 1999, all investment
ssecurities were liquidated. Realized gains and losses and declines in the
value of securities judged to be other-than-temporary are included in income.
INVENTORIES. Inventories consist primarily of raw zinc "pigs," molten
zinc in galvanizing kettles and other chemicals and materials used in the
galvanizing process. 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. Inventories
consist of the following:
(Dollars in Thousands) 1999 1998
============================================
Zinc - LIFO $4,001 $3,645
Other Raw Materials 798 513
- --------------------------------------------
$4,799 $4,158
- --------------------------------------------
The approximate raw material replacement cost based on year-end market
prices of zinc was $3,978,000 and $2,628,000 at December 31, 1999 and 1998,
respectively. Management estimates the cost of zinc inventories will be
recovered from sales of galvanizing services in the normal course of business.
GOODWILL. Goodwill is amortized over 25 years using the straight-line
method. On a periodic basis, the Company estimates the future undiscounted
cash flows of the operations to which goodwill relates to ensure that the
carrying value of goodwill has not been impaired.
DEPRECIATION AND AMORTIZATION. Plant and equipment, including assets
under capital leases, are depreciated on the straight-line basis over their
estimated useful lives, generally at rates of 2% to 6% for buildings and 10%
to 20% for equipment, furnishings, and fixtures.
LONG-LIVED ASSETS. SFAS No. 121 requires that long-lived assets and
certain identifiable intangibles to be held and used or disposed of including
related goodwill, if any, be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. The Company has determined that no impairment loss need be
recognized for the years ended December 31, 1999, 1998 or 1997.
SELF-INSURANCE. The Company is self-insured for workers' compensation
and certain health care claims for its active employees. The Company carries
excess insurance providing statutory workers' compensation coverage for claims
exceeding $125,000 per occurrence, subject to an aggregate limit on losses.
The workers' compensation policy contains a variable dividend plan that could
result in decreased premium costs if claims are contained within targeted
limits. The reserves for workers' compensation benefits and health care
claims represent estimates for reported claims and for claims incurred but
not reported. Such estimates are generally based on estimates of the expected
ultimate claims and losses using appropriate development factors, historical
trends and related methodologies; however, the actual results may vary from
these estimates since the evaluation of losses is inherently subjective and
susceptible to significant changing factors.
PROPERTY TAXES. Lake River records its property tax liabilities based on
assessments from taxing authorities. Lake River has historically appealed
such assessments and reduced the ultimate liability. Any such adjustments are
recognized in the period the appeal is successful.
REVENUE RECOGNITION. The Company recognizes revenue through the sale of
hot dip galvanizing as the galvanizing process is completed; revenue for bulk
liquid terminal and warehousing operations is recognized each month from the
rental of tanks and storage space, and related fees for handling of customers'
products.
FS-10
NEW ACCOUNTING STANDARD. The Company will be required to adopt SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities",
effective January 1, 2001, and is in the process of evaluating the effect of
this standard on its financial reporting. SFAS No. 133 requires fair value
accounting for all stand-alone derivatives, and for many derivatives embedded
in other instruments and contracts.
INCOME TAXES. The Company calculates income taxes according to SFAS No.
109, "Accounting for Income Taxes." Net deferred income tax assets and
liabilities on the consolidated balance sheet reflect the net tax effects of
temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax purposes
and the benefit of net operating loss and other tax credit carryforwards.
Valuation allowances are established against deferred tax assets to the extent
management believes it is more likely than not that the assets will not be
realized.
(2) LONG-TERM OBLIGATIONS
December 31
-------------------
(Dollars in Thousands) 1999 1998
======================================================
Revolving line of credit $ 5,913 $ 5,326
Term loan 4,033 3,561
Advancing bridge loan due 2000 735 ---
10.0% note due 2000 339 382
9.5% note due 2015 24 29
Capital leases 73 222
- ------------------------------------------------------
11,117 9,520
Less current portion (1,131) (930)
- ------------------------------------------------------
$ 9,986 $ 8,590
- ------------------------------------------------------
LONG-TERM DEBT. In September 1999, the company entered into a new
three-year bank credit agreement with total credit facilities of $23,700,000
that replaced a previous loan agreement of $13,250,000 scheduled to expire in
May 2000. The new agreement provides (i) a $9,000,000 maximum revolving line
of credit for working capital and general corporate purposes, (ii) a
$1,500,000 revolving capital expenditures facility, (iii) a $4,200,000 term
loan, (iv) a $2,000,000 advancing bridge loan scheduled to expire March 2000
and (v) a $9,000,000 maximum bridge loan replacement facility. The bridge
loan replacement facility (to be amortized over a maximum period of twelve
(12) years), will take the form of a financial letter of credit facility as
credit enhancement in support of a tax exempt bond financing. The new
agreement matures September 30, 2002.
At the end of 1999, the Company had additional borrowing capacity of $1,081,000
under its revolving line of credit that reflected the underlying value of its
accounts receivable and inventories. In addition, the Company had $1,500,000
under the term loan available for capital expenditures. At December 31, 1999,
the Company had outstanding irrevocable letters of credit totaling $275,000.
Substantially all of the Company's accounts receivable, inventories, fixed
assets and the stock of its subsidiaries are pledged as collateral under the
agreement, and the credit agreement is secured by a guaranty from each of the
Company's subsidiaries. Amounts borrowed under the agreement bear interest at
the prime rate of Bank One, Oklahoma or the LIBOR rate, at the option of the
Company, subject to a rate margin adjustment determined by the Company's
consolidated debt service ratio. The prime rate margin adjustment ranges from
minus 50 basis points (0.50%) to plus 25 basis points (0.25%). The LIBOR rate
margin adjustment ranges from plus 225 basis points (2.25%) to plus 300 basis
points (3.00%). Amounts borrowed under the bank credit facilities bore
interest ranging from 7.5% to 8.25% during 1999 and 1998, resulting in
effective rates of 7.8% at December 31, 1999 and 8.1% at December 31, 1998.
Interest expense capitalized in connection with capital expenditures was $9,035,
$68,610 and $46,584 in 1999, 1998 and 1997, respectively.
Term loan payments are based on a five-year amortization schedule with equal
monthly payments of principal and interest, and the loan may be prepaid
without penalty. The revolving line of credit may be paid down without
penalty, or additional funds may be borrowed up to the revolver limit. The
credit agreement requires the Company to maintain compliance with covenant
limits for current ratio, debt to tangible net worth ratio, debt service
coverage ratio and a capital expenditures ratio. The Company was in
compliance with such covenants at December 31, 1999.
In the fourth quarter of 1999, NAG purchased an undeveloped tract of land in
Houston, Texas for construction of a new galvanizing plant. Interim funding
for the land purchase was provided by an Advancing bridge loan under the
Company's bank credit agreement. The advancing bridge loan was retired during
the first quarter of 2000 from the proceeds of a $9,000,000 tax-exempt
industrial development revenue bond issue which the Company closed March 14,
2000. In the first quarter of 2000, NAG entered into contracts in the aggregate
amount of $6,588,000 for the purchase of equipment and construction of a new
galvanizing plant. These commitments will be funded from the proceeds of the
Company's tax-exempt bonds.
Aggregate maturities of long-term debt, exclusive of capital lease obligations
for 2000 and each of the five years thereafter are $1,101,000, $832,000,
$8,485,000, $53,000, $56,000 and $517,000.
CAPITAL LEASES. Capital leases with an aggregate maturity of $73,000
consist of computers, a manufacturing building and material handling equipment
used in the subsidiary operations.
(3) COMMITMENTS
The Company leases land, office, warehouse facilities, a manufacturing
building and certain equipment under noncancelable leases. The operating
leases generally provide for renewal options and periodic rate increases based
on specified economic indicators and are typically renewed in the normal
course of business. Rent expense was $976,000 in 1999, $1,586,000 in 1998,
and $1,768,000 in 1997.
Minimum annual rental commitments at December 31, 1999 are as follows:
Capital Operating
(Dollars in Thousands) Leases Leases
=========================================================
2000 $ 45 $1,226
2001 26 1,144
2002 15 113
2003 -- 55
2004 -- 35
Thereafter -- 265
- --------------------------------------------------------
$ 86 $2,838
=====
Less: Portion representing
interest (13)
----
Net capitalized lease obligation $ 73
=====
The Company has commitments with domestic and foreign zinc
producers to purchase zinc used in its hot dip galvanizing operations.
FS-11
Commitments for the future delivery of zinc reflect rates then quoted on the
London Metals Exchange which are not subject to price adjustment. At December
31, 1999, the aggregate commitments for the procurement of zinc were
$2,680,000 in 2000, or approximately 28% of that year's estimated
requirements.
Lake River's operating facilities on approximately 50 acres
located on the Chicago Ship Canal in Cook County, Illinois, are leased as five
parcels from the Metropolitan Water Reclamation District of Greater Chicago
("MWRD"), a municipal corporation, for various terms through 2045. Two of the
leases expired in 1999, and Lake River expects to bid for their renewal during
2000. Lake River will not renew the lease on one of the five parcels that is
excess of its current and foreseeable needs, and expects to convert one parcel
into an easement. 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.
(4) CONTINGENCIES
NAG was notified in 1997 by 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. The IEPA notice includes NAG as one of 59 organizations
which arranged for the treatment and disposal of hazardous substances at
Sandoval. Based on current information and the preliminary stage of
investigation, NAG's share of any probable future costs cannot be estimated at
this time.
In November 1997, the EPA informed the Company that it would seek to
recover from the Company its costs associated with the 1995 clean-up of a
former galvanizing plant site in Philadelphia, Pennsylvania in the amount
of $480,000. In May 1998, the parties reached an agreement to settle the
EPA's claims for approximately $264,000. The Company recorded charges to
income of $125,000 in the fourth quarter of 1997 and $139,000 for the quarter
ended March 31, 1998. As previously reported, the Company and the EPA
jointly participated in the successful cleanup of the Philadelphia site in
1995.
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.
At December 31, 1999, NAG had an unresolved insurance claim arising from
the failure of a galvanizing kettle during 1999. A major part of the claim
resulted from additional costs incurred to galvanize product at an alternate
NAG location in order to meet delivery commitments. Due to the uncertainty of
the timing and amount of future insurance recoveries, NAG took a charge of
$176,000 to other expense in the final quarter of 1999 for the net book value
of the kettle and related costs incurred in 1999, net of interim insurance
proceeds. NAG incurred additional costs of approximately $145,000
during the first quarter of 2000 related to first quarter 2000 production and
sales. To the extent these costs are not covered by insurance proceeds
during 2000, they represent a potential charge to current earnings in 2000.
In October 1999, Lake River received notice from a customer of a claim for
approximately $972,000 to recover costs arising from Lake River's alleged
shipment of the wrong product in May 1999. At December 31, 1999, the Company
and its insurance carrier had not made a final determination of the amount
of the claim, nor assessed the potential joint responsibility of the several
parties involved. Although the ultimate amount of the claim and
apportionment of responsibility is not determinable at this time, Lake River
recorded a reserve of $25,000 in 1999 for the self-insurance retention
under its insurance policy.
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 matters, litigation, or
customer claims, the recording of such a liability could have a material
impact on the results of operations for the period involved.
(5) INCOME TAXES
The provision for income taxes consists of the following:
Years Ended December 31,
----------------------------
(Dollars in Thousands) 1999 1998 1997
=========================================================
Current $ 88 $ 44 $(37)
Deferred 547 486 505
- ---------------------------------------------------------
Income tax expense $635 $530 $468
=========================================================
The reconciliation of income taxes at the federal statutory rate to the
Company's effective tax rate is as follows:
Years Ended December 31,
----------------------------
(Dollars in Thousands) 1999 1998 1997
=========================================================
Taxes at statutory rate $487 $384 $359
State tax net of federal
benefit 29 23 23
Goodwill amortization 71 71 71
Other 48 52 15
- ---------------------------------------------------------
Taxes at effective tax rate $635 $530 $468
=========================================================
At December 31, 1999, the Company has approximately $1,526,000 of net
operating loss carryforwards available to offset future taxable income.
Investment tax credits of approximately $69,000 and alternative minimum tax
credit carryforwards of approximately $312,000 are also available as
FS-12
carryforwards to future years. The net operating loss carryforwards expire
in varying amounts during the years 2006 through 2011 and the investment
tax credits expire in 2000.
The tax effects of significant items comprising the Company's net
deferred tax asset consist of the following:
December 31,
---------------
(Dollars in Thousands) 1999 1998
=======================================================
Deferred tax assets:
Alternative minimum tax $ 312 $ 188
Reserves not currently deductible 693 735
Operating loss carryforwards 581 1,092
Tax credit carryforwards 69 138
Pension minimum funding -- 84
- -------------------------------------------------------
1,655 2,237
- -------------------------------------------------------
Deferred tax liabilities:
Differences between book and
tax basis of property 1,420 1,371
- -------------------------------------------------------
$ 235 $ 866
=======================================================
As reported in the balance sheet:
Deferred tax assets $ 693 $ 866
Deferred tax liabilities 458 ---
- -------------------------------------------------------
$ 235 $ 866
=======================================================
Management believes that future taxable income of the Company will be
sufficient to realize the net deferred tax asset.
(6) STOCK OPTION PLANS
At December 31, 1999 and 1998, 1,046,000 and 1,050,500 shares,
respectively, of the Company's common stock were reserved for issuance under
the terms of the stock option plans for key employees and directors. The
plans generally provide options to purchase Company stock at fair value as of
the date the option is granted. Options generally become exercisable in
installments specified by the applicable plan and must be exercised within ten
years of the grant date.
Number Weighted-Avg.
Under Option of Shares Exercise Price
- -----------------------------------------------------------
Balance at Jan. 1, 1997 433,000 $3.57
Granted 80,000 3.44
Cancelled (7,500) 4.58
- -----------------------------------------------------------
Balance at Dec. 31, 1997 505,500 3.12
Granted 20,000 3.06
Cancelled (38,000) 4.37
- -----------------------------------------------------------
Balance at Dec. 31, 1998 487,500 3.02
Granted 20,000 2.00
Cancelled (109,500) 3.47
===========================================================
Balance at Dec. 31, 1999 398,000 $2.97
===========================================================
At December 31, 1999, 1998, and 1997, options for 353,000, 372,125, and
282,375 shares, respectively, were exercisable.
Information about stock options as of December 31, 1999:
Options Outstanding
- ------------------------------------------------------------
Weighted-Avg.
Range of Number Remaining Weighted-Avg.
Exercise Prices Outstanding Contractual Life Exercise Price
- --------------- ----------- ---------------- --------------
$2.00 15,000 9.5 years $2.00
$2.50 to $3.00 234,500 5.79 2.50
$3.06 to $3.50 137,000 7.40 3.38
$4.50 to $4.75 11,500 3.93 4.52
-------
398,000
=======
Options Exercisable
- ----------------------------------------------------
Weighted-Avg. Number
Exercise Price Exercisable
-------------- -----------
$2.50 233,000
3.00 1,500
3.06 20,000
3.25 20,000
3.38 20,000
3.50 47,000
4.50 10,500
4.75 1,000
-------
353,000
=======
The estimated weighted average fair value of options granted during 1999,
1998 and 1997 was $1.02, $1.40, and $1.55 per option, respectively. The
Company accounts for its stock option plans in accordance with Accounting
Principles Board Opinion No. 25, under which no compensation cost has been
recognized for stock option awards. Had compensation cost for the Company's
stock option plans been determined according to the methodology of SFAS
No.123, the Company's pro forma net earnings and earnings per share for 1999,
1998 and 1997 would have been approximately $776,200 and $.12, $538,000 and
$.08, and $400,000 and $.06, respectively. The fair value of options granted
under the Company's stock option plans was estimated using the Black-Scholes
option-pricing model with the following weighted-average assumptions used: no
dividend yield, expected volatility of 48%, 44% and 42% for 1999, 1998 and
1997 respectively, risk free interest rate of 6.8% in 1999, 4.9% in 1998 and
6.0% in 1997; and expected lives of 5 years. The effects of applying SFAS
No.123 in this pro forma disclosure are not necessarily indicative of future
amounts.
(7) EARNINGS PER SHARE RECONCILIATION
Per
For the Year Ended Income Shares Share
December 31 (Numerator) (Denominator) Amount
- ------------------ ----------- ----------- ------
1997
Net earnings $589,000 --- ---
Basic EPS --- 6,778,345 $ .09
Effect of dilutive
stock options --- 34,723 ---
---------
Diluted EPS $589,000 6,813,068 $ .09
==========================================================
FS-13
1998
Net earnings $600,000 --- ---
Basic EPS --- 6,767,540 $ .09
Effect of dilutive
stock options --- 22,057 ---
---------
Diluted EPS $600,000 6,789,597 $ .09
==========================================================
1999
Net earnings $797,000 --- ---
Basic EPS --- 6,712,219 $ .12
Effect of dilutive
stock options --- --- ---
---------
Diluted EPS $797,000 6,712,219 $ .12
==========================================================
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
353,000, 254,500 and 272,500 at December 31, 1999, 1998 and 1997,
respectively.
(8) EMPLOYEE BENEFIT PLANS
Substantially all of the Company's employees are covered by defined
contribution plans, except for certain union employees of Lake River
Corporation who are covered by a defined benefit pension plan. Company
contributions to these benefit plans are as follows:
Years Ended Dec. 31
------------------------
(Dollars in Thousands) 1999 1998 1997
==============================================================
Pension plan $134 $189 $ 68
Defined contribution plans 260 302 292
- --------------------------------------------------------------
$394 $491 $360
==============================================================
In 1999, there were no changes in the nature of or rate of the Company's
contributions to the defined contribution plans.
During 1998, the Company restructured the portfolio of pension plan
assets, which historically had been invested in group annuity insurance
contracts. At the end of 1999, assets of the pension plan and the defined
contribution plans consisted of short-term investments, intermediate bonds,
long-term bonds and listed stocks. Pension costs are funded in accordance
with the Employee Retirement Income Security Act of 1974 (ERISA). The funded
status of the Company's defined benefit pension plan is as follows:
December 31
------------------------
(Dollars in Thousands) 1999 1998 1997
===========================================================
CHANGE IN BENEFIT OBLIGATION
Benefit obligation beginning
of year $1,618 $1,644 $1,359
Service cost 47 49 45
Interest cost 106 109 100
Actuarial loss (gain) (202) (125) 179
Benefits paid (79) (59) (39)
- ------------------------------------------------------------
Benefit obligation
end of year 1,490 1,618 1,644
============================================================
CHANGE IN PLAN ASSETS
Fair value of plan assets
beginning of year 1,004 726 648
Actual return on plan assets 135 148 49
Employer contribution 134 189 68
Benefits paid (79) (59) (39)
- ------------------------------------------------------------
Fair value of plan assets
end of year 1,194 1,004 726
============================================================
Funded status (296) (614) (918)
Unrecognized actuarial(gain) loss (48) 229 476
Unrecognized prior service cost 132 150 168
- ------------------------------------------------------------
Net amount recognized $ (212) $ (235) $ (274)
============================================================
Amounts recognized in the
statement of financial
position consist of:
Accrued benefit
liability $ (286) $ (607) $ (778)
Intangible asset 74 260 307
Minimum pension liability --- 112 197
- ------------------------------------------------------------
Net amount recognized $ (212) $ (235) $ (274)
============================================================
The accumulated benefit obligation, which excludes assumptions about
future compensation levels, was approximately $1,480,000, $1,611,000, and
$1,504,000 at December 31, 1999, 1998 and 1997, respectively.
In 1998 and 1997, a portion of the minimum liability adjustment was
recorded as an adjustment to stockholders' equity of $112,000 and $197,000,
net of deferred tax benefits of $84,000 and $116,000, respectively.
Weighted-average assumptions used in determining the actuarial value of
the projected benefit obligation are as follows:
1999 1998 1997
============================================================
Discount rate* 7.75% 6.75% 6.75%
Rate of compensation increase* 5.0% 5.0% 5.0%
Expected return on plan assets 7.0% 7.0% 7.0%
============================================================
*Used in determining the actuarial value of the projected benefit obligation.
The net periodic benefit cost of the Company's defined benefit pension
plan included the following:
Years Ended Dec. 31
----------------------
(Dollars in Thousands) 1999 1998 1997
=========================================================
Service cost $ 47 $ 49 $ 44
Interest cost 106 110 101
Expected return on assets (72) (55) (50)
Amortization of unrecognized
net transition obligations 9 8 8
Amortization of prior service cost 18 18 18
Amortization of loss 3 21 11
- ---------------------------------------------------------
Net periodic benefit cost $111 $151 $132
=========================================================
On February 26, 1998, the union membership covered by the defined benefit
pension plan at Lake River agreed to freeze maximum retirement benefits at
their current level and to close the pension plan to further enrollments. The
results of the freeze will be reflected through the future benefit obligations
of the plan. Lake River established a 401(k) defined contribution plan for
its union employees in the third quarter of 1998.
(9) STOCKHOLDERS' EQUITY
In August 1998, the Board of Directors authorized the Company to
repurchase up to $1,000,000 of its common stock in open market transactions.
Repurchases of the Company's common stock totaled 55,321 shares at a cost of
$139,000 in 1999 and 10,805 shares at a cost of $29,000 in 1988.
FS-14
(10) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of financial instruments included in current
assets and liabilities approximates fair value. The fair value of the
Company's long-term debt is estimated to approximate carrying value based on
the borrowing rates currently available to the Company for bank loans with
similar terms and average maturities.
(11) UNION CONTRACTS
NAG's 2-year labor agreement with the United Steel Workers Union covering
approximately 110 production workers at its Tulsa galvanizing plants expired
in the first quarter of 2000, and was extended for approximately two weeks to
facilitate on-going discussions between management and the union
representatives. While there can be no assurance, NAG anticipates that a
mutually acceptable agreement will result from these discussions.
In the first quarter of 1998, the union members at Lake River voted to
accept the terms of a new 3-year labor agreement with the Teamsters.
(12) ADJUSTABLE RATE INDUSTRIAL DEVELOPMENT REVENUE BONDS
On March 14, 2000, NAG closed a $9,050,000 funding of tax-exempt adjustable
rate industrial development revenue bonds issued by the Harris County Industrial
Development Corporation ("HCIDC"), pursuant to a loan agreement dated March 1,
2000 between NAG and HCIDC. The applicable interest rate on March 14, 2000 was
5.25%. Bond proceeds, which are held in trust by Bank One Trust Company, N.A.
("Trustee"), will be used by NAG for the purchase of land and construction of a
hot dip galvanizing plant in Harris County, Texas.
(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 manufacturing and service 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. In 1999,
galvanizing represented 84% of the Company's sales, up 3 percentage points
from 1998, chemical storage was unchanged at 11% and warehousing decreased to
5%. Corporate headquarters expenses were primarily for insurance premiums,
rent, audit and legal fees, investor relations, travel, voice and data
communications and salaries. The corporate headquarters staff is comprised of
four persons, including the officers of the Company. In 1998 and 1997, other
deductions of $305,000 and $125,000, respectively, were incurred for
environmental and litigation settlements. In 1999, other expense of $208,000
was incurred for a kettle loss and environmental settlement. In 1998, other
income of $309,000 resulted from insurance proceeds for equipment destroyed in
a fire.
Years Ended December 31
-----------------------------
(Dollars in Thousands) 1999 1998 1997
=========================================================
SALES
Galvanizing $37,841 $39,049 $38,633
Chemical storage 5,187 5,224 5,792
Warehousing 2,030 3,731 4,131
- ----------------------------------------------------------
$45,058 $48,004 $48,556
- ----------------------------------------------------------
OPERATING INCOME (LOSS)
Galvanizing $ 3,533 $ 2,575 $ 2,647
Chemical storage 569 269 466
Warehousing (153) 542 427
Corporate headquarters
expense (1,580) (1,629) (1,577)
Other deductions, net --- (305) (125)
- ----------------------------------------------------------
2,369 1,452 1,838
- ----------------------------------------------------------
Interest expense 729 631 781
Other expense (income) 208 (309) ---
- ----------------------------------------------------------
1,432 1,130 1,057
- ----------------------------------------------------------
Income Tax Expense 635 530 468
- ----------------------------------------------------------
CONSOLIDATED NET INCOME $ 797 $ 600 $ 589
==========================================================
Years Ended December 31
-----------------------------
(Dollars in Thousands) 1999 1998 1997
==========================================================
TOTAL ASSETS
Galvanizing $30,773 $28,380 $26,124
Chemical storage 2,248 2,516 3,137
Warehousing 434 680 903
General corporate 1,254 1,532 1,791
- ----------------------------------------------------------
$34,709 $33,108 $31,955
- ----------------------------------------------------------
CAPITAL EXPENDITURES
Galvanizing $ 5,260 $ 3,155 $ 2,738
Chemical storage 208 217 179
Warehousing 39 76 34
General corporate 4 94 152
- ----------------------------------------------------------
$ 5,511 $ 3,542 $ 3,103
- ----------------------------------------------------------
DEPRECIATION AND
AMORTIZATION EXPENSE
Galvanizing $ 2,560 $ 2,331 $ 2,093
Chemical storage 372 450 503
Warehousing 75 87 76
General corporate 38 55 40
- ----------------------------------------------------------
$ 3,045 $ 2,923 $ 2,712
==========================================================
FS-15
QUARTERLY RESULTS (UNAUDITED)
Quarterly Results of Operations for the Years Ended December 31, 1999 and 1998
Were:
1999
---------------------------------------------
(Dollars in Thousands Except
per Share Amounts) Mar 31 Jun 30 Sep 30 Dec 31(1) Total
==========================================================================
SALES $11,145 $11,893 $11,504 $10,516 $45,058
GROSS PROFIT $ 3,096 $ 2,967 $ 3,080 $ 2,730 $11,873
- --------------------------------------------------------------------------
NET INCOME (LOSS) $ 241 $ 277 $ 362 $ (83) $ 797
==========================================================================
BASIC EARNINGS (LOSS)
PER COMMON SHARE $ .04 $ .04 $ .05 $ (.01) $ .12
DILUTED EARNINGS (LOSS)
PER COMMON SHARE $ .04 $ .04 $ .05 $ (.01) $ .12
1998
--------------------------------------------
(Dollars in Thousands Except
per Share Amounts) Mar 31 Jun 30 Sep 30 Dec 31(2) Total
==========================================================================
SALES $12,164 $12,910 $12,206 $10,724 $48,004
GROSS PROFIT $ 2,809 $ 3,394 $ 2,695 $ 2,519 $11,417
- --------------------------------------------------------------------------
NET INCOME (LOSS) $ 340 $ 383 $ 52 $ (175) $ 600
==========================================================================
BASIC EARNINGS (LOSS)
PER COMMON SHARE $ .05 $ .06 $ .01 $ (.03) $ .09
DILUTED EARNINGS (LOSS)
PER COMMON SHARE $ .05 $ .06 $ .01 $ (.03) $. 09
(1) Includes a charge of $176,000 ($99,000 net of income taxes) for a
casualty loss.
(2) Includes a gain of $66,000 ($35,000 net of income taxes) from insurance
proceeds and charge of $208,000 ($110,000 net of income taxes) to
increase the Allowance for Doubtful Receivables.
FS-16
SELECTED FINANCIAL HIGHLIGHTS
The following is a summary of selected financial data of the Company
(Dollars in Thousands, Except per Share Amounts)
For The Years Ended December 31, 1999 1998 1997 1996(1) 1995(2)
=============================================================================
Sales $45,058 $48,004 $48,556 $47,599 $25,246
Earnings (Loss) from continuing
operations before effect
of minority interest $ 797 $ 600 $ 589 $ 1,438 $ (703)
Net Earnings (Loss) $ 797 $ 600 $ 589 $ 1,274 $(1,879)
Basic Earnings (Loss) per
common share from continuing
operations $ .12 $ .09 $ .09 $ .21 $ (.19)
Diluted Earnings (Loss)
per common share from
continuing operations $ .12 $ .09 $ .09 $ .21 $ (.19)
Basic Earnings (Loss)
per common share $ .12 $ .09 $ .09 $ .21 $ (.50)
Diluted Earnings (Loss)
per common share $ .12 $ .09 $ .09 $ .21 $ (.50)
Capital Expenditures $ 5,511 $ 3,542 $ 3,103 $ 2,790 $ 1,055
Depreciation & Amortization $ 3,045 $ 2,923 $ 2,712 $ 2,347 $ 1,471
Weighted average shares
outstanding* (3) 6,723,903 6,789,597 6,813,068 6,202,763 3,747,134
At December 31, 1999 1998 1997 1996 1995
=============================================================================
Working Capital $ 7,200 $ 7,070 $ 6,164 $ 3,640 $ 2,875
Current Ratio 2.3 2.2 2.1 1.4 1.7
Total Assets $34,709 $33,108 $31,955 $33,439 $18,375
Long-Term Debt $ 9,986 $ 8,590 $ 8,131 $ 7,172 $ 5,932
Stockholders' Equity $18,553 $17,783 $17,127 $16,735 $ 8,165
Book Value Per Share $ 2.76 $ 2.63 $ 2.53 $ 2.48 $ 2.18
Common Shares
Outstanding 6,712,219 6,767,540 6,778,345 6,759,386 3,747,498
*Weighted average shares outstanding include the dilutive effect of stock
options, if applicable.
(1) Includes results of operations of acquired Rogers Galvanizing business
from February 1, 1996.
(2) Net earnings (loss) and per share results include discontinued
operations of Kinpak.
(3) Reflects stock issued in private placement and rights offering in 1996.
FS-17
EXHIBIT 21 - SUBSIDIARIES OF THE REGISTRANT
North American Galvanizing Company
Lake River Corporation
North American Warehousing Company
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements
Nos. 2-89135; 33-13618; and 33-28533 of Kinark Corporation on Forms S-8 and
No. 333-61393 on Form S-3 our report dated February 18, 2000 (except as to
Note 12 for which the date is March 14, 2000), appearing in the Annual Report
on Form 10-K of Kinark Corporation for the year ended December 31, 1999.
/s/Deloitte & Touche LLP
- ------------------------
Deloitte & Touche LLP
Tulsa, Oklahoma
April 5, 2000
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned Director and/or
officer of Kinark Corporation, a Delaware corporation (the "Company"), hereby
constitutes and appoints Paul R. Chastain the true and lawful agent and
attorney-in-fact of the undersigned with full power of substitution and
authority to sign for the undersigned, as Director or an officer of the
Company, or as both, the Company's Form 10-K Annual Report for the period
ended December 31, 1999, and any and all exhibits and amendments thereto to be
filed with the Securities and Exchange Commission, Washington, D.C. pursuant
to Section 13 or Section 15(d) of the Securities Exchange Act of 1934; hereby
ratifying and confirming all acts taken by such agent and attorney-in-fact as
herein authorized.
Dated: March 29, 2000 /s/ Michael T. Crimmins
Michael T. Crimmins
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned Director and/or
officer of Kinark Corporation, a Delaware corporation (the "Company"), hereby
constitutes and appoints Paul R. Chastain the true and lawful agent and
attorney-in-fact of the undersigned with full power of substitution and
authority to sign for the undersigned, as Director or an officer of the
Company, or as both, the Company's Form 10-K Annual Report for the period
ended December 31, 1999, and any and all exhibits and amendments thereto to be
filed with the Securities and Exchange Commission, Washington, D.C. pursuant
to Section 13 or Section 15(d) of the Securities Exchange Act of 1934; hereby
ratifying and confirming all acts taken by such agent and attorney-in-fact as
herein authorized.
Dated: March 29, 2000 /s/ Ronald J. Evans
Ronald J. Evans
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned Director and/or
officer of Kinark Corporation, a Delaware corporation (the "Company"), hereby
constitutes and appoints Paul R. Chastain the true and lawful agent and
attorney-in-fact of the undersigned with full power of substitution and
authority to sign for the undersigned, as Director or an officer of the
Company, or as both, the Company's Form 10-K Annual Report for the period
ended December 31, 1999, and any and all exhibits and amendments thereto to be
filed with the Securities and Exchange Commission, Washington, D.C. pursuant
to Section 13 or Section 15(d) of the Securities Exchange Act of 1934; hereby
ratifying and confirming all acts taken by such agent and attorney-in-fact as
herein authorized.
Dated: March 29, 2000 /s/ Joseph J. Morrow
Joseph J. Morrow
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned Director and/or
officer of Kinark Corporation, a Delaware corporation (the "Company"), hereby
constitutes and appoints Paul R. Chastain the true and lawful agent and
attorney-in-fact of the undersigned with full power of substitution and
authority to sign for the undersigned, as Director or an officer of the
Company, or as both, the Company's Form 10-K Annual Report for the period
ended December 31, 1999, and any and all exhibits and amendments thereto to be
filed with the Securities and Exchange Commission, Washington, D.C. pursuant
to Section 13 or Section 15(d) of the Securities Exchange Act of 1934; hereby
ratifying and confirming all acts taken by such agent and attorney-in-fact as
herein authorized.
Dated: March 29, 2000 /s/ John H. Sununu
John H. Sununu
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that the undersigned Director and/or
officer of Kinark Corporation, a Delaware corporation (the "Company"), hereby
constitutes and appoints Paul R. Chastain the true and lawful agent and
attorney-in-fact of the undersigned with full power of substitution and
authority to sign for the undersigned, as Director or an officer of the
Company, or as both, the Company's Form 10-K Annual Report for the period
ended December 31, 1999, and any and all exhibits and amendments thereto to be
filed with the Securities and Exchange Commission, Washington, D.C. pursuant
to Section 13 or Section 15(d) of the Securities Exchange Act of 1934; hereby
ratifying and confirming all acts taken by such agent and attorney-in-fact as
herein authorized.
Dated: March 29, 2000 /s/ Mark E. Walaker
Mark E. Walker
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THIS SCHEDULE CONTAINS SUMMRY FINANCIAL INFORMATION EXTRACTED FROM THE ISSUER'S
CONSOLIDATED BALANCE SHEET FOR YEAR ENDED DECEMBER 31, 1999 AND ITS CONSOLIDATED
STATEMENT OF EARNINGS FOR YEAR ENDED DECEMBER 31, 1999, SET FORTH IN THE
ACCOMPANYING FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
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