-----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, KCJ5U2yT6ZIYmcywwTeiPnU/UycFVHCvD+pNO4OyUrbjtlEQleRoTsZcb53imZet hl8bw56T1ZWKcIOhf37qaA== 0001072613-07-001152.txt : 20070515 0001072613-07-001152.hdr.sgml : 20070515 20070515151550 ACCESSION NUMBER: 0001072613-07-001152 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20070331 FILED AS OF DATE: 20070515 DATE AS OF CHANGE: 20070515 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NORTH AMERICAN GALVANIZING & COATINGS INC 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: 1934 Act SEC FILE NUMBER: 001-03920 FILM NUMBER: 07852509 BUSINESS ADDRESS: STREET 1: 5314 S YALE AVENUE STREET 2: SUITE 1000 CITY: TULSA STATE: OK ZIP: 74135 BUSINESS PHONE: (918)494-0964 MAIL ADDRESS: STREET 1: 5314 S YALE AVENUE STREET 2: SUITE 1000 CITY: TULSA STATE: OK ZIP: 74135 FORMER COMPANY: FORMER CONFORMED NAME: KINARK CORP DATE OF NAME CHANGE: 19920703 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 form10-q_15127.txt FORM 10-Q FOR QUARTER DATED 03-31-07 ================================================================================ UNITED STATES 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 THE QUARTERLY PERIOD ENDED MARCH 31, 2007 Commission File No. 1-3920 NORTH AMERICAN GALVANIZING & COATINGS, INC. (Exact name of the registrant as specified in its charter) DELAWARE (State of Incorporation) 71-0268502 (I.R.S. Employer Identification No.) 5314 S. YALE AVENUE, SUITE 1000, TULSA, OKLAHOMA 74135 (Address of principal executive offices) Former address of registrant: 2250 East 73rd Street, Tulsa, Oklahoma 74136 (918) 494-0964 (Registrant's telephone number) 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 by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, as defined in Rule 12b-2 of the Exchange Act (Check one): Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the exchange Act). Yes [ ] No [X] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of March 31, 2007: Common Stock $ .10 Par Value....8,165,981 ================================================================================ NORTH AMERICAN GALVANIZING & COATINGS, INC. AND SUBSIDIARY INDEX TO QUARTERLY REPORT ON FORM 10-Q PAGE ---- PART I. FINANCIAL INFORMATION Forward Looking Statements or Information 2 Item 1. Financial Statements Report of Independent Registered 3 Public Accounting Firm Condensed Consolidated Balance Sheets as of March 31, 2007 (unaudited), and December 31, 2006 4 Condensed Consolidated Statements of Income for the three months ended March 31, 2007 and 2006 (unaudited) 5 Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2007 and 2006 (unaudited) 6 Notes to Condensed Consolidated Interim Financial Statements for the three months ended March 31, 2007 and 2006 (unaudited) 7-13 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 14-22 Item 3. Quantitative and Qualitative Disclosure About Market Risks 22 Item 4. Controls and Procedures 22 PART II. OTHER INFORMATION 23-25 SIGNATURES AND CERTIFICATIONS 25 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, the raw materials cost of zinc and the cost of natural gas; 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 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF NORTH AMERICAN GALVANIZING & COATINGS, INC. We have reviewed the accompanying condensed consolidated balance sheet of North American Galvanizing & Coatings, Inc. and subsidiary (the "Company") as of March 31, 2007, and the related condensed consolidated statements of income and of cash flows for the three-month periods ended March 31, 2007 and 2006. These interim financial statements are the responsibility of the Company's management. We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States), 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 interim 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 the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of North American Galvanizing & Coatings, Inc. and subsidiary as of December 31, 2006, and the related consolidated statements of income and comprehensive income, stockholders' equity and cash flows for the year then ended (not presented herein); and in our report dated February 14, 2007, we expressed an unqualified opinion on those consolidated financial statements and included an explanatory paragraph related to the adoption of Statement of Financial Accounting Standards No. 123 (R), Share-Based Payment. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2006 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 15, 2007 3 NORTH AMERICAN GALVANIZING & COATINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - --------------------------------------------------------------------------------------------------- UNAUDITED MARCH 31, DECEMBER 31, ASSETS 2007 2006 CURRENT ASSETS: Cash $ 976 $ 1,979 Trade receivables -- less allowances of $232 for 2007 and $197 for 2006 14,904 13,032 Inventories 6,423 6,755 Prepaid expenses and other assets 707 836 Deferred tax asset -- net 767 784 ---------- ---------- Total current assets 23,777 23,386 PROPERTY, PLANT AND EQUIPMENT -- AT COST: Land 2,167 2,167 Galvanizing plants and equipment 37,378 36,843 ---------- ---------- 39,545 39,010 Less -- allowance for depreciation (19,732) (18,894) Construction in progress 1,048 1,019 ---------- ---------- Total property, plant and equipment -- net 20,861 21,135 GOODWILL 3,448 3,448 OTHER ASSETS 53 242 ---------- ---------- TOTAL ASSETS $ 48,139 $ 48,211 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current maturities of long-term obligations $ 3,636 $ 778 Current portion of bonds payable 5,078 830 Trade accounts payable 4,647 7,444 Accrued payroll and employee benefits 877 1,082 Accrued taxes 1,498 762 Other accrued liabilities 3,226 3,194 ---------- ---------- Total current liabilities 18,962 14,027 ---------- ---------- DEFERRED TAX LIABILITY -- Net 698 802 LONG-TERM OBLIGATIONS 302 3,318 BONDS PAYABLE -- 4,435 ---------- ---------- Total liabilities 19,962 22,645 ---------- ---------- COMMITMENTS AND CONTINGENCIES (NOTE 6) STOCKHOLDERS' EQUITY: Common stock -- $.10 par value, 18,000,000 shares authorized: Issued--8,209,925 shares in 2007 and 2006 821 821 Additional paid-in capital 14,108 14,061 Retained earnings 13,424 11,078 Common shares in treasury at cost -- 43,944 in 2007 and 98,253 in 2006 (176) (394) ---------- ---------- Total stockholders' equity 28,177 25,566 ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 48,139 $ 48,211 ========== ==========
See notes to condensed consolidated interim financial statements. 4 NORTH AMERICAN GALVANIZING & COATINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) THREE MONTHS ENDED MARCH 31, 2007 AND 2006 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - --------------------------------------------------------------------------------------------------- 2007 2006 SALES $ 23,499 $ 15,411 COSTS AND EXPENSES: Cost of sales 16,212 10,996 Selling, general and administrative expenses 2,364 1,841 Depreciation and amortization 838 647 ---------- ---------- Total costs and expenses 19,414 13,484 ---------- ---------- OPERATING INCOME 4,085 1,927 Interest expense 187 241 Interest income (18) -- ---------- ---------- INCOME BEFORE INCOME TAXES 3,916 1,686 INCOME TAX EXPENSE 1,570 704 ---------- ---------- NET INCOME $ 2,346 $ 982 ========== ========== NET INCOME PER COMMON SHARE: Net income Basic $ 0.29 $ 0.14 Diluted $ 0.28 $ 0.13
See notes to condensed consolidated interim financial statements. 5 NORTH AMERICAN GALVANIZING & COATINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) THREE MONTHS ENDED MARCH 31, 2007 AND 2006 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) - --------------------------------------------------------------------------------------------------- 2007 2006 OPERATING ACTIVITIES: Net income $ 2,346 $ 982 Gain on disposal of assets -- 7 Depreciation 838 647 Deferred income taxes (87) 57 Non-cash directors' fees 107 122 Non-cash share-based compensation 83 19 Changes in operating assets and liabilities: Accounts receivable--net (1,872) (2,654) Inventories and other assets 650 403 Accounts payable, accrued liabilities and other (2,233) (195) ---------- ---------- Cash used in operating activities (168) (612) INVESTING ACTIVITIES: Capital expenditures (525) (154) ---------- ---------- Cash used in investing activities (525) (154) FINANCING ACTIVITIES: Payments on long-term obligations (420) (6,789) Proceeds from long-term obligations 223 7,191 Payment on bonds (188) (235) Proceeds from exercise of stock options 75 -- ---------- ---------- Cash (used in) provided by financing activities (310) 167 DECREASE IN CASH AND CASH EQUIVALENTS (1,003) (599) CASH AND CASH EQUIVALENTS: Beginning of period 1,979 1,367 ---------- ---------- End of period $ 976 $ 768 ========== ========== CASH PAID DURING THE PERIOD FOR: Interest $ 129 $ 410 ========== ========== Income taxes $ 667 $ 277 ========== ========== NON-CASH INVESTING AND FINANCING ACTIVITIES: Acquisitions of fixed assets under capital lease obligations $ 39 $ -- ========== ==========
See notes to condensed consolidated interim financial statements. 6 NORTH AMERICAN GALVANIZING & COATINGS, INC.AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006 UNAUDITED NOTE 1. BASIS OF PRESENTATION The condensed consolidated interim financial statements included in this report have been prepared by North American Galvanizing & Coatings, Inc. (the "Company") pursuant to its understanding of 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. The condensed consolidated interim 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 interim 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, 2006. 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 periods. 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"). The Company adopted the provisions of FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes", or FIN 48, on January 1, 2007. FIN 48 clarifies whether or not to recognize assets or liabilities for tax positions taken that may be challenged by a taxing authority. The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal and state income tax examinations by tax authorities for years before 2003. In the second quarter of 2006, the Internal Revenue Service (IRS) commenced an examination of the Company's Federal income tax return for 2004 and subsequently added years 2003 and 2005 to the examination. The Company anticipates that the IRS will complete this examination by the end of the second quarter of 2007. The Company had previously recorded $162,000 relating to anticipated additional federal income taxes as a result of this examination, and does not anticipate that further adjustments resulting from this examination, if any, would result in a material change to its financial position or results of operations. This amount is included in income taxes payable at March 31, 2007. Upon the adoption of FIN 48, the Company commenced a review of all open tax years in all jurisdictions. The Company does not believe it has included any "uncertain tax positions" in its Federal income tax return or any of the state income tax returns it is currently filing. The Company has made an evaluation of the potential impact of additional state taxes being assessed by jurisdictions in which the Company does not currently consider itself liable. The Company does not anticipate that such additional taxes, if any, would result in a material change to its financial position. In connection with the adoption of FIN 48, the Company will include future interest and penalties, if any, related to uncertain tax positions as a component of its provision for taxes. 7 NOTE 2. STOCK OPTIONS At March 31, 2007 the Company has two share-based compensation plans, which are shareholder-approved, the 2004 Incentive Stock Plan and the Director Stock Unit Program (Note 6). The Company's 2004 Incentive Stock Plan (the Plan) permits the grant of share options and shares to its employees and directors for up to 1,250,000 shares of common stock. The Company believes that such awards better align the interests of its employees and directors with those of its shareholders. Option awards are granted with an exercise price equal to the market price of the Company's stock at the date of grant; those option awards usually vest based on 4 years of continuous service and have 10-year contractual terms. The compensation cost for the Plan was $83,000 and $19,000 for the three- months ended March 31, 2007 and 2006, respectively. No tax benefit was recognized for the 2007 incentive stock plan compensation cost. There was no share-based compensation cost capitalized during 2006 or 2007. The fair value of options granted under the Company's stock option plans was estimated using the Black-Scholes option-pricing model with the following assumptions used: Quarter Ended March 31 - -------------------------------------------------------------------------------- Dollars in Thousands, Except per Share Amounts 2007 2006 - -------------------------------------------------------------------------------- Volatility 66% 55% Discount Rate 4.6% 4.7% Dividend Yield -- -- Fair Value $3.54 $1.47 In the first quarter of 2007, the Company issued stock options for 335,000 shares at $5.20 per share, and issued stock options for 157,500 shares at $2.10 per share in the first quarter of 2006. 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, adjusted for stock unit grants. Diluted earnings per common share for the periods presented are based on the weighted average shares outstanding, adjusted for stock unit grants and for the assumed exercise of stock options and warrants using the treasury stock method. THREE MONTHS ENDED MARCH 31 NUMBER OF SHARES - --------------------------- ---------------------------- 2007 2006 ----------- ----------- Basic 8,143,747 7,022,181 Diluted 8,337,157 7,790,182 The options excluded from the calculation of diluted earnings per share, due to the option price exceeding the share market price are 335,000 and 295,000 at March 31, 2007 and 2006, respectively. 8 NOTE 4. LONG-TERM OBLIGATIONS March 31 December 31 (DOLLARS IN THOUSANDS) 2007 2006 ---------------------- ---------- ---------- Capital lease obligations $ 349 $ 328 Term loan 3,573 3,751 Other 16 17 ---------- ---------- $ 3,938 $ 4,096 Less current portion (3,636) (778) ---------- ---------- $ 302 $ 3,318 ---------- ---------- The Company's bank credit agreement expires February 28, 2008. Subject to borrowing base limitations, the amended agreement provides (i) an $8,000,000 maximum revolving credit facility for working capital and general corporate purposes and (ii) a $5,001,000 term loan that combined the outstanding principal balance of the existing term loan with additional financing for the purchase of assets of a galvanizing facility in February of 2005. Term loan payments are based on a seven-year amortization schedule with equal monthly payments of principal and interest, and a final balloon payment in February 2008. The term 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 maximum line of credit. At March 31, 2007, the Company had unused borrowing capacity of $7,612,000 under the line of credit, based on the underlying borrowing base of accounts receivable and inventory. At March 31, 2007, there were no borrowings outstanding under the bank credit agreement, and $388,000 was reserved for outstanding irrevocable letters of credit to secure payment of current and future workers' compensation claims. 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 JPMorgan Chase Bank or the LIBOR rate, at the option of the Company, subject to a rate margin adjustment determined by the Company's consolidated debt service coverage ratio. The interest rate on these borrowings was 8.50% at March 31, 2007. 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 from 3.0% to 5.75% and the Applicable Prime Rate Margin will be increased from .25% 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. In the event the Company fails to maintain a consolidated EBITDA to capital expenditures plus current maturity of long-term debt ratio for any fiscal quarter of not less than 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%. 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. At March 31, 2007, the Company was in compliance with the covenants, with the exception of the Debt Service Coverage Ratio and Capital Expenditures Coverage Ratio. The covenant violations occurred due to the reclassification of the bonds payable as short-term, based on the agreement with the Internal Revenue Service discussed in Note 5. The Company has obtained a commitment for a new long-term facility financed by another bank and has notified its existing bank that it plans to repay and terminate the current facility. The actual financial ratios compared to the required ratios, were as follows: Current Ratio - actual 1.7 versus minimum required of 1.10; Debt to Tangible Net Worth Ratio - actual .77 vs. maximum permitted of 2.50; Debt Service Coverage Ratio - actual 1.02 versus minimum permitted of 1.25; Capital Expenditures Coverage Ratio - actual .85 versus minimum required of 1.0. 9 The company has a signed commitment letter from a bank for a $25,000,000 revolving credit facility, and the right to increase the facility up to $10,000,000 in minimum increments of $5,000,000. The purpose of the new facility is to refinance existing revolving line of credit, term debt, bond debt, issue standby letters of credit, finance acquisitions, and for other general corporate purposes. The credit facility will have a maturity of five years with no principal payments required and no prepayment penalty. The Company plans to complete the refinancing before the bank commitment expires on June 29th, 2007. 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. All of the bond proceeds, which were held in trust by Bank One Trust Company, N.A. ("Trustee"), were used by NAG for the purchase of land and construction of a hot dip galvanizing plant in Harris County, Texas. The galvanizing plant was completed and began operation in the first quarter of 2001. The principal amount outstanding on these bonds was $5,078,000 at March 31, 2007. The Internal Revenue Service has reviewed the Harris County Industrial Development Corporation Adjustable Rate Industrial Development Bonds and compliance with the Internal Revenue Code section (IRC) 144(a)(4)(ii)'s dollar limitation on capital expenditures within a relevant period. The IRS review concerned whether two operating leases commencing in January 2001 were conditional sales contracts, not true leases, according to Revenue Ruling 55-540. As a result of the review, in March, 2007, the Company entered into a settlement agreement (the "Closing Agreement") with the Harris County Industrial Development Corporation and the Commissioner of the Internal Revenue Service ("IRS"). Pursuant to the terms of the Closing Agreement, the Company agreed to make a payment to the IRS of $101,260 in settlement of the issues referenced above. As of December 31, 2006 the Company had recorded an estimated liability of $145,000 related to this matter. Furthermore, the Company agreed to redeem all outstanding Bonds on or before June 30, 2007. As a result, the bonds payable of $5,078,000 are included in short-term liabilities as of March 31, 2007. The Company currently has sufficient borrowing capacity to redeem the Bonds. NOTE 6. COMMITMENTS AND CONTINGENCIES The Company has commitments with domestic and foreign zinc producers and brokers to purchase zinc used in its hot dip galvanizing operations. Commitments for the future delivery of zinc 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, 2007 the aggregate commitments for the procurement of zinc at fixed prices were approximately $900,000. 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 no unpriced commitments for zinc purchases at March 31, 2007. 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. The Company had no derivative instruments required to be reported at fair value at March 31, 2007 or December 31, 2006, and did not utilize derivatives in the three-month period ended March 31, 2007 or the year ended December 31, 2006, except for the forward purchase agreements described above, which are accounted for as normal purchases. The Company's total off-balance sheet contractual obligations at March 31, 2007, consist of approximately $1,466,000 for long-term operating leases for vehicles, office space, office equipment, galvanizing facilities and galvanizing equipment and approximately $900,000 for zinc purchase commitments. The various leases for galvanizing facilities, including option renewals, expire from 2007 to 2017. A lease for galvanizing equipment expires in 2007. On August 30, 2004, the Company was informed by counsel for the Metropolitan Water Reclamation District of Greater Chicago (the "Water District") that the Water District had, on August 25, 2004 filed a Second Amended 10 Complaint in the United States District Court, Northern District of Illinois, Eastern Division, naming North American Galvanizing & Coatings, Inc. (formerly known as Kinark Corporation) as an added defendant. Counsel for the Water District also gave the Company notice of the Water District's intent to file (or amend the Complaint to include) a Citizens Suit under the Resource Compensation and Recovery Act ("RCRA") against North American Galvanizing & Coatings, Inc., pursuant to Section 7002 of RCRA, 42 U.S.C. Section 6972. This Second Amended Complaint seeks enforcement of an August 12, 2004 default judgment in the amount of $1,810,463.34 against Lake River Corporation and Lake River Holding Company, Inc. in connection with the operation of a storage terminal by Lake River Corporation in violation of environmental laws. Lake River Corporation conducted business as a subsidiary of the Company until September 30, 2000, at which time Lake River Corporation was sold to Lake River Holding Company, Inc. and ceased to be a subsidiary of the Company. The Second Amended Complaint asserts that prior to the sale of Lake River Corporation, the Company directly operated the Lake River facility and, accordingly, seeks to have the Court pierce the corporate veil of Lake River Corporation and enforce the default judgment order of August 12, 2004 against the Company. The Company denied the assertions set forth in the Water District's Complaint and on November 13, 2004 filed a partial motion for dismissal of the Second Amended Complaint. In December 2004, the Water District filed a Third Amended complaint in the litigation, adding two claims: (1) a common law claim for nuisance; and (2) a claim under the federal Resource Conservation and Recovery Act, in which the Water District argues that the Company is responsible for conditions on the plaintiff's property that present an "imminent and substantial endangerment to human health and the environment." In January 2005, the Company filed a partial motion to dismiss the Third Amended Complaint. On April 12, 2005, the Court issued an order denying in part and granting in part the Company's partial motion to dismiss plaintiff's third amended complaint. The Company filed an appeal with the Seventh Circuit Court of Appeals requesting dismissal of the sole CERCLA claim contained in the Third Amended Complaint that was not dismissed by the United States District Court's April 12, 2005 order. On January 17, 2007, the Seventh Circuit affirmed the judgment of the United States District Court, stating that the Water District has a right of action under CERCLA. The Company is evaluating the judgment and expects to file a motion for reconsideration with the Seventh Circuit. Meanwhile, litigation and discovery in the trial court have been stayed pending mediation. As a result of the mediation, on April 11, 2007, the Company entered into an Agreement in Principle establishing terms for a conditional settlement. Under the terms of the Agreement in Principle, the Company has agreed to fund 50% of the cost, up to $350,000, to enroll the site in the Illinois Voluntary Site Remediation Program. These funds will be used to prepare environmental reports for approval by the Illinois Environmental Protection Agency. The parties' shared objective is to obtain a "no further remediation determination" from the Illinois EPA based on a commercial / industrial cleanup standard. If the cost to prepare these reports equals or exceed $700,000, additional costs above $700,000 ($350,000 per party) will be borne 100% by the Water District. If a remediation plan is required based on the site assessment, the Company has also agreed to fund 50% of the cost to implement the remediation plan, up to a maximum of $1 million. If the cost to implement the plan is projected to exceed $2 million, then the Water District will have the option to terminate the agreement and resume the litigation. The Water District will have to choose whether to accept or reject the $1 million funding commitment from the Company before accepting any payments from the Company for implementation of the remediation plan. The Company does not believe that it can determine whether any cleanup is required or if any final cleanup cost is likely to exceed $2 million until additional data has been collected and analyzed in connection with the environmental reports. If the Water District elects to accept the maximum funding commitment, the Company has also agreed to remove certain piping and other equipment from one of the parcels. The cost to remove the piping is estimated to be between $35,000 and $60,000. Although the boards of both the Water District and the Company have approved the Agreement in Principle, the agreement of the parties must be embodied in a formal settlement agreement, which is currently in process. The Company has recorded a liability for $350,000 related to the Water District claim in recognition of its currently known and estimable funding commitment under the Agreement in Principle. In the event that the Water 11 District rejects the funding commitment described above, the potential claim could exceed the amount of the previous default judgment. As neither a site evaluation nor a remediation plan has been developed, the Company is unable to make a reasonable estimate of the amount or range of further loss, if any, that could result. Such a liability, if any, could have a material adverse effect on the Company's financial condition, results of operations, or liquidity. 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. All of the bond proceeds, which were held in trust by Bank One Trust Company, N.A. ("Trustee"), were used by NAG for the purchase of land and construction of a hot dip galvanizing plant in Harris County, Texas. The galvanizing plant was completed and began operation in the first quarter of 2001. The principal amount outstanding on these bonds was $5,078,000 at March 31, 2007. The Internal Revenue Service has reviewed the Harris County Industrial Development Corporation Adjustable Rate Industrial Development Bonds and compliance with the Internal Revenue Code section (IRC) 144(a)(4)(ii)'s dollar limitation on capital expenditures within a relevant period. The IRS review concerned whether two operating leases commencing in January 2001 were conditional sales contracts, not true leases, according to Revenue Ruling 55-540. As a result of the review, in March, 2007, the Company entered into a settlement agreement (the "Closing Agreement") with the Harris County Industrial Development Corporation and the Commissioner of the Internal Revenue Service ("IRS"). Pursuant to the terms of the Closing Agreement, the Company agreed to make a payment to the IRS of $101,260 in settlement of the issues referenced above. As of December 31, 2006 the Company had recorded an estimated liability of $145,000 related to this matter. Furthermore, the Company agreed to redeem all outstanding Bonds on or before June 30, 2007. As a result, the bonds payable of $5,078,000 are included in short-term liabilities as of March 31, 2007. The Company currently has sufficient borrowing capacity to redeem the Bonds. NAG was notified in 1997 by the Illinois Environmental Protection Agency ("IEPA") that it was one of approximately 60 potentially responsible parties ("PRPs") 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. A number of the PRPs have agreed to work together and with IEPA on a voluntary basis. The Company has been and continues to participate in this volunteer group. The group has retained consultants and legal representatives familiar with IEPA regulations. This volunteer group, with its consultants, has cooperated with IEPA in attempting to better define the environmental issues associated with the Sandoval Zinc site. To that extent, this voluntary group prepared and submitted to IEPA in August 2000 a work plan. The purpose of this work plan is to attempt to define the extent of environmental remediation that might be required, assess risks, and review alternatives to addressing potential remediation. The estimated timeframe for resolution of the IEPA contingency is unknown. The IEPA has yet to respond to this proposed work plan or suggest any other course of action, and there has been no activity in regards to this issue since 2001. The Company does not have any liability accrued relating to the IEPA matter. Until the work plan is approved and completed, the range of potential loss or remediation, if any, is unknown. In addition, the allocation of potential loss between the 60 potentially responsible parties is unknown and not reasonably estimable. Therefore, the Company has no basis for determining potential exposure and estimated remediation costs at this time. The lease term of a galvanizing facility located in Tulsa, Oklahoma, occupied by Reinforcing Services, Inc. ("RSI"), a subsidiary of North American Galvanizing Company, expired July 31, 2003 and has not been renewed. RSI has exercised an option to purchase the facility, and the landlord is contesting the Company's right to exercise this option. RSI has filed a lawsuit against the landlord seeking enforcement of the right to exercise the option and requested a summary judgment in its favor. The court ruled in favor of RSI and as a result, RSI is negotiating terms of the purchase and related items with the landlord. The Company expects this matter to be resolved during 2007 without negative financial impact. 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 12 future operations. Management is committed to discovering and eliminating environmental issues as they arise. Because of frequent changes in environmental technology, laws and regulations management cannot reasonably quantify the Company's potential future costs in this area. North American Galvanizing & Coatings, Inc. and its subsidiary are parties to a number of other lawsuits and environmental matters which are not discussed herein. Management of the Company, based upon their analysis of known facts and circumstances and reports from legal counsel, does not believe that any other such matter will have a material adverse effect on the results of operations, financial conditions or cash flows of the Company. NOTE 7. DIRECTOR STOCK UNIT PROGRAM On January 1, 2005, the Company implemented the Director Stock Unit Program (approved by the stockholders at the Annual Meeting held July 21, 2004) under which a Director is required to defer 50% of his or her board fee and may elect to defer up to 100% of his or her board fee, plus a matching contribution by the Company that varies from 25% to 75% depending on the level of deferral. Such deferrals are converted into a stock unit grant, payable to the Director five years following the year of deferral. For 2006 and 2007, all of the Company's Outside Directors elected to defer 100% of the annual board fee and the Company's chief executive officer and Inside Director has elected to defer a corresponding amount of his salary. Outside Directors currently receive an annual fee of $35,000, which includes attendance at board meetings and service on committees of the board. In the first three months of 2006, fees and salary deferred by the Directors represented a total of 60,345 stock unit grants valued at $2.03 per stock unit. In the first three months of 2007, fees and salary deferred by the Directors represented a total of 20,384 stock unit grants valued at $5.26 per stock unit. The value of a stock unit grant is the average of the closing prices for a share of the Company's stock for the 10 trading days before the date the director fees otherwise would have been payable in cash. NOTE 8. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS T. Stephen Gregory, a director of North American Galvanizing & Coatings, Inc. is the chairman of the board and a shareholder of Gregory Industries, Inc., a customer of the Company. Total sales to Gregory Industries, Inc. for the three-month periods ended March 31, 2007 and 2006 were approximately $385,000 and $293,000, respectively. The amount due from Gregory Industries, Inc. included in trade receivables at March 31, 2007 and December 31, 2006 was $199,000 and $278,000, respectively. 13 NORTH AMERICAN GALVANIZING & COATINGS, INC. AND SUBSIDIARY ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL North American Galvanizing is a leading provider of corrosion protection for iron and steel components fabricated by its customers. Hot dip galvanizing is the process of applying a zinc coating to fabricated iron or steel material by immersing the material in a bath consisting primarily of molten zinc. Based on the number of its operating plants, the Company is one of the largest merchant market hot dip galvanizing companies in the United States. During the three-month period ended March 31, 2007, there were no significant changes to the Company's critical accounting policies previously disclosed in Form 10-K for the year ended December 31, 2006. The Company adopted the provisions of FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes", or FIN 48, on January 1, 2007. FIN 48 clarifies whether or not to recognize assets or liabilities for tax positions taken that may be challenged by a taxing authority. The Company files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal and state income tax examinations by tax authorities for years before 2003. In the second quarter of 2006, the Internal Revenue Service (IRS) commenced an examination of the Company's Federal income tax return for 2004 and subsequently added years 2003 and 2005 to the examination. The Company anticipates that the IRS will complete this examination by the end of the second quarter of 2007. The Company had previously recorded $162,000 relating to anticipated additional federal income taxes as a result of this examination, and does not anticipate that further adjustments resulting from this examination, if any, would result in a material change to its financial position or results of operations. This amount is included in income taxes payable at March 31, 2007. Upon the adoption of FIN 48, the Company commenced a review of all open tax years in all jurisdictions. The Company does not believe it has included any "uncertain tax positions" in its Federal income tax return or any of the state income tax returns it is currently filing. The Company has made an evaluation of the potential impact of additional state taxes being assessed by jurisdictions in which the Company does not currently consider itself liable. The Company does not anticipate that such additional taxes, if any, would result in a material change to its financial position. In connection with the adoption of FIN 48, the Company will include future interest and penalties, if any, related to uncertain tax positions as a component of its provision for taxes The Company's galvanizing plants offer a broad line of services including centrifuge galvanizing for small threaded products, sandblasting, chromate quenching, polymeric coatings, and proprietary INFRASHIELDSM Coating Application Systems for polyurethane protective linings and coatings over galvanized surfaces. The Company's mechanical and chemical engineers provide customized assistance with initial fabrication design, project estimates and steel chemistry selection. The Company's galvanizing and coating operations are composed of eleven facilities located in Colorado, Kentucky, Missouri, Ohio, Oklahoma, Tennessee and Texas. These facilities operate galvanizing kettles ranging in length from 16 feet to 62 feet, and have lifting capacities ranging from 12,000 pounds to 40,000 pounds. The Company maintains a sales and service network coupled with its galvanizing plants, supplemented by national account business development at the corporate level. In 2006, the Company galvanized in excess of 400,000,000 pounds of steel products for approximately 1,700 customers nationwide. All of the Company's sales are generated for customers whose end markets are principally in the United States. The Company markets its galvanizing and coating services directly to its customers and does not utilize agents or distributors. Although hot dip galvanizing is considered a mature service industry, the Company is actively 14 engaged in developing new markets through participation in industry trade shows, metals trade associations and presentation of technical seminars by its national marketing service team. Hot dip galvanizing provides metals corrosion protection for many product applications used in commercial, construction and industrial markets. The Company's galvanizing can be found in almost every major application and industry that requires corrosion protection where iron or steel is used, including the following end user markets: o highway and transportation, o power transmission and distribution, o wireless and telecommunications, o utilities, o petrochemical processing, o industrial grating, o infrastructure including buildings, airports, bridges and power generation; o wastewater treatment, o fresh water storage and transportation; o pulp and paper, o pipe and tube, o food processing, o agricultural (irrigation systems), o recreation (boat trailers, marine docks, stadium scaffolds), o bridge and pedestrian handrail, o commercial and residential lighting poles, and o original equipment manufactured products, including general fabrication. As a value-added service provider, the Company's revenues are directly influenced by the level of economic activity in the various end markets that it serves. Economic activity in those markets that results in the expansion and/or upgrading of physical facilities (i.e., construction) may involve a time-lag factor of several months before translating into a demand for galvanizing fabricated components. Despite the inherent seasonality associated with large project construction work, the Company maintains a relatively stable revenue stream throughout the year by offering fabricators, large and small, reliable and rapid turn-around service. The Company records revenues when the galvanizing and coating processes are completed. The Company generates all of its operating cash from such revenues, and utilizes a line of credit secured by the underlying accounts receivable and zinc inventory to facilitate working capital needs. Each of the Company's galvanizing plants operate in a highly competitive environment underscored by pricing pressures, primarily from other public and privately-owned galvanizers and alternative forms of corrosion protection, such as paint. The Company's long-term response to these challenges has been a sustained strategy focusing on providing a reliable quality of galvanizing to standard industry technical specifications and rapid turn-around time on every project, large and small. Key to the success of this strategy is the Company's continuing commitment and long-term record of reinvesting earnings to upgrade its galvanizing facilities and provide technical innovations to improve production efficiencies; and to construct new facilities when market conditions present opportunities for growth. The Company is addressing long-term opportunities to expand its galvanizing and coatings business through programs to increase industry awareness of the proven, unique benefits of galvanizing for metals corrosion protection. Each of the Company's galvanizing plants is linked to a centralized system involving sales order entry, facility maintenance and operating procedures, quality assurance, purchasing and credit and accounting that enable the plant to focus on providing galvanizing and coating services in the most cost-effective manner. 15 The principal raw materials essential to the Company's galvanizing and coating operations are zinc and various chemicals which are normally available for purchase in the open market. KEY INDICATORS Key industries which historically have provided the Company some indication of the potential demand for galvanizing in the near-term, (i.e., primarily within a year) include highway and transportation, power transmission and distribution, telecommunications and the level of quoting activity for regional metal fabricators. In general, growth in the commercial/industrial sectors of the economy generates new construction and capital spending which ultimately impacts the demand for galvanizing. Key operating measures utilized by the Company include new orders, zinc inventory, tons of steel galvanized, revenue, pounds and labor costs per hour, zinc usage related to tonnage galvanized, and lost-time safety performance. These measures are reported and analyzed on various cycles, including daily, weekly and monthly. The Company utilizes a number of key financial measures to evaluate the operations at each of its galvanizing plants, to identify trends and variables impacting operating productivity and current and future business results, which include: return on capital employed, sales, gross profit, fixed and variable costs, selling and general administrative expenses, operating cash flows, capital expenditures, interest expense, and a number of ratios such as profit from operations and accounts receivable turnover. These measures are reviewed by the Company's operating and executive management each month, or more frequently, and compared to prior periods, the current business plan and to standard performance criteria, as applicable. 16 RESULTS OF OPERATIONS The following table shows the Company's results of operations for the three months ended March 31, 2007 and 2006: (Dollars in thousands) THREE MONTHS ENDED MARCH 31, ----------------------------------------------- 2007 2006 --------------------- --------------------- % OF % OF AMOUNT SALES AMOUNT SALES Sales $ 23,499 100.0% $ 15,411 100.0% Cost of sales 16,212 69.0% 10,996 71.4% Selling, general and administrative expenses 2,364 10.1% 1,841 11.9% Depreciation and amortization 838 3.6% 647 4.2% --------- ------- --------- ------- Operating income 4,085 17.4% 1,927 12.5% Interest expense 187 0.8% 241 1.6% Interest Income (18) -0.1% -- -- --------- ------- --------- ------- Income before income taxes 3,916 16.7% 1,686 10.9% Income tax expense 1,570 6.7% 704 4.6% --------- ------- --------- ------- Net income $ 2,346 10.0% $ 982 6.4% ========= ======= ========= ======= 2007 COMPARED TO 2006 SALES. Sales for the first quarter ended March 31, 2007 increased 52% over the prior year. First quarter 2007 volumes are close to volumes in the first quarter of 2006. Sales prices have increased in the quarter related to increases in zinc costs. In the three-months ended March 31, 2007, average selling prices for galvanizing and related coating services were 55% higher than the prior year first quarter. The London Metals Exchange (LME) market price for zinc for the first quarter of 2007 averaged $1.57 per pound, compared to $1.02 per pound in the first quarter of 2006, representing a 54% increase. At March 31, 2007, the LME market price for zinc was $1.49 per pound. The Company's zinc forward purchase program in 2006 resulted in some zinc purchases at lower prices than market during the first quarter of 2006. As of March 31, 2007 pricing on the Company's forward purchase contracts does not differ significantly from market. COST OF SALES. The increase in cost of sales from 2006 to 2007 resulted mainly from an increase in zinc costs. Forward purchases of zinc at prices lower than current market during the first three months of 2006 reduced cost of sales by $915,000. Other items impacting cost of sales include increased overhead of $738,000, including $350,000 related to Lake River environmental site assessment costs, as agreed to in the mediation discussed in Note 6, increased labor costs, $497,000, and decreased utility costs, $110,000. SELLING, GENERAL AND ADMINISTRATIVE (SG&A) EXPENSES. SG&A increased $523,000, or 28.0%, from the prior year 17 first quarter, but decreased as a percent of revenues from 11.9%, first quarter 2006 to 10.1%, first quarter 2007. The increase is due to increases in personnel costs, primarily incentive compensation, $192,000, amortization of deferred bond and loan origination costs related to the IRB Bond agreement, $186,000, and other increases in bad debt reserves, shareholder services, audit fees, and other totaling $145,000. DEPRECIATION EXPENSE. Depreciation expense for the first quarter of 2007 increased $191,000 from 2006, resulting primarily from a change in depreciation method for two newer galvanizing facilities. The Company previously used the units of production method for machinery and equipment at these facilities. Effective July 1, 2006, the Company changed to the straight-line method. OPERATING INCOME. Operating income increased $2,158,000 from the first three months of 2006 to the first three months of 2007. Operating income as a percent of sales increased 4.9% for the first quarter of 2007 versus the first quarter of 2006. Increases in operating income result from the factors explained above. INCOME TAXES. The Company's effective income tax rates for the first quarter of 2007 and 2006 were 40.1% and 41.7%, respectively. The effective tax rates differ from the federal statutory rate primarily due to state income taxes. NET INCOME. For the first quarter of 2007, the Company reported net income of $2,346,000 compared to net income of $982,000 for the first quarter of 2006. The increase in net income is primarily due to the increase in average selling price from the first three months of 2006 to the first three months of 2007. LIQUIDITY AND CAPITAL RESOURCES The Company's cash flow from operations and borrowings under credit facilities have consistently been adequate to fund its current facilities' working capital and base capital spending requirements. During 2007 and 2006, operating cash flow and borrowings under credit facilities have been the primary sources of liquidity. The Company monitors working capital and planned capital spending to assess liquidity and minimize cyclical cash flow. Cash flow from operating activities for the first three months of 2007 and 2006 was ($168,000) and ($612,000), respectively. The increase of $444,000 in 2007 cash flow from operations was due to increased net income, offset by increased working capital needs, primarily a decrease in accounts payable and accrued liabilities due to reduction in amounts due to zinc suppliers. Cash of $525,000 used in 2007 investing activities through March 31 consisted of capital expenditures for equipment and upgrade of existing galvanizing facilities. Investing activities in the first quarter of 2006 included $154,000 in capital expenditures. The Company expects base capital expenditures for 2007 to approximate $4,000,000. During the first three months of 2007, total debt (current and long-term obligations and bonds payable) decreased $345,000 to $9,016,000. Other financing activity during the first quarter of 2007 was proceeds from stock option exercises of $75,000. During the first three months of 2006, total debt (current and long-term obligations) increased $167,000 to $14,888,000. Financing activities for first quarter of 2006 included: payments of $235,000 to a bond sinking fund, proceeds of $7,191,000 from a bank line of credit, and payments of $6,789,000 on the bank line of credit and term loans. In February 2005, the Company amended a three-year bank credit agreement that was scheduled to expire in December 2007 and extended its maturity to February 28, 2008. Subject to borrowing base limitations, the amended agreement provides (i) an $8,000,000 maximum revolving credit facility for working capital and general corporate purposes and (ii) a $5,001,000 term loan that combined the outstanding principal balance of the existing term loan with additional financing for the purchase of assets of a galvanizing facility. Term loan payments are based on a seven-year amortization schedule with equal monthly payments of principal and interest, and a final balloon payment in February 2008. The term 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 18 maximum line of credit. At March 31, 2007, the Company had unused borrowing capacity of $7,612,000 under the line of credit, based on the underlying borrowing base of accounts receivable and inventory. At March 31, 2007, there were no borrowings outstanding under the bank credit agreement, and $388,000 was reserved for outstanding irrevocable letters of credit to secure payment of current and future workers' compensation claims. 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 JPMorgan Chase Bank or the LIBOR rate, at the option of the Company, subject to a rate margin adjustment determined by the Company's consolidated debt service coverage ratio. The interest rate on these borrowings was 8.50% at March 31, 2007. 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 from 3.0% to 5.75% and the Applicable Prime Rate Margin will be increased from .25% 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. In the event the Company fails to maintain a consolidated EBITDA to capital expenditures plus current maturity of long-term debt ratio for any fiscal quarter of not less than 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%. 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. At March 31, 2007, the Company was in compliance with the covenants, with the exception of the Debt Service Coverage Ratio and Capital Expenditures Coverage Ratio. The covenant violations occurred due to the reclassification of the bonds payable as short-term, based on the agreement with the Internal Revenue Service discussed in Note 5. The Company has obtained a commitment for a new long-term facility financed by another bank and has notified its existing bank that it plans to repay and terminate the current facility. The actual financial ratios compared to the required ratios, were as follows: Current Ratio - actual 1.7 versus minimum required of 1.10; Debt to Tangible Net Worth Ratio - actual .77 vs. maximum permitted of 2.50; Debt Service Coverage Ratio - actual 1.02 versus minimum permitted of 1.25; Capital Expenditures Coverage Ratio - actual .85 versus minimum required of 1.0. The company has a signed commitment letter from a bank for a $25,000,000 revolving credit facility, and the right to increase the facility up to $10,000,000 in minimum increments of $5,000,000. The purpose of the new facility is to refinance existing revolving line of credit, term debt, bond debt, issue standby letters of credit, finance acquisitions, and for other general corporate purposes. The credit facility will have a maturity of five years with no principal payments required and no prepayment penalty. The Company plans to complete the refinancing before the bank commitment expires on June 29th, 2007. 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. All of the bond proceeds, which were held in trust by Bank One Trust Company, N.A. ("Trustee"), were used by NAG for the purchase of land and construction of a hot dip galvanizing plant in Harris County, Texas. The galvanizing plant was completed and began operation in the first quarter of 2001. The principal amount outstanding on these bonds was $5,078,000 at March 31, 2007. The Internal Revenue Service has reviewed the Harris County Industrial Development Corporation Adjustable Rate Industrial Development Bonds and compliance with the Internal Revenue Code section (IRC) 144(a)(4)(ii)'s dollar limitation on capital expenditures within a relevant period. The IRS review concerned whether two operating leases commencing in January 2001 were conditional sales contracts, not true leases, according to Revenue Ruling 55-540. As a result of the review, in March, 2007, the Company entered into a settlement agreement (the "Closing Agreement") with the Harris County Industrial Development Corporation and the Commissioner of the Internal 19 Revenue Service ("IRS"). Pursuant to the terms of the Closing Agreement, the Company agreed to make a payment to the IRS of $101,260 in settlement of the issues referenced above. As of December 31, 2006 the Company had recorded an estimated liability of $145,000 related to this matter. Furthermore, the Company agreed to redeem all outstanding Bonds on or before June 30, 2007. As a result, the bonds payable of $5,078,000 are included in short-term liabilities as of March 31, 2007. The Company currently has sufficient borrowing capacity to redeem the Bonds. The Company has various commitments primarily related to long-term debt, industrial revenue bonds, operating lease commitments, zinc purchase commitments and vehicle operating leases. The Company's total off-balance sheet contractual obligations at March 31, 2007, consist of approximately $1,466,000 for long-term operating leases for vehicles, office space, office equipment, galvanizing facilities and galvanizing equipment and approximately $900,000 for zinc purchase commitments. The various leases for galvanizing facilities, including option renewals, expire from 2007 to 2017. A lease for galvanizing equipment expires in 2007. NAG periodically enters into fixed price purchase commitments with domestic and foreign zinc producers to purchase a portion of its requirements for its hot dip galvanizing operations; commitments for the future delivery of zinc can be for up to one year. ENVIRONMENTAL MATTERS 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 three months of 2007 and 2006 was approximately $802,000 and $308,000, respectively, for the disposal and recycling of wastes generated by the galvanizing operations. On August 30, 2004, the Company was informed by counsel for the Metropolitan Water Reclamation District of Greater Chicago (the "Water District") that the Water District had, on August 25, 2004 filed a Second Amended Complaint in the United States District Court, Northern District of Illinois, Eastern Division, naming North American Galvanizing & Coatings, Inc. (formerly known as Kinark Corporation) as an added defendant. Counsel for the Water District also gave the Company notice of the Water District's intent to file (or amend the Complaint to include) a Citizens Suit under the Resource Compensation and Recovery Act ("RCRA") against North American Galvanizing & Coatings, Inc., pursuant to Section 7002 of RCRA, 42 U.S.C. Section 6972. This Second Amended Complaint seeks enforcement of an August 12, 2004 default judgment in the amount of $1,810,463.34 against Lake River Corporation and Lake River Holding Company, Inc. in connection with the operation of a storage terminal by Lake River Corporation in violation of environmental laws. Lake River Corporation conducted business as a subsidiary of the Company until September 30, 2000, at which time Lake River Corporation was sold to Lake River Holding Company, Inc. and ceased to be a subsidiary of the Company. The Second Amended Complaint asserts that prior to the sale of Lake River Corporation, the Company directly operated the Lake River facility and, accordingly, seeks to have the Court pierce the corporate veil of Lake River Corporation and enforce the default judgment order of August 12, 2004 against the Company. The Company denied the assertions set forth in the Water District's Complaint and on November 13, 2004 filed a partial motion for dismissal of the Second Amended Complaint. In December 2004, the Water District filed a Third Amended complaint in the litigation, adding two claims: (1) a common law claim for nuisance; and (2) a claim under the federal Resource Conservation and Recovery Act, in which the Water District argues that the Company is responsible for conditions on the plaintiff's property that present an "imminent and substantial endangerment to human health and the environment." In January 2005, the Company filed a partial motion to dismiss the Third Amended Complaint. On April 12, 2005, the Court issued an order denying in part and granting in part the Company's partial motion to dismiss plaintiff's third amended complaint. The Company filed an appeal with the Seventh Circuit Court of Appeals requesting dismissal of the sole CERCLA claim contained in the Third Amended Complaint that was not dismissed by the United States District Court's April 12, 2005 order. On January 17, 2007, the Seventh Circuit affirmed the judgment of the United States District Court, stating that the Water District has a right of action under CERCLA. The Company is evaluating the judgment and expects to file a motion for reconsideration with the Seventh Circuit. Meanwhile, litigation and discovery in the trial court have been stayed pending mediation. 20 As a result of the mediation, on April 11, 2007, the Company entered into an Agreement in Principle establishing terms for a conditional settlement. Under the terms of the Agreement in Principle, the Company has agreed to fund 50% of the cost, up to $350,000, to enroll the site in the Illinois Voluntary Site Remediation Program. These funds will be used to prepare environmental reports for approval by the Illinois Environmental Protection Agency. The parties' shared objective is to obtain a "no further remediation determination" from the Illinois EPA based on a commercial / industrial cleanup standard. If the cost to prepare these reports equals or exceed $700,000, additional costs above $700,000 ($350,000 per party) will be borne 100% by the Water District. If a remediation plan is required based on the site assessment, the Company has also agreed to fund 50% of the cost to implement the remediation plan, up to a maximum of $1 million. If the cost to implement the plan is projected to exceed $2 million, then the Water District will have the option to terminate the agreement and resume the litigation. The Water District will have to choose whether to accept or reject the $1 million funding commitment from the Company before accepting any payments from the Company for implementation of the remediation plan. The Company does not believe that it can determine whether any cleanup is required or if any final cleanup cost is likely to exceed $2 million until additional data has been collected and analyzed in connection with the environmental reports. If the Water District elects to accept the maximum funding commitment, the Company has also agreed to remove certain piping and other equipment from one of the parcels. The cost to remove the piping is estimated to be between $35,000 and $60,000. Although the boards of both the Water District and the Company have approved the Agreement in Principle, the agreement of the parties must be embodied in a formal settlement agreement, which is currently in process. The Company has recorded a liability for $350,000 related to the Water District claim in recognition of its currently known and estimable funding commitment under the Agreement in Principle. In the event that the Water District rejects the funding commitment described above, the potential claim could exceed the amount of the previous default judgment. As neither a site evaluation nor a remediation plan has been developed, the Company is unable to make a reasonable estimate of the amount or range of further loss, if any, that could result. Such a liability, if any, could have a material adverse effect on the Company's financial condition, results of operations, or liquidity. NAG was notified in 1997 by the Illinois Environmental Protection Agency ("IEPA") that it was one of approximately 60 potentially responsible parties ("PRPs") 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. A number of the PRPs have agreed to work together and with IEPA on a voluntary basis. The Company has been and continues to participate in this volunteer group. The group has retained consultants and legal representatives familiar with IEPA regulations. This volunteer group, with its consultants, has cooperated with IEPA in attempting to better define the environmental issues associated with the Sandoval Zinc site. To that extent, this voluntary group prepared and submitted to IEPA in August 2000 a work plan. The purpose of this work plan is to attempt to define the extent of environmental remediation that might be required, assess risks, and review alternatives to addressing potential remediation. The estimated timeframe for resolution of the IEPA contingency is unknown. The IEPA has yet to respond to this proposed work plan or suggest any other course of action, and there has been no activity in regards to this issue since 2001. The Company does not have any liability accrued relating to the IEPA matter. Until the work plan is approved and completed, the range of potential loss or remediation, if any, is unknown. In addition, the allocation of potential loss between the 60 potentially responsible parties is unknown and not reasonably estimable. Therefore, the Company has no basis for determining potential exposure and estimated remediation costs at this time. 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 frequent changes in environmental technology, laws and regulations management cannot reasonably 21 quantify the Company's potential future costs in this area. North American Galvanizing & Coatings, Inc. and its subsidiary are parties to a number of other lawsuits and environmental matters which are not discussed herein. Management of the Company, based upon their analysis of known facts and circumstances and reports from legal counsel, does not believe that any such matter will have a material adverse effect on the results of operations, financial conditions or cash flows of the Company. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company's operations include managing market risks related to changes in interest rates and zinc commodity prices. INTEREST RATE RISK. The Company is exposed to financial market risk related to changes in interest rates. Changing interest rates will affect interest paid on the Company's variable rate debt. At March 31, 2007, the Company's outstanding debt of $9,016,000 consisted of the following: Variable rate debt aggregating $3,573,000 under the bank credit agreement, with an effective rate of 8.5% and variable rate debt of $5,078,000 under the industrial revenue bond agreement, with an effective rate of 4.0%. The borrowings under all of the Company's debt obligations at March 31, 2007 are due as follows: : $8,712,000 in 2007; $289,000 in 2008; $1,000 in 2009 and $14,000 in years 2010 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 approximately $9,000 based on March 31, 2007 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 periodically 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 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, 2007, the aggregate fixed price commitments for the procurement of zinc were approximately $900,000 (Note 6). With respect to these zinc fixed price purchase commitments, a hypothetical decrease of 10% in the market price of zinc from the March 31, 2007 level represented a potential lost gross margin opportunity of approximately $9,000. 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 recognizes that hedging instruments may be effective in minimizing the impact of zinc price fluctuations. The Company's current zinc forward purchase commitments are considered derivatives, but the Company has elected to account for these purchase commitments as normal purchases. ITEM 4. CONTROLS AND PROCEDURES As of the end of the period covered by this report, management, including our chief executive officer and chief financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures. Based upon, and as of the date of, the evaluation, our chief executive officer and chief financial officer concluded that the disclosure controls and procedures were effective, in all material respects, to ensure that information required to be disclosed in the reports we file and submit under the Exchange Act is recorded, processed, summarized and reported as and when required. The Company's certifying officers have indicated that there were no significant changes in internal controls over financial reporting that have occurred during the fiscal quarter ended March 31, 2007 that materially affected, or were reasonably likely to materially affect, internal controls over financial reporting. 22 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. On August 30, 2004, the Company was informed by counsel for the Metropolitan Water Reclamation District of Greater Chicago (the "Water District") that the Water District had, on August 25, 2004 filed a Second Amended Complaint in the United States District Court, Northern District of Illinois, Eastern Division, naming North American Galvanizing & Coatings, Inc. (formerly known as Kinark Corporation) as an added defendant. Counsel for the Water District also gave the Company notice of the Water District's intent to file (or amend the Complaint to include) a Citizens Suit under the Resource Compensation and Recovery Act ("RCRA") against North American Galvanizing & Coatings, Inc., pursuant to Section 7002 of RCRA, 42 U.S.C. Section 6972. This Second Amended Complaint seeks enforcement of an August 12, 2004 default judgment in the amount of $1,810,463.34 against Lake River Corporation and Lake River Holding Company, Inc. in connection with the operation of a storage terminal by Lake River Corporation in violation of environmental laws. Lake River Corporation conducted business as a subsidiary of the Company until September 30, 2000, at which time Lake River Corporation was sold to Lake River Holding Company, Inc. and ceased to be a subsidiary of the Company. The Second Amended Complaint asserts that prior to the sale of Lake River Corporation, the Company directly operated the Lake River facility and, accordingly, seeks to have the Court pierce the corporate veil of Lake River Corporation and enforce the default judgment order of August 12, 2004 against the Company. The Company denied the assertions set forth in the Water District's Complaint and on November 13, 2004 filed a partial motion for dismissal of the Second Amended Complaint. In December 2004, the Water District filed a Third Amended complaint in the litigation, adding two claims: (1) a common law claim for nuisance; and (2) a claim under the federal Resource Conservation and Recovery Act, in which the Water District argues that the Company is responsible for conditions on the plaintiff's property that present an "imminent and substantial endangerment to human health and the environment." In January 2005, the Company filed a partial motion to dismiss the Third Amended Complaint. On April 12, 2005, the Court issued an order denying in part and granting in part the Company's partial motion to dismiss plaintiff's third amended complaint. The Company filed an appeal with the Seventh Circuit Court of Appeals requesting dismissal of the sole CERCLA claim contained in the Third Amended Complaint that was not dismissed by the United States District Court's April 12, 2005 order. On January 17, 2007, the Seventh Circuit affirmed the judgment of the United States District Court, stating that the Water District has a right of action under CERCLA. The Company is evaluating the judgment and expects to file a motion for reconsideration with the Seventh Circuit. Meanwhile, litigation and discovery in the trial court have been stayed pending mediation. As a result of the mediation, on April 11, 2007, the Company entered into an Agreement in Principle establishing terms for a conditional settlement. Under the terms of the Agreement in Principle, the Company has agreed to fund 50% of the cost, up to $350,000, to enroll the site in the Illinois Voluntary Site Remediation Program. These funds will be used to prepare environmental reports for approval by the Illinois Environmental Protection Agency. The parties' shared objective is to obtain a "no further remediation determination" from the Illinois EPA based on a commercial / industrial cleanup standard. If the cost to prepare these reports equals or exceed $700,000, additional costs above $700,000 ($350,000 per party) will be borne 100% by the Water District. If a remediation plan is required based on the site assessment, the Company has also agreed to fund 50% of the cost to implement the remediation plan, up to a maximum of $1 million. If the cost to implement the plan is projected to exceed $2 million, then the Water District will have the option to terminate the agreement and resume the litigation. The Water District will have to choose whether to accept or reject the $1 million funding commitment from the Company before accepting any payments from the Company for implementation of the remediation plan. The Company does not believe that it can determine whether any cleanup is required or if any final cleanup cost is likely to exceed $2 million until additional data has been collected and analyzed in connection with the environmental reports. If the Water District elects to accept the maximum funding commitment, the Company has also agreed to remove certain piping and other equipment from one of the parcels. The cost to remove the piping is estimated to be between $35,000 and $60,000. Although the boards of both the Water District and the Company have approved the Agreement in Principle, the 23 agreement of the parties must be embodied in a formal settlement agreement, which is currently in process. The Company has recorded a liability for $350,000 related to the Water District claim in recognition of its currently known and estimable funding commitment under the Agreement in Principle. In the event that the Water District rejects the funding commitment described above, the potential claim could exceed the amount of the previous default judgment. As neither a site evaluation nor a remediation plan has been developed, the Company is unable to make a reasonable estimate of the amount or range of further loss, if any, that could result. Such a liability, if any, could have a material adverse effect on the Company's financial condition, results of operations, or liquidity. The lease term of a galvanizing facility located in Tulsa, Oklahoma, occupied by Reinforcing Services, Inc. ("RSI"), a subsidiary of North American Galvanizing Company, expired July 31, 2003 and has not been renewed. RSI has exercised an option to purchase the facility, and the landlord is contesting the Company's right to exercise this option. RSI has filed a lawsuit against the landlord seeking enforcement of the right to exercise the option and requested a summary judgment in its favor. The court ruled in favor of RSI and as a result, RSI is negotiating terms of the purchase and related items with the landlord. The Company expects this matter to be resolved during 2007 without negative financial impact. North American Galvanizing & Coatings, Inc. and its subsidiary are parties to a number of other lawsuits and environmental matters which are not discussed herein. Management of the Company, based upon their analysis of known facts and circumstances and reports from legal counsel, does not believe that any such matter will have a material adverse effect on the results of operations, financial conditions or cash flows of the Company. ITEM 1A. RISK FACTORS. There are no material changes from risk factors as previously disclosed in the Company's Annual Report on Form 10-K filed on February 14, 2007. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS - 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 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). 10.1 Executive Employment Agreement, Ronald J. Evans, dated April 1, 2007. 10.2 Metropolitan Water District of Greater Chicago and North American Galvanizing & Coatings, Inc. Agreement in Principle, dated April 11, 2007. 24 15 Letter from Deloitte & Touche LLP regarding interim financial information. 31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32 Certifications pursuant to 18 U.S.C. Section 1350, as adopted by Section 906 of the Sarbanes-Oxley Act of 2002. 99 Cautionary Statements by the Company Regarding Forward-Looking Statements. SIGNATURES Pursuant to the requirements of Section 13 and 15(d) of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized: NORTH AMERICAN GALVANIZING & COATINGS, INC. (Registrant) BY: /S/ BETH B. HOOD -------------------------- Vice President and Chief Financial Officer (Principal Financial Officer) Date: May 15, 2007 25 EX-10.1 2 exh10-1_15127.txt EXECUTIVE EMPLOYMENT AGREEMENT EXHIBIT 10.1 ------------ EXECUTIVE EMPLOYMENT AGREEMENT This Executive Employment Agreement ("Agreement") is entered into by and between North American Galvanizing & Coatings, Inc., a Delaware corporation ("Employer"), and Ronald J. Evans ("Employee"), to be effective on April 1, 2007 (the "Effective Date"). WITNESSETH: WHEREAS, Employer is desirous of employing Employee pursuant to the terms and conditions and for the consideration set forth in this Agreement, and Employee is desirous of continuing in the employ of Employer pursuant to such terms and conditions and for such consideration. NOW, THEREFORE, for and in consideration of the mutual promises, covenants, and obligations contained herein, Employer and Employee agree as follows: ARTICLE 1: EMPLOYMENT AND DUTIES 1.1. Employer agrees to employ Employee, and Employee agrees to be employed by Employer, beginning as of the Effective Date and continuing for three (3) years or until March 31, 2010 (the "Term"), subject to the terms and conditions of this Agreement. 1.2. Employee shall continue to be employed as Chief Executive Officer and President of Employer. Employee will continue to serve in the assigned position and to perform diligently and to the best of Employee's abilities the duties and services pertaining to such position as he has done in the past. Employee also agrees to continue to serve as a Director on Employer's Board of Directors and to stand for reelection at the request of the Nominating Committee throughout the Term. ARTICLE 2: COMPENSATION AND BENEFITS 2.1. During the Term, Employer shall pay Employee a base salary at an annual rate of Three Hundred Twenty-five Thousand Dollars ($325,00.00). The base salary may not be decreased at any time during the Term and may be increased by Employer's Board of Directors at anytime. The base salary shall be paid in accordance with Employer's standard payroll practice for its executives or senior managers. 2.2. Employee shall be eligible to receive incentive bonuses as may be provided from time to time by Employer's Board of Directors. 2.3. As a Director, Employee shall be eligible to participate in and receive benefits or compensation pursuant to the Director Stock Unit Program and to receive any other benefits or compensation that are or may become available to Directors of Employer's Board of Directors. 2.4. Employee shall be eligible to receive stock options and stock appreciation rights as provided under the North American Galvanizing & Coatings, Inc. 2004 Incentive Stock Plan, as amended and restated ("the Incentive Stock Plan"), pursuant to the terms of the Incentive Stock Plan and as determined by Employer's Board of Directors. 2.5. Employee shall be entitled to twenty (20) days of paid vacation per year at the reasonable and mutual convenience of Employer and Employee. 2.6. From and after the Effective Date, Employer shall pay, or reimburse Employee, for all ordinary, reasonable and necessary expenses which Employee incurs in performing his duties under this Agreement including, but not limited to, travel, entertainment, professional dues and subscriptions, and all dues, fees an expenses associated with membership in various professional, business and civic associations and societies of which Employee's participation is in the best interest of Employer. 2.7. During the Term and while Employee is employed by Employer, and in addition to any group term life insurance otherwise generally provided to executives or senior managers of Employer, Employer may purchase and maintain at its expense term life insurance on the life of Employee payable to Employer as a beneficiary. 2.8. While employed by Employer, Employee shall be allowed to participate, on the same basis generally as other employees of Employer, in all general employee benefit plans and programs, including improvements or modifications of the same, which on the Effective Date or thereafter are made available by Employer to all or substantially all of Employer's executives or senior managers. Such benefits, plans, and programs may include, without limitation, medical health, and dental care, life insurance, disability protection, and qualified retirement plans. Except as specifically provided herein, nothing in this Agreement is to be construed or interpreted to provide greater rights, participation, coverage, or benefits under such benefit plans or programs than provided to executives or senior managers pursuant to the terms and conditions of such benefit plans and programs. 2.9. Employer may withhold from any compensation, benefits, or amounts payable under this Agreement all federal, state, city, or other taxes as may be required pursuant to any law or governmental regulation or ruling. ARTICLE 3: TERMINATION PRIOR TO EXPIRATION OF TERM AND EFFECTS OF SUCH TERMINATION: 3.1. Employee's employment with Employer shall be terminated (i) upon the death of Employee, (ii) upon Employee's permanent disability (permanent disability being defined as Employee's physical or mental incapacity to perform his usual duties with such condition likely to remain continuously and permanently); provided, however, that in such event, Employee's employment shall be continued hereunder for a period of not less than one year from the date of such disability with Employee's base salary during such period to be reduced by any Employer-financed disability benefits. 3.2. If Employee's employment is terminated by reason of a "Voluntary Termination" (as hereinafter defined) or by the Employer for "Cause" (as hereinafter defined), all future compensation to which Employee is otherwise entitled and all future benefits for which Employee is eligible shall cease and terminate as of the date of termination. If Employee's employment is terminated by reason of a Voluntary Termination or for Cause, Employee shall be entitled to pro rata base salary through the date of such termination and shall be entitled to any individual bonuses or individual incentive compensation not yet paid but due under Employer's plans but shall not be entitled to any other payments by or on behalf of Employer except for those which may be payable pursuant to the terms of Employer's employee benefit plans. For purposes of this Section 3.2, a "Voluntary Termination" of the employment relationship by Employee prior to expiration of the Term shall be a termination of Employment in the sole discretion of and at the election of Employee, other than (i) a termination of Employee's employment because of a breach by Employer of any material provision of this Agreement which remains uncorrected for thirty (30) 2 days following written notice of such breach by Employee to employer; (ii) a termination by either Employer or Employee of Employee's employment within six (6) months of a reduction in Employee's rank or responsibility with Employer or a "Change in Control" (as hereinafter defined); or (iii) a termination by Employee of Employee's employment due to Employer's request or demand that Employee relocate his business office or residence to a location more than fifteen (15) miles from Employee's current business office. For purposes of this Section 3.2, the term "Cause" shall mean any of (i) Employee's gross negligence or willful misconduct in the performance of the duties and services required of Employee pursuant to this Agreement; (ii) Employee's final conviction of a felony; or (iii) Employee's material breach of any material provision of this Agreement which remains uncorrected for thirty (30) days following written notice to Employee by Employer of such breach. 3.3. If Employee's employment is terminated for any reason other than for Cause, permanent disability (as described in Sections 3.1 and 3.2 above) or a Change in Control, Employer shall pay to Employee (or his estate) 1.0 times his annual base salary, as it exists at the time of termination of employment. Nothing contained in this Section 3.3 shall be construed to be a waiver by Employee of any benefits accrued for or due Employee under any employee benefit plan (as such term is defined in the Employee's Retirement Income Security Act of 1974, as amended) maintained by Employer. 3.4. Should Employee or Employer decide to end the employment relationship due to a Change in Control, Employer shall pay Employee 2.99 times his annual base salary, as it exists at the time of termination of employment. A Change of Control means a change in control of Employer of a nature that would be required to be reported in response to item 6(e) of Schedule 14A of Regulation 14A promulgated under the Securities Exchange Act of 1934, as amended ("the 1934 Act"), as in effect at the time of such "Change in Control", provided that such a Change in Control shall be deemed to have occurred at such time as: (i) any "person" (as that term is used in Sections 13(d) and 14(d)(2) of the 1934 Act), is or becomes the beneficial owner (as defined in Rule 13d-3 under the 1934 Act) directly or indirectly, of securities representing 30% or more of the combined voting power for election of Directors of the then outstanding securities of Employer or any successor to Employer; (ii) during any period of two consecutive years or less, individuals who at the beginning of such period constitute the Board of Directors of Employer cease, for any reason, to constitute at least a majority of the Board of Directors, unless the election or nomination for election of each new Director was approved by a vote of at least two-thirds of the Directors then still in office who were Directors at the beginning of the period; or (iii) the shareholders or the Board of Directors of Employer approve any reorganization, merger, consolidation or share exchange as a result of which the common stock of Employer shall be sold, changed, converted or exchanged into or for securities of another corporation or any dissolution or liquidation of Employer or any sale or the disposition of 50% or more of the assets or business of Employer. 3.5. Termination of the employment relationship does not terminate those obligations imposed by this Agreement which are continuing obligations, including, without limitation, Employee's obligations under Articles 4 and 5. ARTICLE 4: OWNERSHIP AND PROTECTION OF INTELLECTUAL PROPERTY AND CONFIDENTIAL INFORMATION: 3 4.1. All information, ideas, concepts, improvements, discoveries, and inventions, whether patentable or not, which are conceived, made developed or acquired by Employee, individually or in conjunction with others, during Employee's employment by Employer (whether during business hours or otherwise and whether on Employer's premises or otherwise) which relate to Employer's business, products or services (including, without limitation, all such information relating to corporate opportunities, research, financial and sales data, pricing and training terms, evaluations, opinions, interpretations, acquisition prospects, the identity of customers or their requirements, the identity of key contacts within the customer's organizations or within the organization of acquisition prospects, or marketing and merchandising techniques, prospective names, and marks), and all writings or materials of any type embodying any of such items, shall be disclosed to Employer and are and shall be the sole and exclusive property of Employer. 4.2. Employee acknowledges that the businesses of Employer and its affiliates are highly competitive and that their strategies, methods, books, records, and documents, their technical information concerning their products, equipment, services and processes, procurement procedures and pricing techniques, the names of an other information (such as credit and financial data) concerning their customers and business affiliates, all comprise confidential business information and trade secrets which are valuable, special, and unique assets which Employer, or its affiliates use in their business to obtain a competitive advantage over their competitors. Employee further acknowledges that protection of such confidential business information and trade secrets against unauthorized disclosure and use is of critical importance to Employer, and its affiliates in maintaining their competitive position. Employee hereby agrees that Employee will not at any time during or after his employment by Employer, make any unauthorized disclosure of any confidential business information or trade secretes of Employer, or its affiliates, or make any use thereof, except in the carrying out of his employment responsibilities hereunder. The above notwithstanding, a disclosure shall not be unauthorized if (i) it is required by law or by a court of competent jurisdiction or (ii) it is in connection with any judicial or other legal proceeding in which Employee's legal rights and obligations as an employee or under this Agreement are at issue; provided, however, that Employee shall, to the extend practicable and lawful in any such events, give prior notice to employer of his intent to disclose any such confidential business information in such context so as to allow Employer an opportunity (which Employee will not oppose) to obtain such protective order or similar relief with respect thereto as it may deem appropriate. 4.3. All written materials, records, and other document made by, or coming into the possession of, Employee during the period of Employee's employment by Employer which contain or disclose confidential business information or trade secretes of employer, or its affiliates shall be and remain the property of Employer, or its affiliates, as the case may be. Upon termination of Employee's employment by Employer, for any reason, Employee promptly shall deliver the same, and all copies thereof, to Employer. ARTICLE 5: POST-EMPLOYMENT AND NON-COMPETITION OBLIGATIONS: 5.1. As part of the consideration of the compensation and benefits to be paid to Employee hereunder, and as an additional incentive for Employer to enter into this Agreement, Employer and Employee agree to the non-competition provisions of this Article 5. Employee agrees that during the period of Employee's non-competition obligations hereunder, Employee will not, directly or indirectly for Employee or for others, in any geographic area or market where Employer or any of their affiliated companies are conducting any business (other than de minimis business operations) as of the date of 4 termination of the Employment relationship or have during the previous twelve months conducted any business (other than de minimis business operations): (i) Engage in any business directly competitive with any business (other than de minimis business operations) conducted by Employer or any of Employer's affiliates; (ii) render advice or services to, or otherwise assist, any other person, association, or entity who is engaged, directly or indirectly, in any business directly competitive with any business (other than de minimis business operations) conducted by Employer or any of Employer (iii) induce any employee of Employer or any of its affiliates (other than Employee's person secretary or administrative assistant) to terminate his employment with Employer, or its affiliates, or hire or assist in the hiring of any such induced employee by any person, association, or entity not affiliated with Employer. These non-competition obligations shall extend until 12 months after termination of the employment relationship between Employer and Employee. The above notwithstanding, nothing in this Section 5.1 shall prohibit Employee from engaging in or being employed by any entity that engages in the provision of management consulting or other consulting services to third parties, even where such entity on occasion renders advice or services to, or otherwise assists, any other person, association, or entity who is engaged, directly or indirectly, in any business directly competitive with any business conducted by Employer or any of Employer's affiliates, so long as Employee does not personally, directly or indirectly (A) participate in rendering such advice, services or assistance to any such competing person, association or entity, (B) provide any information or other assistance to any other person employed by Employee or by any such consulting entity for use, directly or indirectly, in rendering such assistance to any competing person, association or entity or (C) engage in any conduct which would be violative of the provisions of Article 4 hereof. ARTICLE 6: MISCELLANEOUS: 6.1. For purposes of this Agreement, (i) the terms "affiliates" or "affiliated" means an entity who directly, or indirectly through one or more intermediaries, controls, is controlled by, or is under common control with Employer or in which Employer has a 50% or more equity interest, and (ii) any action or omission permitted to be taken or omitted by Employer hereunder shall only be taken or omitted by Employer or of any committee of the Board of Directors to which authority over such matters may have been delegated. 6.2. For purposes of this Agreement, notices and all other communications provided for herein shall be in writing and shall be deemed to have been duly given when received by or tendered to Employee or Employer, as applicable, by pre-paid courier or by United States registered or certified mail, return receipt requested, postage prepaid addressed as follows: If to Employer, to North American Galvanizing & Coatings, Inc. at its corporate headquarters to the attention of the Board of Directors of North American Galvanizing & Coatings, Inc. If to Employee, to his last known personal residence. 5 6.3. This Agreement shall be governed in all respects by the laws of the State of Florida, excluding any conflict-of-law rule or principle that might refer to the laws of another State or country. 6.4. No failure by either party hereto at any time to give notice of any breach by the other party of, or to require compliance with, any condition or provision of this Agreement shall be deemed a waiver of similar or dissimilar provisions or conditions at the same or at any prior or subsequent time. 6.5. It is a desire and intent of the parties that the terms, provisions, covenants, and remedies contained in this Agreement shall be enforceable to the fullest extent permitted by law. If any such term, provision, covenant, or remedy of this Agreement or the application thereof to any person, association, or entity or circumstances shall, to any extent, be construed to be invalid or unenforceable in whole or in part, then such term, provision, covenant, or remedy shall be construed in a manner so as to permit its enforceability under the applicable law to the fullest extent permitted by law. In any case, the remaining provisions of this Agreement or the application thereof to any person, association, or entity or circumstances other than those to which they have been held invalid or unenforceable, shall remain in full force and effect. 6.6. This Agreement shall be binding upon and inure to the benefit of Employer and any other person, association, or entity which may hereafter acquire or succeed to all or substantially all of the business or assets of Employer by any means whether direct or indirect, by purchase, merger, consolidation, or otherwise. Employee's rights and obligations of Employee shall not be voluntarily or involuntarily assigned, alienated, or transferred, whether by operation of law or otherwise, without the prior written consent of Employer, other than in the case of death or incompetence of Employee. 6.7. This Agreement replaces and merges any previous agreements and discussions pertaining to the subject matter covered herein. This Agreement constitutes the entire agreement of the parties with regard to such subject matter, and contains all of the covenants, promises, representations, warranties, and agreements between the parties with respect such subject matter. Each party to this Agreement acknowledges that no representation, inducement, promise, or agreement, oral or written, has been made by either party with respect to such subject matter, which is not embodied herein, and that no agreement, statement, or promise relating to the employment of Employee by Employer that is not contained in this Agreement shall be valid or binding. Any modification of this Agreement will be effective only if it is in writing and signed by each party whose rights hereunder are affected thereby. IN WITNESS WHEREOF, Employer and Employee have duly executed this Agreement at Greenwich, Connecticut in multiple originals to be effective on the date first stated above. NORTH AMERICAN GALVANIZING & COATINGS, INC. By: /s/ Joseph J. Morrow ---------------------------- Chairman of Board of Directors /s/ Ronald J. Evans ---------------------------- Employee 6 EX-10.2 3 exh10-2_15127.txt CHICAGO WATER DISTRICT AGREEMENT EXHIBIT 10.2 ------------ Lake River Terminals Site Mediation Metropolitan Water Reclamation District v. North American Galvanizing & Coatings, Inc. No. 03-C-0754 (U.S.D.C.N.D. IL) AGREEMENT IN PRINCIPLE The parties are the Metropolitan Water Reclamation District of Greater Chicago (MWRD) and North American Galvanizing and Coatings, Inc. (NAGC). The party representatives attending the mediation session held January 31, 2007 in Chicago, IL concerning the above-captioned matter agreed to recommend to their respective principals and clients the following terms for a settlement. 1. The parties agree that their common objective, expectation and desire is to enroll the Lake River Terminals Site (Site) into the Illinois Environmental Protection Agency (Illinois EPA) Voluntary Site Remediation Program (VSRP) (Cf. 35 I.A.C. Part 740), and to fund an investigation, study, remedy design and report process (the Investigation) as required under the VSRP. The parties agree to fund an Investigation to delineate the presence and extent of contaminants of concern at the site and enable identification of what, if any, response action appears necessary and appropriate at the Site in order to obtain a No Further Remediation (NFR) determination from Illinois EPA allowing commercial or industrial reuse of the Site and taking into consideration any semi-volatile organic compounds (SVOCs), volatile organic compounds (VOCs), pesticides, herbicides, poly-chlorinated biphenyls (PCBs) or metals that may be present at the Site. Funding Commitments 2. Funding Commitment a) NAGC will contribute fifty percent (50%) of the costs of the Investigation and enrollment of the Site (including Illinois EPA oversight fees), through and including the approval or disapproval of a Remediation Action Plan by Illinois EPA, up to a maximum of $350,000 in funding from NAGC. b) NAGC has also agreed to fund 50% of the cost of the Remedial Action Work (Work) required by the approved Site Remedial Action Plan, or by such other Work as the parties may otherwise in writing hereafter agree upon, subject to a maximum commitment of $1,000,000; c) NAGC additionally commits to expend the funds needed to pay for the removal of the Piping on Parcel 3, as per Paragraph 8 hereof. 3. The parties have had their respective consultants confer and have essentially agreed on the basic elements of the Initial Minimum Investigation, which consists of soil and groundwater sampling as delineated in plats and tables separately initialed by the parties. The view of the consultants is that the performance of the Initial Minimum Investigation should provide the basis for a Remedial Investigation Report that is approvable by Illinois EPA. However, it is possible that the actual investigation may turn up results that require additional and more investigation, or that the Illinois EPA will not approve the Remedial Investigation Report. 4. MWRD will have responsibility for contracting out and supervising the Investigation. NAGC will be kept apprised of the Investigation work and results. NAGC will have the right to review and consent to any and all reports submitted to Illinois EPA, including specifically the final Remedial Investigation Report, Remedial Action Objectives Report, and Site Remedial Action Plan or equivalent documents under the Illinois VSRP. MWRD will require that the Investigation contractor prepare a remediation cost estimate and cash flow projection prior to enrollment and submittal of the Remediation Investigation Report, and will share that projection with NAGC. Cost overruns for the Investigation and submittal process in excess of $700,000 ($350,000 from each party) will be the responsibility of MWRD. Each party will bear its own internal personnel and administrative costs and expenses for the Investigation, including legal fees, and such costs shall not count towards the shared Investigation funding. 5. The MWRD reserves the right to decline to enroll the property in the VSRP if further study, remediation and VSRP costs after performance of the Initial Minimum Investigation are reasonably anticipated to exceed $2,150,000. Additionally, within 45 days of a disapproval (if any) by Illinois EPA of the Remediation Investigation Report, the Remediation Objectives Report or the Remediation Action Plan (as the case and stage of work may be), MWRD may elect to reject the NAGC fifty percent Work commitment, provided it has the written advice of an independent environmental consultant that the cost of the future work entailed in likely receiving an NFR letter will exceed Two Million Dollars ($ 2,000,000). If MWRD declines or elects to reject as provided in this Paragraph, the parties shall confer under Paragraph 7 below. 6. If MWRD elects to accept NAGC's fifty percent (50%) commitment to fund the Work up to a $1,000,000 maximum, MWRD will be responsible for all Work costs in excess of $2,000,0000 ($1,000,000 from each party). MWRD will have responsibility for contracting out and supervising the Work. NAGC will be kept apprised of the progress and results of the Work. MWRD will require that the Work contractor prepare a remediation cost estimate and cash flow projection, to be updated at least every six (6) months, and will share those projections with NAGC upon receipt. MWRD will include NAGC as a Remediation Applicant on correspondence with Illinois EPA, and will name NAGC as a party to be included in the releases and protections of a NFR determination from Illinois EPA. Any cost overruns for the Work in excess of $2,000,000 ($1,000,000 from each party) will be the responsibility of MWRD. Each party will bear its own internal personnel and administrative costs and expenses for the Work, including legal fees, and such costs shall not count towards the shared Work funding. 7. If the projected cost of carrying out the Remedial Action Plan exceeds $2,000,000, then MWRD may elect to reject the $1,000,000 maximum funding limit for NAGC. In that event, MWRD shall so notify NAGC. In the event of such notification: the parties may, but under this agreement are not required to, negotiate an alternate agreement specifying how they will fund implementation of the Remedial Action Plan or equivalent document approved by Illinois EPA for the Site; and absent such an alternate agreement, neither party is required under this agreement to implement the Remedial Action Plan or equivalent document approved by Illinois EPA for the Site, and also absent such an alternate refiled without any prejudice whatsoever to any party on account of this Agreement, the passage of time thereunder, or otherwise, nunc pro tunc. Removal of Buildings and Other Structures Prior to Remediation agreement, the litigation may be reactivated or refiled without any prejudice whatsoever to any party on account of this Agreement, the passage of time thereunder, or otherwise, nunc pro tunc. Removal of Buildings and Other Structures Prior to Remediation 2 8. NAGC agrees to remove or fund the removal of any "storage tanks, pumping equipment, pipelines, boilers, steam lines and appurtenances thereto" (the Piping) as described by appendix A (quote Conclusion No.2) in accordance with the non-binding Mediator's Advisory Opinion from Hon. Stephen A. Schiller (Ret.) dated January 22,2007. The cost of this work is a funding commitment of NAGC additional to and not included in the shared Investigation or Work costs or funding limitations of Paragraph 2 (a) and (b). The parties may, but need not, agree to have MWRD's contractor perform this obligation at NAGC's cost. 9. MWRD agrees to demolish and remove any buildings, tanks and other structures that are intended to be removed from Parcels 1, 2, 4 and 5, and any buildings or improvements other than the Piping from Parcel 3. MWRD will remove these structures at no cost to NAGC and without including the expense of such work in the shared funding commitments set out herein. 10. NAGC and MWRD will remove the structures identified in Paragraphs 8 and 9 above on a schedule to be included in the Final Remedial Action Plan submitted to Illinois EPA, but not before MWRD has elected to accept NAGC's 50% funding commitment. It is understood that such buildings and other structures should be removed before Response Action Work is commenced to facilitate an efficient and cost- effective remediation. Disbursement Schedule and Financial Assurances 11. NAGC will pay 100% of the expenses incurred to implement the Remedial Action Plan as due, up to $750,0001; subsequent disbursements will be paid at the rate of 50% until its disbursement is equal to the lower of (1) 50% of the total projected cost; or (2) $1,000,000. 12. Before any disbursements are made under Paragraph 11, both parties will provide assurances that each has funds available to complete the Work and to pay for its own share in a timely manner when due. A letter of credit from a national bank and trust company with total assets exceeding five billion dollars, escrow of funds in trust, or other secured financial assurance of the amount of each party's financial obligations hereunder reasonably acceptable to the other party shall fulfill this requirement. MWRD will also provide written assurances to NAGC that MWRD will actually complete the work described in the Remedial Action Plan, and such assurances will include an indemnity against liabilities arising from any failure by MWRD to complete the Remedial Action Plan. 13. If MWRD has accepted the commitment of remedial work funds from NAGC per Paragraph 6, MWRD will dismiss the above-captioned litigation with prejudice within 14 days of MWRD's receipt of the final disbursement from NAGC of moneys owed per its commitment. 1 However, in no event will NAGC pay greater than 50% of the project cost. Stay of Litigation 14. The parties agree to seek a stay of the above-captioned litigation from the \ Court until such time as MWRD accepts or rejects the funding commitment hereunder from NAGC. In the event the Court declines to grant the requested stay and requires the parties to dismiss the litigation, the parties agree to negotiate and sign a tolling agreement or other claims-preservation documentation which will allow them, if necessary, to refile the claims which they asserted against each other in the above-captioned litigation as a new action. If MWRD elects to accept the NAGC commitment and agrees to complete the remediation, the 3 parties will advise the Court that a full settlement of this litigation has been achieved covering all persons (including Lake River Corporation, Kinark Corporation and the Sanitary District of Chicago) and all claims which are, were, or could have been included or asserted in the litigation, and will draft and file appropriate settlement or dismissal papers with the Court. If MWRD elects to reject the NAGC commitment and the parties are unable to negotiate an alternate settlement within 60 days or such longer time as they shall both agree upon, the parties will advise the Court that settlement has failed and proceed to reactivate the litigation. If the Court required the parties to dismiss the litigation, then the parties may use the tolling or other claims-preservation documentation to refile the claims they asserted against each other in the litigation as a new action. Drafting. Review and Approval 15. This Agreement in Principle is subject to drafting, negotiation and execution of a complete Settlement Agreement between the parties which incorporates the terms set out here and additional standard settlement terms, including without limitation, disclaimers of liability or admissions, reservations of rights, confidentiality, enforceability in court, and applicability to successors and assigns. 16. Any Settlement Agreement between the parties is subject to approval by the Board of Commissioners of the Metropolitan Water District of Greater Chicago and the Board of Directors for North American Galvanizing and Coatings, Inc. The representatives signing this Agreement in Principle agree to recommend this agreement and a full settlement to their respective clients and Boards, but the parties acknowledge that the representatives signing below cannot bind their organizations to a complete Settlement Agreement absent approval by their respective Boards. FOR METROPOLITAN WATER RECLAMATION DISTRICT OF GREATER CHICAGO PHILIP R. KUYAWA APRIL 11, 2007 FOR NORTH AMERICAN GALVANIZING & COATINGS, INC. RONALD J. EVANS APRIL 11, 2007 4 EX-15 4 exh15_15127.txt CONSENT OF DELOITTE AND TOUCHE LLP EXHIBIT 15 ---------- May 15, 2007 North American Galvanizing & Coatings, Inc. 5314 South Yale Avenue Suite 1000 Tulsa, Oklahoma 74135 We have reviewed, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the unaudited interim financial information of North American Galvanizing & Coatings, Inc. and subsidiary for the three-month periods ended March 31, 2007 and 2006, as indicated in our report dated May 15, 2007; because we did not perform an audit, we expressed no opinion on that information. We are aware that our report referred to above, which is included in your Quarterly Report on Form 10-Q for the quarter ended March 31, 2007, is incorporated by reference in Registration Statements No. 333-133848 on Form S-8 and No. 333-61393 on Form S-3 of North American Galvanizing & Coatings, Inc. (formerly Kinark Corporation). We also are aware that the aforementioned report, pursuant to Rule 436(c) under the Securities Act of 1933, is not considered a part of the Registration Statement prepared or certified by an accountant or a report prepared or certified by an accountant within the meaning of Sections 7 and 11 of that Act. /s/ DELOITTE & TOUCHE LLP Tulsa, Oklahoma EX-31.1 5 exh31-1_15127.txt 302 CERTIFICATION OF THE C.E.O. EXHIBIT 31.1 ------------ CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Ronald J. Evans, President and Chief Executive Officer of North American Galvanizing & Coatings, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of North American Galvanizing & Coatings, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 15, 2007 /s/ Ronald J. Evans EX-31.2 6 exh31-2_15127.txt 302 CERTIFICATION OF THE C.F.O. EXHIBIT 31.2 ------------ CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Beth B. Hood, Vice President and Chief Financial Officer of North American Galvanizing & Coatings, Inc., certify that: 1. I have reviewed this quarterly report on Form 10-Q of North American Galvanizing & Coatings, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: May 15, 2007 /s/ Beth B. Hood EX-32 7 exh32_15127.txt 906 CERTIFICATION OF THE C.E.O. AND C.F.O. EXHIBIT 32 ---------- CERTIFICATIONS PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED BY SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of North American Galvanizing & Coatings, Inc. (the "Company") on Form 10-Q for the period ending March 31, 2007 as filed with the Securities and Exchange Commission (the "Report"), each of the undersigned hereby certifies in his or her capacity as an office of the Company, pursuant to 18 U.S.C. ss. 1350, as adopted by ss. 906 of the Sarbanes-Oxley Act of 2002, that to his or her knowledge: 1. The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and the results of operations of the Company. NORTH AMERICAN GALVANIZING & COATINGS, INC. (Registrant) /s/ Ronald J. Evans ---------------------------- President and Chief Executive Officer (Principal Executive Officer) /s/ Beth B. Hood ---------------------------- Vice President and Chief Financial Officer (Principal Financial Officer) Date: May 15, 2007 EX-99 8 exh99_15127.txt CAUTIONARY STATEMENTS BY THE COMPANY 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-K, 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 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. 7. The Company's ability to staff its galvanizing 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-----