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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, 2002
COMMISSION FILE NO. 1-3920
KINARK CORPORATION
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(Exact name of the registrant as specified in its charter)
DELAWARE 71-0268502
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(State of Incorporation) (I.R.S. Employer Identification No.)
2250 EAST 73RD STREET
TULSA, OKLAHOMA 74136
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(Address of principal executive offices)
Registrant's telephone number: (918) 494-0964
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 and 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [_]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of March 31, 2002.
Common Stock $ .10 Par Value . . . . . 6,698,390
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KINARK CORPORATION AND SUBSIDIARY
INDEX TO QUARTERLY REPORT ON FORM 10-Q
PAGE
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PART I. FINANCIAL INFORMATION
Forward Looking Statements or Information 2
Item 1. Financial Statements
Independent Accountants' Review Report 3
Consolidated Balance Sheets as of
March 31, 2002 (unaudited), and
December 31, 2001 4
Consolidated Statements of Operations
for the three months ended
March 31, 2002 and 2001 (unaudited) 5
Consolidated Statements of Cash Flows
for the three months ended
March 31, 2002 and 2001 (unaudited) 6
Notes to Consolidated Financial Statements
for the three months ended
March 31, 2002 and 2001(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 publicly available statements issued or released by the
Company involve significant risks, uncertainties, and other factors which could
cause the Company's actual results, performance (financial or operating) or
achievements to differ materially from the future results, performance
(financial or operating) or achievements expressed or implied by such
forward-looking statements. Factors that could cause or contribute to such
differences could include, but are not limited to, changes in demand, prices,
and the raw materials cost of zinc; changes in economic conditions of the
various markets the Company serves, as well as the other risks detailed herein
and in the Company's reports filed with the Securities and Exchange Commission.
The Company believes that the important factors set forth in the Company's
cautionary statements at Exhibit 99 to this Form 10-Q could cause such a
material difference to occur and investors are referred to Exhibit 99 for such
cautionary statements.
2
INDEPENDENT ACCOUNTANTS" REVIEW REPORT
To the Board of Directors and Stockholders of
Kinark Corporation:
We have reviewed the accompanying consolidated balance sheet of Kinark
Corporation and subsidiary (the "Company") as of March 31, 2002, and the related
consolidated statements of operations and comprehensive income, and of cash
flows for the three months ended March 31, 2002 and 2001. These financial
statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and of making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with auditing standards generally accepted in the United States of
America, the objective of which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to such consolidated financial statements for them to be in conformity
with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of
Kinark Corporation and subsidiary as of December 31, 2001, and the related
consolidated statements of operations and comprehensive income, stockholders"
equity, and cash flows for the year then ended (not presented herein); and in
our report dated February 22, 2002, we expressed an unqualified opinion on those
consolidated financial statements.
/s/Deloitte & Touche LLP
Tulsa, Oklahoma
May 16, 2002
3
KINARK CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
UNAUDITED
MARCH 31 DECEMBER 31
(DOLLARS IN THOUSANDS) 2002 2001
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ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 857 $ 853
Trade receivables, net 5,242 4,821
Inventories 5,545 5,399
Prepaid expenses and other assets 584 291
Deferred tax asset, net 583 583
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TOTAL CURRENT ASSETS 12,811 11,947
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PROPERTY, PLANT AND EQUIPMENT, AT COST
Land 1,714 1,714
Galvanizing plants and equipment 36,422 36,258
Other 70 70
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38,206 38,042
Less: Allowance for depreciation 15,771 15,234
Construction in progress 637 459
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TOTAL PROPERTY, PLANT AND EQUIPMENT, NET 23,072 23,267
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GOODWILL, NET OF ACCUMULATED AMORTIZATION 3,389 3,389
OTHER ASSETS 447 489
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TOTAL ASSETS $ 39,719 $ 39,092
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term obligations $ 979 $ 976
Current portion of bonds payable 595 587
Trade accounts payable 1,098 1,123
Accrued payroll and employee benefits 862 889
Other taxes 139 317
Other accrued liabilities 544 449
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TOTAL CURRENT LIABILITIES 4,217 4,341
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PENSION AND RELATED LIABILITIES 0 101
DEFERRED TAX LIABILITY, NET 819 819
LONG-TERM OBLIGATIONS 8,118 7,361
BONDS PAYABLE 7,750 7,900
SUBORDINATED NOTES PAYABLE 922 917
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TOTAL LIABILITIES 21,826 21,439
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COMMITMENTS AND CONTINGENCIES (NET 8) 0 0
STOCKHOLDERS' EQUITY
Common stock 819 819
Additional paid-in capital 17,464 17,464
Retained earnings 5,623 5,399
Common shares in treasury at cost (6,013) (6,029)
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TOTAL STOCKHOLDERS' EQUITY 17,893 17,653
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 39,719 $ 39,092
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See notes to consolidated financial statements.
4
KINARK CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (UNAUDITED)
THREE MONTHS ENDED MARCH 31
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(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS) 2002 2001
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SALES $ 9,217 $ 8,982
Cost of Sales 6,365 6,345
Selling, general & administrative expenses 1,398 1,297
Depreciation & amortization expense 805 872
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TOTAL COSTS AND EXPENSES 8,568 8,514
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OPERATING INCOME 649 468
Interest expense, net 287 286
Other expense 0 101
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INCOME BEFORE INCOME TAXES 362 81
Income tax expense 138 34
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NET INCOME $ 224 $ 47
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OTHER COMPREHENSIVE INCOME (LOSS):
Cash flow hedges:
Cumulative effect, accounting for derivatives,
net of related income taxes of $48 0 (65)
Less: reclassification adjustment for
derivative losses included in net income,
net of related income taxes of $16 0 23
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OTHER COMPREHENSIVE INCOME (LOSS) 0 (42)
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Comprehensive Income $ 224 $ 5
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Net Income Per Common Share:
Basic $ 0.03 $ 0.01
Diluted $ 0.03 $ 0.01
See notes to consolidated financial statements.
5
KINARK CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED
THREE MONTHS ENDED MARCH 31
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(DOLLARS IN THOUSANDS) 2002 2001
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OPERATING ACTIVITIES
Net income $ 224 $ 47
Depreciation and amortization 805 872
Deferred income taxes 0 (14)
Gain on disposal of assets 0 (11)
Changes in assets and liabilities:
Accounts receivable, net (421) 159
Inventories and other assets (397) (538)
Accounts payable, accrued liabilities and other (231) 1,041
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CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (20) 1,556
INVESTING ACTIVITIES
Capital expenditures (610) (1,751)
Proceeds from sale of assets 0 3
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CASH USED FOR INVESTING ACTIVITIES (610) (1,748)
FINANCING ACTIVITIES
Reissuance of treasury stock 16 0
Deferred financing cost -- (62)
Proceeds from long-term obligations 4,216 5,139
Payments on long-term obligations (3,456) (5,754)
Repayment on bonds (142) (139)
Proceeds from subordinated debt 0 900
Proceeds from stock warrants 0 100
Tax exempt bond funds held by bond trustee 0 1,002
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CASH PROVIDED BY FINANCING ACTIVITIES 634 1,186
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INCREASE IN CASH AND CASH EQUIVALENTS 4 994
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 853 57
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CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 857 $ 1,051
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See notes to consolidated financial statements.
6
KINARK CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2001
UNAUDITED
NOTE 1. BASIS OF PRESENTATION
The consolidated financial statements included in this report have been
prepared by Kinark Corporation (the "Company") pursuant to 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 consolidated financial
statements include the accounts of the Company and its subsidiary.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted pursuant to such
rules and regulations for interim reporting. The Company believes that the
disclosures are adequate to make the information presented not misleading.
However, these financial statements should be read in conjunction with the
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K, for the year ended December 31, 2001. The financial data for the
interim periods presented may not necessarily reflect the results to be
anticipated for the complete year.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the balance
sheet dates and the reported amounts of revenues and expenses for each of the
years. Actual results will be determined based on the outcome of future events
and could differ from the estimates.
The Company's sole business is hot dip galvanizing and coatings which is
conducted through its wholly owned subsidiary, North American Galvanizing
Company ("NAG").
NOTE 2. NEW ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" ("SFAS No. 142") which is fully effective in fiscal years
beginning after December 15, 2001, although certain provisions of SFAS No. 142
are applicable to goodwill and other intangible assets acquired in transactions
completed after June 30, 2001. SFAS No. 142 addresses financial accounting and
reporting for acquired goodwill and other intangible assets and requires that
goodwill and intangible assets with an indefinite life no longer be amortized
but instead be reviewed, at least annually, for impairment. The Company has
determined that as of January 1, 2002 there was no impact on its financial
statements resulting from the adoption of SFAS No. 142. The following
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pro forma results of operations reflects elimination of goodwill amortization
included in the first quarter of 2001, as if SFAS No. 142 had been in effect at
that time.
Three Months Ended March 31,
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Dollars in Thousands 2002 2001
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Reported net income $ 224 $ 47
Add back: Goodwill amortization,
net of income tax -- 32
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Adjusted net income $ 224 $ 79
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Basic and diluted earnings per share:
Reported net income per share $ 0.03 $ 0.01
Goodwill amortization, net of income tax -- --
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Adjusted net income per share $ 0.03 $ 0.01
========== ==========
In June 2001, the FASB issued Statement of Financial Accounting Standards No.
143, "Accounting for Asset Retirement Obligations" ("SFAS No. 143") which
addresses financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. It applies to legal obligations associated with the retirement of
long-lived assets that result from the acquisition, construction, development
and/or the normal operation of a long-lived asset, except for certain
obligations of lessees. This statement is effective for financial statements
issued for fiscal years beginning after June 15, 2002. The Company has not
determined the impact on its financial statements that may result from adoption
of SFAS No. 143.
In August 2001, the FASB issued Statement of Financial Accounting Standards No.
144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS No.
144") which addresses financial accounting and reporting for the impairment or
disposal of long-lived assets by requiring that one accounting model be used for
long-lived assets to be disposed of by sale, whether previously held and used or
newly acquired, and by broadening the presentation of discontinued operations to
include more disposal transactions. SFAS No. 144 is effective for financial
statements issued for fiscal years beginning after December 15, 2001, and
interim periods within those fiscal years. The provisions of this statement
generally are to be applied prospectively.
NOTE 3. EARNINGS PER COMMON SHARE
Basic earnings per common share for the periods presented are computed
based upon the weighted average number of shares outstanding. Diluted earnings
per common share for the periods presented are based on the weighted average
shares outstanding, adjusted for the assumed exercise of stock options and
warrants using the treasury stock method.
8
Three Months Ended March 31 Number of Shares
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2002 2001
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Basic 6,697,024 6,712,209
Diluted 7,363,776 6,712,209
The number of options excluded from the calculation of diluted earnings per
share, due to the option price being higher than the share market value, are
377,333 and 389,208 at March 31, 2002 and 2001, respectively.
NOTE 4. INVENTORIES
Inventories consist of raw zinc "pigs," molten zinc in galvanizing
kettles and other chemicals and materials used in the galvanizing process.
Inventories are stated at the lower of cost or market with market value based on
estimated realizable value from the galvanizing process. Zinc cost is determined
on a last-in first-out (LIFO) basis. Other inventories are valued primarily on
an average cost basis.
NOTE 5. BONDS PAYABLE
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. Bond proceeds were used by NAG for the purchase of land and
construction of a hot dip galvanizing plant in Harris County, Texas, which
became operational during the first quarter of 2001.
The Bonds bear interest at a variable rate (5.25% at March 31, 2002) that can be
converted to a fixed rate upon certain conditions outlined in the bond
agreement. The Bonds are subject to annual redemption of $230,000 that commenced
on June 15, 2001, which increases annually thereafter to a maximum redemption of
$960,000 on June 15, 2012. Beginning in January 2001, the Company makes monthly
principal and interest payments of $86,000 into a sinking fund. The final
maturity date of the Bonds is June 15, 2013. The Company has the option of early
redemption of the Bonds at par unless the bonds are converted to a fixed
interest rate, in which case they are redeemable at a premium during a period
specified in the bond agreement. The Company's obligation under the bond
agreement is secured through a letter of credit with a bank which must remain in
effect as long as any Bonds are outstanding. The letter of credit is
collateralized by substantially all the assets of the Company.
NOTE 6. SUBORDINATED DEBT
In February 2001, the Company completed a $1,000,000 Private Placement
of unsecured subordinated debt. The Company raised these proceeds to satisfy
financing requirements to fund construction of a new galvanizing facility in St.
Louis, Missouri. Participation in the Private Placement was offered to
accredited investors, which included the Company's directors and eligible
stockholders holding a minimum of 100,000 shares of common stock. The amount
outstanding on these notes, net of discount, was $922,000 at March 31, 2002. The
notes, which mature February 17, 2006 and bear interest at 10% payable annually,
were
9
issued with warrants to purchase 666,666 shares of common stock of the Company.
Terms of the warrants, which expire February 17, 2008, permit the holder to
purchase shares of the Company's common stock at any time prior to the
expiration date. The exercise price of $.856 per share reflects the fair value
of the Company's common stock at the time the warrants were issued, as
determined by an independent financial advisor. As of March 31, 2002 no warrants
had been exercised.
NOTE 7. LONG-TERM OBLIGATIONS
March 31 December 31
(Dollars in Thousands) 2002 2001
---------------------- -------- --------
Revolving line of credit $ 5,682 $ 4,759
Term loan 3,381 3,538
9.5% note due 2015 22 22
Capital leases 12 18
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$ 9,097 $ 8,337
Less current portion 979 976
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$ 8,118 $ 7,361
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In November 2001, the Company amended a three-year bank credit agreement that
was scheduled to expire in September 2002. The amended agreement provides (i) a
$9,000,000 maximum revolving line of credit for working capital and general
corporate purposes, (ii) a $3,692,595 term loan and (iii) a $3,000,000 advancing
construction loan facility. At March 31, 2002, no amounts were outstanding under
the advancing construction loan facility. The maturity of the revolving loan
facility was extended to June 30, 2003; the maturity of the term loan was
extended to June 30, 2004.
At March 31, 2002, the Company had fully utilized the borrowing capacity, net of
outstanding irrevocable letters of credit, under the bank revolving line of
credit based on the borrowing base calculated under the agreement. At March 31,
2002, the Company had outstanding irrevocable letters of credit for workers'
compensation claims totaling $400,000.
Substantially all of the Company's accounts receivable, inventories, fixed
assets and the common stock of its subsidiary are pledged as collateral under
the agreement, and the credit agreement is secured by a full and unconditional
guaranty from NAG. Amounts borrowed under the agreement bear interest at the
prime rate of Bank One, Oklahoma or the LIBOR rate, at the option of the
Company, subject to a rate margin adjustment determined by the Company's
consolidated debt service ratio. In the event the Company fails to maintain a
consolidated debt service coverage ratio for any fiscal quarter of at least 1.25
to 1.00, the Applicable LIBOR Rate Margin will be increased to 5.75% and the
Applicable Prime Rate Margin will be increased to 3.00%. Thereafter, the
increased rate margin will remain in effect until such time as the Company has
maintained a consolidated debt service coverage ratio greater than or equal to
1.25 to 1.00 for a subsequent fiscal quarter.
10
In the event the Company fails to maintain a consolidated capital expenditures
to EBITDA ratio for any fiscal quarter of at least 1.00 to 1.00, the increase in
the Applicable LIBOR Rate Margin ranges from 3.75% to 5.75%, and the increase in
the Applicable Prime Rate Margin ranges from 1.00% to 3.00%.
Term loan payments are based on thirty-five (35) installments with equal monthly
payments of principal and interest, and the loan may be prepaid without penalty.
The revolving line of credit may be paid down without penalty, or additional
funds may be borrowed up to the revolver limit. The credit agreement requires
the Company to maintain compliance with covenant limits for current ratio, debt
to tangible net worth ratio, debt service coverage ratio and a capital
expenditures ratio. The Company was in compliance with the covenants at March
31, 2002.
NOTE 8. COMMITMENTS AND CONTINGENCIES
The Company has commenced construction of a new galvanizing plant in
St. Louis, Missouri. At March 31, 2002, the Company had made contractual
commitments totaling approximately $2,700,000 relating to this construction.
The Company has commitments with domestic and foreign zinc producers to purchase
zinc used in its hot dip galvanizing operations. Commitments for the future
delivery of zinc either reflect rates then quoted on the London Metals Exchange
and are not subject to price adjustment or are based on such quoted prices at
the time of delivery. At March 31, 2002, the aggregate commitments for the
procurement of zinc at fixed prices were $4.5 million. The Company reviews these
fixed price contracts for losses using the same methodology employed to estimate
the market value of its zinc inventory. The Company had unpriced commitments for
the purchase of 554,000 pounds of zinc at March 31, 2002.
The Company periodically utilizes derivative instruments which are intended to
offset the impact of potential fluctuations in the market price of zinc. During
2000, the Company purchased two costless collars which expired in September and
October of 2001. Due to the decline in the market price of zinc in 2001, the
Company elected not to replace zinc commodity collar contracts which expired
during the third quarter of 2001. The Company expects to continue evaluating
derivative instruments to minimize the impact of zinc price fluctuations, as
part of its inventory management strategy.
NAG was notified in 1997 by the Illinois Environmental Protection Agency
("IEPA") that it was one of a number of potentially responsible parties under
the Comprehensive Environmental Response, Compensation, and Liability
Information System ("CERCLIS") in connection with cleanup of an abandoned site
formerly owned by Sandoval Zinc Co. ("Sandoval"). NAG arranged for the treatment
and disposal of hazardous substances at Sandoval in the ordinary course of its
business. Based on current information and the stage of investigation, NAG"s
share of any probable future costs, if any, cannot be estimated at this time.
The Company expects it will continue to have environmental compliance costs in
the future associated with operations in the galvanizing business. The Company
is committed to complying with the environmental legislation and regulations
affecting its operations. Due to the uncertainties associated with future
environmental technologies, regulatory interpretations, and
11
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.
Various litigation arising in the ordinary course of business is pending against
the Company. Management believes that resolution of the Company's litigation and
environmental matters should not materially affect the Company's consolidated
financial position or liquidity. Should future developments cause the Company to
record an additional liability for environmental matters, litigation or customer
claims, the recording of such a liability could have a material impact on the
results of operations for the period involved.
NOTE 9. LABOR AGREEMENT
In April 2002, NAG concluded negotiations of a one-year labor agreement
with the United Steel Workers Union covering production workers at its Tulsa
galvanizing plants. The new agreement is not materially changed from the
previous agreement which expired March 31, 2002.
NOTE 10. TREASURY STOCK
In the first quarter of 2002, the Company issued 17,565 shares of its
common stock from Treasury to outside Directors of the Company as payment for
their quarterly board fee in lieu of receiving cash payments. The shares were
valued at the average closing price of Kinark's common stock for a prior 30-day
period, as reported by the American Stock Exchange. Such shares were issued
pursuant to the Director's prior election and notice to the Company to receive
up to all of his quarterly board fee in the Company's stock in lieu of cash.
NOTE 11. PENSION LIABILITY
In the first quarter of 2002, the Company reversed the liability for a
self-funded pension plan of $119,000 upon the death of the sole participant
covered by the plan.
12
KINARK CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Kinark Corporation's sole line of business is hot dip galvanizing and
coatings, which is conducted through its wholly-owned subsidiary, North American
Galvanizing Company.
In January 2002, the Company announced the groundbreaking for a new
galvanizing plant in St. Louis, Missouri that will be located adjacent to the
existing galvanizing facility. The new plant, scheduled to begin operations
during the fourth quarter of 2002, is expected to be the largest galvanizing
facility serving the St. Louis market and will provide NAG a strategic base for
extending its geographic area of service.
In December 2001, the Company temporarily idled a galvanizing plant
located in Houston (the "Cunningham plant") and management plans to restart this
facility when market conditions improve, and also is reviewing potential
alternative uses of this facility. Management does not believe that any
impairment of the carrying value of the facility has occurred at this time. The
majority of work that was being processed at Cunningham has been transferred to
the Company's new Houston plant (the "Fairbanks plant") that began operations in
2001.
RESULTS OF OPERATIONS
Sales for the first quarter of 2002 increased 2.6% to $9,217,000
compared to sales of $8,982,000 for the first quarter of 2001, and they were
slightly higher than the immediate prior quarter ended December 31, 2001.
Despite the recent general market slowdown in hot dip galvanizing, NAG's
regional facilities achieved a solid 4.3% increase in total tonnage output over
the first quarter of 2001. Increased bookings activity reflected, in part, an
upswing in business from small steel fabricators requiring rapid turn-around for
their end-use markets, such as highway related projects. In addition, tonnage
output at NAG's new Fairbanks plant in Houston more than tripled in the first
quarter of 2002 over the start-up first quarter of 2001, as this facility
responded to increased demand for electric power transmission markets. Average
selling prices posted by NAG in the first quarter of 2002 dipped slightly below
those of the 2001 first quarter, but still exceeded NAG's pricing target for the
current year. Ongoing marketing efforts designed to expand business with new and
existing customers enabled NAG to meet its first-quarter production and sales
targets.
Operating income for the first quarter of 2002 was $649,000, an
increase of 38.7% over operating income of $468,000 for the first quarter of
2001, primarily the result of increased sales and gross profit margins. Gross
profit margin in the first quarter of 2002 was 30.9% compared to 29.4% in the
first quarter of 2001, with the gain in profit rate primarily reflecting a lower
average cost for zinc used in the galvanizing process.
Depreciation and amortization expense for the first quarter of 2002 was
$805,000 compared to depreciation and amortization expense of $872,000 for the
first quarter of 2001. The reduction in 2002 reflects discontinuing the
amortization of goodwill, in accordance with the new accounting standard adopted
January 1, 2002. Such standard requires goodwill no longer be amortized but be
reviewed at least annually for impairment (see Note 2 to Consolidated Financial
Statements).
13
Selling, general and administrative expenses for the first quarter of
2002 were $1,398,000, or 15.2% of sales, compared to $1,297,000, or 14.4% of
sales for the same quarter a year ago. Comparing the year-to-year first
quarters, year 2002 increases for insurance, ad valorem taxes and provisions for
collection of doubtful accounts were partially offset by reductions in
administrative salary expenses and reversal of $119,000 accrual for retirement
benefits upon the death of the sole plan participant. The Company maintains a
401(k) defined contribution plan which its eligible employees may elect to join.
Net interest expense of $287,000 for the first quarter of 2002 was
comparable to interest expense of $286,000 for the first quarter of 2001. Other
expense in the first quarter of 2001 of $101,000 resulted from losses incurred
on two commodity collar contracts which were intended to hedge the price risk
associated with fixed price zinc purchase commitments. The contracts expired in
2001 and were not replaced. The Company's effective income tax rate for the
first quarter of 2002 and 2001 was 38.0% and 42.0%, respectively. For 2001, the
rate was higher than the federal statutory rate primarily due to non-deductible
amortization of goodwill.
Income before income taxes was $362,000 for the first quarter of 2002
compared with income of $81,000 for the first quarter of 2001. As discussed
above, the gain in pretax income for the first quarter of 2002 compared to 2001
was primarily the result of improved gross profit margin on higher sales,
elimination of amortization of goodwill and reversal of future retirement
benefit obligations. The Company reported net income of $224,000, or $.03 per
share, for the first quarter of 2002 compared to $47,000, or $.01 per share, for
the first quarter of 2001.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2002, the Company had approximately $857,000 in cash and
cash equivalents, approximately $8,600,000 of net working capital and
approximately $3,000,000 of unused commitment under its Advancing Construction
Loan.
For the three months ended March 31, 2002, the Company's operating
activities used cash of $20,000. This net amount reflects an increase of
approximately $800,000 in accounts receivable and inventory to support the
increase in first-quarter 2002 business over the fourth quarter of 2001, and
payments of approximately $258,000 for property taxes. Net cash used for
investing activities in the first quarter of 2002 of $610,000 consisted of
capital expenditures of approximately $463,000 to maintain current operating
facilities and approximately $147,000 for construction of a new plant in St.
Louis. The Company received net borrowings under the Revolver Facility of
approximately $923,000; such proceeds and cash on hand were used to fund capital
expenditures of approximately $610,000 and repay approximately $306,000 on
long-term debt.
At March 31, 2002, the Company had fully utilized the borrowing
capacity, net of outstanding letters of credit, under its revolving line of
credit based on the borrowing base calculated under the agreement. The Company
currently anticipates that cash flows from operations and borrowings under its
Revolver Facility will be adequate to repay its debt obligations due in one year
of approximately $1,600,000, and for planned capital improvements.
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ENVIRONMENTAL MATTERS AND OTHER CONTINGENCIES
The Company's facilities are subject to extensive environmental
legislation and regulations affecting their operations and the discharge of
wastes. The cost of compliance with such regulations in the first quarter of
2002 and 2001 was approximately $284,000 and $222,000, respectively, for the
disposal and recycling of waste acids generated by the galvanizing operations.
The Company is committed to complying with all federal, state and local
environmental laws and regulations and using its best management practices to
anticipate and satisfy future requirements. As is typical in the galvanizing
business, the Company will have additional environmental compliance costs
associated with past, present and future operations. Management is committed to
discovering and eliminating environmental issues as they arise. Because of the
frequent changes in environmental technology, laws and regulations management
cannot reasonably quantify the Company's potential future costs in this area.
As previously reported, NAG was notified in 1997 by the Illinois
Environmental Protection Agency ("IEPA") that it was a potentially responsible
party under the Comprehensive Environmental Response, Compensation, and
Liability Information System ("CERCLIS") in connection with cleanup of an
abandoned site formerly owned by Sandoval Zinc Co. The IEPA notice includes NAG
as one of 59 organizations which arranged for the treatment and disposal of
hazardous substances at Sandoval. Based on current information and the
preliminary state of investigation, NAG's share of any probable future costs
cannot be estimated at this time.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Kinark's operations include managing market risks related to change in
interest rates and zinc commodity prices.
INTEREST RATE RISK. Kinark is exposed to financial market risk related to
changing interest rates, which will affect interest paid on the Company's
variable rate debt. At March 31, 2002, variable rate debt aggregating $9,063,000
was outstanding under the credit agreement with an effective rate of 5.0% and
$8,345,000 was outstanding under the bond agreement with an effective rate of
5.25% (see Note 5 to Consolidated Financial Statements). In addition, the
Company's fixed rate debt consisting of $1,000,000 of 10% subordinated
promissory notes was outstanding at March 31, 2002. The borrowings under
variable rate facilities are due approximately as follows: $1,165,000 in 2002;
$7,303,000 in 2003; $2,314,000 in 2004 and $6,626,000 in years 2005 through
2013. Each increase of 10 basis points in the effective interest rate would
result in an annual increase in interest charges on variable rate debt of
$17,400 based on March 31, 2002 outstanding borrowings. The actual effect of
changes in interest rates is dependent on actual amounts outstanding under the
various loan agreements. The Company monitors interest rates and has sufficient
flexibility to renegotiate the loan agreement, without penalty, in the event
market conditions and interest rates change.
ZINC PRICE RISK. NAG enters into fixed price purchase commitments with domestic
and foreign zinc producers to purchase a portion of its zinc requirements for
its hot dip galvanizing
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operations. Commitments for the future delivery of zinc, typically up to one (1)
year, reflect rates quoted on the London Metals Exchange. At March 31, 2002, the
aggregate fixed price commitments for the procurement of zinc in 2002 were
approximately $4,500,000. In addition, NAG had unpriced commitments to procure
approximately 554,000 pounds of zinc in 2002. With respect to the fixed price
purchase commitments, a hypothetical decrease of 10% in the market price of zinc
from the March 31, 2002 level would represent a potential lost gross margin
opportunity of approximately $450,000; however, lower zinc prices potentially
could benefit future earnings for the uncommitted zinc purchases that could be
made at the lower market price then prevailing. During the third quarter of
2001, two one-year commodity collar contracts which were intended to hedge the
price risk associated with fixed price zinc purchase commitments expired and
were not renewed.
The Company's financial strategy includes evaluating the selective use
of derivative financial instruments to manage zinc and interest costs. As part
of its inventory management strategy, the Company expects to continue evaluating
hedging instruments to minimize the impact of zinc price fluctuations.
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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) file on June 7,
1996).
3.2 The Company's Amended and Restated Bylaws (incorporated
by reference to Exhibit 3.2 to the Company's Quarterly
Report on Form 10-Q dated March 31, 1996).
(b) Reports on Form 8-K
The Company did not file a Form 8-K Current Report during the
quarter ended March 31, 2002.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized:
KINARK CORPORATION
------------------
(Registrant)
/s/ Paul R. Chastain
----------------------------
Vice President and
Chief Financial Officer
(Principal Financial Officer
Date: May 15, 2002
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