================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED SEPTEMBER 30, 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 IdentificationNo.)
2250 EAST 73RD STREET
TULSA, OKLAHOMA 74136-6832
(Address of principal executive offices)
Registrant's telephone number: (918) 494-0964
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 and 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of September 30, 2001:
Common Stock $.10 Par Value .........6,712,209
================================================================================
KINARK CORPORATION AND SUBSIDIARY
INDEX TO QUARTERLY REPORT ON FORM 10-Q
PART I. FINANCIAL INFORMATION PAGE
----
Forward Looking Statements or Information 2
Item 1. Financial Statements
Independent Accountants' Review Report 3
Consolidated Balance Sheets as of
September 30, 2001 (unaudited), and
December 31, 2000 4
Consolidated Statements of Operations and
Comprehensive Income for the three and nine months
ended September 30, 2001 and 2000 (unaudited) 5
Consolidated Statements of Cash Flows for the
Nine months ended September 30, 2001 and 2000
(unaudited) 6
Notes to Consolidated Financial Statements for
the three and nine months ended September 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 16-17
PART II. OTHER INFORMATION 17
SIGNATURES 18
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 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 Form 10-Q could cause such a material
difference to occur and investors are referred to Exhibit 99 for such cautionary
statements.
2
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
To the Board of Directors and Stockholders of
Kinark Corporation:
We have reviewed the accompanying consolidated balance sheet of Kinark
Corporation and subsidiary (the "Company") as of September 30, 2001, and the
related consolidated statements of operations and comprehensive income, and of
cash flows for the three and nine-month periods ended September 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 consist principally of applying analytical procedures to
financial data and of making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted in the United States of
America, the objective of which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to such consolidated financial statements for them to be in conformity
with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of
Kinark Corporation and subsidiary as of December 31, 2000, and related
consolidated statements of operations, 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.
/s/Deloitte & Touch LLP
Tulsa, Oklahoma
November 12, 2001
3
KINARK CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
UNAUDITED
September 30 December 31
(DOLLARS IN THOUSANDS) 2001 2000
-------------------------------------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents $ 50 $ 57
Trade receivables, net 6,019 5,421
Inventories 5,337 5,953
Prepaid expenses and other assets 397 200
Deferred tax asset, net 561 605
-------- --------
TOTAL CURRENT ASSETS 12,364 12,236
-------- --------
FUNDS HELD BY BOND TRUSTEE -- 1,219
PROPERTY, PLANT AND EQUIPMENT, AT COST
Land 1,712 1,600
Galvanizing plants and equipment 35,525 25,968
Other 66 66
-------- --------
37,303 27,634
Less: Allowance for depreciation (14,530) (12,014)
Construction in progress 410 7,581
-------- --------
TOTAL PROPERTY, PLANT AND EQUIPMENT, NET 23,183 23,201
-------- --------
GOODWILL, NET OF ACCUMULATED AMORTIZATION 3,436 3,577
OTHER ASSETS 486 443
-------- --------
TOTAL ASSETS $ 39,469 $ 40,676
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term obligations $ 928 $ 1,001
Current portion of bonds payable 580 563
Trade accounts payable 773 1,241
Accrued payroll and employee benefits 776 823
Other taxes 296 194
Other accrued liabilities 661 775
-------- --------
TOTAL CURRENT LIABILITIES 4,014 4,597
-------- --------
DEFERRED TAX LIABILITY, NET 733 732
PENSION AND RELATED LIABILITIES 109 127
LONG-TERM OBLIGATIONS 7,892 9,420
BONDS PAYABLE 8,050 8,487
SUBORDINATED NOTES PAYABLE 912 --
-------- --------
TOTAL LIABILITIES 21,710 23,363
-------- --------
COMMITMENTS AND CONTINGENCIES (NOTES 7) -- --
STOCKHOLDERS' EQUITY
Common stock 819 819
Additional paid-in capital 17,464 17,364
Retained earnings 5,456 5,110
Common shares in treasury at cost (5,980) (5,980)
-------- --------
TOTAL STOCKHOLDERS' EQUITY 17,759 17,313
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 39,469 $ 40,676
======== ========
See notes to consolidated financial statements.
4
KINARK CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
---------------------- ----------------------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 2001 2000 2001 2000
---------------------------------------------------------------------------------------------------------
SALES $ 9,812 $ 9,627 $ 28,056 $ 29,491
Cost of sales 6,574 6,605 19,546 20,870
Selling, general & administrative expenses 1,443 1,314 4,032 4,200
Depreciation and amortization 907 723 2,671 2,142
-------- -------- -------- --------
TOTAL COSTS AND EXPENSES 8,924 8,642 26,249 27,212
-------- -------- -------- --------
OPERATING INCOME BEFORE CASUALTY LOSS 888 985 1,807 2,279
Casualty loss -- -- -- 313
-------- -------- -------- --------
OPERATING INCOME 888 985 1,807 1,966
Interest expense, net 337 247 952 708
Other (income) expense 39 (157) 258 (157)
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES 512 895 597 1,415
Income tax expense 215 421 251 649
-------- -------- -------- --------
INCOME FROM CONTINUING OPERATIONS 297 474 346 766
Loss from Discontinued Operations,
net of Income Tax Benefit -- -- -- (444)
Loss on Disposal of Discontinued Operations -- -- -- (1,663)
-------- -------- -------- --------
NET INCOME (LOSS) $ 297 $ 474 $ 346 $ (1,341)
-------- -------- -------- --------
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 $48 19 -- 65 --
OTHER COMPREHENSIVE INCOME 19 -- -- --
COMPREHENSIVE INCOME (LOSS) $ 316 $ 474 $ 346 $ (1,341)
======== ======== ======== ========
NET INCOME (LOSS) PER COMMON SHARE
Continuing Operations:
Basic and Diluted $ .04 $ .07 $ .05 $ .11
Discontinued Operations:
Basic and Diluted -- -- -- (.31)
Net Income (Loss):
Basic and Diluted $ .04 $ .07 $ .05 $ (.20)
======== ======== ======== ========
See notes to consolidated financial statements.
5
KINARK CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
Nine Months Ended
September 30
---------------------------
(DOLLARS IN THOUSANDS) 2001 2000
---------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income (loss) $ 346 $ (1,341)
Loss from discontinued operations -- 2,107
Depreciation and amortization 2,671 2,142
Deferred income taxes 45 377
Gain on disposal of assets (11) (164)
Changes in assets and liabilities:
Accounts receivable, net (598) (318)
Inventories and other assets 464 532
Accounts payable, accrued liabilities and other (545) 222
-------- --------
Net cash provided by continuing operations 2,372 3,557
Net cash used in discontinued operations -- (1,050)
-------- --------
CASH PROVIDED BY OPERATING ACTIVITIES 2,372 2,507
INVESTING ACTIVITIES
Net proceeds from sale of discontinued operations -- 371
Capital expenditures (2,504) (6,639)
Proceeds from sale of assets 3 259
-------- --------
Net cash used in continuing operations (2,501) (6,009)
Net cash used in discontinued operations -- (254)
-------- --------
CASH USED FOR INVESTING ACTIVITIES (2,501) (6,263)
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 (3,662)
Deferred financing cost (76) --
Proceeds from long-term obligations 12,913 10,841
Payments on long-term obligations (14,514) (12,622)
Repayment on bonds (420) --
-------- --------
Net cash provided by continuing operations 122 3,607
Net cash used in discontinued operations -- (5)
-------- --------
CASH PROVIDED BY FINANCING ACTIVITIES 122 3,602
DECREASE IN CASH AND CASH EQUIVALENTS (7) (154)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 57 253
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 50 $ 99
======== ========
See notes to consolidated financial statements.
6
KINARK CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
UNAUDITED
NOTE 1. BASIS OF PRESENTATION
The 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 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 contract, NAG no longer provides
additional services that previously included procurement and fabrication of
steel products prior to galvanizing. For the nine months ended September 30,
2001 and 2000, sales to this customer accounted for approximately 3.8% and 13.2%
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
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
7
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 derivatives existing at January 1, 2001. Accordingly, all changes in the
fair value of those derivatives are recorded in other (income) expense.
NOTE 3. EARNINGS PER COMMON SHARE
Basic earnings per common share for the periods presented are
computed based upon the weighted average number of shares outstanding. Diluted
earnings per common share for the periods presented are based on the weighted
average shares outstanding, adjusted for the assumed exercise of stock options
and warrants using the treasury stock method.
Three Months Ended September 30 N u m b e r o f S h a r e s
------------------------------- -----------------------------
2001 2000
Basic 6,712,209 6,712,209
Diluted 7,378,875 6,712,209
Nine Months Ended September 30
-------------------------------
Basic 6,712,209 6,712,213
Diluted 7,378,875 6,712,213
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
market value. The number of options excluded from the calculation of diluted
earnings per share are 347,333 and 362,500 at September 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 costs basis.
NOTE 5. BONDS PAYABLE
In the first quarter of 2000, the Company issued $9,050,000 of
Harris County Industrial Development Corporation Adjustable Rate Industrial
Development Bonds, Series 2000 (the "Bonds"). The Bonds are senior to other debt
of the Company. Bond proceeds were used by NAG for the purchase of land and
construction of a hot dip galvanizing plant in Harris County, Texas, which
became operational during the first quarter of 2001.
The Bonds bear interest at a variable rate (5.25% at September 30, 2001) that
can be convertd to a fixed rate upon certain conditions outlined in the bond
agreement. Commencing June 15, 2001, the Bonds became subject to annual sinking
funds redemption of $230,000, which
8
increases annually thereafter to a maximum redemption of $960,000 on June 15,
2012. Beginning January 2001, the Company began making monthly principal and
interest payments 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 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
other 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 was 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 16, 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 September 30, 2001 no warrants had been
exercised.
NOTE 7. LONG-TERM OBLIGATIONS
(Dollars in Thousands) September 30, 2001 December 31, 2000
------------------------------------------------------------------
Revolving line of credit $4,932 $6,666
Term loan 3,845 3,407
9.5% note due 2015 22 23
Capital leases 21 36
10.0% note due 2001 --- 289
------------------------------------------------------------------
$8,820 $10,421
Less current portion 928 1,001
------------------------------------------------------------------
$7,892 $ 9,420
------------------------------------------------------------------
Kinark has a credit agreement with domestic bank which provides an original term
loan of $4,200,000 and a maximum line of revolving credit of $9,000,000 for
working capital and general corporate purposes. During the third quarter ended
September 30, 2001, the Company received a commitment from the bank to amend the
credit agreement to extend the maturity of the revolving line of credit from
September 30, 2002 to June 30, 2003, and to provide $3,000,000 financing for a
new galvanizing facility in St. Louis. 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.
9
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 September 30, 2001, $8,777,000 was outstanding under the agreement, and
$275,000 was reserved for outstanding irrevocable letters of credit for workers'
compensation insurance coverage. At September 30, 2001, the Company had
additional borrowing capacity of $216,000, net of outstanding letters of credit,
under its revolving line of credit based on the underlying value of its accounts
receivables and inventories.
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 September 30, 2001.
NOTE 8. COMMITMENTS AND CONTINGENCIES
The Company has commitments through 2002 with domestic and
foreign zinc producers to purchase zinc used in its hot dip galvanizing
operations. Commitments for the future delivery of zinc reflect rates quoted on
the London Metals Exchange. At September 2001, the aggregate commitments for the
procurement of zinc at fixed prices were approximately $8,300,000 and un-priced
commitments for the purchase of zinc represented approximately 1,500 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. Due to the decline in the market price of zinc in 2001, the Company
elected not to replace zinc commodity collar contracts which expired during the
third quarter of 2001. The Company expects to continue evaluating derivative
instruments to minimize the impact of zinc price fluctuations, as part of its
inventory management strategy.
NAG was notified in 1997 by the Illinois Environmental Protection Agency
("IEPA") that it was one of a number of potentially responsible parties under
the Comprehensive Environmental Response, Compensation, and Liability
Information System ("CERCLIS") in connection with cleanup of an abandoned site
formerly owned by Sandoval Zinc. Co. ("Sandoval"). NAG arranged for the
treatment and disposal of hazardous substances at Sandoval in the ordinary
course of its business. Based on current information and the stage of
investigation, NAG's share of any probable future costs 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.
10
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 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. 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, third quarter and nine 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 10. 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 11. 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
interest 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 third
quarter 2001 results and the Company is in the process of evaluating the effect
of this standard on its financial reporting.
11
In August 2001, the FASB issued Statement of Financial Accounting Standards No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No.
144") which is effective for fiscal years beginning after December 15, 2001.
This statement supersedes Statement of Financial Accounting Standard No. 121,
"Accounting for the Impairment of Long-Lived Assets to Be Disposed Of," and the
accounting and reporting provisions relating to disposal of a segment of a
business contained in Accounting Principles Board Opinion No. 30, "Reporting the
Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." This Statement also amends Accounting Research Bulletin No. 51,
"Consolidated Financial Statements" to eliminate the exception to consolidation
for which control is likely to be temporary. 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 sole line of business is hot dip galvanizing and
coatings, which is conducted through its wholly-owned subsidiary, North American
Galvanizing Company.
During the third quarter of 2000, NAG discontinued steel fabrication
which had been provided as a specialty service for its largest galvanizing
customer. Sales to this customer were 3.7% and 8.1% of NAG's total sales in the
third quarter of 2001 and 2000 and 3.8% and 13.2% in the first nine months of
2001 and 2000, respectively for both periods. The Company no longer provides
steel fabrication services and currently has no plans to resume such services in
the future.
In the second quarter of 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. Through the first six months of
2000, these subsidiaries accounted for approximately 19% of the Company's
consolidated sales.
RESULTS OF OPERATIONS
Revenues $(000)
Quarter Ended September 30 2001 2000
--------------------------------------------------------------------------------
Galvanizing $9,812 100.0% $9,288 96.5%
Steel Fabrication --- --- 339 3.5%
-----------------------------------------------
Total $9,812 100.0% $9,627 100.0%
Nine Months Ended September 30
Galvanizing $28,056 100.0% $26,742 90.7%
Steel Fabrication --- --- 2,749 9.3%
-----------------------------------------------
Total $28,056 100.0% $29,491 100.0%
13
Galvanizing sales increased for the second consecutive quarter to $9,812,000 in
the third quarter of 2001, an improvement of 5.9% over the second quarter of
2001 and up 1.9% over sales of $9,627,000 for the third quarter of 2000.
Galvanizing volume at NAG's multi-state plant locations rose 9.7% in the third
quarter of 2001 over the record tonnage produced in the second quarter of 2001.
Adding strength to this positive trend, NAG has maintained improved pricing
levels in 2001 that reflect increased value for its customers through reliable
on-time delivery of high-quality galvanized products.
Excluding revenues from steel fabrication, galvanizing sales for the third
quarter and first nine months of 2001 exceeded sales for the comparable periods
in 2000. Core galvanizing sales in the third quarter of 2001 increased 6.3% to
$9,812,000 compared to like sales of $9,288,000 in the same quarter a year ago.
For the nine months ended September 30, 2001, galvanizing sales increased 4.9%
to $28,056,000 versus sales of $26,742,000 a year ago.
Operating income of $888,000 for the third quarter of 2001 approximately doubled
over the second quarter of 2001 as a result of increased sales and higher gross
profit margins. Gross profit margin as a percent of sales improved in the third
quarter of 2001 to 33.0% compared to 28.4% in the second quarter of 2001 and
31.4% for the third quarter a year ago. For the three month and nine month
periods ended September 30, 2001, operating income was $888,000 and $1,807,000
compared to $985,000 and $1,966,000 for the same periods a year ago. The
decrease in 2001 operating income versus 2000 was due primarily to NAG's
decision to discontinue metal fabrication service and increased depreciation for
a new galvanizing plant. 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 third quarter and first nine
months 2001 was $907,000 and $2,671,000, respectively, compared to $723,000 and
$2,142,000 for the respective periods of 2000. The increase is attributable to
the addition of NAG's new galvanizing facility in Houston and capital
expenditures and improvements made in 2000 to support NAG's other galvanizing
facilities.
Selling, general and administrative expenses ("SG&A") increased 9.8% in the
third quarter of 2001 to $1,443,000 compared to $1,314,000 for the same quarter
a year ago, primarily due to increases in property and liability insurance
premiums, employee severence costs, ad valorem taxes and other costs associated
with stockholder services. For the nine months ended September 30, 2001, SG&A
decreased $168,000, or 4.0%, to $4,032,000 from $4,200,000 in the comparable
nine-month period last year.
Net interest expense increased $90,000 to $337,000 for the third quarter of 2001
and increased $244,000 to $952,000 for the nine months of 2001, over the
comparable periods of 2000. The increase was primarily due to the added interest
expense of the Company's 5.25% industrial revenue bonds that was capitalized in
2000 during construction of a new galvanizing facility. The Company incurred
other expense of $258,000 for the nine months ended September 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 nine-month
periods ended September 30, 2001 was 42.0% compared to 46.0% and 45.9% 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.
14
Income from continuing operations before income taxes was $512,000 for the third
quarter of 2001 compared with income of $895,000 for the third quarter of 2000.
For the nine months ended September 30, 2001, income from continuing operations
before income taxes was $597,000 compared with income of $1,415,000 in the same
period a year ago. For the third quarter of 2001, the Company reported net
income from continuing operations of $297,000, or $.04 per share, compared to
net income of $474,000, or $.07 per share, for the third quarter of 2000. Net
income from continuing operation of $346,000, or $.05 per share, for the nine
month period ended September 30, 2001 compared to net income from operations of
$766,000, or $.11 per share, for the same period in 2000.
LIQUIDITY AND CAPITAL RESOURCES
For the nine months ended September 30 2001, the Company's continuing operating
activities generated cash of $2,372,000 compared to cash generated of $2,507,000
for the same period of 2000. The nominal decrease in cash generated by 2001
operating activities versus the same period a year ago is due primarily to a
decrease in cash generated by continuing operations and changes in working
capital.
Capital expenditures in the first nine months of 2001 were $2,504,000, of which
$1,546,000 was for the new galvanizing facility in Houston. The Company's
financing activities in the first nine months of 2001 included making payments
of $14,514,000 on long-term obligations, payments of $420,000 on tax exempt
bonds and receiving proceeds of $12,913,000 from utilization of the line of
credit, for a net decrease of $2,021,000 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 construction of a new
galvanizing facility in Houston. 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. In June 2001, the
Company increased the bank term loan by $1,016,000, the proceeds of which were
used to pay down the line of credit and payoff of 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 June 30, 2003. The Company's
availability under the revolver was $216,000 at September 30, 2001. The Company
believes it has the ability to generate cash and/or available credit facilities
to its foreseeable needs for working capital and 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 Company. The IEPA notice includes NAG as one of a number of
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 the prior year. A major part of the claim resulted
from additional costs incurred to
15
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 alternate 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 was approximately $746,000 in the first nine
months of 2001 and $732,000 for the same period of 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
business, 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 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 entirety of the Company's bulk liquids
terminal and public warehouse businesses.
QUANTITATIVE AND QAULITATIVE DISCLOSURES ABOUT MARKET RISKS
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 September 30, 2001, variable rate debt
aggregating $8,777,000 was outstanding under the credit agreement with an
effective rate of 6.0% and $8,630,000 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 at September 30, 2001. The
borrowings under these facilities are due as follows: $341,000 in 2001;
$1,416,000 in 2002; $6,443,000 in 2003 and $10,207,000 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 $17,400 based on September 30, 2001 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 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. At September 30, 2001, the aggregate
commitments for the procurement of zinc were
16
approximately $8,300,000. Additional procurement commitments of approximately
1,500 tons were un-priced at September 30, 2001. With respect to the zinc
purchase commitments, a potential decrease of 10% in the market price of zinc
from the September 30, 2001 level would cause a lost gross margin opportunity of
approximately $830,000. During the third quarter of 2001, two one-year commodity
collar contracts which were intended to offset the impact of potential
fluctuations in the market price of zinc expired, and the Company did not renew
them.
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 Matrters to a Vote of Security Holders --- Not
applicable.
Item 5. Other Information --- Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 The Company's Restated Certificate of Incorporation
(incorporated by reference to Exhibit 3.1 to the Company's
Pre-Effective Amendment No. l 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).
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 September 30, 2001.
17
SIGNATURES
Pursuant to the requirements of Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized:
KINARK CORPORATION
------------------
(Registrant)
/s/ Paul R. Chastain
----------------------------
Paul R. Chastain
Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: November 12, 2001
18