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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED SEPTEMBER 30, 1998
COMMISSION FILE NO. 1-3920
KINARK CORPORATION
(Exact name of the registrant as specified in its charter)
DELAWARE 71-0268502
(State of Incorporation) (I.R.S. Employer Identification No.)
2250 EAST 73RD STREET
TULSA, OKLAHOMA 74136-6832
(Address of principal executive offices)
Registrant's telephone number: (918) 494-0964
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 and 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of September 30, 1998.
Common Stock $ .10 Par Value . . . . . 6,778,345
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KINARK CORPORATION AND SUBSIDIARIES
INDEX TO QUARTERLY REPORT ON FORM 10-Q
PAGE
PART I. FINANCIAL INFORMATION
Forward Looking Statements or Information 2
Item 1. Financial Statements
Independent Accountants' Review Report 3
Condensed Consolidated Balance Sheets as
of September 30, 1998 (unaudited), and
December 31, 1997 4
Condensed Consolidated Statements of
Earnings for the three and nine months
ended September 30, 1998 and 1997
(unaudited) 5
Condensed Consolidated Statements of
Cash Flows for the nine months ended
September 30, 1998 and 1997 (unaudited) 6
Notes to Condensed Consolidated Financial
Statements for the three and nine months
ended September 30, 1998 and 1997
(unaudited) 7-10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 11-16
Item 3. Quantitative and Qualitative Disclosures
About Market Risks 17
PART II. OTHER INFORMATION 18-19
SIGNATURES 20
FORWARD LOOKING STATEMENTS OR INFORMATION
Certain statements in this Form 10-Q, including information set forth
under the caption "Management's Discussion and Analysis of Financial Condition
and Results of Operations", constitute "Forward-Looking Statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. The Company cautions
investors that forward-looking statements included in this Form 10-Q, or
hereafter included in other publicly available documents filed with the
Securities and Exchange Commission, reports to the Company's stockholders and
other publically available statements issued or released by the Company
involve significant risks, uncertainties, and other factors which could cause
the Company's actual results, performance (financial or operating) or
achievements to differ materially from the future results, performance
(financial or operating) or achievements expressed or implied by such
forward-looking statements. The Company believes that the important factors
set forth in the Company's cautionary statements at Exhibit 99 to this Form
10-Q could cause such a material difference to occur and investors are
referred to Exhibit 99 for such cautionary statements.
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
To the Board of Directors and Stockholders of
Kinark Corporation:
We have reviewed the accompanying condensed consolidated balance sheet of
Kinark Corporation and subsidiaries (the "Company") as of September 30, 1998,
and the related condensed consolidated statements of earnings for the three-
and nine-month periods ended September 30, 1998 and 1997 and the condensed
consolidated cash flow statements for the nine-months ended September 30, 1998
and 1997. These financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and of making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to such condensed consolidated financial statements for them to
be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Kinark Corporation and
subsidiaries as of December 31, 1997, and the related consolidated statements
of operations, stockholders' equity, and cash flows for the year then ended
(not presented herein); and in our report dated February 20, 1998 (except as
to the first paragraph of the Contingencies footnote, for which the date is
March 6, 1998) we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in the
accompanying condensed consolidated balance sheet as of December 31, 1997 is
fairly stated, in all material respects, in relation to the consolidated
balance sheet from which it has been derived.
/s/Deloitte & Touche LLP
Tulsa, Oklahoma
November 6, 1998
KINARK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
Unaudited
SEPTEMBER 30 Dec 31
(Dollars in Thousands) 1998 1997
- ----------------------------------------------------------------------
ASSETS
Cash $ 152 $ 259
Accounts receivable, net 7,706 7,094
Inventories 4,129 3,503
Prepaid expenses and other current assets 626 360
Deferred tax asset, net 717 717
------ ------
TOTAL CURRENT ASSETS 13,330 11,933
------ ------
PROPERTY, PLANT AND EQUIPMENT, AT COST
Land 707 707
Chemical storage facilities and
warehousing equipment 11,224 11,253
Galvanizing plants and equipment 19,319 20,793
Other 306 336
------ ------
31,556 33,089
Less: Allowance for depreciation 16,278 18,199
------ ------
TOTAL PROPERTY, PLANT & EQUIPMENT, NET 15,278 14,890
------ ------
INVESTMENTS, AT FAIR VALUE 443 ---
DEFERRED TAX ASSET, NET 425 667
GOODWILL, NET 3,863 4,009
OTHER ASSETS 417 456
------ ------
TOTAL ASSETS $33,756 $31,955
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Trade accounts payable $ 1,799 $ 1,672
Accrued payroll and employee benefits 1,069 1,176
Other taxes 1,036 818
Other accrued liabilities 1,884 1,187
Current maturities of long-term obligations 928 916
------ ------
TOTAL CURRENT LIABILITIES 6,716 5,769
------ ------
PENSION AND RELATED LIABILITIES 790 928
LONG-TERM OBLIGATIONS 8,348 8,131
COMMITMENTS AND CONTINGENCIES --- ---
STOCKHOLDERS' EQUITY
Common stock 819 819
Additional paid-in capital 17,364 17,364
Minimum pension liability (197) (197)
Retained earnings 5,728 4,953
Less: Treasury stock at cost (5,812) (5,812)
------ ------
TOTAL STOCKHOLDERS' EQUITY 17,902 17,127
------ ------
TOTAL LIABILITIES &
STOCKHOLDERS' EQUITY $33,756 $31,955
====== ======
See notes to condensed consolidated financial statements.
KINARK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
Unaudited
Three Months Ended Nine Months Ended
September 30 September 30
------------------- ----------------
(Dollars in Thousands Except
per Share Amounts) 1998 1997 1998 1997
- ----------------------------------------------------------------------------
SALES $12,206 $12,206 $37,280 $36,465
COSTS AND EXPENSES
Cost of sales 9,511 9,766 28,382 28,630
Selling, general &
administrative 1,665 1,547 5,065 4,285
Depreciation and amortization 779 684 2,217 2,007
------ ------ ------ ------
TOTAL COSTS AND EXPENSES 11,955 11,997 35,664 34,922
------ ------ ------ ------
OPERATING EARNINGS 251 209 1,616 1,543
OTHER (INCOME) EXPENSE
Interest expense, net 159 189 485 603
Other income --- --- (309) ---
------ ------ ------ ------
TOTAL OTHER EXPENSE 159 189 176 603
EARNINGS BEFORE INCOME TAXES 92 20 1,440 940
Income Tax Expense 40 18 665 403
------ ------- ------ ------
NET EARNINGS $ 52 $ 2 $ 775 $ 537
====== ======= ====== ======
BASIC EARNINGS PER COMMON SHARE $ .01 $ --- $ .11 $ .08
DILUTED EARNINGS PER
COMMON SHARE $ .01 $ --- $ .11 $ .08
See notes to condensed consolidated financial statements.
KINARK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
Nine Months Ended
September 30
-----------------------
(Dollars in Thousands) 1998 1997
- ------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net Earnings $ 775 $ 537
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 2,217 2,007
Gain on involuntary conversion of assets (309) ---
Loss on sale of assets 4 ---
Deferred income taxes 242 265
Change in assets and liabilities:
Accounts receivable (612) (54)
Inventories and other (853) (118)
Accounts payable, accrued liabilities
and other 797 1,585
------ ------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,261 4,222
------ ------
INVESTING ACTIVITIES
Capital expenditures (2,493) (2,340)
Proceeds from involuntary conversion
of assets 325 ---
Proceeds from sale of assets 14 ---
Purchase of investments (443) ---
Acquisition of galvanizing business --- (2,236)
------ ------
NET CASH USED FOR INVESTING ACTIVITIES (2,597) (4,576)
------ ------
FINANCING ACTIVITIES
Proceeds from sale of common stock --- 2
Proceeds from long-term obligations 13,995 13,126
Payments on long-term obligations (13,766) (14,326)
------ ------
NET CASH PROVIDED BY (USED FOR)
FINANCING ACTIVITIES 229 (1,198)
------ ------
DECREASE IN CASH (107) (1,552)
CASH AT BEGINNING OF PERIOD 259 2,041
------ ------
CASH AT END OF PERIOD $ 152 $ 489
====== ======
See notes to condensed consolidated financial statements.
KINARK CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
UNAUDITED
NOTE 1. BASIS OF PRESENTATION
---------------------
The condensed consolidated financial statements included in this
report have been prepared by Kinark Corporation (the "Company")
pursuant to the rules and regulations of the Securities and Exchange
Commission for interim reporting and include all normal and recurring
adjustments which are, in the opinion of management, necessary for
a fair presentation. These financial statements have not been
audited by an independent accountant. The condensed consolidated
financial statements include the accounts of the Company and its
subsidiaries.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to
such rules and regulations for interim reporting. The Company
believes that the disclosures are adequate to make the information
presented not misleading. However, these financial statements
should be read in conjunction with the financial statements and
notes thereto included in the Company's Annual Report on Form 10-K,
for the year ended December 31, 1997. The financial data for the
interim periods presented may not necessarily reflect the results
to be anticipated for the complete year.
NOTE 2. EARNINGS PER COMMON SHARE
-------------------------
Diluted earnings per common share for the periods presented has
been computed based upon the weighted average number of shares
outstanding, adjusted for the dilutive effect of stock options, of
6,790,751 and 6,799,898 for the three months ended September 30, 1998
and 1997 respectively, and 6,807,756 and 6,802,584 for the nine
months ended September 30, 1998 and 1997 respectively. Basic
earnings per common share for these same periods has been computed
based upon the average number of shares outstanding of 6,778,345 for
each period.
NOTE 3. INVENTORIES
-----------
Inventories consist primarily of raw zinc "pigs," molten zinc in
galvanizing kettles and other chemicals and materials used in the
hot dip galvanizing process. All inventories are stated at the
lower of cost or market with market value based on ultimate
realizable value from the galvanizing process. Zinc cost is
determined on a last-in-first-out (LIFO) basis. Other inventories
are valued primarily on an average cost basis.
NOTE 4. INVESTMENT SECURITIES
---------------------
The Company accounts for investment securities under the
provisions of Statement of Financial Accounting Standards
No. 115 ("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 September 30, 1998, the securities
carrying value approximated fair market value. The Company's
unrealized or realized gains or losses for the quarter ended
September 30, 1998 are immaterial. Realized gains and losses and
declines in value of securities judged to be other-than-temporary are
included in income.
NOTE 5. DEBT OBLIGATIONS
----------------
In 1997, the Company entered into a two-year bank credit agreement
which provides a $8,500,000 maximum revolving line of credit, a
$1,250,000 advancing term loan for expansion of galvanizing plants
and a $3,500,000 term loan, that was scheduled to expire May 1999.
In June 1998, the bank extended the expiration date of this
agreement to May 1, 2000, with all other terms and conditions
remaining the same.
Substantially all of the Company's accounts receivable,
inventories and fixed assets are pledged as collateral under the
credit agreement, and the credit agreement is secured by a guaranty
from each of the Company's subsidiaries. Amounts borrowed under the
credit agreement bear interest at the prime rate of Chase
Manhattan Bank minus or plus a spread ranging from minus 25 basis
points to plus 50 basis points, determined by a coverage ratio of
defined earnings to debt service.
Term loan payments are based on a five year amortization schedule
with equal monthly payments of principal and interest. The
advancing term loan, once funded, will require equal monthly
payments of principal and interest based on a seven year
amortization schedule.
The revolver may be paid down without penalty, or additional funds
may be borrowed up to the revolver limit. The term loan and
advancing term loan may be pre-paid without penalty. The credit
agreement provides for capital expenditures related to a
minimum coverage ratio of defined earnings to debt service plus
capital expenditures, limits the pledging of assets for new debt,
and requires the Company to maintain a minimum net worth. The
Company was in compliance with all such covenants at September 30,
1998.
NOTE 6. NEW ACCOUNTING STANDARDS
------------------------
Effective January 1, 1998, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 130, "Comprehensive
Income", and SFAS No. 131, "Disclosure About Segments of an
Enterprise", for the year ending December 31, 1998.
SFAS No. 130 provides for a disclosure of the components of
comprehensive income necessary to reconcile reported net earnings
with the net change in retained earnings for the current reporting
period. At September 30, 1998, there was no difference
between net earnings and comprehensive income. SFAS No. 131
modifies current segment reporting requirements and established
criteria for reported disclosures about a company's products and
services, geographic areas and major customers in annual and
interim financial statements. The Company does not believe that
there will be significant reporting changes resulting from
adoption of SFAS No. 131.
NOTE 7. INVOLUNTARY CONVERSION OF ASSETS
--------------------------------
During the first quarter of 1998, fire destroyed an acid recycling
system at one of the Company's galvanizing plants. The acid
recycling system was covered by insurance for its current
replacement value. As a result of the expected receipt of insurance
proceeds, the Company recorded a pre-tax gain of $309,000 for the
first quarter of 1998, and has purchased a new acid recovery system
for $410,000. Installation of the new acid recovery system was
completed during the third quarter of 1998.
NOTE 8. COMMITMENTS AND CONTINGENCIES
-----------------------------
In 1995 the Company's galvanizing subsidiary participated with the
United States Environmental Protection Agency ("EPA") in the removal
of soil from a former galvanizing site in Philadelphia, PA sold in
1981. In 1995, the Company was notified by the EPA that all
requirements relating to the performance of the Response Action Plan
had been completed. Subsequently in November 1997, the Company was
advised by the EPA that it would seek recovery of response costs of
approximately $480,000 associated with the environmental cleanup
that had been performed at the former Philadelphia site. On March 6,
1998, the Company was informed that the Department of Justice
("DOJ") had filed a lawsuit naming North American Galvanizing
Company ("NAG") and Boyles Galvanizing Company (a former subsidiary
company merged into North American Galvanizing Company in 1997)
in a Comprehensive Environmental Response, Compensation, and
Liability Act ("CERCLA") Cost Recovery Action for approximately
$480,000, in connection with the cleanup of the Philadelphia site.
The Company had been holding discussions on the matter with DOJ, and
in May 1998, the parties reached an agreement to settle the EPA's
claims. As a result, the Company recorded a charge to cost of sales
of $158,000 for the quarter ended March 31, 1998 for the estimated
net impact of the settlement. During the third quarter of 1998, the
parties executed a Consent Decree that resolves all of the claims
brought by the EPA against NAG.
NAG received notice on April 21, 1997 from the Illinois
Environmental Protection Agency ("IEPA") that it was a potentially
responsible party under the Comprehensive Environmental Response,
Compensation, and Liability Information System ("CERCLIS") in
connection with cleanup of an abandoned site formerly owned by
Sandoval Zinc Co. Sandoval had operated a secondary zinc
smelter at the site until it closed in 1985. The IEPA notice
includes NAG as one of 59 organizations which arranged for the
treatment and disposal of hazardous substances at Sandoval. The
Company is in the process of determining the proportional share of
substances that NAG shipped to Sandoval, and does not believe based
on current information that the ultimate resolution of this matter
will have a material adverse impact on the Company's financial
position or results of operations.
Various litigation matters arising in the ordinary course of
business are pending against the Company.
Management believes that resolution of the Company's litigation and
environmental matters should not materially affect the Company's
consolidated financial position or liquidity. Should future
developments cause the Company to record an additional liability
for environmental evaluation or cleanup or litigation, the recording
of such a liability could have a material impact on the results of
operations for the period involved.
As previously reported, on April 13, 1998, the Company received
notice from the Internal Revenue Service that Rogers Galvanizing
Company and its subsidiaries ("Rogers") for the year ended
September 30, 1996 had been selected for examination. The IRS
examination was completed during the second quarter of 1998, and the
resultant determination of a nominal tax assessment was paid by the
Company in the second quarter. In 1997, Rogers was merged into NAG.
NOTE 9. UNION CONTRACT
--------------
On July 18, 1998, NAG signed a new two-year labor agreement with the
United Steelworkers covering approximately 125 production workers at
three of its Tulsa plants. The previous labor agreement had expired
in 1997 and had been extended, without modification, by mutual
agreement between the union and NAG.
NOTE 10. LOSS OF MAJOR CUSTOMERS
-----------------------
On July 1, 1998, NAG decided to discontinue galvanizing
services to one of its largest customers which accounted for
approximately 7% of Kinark's consolidated 1997 sales and 8% of NAG's
1997 sales. This action was based on NAG's decision not to provide
galvanizing services to this customer who plans to compete directly
with NAG in the hot dip galvanizing market.
In the third quarter of 1998, North American Warehousing Company's
largest customer terminated its account. This account represented
approximately 5% of Kinark's 1997 consolidated sales and 55% of
NAW's 1997 sales.
NOTE 11. TREASURY STOCK
--------------
In July 1998, the Board of Directors authorized management to
repurchase up to $1,000,0000 of the Company's common stock in open
market transactions. Shares repurchased by the Company will be
recorded as "Treasury Stock" and will result in a reduction of
"Stockholders' Equity." As of September 30,1998, the Company had
not activated the stock repurchase program.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
REVENUES
Quarter Ended September 30 1998 1997
--------------- ---------------
% of % of
$ (000) Sales $ (000) Sales
-------------------------------
Galvanizing $ 10,091 82.7% $ 9,729 79.7%
Chemical Storage 1,222 10.0% 1,431 11.7%
Warehousing 893 7.3% 1,046 8.6%
------ ---- ------ ----
Total $ 12,206 100.0% $12,206 100.0%
====== ===== ====== =====
Nine Months Ended September 30 1998 1997
-------------- --------------
% of % of
$ (000) Sales $ (000) Sales
--------------------------------
Galvanizing $ 30,102 80.8% $29,091 79.8%
Chemical Storage 4,003 10.7% 4,282 11.7%
Warehousing 3,175 8.5% 3,092 8.5%
------ ---- ------ ----
Total $ 37,280 100.0% $36,465 100.0%
====== ===== ====== =====
Kinark's consolidated sales of $12,206,000 for the third quarter of 1998
were even with sales reported for the same quarter in 1997. Consolidated
sales for the nine months ended September 30, 1998 increased 2.2% to
$37,280,000 compared to $36,465,000 for the same period in 1997. Kinark
continues to focus its primary resources on opportunities to achieve
significant, long-term growth in the hot dip galvanizing business. During
1998, higher sales contributed by the galvanizing subsidiary have increased to
83% of the Company's total sales. Concurrently, Kinark is evaluating certain
strategic realignments at its chemical storage and warehousing subsidiaries to
strengthen its competitive position and enhance the value of these businesses.
NORTH AMERICAN GALVANIZING COMPANY ("NAG"). Galvanizing sales for the
quarter and year-to-date increased 3.7% and 3.5%, respectively, over the same
periods in 1997. Sustained improvement in average prices for hot dip
galvanizing has resulted in higher sales for all periods of 1998. Despite
moderately lower tonnage throughput compared to 1997, NAG's galvanizing plants
located in the central and southwestern regions are benefitting from a
continued high level of construction in those areas. In other areas served by
NAG, production of galvanized specialty components for the transportation and
highway sector is up 37% in the first nine months of 1998 compared to 1997.
LAKE RIVER CORPORATION ("LAKE RIVER"). Chemical storage sales declined
in both the third quarter and first nine months of 1998 compared to the same
periods last year, as a result of lower activity in bulk liquid storage and
custom drumming of chemicals. Sales of $1,222,000 in the third quarter of
1998 declined 14.6% from $1,431,000 in the third quarter of 1997. For the
first nine months of 1998, sales of $4,003,000 were down 6.5% from the
$4,282,000 for the same period last year. The slowing of bulk liquid storage
throughput primarily reflects the continuing excess of tanks available in the
greater-Chicago area. The downturn in custom drumming, which began in the
second quarter of 1998, resulted from reduced orders for export shipment for
a major account.
NORTH AMERICAN WAREHOUSE COMPANY ("NAW"). For the third quarter of 1998
warehousing sales decreased 14.6% to $893,000 compared to $1,046,000 for the
prior year. Year-to-date dales were $3,175,000, an increase of 2.7% over the
$3,092,000 posted in the same period of 1997. The downturn in warehousing
revenue in the third quarter of 1998 resulted from the termination of NAW's
largest account. As previously reported, this account represented
approximately 5% of Kinark's consolidated sales and 55% of NAW's annual
sales. Management is undertaking certain steps to realign its warehousing
business and to partially offset the impact of the loss of this major account,
including termination of excess leased warehouse space.
COSTS AND EXPENSES
Quarter Ended September 30 1998 1997
-------------- ---------------
% of % of
$ (000) Sales $ (000) Sales
---------------------------------
Cost of sales $ 9,511 77.9% $ 9,766 80.0%
Selling, general &
administrative 1,665 13.6% 1,547 12.7%
Depreciation and amortization 779 6.4% 684 5.6%
------ ---- ------ ----
Total $11,955 97.9% $11,997 98.3%
====== ===== ====== ====
Nine months Ended September 30 1998 1997
-------------- --------------
% of % of
$ (000) Sales $ (000) Sales
---------------------------------
Cost of sales $28,382 76.2% $28,630 78.6%
Selling, general &
administrative 5,065 13.6% 4,285 11.7%
Depreciation and amortization 2,217 5.9% 2,007 5.5%
------ ---- ------ ----
Total $35,664 95.7% $34,922 95.8%
====== ==== ====== ====
Consolidated gross profit of $2,695,000 in the third quarter of 1998
increased 10.5% over the $2,440,000 reported for the same quarter of 1997.
Year-to-date, gross profit of $8,898,000 was up 13.6% from $7,835,000 in
1997. Gross profit as a percent of sales also improved in all periods of 1998
compared to 1997. For the third quarter of this year, gross profit was 22.1%
of sales compared to 20.0% in 1997. For the first nine months of this year,
gross profit was 23.8% compared to 21.4% in 1997.
Galvanizing gross profit, in dollars and as a percent of sales, improved
in both the third quarter and year-to-date, compared to the same periods for
1997. For the year-to-date 1998, NAG has improved profitability per ton over
1997 through a combination of pricing and control of direct production costs.
Underlying this year-to-year improvement in profitability, NAG's aggregate
gross profit rate declined in the third quarter of 1998 compared to the first
half of 1998. This was due primarily to higher raw material costs and
disrupted supplier deliveries incurred by NAG's specialty components
subsidiary, Reinforcing Services, Inc. The Company is evaluating alternate
long-term sources of steel supply for this unit, which it expects will
contribute to lower raw material costs and production stability during future
periods.
Following strong first-half 1998 performances, both the Chemical Storage
and Warehousing units in Chicago reported a downturn in gross profit for the
third quarter of 1998 on lower sales. For the first nine months of 1998,
gross profit for each of these units was well-above the same period of 1997,
reflecting higher sales levels and profit contribution achieved during the
first half of 1998.
Selling, general and administrative ("SG&A") expenses were $1,665,000, or
13.6% of sales, in the third quarter of 1998 compared to $1,547,000, or 12.7%,
in the same quarter of 1997. Year-to-date, SG&A is $5,065,000, or 13.9% of
sales, compared to $4,285,000, or 11.8% of sales, in the same period of 1997.
Increases in recruiting, travel and marketing were the principal reasons for
the higher SG&A in 1998.
Interest expense for the third quarter decreased from $189,000 last year
to $159,000 in 1998. Year-to-date interest expense decreased from $603,000 in
1997 to $485,000 this year. The decrease in interest expense in 1998 is due
to lower average debt levels compared to 1997.
In the first quarter of 1998, the Company reported other income of
$309,000 from expected insurance proceeds covering the loss of an acid
recycling system at one of its galvanizing plants.
The Company's effective income tax rates for the first nine months of
1998 and 1997 were 46.2% and 42.9%, respectively, and reflect the
non-deductible amortization of goodwill.
The above operating factors and business conditions affecting Kinark's
diverse operations resulted in higher net earnings in 1998 compared to 1997.
Net earnings for the third quarter of 1998 were $52,000 versus $2,000 in the
same period a year ago. For the first nine months of 1998, net earnings were
$775,000 versus $537,000 in 1997. Diluted earnings per share were $.01 and no
cents for the third quarter of 1998 and 1997, respectively and $.11 and $.08
for the first nine months of 1998 and 1997, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $2,261,000 for the first
nine months of 1998 compared to $4,222,000 for the same period of 1997. The
decrease in net cash provided by operations for the first nine months of 1998,
compared to 1997, was due to increases in trade accounts receivable and
inventory, and lower additions to accounts payable. These changes primarily
reflected higher sales in 1998 and zinc inventory expenditures for added
kettle capacity and replenishment of floor stock. Net working capital on
September 30, 1998 was $6,614,000 versus $6,164,000 at December 31, 1997.
Capital expenditures for plant and operating equipment were $2,493,000
for the first nine months of 1998 compared to $2,340,000 for the same period
last year. The galvanizing operation accounted for 84% of the capital
expenditures to date in 1988. Depreciation and amortization was $2,217,000
for the first nine months of 1998 compared to $2,007,000 for the same period
in 1997.
The Company has a revolving line of credit of $8,500,000 and an advancing
term loan of $1,250,000, of which approximately $2,400,000 was available at
September 30, 1998. As discussed in Note 5 to the Company's Condensed
Consolidated Financial Statements, the Company entered into a two-year bank
credit agreement in 1997, which provides a $8,500,000 revolving line of
credit, a $1,250,000 advancing term loan and a $3,500,000 term loan. In June
1998, the bank extended the expiration date of this credit agreement to May 1,
2000, with all other terms and conditions remaining the same.
The Company believes that it has the ability to continue to generate cash
from operations and has available borrowing capacity to meet its foreseeable
needs for working capital and planned capital expenditures.
ENVIRONMENTAL MATTERS
As previously reported in 1995, the Company's Boyles Galvanizing
subsidiary participated in the final clean-up of a former galvanizing plant
site in Philadelphia, Pennsylvania (the "Philadelphia site") and received
notification from the EPA that it had demonstrated to the satisfaction of the
EPA that all requirements relating to the performance of the Response Action
Plan had been completed. Cleanup of this site consisted primarily of soil
removal at a cost of approximately $85,000 to Boyles, at that time.
In November of 1997, the EPA informed the Company that it would seek to
recover from the Company its costs associated with the 1995 cleanup of the
Philadelphia site, in the amount of $480,000. On March 6, 1998, the Company
was informed that the Department of Justice ("DOJ") had filed a lawsuit naming
NAG and Boyles (a former subsidiary company merged into NAG in 1997) in a
CERCLA Cost Recovery Action for approximately $480,000, in connection with the
cleanup of the Philadelphia site. The Company had been holding discussions on
the matter with DOJ, and in May 1998, the parties reached an agreement to
settle the EPA's claims. As a result, the Company recorded a pre-tax charge
of $158,000 against earnings for the quarter ended March 31, 1998 for the
estimated net impact of the settlement. During the third quarter of 1998, the
parties executed a Consent Decree that resolves all of the claims brought by
the EPA against NAG.
NAG received notice on April 21, 1997 from the Illinois Environmental
Protection Agency ("IEPA") that it was a potentially responsible party under
CERCLIS in connection with cleanup of an abandoned site formerly owned by
Sandoval Zinc Co. Sandoval had operated a secondary zinc smelter at the site
until it closed in 1985. The IEPA notice includes NAG as one of 59
organizations which arranged for the treatment and disposal of hazardous
substances at Sandoval. The Company is in the process of determining the
proportional share of substances that NAG shipped to Sandoval, and does not
believe based on current information that the ultimate resolution of this
matter will have a material impact on the Company's financial position or
results of operations.
The Company's facilities are subject to extensive environmental
legislation and regulations affecting their operations and the discharge of
wastes. NAG's cost of compliance with such regulations in the first nine
months of 1998 and 1997 were $601,000 and $664,000, respectively, with the
disposal and recycling of waste acids generated by the galvanizing operations
representing a major expenditure in this area.
Environmentally related expenditures at Lake River represent a relatively
small percentage of the Company's total costs. The majority of waste disposal
costs at Lake River are incurred on behalf of customers and are reimbursable.
Lake River does not take title to the chemicals stored, blended, drummed or
bagged in its facilities and thus is responsible only for the proper handling
of these materials while under its care, custody, and control. As previously
reported, Kinark has escrowed proceeds from the sale of the assets of Kinpak,
Inc. (a former subsidiary sold in 1996) for possible environmental
remediation.
The Company is committed to complying with all federal, state and local
environmental laws and regulations and using its best management practices to
anticipate and satisfy future requirements. As is typical in the galvanizing
and chemicals businesses, the Company will have additional environmental
compliance costs associated with past, present, and future operations.
Management has committed resources to discovering and eliminating
environmental issues as they arise. Because of the frequent changes in
environmental technology, laws and regulations management cannot reasonably
attempt to quantify the Company's potential costs in this area. However, such
costs are expected to increase above their current levels as discussed above.
CURRENT DEVELOPMENTS - YEAR 2000 ISSUES
STATE OF READINESS. Like many companies that rely on computer
technology, Kinark Corporation is preparing for the year 2000 by taking steps
to insure that its computers can recognize and use years after 1999 correctly.
If such a situation were to exist and not be corrected, Year 2000 errors could
affect Kinark's ability to invoice customers and pay vendors in a timely
manner and to maintain accurate financial records. Kinark has been working on
the resolution of Year 2000 issues since 1996. Kinark has determined that its
primary computer systems serving the corporate headquarters and its
galvanizing operations are structured to accommodate the Year 2000 and beyond,
and the operation of these systems will not be affected by the millennium
change. Galvanizing contributes approximately 83% of Kinark's consolidated
sales. Computer systems serving Kinark's chemical storage and warehousing
operations are not Year 2000 compliant and these systems are scheduled to be
renovated during the first half of 1999.
COST OF ADDRESSING YEAR 2000 ISSUES. Kinark's cost to date of addressing
Year 2000 issues is approximately $120,000, and the on-going assessment and
resolution of such issues should not exceed an additional $100,000. Future
expenditures to make Kinark's computer systems Year 2000 compliant are not
expected to have, a material impact on the results of the Company's
operations, liquidity, and capital resources.
RISKS OF YEAR 2000 ISSUES. Kinark has not fully determined the state of
Year 2000 compliance by its key suppliers of zinc, the primary commodity
required for its hot dip galvanizing operations. Kinark historically has not
relied on a sole-source supply for its zinc requirements and expects to
continue that practice. Going forward, Kinark will be monitoring the progress
of its key vendors, as well as its major customers and service providers in
addressing their Year 2000 issues, and expects this assessment to be completed
by June 1999. An assessment of the "most reasonably likely worst case Year
2000 scenarios" for Kinark would consider (a) the failure of the Company's
computer systems and (b) disruption of production operations due to computer
failures encountered by a customer or supplier. With respect to failure of
the Company's computers, the worst case impact would be the additional cost to
manually process daily business operations and attendant delays in completing
those operations. Kinark does not believe such additional costs would have a
material impact on its operations. With respect to a disruption of Kinark's
production operations due to a customer's or supplier's failure to be Year
2000 compliant, the extent of such disruption is not reasonably estimable. Kina
rk's operations are conducted in widely-disbursed facilities, serving more
than 1,500 commercial and industrial accounts, and the Company believes this
diversity of its operations will help mitigate the risk of a customer's or
supplier's Year 2000 failure.
CONTINGENCY PLANS. Kinark expects to establish a contingency plan to
handle "the most reasonably likely worst case scenarios" as discussed above.
The anticipated date for completing the contingency plan is April 1999, and
will involve independent verification by information technology consultants
and computer service providers.
QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISKS
Not Applicable.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
-----------------
Not applicable.
ITEM 2. CHANGES IN SECURITIES
---------------------
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
-------------------------------
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
Not applicable.
ITEM 5. OTHER INFORMATION
-----------------
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits
3.1 The Company's Restated Certificate of Incorporation
(incorporated by reference to Exhibit 3.1 to the Company's
Pre-Effective Amendment No. 1 to Registration Statement on
Form S-3 (Reg. No. 333-4937) filed on June 7, 1996).
3.2 The Company's Amended and Restated Bylaws (incorporated by
reference to Exhibit 3.2 to the Company's Quarterly Report
on Form 10-Q dated March 31, 1996).
27 Financial Data Schedule
99 Cautionary Statements by the Company Related to
Forward-Looking Statements
(b) Reports on Form 8-K
The Company did not file any reports on Form 8-K during the
quarter ended September 30, 1998.
EXHIBIT INDEX
Ex. No. Description
3.1 The Company's Restated Certificate of Incorporation incorporated by
reference to Exhibit 3.1 to the Company's Pre-Effective Amendment
No. 1 to Registration Statement on Form S-3 (Reg. No. 333-4937)
filed on June 7, 1996).
3.2 The Company's Amended and Restated Bylaws (incorporated by
reference to Exhibit 3.2 to the Company's Quarterly
Report on Form 10-Q dated March 31, 1996).
27 Financial Data Schedule.
99 Cautionary Statements by the Company Related to
Forward-Looking Statements.
SIGNATURES
Pursuant to the requirements of Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized:
KINARK CORPORATION
------------------------------
Registrant
/s/Paul R. Chastain
------------------------------
Paul R. Chastain
Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: November 10, 1998
------------------
EXHIBIT 99
CAUTIONARY STATEMENTS BY THE COMPANY REGARDING
FORWARD LOOKING STATEMENTS
Certain statements in this Form 10-Q, including information set forth
under the caption "Management's Discussion and Analysis of Financial Condition
and Results of Operations", constitute "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended and Section
21E of the Securities Exchange Act of 1934, as amended (together, the
"Securities Acts"). The Securities Acts provide certain "safe harbor"
provisions for forward-looking statements. The Company desires to take
advantage of the "safe harbor" provisions of the Securities Acts and is
including these cautionary statements ("Cautionary Statements") pursuant to
the Provisions of the Securities Acts with the intention of obtaining the
benefits of the "safe harbor" provisions. In order to comply with the terms
of the "safe harbor" in the Securities Acts, the Company cautions investors
that forward-looking statements included in this Form 10-Q, or hereafter
included in other publicly available documents filed with the Securities and
Exchange Commission, reports to the Company's stockholders and other publicly
available statements issued or released by the Company involve substantial
risks, uncertainties, and other factors which could cause the Company's actual
results, performance (financial or operating) or achievements to differ
materially from the future results, performance (financial or operating) or
achievements expressed or implied by such forward-looking statements. The
Company believes the following important factors could cause such a material
difference to occur:
1. The Company's ability to grow through the acquisition and development of
galvanizing, chemical storage and warehousing operations or the
acquisition of ancillary businesses.
2. The Company's ability to identify suitable acquisition candidates, to
consummate or complete construction projects, or to profitably operate or
successfully integrate enterprises into the Company's other operations.
3. The Company's ability to secure the capital and the related cost of such
capital necessary to fund its future growth through acquisition and
development, as well as internal growth.
4. The level of competition in the Company's industries and the possible
entry of new, well-capitalized competitors into the Company's markets.
5. Uncertainties and changes in environmental compliance costs associated
with past, present and future operations.
6. Uncertainties and changes related to federal, state and local regulatory
policies, including environmental laws related to the galvanizing,
chemicals and warehousing industries.
7. The Company's ability to staff its galvanizing, chemical storage and
warehousing operations appropriately with qualified personnel, including
in times of shortages of such personnel and to maintain a satisfactory
relationship with labor unions.
8. The pricing and availability of equipment, materials and inventories,
including zinc "pigs", the major component used in the hot dip galvanizing
industry.
9. Uncertainties and changes in general economic conditions.
10. Uncertainties and changes in several industries to which the company's
businesses are closely tied, such as highway and transportation,
communications and energy.
11. Performance issues with key suppliers and subcontractors.
12. Uncertainties related to the retention of key customers in each of the
Company's business segments.
13. Uncertainties regarding the effect of Year 2000 issues on suppliers and
service providers in each of the Company's business segments.
The words "believe," "expect," "anticipate," "project," "plan" and similar
expressions identify forward-looking statements. Investors are cautioned not
to place undue reliance on these forward-looking statements, which speak only
as of the date the statement was made.
The foregoing review of significant factors should not be construed as
exhaustive or as an admission regarding the adequacy of disclosures previously
made by the Company.