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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, 2001
COMMISSION FILE NO. 1-3920
KINARK CORPORATION
------------------
(Exact name of the registrant as specified in its charter)
DELAWARE 71-0268502
-------- ----------
(State of Incorporation) (I.R.S. Employer Identification No.)
2250 EAST 73RD STREET
TULSA, OKLAHOMA 74136-6832
--------------------------
(Address of principal executive offices)
Registrant's telephone number: (918) 494-0964
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 and 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of June 30, 2001.
Common Stock $ .10 Par Value . . . . . 6,712,209
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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
Condensed Consolidated Balance Sheets as
of June 30, 2001 (unaudited), and
December 31, 2000 4
Condensed Consolidated Statements of
Operations and Comprehensive Income for
the three and six months ended
June 30, 2001 and 2000 (unaudited) 5
Condensed Consolidated Statements of
Cash Flows for the six months ended
June 30, 2001 and 2000 (unaudited) 6
Notes to Condensed Consolidated Financial
Statements for the three and six months ended
June 30, 2001 and 2000 (unaudited) 7-12
Item 2. Management"s Discussion and Analysis of
Financial Condition and Results of
Operations 13-16
Item 3. Quantitative and Qualitative Disclosures
About Market Risks 17
PART II. OTHER INFORMATION 18-19
SIGNATURES 20
1
FORWARD LOOKING STATEMENTS OR INFORMATION
Certain statements in this Form 10-Q, including information set
forth under the caption "Management"s Discussion and Analysis of Financial
Condition and Results of Operations", constitute "Forward-Looking Statements"
within the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. Such statements
are typically punctuated by words or phrases such as "anticipates," "estimate,"
"should," "may," "management believes," and words or phrases of similar import.
The Company cautions investors that such forward-looking statements included in
this Form 10-Q, or hereafter included in other publicly available documents
filed with the Securities and Exchange Commission, reports to the Company"s
stockholders and other publically available statements issued or released by the
Company involve significant risks, uncertainties, and other factors which could
cause the Company"s actual results, performance (financial or operating) or
achievements to differ materially from the future results, performance
(financial or operating) or achievements expressed or implied by such
forward-looking statements. Factors that could cause or contribute to such
differences could include, but are not limited to, changes in demand, prices,
and the raw materials cost of steel and zinc; changes in economic conditions of
the various markets the Company serves, 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 condensed consolidated balance sheet of Kinark
Corporation and subsidiary (the "Company") as of June 30, 2001, and the related
condensed consolidated statements of operations and comprehensive income, and of
cash flows for the three and six-month periods ended June 30, 2001 and 2000.
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 condensed 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 subsidiaries as of December 31, 2000, and the related
consolidated statements of earnings, stockholders" equity and comprehensive
income, and cash flows for the year then ended (not presented herein); and in
our report dated February 23, 2001, 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, 2000 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 3, 2001
3
KINARK CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
Unaudited
June 30 Dec 31
(DOLLARS IN THOUSANDS) 2001 2000
-------- --------
ASSETS
Current Assets
Cash and cash equivalents $ 889 $ 57
Trade receivables, net 5,087 5,421
Inventories 5,665 5,953
Prepaid expenses and other assets 481 200
Deferred tax asset, net 672 605
-------- --------
TOTAL CURRENT ASSETS 12,794 12,236
-------- --------
FUNDS HELD BY BOND TRUSTEE -- 1,219
PROPERTY, PLANT AND EQUIPMENT, AT COST
Land 1,690 1,600
Galvanizing plants and equipment 35,200 25,968
Other 66 66
-------- --------
36,956 27,634
Less: Allowance for depreciation (13,677) (12,014)
Construction in progress 409 7,581
-------- --------
TOTAL PROPERTY, PLANT & EQUIPMENT, NET 23,688 23,201
-------- --------
GOODWILL, NET OF ACCUMULATED AMORTIZATION 3,483 3,577
OTHER ASSETS 501 443
-------- --------
TOTAL ASSETS $ 40,466 $ 40,676
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term obligations $ 882 $ 1,001
Current portion of bonds payable 572 563
Trade accounts payable 1,206 1,241
Accrued payroll and employee benefits 847 823
Other taxes 208 194
Other accrued liabilities 661 775
-------- --------
TOTAL CURRENT LIABILITIES 4,376 4,597
-------- --------
DEFERRED TAX LIABILITY, NET 733 732
PENSION AND RELATED LIABILITIES 115 127
LONG-TERM OBLIGATIONS 8,692 9,420
BONDS PAYABLE 8,200 8,487
SUBORDINATED NOTES PAYABLE 907 --
-------- --------
TOTAL LIABILITIES 23,023 23,363
-------- --------
COMMITMENTS AND CONTINGENCIES (NOTE 7) -- --
STOCKHOLDERS' EQUITY
Common stock 819 819
Additional paid-in capital 17,464 17,364
Accumulated other comprehensive loss (19) --
Retained earnings 5,159 5,110
Common shares in treasury at cost (5,980) (5,980)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 17,443 17,313
-------- --------
TOTAL LIABILITIES &
STOCKHOLDERS" EQUITY $ 40,466 $ 40,676
======== ========
See notes to condensed consolidated financial statements
4
KINARK CORPORATION AND SUBSIDIARY
CONDENSED 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) 2001 2000 2001 2000
-------- -------- -------- --------
SALES $ 9,262 $ 10,662 $ 18,244 $ 19,864
Cost of sales 6,627 7,543 12,972 14,265
Selling, general & administrative expenses 1,274 1,436 2,589 2,886
Depreciation and amortization 892 710 1,764 1,419
-------- -------- -------- --------
TOTAL COSTS AND EXPENSES 8,793 9,689 17,325 18,570
-------- -------- -------- --------
OPERATING INCOME BEFORE CASUALTY LOSS 469 973 919 1,294
Casualty loss -- -- -- 313
-------- -------- -------- --------
OPERATING INCOME 469 973 919 981
Interest expense, net 347 249 615 461
Other expense 118 -- 219 --
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 4 724 85 520
Income tax expense (benefit) 2 318 36 228
-------- -------- -------- --------
INCOME (LOSS) FROM CONTINUING OPERATIONS 2 406 49 292
Loss from Discontinued Operations, net
of income tax benefit -- (398) -- (444)
Loss on Disposal of Discontinued Operations -- (1,663) -- (1,663)
-------- -------- -------- --------
NET INCOME (LOSS) 2 (1,655) 49 (1,815)
-------- -------- -------- --------
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 (LOSS) 25 (1,655) 30 (1,815)
======== ======== ======== ========
NET INCOME (LOSS) PER COMMON SHARE
Continuing Operations:
Basic and Diluted $ -- $ .06 $ .01 $ .04
Discontinued Operations:
Basic and Diluted $ -- $ (.31) $ -- $ (.31)
-------- -------- -------- --------
Net income (Loss):
Basic and Diluted $ -- $ (.25) $ .01 $ (.27)
======== ======== ======== ========
See notes to condensed consolidated financial statements.
5
KINARK CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
Six Months Ended
June 30
---------------------------
(DOLLARS IN THOUSANDS) 2001 2000
-------- --------
OPERATING ACTIVITIES
Net income (loss) $ 49 $ (1,815)
Loss from discontinued operations -- 2,107
Depreciation and amortization 1,764 1,418
Deferred income taxes (67) 272
Gain on disposal of assets (11) (7)
Change in assets and liabilities:
Accounts receivable, net 334 (1,604)
Inventories and other assets 30 496
Accounts payable, accrued liabilities and other (141) 105
-------- --------
Net cash provided by continuing operations 1,958 972
Net cash used in discontinued operations -- (1,212)
-------- --------
CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 1,958 (240)
INVESTING ACTIVITIES
Net proceeds from sale of discontinued operations -- 371
Capital expenditures (2,149) (3,531)
Proceeds from sale of assets 3 9
-------- --------
Net cash used in continuing operations (2,146) (3,151)
Net cash used in discontinued operations -- (254)
-------- --------
CASH USED IN INVESTING ACTIVITIES (2,146) (3,405)
FINANCING ACTIVITIES
Proceeds from subordinated debt 900 --
Proceeds from stock warrants 100 --
Proceeds from tax exempt bonds -- 9,050
Tax exempt bond funds held by bond trustee 1,219 (5,945)
Deferred financing costs (76) --
Proceeds from long-term obligations 10,124 8,060
Payments on long-term obligations (10,969) (7,718)
Repayment on bonds (278) --
-------- --------
Net cash provided by continuing operations 1,020 3,447
Net cash used in discontinued operations -- (5)
-------- --------
CASH PROVIDED BY FINANCING ACTIVITIES 1,020 3,442
-------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 832 (203)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 57 253
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 889 $ 50
======== ========
See notes to condensed consolidated financial statements.
6
KINARK CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2001 AND 2000
UNAUDITED
NOTE 1. BASIS OF PRESENTATION
---------------------
The condensed consolidated financial statements included in this
report have been prepared by Kinark Corporation (the "Company")
pursuant to the rules and regulations of the Securities and
Exchange Commission for interim reporting and include all normal
and recurring adjustments which are, in the opinion of
management, necessary for a fair presentation. These financial
statements have not been audited by an independent accountant.
The condensed consolidated financial statements include the
accounts of the Company and its 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, 2000. 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.
During the third quarter of 2000, the Company's galvanizing
subsidiary, North American Galvanizing Company ("NAG"),
negotiated a new galvanizing contract with its largest customer.
Under terms of the new one-year contract, NAG no longer provides
additional services that previously included procurement and
fabrication of steel products prior to galvanizing. In the first
half of 2001 and 2000, sales to this customer accounted for
approximately 3.8% and 15.6% of NAG's total sales, respectively.
NOTE 2. CHANGE IN ACCOUNTING PRINCIPLE
------------------------------
On January 1, 2001 the Company adopted Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). The
statement, as amended, establishes accounting and reporting
standards for derivative instruments and for hedging activities.
It requires that an entity recognize all derivatives, at fair
value, as either assets or liabilities in the balance sheet with
an offset either to shareholder's equity and comprehensive
income or income depending upon the
7
classification of the derivative. The derivative instruments
identified at January 1, 2001, under the provisions of SFAS No.
133 had been previously designated in hedging relationships that
addressed the variable cash flow exposure of forecasted
purchases of zinc; under the transition provisions of SFAS No.
133, on January 1, 2001 the Company recorded an after-tax,
cumulative-effect-type transition charge of $65,000 to
accumulated other comprehensive income related to these
derivatives. The Company did not elect subsequent hedge
accounting for the derivative existing at January 1, 2001.
Accordingly, all changes in the fair value of that derivative
are recorded in income.
NOTE 3. EARNINGS PER COMMON SHARE
-------------------------
Basic earnings per common share for the periods presented is
computed based upon the weighted average number of shares
outstanding. Diluted earnings per common share for the periods
presented is 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 2001 2000
--------------------------
Basic 6,712,209 6,712,211
Diluted 7,386,583 6,712,211
Six Months Ended June 30
------------------------
Basic 6,712,209 6,712,215
Diluted 7,378,875 6,715,215
Substantially all of the Company's outstanding stock options
have no dilutive effect on the calculation of earnings due to
the option price being higher than the share value. The number
of options excluded from the calculation of diluted earnings per
share are 339,625 and 380,500 at June 30, 2001 and 2000,
respectively.
NOTE 4. INVENTORIES
-----------
Inventories consist primarily of raw zinc "pigs," molten zinc in
galvanizing kettles and other chemicals and materials used in
the hot dip galvanizing process. Inventories are stated at the
lower of cost or market with market value based on ultimate
realizable value from the galvanizing process. Zinc cost is
determined on a last-in-first-out (LIFO) basis. Other
inventories are valued primarily on an average cost basis.
NOTE 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
8
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,
2001) that can be converted to a fixed rate upon certain
conditions outlined in the bond agreement. The Bonds are subject
to annual sinking fund redemption of $230,000 commencing on June
15, 2001, which increases annually thereafter to a maximum
redemption of $960,000 on June 15, 2012. Beginning January 2001,
the Company began making monthly amortization payments of
principal and interest of $86,000 into a sinking fund. 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 subordinated debt with stock warrants to purchase
666,666 shares of common stock of the Company. $100,000 of the
proceeds has been allocated to the stock warrants. The Company
plans to use these proceeds for general working capital and
construction of a new galvanizing plant in St. Louis.
Participation in the Private Placement was offered to the
Company's directors and eligible stockholders holding a minimum
of 100,000 shares of common stock. The notes mature February 17,
2006 and bear interest at 10% payable annually. 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, for cash at an Exercise Price of $.856
per share (fair value at date of issuance) or by surrender of
shares of the Company's common stock with a fair market value
equal to the aggregate Exercise Price. As of June 30, 2001 no
warrants had been exercised.
NOTE 7. LONG-TERM OBLIGATIONS
---------------------
June 30 December 31
(Dollars in Thousands) 2001 2000
------------------------------------------------------------
Revolving lines of credit $ 5,473 $ 6,666
Term loan 4,052 3,407
10.0% note due 2001 --- 289
9.5% note due 2015 22 23
Capital leases 27 36
------------------------------------------------------------
9,574 10,421
Less current portion 882 1,001
------------------------------------------------------------
$ 8,692 $ 9,420
Kinark has a credit agreement with a domestic bank which
provides an original term loan of $4,200,000 and a maximum line
of credit of $9,000,000 for working capital and
9
general corporate purposes. The expiration date of this
agreement is September 2002. Interest rates on borrowings are
based upon current bank prime rate or, at the option of the
Company, upon the London Interbank Offered Rate, subject to a
rate margin adjustment determined by the Company's consolidated
debt service ratio.
Substantially all of the Company"s accounts receivable,
inventories, fixed assets and the stock of its subsidiary, North
American Galvanizing Company are pledged as collateral under the
agreement, and the agreement is secured by a guaranty from this
subsidiary. 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
capital expenditures ratio. The Company was in compliance with
such covenants at June 30, 2001.
During the second quarter of 2001, the Company amended and
increased the bank Term Loan $1,016,000 to $3,980,584. Proceeds
were used to pay an existing promissory note of $266,000 and to
pay down the Company's revolving line of credit in the amount of
$750,000. 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.
At June 30, 2001, $9,525,000 was outstanding under the
agreement, and $275,000 was reserved for outstanding irrevocable
letters of credit for workers' compensation insurance coverage.
At June 30, 2001, the Company had additional borrowing capacity
of $401,000, net of outstanding letters of credit, under its
revolving line of credit that reflected the underlying value of
its accounts receivables and inventories.
NOTE 8. COMMITMENTS AND CONTINGENCIES
-----------------------------
The Company has commitments with domestic and foreign zinc
producers to purchase zinc used in its hot dip galvanizing
operations. The terms of the commitments do not exceed twelve
months. Commitments for the future delivery of zinc reflect
rates quoted on the London Metals Exchange and are not subject
to price adjustment. At June 30, 2001, the aggregate commitments
for the procurement of zinc at fixed prices were $6,742,000 and
unpriced commitments for the purchase of zinc represented
approximately 334 tons.
The Company utilizes derivative instruments, from time-to-time,
which are intended to offset the impact of potential
fluctuations in the market price of zinc. At June 30, 2001,
commodity collar contracts with a bank were in place for a
notional quantity of 400,000 pounds of zinc per month,
representing a nominal percentage of NAG's projected zinc usage
for the balance of 2001. These contracts contain a cap and floor
price for a notional quantity of zinc, and they are cash settled
each month based on the average of the daily closing price of
zinc on the London Metal Exchange. For each potential decrease
of $.01 per pound in the market price of zinc below the
contractual floor price, the Company will incur a cash
settlement cost of $4,000 per month. The Company has elected not
to account for these instruments as hedges and changes in their
market value
10
and the monthly cash settlement amounts are recorded in other
expense. The contracts expire in August and September 2001. The
fair value of the commodity collar contracts in place at June
30, 2001 was a loss of $139,000. 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 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
---------------
On April 1, 2001, NAG concluded negotiations of a one-year labor
agreement with the United Steel Workers Union covering
approximately 70 production workers at its Tulsa galvanizing
plants. The new agreement is not materially changed from the
previous agreement which expired March 31, 2001.
11
NOTE 10. DISCONTINUED OPERATIONS
-----------------------
In the second quarter of 2000, the Company sold its Lake River
Corporation ("Lake River") and North American Warehousing
Company ("NAW") subsidiaries, comprising the Company"s bulk
liquids terminal and public warehousing businesses. Accordingly,
second quarter and six-month 2000 operating results for the Lake
River and NAW segments were accounted for as discontinued
operations, and amounts in the financial statements and related
notes for all periods shown have been restated to reflect
discontinued operations accounting.
NOTE 11. SEGMENT DISCLOSURES
-------------------
Subsequent to the sale of Lake River and NAW, the Company"s sole
business is hot dip galvanizing and coatings which is conducted
through its wholly owned subsidiary, North American Galvanizing
Company.
NOTE 12. NEW ACCOUNTING STANDARDS
------------------------
In July 2001, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 141,
Business Combinations" ("SFAS No. 141") which addresses
financial accounting and reporting for business combinations and
requires that all business combinations initiated after June 30,
2001 be accounted for under the purchase method. Use of the
pooling of interests method is no longer permitted.
In July 2001, the 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
no longer be amortized but instead be periodically reviewed for
impairment. This standard had no impact on second quarter 2001
results and the Company is in the process of evaluating the
effect of this standard on its financial reporting.
12
KINARK CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Kinark Corporation's (the "Company") sole line of business is hot dip
galvanizing and coatings, which is conducted through its wholly-owned
subsidiary, North American Galvanizing Company.
In 2000, Kinark exited the chemical storage and warehousing business with
the sale of its wholly-owned subsidiaries, Lake River Corporation ("Lake River")
and North American Warehousing Company ("NAW"). As a result, these subsidiaries
have been classified as discontinued operations for accounting purposes and
their revenues and expenses are not included in the results of continuing
operations analyzed below. These subsidiaries accounted for approximately 15%
and 19% of the Company's consolidated sales in the second quarter and first six
months of 2000, respectively.
During the third quarter of 2000, NAG discontinued steel fabrication which
had been provided as a specialty service for its largest customer. Sales to this
customer were 3.1% and 17.7% of NAG's total sales in the second quarter of 2001
and 2000 and 3.8% and 15.6% in the first six months of 2001 and 2000,
respectively for both periods. The Company no longer provides steel fabrication
services and has no plans to resume such services in the future.
During the second quarter ended June 30, 2001, the Company completed a
reorganization of corporate structure and personnel in NAG that is expected to
result in annual savings of approximateley $350,000.
RESULTS OF OPERATIONS
REVENUES
Quarter Ended June 30 2001 2000
---- ----
Galvanizing $ 9,262 100.0% $ 9,215 86.4%
Steel Fabrication --- --- 1,447 13.6%
-------- ------- ------- -------
Total $ 9,262 100.0% $10,662 100.0%
Six Months Ended June 30 2001 2000
Galvanizing $18,244 100.0% $17,454 87.9%
Steel Fabrication --- --- 2,410 12.1%
-------- ------- ------- -------
Total $18,244 100.0% $19,864 100.0%
Galvanizing sales for the second quarter of 2001 increased 3.1% to
$9,262,000 from sales of $8,982,000 for the first quarter of 2001. Despite signs
of slowing activity in a number of market sectors, NAG's galvanizing tonnage
increased 1.4% in the second quarter of 2001 over the record level produced in
the first quarter of this year. Significantly, NAG's average selling prices
continued to strengthen during the second quarter of 2001, reflecting the
Company's commitment to provide improved service and value to its customers:
large and small end-users of galvanized structural steel fabrications.
13
Operating income for the second quarter of 2001 was $469,000 compared to
$450,000 for the first quarter of 2001. Gross profit margin on sales of 28.4%
for the second quarter of 2001 included full absorption of startup costs
associated with NAG's newest galvanizing facility commissioned in February 2001
and compared to a gross profit margin of 29.4% in the first quarter of 2001.
Galvanizing sales for the second quarter and first half of 2001 exceeded
sales for the comparable periods in 2000, excluding revenues from steel
fabrication. Galvanizing sales in the second quarter of 2001 increased
approximately 1% to $9,262,000, compared to sales of $9,215,000 in the same
period a year ago. For the six months ended June 30, 2001, galvanizing sales
increased 4.5% to $18,244,000 versus sales of $17,454,000 a year ago. Operating
income for the second quarter of 2001 was $469,000 compared to $973,000 for the
second quarter of 2000. The decrease in operating income for the second quarter
of 2001 compared to the second quarter of 2000 was due primarily to the NAG's
decision to discontinue metal fabrication service, slightly lower average
selling prices for galvanizing and increased depreciation for the new
galvanizing plant. For the six-month period ended June 30, 2001, operating
income was $919,000 compared to $981,000 for the first half of 2000. In the
first quarter of 2000, NAG recorded a casualty loss of $313,000 for the expenses
associated with a kettle failure.
Depreciation and amortization of goodwill for the second quarter and first
six months of 2001 was $892,000 and $1,764,000, respectively, compared to
$710,000 and $1,419,000 for the respective periods of 2000. The increase is
attributable to the addition of NAG's new galvanizing facility and capital
expenditures and improvements made in 2000.
Selling, general and administrative expenses ("SG&A") were lower for all
periods of 2001 compared to 2000, with reductions in this area reflecting the
Company's restructuring programs and, in general, efforts to control expenses.
SG&A for the second quarter of 2001 was $1,274,000 compared to $1,436,000 for
the same quarter a year ago. For the six months ended June 30, 2001, SG&A
decreased $297,000, or 10.1% to $2,589,000 from $2,886,000 in the comparable
period a year ago.
Net interest expense increased $98,000 to $347,000 for the second quarter
of 2001 and increased $154,000 to $615,000 for the first six months of 2001,
over the comparable periods of 2000 primarily due to the added interest expense
of the Company's 5.25% industrial revenue bonds that was capitalized in 2000
during construction of the new galvanizing facility. The Company incurred other
expense of $219,000 for the six months ended June 30, 2001 due to changes in the
fair value of derivative instruments intended to offset the impact of
fluctuations in the market price of zinc used in the galvanizing process. The
Company's effective income tax rate for the three and six-month periods ended
June 30, 2001 was 42% compared to 43.9% for the same periods of 2000. These
rates were higher than federal statutory rates primarily due to non-deductible
amortization of goodwill and state income taxes.
Income from continuing operations before income taxes was $4,000 for the
second quarter of 2001 compared with income of $724,000 in the second quarter of
2000. For the six months ended June 30, 2001, income from continuing operations
before income taxes was $85,000 compared with income of $520,000 in the same
period a year ago. For the second quarter of 2001, the Company reported net
income from continuing operations of $2,000, $0.0 per share, compared to net
income of $406,000, or $.06 per share, for the second quarter of 2000. Net
income from continuing operations of $49,000, or $.01 per share, for the
six-month period ended June 30, 2001 compared to net income of $292,000, or $.04
per share, for the same period in 2000.
14
LIQUIDITY AND CAPITAL RESOURCES
For the first half of 2001, the Company's continuing operating activities
generated cash of $1,958,000 compared to cash generated of $972,000 in the first
half of 2000. The increase in cash generated by 2001 operating activities over
the same period a year ago is due primarily to a reduction in inventory and
improved collections of accounts receivable. During the first half of 2001, the
Company improved turn-over of trade accounts and reduced accounts receivables
$334,000; inventories were reduced $288,000 as zinc raw material stock was
realigned to support current production. In addition, during the first half of
2001, accounts payable, accrued liabilities and current debt obligations payable
within one year decreased $221,000.
Capital expenditures in the first half of 2001 were $2,149,00, of which
$1,546,000 was for the new galvanizing facility in Houston. The company's
financing activities in the first half of 2001 included making payments of
$10,969,000 on long-term obligations, payments of $278,000 on tax exempt bonds
and receiving proceeds of $10,124,000 from utilization of the line of credit,
for a net decrease of $1,123,000 in long-term obligations. In March 2000, the
Company obtained $9,050,000 from the issuance of tax-exempt industrial revenue
bonds, the proceeds of which were used for the construction of a new galvanizing
facility in Houston, Texas. In February 2001, the Company issued $1,000,000 of
subordinated debt, the proceeds of which are expected to be utilized for
construction of a new galvanizing facility in St. Louis, Missouri. In June 2001,
the Company increased the bank term loan $1,016,000, the proceeds of which were
used to pay down the line of credit and payoff a promissory note. The Company's
current credit facility includes a maximum $9,000,000 revolving line of credit
under a credit agreement that expires September 2002. The Company's availability
under the revolver was $401,000 at June 30, 2001. The Company believes it has
the ability to generate cash and/or available credit facilities to meet its
foreseeable needs for working capital planned capital expenditures.
ENVIRONMENTAL MATTERS AND OTHER CONTINGENCIES
As previously reported, NAG was notified in 1997 by the Illinois
Environmental Protection Agency ("IEPA") that it was a potentially responsible
party under the Comprehensive Environmental Response, Compensation, and
Liability Information System (CERCLIS) in connection with cleanup of an
abandoned site formerly owned by Sandoval Zinc Co. The IEPA notice includes NAG
as one of 59 organizations which arranged for the treatment and disposal of
hazardous substances at Sandoval. Based on current information and the
preliminary stage of investigation, NAG"s share of any probable future costs
cannot be estimated at this time.
During 2000, NAG resolved an insurance claim arising from the failure of a
galvanizing kettle during 1999. A major part of the claim resulted from
additional costs incurred to galvanize product at an alternate NAG location in
order to meet delivery commitments. NAG recorded a casualty loss of $313,000
during the first quarter of 2000, primarily representing costs incurred during
that period to transport product to an alternative galvanizing location.
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
15
was approximately $481,000 in the first six months of 2001 and $524,000 for the
same period in 2000, 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 and
chemicals businesses, the Company will have additional environmental compliance
costs associated with past, present, and future operations. Management has
committed resources to discovering and eliminating environmental issues as they
arise. Because of the frequent changes in environmental technology, laws and
regulations management cannot reasonably attempt to quantify the Company's
potential costs in this area.
DISCONTINUED OPERATIONS
During the second quarter of 2000, the Company elected to sell its Lake
River and NAW subsidiaries, comprising the Company"s bulk liquids terminal and
public warehousing businesses.
16
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Kinark's current operations include managing market risks related to
changes in interest rates and zinc commodity prices.
INTEREST RATE RISK. Kinark is exposed to financial market risk
related to changing interest rates. Changing interest rates will affect interest
paid on Kinark"s variable rate debt. At June 30, 2001, variable rate debt
consisting of $9,525,000 was outstanding under the credit agreement with an
effective rate of 6.75% and $8,772,000 was outstanding under the bond agreement
with an effective rate of 5.25% (see Note 5 to Condensed Consolidated Financial
Statements). In addition, the Company's fixed rate debt consisting of $1,000,000
of 10% subordinated promissory notes was outstanding. The borrowings under these
facilities are due as follows: $709,000 in 2001, $9,689,000 in 2002, $617,000 in
2003 and $8,282,000 in years 2004 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 approximately $18,300 based on June 30, 2001
outstanding borrowings. The actual effect of changes in interest rates is
dependent on actual amounts outstanding which vary under the revolving credit
facility. The Company monitors interest rates and has sufficient flexibility to
renegotiate the loan agreement, without penalty, in the event market conditions
and interest rates change.
ZINC PRICE RISK. NAG enters into purchase commitments with domestic
and foreign zinc producers to purchase certain of its zinc requirements for its
hot dip galvanizing operations. Commitments for the future delivery of zinc
reflect rates quoted on the London Metals Exchange which are not subject to
future price adjustment. At June 30, 2001, the aggregate commitments for the
procurement of zinc were approximately $6.7 million. Additional procurement
commitments of approximately 334 tons were unpriced at June 30, 2001. During the
third and fourth quarters of 2000, the Company entered into two one-year
commodity collar contracts which are intended to offset the impact of potential
fluctuations in the market price of zinc. The contracts are cash settled monthly
based on a commodity reference price, determined by the average of the daily
closing price of zinc on the London Metal Exchange. At June 30, 2001, the
commodity collar contracts were in place or a notional quantity of 400,000
pounds of zinc per month through September 30, 2001. The fair value of the
commodity collar contracts in place at this date was an unrealized loss of
$139,000. Depending on zinc price trends, and other factors, the Company may
elect to increase its use of zinc derivative instruments from time-to-time.
Management believes these procurement commitments and the use of derivative
contracts ensure adequate supplies of zinc and may assist in stabilizing income
from its galvanizing operations. With respect to the zinc purchase commitments,
a potential decrease of 10% in the market price of zinc from the June 30, 2001
level would cause a lost gross margin opportunity of approximately $670,000.
With respect to the zinc commodity collar contract, for each potential decrease
of $.01 per pound in the market price of zinc below the contractual floor price
the Company would incur an additional cash settlement of $4,000 per month.
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 2001 Annual Meeting of the Company"s stockholders was held
on Monday, May 14, 2001 in New York City, NY. At the meeting,
the stockholders elected eight directors.
The votes for the election of directors were as follows:
For Withheld
--- --------
Linwood J. Bundy 6,080,127 58,827
Paul R. Chastain 6,075,457 63,497
Ronald J. Evans 6,077,706 61,248
Gilbert L. Klemann, II 6,071,067 67,887
Patrick J. Lynch 6,070,067 68,887
Joseph J. Morrow 6,074,527 64,427
John H. Sununu 6,073,365 65,589
Mark E. Walker 6,078,527 60,538
ITEM 5. OTHER INFORMATION
-----------------
Not applicable.
18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) Exhibits
3.1 The Company's Restated Certificate of
Incorporation (incorporated by reference to
Exhibit 3.1 to the Company's Pre-Effective
Amendment No. 1 to Registration Statement on Form
S-3 (Reg. No. 333-4937) filed on June 7, 1996).
3.2 The Company's Amended and Restated Bylaws
(incorporated by reference to Exhibit 3.2 to the
Company"s Quarterly Report on Form 10-Q dated
March 31, 1996).
27 Financial Data Schedule
99 Cautionary Statements by the Company Related to
Forward-Looking Statements
(b) Reports on Form 8-K
The Company did not file a Form 8-K Current Report during
the quarter ended June 30, 2001.
19
SIGNATURES
Pursuant to the requirements of Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized:
KINARK CORPORATION
--------------------
Registrant
/S/Paul R. Chastain
-----------------------------
Paul R. Chastain
Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: August 13, 2001
20