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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTER ENDED MARCH 31, 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
(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 March 31, 2000.
Common Stock $ .10 Par Value . . . . . 6,712,219
==============================================================================
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 March 31, 2000 (unaudited), and
December 31, 1999 4
Condensed Consolidated Statements of
Operations for the three months ended
March 31, 2000 and 1999 (unaudited) 5
Condensed Consolidated Statements of
Cash Flows for the three months ended
March 31, 2000 and 1999 (unaudited) 6
Notes to Condensed Consolidated Financial
Statements for the three months ended
March 31, 2000 and 1999(unaudited) 7-12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 13-15
Item 3. Quantitative and Qualitative Disclosure
About Market Risks 16
PART II. OTHER INFORMATION 17
SIGNATURES 18
FORWARD LOOKING STATEMENTS OR INFORMATION
Certain statements in this Form 10-Q, including information set forth
under the caption "Management's Discussion and Analysis of Financial Condition
and Results of Operations", constitute "Forward-Looking Statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. Such statements are
typically punctuated by words or phrases such as "anticipates," "estimate,"
"should," "may," "management believes," and words or phrases of similar
import. The Company cautions investors that such forward-looking statements
included in this Form 10-Q, or hereafter included in other publicly available
documents filed with the Securities and Exchange Commission, reports to the
Company's stockholders and other publically available statements issued or
released by the Company involve significant risks, uncertainties, and other
factors which could cause the Company's actual results, performance (financial
or operating) or achievements to differ materially from the future results,
performance (financial or operating) or achievements expressed or implied by
such forward-looking statements. Factors that could cause or contribute to
such differences could include, but are not limited to, changes in demand,
prices, and the raw materials cost of steel and zinc; changes in economic
conditions of the various markets the Company serves, 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.
2
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
To the Board of Directors and Stockholders of
Kinark Corporation:
We have reviewed the accompanying condensed consolidated balance sheet of
Kinark Corporation and subsidiaries (the "Company") as of March 31, 2000, and
the related condensed consolidated statements of operations and of cash flows
for the three month periods ended March 31, 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 earnings, 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
May 10, 2000
3
KINARK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
Unaudited
MARCH 31 Dec 31
(Dollars in Thousands) 2000 1999
==============================================================================
CURRENT ASSETS
Cash and cash equivalents $ 421 $ 253
Trade receivables, net 7,139 6,229
Inventories 5,225 4,799
Prepaid expenses and other assets 269 629
Deferred tax asset, net 759 693
------ ------
TOTAL CURRENT ASSETS 13,813 12,603
------ ------
FUNDS HELD BY BOND TRUSTEE 7,420 ---
PROPERTY, PLANT AND EQUIPMENT, AT COST
Land 1,571 1,571
Chemical storage facilities 10,823 10,734
Warehousing equipment 798 789
Galvanizing plants and equipment 24,084 23,357
Construction in progress 1,546 1,073
Other 147 146
------ ------
38,969 37,670
Less: Allowance for depreciation 20,285 19,510
------ ------
TOTAL PROPERTY, PLANT &
EQUIPMENT, NET 18,684 18,160
------ ------
GOODWILL, NET OF ACCUMULATED AMORTIZATION 3,717 3,765
OTHER ASSETS 175 181
------ ------
TOTAL ASSETS $43,809 $ 34,709
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Trade accounts payable $ 1,779 $ 1,404
Accrued payroll and employee benefits 1,251 1,116
Other taxes 594 1,018
Other accrued liabilities 885 734
Current maturities of
long-term obligations 1,104 1,131
Current portion of bonds payable 138 ---
------ ------
TOTAL CURRENT LIABILITIES 5,751 5,403
------ ------
DEFERRED TAX LIABILITY, LONG-TERM 458 458
PENSION AND RELATED LIABILITIES 304 309
LONG-TERM OBLIGATIONS 9,991 9,986
BONDS PAYABLE 8,912 ---
COMMITMENTS AND CONTINGENCIES (NOTE 7) --- ---
STOCKHOLDERS' EQUITY
Common stock 819 819
Additional paid-in capital 17,364 17,364
Retained earnings 6,190 6,350
Less: Treasury stock at cost (5,980) (5,980)
------ ------
TOTAL STOCKHOLDERS' EQUITY 18,393 18,553
------ ------
TOTAL LIABILITIES &
STOCKHOLDERS' EQUITY $43,809 $34,709
====== ======
See notes to condensed consolidated financial statements.
4
KINARK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited
Three Months Ended
March 31
-------------------------
(Dollars in Thousands Except
per Share Amounts) 2000 1999
==============================================================================
SALES $10,921 $11,145
COSTS AND EXPENSES
Cost of sales 8,262 8,049
Selling, general and
administrative expenses 1,593 1,776
Depreciation and amortization 827 723
------ ------
TOTAL COSTS AND EXPENSES 10,682 10,548
------ ------
OPERATING INCOME BEFORE CASUALTY LOSS 239 597
Casualty loss (Note 6) 313 ---
------ ------
OPERATING INCOME (LOSS) (74) 597
Interest expense, net 212 175
------ ------
INCOME (LOSS) BEFORE INCOME TAXES (286) 422
Income tax expense (benefit) (126) 181
------ ------
NET INCOME (LOSS) $ (160) $ 241
====== ======
NET EARNINGS (LOSS) PER COMMON SHARE
Basic $ (.02) $ .04
Diluted $ (.02) $ .04
See notes to condensed consolidated financial statements.
5
KINARK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
Three Months Ended
March 31
--------------------
(Dollars in Thousands) 2000 1999
==============================================================================
OPERATING ACTIVITIES
Net income (loss) $ (160) $ 241
Depreciation and amortization 827 723
Loss on disposal of assets --- 6
Gain on sale of securities --- (12)
Deferred income taxes (66) 79
Change in assets and liabilities:
Accounts receivable, net (910) (191)
Inventories and other (60) 571
Accounts payable, accrued
liabilities and other 232 (129)
----- -----
CASH PROVIDED BY (USED FOR)
OPERATING ACTIVITIES (137) 1,288
INVESTING ACTIVITIES
Sale of securities --- 402
Capital expenditures (1,303) (844)
Funds held by bond trustee (7,420) ---
------ ------
CASH USED FOR INVESTING ACTIVITIES (8,723) (442)
FINANCING ACTIVITIES
Purchase of common stock --- (71)
Proceeds from tax-exempt bonds 9,050 ---
Proceeds from long-term obligations 5,392 4,012
Payments on long-term obligations (5,414) (4,749)
------ ------
Cash Provided by (Used for)
Financing Activities 9,028 (808)
------ ------
INCREASE IN CASH AND CASH EQUIVALENTS 168 38
CASH AND CASH EQUIVALENTS AT
BEGINNING OF PERIOD 253 189
------ ------
CASH AT END OF PERIOD $ 421 $ 227
====== ======
See notes to condensed consolidated financial statements.
6
KINARK CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 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.
The Company will be required to adopt Statement
of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging
Activities", effective January 1, 2001, and is in the
process of evaluating the effect of this standard on its
financial reporting. SFAS No. 133 requires fair
value accounting for all stand-alone derivatives,
and for many derivatives embedded in other
instruments and contracts.
NOTE 2. EARNINGS PER COMMON SHARE
--------------------------
Diluted earnings per common share for the periods
presented has been computed based upon the weighted
average number of shares outstanding of 6,712,219
and 6,762,208 adjusted for the dilutive effect of stock
options for the three months ended March 31, 2000
and 1999, respectively. Basic earnings per common share
for these same periods has been computed based upon
the average number of shares outstanding of 6,712,219
7
and 6,751,754, respectively for each period.
The number of options excluded from the calculation
of diluted earnings per share due to the option price
being higher than the share value are 383,000 and
254,500 at March 31, 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. All 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 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 (5.25%
at March 31, 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,
and thereafter increases annually 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 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.
The Agreement contains certain restrictive
covenants including consolidated tangible net worth,
debt service coverage ratio, current ratio, maximum
leverage ratio and capital expenditures. The Company
was in compliance with the covenants or had waivers for
events of non-compliance at March 31, 2000.
NOTE 5. DEBT OBLIGATIONS
----------------
In September 1999, the Company entered into a
new three-year bank credit agreement with total credit
facilities of $23,700,00 that replaced a previous loan
agreement of $13,250,000 scheduled to expire in May 2000.
The new agreement provides (1) 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
8
bridge loan replacement facility. The bridge loan
replacement facility was fully funded in the first
quarter of 2000 from the proceeds of Harris County Industrial
Development Cororation Adjustable Rate Industrial Development
Bonds, Series 2000. Among other conditions of the bond financing,
which will be amortized over 12 years, the bonds are
supported by a financial letter of credit issued by
a bank and guaranteed by the Company. The new
bank credit agreement matures September 30, 2002.
At March 31, 2000, the Company had additional
borrowing capacity of $1,654,000, 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 first quarter 2000, the Company also had
outstanding an irrevocable letter of credit totaling
$1,980,000 for commitments related to the construction
of a new galvanizing plant, which it expects to pay in
full by the end of 2000 from existing bond proceeds.
Substantially all of the Company's accounts receivable,
inventories, fixed assets and the stock of its
subsidiaries are pledged as collateral under the
agreement, and the credit agreement is secured by a
guaranty from each of the Company's subsidiaries.
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 points (3.00%).
Term loan payments are based on a five year
amortization schedule with equal monthly payments of
principal and interest, and the loan may be
prepaid without penalty. The revolving line of credit
may be paid down without penalty, or additional
funds may be borrowed up to the 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 March 31, 2000.
NOTE 6. CASUALTY LOSSES
---------------
At March 31, 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 took a charge of $176,000
to other expense in the final quarter of 1999 for the
net book value of the kettle and related costs incurred
in 1999, net of interim insurance proceeds. Due
to the uncertainty of the timing and amount of future
insurance recoveries, NAG took an additional charge of
$313,000 during the first quarter of 2000.
9
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.
In October 1999, Lake River received notice from a
customer of a claim for approximately $972,000 to
recover costs arising from Lake River's alleged
shipment of the wrong product in May 1999. At March 31,
2000, the Company and its insurance carrier had not
made a final determination of the amount of the claim,
nor assessed the potential joint responsibility of
the several parties involved. Although the ultimate
amount of the claim and apportionment of
responsibility is not determinable at this time,
Lake River recorded a reserve of $25,000 in 1999
for the self-insurance retention under its insurance
policy.
The Company will continue to have additional
environmental compliance costs associated with
operations in the galvanizing and chemicals
businesses. 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 reasonably
attempt to 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 Metals Exchange which are not
subject to future price adjustment. At March 31,
2000, the aggregate commitments for the procurement of
zinc were approximately $3.7 million in 2000, which
represents approximately 56% of estimated requirements
for the remainder of 2000. Management believes
this zinc procurement program ensures adequate supplies
of zinc and stable 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 March 31, 2000 level would
cause a lost gross margin opportunity of
approximately $370,000. However, a favorable impact
of a similar amount would result from the same
hypothetical price movement on the 44% requirements
satisfied by short-term spot purchases of zinc not
yet committed.
In the first quarter of 2000, NAG began construction
on a new galvanizing plant in Harris County,
10
Texas and, in connection with this project, entered
into contract commitments of approximately
$6,100,000.
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.
NOTE 9. SEGMENT DISCLOSURES
-------------------
The Company is engaged principally in hot dip
galvanizing and also conducts business in bulk
liquid chemical storage and public warehousing.
The services provided by the Company's wholly-owned
subsidiaries are classified into the following industry
segments: Galvanizing, Chemical Storage and
Warehousing. Operating performance is measured by
segment sales and operating earnings which includes
operating costs, selling and administrative expenses,
depreciation and amortization. All of the Company's
revenues are derived from sales to customers located
within the United States and there are no inter-
segment sales. The galvanizing segment provides
corrosion protection for customers' fabricated iron
and steel structures through the process of
immersing the structure into a bath of molten zinc.
The chemical storage segment operates a bulk liquid
terminal for the storage of customers' products and
also provides specialty chemical bagging and drumming
services. The warehousing segment provides public
warehousing space, primarily for commercial and
industrial dry good products. Corporate headquarters
expenses were primarily for insurance premiums, audit
and legal fees, investor relations, travel, voice
and data communications and salaries. The corporate
headquarters staff is comprised of four persons,
including the officers of the Company.
11
Quarter Ended March 31
--------------------------------------
(Dollars in Thousands) 2000 1999
==============================================================================
SALES
Galvanizing $ 9,170 84.0% $ 9,280 83.3%
Chemical storage 1,231 11.3% 1,321 11.8%
Warehousing 520 4.7% 544 4.9%
- ------------------------------------------------------------------------------
10,921 100.0% 11,145 100.0%
- ------------------------------------------------------------------------------
OPERATING INCOME BEFORE CASUALTY LOSS
AND INTEREST EXPENSE
Galvanizing $ 644 $ 754
Chemical storage (15) 271
Warehousing (67) (44)
Corporate headquarters expense (323) (384)
- ------------------------------------------------------------------------------
239 597
- ------------------------------------------------------------------------------
Casualty loss 313 ---
Interest expense 212 175
- ------------------------------------------------------------------------------
525 175
- ------------------------------------------------------------------------------
Income tax expense (benefit) (126) 181
- ------------------------------------------------------------------------------
NET INCOME (LOSS) $ (160) $ 241
==============================================================================
CAPITAL EXPENDITURES
Galvanizing $ 1,205 $ 767
Chemical storage 89 61
Warehousing 9 14
General corporate 0 2
- ------------------------------------------------------------------------------
$ 1,303 $ 844
- ------------------------------------------------------------------------------
DEPRECIATION AND AMORTIZATION EXPENSE
Galvanizing $ 703 $ 605
Chemical storage 98 94
Warehousing 20 17
General corporate 6 7
- ------------------------------------------------------------------------------
$ 827 $ 723
- ------------------------------------------------------------------------------
March 31, 2000 December 31, 1999
-------------- -----------------
TOTAL ASSETS
Galvanizing $31,414 $30,773
Chemical storage 1,998 2,248
Warehousing 439 434
General corporate 9,958 1,254
- ------------------------------------------------------------------------------
$43,809 $34,709
==============================================================================
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Kinark's consolidated sales for the first quarter of 2000 were
$10,921,000, a decrease of 2.0% from $11,145,000 for the first quarter of
1999, due to marginally lower revenues at all of its business units.
Galvanizing tonnage for the first quarter of 2000 was up 8.2% over the
prior year but lower average selling prices more than offset the growth
from increased volume. The Company believes current price levels for
hot dip galvanizing have, for the most part, stabilized following a
year-long trend of downward adjustment. Lower product throughput and storage
activity at the Company's chemical storage and warehousing segments reflects
excess storage capacity generally prevailing in the Chicago-area markets.
Kinark reported a net loss of $160,000 for the first quarter of 2000, or
$.02 per share, which includes a pretax charge of $313,000 for costs
associated with the failure of a galvanizing kettle. Net income for the
same period in 1999 was $241,000, or $.04 per share. Operating income for
the first quarter of 2000, before the special kettle charge, was $239,000
compared to operating earnings of $597,000 for the first quarter of 1999. The
reduction in operating earnings primarily reflects lower segment sales for the
first quarter of 2000, combined with higher operating expenses for rent
in the chemical storage segment, and higher depreciation in galvanizing
due to prior plant additions.
Selling, general and administrative expenses ("SG&A") for the first
quarter of 2000 decreased 10.3% to $1,593,000 from $1,776,000 in the first
quarter of 1999, reflecting year-to-year reductions in corporate staff and
improved collections of accounts receivable.
Net interest expense for the first quarter of 2000 increased 21.1% to
$212,000 from $175,000 in the same quarter of 1999, due primarily to increased
borrowing for current working capital requirements. The Company's effective
income tax rate for the first quarter of 2000 was 44.0% compared to 42.9% for
the same period in 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 quarter of 2000, the Company's operating activities used
cash of $137,000, compared to generating cash of $1,288,000 in the first
quarter of 1999, resulting in a quarter-to-quarter reduction of $1,425,000 in
cash generated. Approximately 28% of this reduction is due to lower
earnings reported for the first quarter of 2000, and the remainder primarily
reflects an increase in net working capital at the galvanizing segment. The
Company plans to lower its current inventory of zinc used in the galvanizing
process over the remainder of 2000, which is expected to have the effect of
generating cash.
In the first quarter of 2000, the Company obtained $9,050,000 from the
issuance of tax-exempt industrial revenue bonds, the use of which is
restricted for constructing a new galvanizing plant. The Company's other
financing activities in the first quarter of
13
2000 included making payments of $5,414,000 on long-term obligations and
receiving proceeds of $5,392,000 from long-term obligations, for a net
decrease of $22,000 in long-term obligations. The Company's current credit
facility includes a $9,000,000 revolving line of credit under a bank credit
agreement that expires September 30, 2002. The Company's availability under
the revolver was $1,654,000 in March 31, 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 it was a potentially responsible
party under the Comprehensive Environmental Response, Compensation, and
Liability Information System (CERCLIS) in connection with cleanup of an
abandoned site formerly owned by Sandoval Zinc Co. The IEPA notice includes
NAG as one of 59 organizations which arranged for the treatment and disposal
of hazardous substances at Sandoval. Based on current information and the
preliminary stage of investigation, NAG's share of any probable future costs
cannot be estimated at this time.
In October 1999, Lake River received notice from a customer of a claim
for approximately $972,000 to recover costs arising from Lake River's alleged
shipment of the wrong product in May 1999. At March 31, 2000, the Company and
its insurance carrier had not made a final determination of the amount of the
claim, nor assessed the potential joint responsibility of the several parties
involved. Although the ultimate amount of the claim and apportionment of
responsibility is not determinable at this time, Lake River recorded a reserve
of $25,000 in 1999 for the self-insurance retention under its insurance
policy.
At March 31, 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 took a charge of
$176,000 to other expense in the final quarter of 1999 for the net book value
of the kettle and related costs incurred in 1999, net of interim insurance
proceeds. Due to the uncertainty of the timing and amount of future insurance
recoveries, NAG took an additional charge of $313,000 during the first quarter
of 2000.
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
$250,000 in the first quarter of both 2000 and 1999, with the disposal and
recycling of waste acids generated by the galvanizing operations representing
the major expenditure in this area. 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. Environmentally
related expenditures at Lake River represent a relatively small percentage of
the Company's total cost. The majority of waste disposal costs at Lake River
are incurred on behalf of its customers and are reimbursable.
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
14
has committed resources to discovering and eliminating environmental issues as
they arise. Because of the frequent changes in environmental technology, laws
and regulations management cannot reasonably attempt to quantify the Company's
potential costs in this area.
15
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 March 31, 2000, $9,804,000 was outstanding
under the credit agreement with an effective rate of 8.25% and $9,050,000 was
outstanding under the bond agreement with an effective rate of 5.25% (see
Note 5 to Condensed Consolidated Financial Statements). The borrowings are
due as follows: $723,000 in 2000, $1,346,000 in 2001, $8,885,000 in 2002 and
$7,900,000 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 $18,900 based on March 31, 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 Metals Exchange which are not subject to
future price adjustment. At March 31, 2000, the aggregate commitments for the
procurement of zinc were approximately $3.7 million, to cover 56% of NAG's
estimated requirements for the remainder of 2000. Management believes this
zinc procurement program ensures adequate supplies of zinc and stable 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
March 31, 2000 level would cause a lost gross margin opportunity of
approximately $370,000. However, a favorable impact of a similar amount would
result from the same hypothetical price movement on the 44% requirements
satisfied by short-term spot purchases of zinc not yet committed.
16
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a)Exhibits
3.1 The Company's Restated Certificate of
Incorporation (incorporated by reference to
Exhibit 3.1 to the Company's Pre-Effective
Amendment No. 1 to Registration Statement on
Form S-3 (Reg. No. 333-4937)filed on June 7,
1996).
3.2 The Company's Amended and Restated Bylaws
(incorporated by reference to Exhibit 3.2 to
the Company's Quarterly Report on Form 10-Q dated
March 31, 1996).
27 Financial Data Schedule
99 Cautionary Statements by the Company Related
to Forward-Looking Statements.
(b)Reports on Form 8-K
The Company did not file any reports on Form 8-K
during the quarter ended March 31, 2000.
17
SIGNATURES
Pursuant to the requirements of Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned there unto duly authorized:
KINARK CORPORATION
---------------------
Registrant
/S/Paul R. Chastain
--------------------
Paul R. Chastain
Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: May 12, 2000
------------
18
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.
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ISSUER'S
INTERIM FINANCIAL STATEMENTS DATED MARCH 31, 2000, SET FORTH IN THE ACCOMPANYING
FORM 10-q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
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<CASH> 421
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<RECEIVABLES> 7,481
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0
0
<COMMON> 819
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<TOTAL-LIABILITY-AND-EQUITY> 43,809
<SALES> 10,921
<TOTAL-REVENUES> 10,921
<CGS> 8,262
<TOTAL-COSTS> 10,682
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 313
<INTEREST-EXPENSE> 212
<INCOME-PRETAX> (286)
<INCOME-TAX> (126)
<INCOME-CONTINUING> (160)
<DISCONTINUED> 0
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EXHIBIT 99
CAUTIONARY STATEMENTS BY THE COMPANY REGARDING
FORWARD LOOKING STATEMENTS
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 (together, the
"Securities Acts"). The Securities Acts provide certain "safe harbor"
provisions for forward-looking statements. The Company desires to take
advantage of the "safe harbor" provisions of the Securities Acts and is
including these cautionary statements ("Cautionary Statements") pursuant to
the Provisions of the Securities Acts with the intention of obtaining the
benefits of the "safe harbor" provisions. In order to comply with the terms
of the "safe harbor" in the Securities Acts, the Company cautions investors
that 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 substantial
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. The
Company believes the following important factors could cause such a material
difference to occur:
1. The Company's ability to grow through the acquisition and development of
galvanizing, chemical storage and warehousing operations or the acquisition
of ancillary businesses.
2. The Company's ability to identify suitable acquisition candidates, to
consummate or complete construction projects, or to profitably operate or
successfully integrate enterprises into the Company's other operations.
3. The Company's ability to secure the capital and the related cost of such
capital necessary to fund its future growth through acquisition and
development, as well as internal growth.
4. The level of competition in the Company's industries and the possible entry
of new, well-capitalized competitors into the Company's markets.
5. Uncertainties and changes in environmental compliance costs associated with
past, present and future operations.
6. Uncertainties and changes related to federal, state and local regulatory
policies, including environmental laws related to the galvanizing,
chemicals and warehousing industries.
7. The Company's ability to staff its galvanizing, chemical storage and
warehousing operations appropriately with qualified personnel, including
in times of shortages of such personnel and to maintain a satisfactory
relationship with labor unions.
8. The pricing and availability of equipment, materials and inventories,
including zinc "pigs", the major component used in the hot dip galvanizing
industry.
9. Uncertainties and changes in general economic conditions.
10. Uncertainties and changes in several industries to which the company's
businesses are closely tied, such as highway and transportation,
communications and energy.
11. Performance issues with key suppliers and subcontractors.
12. Uncertainties related to the retention of key customers in each of the
Company's business segments.
The words "believe," "expect," "anticipate," "project," "plan" and similar
expressions identify forward-looking statements. Investors are cautioned not
to place undue reliance on these forward-looking statements, which speak only
as of the date the statement was made.
The foregoing review of significant factors should not be construed as
exhaustive or as an admission regarding the adequacy of disclosures previously
made by the Company.
