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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 SEPTEMBER 30, 2002
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 [_]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of September 30, 2002.
Common Stock $ .10 Par Value . . . . . 6,725,555
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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
September 30, 2002 (unaudited), and
December 31, 2001 4
Consolidated Statements of Operations
for the three and nine month periods ended
September 30, 2002 and 2001 (unaudited) 5
Consolidated Statements of Cash Flows
for the nine months ended
September 30, 2002 and 2001 (unaudited) 6
Notes to Consolidated Financial Statements
for the three and nine month periods ended
September 30, 2002 and 2001(unaudited) 7-13
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 14-17
Item 3. Quantitative and Qualitative Disclosure
About Market Risks 17-18
Item 4. Controls and Procedures 18
PART II. OTHER INFORMATION 19
SIGNATURES AND CERTIFICATIONS 20-22
FORWARD LOOKING STATEMENTS OR INFORMATION
Certain statements in this Form 10-Q, including information set forth under the
caption "Management's Discussion and Analysis of Financial Condition and Results
of Operations", constitute "Forward-Looking Statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Such statements are typically
punctuated by words or phrases such as "anticipates," "estimate," "should,"
"may," "management believes," and words or phrases of similar import. The
Company cautions investors that such forward-looking statements included in this
Form 10-Q, or hereafter included in other publicly available documents filed
with the Securities and Exchange Commission, reports to the Company's
stockholders and other publicly available statements issued or released by the
Company involve significant risks, uncertainties, and other factors which could
cause the Company's actual results, performance (financial or operating) or
achievements to differ materially from the future results, performance
(financial or operating) or achievements expressed or implied by such
forward-looking statements. Factors that could cause or contribute to such
differences could include, but are not limited to, changes in demand, prices,
and the raw materials cost of zinc; changes in economic conditions of the
various markets the Company serves, as well as the other risks detailed herein
and in the Company's reports filed with the Securities and Exchange Commission.
The Company believes that the important factors set forth in the Company's
cautionary statements at Exhibit 99 to this Form 10-Q could cause such a
material difference to occur and investors are referred to Exhibit 99 for such
cautionary statements.
2
INDEPENDENT ACCOUNTANTS" REVIEW REPORT
To the Board of Directors and Stockholders of
Kinark Corporation:
We have reviewed the accompanying consolidated balance sheet of Kinark
Corporation and subsidiary (the "Company") as of September 30, 2002, and the
related consolidated statements of operations and comprehensive income, and cash
flows for the three and nine-month periods ended September 30, 2002 and 2001.
These financial statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and of making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted in the United States of
America, the objective of which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to such consolidated financial statements for them to be in conformity
with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of
Kinark Corporation and subsidiary as of December 31, 2001, and the related
consolidated statements of operations and comprehensive income, stockholders"
equity, and cash flows for the year then ended (not presented herein); and in
our report dated February 22, 2002, we expressed an unqualified opinion on those
consolidated financial statements.
/s/Deloitte & Touche LLP
Tulsa, Oklahoma
October 18, 2002
3
KINARK CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
Unaudited
September 30 December 31
(Dollars in Thousands) 2002 2001
- -------------------------------------------------------------------------------
ASSETS
Current Assets
Cash and cash equivalents $ 55 $ 853
Trade receivables, net 5,661 4,821
Inventories 5,426 5,399
Prepaid expenses and other assets 399 291
Deferred tax asset, net 583 583
-------- --------
Total Current Assets 12,124 11,947
-------- --------
Property, Plant and Equipment, at Cost
Land 1,714 1,714
Galvanizing plants and equipment 35,349 36,258
Other 70 70
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37,133 38,042
Less: Allowance for depreciation 15,454 15,234
Construction in progress 3,258 459
-------- --------
Total Property, Plant and Equipment, Net 24,937 23,267
-------- --------
Goodwill 3,389 3,389
Other Assets 396 489
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TOTAL ASSETS $ 40,846 $ 39,092
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Current maturities of long-term obligations $ 993 $ 976
Current portion of bonds payable 610 587
Trade accounts payable 1,037 1,123
Accrued payroll and employee benefits 724 889
Other taxes 361 317
Other accrued liabilities 770 449
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Total Current Liabilities 4,495 4,341
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Pension and Related Liabilities -- 101
Deferred Tax Liability, Net 819 819
Long-Term Obligations 8,504 7,361
Bonds Payable 7,440 7,900
Subordinated Notes Payable 932 917
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Total Liabilities 22,190 21,439
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Commitments and Contingencies (Note 8) -- --
Stockholders' Equity
Common stock 821 819
Additional paid-in capital 17,462 17,464
Retained earnings 6,353 5,399
Common shares in treasury at cost (5,980) (6,029)
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Total Stockholders' Equity 18,656 17,653
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 40,846 $ 39,092
======== ========
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) 2002 2001 2002 2001
- -------------------------------------------------------------------------------------------------------------------
SALES $ 9,915 $ 9,812 $ 29,235 $ 28,056
Cost of sales 6,821 6,574 20,052 19,546
Selling, general & administrative expenses 1,481 1,443 4,393 4,032
Depreciation and amortization 810 907 2,416 2,671
-------- -------- -------- --------
TOTAL COSTS AND EXPENSES 9,112 8,924 26,861 26,249
-------- -------- -------- --------
OPERATING INCOME 803 888 2,374 1,807
Interest expense, net 270 337 836 952
Other (income) expense -- 39 -- 258
-------- -------- -------- --------
INCOME BEFORE INCOME TAXES 533 512 1,538 597
Income tax expense 195 215 584 251
-------- -------- -------- --------
NET INCOME 338 297 954 346
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 (LOSS) -- 19 -- --
-------- -------- -------- --------
COMPREHENSIVE INCOME $ 338 $ 316 $ 954 $ 346
======== ======== ======== ========
NET INCOME PER COMMON SHARE
Basic $ .05 $ .04 $ .14 $ .05
Diluted $ .05 $ .04 $ .13 $ .05
See notes to consolidated financial statements.
5
KINARK CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
Nine Months Ended
September 30
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(Dollars in Thousands) 2002 2001
- -----------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 954 $ 346
Depreciation and amortization 2,416 2,671
Deferred income taxes -- 45
Gain on disposal of assets -- (5)
Changes in assets and liabilities:
Accounts receivable, net (840) (598)
Inventories and other assets (42) 464
Accounts payable, accrued liabilities and other 28 (545)
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CASH PROVIDED BY OPERATING ACTIVITIES 2,516 2,378
INVESTING ACTIVITIES
Capital expenditures (4,086) 2,510
Proceeds from sale of assets -- 3
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CASH USED FOR INVESTING ACTIVITIES (4,086) (2,507)
FINANCING ACTIVITIES
Reissuance of treasury stock 49 --
Deferred financing cost -- (76)
Proceeds from long-term obligations 13,100 12,913
Payments on long-term obligations (11,940) (14,514)
Repayment on bonds (437) (420)
Proceeds from subordinated debt -- 900
Proceeds from stock warrants -- 100
Tax exempt bond funds held by bond trustee -- 1,219
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CASH PROVIDED BY FINANCING ACTIVITIES 772 122
-------- --------
DECREASE IN CASH AND CASH EQUIVALENTS (798) (7)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 853 57
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 55 $ 50
======== ========
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, 2002 and 2001
UNAUDITED
NOTE 1. BASIS OF PRESENTATION
The consolidated financial statements included in this report have been prepared
by Kinark Corporation (the "Company") pursuant to its understanding of the rules
and regulations of the Securities and Exchange Commission for interim reporting
and include all normal and recurring adjustments which are, in the opinion of
management, necessary for a fair presentation. The consolidated financial
statements include the accounts of the Company and its subsidiary.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted pursuant to such
rules and regulations for interim reporting. The Company believes that the
disclosures are adequate to make the information presented not misleading.
However, these financial statements should be read in conjunction with the
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K, for the year ended December 31, 2001. The financial data for the
interim periods presented may not necessarily reflect the results to be
anticipated for the complete year.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the balance
sheet dates and the reported amounts of revenues and expenses for each of the
years. Actual results will be determined based on the outcome of future events
and could differ from the estimates.
The Company's sole business is hot dip galvanizing and coatings which is
conducted through its wholly owned subsidiary, North American Galvanizing
Company ("NAG").
NOTE 2. NEW ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 142, "Goodwill and Other Intangible
Assets" ("SFAS No. 142") which is fully effective in fiscal years beginning
after December 15, 2001, although certain provisions of SFAS No. 142 are
applicable to goodwill and other intangible assets acquired in transactions
completed after June 30, 2001. SFAS No. 142 addresses financial accounting and
reporting for acquired goodwill and other intangible assets and requires that
goodwill and intangible assets with an indefinite life no longer be amortized
but instead be reviewed, at least annually, for impairment. The Company assessed
initial impairment under the transition rules of SFAS 142 in the second quarter
of 2002 and determined that goodwill was not impaired at January 1, 2002. The
following pro forma results of operations reflect elimination of goodwill
7
amortization included in the three and nine month periods ended September 30,
2001, as if SFAS No. 142 had been in effect at that time (Dollars in thousands
except per share amounts).
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- ----------------------
2002 2001 2002 2001
------- ------- ------- -------
Reported net income $ 338 $ 297 $ 954 $ 346
Add back: Goodwill amortization,
net of income tax -- 18 -- 82
------- ------- ------- -------
Adjusted net income $ 338 $ 315 $ 954 $ 428
======= ======= ======= =======
Earnings per share:
Reported net income per share
Basic $ 0.05 $ 0.04 $ 0.14 $ 0.05
Diluted 0.05 0.04 0.13 0.05
Goodwill amortization, net of tax
Basic $ -- $ -- $ -- $ 0.01
Diluted -- -- -- 0.01
Adjusted net income per share
Basic $ 0.05 $ 0.04 $ 0.14 $ 0.06
Diluted 0.05 0.04 0.13 0.06
In June 2001, the FASB issued Statement of Financial Accounting Standards No.
143, "Accounting for Asset Retirement Obligations" ("SFAS No. 143") which
addresses financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. It applies to legal obligations associated with the retirement of
long-lived assets that result from the acquisition, construction, development
and/or the normal operation of a long-lived asset, except for certain
obligations of lessees. This statement is effective for financial statements
issued for fiscal years beginning after June 15, 2002. The Company has not
determined the impact on its financial statements that may result from adoption
of SFAS No. 143.
In August 2001, the FASB issued Statement of Financial Accounting Standards No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No.
144") which addresses financial accounting and reporting for the impairment or
disposal of long-lived assets by requiring that one accounting model be used for
long-lived assets to be disposed of by sale, whether previously held and used or
newly acquired, and by broadening the presentation of discontinued operations to
include more disposal transactions. SFAS No. 144 is effective for financial
statements issued for fiscal years beginning after December 15, 2001, and
interim periods within those fiscal years. The adoption of this statement had no
impact on the Company's consolidated financial statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44 and 62, Amendment of FASB Statement No. 13, and Technical Corrections."
SFAS 145 will require gains and losses on extinguishments of debt to be
classified as income or loss from continuing
8
operations rather than as extraordinary items as previously required under SFAS
4. SFAS 145 also amends SFAS 13 to require certain modifications to capital
leases be treated as a sale-leaseback and modifies the accounting for sub-leases
when the original lessee remains a secondary obligor or guarantor. Accordingly,
most gains or losses from extinguishments of debt for fiscal years beginning
after May 15, 2002 shall not be reported as extraordinary. Upon adoption, any
gain or loss on extinguishment of debt previously classified as an extraordinary
item in prior periods presented must be reclassified to conform with the
provisions of SFAS 145. SFAS 145's amendment and technical correction to SFAS 13
is effective for all transactions occurring after May 15, 2002. Management does
not expect a material impact on our financial statements upon adoption of this
statement.
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
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. Management does not expect a material
impact on our financial statements upon adoption of this statement.
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 Sept. 30 Number of Shares
- --------------------------- ----------------------------------
2002 2001
---- ----
Basic 6,723,352 6,712,209
Diluted 7,396,644 7,378,875
Nine Months Ended Sept. 30
- --------------------------
Basic 6,711,321 6,712,209
Diluted 7,382,896 7,378,875
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 347,333 at September 30, 2002 and 2001, respectively.
9
NOTE 4. INVENTORIES
Inventories consist of raw zinc "pigs," molten zinc in galvanizing kettles and
other chemicals and materials used in the galvanizing process. Inventories are
stated at the lower of cost or market with market value based on estimated
realizable value from the galvanizing process. Zinc cost is determined on a
last-in first-out (LIFO) basis. Other inventories are valued primarily on an
average cost basis.
NOTE 5. 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 September 30, 2002) that
can be converted to a fixed rate upon certain conditions outlined in the bond
agreement. The Bonds are subject to annual redemption of $230,000 that commenced
on June 15, 2001, which increases annually thereafter to a maximum redemption of
$960,000 on June 15, 2012. The Company makes monthly principal and interest
payments of $86,000 into a sinking fund. The amount outstanding on these bonds
was $8,050,000 at September 30, 2002. The final maturity date of the Bonds is
June 15, 2013. The Company has the option of early redemption of the Bonds at
par unless the bonds are converted to a fixed interest rate, in which case they
are redeemable at a premium during a period specified in the bond agreement. The
Company's obligation under the bond agreement is secured through a letter of
credit with a bank which must remain in effect as long as any Bonds are
outstanding. The letter of credit is collateralized by substantially all the
assets of the Company.
NOTE 6. SUBORDINATED DEBT
In February 2001, the Company completed a $1,000,000 Private Placement of
unsecured subordinated debt. The Company raised these proceeds to satisfy
financing requirements to fund construction of a new galvanizing facility in St.
Louis, Missouri. Participation in the Private Placement was offered to
accredited investors, which included the Company's directors and eligible
stockholders holding a minimum of 100,000 shares of common stock. The amount
outstanding on these notes, net of discount, was $931,673 at September 30, 2002.
The notes, which mature February 17, 2006 and bear interest at 10% payable
annually, were issued with warrants to purchase 666,666 shares of common stock
of the Company. Terms of the warrants, which expire February 17, 2008, permit
the holder to purchase shares of the Company's common stock at any time prior to
the expiration date. The exercise price of $.856 per share reflects the fair
value of the Company's common stock at the time the warrants were issued, as
determined by an independent financial advisor. As of September 30, 2002 no
warrants had been exercised.
10
NOTE 7. LONG-TERM OBLIGATIONS
September 30 December 31
(Dollars in Thousands) 2002 2001
---------------------- ---------- ----------
Revolving line of credit $ 5,134 $ 4,759
Term loan 2,822 3,538
Advancing Construction Loan 1,517 --
9.5% note due 2015 21 22
Capital leases 3 18
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$ 9,497 $ 8,337
Less current portion 993 976
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$ 8,504 $ 7,361
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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. At September 30, 2002, $1,517,000 was outstanding
under the advancing construction loan facility. The advancing construction loan
converts to a Construction Note on the earlier of (i) the date as of which the
Project has been Substantially Completed or (ii) January 15, 2003. The principal
amount of the Construction Note, with applicable interest, will be payable in
equal monthly installments. The entire remaining principal balance of the
Construction Note, together with all accrued and unpaid interest thereon, will
be due and payable in full on June 30, 2004. In September 2002, the maturity of
the revolving loan facility was extended to June 30, 2004 to coincide with the
maturity of the term loan.
At September 30, 2002, the Company had available borrowing capacity of
$1,314,000, net of outstanding irrevocable letters of credit, under the bank
revolving line of credit based on the borrowing base calculated under the
agreement. At September 30, 2002, the Company had outstanding irrevocable
letters of credit totaling $400,000 to secure payment of current and future
workers' compensation claims.
Substantially all of the Company's accounts receivable, inventories, fixed
assets and the common stock of its subsidiary are pledged as collateral under
the agreement, and the credit agreement is secured by a full and unconditional
guaranty from NAG. Amounts borrowed under the agreement bear interest at the
prime rate of Bank One, Oklahoma or the LIBOR rate, at the option of the
Company, subject to a rate margin adjustment determined by the Company's
consolidated debt service coverage ratio. In the event the Company fails to
maintain a consolidated debt service coverage ratio for any fiscal quarter of at
least 1.25 to 1.00, the Applicable LIBOR Rate Margin will be increased to 5.75%
and the Applicable Prime Rate Margin will be increased to 3.00%. Thereafter, the
increased rate margin will remain in effect until such time as the Company has
maintained a consolidated debt service coverage ratio greater than or equal to
1.25 to 1.00 for a subsequent fiscal quarter.
11
In the event the Company fails to maintain a consolidated capital expenditures
to EBITDA ratio for any fiscal quarter of at least 1.00 to 1.00, the increase in
the Applicable LIBOR Rate Margin ranges from 3.75% to 5.75%, and the increase in
the Applicable Prime Rate Margin ranges from 1.00% to 3.00%.
Term loan payments are based on thirty-five (35) installments with equal monthly
payments of principal and interest, and the loan may be prepaid without penalty.
The revolving line of credit may be paid down without penalty, or additional
funds may be borrowed up to the revolver limit. The credit agreement requires
the Company to maintain compliance with covenant limits for current ratio, debt
to tangible net worth ratio, debt service coverage ratio and a capital
expenditures ratio. The Company was in compliance with the covenants at
September 30, 2002.
NOTE 8. COMMITMENTS AND CONTINGENCIES
At September 30, 2002, the Company had outstanding contractual commitments
totaling approximately $1,225,000 relating to the construction of a new
galvanizing plant in St. Louis, Missouri.
The Company has commitments with domestic and foreign zinc producers to purchase
zinc used in its hot dip galvanizing operations. Commitments for the future
delivery of zinc reflect rates then quoted on the London Metals Exchange and are
not subject to price adjustment. At September 30, 2002, the aggregate
commitments for the procurement of zinc at fixed prices were $6.4 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 1.5 million pounds of zinc
at September 30, 2002.
The Company periodically utilizes derivative instruments 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 over the past year, 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"). Based on current information
and the stage of investigation, NAG"s share of any probable future costs, if
any, cannot be estimated at this time.
The Company expects it will continue to have environmental compliance costs in
the future associated with operations in the galvanizing business. The Company
is committed to complying with the environmental legislation and regulations
affecting its operations. Due to the uncertainties associated with future
environmental technologies, regulatory interpretations, and prospective
legislative activity, management cannot quantify potential costs in this area.
The Company expenses or capitalizes, where appropriate, environmental
expenditures that relate
12
to current operations as they are incurred. Such expenditures are expensed when
they are attributable to past operations and are not expected to contribute to
current or future revenue generation. The Company records liabilities when
remediation or other environmental assessment or clean-up efforts are probable
and the cost can be reasonably estimated.
Various litigation arising in the ordinary course of business is pending against
the Company. Management believes that resolution of the Company's litigation and
environmental matters should not materially affect the Company's consolidated
financial position or liquidity. Should future developments cause the Company to
record an additional liability for environmental matters, litigation or customer
claims, the recording of such a liability could have a material impact on the
results of operations for the period involved.
NOTE 9. LABOR AGREEMENT
In April 2002, NAG concluded negotiations of a one-year labor agreement with the
United Steel Workers Union covering production workers at its Tulsa galvanizing
plants. The new agreement is not materially changed from the previous agreement
which expired March 31, 2002.
NOTE 10. TREASURY STOCK
In the third quarter of 2002, the Company issued 11,923 shares of its common
stock from Treasury to outside Directors of the Company as payment for their
quarterly board fee in lieu of receiving cash payments. During the first nine
months of 2002, the Company issued 44,730 shares for such purpose. 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 2002 quarterly board fees in the Company's stock in
lieu of cash.
NOTE 11. PENSION LIABILITY
In the first quarter of 2002, the Company reversed the liability for a
self-funded pension plan of $119,000 upon the death of the sole participant
covered by the plan.
13
Kinark Corporation and Subsidiary
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Kinark Corporation is a leading provider of hot dip galvanizing and coatings for
corrosion protection of fabricated steel products, through its wholly-owned
subsidiary North American Galvanizing Company.
In a news release dated July 15, 2002, the Company announced the introduction of
INFRASHIELDSM Coating Systems, a specialty polymer coating that is designed to
be applied over hot dip galvanized material slated for harsh operating
conditions. The Company has also developed a unique method of polymer
application for the internal coating of tubular products. This process will
provide economical application of coatings for tubular product and pipe from 9
inches to 24 inches in diameter, including tapered products, with further
developmental research expected to achieve diameters up to 84 inches.
In January 2002, the Company announced the groundbreaking for a new galvanizing
plant in St. Louis, Missouri that will be located adjacent to the existing
galvanizing facility. Construction of the new plant is proceeding on schedule
and new plant operations are expected to begin during the fourth quarter of
2002. This new plant is expected to service the regional St. Louis market and
will provide NAG a strategic base for extending its geographic area of service.
In December 2001, the Company temporarily idled a galvanizing plant located in
Houston (the "Cunningham plant"). Management plans to restart this facility when
local market conditions improve and also is reviewing potential alternatives for
this facility. Management does not believe that any impairment of the carrying
value of the facility has occurred at this time. The majority of customer orders
that were being processed at Cunningham have been transferred to the Company's
new Houston plant (the "Fairbanks plant") that began operations in 2001.
RESULTS OF OPERATIONS
Galvanizing tonnage produced by North American Galvanizing in the third quarter
ended September 30, 2002 held steady with the preceding second quarter, but
sales dipped slightly on lower average selling prices. Characteristic of the
uncertain market environment being encountered in some sectors of the economy
and competitive pressures from other galvanizers, combined with lower zinc
prices, resulted in lower average selling prices for the Company's galvanizing
services. At September 30, 2002 the price of zinc, the principal material used
in the galvanizing process, had declined approximately 10% from its level a year
earlier. In 2002, North American Galvanizing's average selling prices decreased
approximately 2% compared to the prior year. The impact on North American
Galvanizing's 2002 sales due to the decrease in average selling prices has been
more than offset by the increase in its production tonnage, which continues at a
historical record level.
Sales for the third quarter of 2002 increased 1.0% to $9,915,000 compared to
sales of $9,812,000 for the third quarter of 2001. North American Galvanizing
continued to improve its market position measured by the increase in tonnage.
Tonnage for the third quarter of 2002 rose 2.7% over the third quarter of 2001.
14
Sales for the nine-months ended September 30, 2002 increased 4.2% to $29,235,000
compared to sales of $28,056,000 in the first nine-months of 2001, reflecting a
6.7% increase in tonnage for the period.
Operating income for the third quarter of 2002 was $803,000 compared to $888,000
for the same period a year earlier. The decline in operating income was due
primarily to lower average selling prices compared to 2001. North American
Galvanizing also experienced lower-than expected order volume in July 2002,
which affected cost of sales and lowered operating income for the third quarter.
In August and September 2002, order volume exceeded plan to bring total volume
for the third quarter of 2002 slightly ahead of volume for the third quarter of
2001. Gross profit of $3,094,000 was 31.2% of sales in the third quarter of 2002
compared to gross profit of $3,238,000 and 33.0% of sales in the third quarter a
year ago.
Operating income of $2,374,000 for the nine months ended September 30, 2002
increased 31.4% over operating income of $1,807,000 for the same period of 2001.
Contributing to the increase in operating income were higher sales, lower
average cost for zinc used in the galvanizing process, and lower depreciation
and amortization charges. Gross profit of $9,183,000 was 31.4% of sales for the
first nine months of 2002 compared to gross profit of $8,510,000 and 30.3% of
sales in the same period of 2001.
Depreciation expense for the third quarter and first nine months of 2002 was
$810,000 and $2,416,000 respectively, compared to depreciation and amortization
expense of $907,000 and $2,671,000, respectively for the same periods in 2001.
Depreciation and amortization expense was reduced in 2002 primarily due to
discontinuing the amortization of goodwill, in accordance with the new
accounting standard adopted January 1, 2002. This standard requires goodwill no
longer be amortized as a current operating expense, but must be reviewed at
least annually for impairment of its carrying value (see Note 2 to Consolidated
Financial Statements).
The Company's selling, general and administrative expenses ("SG&A") for the
third quarter of 2002 were $1,481,000 compared to $1,443,000 for the third
quarter of 2001. For the nine months ended September 30, 2002, SG&A expenses
were $4,393,000 compared to $4,032,000 for the same period of 2001. During 2002,
cost reductions in administrative salaries and elimination of a pension
liability have been offset by increases in the reserve for collection of
doubtful accounts receivable, higher ad valorem taxes and increased premiums for
property and liability insurance. Insurance premiums for most risk coverages
essentially have doubled over the prior year, primarily reflecting market
conditions prevailing in the insurance industry. The Company reviews its
insurance program annually.
The Company's net interest expense for 2002 is lower than last year primarily
due to lower interest rates on certain of its variable-rate debt, a reduction in
debt and interest capitalized on financing related to the construction of the
new St. Louis galvanizing plant. For the first nine months of 2002, net interest
expense was $836,000 compared to$952,000 for the same period of 2001.
In 2001, the Company incurred losses on commodity collar contracts which were
intended to hedge the price risk associated with fixed price zinc purchase
commitments. These losses were
15
recorded as Other Expense in the amount of $39,000 and $258,000 in the third
quarter and the first nine months of 2001, respectively. The commodity contracts
expired in 2001 and were not replaced.
The Company has estimated its effective income tax rate in 2002 at 38%; this
rate compares to an income tax rate of approximately 42% in 2001 which was
higher than the federal statutory rate primarily due to non-deductible
amortization of goodwill.
Income before income taxes was $533,000 for the third quarter of 2002 compared
to income of $512,000 for the third quarter of 2001. For the nine-month period
ended September 30, 2002, pre-tax income was $1,538,000 compared to $597,000 for
the first nine months of 2001. The increase in pre-tax income for 2002 was
generated primarily from increased gross profit, as discussed above, with the
added benefit of lower interest expense and elimination of commodity contract
losses. The Company reported net income of $338,000, or $.05 per share, for the
third quarter of 2002 compared to net income of $297,000 for the third quarter
of 2001. Net income for the nine month period ended September 30, 2002 was
$954,000, or $.14 per share, compared to net income of $346,000, or $.05 per
share, for the same period in 2001.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2002, the Company had $55,000 in cash, approximately $7,629,000
in net working capital and available borrowing capacity of approximately
$1,314,000 under the bank revolving line of credit. In addition, the Company had
$1,483,000 available under its Advancing Construction Loan.
For the nine months ended September 30, 2002, the Company's operating activities
generated cash of $2,516,000 compared to cash generated of $2,378,000 for the
same period of 2001. The increase in cash generated by 2002 operating activities
versus the same period a year ago is due primarily to an increase in net income,
offset by increases in working capital. Net cash used for investing activities
in the first nine months of 2002 of $4,086,000 consisted of capital expenditures
of approximately $1,225,000 for new equipment and to maintain current operating
facilities and approximately $2,861,000 for construction of a new galvanizing
plant in St. Louis. The capital expenditures were funded by proceeds on hand
from the Company's private placement of subordinated debt in 2001, proceeds from
the advancing construction loan and cash provided by operating activities. In
the nine months ended September 30, 2002, cash provided by financing activities
was $772,000 primarily as a result of financing activities under a credit
agreement with a bank.
The Company currently anticipates that cash flows from operations and borrowing
under its revolving line of credit will be adequate to repay its debt
obligations due within one year of approximately $1,603,000, 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 nine months of 2002 and 2001 was
approximately $896,000 and $746,000,
16
respectively, for the disposal and recycling of waste acids generated by the
galvanizing operations.
The Company is committed to complying with all federal, state and local
environmental laws and regulations and using its best management practices to
anticipate and satisfy future requirements. As is typical in the galvanizing
business, the Company will have additional environmental compliance costs
associated with past, present and future operations. Management is committed to
discovering and eliminating environmental issues as they arise. Because of the
frequent changes in environmental technology, laws and regulations management
cannot reasonably quantify the Company's potential future costs in this area.
As previously reported, NAG was notified in 1997 by the Illinois Environmental
Protection Agency ("IEPA") that it was a potentially responsible party under the
Comprehensive Environmental Response, Compensation, and Liability Information
System ("CERCLIS") in connection with cleanup of an abandoned site formerly
owned by Sandoval Zinc Co. The IEPA notice includes NAG as one of 59
organizations which arranged for the treatment and disposal of hazardous
substances at Sandoval. Based on current information and the preliminary state
of investigation, NAG's share of any probable future costs cannot be estimated
at this time.
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 September 30, 2002, variable rate debt aggregating
$9,473,000 was outstanding under the credit agreement with an effective rate of
5.0% and $8,050,000 was outstanding under the bond agreement with an effective
rate of 5.25% (see Note 5 to Consolidated Financial Statements). In addition,
the Company's fixed rate debt consisting of $1,000,000 of 10% subordinated
promissory notes was outstanding at September 30, 2002. The borrowings under
variable rate facilities are due approximately as follows: $393,000 in 2002;
$1,954,000 in 2003; $8,550,000 in 2004 and $6,626,000 in years 2005 through
2013. Each increase of 10 basis points in the effective interest rate would
result in an annual increase in interest charges on variable rate debt of
$17,523 based on September 30, 2002 outstanding borrowings. The actual effect of
changes in interest rates is dependent on actual amounts outstanding under the
various loan agreements. The Company monitors interest rates and has sufficient
flexibility to renegotiate the loan agreement, without penalty, in the event
market conditions and interest rates change.
ZINC PRICE RISK. NAG enters into fixed price purchase commitments with domestic
and foreign zinc producers to purchase a portion of its zinc requirements for
its hot dip galvanizing operations. Commitments for the future delivery of zinc,
typically up to one (1) year, reflect rates quoted on the London Metals
Exchange. At September 30, 2002, the aggregate fixed price commitments for the
procurement of zinc in 2002 and 2003 were approximately $6,400,000. In addition,
NAG had unpriced commitments to procure approximately 1,500,000 pounds of zinc
in 2002 and 2003. With respect to the fixed price purchase commitments, a
hypothetical decrease of 10% in the market price of zinc from the September 30,
2002 level would represent a potential
17
lost gross margin opportunity of approximately $640,000; 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.
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.
18
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 September 30, 2002.
19
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: October 30, 2002
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 September 30, 2002 fully complies with the
requirements of Section 13(a) of the Securities Exchange Act of 1934 and that
the information contained in such report fairly presents, in all material
respects, the financial condition and the results of operations of the Company.
KINARK CORPORATION
------------------
(Registrant)
/s/ Ronald J. Evans
------------------------------------
President and
Chief Executive Officer
/s/ Paul R. Chastain
------------------------------------
Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: October 30, 2002
20
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.
21
Date: October 30, 2002 /s/ Ronald J. Evans
--------------------
President and
Chief Executive Officer
Date: October 30, 2002 /s/ Paul R. Chastain
--------------------
Vice President and
Chief Financial Officer
(Principal Financial Officer)
22