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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 June 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 June 30, 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 June 30, 2000 (unaudited), and
December 31, 1999 4
Condensed Consolidated Statements of
Operations for the three and six months ended
June 30, 2000 and 1999 (unaudited) 5
Condensed Consolidated Statements of
Cash Flows for the six months ended
June 30, 2000 and 1999 (unaudited) 6
Notes to Condensed Consolidated Financial
Statements for the three and six months ended
June 30, 2000 and 1999 (unaudited) 7-11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 12-14
Item 3. Quantitative and Qualitative Disclosures
About Market Risks 15
Part II. Other Information 16-17
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, 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 subsidiary (the "Company") as of June 30, 2000, and
the related condensed consolidated statements of operations for the three and
six-month periods ended June 30, 2000 and 1999 and the condensed consolidated
statements of cash flows for the six months ended June 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 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
August 18, 2000
-3-
KINARK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
Unaudited
June 30 Dec 31
(Dollars in Thousands) 2000 1999
==============================================================================
ASSETS
Current Assets
Cash and cash equivalents $ 50 $ 168
Trade receivables, net 6,921 5,317
Inventories 4,528 4,771
Prepaid expenses and other assets 289 534
Deferred tax asset, net 603 693
Net assets of discontinued operations --- 1,092
------ ------
Total Current Assets 12,391 12,575
------ ------
Funds held by bond trustee 5,945 ---
Property, Plant and Equipment, at Cost
Land 1,571 1,571
Galvanizing plants and equipment 24,905 23,357
Construction in progress 3,022 1,073
Other 146 146
------ ------
29,644 26,147
Less: Allowance for depreciation 10,767 9,475
------ ------
Total Property, Plant & Equipment, Net 18,877 16,672
------ ------
Goodwill, net of accumulated amortization 3,671 3,765
Other Assets 97 105
Net Assets of Discontinued Operations --- 1,092
------ ------
TOTAL ASSETS $ 40,981 $ 33,117
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Trade accounts payable $ 1,335 $ 1,190
Accrued payroll and employee benefits 752 820
Other taxes 247 286
Other accrued liabilities 638 553
Current maturities of long-term
obligations 1,074 1,119
Current portion of bonds payable 277 ---
------ ------
Total Current Liabilities 4,323 3,968
------ ------
Deferred Tax Liability, Net 640 458
Pension and Related Liabilities 135 153
Long-Term Obligations 10,372 9,985
Bonds Payable 8,773 ---
------ ------
Total Liabilities 24,243 14,564
------ ------
Commitments and Contingencies (Note 7) --- ---
Stockholders' Equity
Common stock 819 819
Additional paid-in capital 17,364 17,364
Retained earnings 4,535 6,350
Less: Treasury stock at cost (5,980) (5,980)
------ ------
Total Stockholders' Equity 16,738 18,553
------ ------
TOTAL LIABILITIES &
STOCKHOLDERS' EQUITY $ 40,981 $ 33,117
====== ======
See notes to condensed consolidated financial statements.
-4-
KINARK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited
Three Months Ended Six Months Ended
June 30 June 30
------------------ ----------------
(Dollars in Thousands 2000 1999 2000 1999
Except per Share Amounts)
===============================================================================
Sales $10,628 $10,050 $19,798 $19,330
Cost of sales 7,509 7,478 14,199 14,110
Selling, general &
administrative expenses 1,436 1,439 2,886 3,105
Depreciation and amortization 710 623 1,419 1,235
------ ------ ------ ------
Total Costs and Expenses 9,655 9,540 18,504 18,450
------ ------ ------ ------
Operating Income before Casualty Loss 973 510 1,294 880
Casualty (income) loss (Note 6) --- --- 313 ---
------ ------ ------ ------
Operating Income 973 510 981 880
Interest expense, net 249 176 461 350
------ ------ ------ ------
Income before Income Taxes 724 334 520 530
Income tax expense 318 144 228 228
------ ------ ------ ------
Income from Continuing Operations 406 190 292 302
Income (Loss) from Discontinued
Operations, net of income taxes (398) 87 (444) 216
Loss on Disposal of Discontinued
Operations (1,663) --- (1,663) ---
------ ------ ------ ------
Net Income (Loss) (1,655) 277 (1,815) 518
====== ====== ====== ======
Net Income (Loss) Per Common Share
Continuing Operations:
Basic and Diluted $ .06 $ .03 $ .04 $ .05
Discontinued Operations:
Basic and Diluted $ (.31) $ .01 $ (.31) $ .03
Net Income (Loss):
Basic and Diluted $ (.25) $ .04 $ (.27) $ .08
See notes to condensed consolidated financial statements.
-5-
KINARK CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
Six Months Ended
June 30
-------------------
(Dollars in Thousands) 2000 1999
==============================================================================
Operating Activities
Net income (loss) $(1,815) $ 518
Loss (income) from discontinued operations 2,107 (257)
Depreciation and amortization 1,418 1,234
Gain on disposal of assets (7) (5)
Gain on sale of securities --- (12)
Deferred income taxes 272 172
Change in assets and liabilities:
Accounts receivable, net (1,604) (505)
Inventories and other 496 332
Accounts payable, accrued liabilities and other 105 378
------ ------
Net cash provided by continuing operations 972 1,855
Net cash provided by (used in)
discontinued operations (1,212) 225
------ ------
Cash Provided by (Used In) Operating Activities (240) 2,080
Investing Activities
Net proceeds from sale of discontinued operations 371 ---
Sale of securities --- 402
Capital expenditures (3,531) (1,949)
Proceeds from sale of assets 9 5
------ ------
Net cash used in continuing operations (9,096) (1,542)
Net cash used in discontinued operations (254) (123)
------ ------
Cash Used in Investing Activities (3,405) (1,665)
------ ------
Financing Activities
Proceeds from tax exempt bonds 9,050 ---
Tax exempt bond funds held by bond trustee (5,945) ---
Purchase of common stock for treasury --- (139)
Proceeds from long-term obligations 8,060 7,530
Payments on long-term obligations (7,718) (7,575)
------ ------
Net cash provided by (used in) continuing operations 3,447 (184)
Net cash used in discontinued operations (5) (31)
------ ------
Cash Provided by (Used in) Financing Activities 3,442 (215)
------ ------
Increase (Decrease) in Cash and Cash Equivalents (203) 200
Cash and Cash Equivalents at Beginning of Period 253 189
------ -------
Cash at End of Period $ 50 $ 389
====== ======
See notes to condensed consolidated financial statements.
-6-
KINARK CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 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.
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
-------------------------
Basic and diluted earnings per common share for the periods
presented have been computed based upon the weighted average
number of shares outstanding of 6,712,211 and 6,720,034 for the
three months ended June 30, 2000 and 1999 respectively, and
6,712,215 and 6,735,810 for the six months ended June 30, 2000
and 1999 respectively. Due to the option price being higher than the
share value, the outstanding stock options have no dilutive effect
on the calculation of earnings per share. The number of options
-7-
excluded from the calculation of diluted earnings per share are
380,500 and 407,125 at June 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 "Bond"). 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 (4.22% at June 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 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
---------------------
June 30, December 31,
(Dollars in Thousands) 2000 1999
--------------------------------------------------------------
Revolving lines of credit $ 7,373 $ 5,913
Term loan 3,688 4,033
Advancing bridge loan due 2000 --- 735
10.0% note due 2000 317 339
95% note due 2015 23 24
Capital leases 45 60
--------------------------------------------------------------
11,446 11,104
Less current portion (1,074) 1,119
--------------------------------------------------------------
$10,372 $ 9,985
==============================================================
-8-
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 (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 fully funded in the first quarter of
2000 from the proceeds of the Bonds, Series 2000. The new bank
credit agreement matures September 30, 2002.
At June 30, 2000, the Company had additional borrowing capacity
of $353,000, 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 second 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 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
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 at June 30, 2000.
Note 6. Casualty Losses
---------------
At June 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.
-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.
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 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 June 30, 2000,
the aggregate commitments for the procurement of zinc were
approximately $4.5 million in 2000, which represents all of the
estimated operating 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.
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 June 30, 2000 were
$3,105,000.
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.
-10-
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. Discontinued Operations
-----------------------
During the second quarter of 2000, the Company elected to sell its
Lake River Corporation ("Lake River") and North American Warehousing
Company ("North American") 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 North American for $371,000 cash and other considerations,
including assumption of all financial liabilities.
These transactions resulted in a net loss on the disposal of
business segments of approximately $1,246,000 and $417,000 for
Lake River Corporation and North American Warehousing Company,
respectively. The Lake River and North American 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 Corporation and North American Warehousing Company,
both located in the Chicago area, represented approximately 16% of
the Company's 1999 sales. Lake River Corporation conducts business
primarily in the storage and trans-shipment of bulk liquid
chemicals. North American Warehousing Company is involved in the
warehousing and trans-shipment of drummed and dry chemicals. Both
of the acquiring corporations are controlled by members of the
existing management of Lake River Corporation and North American
Warehousing Company.
Note 10. Segment Disclosures
-------------------
Subsequent to the sale of Lake River Corporation and North American
Warehousing Company, the Company's sole business is hot dip
galvanizing which is conducted through its wholly owned subsidiary,
North American Galvanizing Company.
-11-
Kinark Corporation and Subsidiaries
Management's Discussion and Analysis of
Financial Condition and Results of Operations
During the second quarter of 2000, Kinark (the "Company") exited the
chemical storage and warehousing business with the sale of its wholly-owned
subsidiaries, Lake River Corporation and North American Warehousing Company.
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 Continuing Operations
Kinark's consolidated sales for the second quarter of 2000 were
$10,628,000, an increase of 5.8% from $10,050,000 for the second quarter of
1999, due to higher revenues from galvanizing.
Galvanizing tonnage for the second quarter of 2000 established a four-year
high, rising 9.2% over the prior year. Business activity accelerated in the
second quarter as the demand for galvanizing customer's fabricated steel
products generated a tonnage increase of 10.1% over the first quarter of
2000. This increase was broadly spread over the multi-state regions serviced
by the Company's galvanizing segment.
For the first six months of 2000, sales increased 2.4% to $19,798,000
from $19,330,000 for the comparable period a year ago. Galvanizing tonnage
was up 8.2% over the same period of 1999. The increase in sales reflects a
general improvement in a number of markets served by the galvanizing segment,
with particular strength continuing from transportation and communications
sectors.
Net income from continuing operations for the second quarter of 2000 was
$406,000, or $.06 per share, compared to net income of $190,000, or $.03 per
share for the second quarter of 1999. For the first six months of 2000, net
income from continuing operations was $292,000, or $.04 per share, compared to
net income of $302,000, or $.05 for the same period a year ago.
During the second quarter of 2000, gross profit margin as a percent of
sales continued to rise over 1999, due to improvements in both labor
productivity and zinc consumption. For the second quarter of 2000, the gross
profit margin rate was 29.4% compared to 25.6% for the second quarter of
1999. Year-to-date through June 30, 2000, the gross profit margin rate was
28.3% compared to 27.0% for the first half of 1999. This improvement reflects
implementation of the Company's planned capital expenditures program to
upgrade material handling and processing systems at all of its galvanizing
plants, and improved labor and zinc operating practices. The increase in
tonnage in 2000 provided an opportunity for greater utilization of processing
capacity and is an added factor contributing to the improved gross margin.
Selling, general and administrative expenses ("SG&A") of $1,436,000 for
the second quarter of 2000 were unchanged from the comparable period of 1999.
For the first six months of 2000, SG&A expenses were $2,886,000, down 7.0%
from the comparable period of 1999, reflecting reductions in corporate staff
and improved collections of accounts receivable.
-12-
During the first quarter of 2000, the Company recorded charges to income
of $313,000 for the expenses associated with a galvanizing 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 portion of this loss.
Net interest expense for the second quarter of 2000 rose to $249,000 from
$176,000 for the second quarter of 1999. Interest expense for the first half
of 2000 was $461,000 compared to $350,000 for the first half 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 first
half of 2000 was 43.8% compared to 43.0% 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 half of 2000, the Company's continuing operating
activities generated cash of $972,000 compared to cash generated of
$1,855,000 in the first half of 1999. The reduction in cash generated by
year 2000 operating activities is primarily due to an increase in accounts
receivable in the galvanizing segment related to increased sales.
In March 2000, the Company obtained $9,050,000 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 half of 2000 were $3,531,000, of which $1,948,000 was for the new
galvanizing plant. The Company's other financing activities in the first half
of 2000 included making payments of $7,718,000 on long-term obligations and
receiving proceeds of $8,060,000 from long-term obligations, for a net
increase of $342,000 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 $353,000 at June 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 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.
At June 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
-13-
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
$524,000 in the first half of 2000 and $421,000 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 reasonably
attempt to 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 Corporation ("Lake River") and North American Warehousing Company
("North American") 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 North American
for $371,000 cash and other considerations, including assumption of all
financial liabilities. (see Note 9 to Condensed Consolidated Financial
Statements).
The transactions resulted in a loss on disposal of $1,663,000 for the net
value of assets sold. The combined revenues of Lake River and North American
were $3,403,000 and $3,708,000 for the six-month periods ended June 30, 2000
and 1999, respectively. Their combined operating results were a net loss of
$444,000 and a net profit of $216,000 for the six-month periods ended June 30,
2000 and 1999, respectively. The combined income tax expense (benefit) on the
operating results of Lake River and North American were $(268,000) and
$163,000 for the six-month periods ended June 30, 2000 and 1999, respectively.
-14-
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 June 30, 2000, $10,325,000 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 4.22% (see Note
5 to Condensed Consolidated Financial Statements). The borrowings are due as
follows: $347,000 in 2000, $1,279,000 in 2001, $9,849,000 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 $19,400 based on June 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 zinc 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 June 30, 2000, the aggregate commitments for the procurement
of zinc were approximately $4.5 million, to cover all of NAG's estimated
operating 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
June 30, 2000 level would cause a lost gross margin opportunity of
approximately $450,000.
-15-
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
---------------------------------------------------
The 2000 Annual Meeting of the Company's stockholders was
held on Monday, May 15, 2000 in New York City, NY.
At the meeting, the stockholders elected six directors.
The votes for the election of directors were as follows:
For Withheld
--------- --------
Linwood J. Bundy 5,375,247 57,946
Paul R. Chastain 5,368,599 64,589
Ronald J. Evans 5,368,208 64,980
Joseph J. Morrow 5,378,257 54,931
John H. Sununu 5,372,794 60,394
Mark E. Walker 5,374,187 59,001
Item 5. Other Information
-----------------
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
-16-
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 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.
-17-
SIGNATURES
Pursuant to the requirements of Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized:
KINARK CORPORATION
-------------------
Registrant
/S/Paul R. Chastain
--------------------
Paul R. Chastain
Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date: August 21, 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.
