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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED JUNE 30, 2002
COMMISSION FILE NO. 1-3920
KINARK CORPORATION
(Exact name of the registrant as specified in its charter)
DELAWARE 71-0268502
(State of Incorporation) (I.R.S. Employer Identification No.)
2250 EAST 73RD STREET
TULSA, OKLAHOMA 74136
(Address of principal executive offices)
Registrant's telephone number: (918) 494-0964
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 and 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of June 30, 2002.
Common Stock $ .10 Par Value . . . . . 6,713,632
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KINARK CORPORATION AND SUBSIDIARY
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
Consolidated Balance Sheets as of
June 30, 2002 (unaudited), and
December 31, 2001 4
Consolidated Statements of Operations
for the three and six-month periods ended
June 30, 2002 and 2001 (unaudited) 5
Consolidated Statements of Cash Flows
for the six months ended
June 30, 2002 and 2001 (unaudited) 6
Notes to Consolidated Financial Statements
for the three and six-month periods ended
June 30, 2002 and 2001(unaudited) 7-13
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 14-17
Item 3. Quantitative and Qualitative Disclosure
About Market Risks 17
PART II. OTHER INFORMATION 18
SIGNATURES 19
FORWARD LOOKING STATEMENTS OR INFORMATION
Certain statements in this Form 10-Q, including information set forth under
the caption "Management's Discussion and Analysis of Financial Condition and
Results of Operations", constitute "Forward-Looking Statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Such statements are
typically punctuated by words or phrases such as "anticipates," "estimate,"
"should," "may," "management believes," and words or phrases of similar import.
The Company cautions investors that such forward-looking statements included in
this Form 10-Q, or hereafter included in other publicly available documents
filed with the Securities and Exchange Commission, reports to the Company's
stockholders and other publicly available statements issued or released by the
Company involve significant risks, uncertainties, and other factors which could
cause the Company's actual results, performance (financial or operating) or
achievements to differ materially from the future results, performance
(financial or operating) or achievements expressed or implied by such
forward-looking statements. Factors that could cause or contribute to such
differences could include, but are not limited to, changes in demand, prices,
and the raw materials cost of 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.
The Company believes that the important factors set forth in the Company's
cautionary statements at Exhibit 99 to this Form 10-Q could cause such a
material difference to occur and investors are referred to Exhibit 99 for such
cautionary statements.
2
INDEPENDENT ACCOUNTANTS" REVIEW REPORT
To the Board of Directors and Stockholders of
Kinark Corporation:
We have reviewed the accompanying consolidated balance sheet of Kinark
Corporation and subsidiary (the "Company") as of June 30, 2002, and the related
consolidated statements of operations and comprehensive income, and of cash
flows for the three and six-month periods ended June 30, 2002 and 2001. These
financial statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and of making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted in the United States of
America, the objective of which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to such consolidated financial statements for them to be in conformity
with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of
Kinark Corporation and subsidiary as of December 31, 2001, and the related
consolidated statements of operations and comprehensive income, stockholders"
equity, and cash flows for the year then ended (not presented herein); and in
our report dated February 22, 2002, we expressed an unqualified opinion on those
consolidated financial statements.
/s/Deloitte & Touche LLP
Tulsa, Oklahoma
August 14, 2002
3
KINARK CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
UNAUDITED
JUNE 30 December 31
(DOLLARS IN THOUSANDS) 2002 2001
--------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 4 $ 853
Trade receivables, net 5,644 4,821
Inventories 5,226 5,399
Prepaid expenses and other assets 567 291
Deferred tax asset, net 583 583
-------- --------
TOTAL CURRENT ASSETS 12,024 11,947
PROPERTY, PLANT AND EQUIPMENT, AT COST
Land 1,714 1,714
Galvanizing plants and equipment 34,911 36,258
Other 70 70
-------- --------
36,695 38,042
Less: Allowance for depreciation 14,644 15,234
Construction in progress 1,971 459
-------- --------
TOTAL PROPERTY, PLANT AND EQUIPMENT, NET 24,022 23,267
-------- --------
GOODWILL 3,389 3,389
OTHER ASSETS 433 489
-------- --------
TOTAL ASSETS $ 39,868 $ 39,092
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term obligations $ 986 $ 976
Current portion of bonds payable 602 587
Trade accounts payable 1,732 1,123
Accrued payroll and employee benefits 838 889
Other taxes 239 317
Other accrued liabilities 842 449
-------- --------
TOTAL CURRENT LIABILITIES 5,239 4,341
-------- --------
PENSION AND RELATED LIABILITIES -- 101
DEFERRED TAX LIABILITY, NET 819 819
LONG-TERM OBLIGATIONS 6,984 7,361
BONDS PAYABLE 7,598 7,900
SUBORDINATED NOTES PAYABLE 927 917
-------- --------
TOTAL LIABILITIES 21,567 21,439
-------- --------
COMMITMENTS AND CONTINGENCIES (NET 8) -- --
STOCKHOLDERS' EQUITY
Common stock 821 819
Additional paid-in capital 17,462 17,464
Retained earnings 6,015 5,399
Common shares in treasury at cost (5,997) (6,029)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 18,301 17,653
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 39,868 $ 39,092
======== ========
See notes to consolidated financial statements.
4
KINARK CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 2002 2001 2002 2001
------------------------------------------------------------------------------------------------------
SALES $ 10,103 $ 9,262 $ 19,320 $ 18,244
Cost of sales 6,866 6,627 13,231 12,972
Selling, general & administrative expenses 1,514 1,292 2,912 2,552
Depreciation and amortization expense 801 892 1,606 1,764
---------- ---------- ---------- ----------
TOTAL COSTS AND EXPENSES 9,181 8,811 17,749 17,288
---------- ---------- ---------- ----------
OPERATING INCOME 922 451 1,571 956
Interest expense, net 279 329 566
652
Other expense -- 118 -- 219
INCOME BEFORE INCOME TAXES 643 4 1,005 85
Income tax expense 251 2 389 36
---------- ---------- ---------- ----------
NET INCOME 392 2 616 49
OTHER COMPREHENSIVE INCOME (LOSS):
Cash flow hedges:
Cumulative effect, accounting for derivatives,
net of related income taxes of $48 -- -- -- (65)
Less: reclassification adjustment for derivative
losses included in net income, net of related
income taxes of $32 -- 23 -- 46
---------- ---------- ---------- ----------
OTHER COMPREHENSIVE INCOME (LOSS) -- 23 -- (19)
---------- ---------- ---------- ----------
COMPREHENSIVE INCOME $ 392 $ 25 $ 616 $ 30
========== ========== ========== ==========
NET INCOME PER COMMON SHARE:
Basic $ .06 $ -- $ .09 $ .01
Diluted $ .05 $ -- $ .08 $ --
See notes to consolidated financial statements.
5
KINARK CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
Six Months Ended
June 30
(DOLLARS IN THOUSANDS) 2002 2001
--------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 616 $ 49
Depreciation and amortization 1,606 1,764
Deferred income taxes -- (67)
Gain on disposal of assets -- (11)
Changes in assets and liabilities:
Accounts receivable, net (823) 334
Inventories and other assets (47) 30
Accounts payable, accrued liabilities and other 782 (141)
---------- ----------
CASH PROVIDED BY OPERATING ACTIVITIES 2,134 1,958
INVESTING ACTIVITIES
Capital expenditures (2,361) (2,149)
Proceeds from sale of assets -- 3
---------- ----------
CASH USED FOR INVESTING ACTIVITIES (2,361) (2,146)
FINANCING ACTIVITIES
Reissuance of treasury stock 32 0
Deferred financing cost -- (76)
Proceeds from long-term obligations 6,051 10,124
Payments on long-term obligations (6,418) (10,969)
Repayment on bonds (287) (278)
Proceeds from subordinated debt -- 900
Proceeds from stock warrants -- 100
Tax exempt bond funds held by bond trustee -- 1,219
---------- ----------
CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES (622) 1,020
---------- ----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (849) 832
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 853 57
---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 4 $ 889
========== ==========
See notes to consolidated financial statements.
6
KINARK CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002 AND 2001
UNAUDITED
NOTE 1. BASIS OF PRESENTATION
The consolidated financial statements included in this report have been prepared
by Kinark Corporation (the "Company") pursuant to its understanding of 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 consolidated financial
statements include the accounts of the Company and its subsidiary.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America 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, 2001. The financial data for the
interim periods presented may not necessarily reflect the results to be
anticipated for the complete year.
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.
The Company's sole business is hot dip galvanizing and coatings which is
conducted through its wholly owned subsidiary, North American Galvanizing
Company ("NAG").
NOTE 2. NEW ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets" ("SFAS No. 142") which is fully effective in fiscal years beginning
after December 15, 2001, although certain provisions of SFAS No. 142 are
applicable to goodwill and other intangible assets acquired in transactions
completed after June 30, 2001. SFAS No. 142 addresses financial accounting and
reporting for acquired goodwill and other intangible assets and requires that
goodwill and intangible assets with an indefinite life no longer be amortized
but instead be reviewed, at least annually, for impairment. The Company assessed
initial impairment under the transition rules of SFAS 142 in the second quarter
of 2002 and determined that goodwill was not impaired. The
7
following pro forma results of operations reflects elimination of goodwill
amortization included in the first three and six months of 2001, as if SFAS No.
142 had been in effect at that time.
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
Dollars in Thousands 2002 2001 2002 2001
--------------------------------- -------- -------- -------- --------
Reported net income $ 392 $ 2 $ 616 $ 49
Add back: Goodwill amortization,
net of income tax --- 32 --- 64
-------- -------- -------- --------
Adjusted net income $ 392 $ 34 $ 616 $ 113
======== ======== ======== ========
Earnings per share:
Reported net income per share
Basic $ 0.06 $ --- $ 0.09 $ 0.01
Diluted 0.05 --- 0.08 ---
Goodwill amortization, net of tax
Basic $ --- $ --- $ --- $ 0.01
Diluted --- --- --- 0.01
Adjusted net income per share
Basic $ 0.06 $ --- $ 0.09 $ 0.02
Diluted 0.05 --- 0.08 0.01
In June 2001, the FASB issued Statement of Financial Accounting Standards No.
143, "Accounting for Asset Retirement Obligations" ("SFAS No. 143") which
addresses financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. It applies to legal obligations associated with the retirement of
long-lived assets that result from the acquisition, construction, development
and/or the normal operation of a long-lived asset, except for certain
obligations of lessees. This statement is effective for financial statements
issued for fiscal years beginning after June 15, 2002. The Company has not
determined the impact on its financial statements that may result from adoption
of SFAS No. 143.
In August 2001, the FASB issued Statement of Financial Accounting Standards No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No.
144") which addresses financial accounting and reporting for the impairment or
disposal of long-lived assets by requiring that one accounting model be used for
long-lived assets to be disposed of by sale, whether previously held and used or
newly acquired, and by broadening the presentation of discontinued operations to
include more disposal transactions. SFAS No. 144 is effective for financial
statements issued for fiscal years beginning after December 15, 2001, and
interim periods within those fiscal years. The provisions of this statement
generally are to be applied prospectively.
8
NOTE 3. EARNINGS PER COMMON SHARE
Basic earnings per common share for the periods presented are computed based
upon the weighted average number of shares outstanding. Diluted earnings per
common share for the periods presented are based on the weighted average shares
outstanding, adjusted for the assumed exercise of stock options and warrants
using the treasury stock method.
Number of Shares
---------------------
Three Months Ended June 30 2002 2001
-------------------------- --------- ---------
Basic 6,713,632 6,712,209
Diluted 7,385,057 7,386,583
Six Months Ended June 30
------------------------
Basic 6,705,205 6,712,209
Diluted 7,376,068 7,378,875
The number of options excluded from the calculation of diluted earnings per
share, due to the option price being higher than the share market value, are
319,000 and 339,625 at June 30, 2002 and 2001, respectively.
NOTE 4. INVENTORIES
Inventories consist 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 estimated
realizable value from the galvanizing process. Zinc cost is determined on a
last-in first-out (LIFO) basis. Other inventories are valued primarily on an
average cost basis.
For the six months ended June 30, 2002, the Company incurred a temporary
reduction in zinc inventory of approximately 240,500 pounds, or 3%, from the
base period inventory at December 31, 2001. The reduction reflected a
realignment of planned purchase commitments with projected requirements for
2002. The Company expects to replace this inventory by year end.
NOTE 5. BONDS PAYABLE
During the first quarter of 2000, the Company issued $9,050,000 of Harris County
Industrial Development Corporation Adjustable Rate Industrial Development Bonds,
Series 2000 (the "Bonds"). The Bonds are senior to other debt of the Company.
Bond proceeds were used by NAG for the purchase of land and construction of a
hot dip galvanizing plant in Harris County, Texas, which became operational
during the first quarter of 2001.
The Bonds bear interest at a variable rate (5.25% at June 30, 2002) that can be
converted to a fixed rate upon certain conditions outlined in the bond
agreement. The Bonds are subject to annual redemption of $230,000 that commenced
on June 15, 2001, which increases annually thereafter to a maximum redemption of
$960,000 on June 15, 2012. The Company makes
9
monthly principal and interest payments of $86,000 into a sinking fund. The
amount outstanding on these bonds was $8,200,000 at June 30, 2002. The final
maturity date of the Bonds is June 15, 2013. The Company has the option of early
redemption of the Bonds at par unless the bonds are converted to a fixed
interest rate, in which case they are redeemable at a premium during a period
specified in the bond agreement. The Company's obligation under the bond
agreement is secured through a letter of credit with a bank which must remain in
effect as long as any Bonds are outstanding. The letter of credit is
collateralized by substantially all the assets of the Company.
NOTE 6. SUBORDINATED DEBT
In February 2001, the Company completed a $1,000,000 Private Placement of
unsecured subordinated debt. The Company raised these proceeds to satisfy
financing requirements to fund construction of a new galvanizing facility in St.
Louis, Missouri. Participation in the Private Placement was offered to
accredited investors, which included the Company's directors and eligible
stockholders holding a minimum of 100,000 shares of common stock. The amount
outstanding on these notes, net of discount, was $926,672 at June 30, 2002. The
notes, which mature February 17, 2006 and bear interest at 10% payable annually,
were issued with warrants to purchase 666,666 shares of common stock of the
Company. Terms of the warrants, which expire February 17, 2008, permit the
holder to purchase shares of the Company's common stock at any time prior to the
expiration date. The exercise price of $.856 per share reflects the fair value
of the Company's common stock at the time the warrants were issued, as
determined by an independent financial advisor. As of June 30, 2002 no warrants
had been exercised.
NOTE 7. LONG-TERM OBLIGATIONS
June 30 December 31
(Dollars in Thousands) 2002 2001
---------------------- ---------- ----------
Revolving line of credit $ 4,799 $ 4,759
Term loan 3,143 3,538
9.5% note due 2015 22 22
Capital leases 6 18
---------- ----------
$ 7,970 $ 8,337
Less current portion 986 976
---------- ----------
$ 6,984 $ 7,361
---------- ----------
In November 2001, the Company amended a three-year bank credit agreement that
was scheduled to expire in September 2002. The amended agreement provides (i) a
$9,000,000 maximum revolving line of credit for working capital and general
corporate purposes, (ii) a $3,692,595 term loan and (iii) a $3,000,000 advancing
construction loan facility. At June 30, 2002, no amounts were outstanding under
the advancing construction loan facility. The maturity of the revolving loan
facility was extended to June 30, 2003; the maturity of the term loan was
extended to June 30, 2004.
10
At June 30, 2002, the Company had available borrowing capacity of $1,008,000,
net of outstanding irrevocable letters of credit, under the bank revolving line
of credit based on the borrowing base calculated under the agreement. At June
30, 2002, the Company had outstanding irrevocable letters of credit totaling
$400,000 to secure payment of current and future workers' compensation claims.
Substantially all of the Company's accounts receivable, inventories, fixed
assets and the common stock of its subsidiary are pledged as collateral under
the agreement, and the credit agreement is secured by a full and unconditional
guaranty from NAG. 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 coverage ratio. In the event the Company fails to
maintain a consolidated debt service coverage ratio for any fiscal quarter of at
least 1.25 to 1.00, the Applicable LIBOR Rate Margin will be increased to 5.75%
and the Applicable Prime Rate Margin will be increased to 3.00%. Thereafter, the
increased rate margin will remain in effect until such time as the Company has
maintained a consolidated debt service coverage ratio greater than or equal to
1.25 to 1.00 for a subsequent fiscal quarter.
In the event the Company fails to maintain a consolidated capital expenditures
to EBITDA ratio for any fiscal quarter of at least 1.00 to 1.00, the increase in
the Applicable LIBOR Rate Margin ranges from 3.75% to 5.75%, and the increase in
the Applicable Prime Rate Margin ranges from 1.00% to 3.00%.
Term loan payments are based on thirty-five (35) installments 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 the covenants at June 30,
2002.
NOTE 8. COMMITMENTS AND CONTINGENCIES
At June 30, 2002, the Company had outstanding contractual commitments totaling
approximately $2,150,000 relating to the construction of a new galvanizing plant
in St. Louis, Missouri.
The Company has commitments with domestic and foreign zinc producers to purchase
zinc used in its hot dip galvanizing operations. Commitments for the future
delivery of zinc either reflect rates then quoted on the London Metals Exchange
and are not subject to price adjustment or are based on such quoted prices at
the time of delivery. At June 30, 2002, the aggregate commitments for the
procurement of zinc at fixed prices were $5.0 million. The Company reviews these
fixed price contracts for losses using the same methodology employed to estimate
the market value of its zinc inventory. The Company had unpriced commitments for
the purchase of 2.6 million pounds of zinc at June 30, 2002.
The Company periodically utilizes derivative instruments which are intended to
offset the impact of potential fluctuations in the market price of zinc. During
2000, the Company purchased two
11
costless collars which expired in September and October of 2001. Due to the
decline in the market price of zinc, the Company elected not to replace zinc
commodity collar contracts which expired during the third quarter of 2001. The
Company expects to continue evaluating derivative instruments to minimize the
impact of zinc price fluctuations, as part of its inventory management strategy.
NAG was notified in 1997 by the Illinois Environmental Protection Agency
("IEPA") that it was one of a number of potentially responsible parties 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"). NAG arranged for the treatment
and disposal of hazardous substances at Sandoval in the ordinary course of its
business. Based on current information and the stage of investigation, NAG"s
share of any probable future costs, if any, cannot be estimated at this time.
The Company expects it will continue to have environmental compliance costs in
the future associated with operations in the galvanizing business. 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 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.
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.
NOTE 9. LABOR AGREEMENT
In April 2002, NAG concluded negotiations of a one-year labor agreement with the
United Steel Workers Union covering production workers at its Tulsa galvanizing
plants. The new agreement is not materially changed from the previous agreement
which expired March 31, 2002.
NOTE 10. TREASURY STOCK
In the first and second quarter of 2002, the Company issued 17,565 and 15,242
shares of its common stock, respectively, from Treasury to outside Directors of
the Company as payment for their quarterly board fee in lieu of receiving cash
payments. The shares were valued at the average closing price of Kinark's common
stock for a prior 30-day period, as reported by the American Stock Exchange.
12
Such shares were issued pursuant to the Directors' prior election and notice to
the Company to receive up to all of their quarterly board fees in the Company's
stock in lieu of cash.
NOTE 11. PENSION LIABILITY
In the first quarter of 2002, the Company reversed the liability
for a self-funded pension plan of $119,000 upon the death of the sole
participant covered by the plan.
13
KINARK CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Kinark Corporation is a leading provider of hot dip galvanizing and
coatings for corrosion protection of fabricated steel products, through its
wholly-owned subsidiary North American Galvanizing Company.
In a news release dated July 15, 2002, the Company announced the
introduction of INFRASHIELDSM Coating Systems, a specialty polymer coating that
is designed to be applied over hot dip galvanized material slated for harsh
operating conditions. The Company has also developed a unique method of polymer
application for the internal coating of tubular products. This process will
provide economical application of coatings for tubular product and pipe from 9
inches to 24 inches in diameter, including tapered products, with further
developmental research expected to achieve diameters up to 84 inches.
In January 2002, the Company announced the groundbreaking for a new
galvanizing plant in St. Louis, Missouri that will be located adjacent to the
existing galvanizing facility. Construction of the new plant is proceeding on
schedule and new plant operations are expected to begin during the fourth
quarter of 2002. This new plant is expected to service the regional St. Louis
market and will provide NAG a strategic base for extending its geographic area
of service.
In December 2001, the Company temporarily idled a galvanizing plant located
in Houston (the "Cunningham plant"). Management plans to restart this facility
when local market conditions improve and also is reviewing potential
alternatives for this facility. Management does not believe that any impairment
of the carrying value of the facility has occurred at this time. The majority of
customer orders that were being processed at Cunningham have been transferred to
the Company's new Houston plant (the "Fairbanks plant") that began operations in
2001.
RESULTS OF OPERATIONS
In the second quarter ended June 30, 2002, North American Galvanizing
posted sales gains for the second consecutive quarter and also exceeded sales
for the same period in 2001, as a result of continued quarter-to-quarter growth
in the volume of steel processed through its galvanizing plants.
Sales for the second quarter of 2002 increased 9.1% to $10,103,000 compared
to sales of $9,262,000 for the second quarter of 2001, and they were 9.6% higher
than the immediate prior quarter ended March 31, 2002. North American
Galvanizing continued to gain market share measured by the increase in tonnage.
Tonnage for the second quarter of 2002 rose 10.4% over the first quarter of 2002
and 13.5% over the second quarter of 2001.
Sales for the six-months ended June 30, 2002 increased 5.9% to $19,320,000
compared to sales of $18,244,000 in the first six-months of 2001, reflecting an
8.9% increase in tonnage for the period.
14
At June 30, 2002 the price of zinc, the principal material used in the
galvanizing process, had declined approximately 10% from its level a year
earlier. North American Galvanizing has experienced a nominal decrease in its
average selling prices. The impact on North American Galvanizing's 2002 sales
due to the decrease in average selling prices has been more than offset by the
increase in its production tonnage, which is at a historical record level.
Operating income for the three and six month periods ended June 30, 2002
rose significantly over the same periods a year ago, as a result of increased
sales and higher gross profit margins. Operating income of $922,000 for the
second quarter of 2002 increased 104.4% over operating income of $451,000 for
the second quarter of 2001; operating income for the first six months of 2002
increased 64.3% to $1,571,000 compared to $956,000 a year ago. Gross profit of
$3,237,000 was 32.0% of sales in the second quarter of 2002 compared to gross
profit of $2,635,000 and 28.4% of sales in the second quarter a year ago. For
the first six months of 2002, gross profit of $6,089,000 was 31.5% of sales
compared to gross profit of $5,272,000 and 28.9% of sales in the same period of
2001. Gains in gross profit margin for 2002 also reflect the benefits of
cost/production efficiencies derived from higher sales in 2002, combined with a
lower average cost for zinc used in the galvanizing process.
Depreciation and amortization expense was reduced in 2002 primarily due to
discontinuing the amortization of goodwill, in accordance with the new
accounting standard adopted January 1, 2002. This standard requires goodwill no
longer be amortized as a current operating expense, but must be reviewed at
least annually for impairment of its carrying value (see Note 2 to Consolidated
Financial Statements). Depreciation expense for the second quarter and first
half of 2002 was $801,000 and $1,606,000, respectively, compared to depreciation
and amortization expense of $892,000 and $1,764,000, respectively for the same
periods in 2001.
The Company's selling, general and administrative expenses ("SG&A") for the
second quarter of 2002 were $1,514,000 compared to $1,292,000 for the second
quarter of 2001. For the six months ended June 30, 2002, SG&A expenses were
$2,912,000 compared to $2,552,000 for the same period of 2001. During 2002, cost
reductions in administrative salaries and elimination of a pension liability
have been offset by increases in the reserve for collection of doubtful accounts
receivable, higher ad valorem taxes and increased premiums for property and
liability insurance. Insurance premiums for most risk coverages essentially have
doubled over the prior year, primarily reflecting market conditions prevailing
in the insurance industry. The Company reviews its insurance program annually.
The Company's net interest expense for 2002 is lower than last year
primarily due to lower interest rates on certain of its variable-rate debt, a
reduction in debt and interest capitalized on financing related to the
construction of the new St. Louis galvanizing plant.
In 2001, the Company incurred losses on commodity collar contracts which
were intended to hedge the price risk associated with fixed price zinc purchase
commitments. These losses were recorded as Other Expense in the amount of
$118,000 and $219,000 in the second quarter and the first half of 2001,
respectively. The commodity contracts expired in 2001 and were not replaced.
15
The Company has estimated its effective income tax rate in 2002 at 38%;
this rate compares to an income tax rate of approximately 42% in 2001 which was
higher than the federal statutory rate primarily due to non-deductible
amortization of goodwill.
Income before income taxes was $643,000 for the second quarter of 2002
compared to income of $4,000 for the second quarter of 2001. For the six-month
period ended June 30, 2002, pre-tax income was $1,005,000 compared to $85,000
for the first half of 2001. The increase in pre-tax income for 2002 was
generated primarily from increased gross profit, as discussed above, with the
added benefit of lower interest expense and elimination of commodity contract
losses. The Company reported net income of $392,000, or $.06 per share, for the
second quarter of 2002 compared to net income of $2,000 for the second quarter
of 2001. Net income for the six month period ended June 30, 2002 was $616,000,
or $.09 per share, compared to net income of $49,000, or $.01 per share, for the
same period in 2001.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2002, the Company had $4,000 in cash, approximately $6,800,000
in net working capital and available borrowing capacity of approximately
$1,008,000 under the bank revolving line of credit. In addition, the Company has
a $3,000,000 unused commitment under its Advancing Construction Loan.
For the six months ended June 30, 2002, the Company's operating activities
generated cash of $2,134,000 compared to cash generated of $1,958,000 for the
same period of 2001. The increase in cash generated by 2002 operating activities
versus the same period a year ago is due primarily to an increase in net income,
net of increases in working capital. Net cash used for investing activities in
the first six months of 2002 of $2,361,000 consisted of capital expenditures of
approximately $870,000 to maintain current operating facilities and
approximately $1,491,000 for construction of a new galvanizing plant in St.
Louis. The capital expenditures were funded by proceeds on hand from the
Company's private place of subordinated debt in 2001 and cash provided by
operating activities. In the six months ended June 30, 2002, the Company also
reduced total debt $654,000 with cash provided by operating activities.
The Company currently anticipates that cash flows from operations and
borrowing under its revolving line of credit will be adequate to repay its debt
obligations due within one year of approximately $1,600,000, and for capital
improvements to maintain current operating facilities.
ENVIRONMENTAL MATTERS AND OTHER CONTINGENCIES
The Company's facilities are subject to extensive environmental legislation
and regulations affecting their operations and the discharge of wastes. The cost
of compliance with such regulations in the first half of 2002 and 2001 was
approximately $598,000 and $481,000, respectively, for the disposal and
recycling of waste acids generated by the galvanizing operations.
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
business, the Company will have additional environmental compliance costs
associated with past, present and future operations.
16
Management is committed to discovering and eliminating environmental issues as
they arise. Because of the frequent changes in environmental technology, laws
and regulations management cannot reasonably quantify the Company's potential
future costs in this area.
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 state of investigation, NAG's share of any probable future costs
cannot be estimated at this time.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Kinark's operations include managing market risks related to change in
interest rates and zinc commodity prices.
INTEREST RATE RISK. Kinark is exposed to financial market risk related to
changing interest rates, which will affect interest paid on the Company's
variable rate debt. At June 30, 2002, variable rate debt aggregating $7,942,000
was outstanding under the credit agreement with an effective rate of 5.0% and
$8,200,000 was outstanding under the bond agreement with an effective rate of
5.25% (see Note 5 to Consolidated Financial Statements). In addition, the
Company's fixed rate debt consisting of $1,000,000 of 10% subordinated
promissory notes was outstanding at June 30, 2002. The borrowings under variable
rate facilities are due approximately as follows: $862,000 in 2002; $6,420,000
in 2003; $2,234,000 in 2004 and $6,626,000 in years 2005 through 2013. Each
increase of 10 basis points in the effective interest rate would result in an
annual increase in interest charges on variable rate debt of $16,100 based on
June 30, 2002 outstanding borrowings. The actual effect of changes in interest
rates is dependent on actual amounts outstanding under the various loan
agreements. 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 fixed price purchase commitments with domestic
and foreign zinc producers to purchase a portion of its zinc requirements for
its hot dip galvanizing operations. Commitments for the future delivery of zinc,
typically up to one (1) year, reflect rates quoted on the London Metals
Exchange. At June 30, 2002, the aggregate fixed price commitments for the
procurement of zinc in 2002 and 2003 were approximately $5,000,000. In addition,
NAG had unpriced commitments to procure approximately 2,600,000 pounds of zinc
in 2002 and 2003. With respect to the fixed price purchase commitments, a
hypothetical decrease of 10% in the market price of zinc from the June 30, 2002
level would represent a potential lost gross margin opportunity of approximately
$500,000; however, lower zinc prices potentially could benefit future earnings
for the uncommitted zinc purchases that could be made at lower market prices.
The Company's financial strategy includes evaluating the selective use of
derivative financial instruments to manage zinc and interest costs. As part of
its inventory management strategy, the Company expects to continue evaluating
hedging instruments to minimize the impact of zinc price fluctuations.
17
PART II OTHER INFORMATION
Item 1. Legal Proceedings - Not applicable.
Item 2. Changes in Securities - Not applicable.
Item 3. Defaults Upon Senior Securities - Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Stockholders on Wednesday May
15, 2002 in New York City, NY. At the meeting, stockholders elected
eight directors to serve a one-year term, and ratified the Board of
Directors appointment of Deloitte & Touche LLP as the Company's
independent accountants for the year ending December 31, 2002. The
votes for the election of directors were as follows:
For Withheld
--- --------
Linwood J. Bundy 6,065,405 32,382
Paul R. Chastain 6,065,405 32,382
Ronald J. Evans 6,061,605 36,182
Gilbert L. Klemann, II 6,065,405 32,382
Patrick J. Lynch 6,065,405 32,382
Joseph J. Morrow 6,061,405 36,382
John J. Sununu 6,063,555 34,232
Mark E. Walker 6,061,305 36,482
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) file 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).
99 Cautionary Statements by the Company Related to
Forward-Looking Statements.
(b) Reports on Form 8-K
The Company did not file a Form 8-K Current Report during the
quarter ended June 30, 2002.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized:
KINARK CORPORATION
------------------
(Registrant)
/s/ Paul R. Chastain
-----------------------------
Paul R. Chastain
Vice President and Chief Financial Officer
(Principal Financial Officer)
Date: August 14, 2002
CERTIFICATION
Each of the undersigned hereby certifies in his capacity as an officer of Kinark
Corporation (the "Company") that the Quarterly Report of the Company on Form
10-Q for the period ended June 30, 2002 fully complies with the requirements of
Section 13(a) of the Securities Exchange Act of 1934 and that the information
contained in such report fairly presents, in all material respects, the
financial condition and the results of operations of the Company.
KINARK CORPORATION
------------------
(Registrant)
/s/ Ronald J. Evans
-----------------------------
Ronald J. Evans
President and
Chief Executive Officer
/s/ Paul R. Chastain
-----------------------------
Paul R. Chastain
Vice President and Chief Financial Officer
(Principal Financial Officer)
Date: August 14, 2002
20