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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, 2000
Commission File No. 1-3920
KINARK CORPORATION
(Exact name of the registrant as specified in its charter)
Delaware 71-0268502
(State of Incorporation) (I.R.S. Employer Identification No.)
2250 East 73rd Street
Tulsa, Oklahoma 74136-6832
(Address of principal executive offices)
Registrant's telephone number: (918) 494-0964
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 and 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes x No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of September 30, 2000.
Common Stock $ .10 Par Value . . . . . 6,712,209
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KINARK CORPORATION AND SUBSIDIARIES
Index to Quarterly Report on Form 10-Q
Page
Part I. Financial Information
Forward Looking Statements or Information 2
Item 1. Financial Statements
Independent Accountants' Review Report 3
Condensed Consolidated Balance Sheets as
of September 30, 2000 (unaudited), and
December 31, 1999 4
Condensed Consolidated Statements of
Operations for the three and nine months
ended September 30, 2000 and 1999 (unaudited) 5
Condensed Consolidated Statements of
Cash Flows for the nine months ended
September 30, 2000 and 1999 (unaudited) 6
Notes to Condensed Consolidated Financial
Statements for the three and nine months
ended September 30, 2000 and 1999 (unaudited) 7-12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13-16
Item 3. Quantitative and Qualitative Disclosures
About Market Risks 17
Part II. Other Information 18-19
Signatures 20
FORWARD LOOKING STATEMENTS OR INFORMATION
Certain statements in this Form 10-Q, including information set forth
under the caption "Management's Discussion and Analysis of Financial Condition
and Results of Operations", constitute "Forward-Looking Statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Such statements are
typically punctuated by words or phrases such as "anticipates," "estimate,"
"should," "may," "management believes," and words or phrases of similar
import. The Company cautions investors that such forward-looking statements
included in this Form 10-Q, or hereafter included in other publicly available
documents filed with the Securities and Exchange Commission, reports to the
Company's stockholders and other publically available statements issued or
released by the Company involve significant risks, uncertainties, and other
factors which could cause the Company's actual results, performance (financial
or operating) or achievements to differ materially from the future results,
performance (financial or operating) or achievements expressed or implied by
such forward-looking statements. Factors that could cause or contribute to
such differences could include, but are not limited to, changes in demand,
prices, and the raw materials cost of zinc; changes in economic conditions of
the various markets the Company serves, Year 2000 issues, 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.
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INDEPENDENT ACCOUNTANTS' REVIEW REPORT
To the Board of Directors and Stockholders of
Kinark Corporation:
We have reviewed the accompanying condensed consolidated balance sheet of
Kinark Corporation and subsidiary (the "Company") as of September 30, 2000,
and the related condensed consolidated statements of operations for the three
and nine-month periods ended September 30, 2000 and 1999 and the condensed
consolidated statements of cash flows for the nine months ended September 30,
2000 and 1999. These financial statements are the responsibility of the
Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and of making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with auditing standards generally accepted in the
United States of America, the objective of which is the expression of an
opinion regarding the financial statements taken as a whole. Accordingly, we
do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to such condensed consolidated financial statements for them to
be in conformity with accounting principles generally accepted in the United
States of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of
Kinark Corporation and subsidiaries as of December 31, 1999, and the related
consolidated statements of operations, stockholders' equity and comprehensive
income, and cash flows for the year then ended (not presented herein); and in
our report dated February 18, 2000 (except as to Note 12 for which the date is
March 14, 2000), we expressed an unqualified opinion on those consolidated
financial statements. In our opinion, the information set forth in the
accompanying condensed consolidated balance sheet as of December 31, 1999 is
fairly stated, in all material respects, in relation to the consolidated
balance sheet from which it has been derived.
/s/Deloitte & Touche LLP
Tulsa, Oklahoma
November 13, 2000
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KINARK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
Unaudited
September 30 Dec 31
(Dollars in Thousands) 2000 1999
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ASSETS
Current Assets
Cash and cash equivalents $ 99 $ 168
Trade receivables, net 5,635 5,317
Inventories 4,573 4,771
Prepaid expenses and other assets 212 534
Deferred tax asset, net 337 531
Net assets of discontinued operations --- 1,254
------ ------
Total Current Assets 10,856 12,575
------ ------
Funds held by bond trustee 3,662 ---
Property, Plant and Equipment, at Cost
Land 1,600 1,571
Galvanizing plants and equipment 26,542 24,151
Construction in progress 4,317 278
Other 147 147
------ ------
32,606 26,147
Less: Allowance for depreciation 11,391 9,475
------ ------
Total Property, Plant & Equipment, Net 21,215 16,672
------ ------
Goodwill, net of accumulated amortization 3,624 3,765
Other Assets 93 105
------ ------
TOTAL ASSETS $ 39,450 $ 33,117
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Trade accounts payable $ 1,344 $ 1,190
Accrued payroll and employee benefits 797 820
Other taxes 309 286
Other accrued liabilities 647 553
Current maturities of long-term obligations 1,094 1,119
Current portion of bonds payable 420 ---
------ ------
Total Current Liabilities 4,611 3,968
------ ------
Deferred Tax Liability, Net 641 458
Pension and Related Liabilities 127 153
Long-Term Obligations 8,229 9,985
Bonds Payable 8,630 ---
------ ------
Total Liabilities 22,238 14,564
------- ------
Commitments and Contingencies (Note 7) --- ---
Stockholders' Equity
Common stock 819 819
Additional paid-in capital 17,364 17,364
Retained earnings 5,009 6,350
Less: Treasury stock at cost (5,980) (5,980)
------ ------
Total Stockholders' Equity 17,212 18,553
------ ------
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $ 39,450 $ 33,117
====== ======
See notes to condensed consolidated financial statements.
-4-
KINARK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
(Dollars in Thousands
Except per Share Amounts) 2000 1999 2000 1999
============================================================================
Sales $ 9,576 $ 9,800 $29,374 $29,130
Cost of sales 6,554 6,900 20,753 21,010
Selling, general &
administrative expenses 1,314 1,431 4,200 4,536
Depreciation and amortization 723 654 2,142 1,889
------ ------ ------ ------
Total Costs and Expenses 8,591 8,985 27,095 27,435
------ ------ ------ ------
Operating Income before
Casualty Loss 985 815 2,279 1,695
Casualty loss (Note 6) --- --- 313 ---
------ ------ ------ ------
Operating Income (Expense) 985 815 1,966 1,695
Interest expense, net (247) (171) (708) (521)
Other income, net 157 --- 157 ---
------ ------ ------ ------
Income before Income Taxes 895 644 1,415 1,174
Income tax expense 421 276 649 504
------ ------ ------ ------
Income from Continuing Operations 474 368 766 670
Income (Loss) from Discontinued
Operations, net of income taxes --- (6) (444) 210
Loss on Disposal of Discontinued
Operations --- --- (1,663) ---
------ ------ ------ ------
Net Income (Loss) $ 474 $ 362 $ (1,341) $ 880
====== ====== ====== ======
Net Income (Loss) Per Common Share
Continuing Operations:
Basic and Diluted $ .07 $ .05 $ .11 $ .10
Discontinued Operations:
Basic and Diluted --- --- (.31) .03
Net Income (Loss):
Basic and Diluted $ .07 $ .05 $ (.20) $ .13
See notes to condensed consolidated financial statements.
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KINARK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
Nine Months Ended
September 30
----------------------
(Dollars in Thousands) 2000 1999
=============================================================================
Operating Activities
Net income (loss) $(1,341) $ 880
Loss (income) from discontinued operations 2,107 (210)
Depreciation and amortization 2,142 1,889
Gain on disposal of assets (164) (11)
Gain on sale of securities --- (23)
Deferred income taxes 377 280
Change in assets and liabilities:
Accounts receivable, net (318) (514)
Inventories and other 532 (429)
Accounts payable, accrued liabilities and other 222 479
------ ------
Net cash provided by continuing operations 3,557 2,341
Net cash provided by (used in) discontinued
operations (1,050) 583
------ ------
Cash Provided by Operating Activities 2,507 2,924
Investing Activities
Net proceeds from sale of discontinued operations 371 ---
Sale of securities --- 510
Capital expenditures (6,639) (3,787)
Proceeds from sale of assets 259 11
------ ------
Net cash used in continuing operations (6,009) (3,266)
Net cash used in discontinued operations (254) (186)
------ ------
Cash Used in Investing Activities (6,263) (3,452)
------ ------
Financing Activities
Proceeds from tax exempt bonds 9,050 ---
Tax exempt bond funds held by bond trustee (3,662) ---
Purchase of common stock for treasury --- (139)
Proceeds from long-term obligations 10,841 21,971
Payments on long-term obligations (12,622) (21,319)
------ ------
Net cash provided by continuing operations 3,607 513
Net cash used in discontinued operations (5) (42)
------ ------
Cash Provided by Financing Activities 3,602 471
------ ------
Decrease in Cash and Cash Equivalents (154) (57)
Cash and Cash Equivalents at Beginning of Period 253 189
------ ------
Cash at End of Period $ 99 $ 132
====== ======
See notes to condensed consolidated financial statements.
-6-
KINARK CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999
UNAUDITED
Note 1. Basis of Presentation
---------------------
The condensed consolidated financial statements included in this report
have been prepared by Kinark Corporation (the "Company") pursuant to
the rules and regulations of the Securities and Exchange Commission
for interim reporting and include all normal and recurring
adjustments which are, in the opinion of management, necessary for
a fair presentation. These financial statements have not been
audited by an independent accountant. The condensed consolidated
financial statements include the accounts of the Company and its
subsidiaries.
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, 1999. The financial data for the interim periods
presented may not necessarily reflect the results to be anticipated
for the complete year.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the balance sheet dates and
the reported amounts of revenues and expenses for each of the years.
Actual results will be determined based on the outcome of future
events and could differ from the estimates.
During the third quarter of 2000, NAG negotiated a new galvanizing
contract with its largest customer. Under terms of the new one-year
contract, NAG will no longer provide additional services that
previously included procurement and fabrication of steel products
prior to galvanizing. In 1999, sales to this customer that
accounted for 17.0% of NAG's total sales. The Company anticipates
that sales under the new contract will be less than 5.0% of NAG's total
sales. Management does not anticipate the new contract will have a
negative impact on gross margin.
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities" ("SFAS No. 133").
In June 2000, Statement of Financial Accounting Standards No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging
Activities" ("SFAS No. 138"), an amendment of SFAS No. 133, was
issued. The statement, as amended by SFAS No. 138, established
accounting and reporting standards for derivative instruments and
for hedging activities. It requires that an entity recognize all
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derivatives, at fair value, as either assets or liabilities in the
statement of financial position with an offset either to
shareholder's equity and comprehensive income or income depending
upon the classification of the derivative. Kinark is in the process
of reviewing its contracts to determine the appropriate accounting
treatment required by SFAS No. 133. Kinark management is in the
process of reviewing its activities to determine the impact on its
financial statements that will result from adoption of SFAS No. 133,
as amended by SFAS No. 138, which is required no later than
January 1, 2001. Note 7 -- Commitments and Contingencies includes
a description of Kinark's current derivative activities.
Note 2. Earnings Per Common Share
-------------------------
Basic and diluted earnings per common share for the periods presented
have been computed based upon the weighted average number of shares
outstanding of 6,712,209 and 6,712,159 for the three months ended
September 30, 2000 and 1999 respectively, and 6,712,213 and
6,727,840 for the nine months ended September 30, 2000 and 1999
respectively. Due to the option price being higher than the share
market value, the outstanding stock options have no dilutive effect
on the calculation of earnings per share. The number of options
excluded from the calculation of diluted earnings per share are
362,500 and 428,000 at September 30, 2000 and 1999, respectively.
Note 3. Inventories
-----------
Inventories consist primarily of raw zinc "pigs," molten zinc in
galvanizing kettles and other chemicals and materials used in the
hot dip galvanizing process. Such inventories are stated at the
lower of cost or market with market value based on ultimate
realizable value from the galvanizing process. Zinc cost is
determined on a last-in-first-out (LIFO) basis. Other
inventories are valued primarily on an average cost basis.
Note 4. Bonds Payable
-------------
During the first quarter of 2000, the Company issued $9,050,000 of
Harris County Industrial Development Corporation Adjustable Rate
Industrial Development Bonds, Series 2000 (the "Bonds"). The Bonds
are senior to other debt of the Company. Proceeds from the bond
issue are to be used for specified capital expenditures and were
transferred to Bank One Trust Company, N.A. (the "Trustee"). The
Trustee holds the unexpended bond funds and delivers funds to the
Company as requested for appropriate expenditures.
The Bonds bear interest at a variable rate (5.75% at September 30,
2000) that can be converted to a fixed rate upon certain conditions
outlined in the bond agreement. The Bonds are subject to annual
sinking fund redemption of $230,000 commencing on June 15, 2001,
which increases annually thereafter to a maximum redemption
of $960,000 on June 15, 2012. 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
-8-
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 5. Long-Term Obligations
---------------------
September 30 December 31
(Dollars in Thousands) 2000 1999
--------------------------------------------------------------------
Revolving lines of credit $ 5,377 $ 5,913
Term loan 3,577 4,033
10.0% note due 2001 305 339
9.5% note due 2015 23 24
Capital leases 41 60
Advancing Bridge loan repaid in 2000 --- 735
--------------------------------------------------------------------
9,323 11,104
Less current portion 1,094 1,119
--------------------------------------------------------------------
$ 8,229 $ 9,985
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In September 1999, the Company entered into a new three-year bank
credit agreement with total credit facilities of $23,700,000 that
replaced a previous loan agreement of $13,250,000 scheduled to
expire in May 2000. The new agreement provides (i) a $9,000,000
maximum revolving line of credit for working capital and general
corporate purposes, (ii) a $1,500,000 revolving capital expenditures
facility, (iii) a $4,200,000 term loan, (iv) a $2,000,000 advancing
bridge loan which expired March 2000 and (v) a $9,000,000 maximum
bridge loan replacement facility. The bridge loan replacement
facility was repaid in the first quarter of 2000 from the proceeds
of the Bonds. The new bank credit agreement matures September 30,
2002.
At September 30, 2000, the Company had additional borrowing
capacity of $711,000, net of outstanding letters of credit totaling
$275,000, under its revolving line of credit that reflected the
underlying value of its accounts receivable and inventories. In
addition, the Company had $1,500,000 under the term loan available
for capital expenditures. At the end of the third quarter 2000, the
Company also had outstanding an irrevocable letter of credit
totaling $1,860,000 for commitments related to the construction of
a new galvanizing plant, which it expects to fund by the end of 2000
from the Bond proceeds.
Substantially all of the Company's accounts receivable, inventories,
fixed assets and the stock of its subsidiary, North American
Galvanizing Company ("NAG") are pledged as collateral under the
agreement, and the credit agreement is secured by a 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 ratio. The prime rate
margin adjustment ranges from minus 50 basis points (0.50%) to plus 25
basis points (0.25%). The LIBOR rate margin adjustment ranges from
plus 225 basis points (2.25%) to plus 300 basis points (3.00%).
Term loan payments are based on a five year amortization schedule
-9-
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 capital
expenditures ratio. The Company was in compliance with the
covenants or had waivers for events of non-compliance at
September 30, 2000.
Note 6. Casualty Losses
---------------
At September 30, 2000, NAG had an unresolved insurance claim arising
from the failure of a galvanizing kettle during 1999. A major part of
the claim resulted from additional costs incurred to galvanize product
at an alternate NAG location in order to meet delivery commitments.
NAG recorded a casualty loss of $176,000 in the fourth quarter of
1999 representing the estimated loss, net of interim insurance
proceeds. NAG recorded an additional casualty loss of $313,000
during the first quarter of 2000, primarily representing costs
incurred during that period to transport product to an alternative
galvanizing location.
Note 7. Commitments and Contingencies
-----------------------------
As previously reported, North American Galvanizing Company ("NAG")
was notified in 1996 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 will continue to have additional environmental
compliance costs associated with operations in the galvanizing
business. The Company is committed to complying with the
environmental legislation and regulations affecting its operations.
Due to the uncertainties associated with future environmental
technologies, regulatory interpretations, and prospective
legislative activity, management cannot quantify potential costs
in this area.
The Company expenses or capitalizes, where appropriate, environmental
expenditures that relate to current operations as they are incurred.
Such expenditures are expensed when they are attributable to past
operations and are not expected to contribute to current or future
revenue generation. The Company records liabilities when
remediation or other environmental assessment or clean-up efforts
are probable and the cost can be reasonably estimated.
NAG enters into purchase commitments with domestic and foreign zinc
producers to purchase certain of its zinc requirements for its hot dip
galvanizing operations. Commitments for the future delivery of
zinc reflect rates quoted on the London Metal Exchange and which
-10-
are not subject to future price adjustment. At September 30, 2000,
the aggregate commitments for the procurement of zinc were
approximately $3.4 million, which represents all of the estimated
operating requirements for the remainder of 2000 and additions to
inventory for a new galvanizing plant. During the third quarter of
2000, the Company entered into a one-year commodity collar contract
with a bank which is intended to offset the impact of potential
fluctuations in the market price of zinc. The contract contains a
cap and floor price for a notional quantity of zinc. Each month,
the contract is cash settled based on a commodity reference price,
determined by the average of the daily closing price of zinc on the
London Metal Exchange. At September 30, 2000, the commodity collar
contract in place for a notional quantity of 200,000 pounds of zinc
per month through August 31, 2001, represents approximately 13% of
NAG's projected annual zinc usage. The fair value of the commodity
collar contract in place at September 30, 2000 was an unrealized
loss of $68,000. Depending on zinc price trends, and other factors,
the Company may elect to increase its zinc hedge commitment from
time-to-time. Management believes these procurement and hedging
programs ensure adequate supplies of zinc and assist in stablizing
gross margins from its galvanizing operations.
In the first quarter of 2000, NAG began construction on a new
galvanizing plant in Harris County, Texas and, in connection with
this project, entered into contract commitments of approximately
$6,100,000. Project expenditures through September 30, 2000 were
$5,141,000.
During the second quarter of 2000, Kinark received a commitment from
a bank to provide $2,200,000 lease financing for equipment for a
new galvanizing plant. Terms of the commitment require monthly
interest payments at prime rate on interim credit financing through
the end of 2000. Commencing January 1, 2001, the interim financing
converts to a non-cancelable net lease with monthly payments of
$33,593 for a term of seven (7) years. The lease will contain
early buyout options equal to the Fair Market Value of the equipment.
Various litigation arising in the ordinary course of business is
pending against the Company.
Management believes that resolution of the Company's contingencies
should not materially affect the Company's consolidated financial
position or liquidity. Should future developments cause the
Company to record an additional liability for customer claims,
environmental evaluation, clean-up or litigation, the recording of
such a liability could have a material impact on the results of
operations for the period involved.
Note 8. Labor Agreement
---------------
On April 1, 2000, NAG concluded negotiations of a one-year labor
agreement with the United Steel Workers Union covering approximately
110 production workers at its Tulsa galvanizing plant. The new
agreement is not materially changed from the previous agreement
which expired in the first quarter of 2000.
-11-
Note 9. Discontinued Operations
-----------------------
During the second quarter of 2000, the Company elected to sell its
Lake River Corporation ("Lake River") and North American Warehousing
Company ("NAW") subsidiaries, comprising the Company's bulk liquids
terminal and public warehousing businesses. On June 26, 2000, the
Company sold all of the common stock of Lake River and NAW for
$371,000 cash.
These transactions resulted in a net loss on the disposal of
business segments of approximately $1,246,000 and $417,000 for Lake
River and NAW, respectively. The Lake River and NAW segments are
accounted for as discontinued operations, and accordingly, amounts
in the financial statements and related notes for all periods shown
have been restated to reflect discontinued operations accounting.
Lake River and NAW, both located in the Chicago area, represented
approximately 16% of the Company's 1999 sales. Both of the acquiring
corporations are controlled by members of the existing management of
Lake River and NAW.
Note 10. Segment Disclosures
-------------------
Subsequent to the sale of Lake River and NAW, the Company's sole
business is hot dip galvanizing which is conducted through its wholly
owned subsidiary, North American Galvanizing Company.
-12-
Kinark Corporation and Subsidiaries
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Kinark Corporation's (the "Company") business is metals protection and
coatings, which is conducted through its wholly-owned subsidiary, North
American Galvanizing Company. During the second quarter of 2000, Kinark
exited the chemical storage and warehousing business with the sale of its
wholly-owned subsidiaries, Lake River Corporation ("Lake River") and North
American Warehousing Company ("NAW"). As a result, these subsidiaries have
been classified as discontinued operations for accounting purposes and their
revenues and expenses are not included in the results of continuing operations
analyzed below. These subsidiaries accounted for approximately 16% of the
Company's consolidated sales for 1999. Currently, the Company's sole line of
business is hot dip galvanizing.
RESULTS OF OPERATIONS
Galvanizing sales increased 7.3% from the third quarter of 1999,
reflecting solid year-to-year growth in tonnage. However, this strong
performance was offset by the Company's decision to eliminate fabrication of
steel product for its largest galvanizing account. During the third quarter
of 2000, NAG re-negotiated a one-year contract under which this customer
resumed fabrication of its steel products and NAG provides standard hot dip
galvanizing. The net effect of eliminating steel fabrication reduced NAG's
third quarter 2000 sales approximately $863,000, or 8.8%, from the third
quarter of 1999. Management does not anticipate the new contract will have a
negative impact on gross margin. NAG does not conduct any other fabrication
operations.
For the first nine months of 2000, sales of $29,374,000 increased
slightly over $29,130,000 reported for the same period of 1999. Excluding
steel fabrication, core hot dip galvanizing sales increased 7.1% in the first
nine months of 2000 over the nine-month period a year ago. Through the first
three quarters of 2000, the Company generated increased sales from its
multi-state galvanizing plants, with continuing strength from serving
transportation, communications, electrical transmission and distribution
markets.
Net income from continuing operations for the third quarter of 2000 was
$474,000, or $.07 per share, compared to net income of $368,000, or $.05 per
share for the third quarter of 1999. For the first nine months of 2000, net
income from continuing operations was $766,000, or $.11 per share, compared to
net income of $670,000, or $.10 per share for the same period a year ago.
Cost of goods sold declined to 68.4% of sales in the third quarter of
2000, from 70.4% in the same period of 1999. For the nine months ended
September 30, 2000, cost of goods sold was 70.7% of sales compared to 72.1%
for the same period a year ago. The quarter-by-quarter gain in gross margin
for the current year is due primarily to improvement in galvanizing operations
among NAG's multi-state locations and sharply increased sales from NAG's
recently expanded Nashville plant.
Depreciation (including amortization of goodwill) of $723,000 and
-13-
$2,142,000, respectively, for the three and nine months ended September 30,
2000, increased from $654,000 and $1,889,000, respectively, for the same periods
ended September 30, 1999. The increase in depreciation is the result of the
Company's increased capital expenditures for refurbishing facilities and
replacing obsolete equipment at NAG's Galvaizing plants.
Selling, general and administrative expenses (SG&A) of $1,314,000 in the
third quarter of 2000 decreased $117,000, or 8.2%, from $1,431,000 in the
third quarter of 1999. For the first nine months of 2000, SG&A expenses of
$4,200,000 decreased $336,000, or 7.4% from $4,536,000 in the same period of
1999. The reductions in SG&A reflect reductions in staff and the result of
management's actions to reduce administrative expenses throughout the Company.
The Company recorded a casualty loss of $313,000 in the first quarter of
2000 for the expenses associated with a kettle failure. While the Company
believes this casualty loss is covered by insurance, a final settlement has
not been determined and there can be no assurance that the Company will
recover any further portion of this loss.
Net interest expense for the third quarter of 2000 rose to $247,000 from
$171,000 for the third quarter of 1999. Interest expense for the first nine
months of 2000 was $708,000 compared to $521,000 for the first nine months of
1999. The increases in interest expense for the respective periods of 2000 is
due primarily to increased borrowings for current working capital requirements
and capital expenditures. The Company's effective income tax rate for the
three and nine months ended September 30, 2000 were 47.0% and 45.9%,
respectively, compared to 42.9% for the same periods ended September 30, 1999.
The rates were higher than federal statutory rates primarily due to
non-deductible amortization of goodwill and state income taxes.
LIQUIDITY AND CAPITAL RESOURCES
For the first nine months of the current year, the Company's continuing
operating activities generated cash of $3,557,000 compared to cash generated
of $2,341,000 in the first nine months of 1999. The increase in cash
generated by year 2000 operating activities is primarily due to an increase in
operating earnings and a decrease in working capital.
Working capital increased from $7,326,00 at the end of the third quarter
of 1999 to $7,353,000 at the end of 1999 and decreased to $6,245,000 at the
end of the third quarter of this year. The reduction of $1,108,000 in
working capital during the nine months ended September 30, 2000 was due
primarily to decreases in prepaid and deferred tax asset accounts, plus
increases in trade accounts payable, accrued liabilities and current debt
obligations payable within one year. The ratio of current assets to
current liabilities was 2.54, 2.85 and 2.35 at September 30, 1999, December 31,
1999 and September 30, 2000, respectively.
In March 2000, the Company obtained $9,050,00 from the issuance of
tax-exempt industrial revenue bonds, the use of which is restricted for a new
galvanizing plant currently under construction. Capital expenditures for the
first nine months of 2000 were $6,639,000, of which $4,068,000 was for the new
galvanizing plant. The Company's other financing activities in the first nine
months of 2000 included making payments of $12,622,000 on long-term
obligations and receiving proceeds of $10,841,000 from long-term obligations,
for a net decrease of $1,781,000 in long-term obligations. The Company's
current credit facility includes a $9,000,00 revolving line of credit under a
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bank credit agreement that expires September 30, 2002. The Company's
availability under the revolver was $711,000 at September 30, 2000. The
Company believes it has the ability to generate cash and/or has available
credit facilities to meet its foreseeable needs for working capital and
planned capital expenditures.
ENVIRONMENTAL MATTERS AND OTHER CONTINGENCIES
As previously reported, NAG was notified in 1997 by the Illinois
Environmental Protection Agency ("IEPA") that is 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.
At September 30, 2000, NAG had an unresolved insurance claim arising from
the failure of a galvanizing kettle during 1999. A major part of the claim
resulted from additional costs incurred to galvanize product at an alternate
NAG location in order to meet delivery commitments. NAG recorded a casualty
loss of $176,000 in the fourth quarter of 1999 representing the estimated
loss, net of interim insurance proceeds. NAG recorded an additional casualty
loss of $313,000 during the first quarter of 2000, primarily representing
costs incurred during that period to transport product to an alternative
galvanizing location.
The Company's facilities are subject to extensive environmental
legislation and regulations affecting their operations and the discharge of
wastes. The cost of compliance with such regulations was approximately
$732,000 in the first nine months of 2000 and $570,000 for the same period in
1999, for the disposal and recycling of waste acids generated by the
galvanizing operations. NAG operates on-site sulphuric acid recovery systems
at three of its galvanizing plants, and plans to continue using hydrochloric
acid at its other galvanizing plants.
The Company is committed to complying with all federal, state and local
environmental laws and regulations and using its best management practices to
anticipate and satisfy future requirements. As is typical in the galvanizing
and chemicals businesses, the Company will have additional environmental
compliance costs associated with past, present, and future operations.
Management has committed resources to discovering and eliminating
environmental issues as they arise. Because of the frequent changes in
environmental technology, laws and regulations management cannot quantify the
Company's potential costs in this area.
DISCONTINUED OPERATIONS
During the second quarter of 2000, the Company elected to sell its Lake
River and NAW subsidiaries, comprising the Company's bulk liquids terminal and
public warehousing businesses. On June 26, 2000, the Company sold all of the
common stock of Lake River and NAW for $371,000 cash (see Note 9 to Condensed
Consolidated Financial Statements).
The transactions resulted in a loss on disposal of $1,663,000. The
combined revenues of Lake River and NAW were $3,403,000 and $5,412,000 for
the nine-month periods ended September 30, 2000 and 1999, respectively.
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Their combined operating results were a net loss of $444,000 and a net profit
of $210,000 for the nine-month periods ended September 30, 2000 and 1999,
respectively. The combined income tax expense (benefit) on the operating
results of Lake River and NAW were $(268,000) and $(158,000) for the
nine-month periods ended September 30, 2000 and 1999, respectively.
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Kinark's current operations include managing market risks related to
changes in interest rates and zinc commodity prices.
INTEREST RATE RISK. Kinark is exposed to financial market risk related
to changing interest rates. Changing interest rates will affect interest paid
on Kinark's variable rate debt. At September 30, 2000, $8,954,000 was
outstanding under the credit agreement with an effective rate of 9.5% and
$9,050,000 was outstanding under the bond agreement with an effective rate of
4.63% (see Note 5 to Condensed Consolidated Financial Statements). The
borrowings are due as follows: $194,000 in 2000, $1,673,000 in 2001,
$8,591,000 in 2002 and $7,915,000 in years 2003 through 2012. Each increase
of 10 basis points in the effective interest rate would result in an annual
increase in interest charges of approximately $18,400 based on September 30,
2000 outstanding borrowings. The actual effect of changes in interest rates
is dependent on actual amounts outstanding which vary under the revolving
credit facility. The Company monitors interest rates and has sufficient
flexibility to renegotiate the loan agreement, without penalty, in the event
market conditions and interest rates change.
ZINC PRICE RISK. NAG enters into purchase commitments with domestic
and foreign zinc producers to purchase certain of its zinc requirements for
its hot dip galvanizing operations. Commitments for the future delivery of
zinc reflect rates quoted on the London Metal Exchange and which are not
subject to future price adjustment. At September 30, 2000, the aggregate
commitments for the procurement of zinc were approximately $3.4 million,
which represents all of the estimated operating requirements for the
remainder of 2000 and additions to inventory for a new galvanizing plant.
During the third quarter of 2000, the Company entered into a one-year
commodity collar contract with a bank which is intended to offset the impact
of potential fluctuations in the market price of zinc. The contract
contains a cap and floor price for a notional quantity of zinc. Each month,
the contract is cash settled based on a commodity reference price, determined
by the average of the daily closing price of zinc on the London Metal
Exchange. At September 30, 2000, the commodity collar contract in place for
a notional quantity of 200,000 pounds of zinc per month through August 31,
2001, represents approximatley 13% of NAG's projected annual zinc usage.
The fair value of the commodity collar contract in place at September 30,
2000 was an unrealized loss of $68,000. Depending on zinc price trends, and
other factors, the Company may elect to increase its zinc hedge commitment
from time-to-time. Management believes these procurement and hedging
programs ensure adequate supplies of zinc and assist in stabilizing
gross margins from its galvanizing operations. With respect to the zinc
purchase commitments, a potential decrease of 10% in the market price of
zinc from the September 30, 2000 level would cause a lost gross margin
opportunity of approximately $340,000. With respect to the zinc commodity
collar contract, for each potential decrease of $.01 per pound in the market
price of zinc below the contractual floor price the Company would incur an
additional cost of $2,000.
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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) filed on
June 7, 1996).
3.2 The Company's Amended and Restated Bylaws (incorporated by
reference to Exhibit 3.2 to the Company's Quarterly Report
on Form 10-Q dated March 31, 1996).
27 Financial Data Schedule
99 Cautionary Statements by the Company Related to
Forward-Looking Statements
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(b) Reports on form 8-K
The Company filed a Form 8-K Current Report on July 12, 2000
regarding the sale of the common stock of its subsidiaries,
Lake River Corporation and North American Warehousing Company,
on June 26, 2000.
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SIGNATURES
Pursuant to the requirements of Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized:
KINARK CORPORATION
---------------------
Registrant
/S/Paul R. Chastain
---------------------
Paul R. Chastain
Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: November 10, 2000
-----------------
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EXHIBIT INDEX
Ex. No. Description
3.1 The Company's Restated Certificate of Incorporation
(incorporated by reference to Exhibit 3.1 to the
Company's Pre-Effective Amendment No. 1 to Registration
Statement on Form S-3 (Reg. No. 333-4937) filed on June 7, 1996).
3.2 The Company's Amended and Restated Bylaws (incorporated by
reference to Exhibit 3.2 to the Company's Quarterly
Report on Form 10-Q dated March 31, 1996).
27 Financial Data Schedule
99 Cautionary Statements by the Company Related to Forward-Looking
Statements.
