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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, 2003
COMMISSION FILE NO. 1-3920
NORTH AMERICAN GALVANIZING & COATINGS, INC.
(formerly 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 [_]
AMENDMENT
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Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
YES [_] NO [X]
END OF AMENDMENT
--------------------------------------------------------------------------------
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of June 30, 2003.
Common Stock $.10 Par Value . . . . . 6,758,182
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NORTH AMERICAN GALVANIZING & COATINGS, INC.
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
Condensed Consolidated Balance Sheets as of
June 30, 2003 (unaudited), and
December 31, 2002 4
Condensed Consolidated Statements of Operations
for the three and six-month periods ended
June 30, 2003 and 2002 (unaudited) 5
Condensed Consolidated Statements of Cash Flows
for the six months ended June 30, 2003 and
2002 (unaudited) 6
Notes to Condensed Consolidated Interim Financial
Statements for the three and six-month periods ended
June 30, 2003 and 2002(unaudited) 7-13
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 14-16
Item 3. Quantitative and Qualitative Disclosure
About Market Risks 16-17
Item 4. Controls and Procedures 17
PART II. OTHER INFORMATION 18-19
SIGNATURES AND CERTIFICATIONS 20-22
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
North American Galvanizing & Coatings, Inc. (formerly Kinark Corporation):
We have reviewed the accompanying condensed consolidated balance sheet of North
American Galvanizing & Coatings, Inc. and subsidiary ("NAGC" or the "Company")
as of June 30, 2003, and the related condensed consolidated statements of
operations for the three and six-month periods ended June 30, 2003 and 2002 and
the condensed consolidated statements of cash flows for the six months ended
June 30, 2003 and 2002. These interim 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 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 condensed consolidated interim 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
North American Galvanizing & Coatings, Inc. and subsidiary as of December 31,
2002, and the related consolidated statements of operations and comprehensive
income, stockholders' equity, and cash flows for the year then ended filed (not
presented herein); and in our report dated February 7, 2003, 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, 2002 is fairly stated, in all material respects, in
relation to the consolidated balance sheet from which it has been derived.
/s/Deloitte & Touche LLP
Tulsa, Oklahoma
August 4, 2003
3
NORTH AMERICAN GALVANIZING & COATINGS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
UNAUDITED
JUNE 30 December 31
(DOLLARS IN THOUSANDS) 2003 2002
-------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash $ 4 $ 3
Trade receivables, net 4,680 4,529
Inventories 5,712 6,154
Prepaid expenses and other assets 811 618
Deferred tax asset, net 971 444
-------- --------
TOTAL CURRENT ASSETS 12,178 11,748
-------- --------
PROPERTY, PLANT AND EQUIPMENT, AT COST
Land 1,473 1,714
Galvanizing plants and equipment 35,274 40,099
-------- --------
36,747 41,813
Less: Allowance for depreciation 13,134 16,203
Construction in progress 214 303
-------- --------
TOTAL PROPERTY, PLANT AND EQUIPMENT, NET 23,827 25,913
-------- --------
GOODWILL, NET OF ACCUMULATED AMORTIZATION 3,389 3,389
OTHER ASSETS 358 381
-------- --------
TOTAL ASSETS $ 39,752 $ 41,431
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term obligations $ 1,425 $ 1,283
Current portion of bonds payable 634 617
Trade accounts payable 661 1,025
Accrued payroll and employee benefits 720 846
Other taxes 289 301
Other accrued liabilities 646 644
-------- --------
TOTAL CURRENT LIABILITIES 4,375 4,716
-------- --------
DEFERRED TAX LIABILITY, NET 1,054 1,187
LONG-TERM OBLIGATIONS 8,596 8,480
BONDS PAYABLE 6,964 7,283
SUBORDINATED NOTES PAYABLE 947 937
-------- --------
TOTAL LIABILITIES 21,936 22,603
-------- --------
COMMITMENTS AND CONTINGENCIES (NOTE 10)
STOCKHOLDERS' EQUITY
Common stock 819 819
Additional paid-in capital 17,438 17,464
Retained earnings 5,465 6,509
Common shares in treasury at cost (5,906) (5,964)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 17,816 18,828
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 39,752 $ 41,431
======== ========
See notes to condensed consolidated interim financial statements.
4
NORTH AMERICAN GALVANIZING & COATINGS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30 JUNE 30
------------------------- -------------------------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 2003 2002 2003 2002
---------------------------------------------- -------- -------- -------- --------
SALES $ 8,398 $ 10,103 $ 16,438 $ 19,320
Cost of sales 5,835 6,857 11,837 13,216
Selling, general & administrative expenses 1,413 1,495 2,866 2,873
Depreciation expense 696 749 1,471 1,499
-------- -------- -------- --------
TOTAL COSTS AND EXPENSES 7,944 9,101 16,174 17,588
-------- -------- -------- --------
OPERATING INCOME 454 1,002 264 1,732
Interest expense, net 299 279 607 566
-------- -------- -------- --------
Income (loss) from Continuing Operations
before income taxes 155 723 (343) 1,166
Income tax expense (benefit) 79 282 (130) 451
-------- -------- -------- --------
INCOME (LOSS) FROM CONTINUING OPERATIONS 76 441 (213) 715
Discontinued Operations:
Loss on discontinued operations, net (36) (49) (77) (99)
Loss on write-off of assets of
discontinued operations, net (754) -- (754) --
-------- -------- -------- --------
NET INCOME (LOSS) $ (714) $ 392 $ (1,044) $ 616
======== ======== ======== ========
NET INCOME (LOSS) PER COMMON SHARE
Continuing Operations:
Basic $ 0.01 $ 0.07 $ (0.03) $ 0.10
Diluted $ 0.01 $ 0.06 $ (0.03) $ 0.09
Discontinued Operations:
Basic $ (0.12) $ (0.01) $ (0.12) $ (0.01)
Diluted $ (0.12) $ (0.01) $ (0.12) $ (0.01)
Net Income (Loss):
Basic $ (0.11) $ 0.06 $ (0.15) $ 0.09
Diluted $ (0.11) $ 0.05 $ (0.15) $ 0.08
See notes to condensed consolidated interim financial statements.
5
NORTH AMERICAN GALVANIZING & COATINGS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
SIX MONTHS ENDED
JUNE 30
-----------------------
(DOLLARS IN THOUSANDS) 2003 2002
------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income (loss) $(1,044) $ 616
Loss from discontinued operation 1,197 161
Depreciation 1,471 1,499
Deferred income taxes (660) --
Non-cash directors' fee 32 32
Changes in assets and liabilities:
Accounts receivable, net (151) (995)
Inventories and other assets 272 (394)
Accounts payable, accrued liabilities and other (500) 877
------- -------
NET CASH PROVIDED BY CONTINUING OPERATIONS 617 1,796
Net cash provided by discontinued operation 79 370
------- -------
CASH PROVIDED BY OPERATING ACTIVITIES 696 2,166
INVESTING ACTIVITIES
Capital expenditures (661) (2,361)
------- -------
CASH USED IN INVESTING ACTIVITIES (661) (2,361)
FINANCING ACTIVITIES
Proceeds from long-term obligations 8,095 6,051
Payments on long-term obligations (7,827) (6,418)
Payment on bonds (302) (287)
------- -------
CASH USED IN FINANCING ACTIVITIES (34) (654)
------- -------
INCREASE (DECREASE) IN CASH 1 (849)
CASH AT BEGINNING OF PERIOD 3 853
------- -------
CASH AT END OF PERIOD $ 4 $ 4
======= =======
See notes to condensed consolidated interim financial statements.
6
NORTH AMERICAN GALVANIZING & COATINGS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2003 AND 2002
UNAUDITED
NOTE 1. BASIS OF PRESENTATION
At the Company's Annual Meeting held on May 14, 2003, stockholders approved an
amendment of the Company's certificate of incorporation to change the Company's
name from Kinark Corporation to North American Galvanizing & Coatings, Inc.,
effective July 1, 2003.
The condensed consolidated interim financial statements included in this report
have been prepared by North American Galvanizing & Coatings, Inc. ("NAGC" or 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. The condensed consolidated interim 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, 2002. 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 May 2003, the FASB issued Statement of Financial Accounting Standards No.
150, "Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity" ("SFAS No. 150"), which establishes standards for how an
issuer classifies and measures in its statement of financial position certain
financial instruments with characteristics of both liabilities and equity. It
requires that an issuer classify a financial instrument that is within its scope
as a liability, or an asset in some circumstances because that financial
instrument embodies an obligation of the issuer. SFAS No. 150 is effective for
financial instruments entered into or modified after May 31, 2003, and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. Management does not expect a material impact on the Company's
consolidated financial position or results of operations upon adoption of this
statement.
7
NOTE 3. STOCK OPTIONS
The Company accounts for its stock option plans in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees",
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 Statement of Financial Accounting Standard
No.123, "Accounting for Stock Based Compensation" ("SFAS No. 123"), the
Company's pro forma net income (loss) and basic and diluted income (loss) per
share for the six months ended June 30, 2003 and 2002 would have been as
follows:
Six Months Ended June 30
------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2003 2002
-------------------------------------------------------------------------------
Net Income (Loss), as reported $ (1,044) $ 616
Deduct: Total stock-based employee compensation
expense determined under fair value based methods,
net of tax $ (8) $ (6)
--------- ---------
Pro forma net income (loss) $ (1,052) $ 610
--------- ---------
Income (loss) per share:
Basic - as reported $ (.15) $ .09
--------- ---------
Basic - pro forma $ (.16) $ .09
--------- ---------
Diluted - as reported $ (.15) $ .08
--------- ---------
Diluted - pro forma $ (.15) $ .08
--------- ---------
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
assumptions used:
Six Months Ended June 30
------------------------
2003 2002
------------------------
Volatility 66% 66%
Discount Rate 5% 5%
Dividend Yield 0% 0%
Fair Value $ 0.83 $ 0.58
The Company issued stock options for 50,000 shares at $1.50 per share and 45,000
shares at $1.00 per share in the first six months of 2003 and 2002,
respectively.
NOTE 4. INCOME (LOSS) PER COMMON SHARE
Basic income (loss) per common share for the periods presented are computed
based upon the weighted average number of shares outstanding. Diluted income
(loss) 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. The Company had a net loss for the
three and six-month periods ended June 30, 2003 and the effect of including
dilutive securities in the earnings per common share would have been
anti-dilutive. Accordingly, options to purchase 676,199 and 677,397 common
shares were excluded from the calculation of diluted loss per share for the
three and six-month periods ended June 30, 2003, respectively.
8
Three Months Ended June 30 Number of Shares
-------------------------- -----------------------------
2003 2002
--------- ---------
Basic 6,756,452 6,713,632
Diluted 6,756,452 7,385,057
Six Months Ended June 30
------------------------
Basic 6,751,321 6,705,205
Diluted 6,751,321 7,376,068
NOTE 5. 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.
NOTE 6. GOODWILL
The Company adopted the provisions of SFAS No. 141. "Business Combinations" and
SFAS No. 142, "Goodwill and Other Intangible Assets" as required on January 1,
2002. On January 1, 2002, the Company ceased amortization of goodwill. During
the second quarter of 2002, the Company completed its transitional goodwill
impairment test in accordance with SFAS No. 142 for each reporting unit as of
January 1, 2002, and determined that goodwill was not impaired. During the
second quarter, the Company completed the annual impairment test of goodwill for
2003 and concluded goodwill was not impaired. The Company will complete the
annual impairment test on goodwill during the second quarter of each year unless
circumstances arise that require more frequent testing.
NOTE 7. BONDS PAYABLE
In 2000, the Company issued $9,050,000 of Harris County Industrial Development
Corporation Adjustable Rate Industrial Development Bonds, Series 2000 (the
"Bonds") for the purchase of land and construction of a hot dip galvanizing
plant in Harris County, Texas. The Bonds are senior to other debt of the
Company.
The Bonds bear interest at a variable rate (5.25% at June 30, 2003) that can be
converted to a fixed rate upon certain conditions outlined in the bond
agreement. The Bonds are subject to sinking fund redemption, which was $587,000
in 2002 and increases annually thereafter to a maximum redemption of $960,000 on
June 15, 2012. The Company makes monthly principal and interest payments of
approximately $86,000 into a sinking fund. The amount outstanding on these bonds
was $7,597,500 at June 30, 2003. 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.
9
NOTE 8. SUBORDINATED DEBT
In February 2001, the Company completed a $1,000,000 Private Placement of
unsecured subordinated debt. The Company utilized the proceeds to partially fund
construction of a new galvanizing facility in St. Louis, Missouri in 2002.
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 $946,676 at June 30, 2003. 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, 2003 no warrants had been
exercised.
NOTE 9. LONG-TERM OBLIGATIONS
June 30 December 31
(Dollars in Thousands) 2003 2002
---------------------- ------------- ------------
Revolving line of credit $ 4,960 $ 4,390
Term loan 2,089 2,584
Advancing Construction Loan 2,889 2,768
9.5% note due 2015 21 21
Capital leases 62 ---
------------- ------------
$ 10,021 $ 9,763
Less current portion 1,425 1,283
------------- ------------
$ 8,596 $ 8,480
------------- ------------
In November 2001, the Company amended a three-year bank credit agreement that
was scheduled to expire in September 2002. Subject to borrowing base
limitations, 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. In September 2002, the maturity of the revolving loan facility was
extended to June 30, 2004 to coincide with the maturities of the term and
advancing construction loans. Based on current discussions with the bank, the
bank has formally agreed to extend the current agreement through October 1, 2004
and started the process to amend the credit agreement with the objective to
ultimately extend its maturity to June 30, 2005.
Term loan payments are based on a three-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 maximum line of credit. Payments on
the advancing construction loan are based on a 108-month amortization schedule,
plus interest, that commenced March 1, 2003, and the loan may be prepaid without
penalty.
At June 30, 2003, $9,939,000 was outstanding under the bank credit agreement,
and $500,000 was reserved for outstanding irrevocable letters of credit to
secure payment of current and future workers' compensation claims. The Company
had available borrowing capacity of $48,000, net of outstanding irrevocable
letters of credit, under the bank revolving line of credit based on the
borrowing base calculated under the agreement.
10
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 EBITDA to capital
expenditures plus current maturity of long-term debt ratio for any fiscal
quarter of not less than 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%.
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, 2003.
NOTE 10. COMMITMENTS AND CONTINGENCIES
The Company has commitments with domestic and foreign zinc producers and brokers
to purchase zinc used in its hot dip galvanizing operations. Commitments for the
future delivery of zinc 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, 2003 the aggregate commitments for the
procurement of zinc at fixed prices were approximately $2.1 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 also
had un-priced commitments for the purchase of approximately 934,000 pounds of
zinc at June 30, 2003.
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. The
Company had no derivative instruments outstanding at June 30, 2003 or December
31, 2002, and did not utilize derivatives in the six months ended June 30, 2003
or the year ended December 31, 2002.
The Company's total off-balance sheet contractual obligations at June 30, 2003,
consist of $2,837,717 for long-term operating leases for three galvanizing
facilities and galvanizing equipment and approximately $2,100,000 for zinc
purchase commitments. The various leases for galvanizing facilities, including
option renewals, expire from 2015 to 2017. A lease for galvanizing equipment
expires in 2007.
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.
11
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. 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.
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 11. LABOR AGREEMENT
NAG's one-year labor agreement with the United Steel Workers Union covering
production workers at its Tulsa galvanizing plants originally expired March 31,
2003. The Company has not experienced any labor interruption and discussions
between the union and NAG are continuing by mutual agreement.
NOTE 12. TREASURY STOCK
In the first six months of 2003, the Company issued 21,263 shares of its common
stock from Treasury to outside Directors of the Company as payment for their
quarterly board fee in lieu of cash payments of $32,000. The shares were valued
at the average closing price of NAGC's common stock for a prior 30-day period,
as reported by the American Stock Exchange. Such shares were issued pursuant to
the Directors' prior election and notice to the Company to receive up to all of
their 2003 quarterly board fees in the Company's stock in lieu of cash. During
2002, the Company issued 56,094 shares for such purpose.
NOTE 13. RETIREMENT OBLIGATION
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.
NOTE 14. BUSINESS DEVELOPMENT
The lease term of a galvanizing facility occupied by one of NAG's subsidiaries
expires July 31, 2003, and has not been renewed. NAG is seeking to exercise an
option to purchase the facility and expects there will be no disruption to its
galvanizing business being conducted at the facility.
12
NOTE 15. DISCONTINUED OPERATIONS
In 2002, the Board of Directors authorized the Company to pursue alternative
uses for the Houston-Cunningham plant, which was temporarily idled in late 2001.
Management believed the carrying value of the plant and the related galvanizing
assets could be recovered through future operations of the plant. Accordingly,
no write-down was recognized in 2002. However, in late April 2003, new events,
combined with a further contraction of the galvanizing business in the Houston
market, resulted in the likely inability to maintain the plant as part of the
Company's continuing operations. As a result, the Company wrote-off its
investment in the formerly idled Houston-Cunningham galvanizing plant in the
second quarter ended June 30, 2003. The write-off resulted in a net loss on the
abandoned assets of $754,000, net of taxes of $443,000. The net loss from
operations for the Cunningham plant was $77,000 and $99,000, net of taxes of
$45,000 and $62,000 for the six-months ended June 30, 2003 and 2002,
respectively. The abandoned Cunningham plant has been classified as a
discontinued operation and its expenses are not included in the results of
continuing operations.
13
NORTH AMERICAN GALVANIZING & COATINGS, INC. AND SUBSIDIARY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
North American Galvanizing & Coatings, Inc.(the "Company") 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
("NAG").
During the quarter and six month periods ended June 30, 2003, there were no
significant changes to the Company's critical accounting policies previously
disclosed in Form 10-K.
RECENT DEVELOPMENTS
JULY 1, 2003 - Pursuant to approval received from the Company's stockholders at
the annual meeting held May 14, 2003, the Company's name was changed from Kinark
Corporation to North American Galvanizing & Coatings, Inc. The new name better
describes the Company's core business and reflects the culmination of
strategically refocusing the Company on hot dip galvanizing and coatings. The
Board of Directors also believes the Company has developed a very recognizable
brand name with North American Galvanizing, a name reflecting quality of product
and service, and is positioned to capitalize on that asset.
DISCONTINUED OPERATIONS - In 2002, the Board of Directors authorized the Company
to pursue alternative uses for the Houston-Cunningham plant, which was
temporarily idled in late 2001. Management believed the carrying value of the
plant and the related galvanizing assets could be recovered through future
operations of the plant. Accordingly, no write-down was recognized in 2002.
However, in late April 2003, new events, combined with a further contraction of
the galvanizing business in the Houston market, resulted in the likely inability
to maintain the plant as part of the Company's continuing operations. As a
result, the Company wrote-off its investment in the formerly idled
Houston-Cunningham galvanizing plant in the second quarter ended June 30, 2003.
The write-off resulted in a net loss on the abandoned assets of $754,000, net of
taxes of $443,000. The net loss from operations for the Cunningham plant was
$81,000 and $99,000, net of taxes of $45,000 and $62,000, for the six-months
ended June 30, 2003 and 2002, respectively. The abandoned Cunningham plant has
been classified as a discontinued operation and its expenses are not included in
the results of continuing operations discussed below.
RESULTS OF OPERATIONS
The Company's second quarter 2003 galvanizing and coatings business recorded
increased sales and returned to profitable continuing operations compared to the
first quarter 2003 as order volume from fabricators began the expected, but
gradual, improvement. Despite increased sales in the second quarter of 2003, the
Company is still experiencing significantly lower demand for galvanizing
compared to last year, a reflection of depressed economic conditions that began
to impact the Company in mid-2002.
Sales for the second quarter of 2003 were $8,398,000, a decrease of $1,705,000,
or 16.9% from second quarter 2002 sales of $10,103,000. Total production volume
in the second quarter of 2003, measured by tons of steel galvanized, decreased
22.4% from second quarter 2002 volume. Underlying production volume at the
Company's galvanizing facilities varied significantly by region, with the
weakness in some industrial markets still impacting small and medium
fabricators.
Sales for the six-months ended June 30, 2003 were $16,438,000 compared to sales
of $19,320,000 in the first six months of 2002, reflecting an 18.7% decrease in
tonnage due to the weak economy impacting construction and fabrication activity
requiring galvanizing. For the first six months of 2003, a continuation of
downward
14
pressure on selling prices due to the weak market and competitive conditions,
combined with increased natural gas costs, adversely impacted NAG's operations.
As stated in the Company's first quarter 10-Q Report, NAG's future prospects for
increased galvanizing business in 2003, as reflected by a number of its
customers, suggests a slight improvement for the remainder of this year. The
Company, however, remains guarded as to the timing of any broad-based recovery
due to weakness in long-range capital spending in a number of its major market
sectors.
For the second quarter of 2003, the Company reported operating income, before
interest expense and taxes, of $454,000 compared to an operating income of
$1,002,000 in the second quarter of 2002. Gross profit of $2,563,000 for the
second quarter of 2003 decreased 21.0% from gross profit of $3,246,000 for the
second quarter of 2002. This quarter-to-quarter decrease in 2003 gross profit
and operating earnings resulted primarily from lower volume associated with a
weak economy.
Operating income for the six-months ended June 30, 2003 was $264,000 compared to
$1,732,000 in the first six months of 2002, primarily due to lower sales and
increased costs due to higher natural gas and insurance premiums.
Depreciation expense for the second quarter of 2003 was $696,000 compared to
$749,000 for the same period of 2002.
The Company's selling, general and administrative expenses of $1,413,000 for the
second quarter of 2003 decreased 5.5% from $1,495,000 for the second quarter of
2002, reflecting measures taken by management to align administrative overhead
with the current level of sales.
Net interest expense for the second quarter of 2003 was $299,000 compared to
$279,000 for the second quarter of 2002. The increase in interest expense for
the second quarter of 2003 is primarily the result of financing for the
Company's new galvanizing plant in St. Louis which began production in 2003.
The Company's effective income tax rate for the second quarter of 2003 and 2002
were 51% and 39%, respectively. For the six months ended June 30, 2003 and 2002,
the effective tax rates were 38% and 39%, respectively. The tax rate was
adjusted in the second quarter of 2003 to bring the rate in line with an
expected effective tax rate of 38% for 2003.
For the second quarter of 2003, income from continuing operations before income
tax expense was $155,000 compared to income before taxes of $723,000 for the
second quarter of 2002. For the six months ended June 30, 2003, the loss from
continuing operations was $213,000 compared to income of $715,000 for the same
period of 2002. The decrease in income in 2003 primarily reflects lower sales
volume resulting from a measurable downturn in commercial, industrial and OEM
capital spending.
The Company's net loss for the second quarter of 2003, including discontinued
operations, was $714,000, or $.11 per share basic and diluted. This compared to
second quarter 2002 net income of $392,000, or $.06 per share basic and $.05 per
share diluted. For the six months ended June 30, 2003, the Company reported a
net loss $1,044,000, or $.15 per share basic and diluted.
15
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2003 the Company had approximately $7,800,000 in net working capital
and available borrowing capacity of approximately $48,000 under a bank credit
agreement. Under the this agreement, the Company maintains minimal cash balances
through a daily "sweep" arrangement that automatically pays down or borrows
against a revolving line of credit. Borrowing capacity on the revolver will vary
significantly as a result of the daily sweep activity.
For the six months ended June 30, 2003, the Company's continuing operating
activities generated cash of $617,000 compared to cash generated of $1,796,000
for the same period of 2002. The decrease in cash generated by 2003 activities
is due primarily to a net loss and increases in deferred income taxes and
working capital. Cash used in investing activities in the first quarter of 2003
of $661,000 consisted of capital expenditures of $423,000 to maintain current
operating facilities and $238,000 to complete construction of the new
galvanizing plant in St. Louis, Missouri. The capital expenditures were funded
by cash provided by operating activities and proceeds from an advancing
construction loan. In the six months ended June 30, 2003, cash used in financing
activities of $34,000 primarily resulted from financing activities under a
credit agreement with a bank.
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 $2,000,000, 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 six months of 2003 and 2002 was
approximately $543,000 and $598,000, respectively, for the disposal and
recycling of waste acids generated by the galvanizing operations.
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.
In the first quarter of 2003, a subsidiary of NAG, and other unrelated parties,
was notified by a third party of a claim for environmental cleanup at a site
leased by NAG in Tulsa, Oklahoma. NAG denies responsibility for contributing to
the asserted cleanup and will undertake to be dismissed from the complaint.
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. 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Company's operations include managing market risks related to change in
interest rates and zinc commodity prices.
16
INTEREST RATE RISK. The Company is exposed to financial market risk related to
changing interest rates, which will affect interest paid on its variable rate
debt. At June 30, 2003 variable rate debt aggregating $9,939,000 was outstanding
under the credit agreement with an effective rate of 4.4% and $7,598,000 was
outstanding under the bond agreement with an effective rate of 5.25% (see Note 6
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, 2003. The borrowings under variable rate facilities are
due approximately as follows: $990,000 in 2003; $2,024,000 in 2004; $8,589,000
in 2005 and $5,934,000 in years 2006 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 $17,537 based on June 30, 2003
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, 2003 the aggregate fixed price commitments for the
procurement of zinc was approximately $2,100,000. In addition, NAG had unpriced
commitments to procure approximately 934,000 pounds of zinc in 2003. With
respect to the fixed price purchase commitments, a hypothetical decrease of 10%
in the market price of zinc from the June 30, 2003 level would represent a
potential lost gross margin opportunity of approximately $210,000; however, a
favorable gross margin impact could result from a hypothetical upward price
movement above these fixed price commitments. Additionally, lower zinc prices
potentially could benefit future earnings for the unpriced commitments and
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. The
Company had no derivative instruments outstanding at June 30, 2003 or December
31, 2002, and did not utilize derivatives in the quarter ended June 30, 2003 or
the year ended December 31, 2002.
ITEM 4. CONTROLS AND PROCEDURES
The certifying officers of the Company are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the Company and have i) designed such disclosure controls
and procedures to ensure that material information relating to the Company,
including its consolidated subsidiaries, is made known to them by others within
those entities, particularly during the period in which this quarterly report is
being prepared; and ii) evaluated the effectiveness of the Company's disclosure
controls and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"). Based on this evaluation, the
chief executive officer and the chief financial officer of the Company have
concluded that the Company's disclosure controls and procedures were effective
during the quarter being reported on in this quarterly report.
The Company's certifying officers have indicated that there were no significant
changes in internal controls or in other factors that could significantly affect
internal controls subsequent to the date of their most recent evaluation,
including any corrective actions with regard to significant deficiencies and
material weaknesses.
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 14, 2003 in
New York City, NY. At the meeting, stockholders elected eight directors to serve
a one-year term, ratified the Board of Directors' appointment of Deloitte &
Touche LLP as the Company's independent accountants for the year ending December
31, 2003, and approved an amendment to the Company's certificate of
incorporation to change the Company's name to: North American Galvanizing &
Coatings, Inc. The votes for the election of directors were as follows:
For Withheld
--- --------
Linwood J. Bundy 6,077,161 60,120
Paul R. Chastain 6,084,991 52,290
Ronald J. Evans 6,048,111 89,170
Gilbert L. Klemann, II 6,077,161 60,120
Patrick J. Lynch 6,077,161 60,120
Joseph J. Morrow 6,077,161 60,120
John H. Sununu 6,075,636 61,645
Mark E. Walker 6,085,021 52,260
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).
31 Certifications pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32 Certifications pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
99 Cautionary Statements by the Company Related to
Forward-Looking Statements.
18
(b) Reports on Form 8-K
The Company filed three (3) Form 8-K Current Reports during the
quarter ended June 30, 2003:
May 14, 2003 - Announcement of First Quarter 2003 Sales and
Earnings Results.
May 21, 2003 - Announcement of Election of Directors at the
Company's Annual Meeting of Stockholders held May 14, 2003, and
Stockholders' approval to amend the Company's certificate of
incorporation to change the Company's name to: North American
Galvanizing & Coatings, Inc.
June 30, 2003 - Certificate of Amendment of Restated
Certificate of Incorporation of Kinark Corporation, to change
the Company's name to: North American Galvanizing & Coatings,
Inc.
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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:
NORTH AMERICAN GALVANIZING & COATINGS, INC.
-------------------------------------------
(Registrant)
/s/ Paul R. Chastain
---------------------------------
Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: August 7, 2003
20