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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
COMMISSION FILE NUMBER 1-9838
NS GROUP, INC.
Exact name of registrant as specified in its charter
KENTUCKY 61-0985936
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
530 WEST NINTH STREET, NEWPORT, KENTUCKY 41071
(Address of principal executive offices)
Registrant's telephone number, including area code (859) 292-6809
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 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
--- ---
At July 31, 2002, there were 20,647,054 shares outstanding of the Company's
common stock.
NS GROUP, INC.
INDEX
Page No.
--------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Operations............... 3
Condensed Consolidated Balance Sheets......................... 4
Condensed Consolidated Statements of Cash Flows............... 5
Notes to Financial Statements................................. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 18
Item 3. Quantitative and Qualitative Disclosures About
Market Risk................................................. 26
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders........... 27
Item 6. Exhibits and Reports on Form 8-K.............................. 27
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
NS GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts) (Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
-------------- -------------- -------------- --------------
Net sales $ 54,851 $ 102,727 $ 93,699 $ 184,841
Cost of products sold 52,598 87,268 99,679 161,985
--------- --------- --------- ---------
Gross profit (loss) 2,253 15,459 (5,980) 22,856
Selling, general and administrative expenses 3,872 5,476 8,194 11,101
Restructuring charges -- -- -- 55,585
--------- --------- --------- ---------
Operating income (loss) (1,619) 9,983 (14,174) (43,830)
Other income (expense)
Investment income 370 1,286 1,121 2,124
Interest expense (2,658) (2,580) (5,254) (5,102)
Other, net (12) 206 81 1,305
--------- --------- --------- ---------
Income (loss) before income taxes and
extraordinary items (3,919) 8,895 (18,226) (45,503)
Provision (benefit) for income taxes -- -- -- --
--------- --------- --------- ---------
Income (loss) before extraordinary items (3,919) 8,895 (18,226) (45,503)
Extraordinary items, net of income taxes -- -- -- (59)
--------- --------- --------- ---------
Net income (loss) $ (3,919) $ 8,895 $ (18,226) $ (45,562)
========= ========= ========= =========
Per common share - basic
Net income (loss) before extraordinary items $ (0.19) $ 0.42 $ (0.88) $ (2.17)
Extraordinary items, net of income taxes -- -- -- --
--------- --------- --------- ---------
Net income (loss) $ (0.19) $ 0.42 $ (0.88) $ (2.17)
========= ========= ========= =========
Per common share - diluted
Net income (loss) before extraordinary items $ (0.19) $ 0.41 $ (0.88) $ (2.17)
Extraordinary items, net of income taxes -- -- -- --
--------- --------- --------- ---------
Net income (loss) $ (0.19) $ 0.41 $ (0.88) $ (2.17)
========= ========= ========= =========
Weighted average shares outstanding
Basic 20,647 20,994 20,646 20,971
Diluted 20,647 21,689 20,646 20,971
See accompanying notes to financial statements.
3
NS GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands) (Unaudited)
June 30, December 31,
2002 2001
--------------- ---------------
ASSETS
Current assets
Cash and cash equivalents $ 55,940 $ 72,383
Accounts receivable, net 23,987 23,161
Inventories 74,917 55,329
Deferred tax assets 3,015 3,015
Other current assets 11,934 12,638
--------- ---------
Total current assets 169,793 166,526
Property, plant and equipment, net 55,528 60,196
Long-term investments 10,054 16,833
Other assets 6,008 5,482
Assets held for sale 11,013 11,447
--------- ---------
Total assets $ 252,396 $ 260,484
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 20,595 $ 14,303
Accrued liabilities 22,778 19,205
Accrued restructuring liabilities 5,958 6,295
Current portion of long-term debt 35,034 33
--------- ---------
Total current liabilities 84,365 39,836
Long-term debt 33,851 68,070
Deferred taxes 3,203 3,203
Other long-term liabilities 5,775 5,713
--------- ---------
Total liabilities 127,194 116,822
--------- ---------
Shareholders' equity
Common stock, no par value 282,935 282,928
Treasury stock (35,572) (35,578)
Common stock options and warrants 697 635
Accumulated other comprehensive loss (1,149) (842)
Accumulated deficit (121,709) (103,481)
--------- ---------
Total shareholders' equity 125,202 143,662
--------- ---------
Total liabilities and shareholders' equity $ 252,396 $ 260,484
========= =========
See accompanying notes to financial statements.
4
NS GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) (Unaudited)
Six Months Ended
June 30,
2002 2001
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(18,226) $(45,562)
Adjustments to reconcile net loss
to net cash flows from operating activities:
Depreciation and amortization 5,728 8,268
Amortization of debt discount and finance costs 636 559
Restructuring charges, including asset impairments -- 42,820
Realized losses on securities 120 511
Changes in operating assets and liabilities:
Accounts receivable, net (826) (11,231)
Inventories (19,588) (9,103)
Other current assets 704 74
Accounts payable 6,292 18,399
Accrued liabilities 4,063 6,193
Restructuring liabilities (337) 7,681
-------- --------
Net cash flows from operating activities (21,434) 18,609
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant and equipment (997) (711)
Net proceeds of assets held for sale 434 972
Net sales and maturities of long-term investments 6,351 3,752
Changes in other assets (35) (128)
-------- --------
Net cash flows from investing activities 5,753 3,885
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayments of long-term debt (16) (945)
Payment of financing costs (757) --
Proceeds from issuance of common stock 11 282
Purchase of treasury stock -- (394)
Net cash flows from financing activities (762) (1,057)
-------- --------
Net increase (decrease) in cash and cash equivalents (16,443) 21,437
-------- --------
Cash and cash equivalents at beginning of period 72,383 42,793
-------- --------
Cash and cash equivalents at end of period $ 55,940 $ 64,230
======== ========
Cash paid for:
Interest $ 4,648 $ 4,714
Income taxes $ -- $ --
See accompanying notes to financial statements.
5
NS GROUP, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of
NS Group, Inc. and its wholly-owned subsidiaries (collectively referred to as
"the Company"). Subsidiaries are Newport Steel Corporation (Newport), Koppel
Steel Corporation (Koppel), Erlanger Tubular Corporation (Erlanger), and
Northern Kentucky Management, Inc. All significant intercompany balances and
transactions have been eliminated.
The accompanying unaudited condensed consolidated financial
statements have been prepared in conformity with accounting principles generally
accepted in the United States of America for interim financial information and
with the rules and regulations of the Securities and Exchange Commission.
Accordingly, they do not include all of the information and footnotes for
complete financial statements as required by accounting principles generally
accepted in the United States of America. In the opinion of management, all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation have been included in the financial statements.
Operating results for an interim period are not necessarily indicative of the
results that may be expected for a full year. Reference should be made to NS
Group, Inc.'s Annual Report on Form 10-K for the year ended December 31, 2001
for additional footnote disclosure, including a summary of significant
accounting policies.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires that
management make certain estimates and assumptions that affect the amounts
reported in the condensed consolidated financial statements and accompanying
notes. Actual results could differ from those estimates.
Certain prior period amounts have been reclassified to conform to the
current period presentation. Such reclassifications do not affect previously
reported results of operations.
EARNINGS PER SHARE
Basic earnings per share are computed by dividing net income (loss) by
the weighted-average number of common shares outstanding for the period. Diluted
earnings per share reflects the potential dilution from securities that could
result in additional common shares being issued which, for the Company, are
comprised of stock options and warrants.
6
Securities that could potentially result in dilution of basic earnings
per share through the issuance of 2.4 million shares of the Company's common
shares for both the three and six month period ended June 30, 2002, were not
included in the computation of diluted earnings per share because to do so would
be anti-dilutive. Also, for the six month period ended June 30, 2001, 2.3
million shares of the Company's common shares were excluded because they were
antidilutive.
NOTE 2: RESTRUCTURING CHARGES
During the quarter ended March 31, 2001, the Company implemented
certain restructuring initiatives involving certain operations of its
businesses. The Company discontinued the manufacturing of hot-rolled coils by
closing its melt shop and hot strip mill operations at its welded tubular
facilities in Wilder, Kentucky. In addition, the Company decided to exit the
special bar quality (SBQ) business by June 30, 2001, which was operated from its
Koppel, Pennsylvania facility.
As a result of these decisions, the Company recorded charges of $56.2
million, which included approximately $42.4 million of asset impairment losses
resulting from the write-down of the net book value of machinery, equipment and
related spare parts inventories to be sold. The asset impairment losses were
determined based upon an independent outside appraisal. Other non-cash charges
included the write-down of inventories of SBQ finished goods, spare parts and
operating supplies. A $0.6 million write-down of the SBQ inventory is included
in costs of products sold as required by accounting pronouncements.
Following is a summary of the accrued restructuring liabilities and
activity for the six months ended June 30, 2002:
Facility
Employee closing
(In thousands) separation costs Total
---------------- ------------ ----------
Balance, December 31, 2001 $ 155 $ 6,140 $ 6,295
Cash payments (2) (335) (337)
Accruals (reversals) -- -- --
------- ------- -------
Balance, June 30, 2002 $ 153 $ 5,805 $ 5,958
======= ======= =======
The remaining estimated facility closing costs, consisting of operating
contract cancellation and environmental remediation costs, are anticipated to be
paid in late 2002 and 2003. The timing of any payments depends on environmental
regulatory approvals and results of contract settlements. The remaining
liability for employee separation is for continuing employee benefits. The
assets of the closed operations, consisting of machinery and equipment and
related spare parts and supply inventories are classified as Assets Held for
Sale on the Company's consolidated balance sheet. An independent broker is
actively marketing the assets and the net proceeds from sales of these assets
amounted to $0.4 million for the six months ended June 30, 2002.
7
NOTE 3: OTHER INCOME, NET
In the quarter ended March 31, 2001, the Company received a claim
settlement pertaining to purchases of electrodes in the years from 1992 to 1997.
The settlement increased Other, net by $1.1 million, or $0.05 per diluted share,
for the quarter.
NOTE 4: EXTRAORDINARY CHARGE
During the quarter ended March 31, 2001, the Company purchased $0.9
million in principal amount of its 13.5% Senior Secured Notes in an open market
transaction. In connection with the purchase of the notes, the Company recorded
an extraordinary charge of $0.1 million for the premium incurred and write-off
of associated original discount and deferred finance charges.
NOTE 5: COMPREHENSIVE INCOME
The Company's other comprehensive income consists of unrealized gains
and losses on available-for-sale securities. Comprehensive income for the
periods was as follows:
Three Months Ended Six Months Ended
June 30, June 30,
(In thousands) 2002 2001 2002 2001
--------- -------- --------- ---------
Net income (loss) $ (3,919) $ 8,895 $(18,226) $(45,562)
Net unrealized gains (losses) (680) 24 (307) 891
-------- -------- -------- --------
Comprehensive income (loss) $ (4,599) $ 8,919 $(18,533) $(44,671)
======== ======== ======== ========
NOTE 6: BUSINESS SEGMENT INFORMATION
In recent prior periods, the Company operated and reported its results
in two reportable segments. The Company's Energy Products segment consists
primarily of (i) welded and seamless tubular products used primarily in oil and
natural gas drilling and production operations (oil country tubular goods, or
OCTG); and (ii) line pipe used in the transmission of oil, natural gas and other
fluids. The Company's Industrial Products segment consisted of SBQ products used
primarily in the manufacture of heavy industrial equipment. As mentioned in Note
2, the Company exited the SBQ products business as of June 30, 2001, and since
that time has reported its results in a single segment.
The Energy Products segment consists of the Company's welded and
seamless tubular operations which have similar products and services,
manufacturing processes, customers and distribution channels and is consistent
with both internal management reporting and resource and budgetary allocations.
Three Energy Products customers accounted for 15%, 13% and 10%, respectively, of
the segment's sales for the six months ended June 30, 2002 and two Energy
Products customers each accounted for 17% of the segment's sales in the six
months ended June 30, 2001.
8
The following table contains selected segment financial information for
the three months and six months ended June 30, 2002 and 2001. Reference is made
to Note 2 concerning the Company's restructuring initiatives implemented in
2001.
Energy Industrial
(In thousands) Products Products Corporate Total
-------- ---------- --------- -----
THREE MONTHS ENDED JUNE 30, 2002
Net sales $ 54,851 $ -- $ -- $ 54,851
Operating income (loss) 277 -- (1,896) (1,619)
Assets 177,535 -- 74,861 252,396
Depreciation and amortization 2,892 -- 31 2,923
Capital expenditures 593 -- -- 593
THREE MONTHS ENDED JUNE 30, 2001
Net sales $ 98,866 $ 3,861 $ -- $ 102,727
Operating income (loss) 13,267 (981) (2,303) 9,983
Assets 213,369 2,114 90,487 305,970
Depreciation and amortization 2,826 -- 304 3,130
Capital expenditures 359 -- -- 359
SIX MONTHS ENDED JUNE 30, 2002
Net sales $ 93,699 $ -- $ -- $ 93,699
Operating loss (10,689) -- (3,485) (14,174)
Depreciation and amortization 5,665 -- 63 5,728
Capital expenditures 997 -- -- 997
SIX MONTHS ENDED JUNE 30, 2001
Net sales $ 174,992 $ 9,849 $ -- $ 184,841
Operating income (loss)
before restructuring items $ 20,125 $ (3,714) $ (4,017) $ 12,394
Inventory mark-down -- (639) -- (639)
Restructuring charges (44,499) (9,486) (1,600) (55,585)
--------- --------- --------- ---------
Operating loss $ (24,374) $ (13,839) $ (5,617) $ (43,830)
--------- --------- --------- ---------
Depreciation and amortization $ 7,253 $ 941 $ 74 $ 8,268
Capital expenditures 711 -- -- 711
9
NOTE 7: INVENTORIES
Inventories consist of the following:
June 30, December 31,
(In thousands) 2002 2001
------------ -------------
Raw materials $20,875 $ 9,358
Semi-finished and finished products 54,042 45,971
------- -------
$74,917 $55,329
======= =======
NOTE 8: CREDIT FACILITY AND LONG-TERM DEBT
The Company entered into a new five-year revolving credit facility in
March 2002 that provides up to $50.0 million under a borrowing formula which is
based upon eligible inventory and accounts receivable, subject to certain
reserves and satisfaction of certain conditions to each draw under the facility.
Interest rates on the facility vary according to the amount of loans outstanding
and range from the prime rate plus 0.50% to prime plus 1.25% with respect to
domestic rate loans, and from the LIBOR rate plus 2.00% to LIBOR plus 2.75% with
respect to LIBOR rate loans. The facility contains various representations and
warranties and operating and other covenants. There are no financial covenants
under the facility. There have been no borrowings under the facility. The
facility is secured by a first priority lien on all inventories, accounts
receivable and certain intangibles of the Company. As of June 30, 2002, the
Company had a borrowing availability under the agreement, based on eligible
receivable and inventory on such date, of approximately $30.0 million.
On June 13, 2002, the Company made an early redemption call for $35.0
million of its $68.8 million principal amount 13.5 % senior secured notes due in
July 2003. The redemption on July 15, 2002 was at par plus accrued interest and
was funded from existing cash balances. The Company will recognize a charge of
$0.6 million, or $0.03 cents per diluted share, in the third quarter of 2002,
for the write-off of related debt discount and issue costs.
NOTE 9: SHELF REGISTRATION
In July 2002, the Company filed a universal shelf registration
statement with the Securities and Exchange Commission for the issuance and the
sale from time to time to the public of up to $100 million in securities,
including debt, preferred stock, common stock and warrants. The registration
statement has not yet become effective. After the registration statement has
been declared effective, the Company may sell the securities in one or more
separate offerings in amounts, at prices and on terms to be determined at the
time of sale. If and when the Company offers any securities under this
registration statement, the Company will prepare and make available a prospectus
supplement that includes the specific terms of the securities being offered.
10
NOTE 10: COMMITMENTS AND CONTINGENCIES
The Company has various commitments for the purchase of materials,
supplies and energy arising in the ordinary course of business.
Legal Matters
The Company is subject to various claims, lawsuits and administrative
proceedings arising in the ordinary course of business with respect to workers'
compensation, health care and product liability coverages (each of which is
self-insured to certain levels), as well as commercial and other matters. The
Company accrues for the cost of such matters when the incurrence of such costs
is probable and can be reasonably estimated. Based upon its evaluation of
available information, management does not believe that any such matters will
have, individually or in the aggregate, a material adverse effect upon the
Company's consolidated financial position, results of operations or cash flows.
Environmental Matters
The Company is subject to federal, state and local environmental laws
and regulations, including, among others, the Resource Conservation and Recovery
Act (RCRA), the Clean Air Act, the 1990 Amendments to the Clean Air Act and the
Clean Water Act, and all regulations promulgated in connection therewith. Such
laws and regulations include those concerning the discharge of contaminants as
air emissions or wastewater effluents and the disposal of solid and/or hazardous
wastes such as electric arc furnace dust. As such, the Company is from time to
time involved in administrative and judicial proceedings and administrative
inquiries related to environmental matters.
In late 2001, the U.S. Environmental Protection Agency (EPA) designated
Imperial Adhesives, Inc., a former subsidiary of the Company, as one of a number
of potentially responsible parties (PRPs) under the Comprehensive Environmental
Response, Compensation and Liability Act (CERCLA) at an environmental
remediation site. The EPA has contended that any company linked to a CERCLA site
is potentially liable for costs under the legal doctrine of joint and several
liability. This environmental remediation site involves a municipal waste
disposal facility owned and operated by an independent operator. A preliminary
study of the site is in its early stages. Consequently, it is too early to
determine the Company's liability exposure. The Company believes, however, that
the reasonably foreseeable resolution of this matter will not have a material
adverse effect upon the Company's consolidated financial position, results of
operations or cash flows.
The Company has a hazardous waste landfill on its property in Wilder,
Kentucky, which it no longer utilizes. In connection with the Company's March
2001 restructuring actions, in which it closed Newport's melt shop and hot strip
mill operations, the Company accrued the estimated costs for closure and
post-closure care of the landfill. These costs were included in restructuring
charges in the first quarter of 2001. The Company is currently awaiting final
approval of its closure/post-closure plan from the Kentucky Division of Waste
Management. The Company expects closure of the landfill will be completed by the
end of 2003.
11
The Company operates a steel mini-mill that produces dust that contains
lead, cadmium and chromium, and is classified as a hazardous waste. Dust
produced by its electric arc furnace is collected through emission control
systems and recycled at EPA-approved facilities.
The Company believes that it is currently in compliance in all material
respects with all applicable environmental regulations. The Company cannot
predict the level of required capital expenditures or operating costs that may
result from future environmental regulations.
Capital expenditures for environmental control facilities are expected
to be approximately $0.3 million for the last six months of 2002. New or revised
environmental regulations and laws or new information or developments with
respect to the Company's operating facilities could influence such expenditures.
The Company has accrued for environmental remediation obligations of
$4.3 million and $4.3 million, respectively, at June 30, 2002 and December 31,
2001. Based upon its evaluation of available information, management does not
believe that any of the Company's environmental contingency matters will have,
individually or in the aggregate, a material adverse effect upon the Company's
consolidated financial position, results of operations or cash flows. However,
the Company cannot predict with certainty that new information or developments
with respect to its environmental contingency matters, individually or in the
aggregate, will not have a material adverse effect on the Company's consolidated
financial position, results of operations or cash flows.
NOTE 11: SUPPLEMENTARY INFORMATION - CONDENSED CONSOLIDATING FINANCIAL
STATEMENTS
The Company's senior secured notes are unconditionally guaranteed in
full, jointly and severally, by each of the Company's subsidiaries (Guarantor
Subsidiaries), each of which is wholly owned. Set forth below are the condensed
consolidating financial statements of NS Group, Inc. including the Guarantor
Subsidiaries. The Guarantor Subsidiaries include Newport, Koppel, Erlanger and
Northern Kentucky Management, Inc. Separate financial statements and other
disclosures relating to the Guarantor Subsidiaries have not been presented
because management has determined that this information would not be material.
The following unaudited condensed consolidating financial statements
present the results of operations, financial position and cash flows of (a) NS
Group, Inc. (Parent), reflecting investments in its consolidated subsidiaries
under the equity method of accounting, (b) the guarantor subsidiaries of the
Parent and (c) the eliminations necessary to arrive at the information for the
Parent on a consolidated basis. Income tax expense (benefit) is allocated among
the consolidating entities based upon taxable income (loss) within the
companies. These condensed consolidating financial statements should be read in
conjunction with the accompanying condensed consolidated financial statements of
NS Group. All significant intercompany accounts and transactions have been
eliminated.
12
NS Group, Inc.
Unaudited Condensed Consolidating Statement of Operations
THREE MONTHS ENDED JUNE 30, 2002
Guarantor
(In thousands) Parent Subsidiaries Eliminations Consolidated
--------- ------------ ------------ ------------
Net sales $ -- $ 54,851 $ -- $ 54,851
Costs of products sold -- 52,598 -- 52,598
-------- -------- -------- --------
Gross profit -- 2,253 -- 2,253
Selling, general and administrative expenses -- 3,872 -- 3,872
-------- -------- -------- --------
Operating loss -- (1,619) -- (1,619)
Other income (expense)
Equity in earnings of subsidiaries (3,553) -- 3,553 --
Investment income 336 34 -- 370
Interest expense (2,655) (3) -- (2,658)
Other income, net (34) 22 -- (12)
Intercompany interest, net 3,899 (3,899) -- --
-------- -------- -------- --------
Income (loss) before income taxes (2,007) (5,465) 3,553 (3,919)
Provision (benefit) for income taxes 1,912 (1,912) -- --
-------- -------- -------- --------
Net income (loss) $ (3,919) $ (3,553) $ 3,553 $ (3,919)
======== ======== ======== ========
THREE MONTHS ENDED JUNE 30, 2001
Guarantor
(In thousands) Parent Subsidiaries Eliminations Consolidated
--------- ------------ ------------ ------------
Net sales $ -- $ 102,727 $ -- $ 102,727
Cost of products sold -- 87,268 -- 87,268
--------- --------- --------- ---------
Gross profit -- 15,459 -- 15,459
Selling, general and administrative expenses -- 5,476 -- 5,476
Restructuring charges -- -- -- --
--------- --------- --------- ---------
Operating income -- 9,983 -- 9,983
Other income (expense)
Equity in earnings of subsidiaries 3,448 -- (3,448) --
Investment income 1,254 32 -- 1,286
Interest expense (2,577) (3) -- (2,580)
Other income, net 167 39 -- 206
Intercompany interest, net 4,747 (4,747) -- --
--------- --------- --------- ---------
Income (loss) before income taxes 7,039 5,304 (3,448) 8,895
Provision (benefit) for income taxes (1,856) 1,856 -- --
--------- --------- --------- ---------
Net income (loss) $ 8,895 $ 3,448 $ (3,448) $ 8,895
========= ========= ========= =========
13
NS Group, Inc.
Unaudited Condensed Consolidating Statement of Operations
SIX MONTHS ENDED JUNE 30, 2002
Guarantor
(In thousands) Parent Subsidiaries Eliminations Consolidated
---------- -------------- ------------ ------------
Net sales $ -- $ 93,699 $ -- $ 93,699
Costs of products sold -- 99,679 -- 99,679
--------- --------- --------- ---------
Gross loss -- (5,980) -- (5,980)
Selling, general and administrative expenses -- 8,194 -- 8,194
--------- --------- --------- ---------
Operating loss -- (14,174) -- (14,174)
Other income (expense)
Equity in earnings of subsidiaries (14,341) -- 14,341 --
Investment income 1,043 78 -- 1,121
Interest expense (5,248) (6) -- (5,254)
Other income, net 36 45 -- 81
Intercompany interest, net 8,006 (8,006) -- --
--------- --------- --------- ---------
Income (loss) before income taxes (10,504) (22,063) 14,341 (18,226)
Provision (benefit) for income taxes 7,722 (7,722) -- --
--------- --------- --------- ---------
Net income (loss) $ (18,226) $ (14,341) $ 14,341 $ (18,226)
========= ========= ========= =========
SIX MONTHS ENDED JUNE 30, 2001
Guarantor
(In thousands) Parent Subsidiaries Eliminations Consolidated
---------- -------------- ------------ ------------
Net sales $ -- $ 184,841 $ -- $ 184,841
Cost of products sold -- 161,985 -- 161,985
--------- --------- --------- ---------
Gross profit -- 22,856 -- 22,856
Selling, general and administrative expenses -- 11,101 -- 11,101
Restructuring charges 1,600 53,985 -- 55,585
--------- --------- --------- ---------
Operating loss (1,600) (42,230) -- (43,830)
Other income (expense)
Equity in earnings of subsidiaries (33,021) -- 33,021 --
Investment income 2,059 65 -- 2,124
Interest expense (5,096) (6) -- (5,102)
Other income, net 167 1,138 -- 1,305
Intercompany interest, net 9,769 (9,769) -- --
--------- --------- --------- ---------
Income (loss) before income taxes
and extraordinary items (27,722) (50,802) 33,021 (45,503)
Provision (benefit) for income taxes 17,781 (17,781) -- --
--------- --------- --------- ---------
Income (loss) before extraordinary items (45,503) (33,021) 33,021 (45,503)
Extraordinary items, net of income taxes (59) -- -- (59)
--------- --------- --------- ---------
Net income (loss) $ (45,562) $ (33,021) $ 33,021 $ (45,562)
========= ========= ========= =========
14
NS Group, Inc.
Unaudited Condensed Consolidating Balance Sheet
June 30, 2002
Guarantor
(In thousands) Parent Subsidiaries Eliminations Consolidated
--------- ------------ ------------ ------------
ASSETS
Cash and cash equivalents $ 55,838 $ 102 $ -- $ 55,940
Accounts receivable, net 409 23,578 -- 23,987
Inventories -- 74,917 -- 74,917
Other current assets 5,410 9,539 -- 14,949
--------- --------- --------- ---------
Total current assets 61,657 108,136 -- 169,793
Property, plant and equipment -- 196,106 -- 196,106
Accumulated depreciation -- (140,578) -- (140,578)
Long-term investments 9,862 192 -- 10,054
Investment in subsidiaries (74,562) -- 74,562 --
Intercompany, net 209,735 -- (209,735) --
Other assets 3,342 2,666 -- 6,008
Assets held for sale -- 11,013 -- 11,013
--------- --------- --------- ---------
Total assets $ 210,034 $ 177,535 $(135,173) $ 252,396
========= ========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ -- $ 20,595 $ -- $ 20,595
Accrued liabilities 7,502 15,276 -- 22,778
Accrued restructuring charges -- 5,958 -- 5,958
Current portion of long-term debt 35,000 34 -- 35,034
--------- --------- --------- ---------
Total current liabilities 42,502 41,863 -- 84,365
Long-term debt 33,352 499 -- 33,851
Intercompany, net -- 209,735 (209,735) --
Deferred taxes 3,203 -- -- 3,203
Other long-term liabilities 5,775 -- -- 5,775
Shareholders' equity 125,202 (74,562) 74,562 125,202
--------- --------- --------- ---------
Total liabilities and
shareholders' equity $ 210,034 $ 177,535 $(135,173) $ 252,396
========= ========= ========= =========
15
NS Group, Inc.
Unaudited Condensed Consolidating Balance Sheet
December 31, 2001
Guarantor
(In thousands) Parent Subsidiaries Eliminations Consolidated
--------- ------------ ------------ ------------
ASSETS
Cash and cash equivalents $ 72,206 $ 177 $ -- $ 72,383
Accounts receivable 655 22,506 -- 23,161
Inventories -- 55,329 -- 55,329
Other current assets 4,696 10,957 -- 15,653
--------- --------- --------- ---------
Total current assets 77,557 88,969 -- 166,526
Property, plant & equipment -- 194,407 -- 194,407
Accumulated depreciation -- (134,211) -- (134,211)
Long-term investments 16,669 164 -- 16,833
Investment in subsidiaries (60,247) -- 60,247 --
Intercompany, net 191,363 -- (191,363) --
Other assets 2,777 2,705 -- 5,482
Assets held for sale -- 11,447 -- 11,447
--------- --------- --------- ---------
Total assets $ 228,119 $ 163,481 $(131,116) $ 260,484
========= ========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ 265 $ 14,038 $ -- $ 14,303
Accrued liabilities and other 7,722 11,483 -- 19,205
Accrued restructuring liabilities -- 6,295 -- 6,295
Current portion of long-term debt -- 33 -- 33
--------- --------- --------- ---------
Total current liabilities 7,987 31,849 -- 39,836
Long-term debt 67,554 516 -- 68,070
Intercompany, net -- 191,363 (191,363) --
Deferred taxes 3,203 -- -- 3,203
Other long-term liabilities 5,713 -- -- 5,713
Shareholders' equity 143,662 (60,247) 60,247 143,662
--------- --------- --------- ---------
Total liabilities and
shareholders' equity $ 228,119 $ 163,481 $(131,116) $ 260,484
========= ========= ========= =========
16
NS Group, Inc.
Unaudited Condensed Consolidating Statement of Cash Flows
SIX MONTHS ENDED JUNE 30, 2002
Guarantor
(In thousands) Parent Subsidiaries Eliminations Consolidated
------------- ------------- -------------- ---------------
Net cash flows from operating activities $(21,938) $ 504 $ -- $(21,434)
-------- -------- ------------- --------
Purchases of property, plant and equipment -- (997) -- (997)
Net proceeds of assets held for sale -- 434 -- 434
Net sales and maturities of long-term investments 6,351 -- -- 6,351
Changes in other assets (35) -- -- (35)
-------- -------- ------------- --------
Net cash from investing activities 6,316 (563) -- 5,753
-------- -------- ------------- --------
Repayments of long term debt -- (16) -- (16)
Payment of financing costs (757) -- -- (757)
Proceeds from issuance of common stock 11 -- -- 11
-------- -------- ------------- --------
Net cash from financing activities (746) (16) -- (762)
-------- -------- ------------- --------
Net decrease in cash and cash equivalents (16,368) (75) -- (16,443)
Cash and cash equivalents -
Beginning of period 72,206 177 -- 72,383
-------- -------- ------------- --------
End of period $ 55,838 $ 102 $ -- $ 55,940
======== ======== ============= ========
Cash paid during the period for:
Interest $ 4,642 $ 6 $ 4,648
Income taxes $ -- $ -- $ --
SIX MONTHS ENDED JUNE 30, 2001
Guarantor
(In thousands) Parent Subsidiaries Eliminations Consolidated
------------- ------------- -------------- ---------------
Net cash flows from operating activities $ 18,695 $ (86) $ -- $ 18,609
-------- -------- ------------- --------
Purchases of property, plant and equipment -- (711) -- (711)
Net proceeds of assets held for sale -- 972 -- 972
Net sales and maturities of long-term investments 3,752 -- -- 3,752
Changes in other assets (167) 39 -- (128)
-------- -------- ------------- --------
Net cash from investing activities 3,585 300 -- 3,885
-------- -------- ------------- --------
Repayments of long-term debt (890) (55) -- (945)
Proceeds from issuance of common stock 282 -- -- 282
Purchase of treasury stock (394) -- -- (394)
-------- -------- ------------- --------
Net cash from financing activities (1,002) (55) -- (1,057)
-------- -------- ------------- --------
Net increase in cash and cash equivalents 21,278 159 -- 21,437
Cash and cash equivalents -
Beginning of period 42,543 250 -- 42,793
-------- -------- ------------- --------
End of period $ 63,821 $ 409 $ -- $ 64,230
======== ======== ============= ========
Cash paid during the period for:
Interest $ 4,708 $ 6 $ 4,714
Income taxes $ -- $ -- $ --
17
NS GROUP, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
We make forward-looking statements in this report which represent our
expectations or beliefs about future events and financial performance. You can
identify these statements by forward-looking words such as "expect", "believe",
"anticipate", "goal", "plan", "intend", "estimate", "may", "will", or similar
words. Forward-looking statements are subject to known and unknown risks,
uncertainties and assumptions, including:
- world-wide and domestic supplies of and demand for natural gas
and oil;
- fluctuations in industry-wide inventory levels;
- domestic and foreign competitive pressures;
- the level of imports and the presence or absence of
governmentally imposed trade restrictions;
- steel coil and steel scrap price volatility;
- manufacturing efficiencies;
- costs of compliance with environmental regulations;
- asserted and unasserted claims;
- general economic conditions; and
- other risks and uncertainties described under "Risk Factors"
included in Exhibit 99.1 of the Company's Form 10-K for the
year ended December 31, 2001.
In light of these risks, uncertainties and assumptions, the
forward-looking events discussed in this report might not occur. In addition,
actual results could differ materially from those suggested by the
forward-looking statements. Accordingly, you should not place undue reliance on
the forward-looking statements which speak only as of the date on which they are
made. We may not update these forward-looking statements, even though our
situation may change in the future, unless we are obligated under federal
securities laws to update and disclose material developments related to
previously disclosed information. We qualify all of our forward-looking
statements by these cautionary statements.
For a more complete understanding of our business activities and
financial results, you should read the following analysis of financial condition
and results of operations together with the unaudited condensed consolidated
financial statements included in this report.
18
RESULTS OF OPERATIONS
SEGMENT REPORTING CHANGES RESULTING FROM RESTRUCTURINGS
During the quarter ended March 31, 2001, we implemented restructuring
initiatives involving certain operations of our businesses. One initiative was
to purchase hot-rolled coils rather than manufacture them at our welded tubular
operations. As a result, we closed the melt shop and hot strip mill operations
in Wilder, Kentucky effective March 31, 2001. In addition, we decided to cease
the manufacturing of special bar quality products (which we refer to as "SBQ"),
which were being manufactured at our Koppel, Pennsylvania facility. Accordingly,
in the March 2001 quarter, we recorded $56.2 million of restructuring charges
that included $43.4 million of non-cash charges resulting primarily from the
write-down of fixed assets. See Note 2 to the unaudited condensed consolidated
financial statements for further information related to the restructurings.
Through June 30, 2001, we conducted our business within two reportable
business segments - the Energy Products segment and the Industrial Products
segment. In June 2001, we exited the SBQ operations that comprised our
Industrial Products segment. Since that time we have conducted our operations
solely within the Energy Products segment.
Our Energy Products segment includes tubular steel products that are
used in the energy industry. These products include welded and seamless tubular
goods, primarily used in oil and natural gas drilling and production operations.
These products are referred to as oil country tubular goods, or OCTG. We also
produce welded and seamless line pipe products, which are used in the
transmission of oil and natural gas, as well as a limited amount of other
tubular products.
Our Industrial Products segment consisted solely of special bar quality
products used in a variety of industrial applications such as farm equipment,
heavy machinery, construction and off-road vehicles.
You should read Note 6 to the unaudited condensed consolidated
financial statements included in this report for selected financial information
by business segment.
OVERVIEW / OUTLOOK
Demand for our OCTG products is cyclical in nature, being dependent on
the number and depth of oil and natural gas wells being drilled in the United
States and globally. The level of drilling activity is, among other things,
dependent on the current and anticipated supply and demand for oil and natural
gas. Oil and natural gas prices are volatile and can have a substantial effect
upon drilling levels and resulting demand for our energy related products. In
addition, shipments by domestic producers of OCTG products may be positively or
negatively affected by the amount of inventory held by producers, distributors
and end users, as well as by imports of OCTG products.
19
The average number of oil and natural gas drilling rigs in operation in
the United States is referred to as "rig count". In response to strong oil and
natural gas prices, rig count rose steadily throughout the first half of 2001,
averaging 1,190 in the first half of 2001, and rose to a high of 1,293 in July
2001. Natural gas prices began to fall, however, as (i) the slowdown in the
economy, (ii) milder weather and (iii) fuel switching resulted in strong
injection rates into natural gas storage during the summer months of 2001. The
weak economy and mild weather in the latter part of 2001 resulted in
historically high levels of natural gas storage, which further pressured natural
gas prices downward. As a result, rig count dropped 43%, from the July 2001 high
to 738 in April 2002. The average rig count for the three and six months ended
June 30, 2002 was 808 and 811, respectively, decreases of 35% and 32% from
comparable periods in 2001.
According to published industry reports, imports of OCTG products in
the first half of 2001 accounted for an estimated 28% of the total domestic
market and are expected to be approximately 24% in the first half of 2002. The
effects of continued high levels of imports, together with the decline in
drilling activity, resulted in excessive industry-wide tubular inventories,
which negatively affected our OCTG business. Primarily as a result of the
decrease in the rig count, our shipments for the three and six months ended June
30, 2002 declined 37.5% and 40.6%, respectively, from the comparable periods in
2001. We expect improved shipment levels in the second half of 2002 resulting
from anticipated improvements in the marketplace.
In November 2001, the United States International Trade Commission
(ITC) reported injury from various imported steel products under Section 201 and
recommended to the President of the United States a wide-scale program of quotas
and duties. However, the ITC recommendation for quotas and duties did not
include imports of oil country tubular goods and, as a result, we have continued
to experience high levels of competition from imports. In response, in April
2002, we, together with other domestic oil country tubular goods providers,
filed suit with the ITC against 13 countries, seeking relief from unfair trade.
On May 10, 2002, the ITC voted against us and the case was terminated.
On March 5, 2002, the President of the United States announced his
remedy decision in response to the ITC's Section 201 investigation on steel
imports. Under the remedy decision, effective March 21, 2002, tariff rates of
30%, 24% and 18% will be applied to imports of hot-rolled coil for the next
three years, respectively. Imports from Canada, Mexico, and certain other
countries are exempt from the tariffs. The tariffs have increased the cost of
imported hot-rolled coils which, in turn, has increased the cost of domestic
hot-rolled coils. An increase in our steel costs will adversely affect our
financial results if we are not able to successfully raise the price of our
products to compensate for the increased costs.
Since 1995, the U.S. government has been imposing duties on imports of
various OCTG products from Argentina, Italy, Japan, Korea and Mexico in response
to antidumping and countervailing duty cases filed by several U.S. companies. In
June 2001, the ITC voted to continue these duties for five more years.
20
In response to petitions filed with the U.S. government by us and
certain other line pipe producers, import relief was granted to the line pipe
industry effective March 1, 2000. This relief is in the form of tariffs applied
for three years to imports of welded line pipe that is 16 inch or less in
diameter, from all countries excluding Canada and Mexico.
We cannot predict the U.S. government's future actions regarding duties
and tariffs on imports or other trade restrictions on imports of OCTG and line
pipe products.
The Company's net sales, gross profit (loss), operating income (loss)
and tons shipped by business segment for the three and six months ended June 30,
2002 and 2001 are summarized in the following table:
Three Months Ended Six Months Ended
(Dollars in thousands) June 30, June 30,
2002 2001 2002 2001
--------- --------- --------- --------
Net sales
Energy Products $ 54,851 $ 98,866 $ 93,699 $ 174,992
Industrial Products - SBQ -- 3,861 -- 9,849
--------- --------- --------- ---------
$ 54,851 $ 102,727 $ 93,699 $ 184,841
========= ========= ========= =========
Gross profit (loss)
Energy Products $ 2,253 $ 16,008 $ (5,980) $ 26,120
Industrial Products - SBQ -- (549) -- (3,264)(1)
--------- --------- --------- ---------
$ 2,253 $ 15,459 $ (5,980) $ 22,856
========= ========= ========= =========
Operating income (loss)
Energy Products $ 277 $ 13,267 $ (10,689) $ 20,125
Industrial Products - SBQ -- (981) -- (3,714)
--------- --------- --------- ---------
277 12,286 (10,689) 16,411
Restructuring charges -- -- -- (56,224)(1)
Corporate allocations (1,896) (2,303) (3,485) (4,017)
--------- --------- --------- ---------
$ (1,619) $ 9,983 $ (14,174) $ (43,830)
========= ========= ========= =========
Tons shipped
Energy Products
Welded products 63,600 95,900 104,300 170,100
Seamless products 32,200 57,000 57,500 102,000
Other -- 300 -- 500
--------- --------- --------- ---------
95,800 153,200 161,800 272,600
Industrial Products - SBQ -- 9,900 -- 23,900
--------- --------- --------- ---------
95,800 163,100 161,800 296,500
========= ========= ========= =========
(1) Includes restructuring charge of $0.6 million recorded to cost
of products sold.
21
Net sales in the quarter ended June 30, 2002 were $54.9 million, down
$47.9 million, or a 46.6% decrease from the $102.7 million recorded in the
second quarter of 2001. The quarter ended June 30, 2001 included $3.9 million of
SBQ sales. This business was closed in June 2001. For the quarter ended June 30,
2002, operating losses were $1.6 million compared to $10.0 million of operating
income in the comparable quarter in 2001. We reported a net loss of $3.9
million, or a $0.19 loss per basic and diluted share, in the three months ended
June 30, 2002. This compares to net income of $8.9 million, or $0.41 per diluted
share, in the second quarter of 2001.
Net sales in the six months ended June 30, 2002 were $93.7 million,
down $91.3 million, or a 49.3% decrease from the $184.8 million recorded in the
first six months of 2001. The six months ended June 30, 2001 included $9.8
million of SBQ sales. For the six months ended June 30, 2002, operating losses
were $14.2 million compared to $43.8 million of operating losses in the
comparable period in 2001. For the six months ended June 30, 2002, we reported a
net loss of $18.2 million, or an $0.88 loss per basic and diluted share. This
compares to net loss of $45.6 million, or a $2.17 loss per diluted share, in the
first six months of 2001. Excluding restructuring charges of $56.2 million
included in the first six months of 2001, operating income would have been $12.4
million, and net income and income per diluted share would have been $10.7
million, or $0.49 per diluted share, respectively.
ENERGY PRODUCTS
Energy Products segment sales in the three and six-month periods ended
June 30, 2002 were $54.9 million and $93.7 million, respectively, decreases of
44.5% and 46.5% from the comparable periods ended June 30, 2001. The decrease in
Energy Product segment sales was attributable to the significant decreases in
shipments and average revenue per ton.
Total shipments of energy products for the second quarter of 2002 were
95,800 tons, a 37.5% decrease from the 153,200 tons shipped in the comparable
prior year period. Shipments for the six months of 2002 were 161,800 tons, down
40.6% from the 272,600 tons shipped in the comparable period in 2001. The
decline in shipments was experienced in both our welded and seamless energy
products. The decline resulted primarily from a decline in demand of OCTG
products resulting from lower consumption and a focus by distributors on
reducing their inventories in light of a significant decline in drilling
activity.
For the quarter ended June 30, 2002, the average revenue per ton for
our welded and seamless tubular products was $424 and $867 per ton,
respectively, compared to $490 and $899 per ton in the second quarter of 2001.
The 13.5% decrease for welded products and the 3.6% decrease for seamless
products resulted from the decline in the demand for OCTG products as well as a
change in product mix.
22
The Energy Products segment recorded a gross profit of $2.3 million and
operating income of $0.3 million in the quarter ended June 30, 2002. These
results compare to a gross profit of $16.0 million and operating income of $13.3
million in the quarter ended June 30, 2001. The significant decline in
profitability from the prior year period was primarily the result of the
significant decline in shipments along with lower pricing for our products.
Also, as a result of the lower operating levels in the first half of 2002, our
margins were negatively impacted due to lower fixed cost absorption.
Selling, general and administrative expenses for the Energy Products
segment in the quarter ended June 30, 2002 decreased $0.8 million from the
quarter ended June 30, 2001. Selling, general and administrative expenses for
the six months ended June 30, 2002, were $4.7 million, a $1.3 million decrease
from the comparable period in 2001. The restructuring initiatives started in
2001 and general cost constraints were the primary reasons for the reduction in
expenses.
In April 2002, the hourly employees of our welded tubular facility,
Newport Steel Corporation, approved a new three-year labor agreement. The United
Steelworkers of America represent the hourly employees.
INVESTMENT INCOME
Investment income was $0.4 million and $1.1 million for the three and
six months ended June 30, 2002, respectively, compared with $1.3 million and
$2.1 million for the comparable periods in 2001. Included in the 2002 amounts
are $0.1 million of net recognized losses on investments and $0.5 million of
recognized losses are included in 2001. In addition, interest income is lower in
2002 when compared to 2001 amounts because of lower invested balances and lower
interest rates.
INCOME TAXES
We exhausted our federal income tax refund capability in 1999, and
accordingly, tax benefits from operating losses normally are offset by valuation
allowances resulting in no net federal tax benefit being recorded for losses.
LIQUIDITY AND CAPITAL RESOURCES
Working capital at June 30, 2002 was $85.4 million compared to $126.7
million at December 31, 2001. The working capital decrease was primarily caused
by the reclassification of $35.0 million of our long-term debt to a current
liability as the result of our announced redemption call on June 13, 2002. The
current ratio was 2.0 to 1 at June 30, 2002 compared to 4.2 to 1 at December 31,
2001. At June 30, 2002, we had cash and investments totaling $66.0 million and
had no advances against our $50 million revolving credit facility.
23
The major component of cash from operating activities for the six
months ended June 30, 2002 was $5.7 million in depreciation and amortization
charges. Major uses of cash from operating activities were for a $19.6 million
increase in inventories, partially offset by increases of $6.3 million and $4.1
million in accounts payable and accrued liabilities, respectively. The increases
in inventories and accounts payables were primarily related to purchases of
hot-rolled coils and the build of finished goods inventories. The increased
purchases of steel coils were based on our expectations of higher steel prices
in the second half of 2002. We added to our finished goods inventory to meet
anticipated increased customer demand in the third and fourth quarter of 2002.
The increase in accrued liabilities is the result of an increase in deferred
revenue, resulting from higher shipments in the June 2002 quarter.
Cash flows from investing activities were $5.8 million for the six
months ended June 30, 2002. Sales and maturities of long-term investments
resulted in proceeds of $6.4 million during the period. We made capital
investments of $1.0 million in the first six months of 2002 and we currently
estimate capital spending for 2002 to be approximately $3.2 million, primarily
for maintenance capital in our Energy Products segment and improvements in
information technology systems.
We entered into a new five-year revolving credit facility in March 2002
that provides up to $50.0 million under a borrowing formula which is based upon
eligible inventory and accounts receivable, subject to certain reserves and
satisfaction of certain conditions to each draw under the facility. Interest
rates on the facility vary according to the amount of loans outstanding and
range from the prime rate plus 0.50% to prime plus 1.25% with respect to
domestic rate loans, and from the LIBOR rate plus 2.00% to LIBOR plus 2.75% with
respect to LIBOR rate loans. The facility contains various representations and
warranties and operating and other covenants. There are no financial covenants
under the facility. There have been no borrowings under the facility. The
facility is secured by a first priority lien on all inventories, accounts
receivable and certain intangibles of the Company. As of June 30, 2002, we had
approximately $30.0 million in borrowing availability under the agreement, based
on eligible receivable and inventory balances on that date.
On June 13, 2002, we made an early redemption call for $35.0 million of
then outstanding $68.8 million principal amount, 13.5 % senior secured notes due
in July 2003. The redemption was at par plus accrued interest and was completed
on July 15, 2002 using existing cash balances.
Additionally, in July 2002 we filed a universal shelf registration
statement for the issuance and the sale from time to time to the public of up to
$100 million in securities, including debt, preferred stock, common stock and
warrants. The shelf registration has not yet become effective. See Notes 8 and 9
in the accompanying financial statements for more information on the credit
facility and shelf registration. We believe that these new facilities afford us
the financial flexibility to react to opportunities in the market in the coming
years.
24
In February 2002, our board of directors authorized the repurchase of
up to two million shares of our common stock over the following twelve months.
Repurchases are authorized to be made from time to time in open market purchases
or through privately negotiated transactions, when, in the opinion of
management, market conditions warrant. Repurchased shares will be available for
general corporate purposes. We did not purchase any of our common shares during
the first half of 2002.
We calculate EBITDA as earnings before extraordinary items, interest
expense, investment income, taxes, depreciation and amortization. For the six
months ended June 30, 2001, EBITDA was adjusted to exclude restructuring charges
of $56.2 million, which included approximately $42.4 million of asset impairment
losses resulting from the write-down of the net book value of machinery,
equipment and related spare parts. EBITDA should not be construed as a
substitute for operating income, or as a better indicator of liquidity than cash
flow from operating activities, as they are determined in accordance with
accounting principles generally accepted in the United States of America (GAAP).
EBITDA provides additional information for determining our ability to meet debt
service requirements. Our calculation of EBITDA may not be comparable to
similarly titled measures reported by other companies. A reconciliation of net
loss as determined in accordance with GAAP to EBITDA is shown below.
Six Months Ended
June 30,
(In millions) 2002 2001
-------- --------
Net loss $ (18.2) $ (45.6)
Interest expense 5.2 5.1
Investment income (1.1) (2.1)
Provision for income taxes -- --
Depreciation and amortization 5.7 8.4
------- -------
EBITDA (8.4) (34.2)
Restructuring charges -- 56.2
------- -------
EBITDA, as adjusted $ (8.4) $ 22.0
======= =======
We believe that our current available cash and investments, cash flows
from operations and our borrowing sources will be sufficient to meet anticipated
operating cash requirements and capital expenditures, for at least the next
twelve months. We also expect we will have sufficient resources to meet our
obligations on our senior notes due in July 2003.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of consolidated financial statements requires us to
make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, we evaluate our estimates, including
those related to allowance for bad debts, inventories, investments, long-lived
assets, income taxes, customer claims, product liability, restructuring
liabilities, environmental contingencies and litigation. We base our estimates
on historical experience and on various other assumptions that we believe are
reasonable under the circumstances. Actual results may differ from these
estimates under different assumptions or conditions. The critical accounting
policies we believe affect our more significant judgments and estimates used in
the preparation of our consolidated financial statements are included in Item 7.
"Management's Discussion and Analysis of Financial Condition And Results of
Operations" of the Company's Form 10-K for the year ended December 31, 2001.
25
RECENTLY ISSUED ACCOUNTING STANDARDS
In May 2002, the Financial Accounting Standards Board issued SFAS 145,
"Recission of SFAS Nos. 4, 44, and 64, Amendment of SFAS 13, and Technical
Corrections." For most companies, SFAS No. 145 will require gains and losses on
extinguishment of debt to be classified as income or loss from continuing
operations rather than as extraordinary items as previously required under SFAS
No. 4. Extraordinary treatment will be required for certain extinguishments as
provided in APB No. 30. The provisions of SFAS No. 145 related to the SFAS No. 4
revision are effective for financial statements issued for fiscal years
beginning after May 15, 2002, however, early adoption is encouraged. Once
adopted, any gain or loss on extinguishment of debt that was classified as an
extraordinary item in prior periods presented that does not meet the criteria in
APB No. 30 for classification as an extraordinary item should be reclassified.
We believe the adoption of the standard will not have a significant impact on
our consolidated financial position, results of operations or cash flows.
OTHER MATTERS
You should read Note 10 to the notes to condensed consolidated
financial statements for information pertaining to commitments and
contingencies.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our long-term investments and long-term debt, all of which are for
other than trading purposes, are subject to interest rate risk. We utilize
professional investment advisors and consider our net interest rate risk when
selecting the type and maturity of securities to purchase for our portfolio.
Other factors considered include, but are not limited to, the timing of the
expected need for the funds invested and the repricing and credit risks of the
securities.
Purchased steel, in the form of hot-rolled coils and steel scrap,
represents the largest portion of our cost of goods sold. The price and
availability of steel coils and scrap that we use in our manufacturing processes
are highly competitive and volatile. Various factors, most of which are beyond
our control, affect the supply and price of steel coils and scrap. Changes in
steel coil and scrap costs have and will have a significant impact on our
earnings.
As of June 30, 2002, we were not engaged in any activities which would
cause exposure to the risk of material earnings or cash flow loss due to changes
in interest rates, foreign currency exchange rates or market commodity prices.
26
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of shareholders was held on May 14, 2002. In
connection with the meeting, proxies were solicited pursuant to the Securities
Exchange Act of 1934. The shareholders elected Messers. Paul C. Borland, Jr., J.
C. Burton, and John F. Schwarz as Class I Directors, to serve until the May 2005
annual meeting. All Class II and III Directors continued in office after the
meeting. Messers. Borland, Jr., Burton and Schwarz were elected by a vote of
17,960,071 shares, 18,151,611 shares and 18,151,761 shares, respectively, and
255,331 shares, 63,791 shares and 63,641 shares, respectively, withheld
authority to vote. There were no other proposals considered or voted on at the
meeting.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits - Reference is made to the Index to Exhibits, which is
incorporated herein by reference.
b) Reports on Form 8-K
Current Report on Form 8-K dated April 1, 2002 reporting under Item 9
the Company's press release regarding financial results for the
quarter ended March 31, 2002.
Current Report on Form 8-K dated April 2, 2002 reporting under Item 9
the Company's press release regarding a new credit facility.
Current Report on Form 8-K dated April 15, 2002 reporting under Item 9
the Company's press release regarding the dates and times of NS
Group, Inc.'s conference call reporting the results for the quarter
ended March 31, 2002.
Current Report on Form 8-K dated April 18, 2002 reporting under Item 9
the Company's earnings press release for the quarter ended March
31, 2002.
Current Report on Form 8-K dated April 22, 2002 reporting under Item 9
the Company's press release regarding the ratification of labor
agreement at one of the Company's subsidiaries, Newport Steel
Corporation.
Current Report on Form 8-K dated May 16, 2002 reporting under Item 9
certain information to be presented to various individuals and
institutional investors beginning on May 16, 2002.
Current Report on Form 8-K dated May 14, 2002 reporting under Item 4
the Company's announcement of its change in independent auditors.
27
Current Report on Form 8-K dated June 13, 2002 reporting under Item 9
the Company's press release announcing the early redemption call
of $35 million of its senior secured notes.
Current Report on Form 8-K dated June 18, 2002 reporting under Item 9
the Company's press release announcing its estimate of earnings
for the quarter ended June 30, 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NS GROUP, INC.
Date: August 7, 2002 By: /s/ Rene J. Robichaud
------------------ -------------------------------------
Rene J. Robichaud
President and Chief Executive Officer
Date: August 7, 2002 By: /s/ Thomas J. Depenbrock
----------------- ------------------------------------
Thomas J. Depenbrock
Vice President, Treasurer and
Chief Financial Officer
28
INDEX TO EXHIBITS
NUMBER DESCRIPTION
3.1 Amended and Restated Articles of Incorporation of Registrant,
filed as Exhibit 3.1 to Amendment No. 1 to Registrant's Form S-1
dated January 17, 1995, File No. 33-56637, and incorporated
herein by this reference. Articles of Amendment to the Amended
and Restated Articles of Incorporation, dated November 4, 1998,
filed as Exhibit 3.1 to the Company's Form 10-Q for the quarter
ended September 30, 2001, File No. 1-9838, and incorporated
herein by reference
3.2 Amended and Restated By-Laws of Registrant, dated November 4,
1999, filed as Exhibit 3.2 to Company's Form 10-Q for the fiscal
quarter ended January 1, 2000, File No. 1-9838, and incorporated
herein by this reference
10.1 Change of Control Severance Agreement between the Company and
Robert L. Okrzesik, dated June 25, 2002 filed herewith*
10.2 Salary Continuation Agreement between the Company and Robert L.
Okrzesik, dated June 25, 2002 filed herewith*
10.3 Change of Control Severance Agreement between the Company and
Albert E. Ferrara, Jr., dated July 8, 2002 filed herewith*
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 Of the Sarbanes-Oxley Act of 2002 filed
herewith
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 Of the Sarbanes-Oxley Act of 2002 filed
herewith
* Indicates management contract or compensatory plan or arrangement in which one
or more directors or executive officers of the Company participates or is a
party.
29