-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Dz6YnHtO9EQSpOhfzXWXgPXGhaBVktqFkvu/rPvof9qb/0DamZ4UgKmoOiKUHv8b ddizXSJuwrY019IOHXxBTw== 0000055805-00-000007.txt : 20000516 0000055805-00-000007.hdr.sgml : 20000516 ACCESSION NUMBER: 0000055805-00-000007 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: KINARK CORP CENTRAL INDEX KEY: 0000055805 STANDARD INDUSTRIAL CLASSIFICATION: COATING, ENGRAVING & ALLIED SERVICES [3470] IRS NUMBER: 710268502 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-03920 FILM NUMBER: 633459 BUSINESS ADDRESS: STREET 1: 2250 EAST 73RD STREET STREET 2: SUITE 300 CITY: TULSA STATE: OK ZIP: 74136-6832 BUSINESS PHONE: (918)494-0964 MAIL ADDRESS: STREET 1: 2250 EAST 73RD STREET STREET 2: SUITE 300 CITY: TULSA STATE: OK ZIP: 74136-6832 FORMER COMPANY: FORMER CONFORMED NAME: KIN ARK OIL CO DATE OF NAME CHANGE: 19690601 FORMER COMPANY: FORMER CONFORMED NAME: KIN ARK OIL & GAS CO DATE OF NAME CHANGE: 19680906 10-Q 1 ============================================================================== 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. EX-27 2
5 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. 1,000 U. S. DOLLARS 3-MOS DEC-31-2000 JAN-01-2000 MAR-31-2000 1.0 421 0 7,481 342 5,225 13,813 38,969 20,285 43,809 5,658 19,665 0 0 819 17,574 43,809 10,921 10,921 8,262 10,682 0 313 212 (286) (126) (160) 0 0 0 (160) (.02) (.02)
EX-99 3 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. -----END PRIVACY-ENHANCED MESSAGE-----