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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 MARCH 31, 2003
COMMISSION FILE NO. 1-3920
KINARK CORPORATION
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(Exact name of the registrant as specified in its charter)
DELAWARE 71-0268502
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(State of Incorporation) (I.R.S. Employer
Identification No.)
2250 EAST 73RD STREET
TULSA, OKLAHOMA 74136
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(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 _____________________________________________________________________
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 March 31, 2003.
Common Stock $.10 Par Value .......... 6,747,689
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KINARK CORPORATION AND SUBSIDIARY
INDEX TO QUARTERLY REPORT ON FORM 10-Q
PAGE
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PART I. FINANCIAL INFORMATION
Forward Looking Statements or Information ..................... 2
Item 1. Financial Statements
Independent Accountants' Review Report ............. 3
Consolidated Balance Sheets as of March 31,
2003 (unaudited), and December 31, 2002 ......... 4
Consolidated Statements of Operations for
the three months ended March 31, 2003
and 2002 (unaudited) ............................ 5
Consolidated Statements of Cash Flows for
the three months ended March 31, 2003
and 2002 (unaudited) ............................ 6
Notes to Consolidated Financial Statements
for the three months ended March 31,
2003 and 2002(unaudited) ........................ 7-12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations ......................................13-15
Item 3. Quantitative and Qualitative Disclosure
About Market Risks .............................. 16
Item 4. Controls and Procedures ............................ 16
PART II. OTHER INFORMATION ............................................. 17
SIGNATURES AND CERTIFICATIONS ............................................18-19
FORWARD LOOKING STATEMENTS OR INFORMATION
Certain statements in this Form 10-Q, including information set forth under the
caption "Management's Discussion and Analysis of Financial Condition and Results
of Operations", constitute "Forward-Looking Statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Such statements are typically
punctuated by words or phrases such as "anticipates," "estimate," "should,"
"may," "management believes," and words or phrases of similar import. The
Company cautions investors that such forward-looking statements included in this
Form 10-Q, or hereafter included in other publicly available documents filed
with the Securities and Exchange Commission, reports to the Company's
stockholders and other publicly available statements issued or released by the
Company involve significant risks, uncertainties, and other factors which could
cause the Company's actual results, performance (financial or operating) or
achievements to differ materially from the future results, performance
(financial or operating) or achievements expressed or implied by such
forward-looking statements. Factors that could cause or contribute to such
differences could include, but are not limited to, changes in demand, prices,
and the raw materials cost of zinc; changes in economic conditions of the
various markets the Company serves, as well as the other risks detailed herein
and in the Company's reports filed with the Securities and Exchange Commission.
The Company believes that the important factors set forth in the Company's
cautionary statements at Exhibit 99 to this Form 10-Q could cause such a
material difference to occur and investors are referred to Exhibit 99 for such
cautionary statements.
2
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
To the Board of Directors and Stockholders of
Kinark Corporation:
We have reviewed the accompanying consolidated balance sheet of Kinark
Corporation and subsidiary (the "Company") as of March 31, 2003, and the related
consolidated statements of operations and cash flows for the three months ended
March 31, 2003 and 2002. These financial statements are the responsibility of
the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and of making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted in the United States of
America, the objective of which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to such consolidated financial statements for them to be in conformity
with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of
Kinark Corporation and subsidiary as of December 31, 2002, and the related
consolidated statements of operations and comprehensive income, stockholders'
equity, and cash flows for the year then ended (not presented herein); and in
our report dated February 7, 2003, we expressed an unqualified opinion on those
consolidated financial statements.
/s/ Deloitte & Touche LLP
Tulsa, Oklahoma
May 9, 2003
3
KINARK CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
UNAUDITED
MARCH 31 December 31
(DOLLARS IN THOUSANDS) 2003 2002
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ASSETS
CURRENT ASSETS
Cash ....................................... $ 4 $ 3
Trade receivables, net ..................... 4,481 4,529
Inventories ................................ 5,986 6,154
Prepaid expenses and other assets .......... 827 618
Deferred tax asset, net .................... 703 444
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TOTAL CURRENT ASSETS ................... 12,001 11,748
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PROPERTY, PLANT AND EQUIPMENT, AT COST
Land ....................................... 1,714 1,714
Galvanizing plants and equipment ........... 37,361 40,099
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39,089 41,813
Less: Allowance for depreciation ........... 13,999 16,203
Construction in progress ................... 480 303
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TOTAL PROPERTY, PLANT AND EQUIPMENT, NET 25,556 25,913
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GOODWILL, NET OF ACCUMULATED AMORTIZATION ..... 3,389 3,389
OTHER ASSETS .................................. 370 381
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TOTAL ASSETS .................................. $ 41,316 $ 41,431
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term obligations. $ 1,439 $ 1,283
Current portion of bonds payable ........... 625 617
Trade accounts payable ..................... 1,267 1,025
Accrued payroll and employee benefits ...... 864 846
Other taxes ................................ 177 301
Other accrued liabilities .................. 632 644
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TOTAL CURRENT LIABILITIES .............. 5,004 4,716
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DEFERRED TAX LIABILITY, NET ................... 1,186 1,187
LONG-TERM OBLIGATIONS ......................... 8,542 8,480
BONDS PAYABLE ................................. 7,125 7,283
SUBORDINATED NOTES PAYABLE .................... 942 937
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TOTAL LIABILITIES ...................... 22,799 22,603
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COMMITMENTS AND CONTINGENCIES (NOTE 8)
STOCKHOLDERS' EQUITY
Common stock ............................... 819 819
Additional paid-in capital ................. 17,464 17,464
Retained earnings .......................... 6,182 6,509
Common shares in treasury at cost .......... (5,948) (5,964)
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TOTAL STOCKHOLDERS' EQUITY ............. 18,517 18,828
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY .... $ 41,316 $ 41,431
========== ==========
See notes to consolidated financial statements.
4
KINARK CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED
MARCH 31
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(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 2003 2002
===============================================================================
SALES ......................................... $ 8,040 $ 9,217
Cost of sales ............................. 6,005 6,365
Selling, general & administrative expenses. 1,467 1,398
Depreciation expense ...................... 823 805
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TOTAL COSTS AND EXPENSES ...................... 8,295 8,568
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OPERATING INCOME (LOSS) ....................... (255) 649
Interest expense, net ..................... 308 287
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INCOME BEFORE INCOME TAXES .................... (563) 362
Income tax expense (benefit) .............. (236) 138
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NET INCOME (LOSS) ............................. $ (327) $ 224
========== ==========
NET INCOME (LOSS) PER COMMON SHARE
Basic ..................................... $ (.05) $ .03
Diluted ................................... $ (.04) $ .03
See notes to consolidated financial statements.
5
KINARK CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
THREE MONTHS ENDED MARCH 31
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(DOLLARS IN THOUSANDS) 2003 2002
===============================================================================
OPERATING ACTIVITIES
Net income (loss) ................................ $ (327) $ 224
Depreciation ..................................... 823 805
Deferred income taxes ............................ (258) --
Non-cash directors' fee .......................... 14 --
Changes in assets and liabilities:
Accounts receivable, net ...................... 48 (421)
Inventories and other assets .................. (30) (397)
Accounts payable, accrued liabilities and other 124 (231)
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CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES 394 (20)
INVESTING ACTIVITIES
Capital expenditures ............................. (466) (610)
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CASH USED IN INVESTING ACTIVITIES ................ (466) (610)
FINANCING ACTIVITIES
Proceeds from long-term obligations .............. 4,304 4,216
Payments on long-term obligations ................ (4,081) (3,456)
Payment on bonds ................................. (150) (142)
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CASH PROVIDED BY FINANCING ACTIVITIES ............ 73 634
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INCREASE IN CASH ................................. 1 4
CASH AT BEGINNING OF PERIOD ...................... 3 853
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CASH AT END OF PERIOD ............................ $ 4 $ 857
========== ==========
See notes to consolidated financial statements.
6
KINARK CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2003 AND 2002
UNAUDITED
NOTE 1. BASIS OF PRESENTATION
The consolidated financial statements included in this report have been prepared
by Kinark Corporation (the "Company") pursuant to its understanding of the rules
and regulations of the Securities and Exchange Commission for interim reporting
and include all normal and recurring adjustments which are, in the opinion of
management, necessary for a fair presentation. 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, 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 June 2001, the FASB issued Statement of Financial Accounting Standards No.
143, "Accounting for Asset Retirement Obligations" ("SFAS No. 143") which
addresses financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. It applies to legal obligations associated with the retirement of
long-lived assets that result from the acquisition, construction, development
and/or the normal operation of a long-lived asset, except for certain
obligations of lessees. This statement is effective for financial statements
issued for fiscal years beginning after June 15, 2002. The adoption of this
standard, in the first quarter of 2003, had no impact on the Company's
consolidated financial position or results of operations.
In July 2002, FASB issued SFAS 146, "Accounting for Costs Associated with Exit
or Disposal Activities." The statement addresses financial accounting and
reporting for costs associated with exit or disposal activities and nullifies
EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
7
in a Restructuring)." SFAS 146 requires that a liability for a cost associated
with an exit or disposal activity be recognized when a liability is incurred.
Under Issue 94-3, a liability for an exit cost as generally defined in Issue
94-3 was recognized at the date of an entity's commitment to an exit plan. The
provisions of this Statement are effective for exit or disposal activities that
are initiated after December 31, 2002. The adoption of this standard, in the
first quarter of 2003, had no impact on the Company's consolidated financial
position or results of operations.
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 earnings (loss) and basic and diluted earnings (loss)
per share for the quarter ended March 31, 2003 and 2002 would have been as
follows:
QUARTER ENDED MARCH 31
=======================
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) 2003 2002
===============================================================================
Net Income (Loss), as reported $ (327) $ 224
Deduct: Total stock-based employee compensation
expense determined under fair value based methods,
net of tax $ (4) $ (3)
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Pro forma net income (loss) $ (331) $ 221
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Earnings (loss) per share:
Basic - as reported $ (.05) $ .03
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Basic - pro forma $ (.05) $ .03
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Diluted - as reported $ (.04) $ .03
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Diluted - pro forma $ (.04) $ .03
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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:
QUARTER ENDED MARCH 31
-----------------------
2003 2002
-----------------------
Volatility 66% 66%
Discount Rate 5% 5%
Dividend Yield 0% 0%
Fair Value $ .83 $ .58
In the first quarter of 2003, the Company issued stock options for 50,000 shares
at $1.50 per share, and issued stock options for 45,000 shares at $1.00 per
share in the first quarter of 2002.
NOTE 4. EARNINGS PER COMMON SHARE
Basic earnings (loss) per common share for the periods presented are computed
based upon the weighted average number of shares outstanding. Diluted earnings
8
(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.
Three Months Ended March 31 Number of Shares
--------------------------- -------------------------
2003 2002
---------- ----------
Basic 6,746,133 6,697,024
Diluted 7,426,253 7,363,776
The numbers of options excluded from the calculation of diluted earnings per
share, due to the option price being higher than the share market value, are
319,000 and 377,333 at March 31, 2003 and 2002, respectively.
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. 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 March 31, 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 $7,750,000 at March 31, 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.
NOTE 7. 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
9
notes, net of discount, was $941,675 at March 31, 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 March 31, 2003 no warrants had been
exercised.
NOTE 8. LONG-TERM OBLIGATIONS
March 31 December 31
(Dollars in Thousands) 2003 2002
---------------------- -------- --------
Revolving line of credit $ 4,562 $ 4,390
Term loan 2,338 2,584
Advancing Construction Loan 2,972 2,768
9.5% note due 2015 21 21
Capital leases 88 --
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$ 9,981 $ 9,763
Less current portion 1,439 1,283
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$ 8,542 $ 8,480
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In November 2001, the Company amended a three-year bank credit agreement that
was scheduled to expire in September 2002. The amended agreement provides (i) a
$9,000,000 maximum revolving line of credit for working capital and general
corporate purposes, (ii) a $3,692,595 term loan and (iii) a $3,000,000 advancing
construction loan facility. 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.
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 March 31, 2003, $9,873,000 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 $210,000, net of outstanding irrevocable
letters of credit, under the bank revolving line of credit based on the
borrowing base calculated under the agreement.
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
10
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 March 31, 2003.
NOTE 9. 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 March 31, 2003 the aggregate commitments for the
procurement of zinc at fixed prices were approximately $3.7 million. The Company
reviews these fixed price contracts for losses using the same methodology
employed to estimate the market value of its zinc inventory. The Company had
unpriced commitments for the purchase of approximately 1.2 million pounds of
zinc at March 31, 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 March 31, 2003 or December
31, 2002, and did not utilize derivatives in the quarter ended March 31, 2003 or
the year ended December 31, 2002.
The Company's total off-balance sheet contractual obligations at March 31, 2003,
consist of $2,697,000 for long-term operating leases for three galvanizing
facilities and galvanizing equipment and approximately $3,700,000 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.
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
11
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 10. LABOR AGREEMENT
NAG's one-year labor agreement with the United Steel Workers Union covering
production workers at its Tulsa galvanizing plants expired March 31, 2003, and
was extended by mutual agreement between the union and NAG. At May 9, 2003, the
parties were continuing negotiations.
NOTE 11. TREASURY STOCK
In the first quarter of 2003, the Company issued 10,770 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. The shares were valued at the
average closing price of Kinark's common stock for a prior 30-day period, as
reported by the American Stock Exchange. 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 12. PENSION LIABILITY
In the first quarter of 2002, the Company reversed the liability for a
self-funded pension plan of $119,000 upon the death of the sole participant
covered by the plan.
NOTE 13. SUBSEQUENT EVENT
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. The Company will record a pre-tax write-down of
approximately $1.23 million ($710,000 after tax) in the second quarter of 2003
related to these events and circumstances.
12
KINARK CORPORATION AND SUBSIDIARY
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Kinark Corporation (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.
During the quarter ended March 31, 2003, there were no significant changes to
the Company's critical accounting policies previously disclosed in Form 10-K.
RECENT DEVELOPMENTS
MARCH 26, 2003 - The Company announced that its Board of Directors had adopted a
resolution proposing to change the name of the corporation to North American
Galvanizing & Coatings, Inc. The proposed name change will be submitted to the
shareholders for approval at the Company's Annual Meeting scheduled to be held
at the American Stock Exchange on May 14, 2003.
MARCH 4, 2003 - The Company announced that its North American Galvanizing
Company subsidiary had finalized an agreement to supply hot dip galvanizing and
INFRASHIELDSM coatings to the Thomas and Betts Corporation (NYSE-TNB) for a
broad range of tubular and lattice tower structures in the electrical
transmission and distribution markets. The Company's announcement noted, "Access
to our network of facilities providing hot dip galvanizing services combined
with our exclusive INFRASHIELDSM polyurethane coating application technology
make this a long-term, mutually beneficial relationship."
JANUARY 14, 2003 - The Company announced that North American Galvanizing Company
had completed installation and begun processing operations of a hot dip
galvanizing "Spinner" line located in its Nashville, Tennessee facility.
DECEMBER 2002 - The Company announced production startup at its new galvanizing
plant in St. Louis, Missouri, located adjacent to the existing galvanizing
facility. This new plant serves the regional St. Louis market and will provide
NAG a strategic base for extending its geographic area of service.
RESULTS OF OPERATIONS
The continued weakness in the domestic economy negatively affected North
American Galvanizing's galvanizing and coatings business in the first quarter of
2003. Orders from fabricators serving major industries, such as Electrical
Transmission, Communications, Highway and PetroChemical, all declined compared
to last year. Sales for the first quarter of 2003 were $8,040,000, a decrease of
$1,177,000, or 12.8% from sales of $9,217,000 in the first quarter of 2002.
Total production volume, measured by tons of steel galvanized, declined 14.3%
from the prior year. Underlying production volume at the Company's galvanizing
facilities varied significantly by region. Despite aggressive pricing from
competing galvanizers, North American Galvanizing maintained stable average
selling prices during the first quarter of 2003, and recorded a slight
improvement in average pricing over the first quarter of 2002.
13
North American Galvanizing'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. Quotation activity for Electrical
Transmission has increased slightly and Highway spending is gradually improving
in certain regions served by North American Galvanizing. 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 first quarter of 2003, the Company reported an operating loss, before
interest expense and taxes, of $255,000 compared to operating income of $649,000
in the first quarter of 2002. The decline in operating income was primarily due
to lower order volume, higher utility costs for natural gas, and increased
premiums for property, liability and worker's compensation insurance coverages,
that affected cost of sales. Natural gas costs, which typically represent 5% of
North American Galvanizing's cost of sales, increased 105% over the first
quarter of 2002, reflecting increased market prices. While the current market
price for natural gas has been decreasing, the Company is experiencing utility
costs approximately 23% above the level of a year ago, which appear to have
stabilized for the near-term. Insurance premium costs for the first quarter of
2003 increased approximately 54% over the prior year, reflecting both increased
market pricing for all lines of property and liability coverage and the impact
of prior claims incurred in the galvanizing operation. Gross profit of
$2,035,000 for the first quarter of 2003 was down 28.6% from gross profit of
$2,852,000 for the first quarter of 2002, reflecting lower sales and increased
operating costs. Depreciation expense for the first quarter of 2003 was $823,000
compared to $805,000 for the same period of 2002.
The Company's selling, general and administrative expenses ("SG&A") of
$1,467,000 for the first quarter of 2003 increased 4.9% from $1,398,000 for the
first quarter of 2002, reflecting increases in direct selling and marketing
expenses and insurance premiums.
The Company's net interest expense for the first quarter of 2003 was $308,000
compared to $287,000 for the first quarter of 2002, reflecting financing costs
for construction of a new galvanizing plant in St. Louis, Missouri, which began
operating in December 2002.
The Company has estimated its effective income tax rate in 2003 at 42%, which
compares to an estimated tax rate of 38% used for the first quarter of 2002.
For the first quarter of 2003, the loss before income tax benefit was $563,000,
compared to income before taxes of $362,000 for the first quarter of 2002. The
decrease in income primarily reflects lower sales volume resulting from a
measurable downturn in commercial, industrial and OEM spending and higher
operating costs.
The Company's net loss for the first quarter of 2003 was $327,000, or $.05 per
share basic and $.04 per share diluted. This compared to first quarter 2002 net
income of $224,000, or $.03 per share basic and diluted.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2003 the Company had approximately $7,000,000 in net working
capital and available borrowing capacity of approximately $210,000 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.
14
For the three months ended March 31, 2003, the Company's operating activities
generated cash of $394,000 compared to cash used of $20,000 for the same period
of 2002. The increase in cash generated by 2003 activities is due primarily to
decreases in working capital, offset by a net loss and an increase in deferred
income taxes. Cash used in investing activities in the first quarter of 2003 of
$466,000 consisted of capital expenditures of $268,000 to maintain current
operating facilities and $198,000 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 three months ended March 31, 2003, cash provided by
financing activities of $73,000 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 repay its debt obligations
due within one year of approximately $2,100,000, 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 three months of 2003 and 2002 was
approximately $269,000 and $284,000, 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.
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.
SUBSEQUENT EVENTS
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. The Company will record a pre-tax write-down of
approximately $1.23 million ($710,000 after tax) in the second quarter of 2003
related to these events and circumstances.
15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Kinark's operations include managing market risks related to change in interest
rates and zinc commodity prices.
INTEREST RATE RISK. Kinark is exposed to financial market risk related to
changing interest rates, which will affect interest paid on the Company's
variable rate debt. At March 31, 2003 variable rate debt aggregating $9,873,000
was outstanding under the credit agreement with an effective rate of 4.6% and
$7,750,000 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 March 31, 2003. The borrowings under
variable rate facilities are due approximately as follows: $1,475,000 in 2003;
$9,521,000 in 2004; $693,000 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 $17,623 based on
March 31, 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 March 31, 2003 the aggregate fixed price commitments for the
procurement of zinc was approximately $3,700,000. In addition, NAG had unpriced
commitments to procure approximately 1,200,000 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 March 31, 2003 level would represent a
potential lost gross margin opportunity of approximately $370,000; 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 March 31, 2003 or December
31, 2002, and did not utilize derivatives in the quarter ended March 31, 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.
16
PART II OTHER INFORMATION
Item 1. Legal Proceedings - Not applicable.
Item 2. Changes in Securities - Not applicable.
Item 3. Defaults Upon Senior Securities - Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders -
Not applicable.
Item 5. Other Information - Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 The Company's Restated Certificate of
Incorporation (incorporated by reference to
Exhibit 3.1 to the Company's Pre-Effective
Amendment No. 1 to Registration Statement on
Form S-3 (Reg. No. 333-4937) file on June 7,
1996).
3.2 The Company's Amended and Restated Bylaws
(incorporated by reference to Exhibit 3.2 to
the Company's Quarterly Report on Form 10-Q
dated March 31, 1996).
99 Cautionary Statements by the Company Related
to Forward-Looking Statements.
(b) Reports on Form 8-K
The Company did not file a Form 8-K Current Report
during the quarter ended March 31, 2003.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized:
KINARK CORPORATION
------------------
(Registrant)
/s/ Paul R. Chastain
------------------------
Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: May 12, 2003
SECTION 906 CERTIFICATION
Each of the undersigned hereby certifies in his capacity as an officer of Kinark
Corporation (the "Company") that the Quarterly Report of the Company on Form
10-Q for the period ended March 31, 2003 fully complies with the requirements of
Section 13(a) of the Securities Exchange Act of 1934 and that the information
contained in such report fairly presents, in all material respects, the
financial condition and the results of operations of the Company.
KINARK CORPORATION
------------------
(Registrant)
/s/ Ronald J. Evans
--------------------------
President and
Chief Executive Officer
/s/ Paul R. Chastain
--------------------------
Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: May 12, 2003
18
SECTION 302 CERTIFICATION
I, the undersigned Ronald J. Evans, President and Chief Executive Officer of
Kinark Corporation, and I, the undersigned Paul R. Chastain, Vice President and
Chief Financial Officer of Kinark Corporation, hereby certify that:
1. I have reviewed this quarterly report on Form 10-Q of Kinark Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report(the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 12, 2003 /s/ Ronald J. Evans
---------------------------
President and
Chief Executive Officer
Date: May 12, 2003 /s/ Paul R. Chastain
---------------------------
Vice President and
Chief Financial Officer
(Principal Financial Officer)
19