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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 September 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 October 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 Condensed Consolidated Financial Statements............ 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................... 19
Item 3. Quantitative and Qualitative Disclosures About
Market Risk................................................... 29
Item 4. Controls and Procedures......................................... 30
PART II OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders............. 30
Item 6. Exhibits and Reports on Form 8-K................................ 30
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 Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
-------------- -------------- -------------- --------------
Net sales $57,297 $78,908 $150,996 $263,749
Cost of products sold 57,615 73,852 157,294 235,837
-------------- -------------- -------------- --------------
Gross profit (loss) (318) 5,056 (6,298) 27,912
Selling, general and administrative expenses 5,189 4,728 13,383 15,829
Restructuring charges - - - 55,585
-------------- -------------- -------------- --------------
Operating income (loss) (5,507) 328 (19,681) (43,502)
Other income (expense)
Investment income 69 1,062 1,190 3,186
Interest expense (1,565) (2,619) (6,819) (7,721)
Other, net 160 788 241 2,093
-------------- -------------- -------------- --------------
Loss before income taxes and
extraordinary charges (6,843) (441) (25,069) (45,944)
Provision (benefit) for income taxes - - - -
-------------- -------------- -------------- --------------
Loss before extraordinary charges (6,843) (441) (25,069) (45,944)
Extraordinary charges, net of income taxes (615) - (615) (59)
-------------- -------------- -------------- --------------
Net loss $(7,458) $ (441) $(25,684) $(46,003)
============== ============== ============== ==============
Per common share - basic and diluted
Net loss before extraordinary items $ (0.33) $ (0.02) $ (1.21) $ (2.19)
Extraordinary items, net of income taxes (0.03) - (0.03) -
-------------- -------------- -------------- --------------
Net loss $ (0.36) $ (0.02) $ (1.24) $ (2.19)
============== ============== ============== ==============
Weighted average shares outstanding
Basic and diluted 20,647 20,974 20,647 20,972
See accompanying notes to condensed consolidated financial statements.
3
NS GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands) (Unaudited)
September 30, December 31,
2002 2001
-------------- --------------
ASSETS
Current assets
Cash and cash equivalents $ 14,820 $ 72,383
Accounts receivable, net 24,324 23,161
Inventories 74,403 55,329
Deferred income taxes 3,015 3,015
Other current assets 12,356 12,638
-------------- --------------
Total current assets 128,918 166,526
Property, plant and equipment, net 53,503 60,196
Long-term investments 5,614 16,833
Other assets 5,792 5,482
Assets held for sale 10,714 11,447
-------------- --------------
Total assets $ 204,541 $ 260,484
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 17,719 $ 14,303
Accrued liabilities 20,361 19,205
Accrued restructuring liabilities 5,903 6,295
Current portion of long-term debt 33,455 33
-------------- --------------
Total current liabilities 77,438 39,836
Long-term debt 490 68,070
Deferred income taxes 3,203 3,203
Other long-term liabilities 6,012 5,713
-------------- --------------
Total liabilities 87,143 116,822
-------------- --------------
Shareholders' equity
Common stock, no par value 282,935 282,928
Treasury stock, at cost (35,572) (35,578)
Common stock options and warrants 729 635
Accumulated other comprehensive loss (1,529) (842)
Accumulated deficit (129,165) (103,481)
-------------- --------------
Total shareholders' equity 117,398 143,662
-------------- --------------
Total liabilities and shareholders' equity $ 204,541 $ 260,484
============== ==============
See accompanying notes to condensed consolidated financial statements.
4
NS GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands) (Unaudited)
Nine Months Ended
September 30,
2002 2001
-------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(25,684) $(46,003)
Adjustments to reconcile net loss
to net cash flows from operating activities:
Depreciation and amortization 8,430 11,019
Amortization of debt discount and finance costs 818 777
Extraordinary charges on debt extinguishment 615 59
Restructuring charges, including asset impairments - 42,820
Impairment losses on long-term investments 450 -
Realized (gains) losses on securities (78) 511
Changes in operating assets and liabilities:
Accounts receivable, net (1,163) 1,193
Inventories (19,074) (10,213)
Other current assets 282 449
Accounts payable 3,416 10,624
Accrued liabilities 1,156 858
Accrued restructuring liabilities (392) 6,868
Other, net 433 649
-------------- --------------
Net cash flows from operating activities (30,791) 19,611
-------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment (1,737) (1,327)
Net proceeds of assets held for sale 733 2,077
Net sales and maturities of long-term investments 10,157 3,752
Changes in other assets (150) 185
-------------- --------------
Net cash flows from investing activities 9,003 4,687
-------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Repayment of long-term debt (35,025) (953)
Payment of financing costs (761) -
Proceeds from issuance of common stock 11 335
Purchase of treasury stock - (2,729)
-------------- --------------
Net cash flows from financing activities (35,775) (3,347)
-------------- --------------
Net increase (decrease) in cash and cash equivalents (57,563) 20,951
Cash and cash equivalents at beginning of period 72,383 42,793
-------------- --------------
Cash and cash equivalents at end of period $ 14,820 $ 63,744
============== ==============
Cash paid for:
Interest $ 9,292 $ 9,359
Income taxes $ - $ (1,326)
See accompanying notes to condensed consolidated 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, Newport Steel Corporation
(Newport), Koppel Steel Corporation (Koppel), Erlanger Tubular Corporation
(Erlanger), and Northern Kentucky Management, Inc. (collectively referred to as
"the Company"). All significant intercompany balances and transactions have been
eliminated. Certain prior period amounts have been reclassified to conform to
the current period presentation. Such reclassifications do not affect previously
reported results of operations.
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 (SEC). 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.
LOSS PER SHARE
Basic loss per share is computed by dividing net loss by the
weighted-average number of common shares outstanding for the period. Diluted
loss 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
For all reported periods, securities that could potentially result in
dilution of basic loss per share through the issuance of 2.2 million shares of
the Company's common shares were not included in the computation of diluted
earnings per share because to do so would be 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 appraisal. Other non-cash charges included
the write-down of inventories of SBQ finished goods, spare parts and operating
supplies. The $0.6 million write-down of the SBQ inventory was included in costs
of products sold as required by accounting pronouncements.
Following is a summary of the accrued restructuring liabilities and
activity for the nine months ended September 30, 2002:
Facility
Employee closing
(In thousands) separation costs Total
------------- ------------- -------------
Balance, December 31, 2001 $ 155 $ 6,140 $ 6,295
Cash payments (2) (390) (392)
Accruals (reversals) - - -
------------- ------------- -------------
Balance, September 30, 2002 $ 153 $ 5,750 $ 5,903
============= ============= =============
Most of the remaining estimated facility closing costs, consisting of
operating contract cancellation and environmental remediation costs, are
expected to be paid in 2003. The timing of any payment depends on environmental
regulatory approvals and the 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 condensed consolidated balance sheet. An independent
broker is actively marketing the assets. The net proceeds from sales of these
assets amounted to $0.7 million for the nine months ended September 30, 2002.
7
NOTE 3: OTHER, 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.
NOTE 4: EXTRAORDINARY CHARGES
On June 13, 2002, the Company issued an early redemption call for $35.0
million of its 13.5% senior secured notes. The redemption on July 15, 2002 was
at par plus accrued interest and was funded from existing cash balances. The
Company recorded a charge of $0.6 million, or $0.03 per diluted share, in the
third quarter of 2002, for the write-off of associated original discount and
issue costs.
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
a charge of $0.1 million for the premium incurred and write-off of associated
original discount and issue costs.
NOTE 5: COMPREHENSIVE LOSS
The Company's other comprehensive loss consists of unrealized gains and
losses on available-for-sale securities. Comprehensive loss for the periods was
as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
(In thousands) 2002 2001 2002 2001
------------- ------------- ------------ -------------
Net loss $ (7,458) $ (441) $(25,684) $ (46,003)
Net unrealized gains (losses) (380) (773) (687) 118
------------- ------------- ------------ -------------
Comprehensive loss $ (7,838) $ (1,214) $(26,371) $ (45,885)
============= ============= ============ =============
NOTE 6: BUSINESS SEGMENT INFORMATION
Prior to July 1, 2001, 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 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.
8
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. Two Energy
Products customers accounted for 17% and 12%, respectively, of the segment's
sales for the nine months ended September 30, 2002 and these two customers each
accounted for 17% of the segment's sales in the nine months ended September 30,
2001.
The following table contains selected segment financial information for the
three months and nine months ended September 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 September 30, 2002
Net sales $ 57,297 $ - $ - $ 57,297
Operating loss (3,064) - (2,443) (5,507)
Assets 170,674 1,186 32,681 204,541
Depreciation and amortization 2,765 - - 2,765
Capital expenditures 740 - - 740
Three Months Ended September 30, 2001
Net sales $ 78,908 $ - $ - $ 78,908
Operating income (loss) 2,390 - (2,062) 328
Assets 200,462 1,186 87,641 289,289
Depreciation and amortization 2,825 - - 2,825
Capital expenditures 616 - - 616
Nine Months Ended September 30, 2002
Net sales $ 150,996 $ - $ - $ 150,996
Operating loss (13,753) - (5,928) (19,681)
Depreciation and amortization 8,430 - - 8,430
Capital expenditures 1,737 - - 1,737
Nine Months Ended September 30, 2001
Net sales $ 253,900 $ 9,849 $ - $ 263,749
Operating income (loss)
before restructuring items $ 22,515 $ (3,714) $ (6,079) $ 12,722
Inventory mark-down - (639) - (639)
Restructuring charges (44,499) (9,486) (1,600) (55,585)
--------------- ------------- -------------- ---------------
Operating loss $ (21,984) $(13,839) $ (7,679) $ (43,502)
--------------- ------------- -------------- ---------------
Depreciation and amortization $ 10,078 $ 941 $ - $ 11,019
Capital expenditures 1,327 - - 1,327
9
NOTE 7: INVENTORIES
Inventories consist of the following:
September 30, December 31,
(In thousands) 2002 2001
------------- -------------
Raw materials $19,450 $ 9,358
Semi-finished and finished products 54,953 45,971
------------- -------------
$74,403 $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; however,
at September 30, 2002, $5.3 million of letters of credit were issued against the
credit line. The facility is secured by a first priority lien on all
inventories, accounts receivable and related intangibles of the Company. As of
September 30, 2002, the Company had approximately $20.0 million in borrowing
availability under the agreement, based on eligible receivable and inventory
balances and net of outstanding letters of credit on such date.
NOTE 9: SHELF REGISTRATION
In July 2002, the Company filed a universal shelf registration statement
with the SEC 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 was declared effective by the SEC in
September 2002. 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 October 2002, the United States Environmental Protection Agency (EPA)
issued a Notice of Violation (NOV) to Newport for certain alleged violations
dating from 1998 to April 2000 of its Clean Air Act emission permit for
Newport's electric arc furnace that was installed in 1999 and shuttered in early
2001. The NOV alleges that the permit issued to Newport in June 1998 was based
upon an incorrect analysis as to potential emissions, and thus represented a
violation of the Clean Air Act. In November 2002, the United States Department
of Justice notified Newport that it is preparing to file a civil action in the
United States District Court for the Eastern District of Kentucky for the
alleged Clean Air Act violations set forth in the October 2002 NOV and for
certain alleged violations of the Clean Water Act and RCRA at Newport. The EPA
has invited Newport to propose a good faith settlement offer for resolving the
claims. Newport believes that it has defenses against these allegations and
intends to pursue resolution with the EPA. The Company believes resolution of
these claims will not have a material adverse effect on its consolidated
financial position, results of operations or cash flows. However, there can be
no assurance that the Company will reach a settlement with the EPA and the
Department of Justice.
11
In late 2001, the 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.
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 less than $0.1 million in
the fourth quarter of 2002 with estimated expenditures of $0.3 million for 2003.
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 $4.2
million and $4.3 million, respectively, at September 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.
12
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.
13
NS Group, Inc.
Unaudited Condensed Consolidating Statement of Operations
Three Months Ended September 30, 2002
- -----------------------------------------
Guarantor
(In thousands) Parent Subsidiaries Eliminations Consolidated
--------------- -------------- -------------- ----------------
Net sales $ - $ 57,297 $ - $ 57,297
Costs of products sold - 57,615 - 57,615
--------------- -------------- -------------- ----------------
Gross profit - (318) - (318)
Selling, general and administrative expenses - 5,189 - 5,189
--------------- -------------- -------------- ----------------
Operating loss - (5,507) - (5,507)
Other income (expense)
Equity in earnings of subsidiaries (5,560) - 5,560 -
Investment income 47 22 - 69
Interest expense (1,563) (2) - (1,565)
Other income, net 114 46 - 160
Intercompany interest, net 3,113 (3,113) - -
--------------- -------------- -------------- ----------------
Loss before income taxes and
extraordinary items (3,849) (8,554) 5,560 (6,843)
Provision (benefit) for income taxes 2,994 (2,994) - -
--------------- -------------- -------------- ----------------
Loss before extraordinary items (6,843) (5,560) 5,560 (6,843)
Extraordinary charges, net of income taxes (615) - - (615)
--------------- -------------- -------------- ----------------
Net loss $ (7,458) $ (5,560) $ 5,560 $ (7,458)
=============== ============== ============== ================
Three Months Ended September 30, 2001
- -----------------------------------------
Guarantor
(In thousands) Parent Subsidiaries Eliminations Consolidated
--------------- ------------------------------- ----------------
Net sales $ - $ 78,908 $ - $78,908
Cost of products sold - 73,852 - 73,852
--------------- -------------- -------------- ----------------
Gross profit - 5,056 - 5,056
Selling, general and administrative expenses - 4,728 - 4,728
--------------- -------------- -------------- ----------------
Operating income - 328 - 328
Other income (expense)
Equity in earnings of subsidiaries (2,519) - 2,519 -
Investment income 1,029 33 - 1,062
Interest expense (2,616) (3) - (2,619)
Other income, net 460 328 - 788
Intercompany interest, net 4,547 (4,547) - -
--------------- -------------- -------------- ----------------
Income (loss) before income taxes 901 (3,861) 2,519 (441)
Provision (benefit) for income taxes 1,342 (1,342) - -
--------------- -------------- -------------- ----------------
Net loss $ (441) $ (2,519) $ 2,519 $ (441)
=============== ============== ============== ================
14
NS Group, Inc.
Unaudited Condensed Consolidating Statement of Operations
Nine Months Ended September 30, 2002
- ---------------------------------------------------
Guarantor
(In thousands) Parent Subsidiaries Eliminations Consolidated
--------------- -------------- -------------- ----------------
Net sales $ - $ 150,996 $ - $ 150,996
Costs of products sold - 157,294 - 157,294
--------------- -------------- -------------- ----------------
Gross loss - (6,298) - (6,298)
Selling, general and administrative expenses - 13,383 - 13,383
--------------- -------------- -------------- ----------------
Operating loss - (19,681) - (19,681)
Other income (expense)
Equity in earnings of subsidiaries (19,901) - 19,901 -
Investment income 1,090 100 - 1,190
Interest expense (6,811) (8) - (6,819)
Other income, net 150 91 - 241
Intercompany interest, net 11,119 (11,119) - -
--------------- -------------- -------------- ----------------
Loss before income taxes and (14,353) (30,617) 19,901 (25,069)
extraordinary items
Provision (benefit) for income taxes 10,716 (10,716) - -
--------------- -------------- -------------- ----------------
Loss before extraordinary items (25,069) (19,901) 19,901 (25,069)
Extraordinary charges, net of income taxes (615) - - (615)
--------------- -------------- -------------- ----------------
Net loss $ (25,684) $ (19,901) $ 19,901 $ (25,684)
=============== ============== ============== ================
Nine Months Ended September 30, 2001
- ---------------------------------------------------
Guarantor
(In thousands) Parent Subsidiaries Eliminations Consolidated
--------------- ------------------------------- ----------------
Net sales $ - $ 263,749 $ - $ 263,749
Cost of products sold - 235,837 - 235,837
--------------- -------------- -------------- ----------------
Gross profit - 27,912 - 27,912
Selling, general and administrative expenses - 15,829 - 15,829
Restructuring charges 1,600 53,985 - 55,585
--------------- -------------- -------------- ----------------
Operating loss (1,600) (41,902) - (43,502)
Other income (expense)
Equity in earnings of subsidiaries (35,540) - 35,540 -
Investment income 3,088 98 - 3,186
Interest expense (7,712) (9) - (7,721)
Other income, net 627 1,466 - 2,093
Intercompany interest, net 14,316 (14,316) - -
--------------- -------------- -------------- ----------------
Loss before income taxes
and extraordinary charges (26,821) (54,663) 35,540 (45,944)
Provision (benefit) for income taxes 19,123 (19,123) - -
--------------- -------------- -------------- ----------------
Loss before extraordinary charges (45,944) (35,540) 35,540 (45,944)
Extraordinary charges, net of income taxes (59) - - (59)
--------------- -------------- -------------- ----------------
Net loss $ (46,003) $ (35,540) $ 35,540 $ (46,003)
=============== ============== ============== ================
15
NS Group, Inc.
Unaudited Condensed Consolidating Balance Sheet
September 30, 2002
Guarantor
(In thousands) Parent Subsidiaries Eliminations Consolidated
--------------- -------------- -------------- ----------------
ASSETS
Cash and cash equivalents $ 14,834 $ (14) $ - $ 14,820
Accounts receivable, net 344 23,980 - 24,324
Inventories - 74,403 - 74,403
Other current assets 5,381 9,990 - 15,371
--------------- -------------- -------------- ----------------
Total current assets 20,559 108,359 - 128,918
Property, plant and equipment - 196,761 - 196,761
Accumulated depreciation - (143,258) (143,258)
Long-term investments 5,574 40 - 5,614
Investment in subsidiaries (80,272) - 80,272 -
Intercompany, net 216,108 - (216,108) -
Other assets 3,126 2,666 - 5,792
Assets held for sale - 10,714 - 10,714
--------------- -------------- -------------- ----------------
Total assets $165,095 $175,282 $ (135,836) $ 204,541
=============== ============== ============== ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable $ - $ 17,719 $ - $ 17,719
Accrued liabilities 5,061 15,300 - 20,361
Accrued restructuring liabilities - 5,903 - 5,903
Current portion of long-term debt 33,421 34 - 33,455
--------------- -------------- -------------- ----------------
Total current liabilities 38,482 38,956 - 77,438
Long-term debt - 490 - 490
Intercompany, net - 216,108 (216,108) -
Deferred income taxes 3,203 - - 3,203
Other long-term liabilities 6,012 - - 6,012
Shareholders' equity 117,398 (80,272) 80,272 117,398
--------------- -------------- -------------- ----------------
Total liabilities and
shareholders' equity $165,095 $175,282 $ (135,836) $ 204,541
=============== ============== ============== ================
16
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, net 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 income 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
=============== =============== =============== ================
17
NS Group, Inc.
Unaudited Condensed Consolidating Statement of Cash Flows
Nine Months Ended September 30, 2002
- ---------------------------------------------
Guarantor
(In thousands) Parent Subsidiaries Eliminations Consolidated
------------- ------------- -------------- ---------------
Net cash flows from operating activities $(31,629) $ 838 $ - $ (30,791)
------------- ------------- -------------- ---------------
Purchase of property, plant and equipment - (1,737) - (1,737)
Net proceeds of assets held for sale - 733 - 733
Net sales and maturities of long-term investments 10,157 - - 10,157
Changes in other assets (150) - - (150)
------------- ------------- -------------- ---------------
Net cash flows from investing activities 10,007 (1,004) - 9,003
------------- ------------- -------------- ---------------
Repayment of long-term debt (35,000) (25) - (35,025)
Payment of financing costs (761) - - (761)
Proceeds from issuance of common stock 11 - - 11
------------- ------------- -------------- ---------------
Net cash from from financing activities (35,750) (25) - (35,775)
------------- ------------- -------------- ---------------
Net decrease in cash and cash equivalents (57,372) (191) - (57,563)
Cash and cash equivalents - -
Beginning of period 72,206 177 - 72,383
------------- ------------- -------------- ---------------
End of period $ 14,834 $ (14) $ - $ 14,820
============= ============= ============== ===============
Cash paid during the period for:
Interest $ 9,284 $ 8 $ 9,292
Income taxes $ - $ - $ -
Nine Months Ended September 30, 2001
- ---------------------------------------------
Guarantor
(In thousands) Parent Subsidiaries Eliminations Consolidated
------------- ------------- -------------- ---------------
Net cash flows from operating activities $ 20,597 $ (986) $ - $ 19,611
------------- ------------- -------------- ---------------
Purchases of property, plant and equipment - (1,327) - (1,327)
Net proceeds of assets held for sale - 2,077 - 2,077
Net sales and maturities of long-term investments 3,752 - - 3,752
Changes in other assets (290) 475 - 185
------------- ------------- -------------- ---------------
Net cash flows from investing activities 3,462 1,225 - 4,687
------------- ------------- -------------- ---------------
Repayments of long-term debt (890) (63) - (953)
Proceeds from issuance of common stock 335 - - 335
Purchase of treasury stock (2,729) - - (2,729)
------------- ------------- -------------- ---------------
Net cash flows from financing activities (3,284) (63) - (3,347)
------------- ------------- -------------- ---------------
Net increase in cash and cash equivalents 20,775 176 - 20,951
Cash and cash equivalents -
Beginning of period 42,543 250 - 42,793
------------- ------------- -------------- ---------------
End of period $ 63,318 $ 426 $ - $ 63,744
============= ============= ============== ===============
Cash paid (received) during the period for:
Interest $ 9,350 $ 9 $ 9,359
Income taxes $ (1,326) $ - $ (1,326)
18
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 that 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 tubular 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 in various sections of the
Company's recent filings with the Securities and Exchange Commission
(SEC) under the Securities Act of 1933 and the Securities Act of 1934,
including those set forth under the heading "Risk Factors" in the
Company's Registration Statement on Form S-3 (File no. 333-91530).
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.
19
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.
20
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,
reaching 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 a
high of 1,273 in July 2001 to a low of 738 in April 2002. The average rig count
for the three and nine months ended September 30, 2002 was 853 and 830,
respectively, decreases of 31% from the comparable periods of 2001.
According to published industry reports, imports of OCTG products in the
first nine months of 2001 accounted for an estimated 29% of the total domestic
market and are expected to be approximately 23% in the first nine months of
2002. The effects of the continued high level of imports, together with the
decline in drilling activity, which resulted in excessive industry-wide tubular
inventories, have negatively affected our OCTG business. Primarily as a result
of the decrease in the rig count, our shipments for the three and nine months
ended September 30, 2002 declined 23% and 35%, respectively, from the comparable
periods in 2001. We expect lower shipment levels and higher purchased steel
costs to negatively impact our fourth quarter 2002 results as compared to third
quarter 2002 results.
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 producers,
filed suit with the ITC against 13 countries, seeking relief from unfair trade.
On May 10, 2002, the ITC voted against our suit 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.
21
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. Argentina
has appealed the ITC's ruling and a decision is pending.
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.
22
The Company's net sales, gross profit (loss), operating income (loss) and
tons shipped by business segment for the three and nine months ended September
30, 2002 and 2001 are summarized in the following table:
Three Months Ended Nine Months Ended
September 30, September 30,
(Dollars in thousands) 2002 2001 2002 2001
--------------- --------------- --------------- ---------------
Net sales
Energy Products $ 57,297 $ 78,908 $ 150,996 $ 253,900
Industrial Products - SBQ - - - 9,849
--------------- --------------- --------------- ---------------
$ 57,297 $ 78,908 $ 150,996 $ 263,749
=============== =============== =============== ===============
Gross profit (loss)
Energy Products $ (318) $ 5,056 $ (6,298) $ 31,176
Industrial Products - SBQ - - - (3,264)(1)
--------------- --------------- --------------- ---------------
$ (318) $ 5,056 $ (6,298) $ 27,912
=============== =============== =============== ===============
Operating income (loss)
Energy Products $ (3,064) $ 2,390 $ (13,753) $ 22,515
Industrial Products - SBQ - - - (3,714)
--------------- --------------- --------------- ---------------
(3,064) 2,390 (13,753) 18,801
Restructuring charges - - - (56,224)(1)
Corporate allocations (2,443) (2,062) (5,928) (6,079)
--------------- --------------- --------------- ---------------
$ (5,507) $ 328 $ (19,681) $ (43,502)
=============== =============== =============== ===============
Tons shipped
Energy Products
Welded products 54,000 72,300 158,300 242,400
Seamless products 41,200 51,100 98,700 153,100
Other - - - 500
--------------- --------------- --------------- ---------------
95,200 123,400 257,000 396,000
Industrial Products - SBQ - - - 23,900
--------------- --------------- --------------- ---------------
95,200 123,400 257,000 419,900
=============== =============== =============== ===============
(1) Includes restructuring charge of $0.6 million recorded to cost of
products sold.
Net sales in the quarter ended September 30, 2002 were $57.3 million, down $21.6
million, or a 27.4% decrease from the $78.9 million recorded in the third
quarter of 2001. For the quarter ended September 30, 2002, operating losses were
$5.5 million compared to operating income of $0.3 million in the comparable
quarter in 2001. We reported a net loss of $7.5 million, or a $0.36 loss per
diluted share, in the three months ended September 30, 2002 compared to a net
loss of $0.4 million, or $0.02 per diluted share, in the third quarter of 2001.
The Company recognized an extraordinary charge of $0.6 million, or $0.03 per
diluted share, in the third quarter of 2002, for the write-off of associated
original discount and issue costs in connection with the early repayment of
debt.
23
Net sales in the nine months ended September 30, 2002 were $151.0 million,
down $112.7 million, or a 42.7% decrease from the $263.7 million recorded in the
first nine months of 2001. Results for the nine months ended September 30, 2001
included $9.8 million of SBQ sales. For the nine months ended September 30,
2002, operating losses were $19.7 million compared to $43.5 million of operating
losses in the comparable period in 2001. For the nine months ended September 30,
2002, we reported a net loss of $25.7 million, or a $1.24 loss per diluted
share. This compares to net loss of $46.0 million, or a $2.19 loss per diluted
share, in the first nine months of 2001. Excluding restructuring charges of
$56.2 million included in the first nine months of 2001, operating income would
have been $12.7 million, and net income and income per diluted share would have
been $10.2 million, or $0.49 per diluted share, respectively.
ENERGY PRODUCTS
Energy Products segment sales for the three and nine-month periods ended
September 30, 2002 were $57.3 million and $151.0 million, respectively,
decreases of 27.4% and 40.5% from the comparable periods ended September 30,
2001. The decrease in Energy Product segment sales was attributable to the
significant decreases in shipments and lower average revenue per ton.
Total shipments of energy products for the third quarter of 2002 were
95,200 tons, a 22.9% decrease from the 123,400 tons shipped in the comparable
prior year period. Shipments for the first nine months of 2002 were 257,000
tons, down 35.1% from the 396,000 tons shipped in the comparable period in 2001.
The decline in shipments was experienced in both our welded and seamless energy
products and was caused a lower consumption of OCTG products and a focus by
distributors on reducing their inventories in light of declining drilling
activity.
For the quarter ended September 30, 2002, the average revenue per ton for
our welded and seamless tubular products was $454 and $795 per ton,
respectively, compared to $486 and $872 per ton in the third quarter of 2001.
The 6.6% decrease for welded products and the 8.8% decrease for seamless
products resulted from the decline in the demand for OCTG products as well as a
change in product mix toward lower value-added products.
The Energy Products segment recorded a gross loss of $0.3 million and an
operating loss of $3.1 million in the quarter ended September 30, 2002. These
results compare to a gross profit of $5.1 million and operating income of $2.4
million in the quarter ended September 30, 2001. The decline in profitability
from the prior year period was primarily the result of the significant decline
in shipments, lower pricing for our products and an increase in purchased steel
costs. Also, as a result of the lower operating levels in the first nine months
of 2002, our margins were negatively impacted due to lower fixed cost
absorption.
24
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses for the quarter ended
September 30, 2002 were $0.5 million higher than the comparable quarter in 2001,
but $2.4 million lower for the comparable nine-month periods in 2002 and 2001.
Expenses for the third quarter 2002 included certain reorganization costs and
professional fees in connection with reviews for improvements in business
processes. The restructuring initiatives started in 2001 and general cost
constraints were the primary reasons for the reduction in expenses comparing
year-to-date amounts for 2002 and 2001.
EMPLOYEES
Substantially all of our hourly employees are represented by the United
Steelworkers of America. The collective bargaining agreement covering employees
at our Koppel facilities expired at the end of August 2002. Management and the
negotiating committee for the hourly employees covered by the collective
bargaining agreement at Koppel have reached a tentative contract agreement and
the negotiating committee will present the contract to the employees for
ratification on November 15, 2002. If the contract is not ratified and the
negotiations are discontinued, we could experience a work stoppage.
In April 2002, the hourly employees of our welded tubular facility, Newport
Steel Corporation, approved a new three-year labor agreement.
INTEREST EXPENSE
Interest expense for the quarter ended September 30, 2002 decreased $1.1
million from the comparable quarter in 2001 as the result of the repayment of
$35.0 million of our senior notes in July 2002.
INVESTMENT INCOME
Investment income was $0.1 million and $1.2 million for the three and nine
months ended September 30, 2002, respectively, compared with $1.1 million and
$3.2 million for the comparable periods in 2001. The decreases in investment
income during 2002 are the result of lower invested balances at lower interest
rates. The year-to-date amounts for 2002 and 2001 include $0.4 million and $0.5
million, respectively, of recognized losses on long-term investments.
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.
25
LIQUIDITY AND CAPITAL RESOURCES
Working capital at September 30, 2002 was $51.5 million compared to $126.7
million at December 31, 2001. The working capital decrease was primarily due to
our use of cash to repay $35.0 million of our long-term debt and to fund
operating losses for the period. Our working capital was also reduced by the
$33.4 million current maturities of our senior notes due in July 2003. The
current ratio was 1.7 to 1 at September 30, 2002 compared to 4.2 to 1 at
December 31, 2001. At September 30, 2002, we had cash and long-term investments
totaling $20.4 million and had no advances against our revolving credit
facility.
The major component of cash from operating activities for the nine months
ended September 30, 2002 was $8.5 million in depreciation and amortization
charges. Major uses of cash from operating activities were for a $19.1 million
increase in inventories, partially offset by increases of $3.4 million and $1.5
million in accounts payable and accrued liabilities, respectively. We added to
our inventory levels in the first half of 2002 to avoid expected higher coil
costs and to meet anticipated increased customer demand in the second half of
2002. Accrued liabilities increased principally as the result of an increase in
deferred revenue, partially offset by a lower balance of accrued interest
because of a reduced balance of debt and differing interest accrual periods.
Cash flows from investing activities were $9.0 million for the nine months
ended September 30, 2002. Sales and maturities of long-term investments resulted
in proceeds of $10.2 million during the period. We made capital investments of
$1.7 million in the first nine months of 2002 and we currently estimate capital
spending for 2002 to be approximately $2.2 million, primarily for maintenance
capital in our Energy Products segment and 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 that 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 related intangibles of the Company. As of September 30, 2002, the
Company had approximately $20.0 million in borrowing availability under the
agreement, based on eligible receivable and inventory balances and net of
outstanding letters of credit on such date.
On June 13, 2002, we made an early redemption call for $35.0 million in
principal amount, of our 13.5 % senior secured notes. The redemption was at par
plus accrued interest and was completed on July 15, 2002 using existing cash
balances.
26
Additionally, in July 2002 we filed a universal shelf registration
statement for the issuance and 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 was declared effective by the SEC in September
2002. 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 future
opportunities in the market.
We believe that our existing cash and cash equivalents, long-term
investments, borrowing capacity and cash generated from operations will be
sufficient to satisfy anticipated cash requirements 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.
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 have not purchased any of our common shares under
this authorization.
We calculate EBITDA as earnings before extraordinary items, interest
expense, investment income, income taxes, depreciation and amortization. For the
nine months ended September 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.
Nine Months Ended
September 30,
(In millions) 2002 2001
---------- ----------
Net loss before extraordinary items $ (25.1) $ (45.9)
Interest expense 6.8 7.7
Investment income (1.2) (3.2)
Provision for income taxes - -
Depreciation and amortization 8.4 11.0
---------- ----------
EBITDA (11.1) (30.4)
Restructuring charges - 56.2
---------- ----------
EBITDA, as adjusted $ (11.1) $ 25.8
========== ==========
27
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.
RECENTLY ISSUED ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board (FASB) issued
Financial Accounting Standard (SFAS) No. 143 "Accounting for Asset Retirement
Obligations". SFAS 143 addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. It applies to all legal obligations
associated with the retirement of long-lived assets that result from the
acquisition, construction, development and/or the normal operation of a
long-lived asset. This statement is effective for financial statements issued
for fiscal years beginning after June 15, 2002. We will adopt the statement as
of January 1, 2003, and we believe that the implementation of the statement will
not have a material impact on our results of operations and financial position.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets. We
adopted SFAS 144 on January 1, 2002. The adoption of SFAS 144 did not have a
material impact on our results of operations, cash flows or financial position.
In May 2002, the FASB issued SFAS No. 145, "Rescission of SFAS No. 4, 44,
and 64, Amendment of SFAS No.13, and Technical Corrections". SFAS 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 4. The provisions of SFAS 145 related to the SFAS 4 revision
are effective for financial statements issued for fiscal years beginning after
May 15, 2002. Once adopted, any gain or loss on extinguishment of debt that was
classified as an extraordinary item in prior periods presented will be
reclassified. We will adopt SFAS 145 beginning January 1, 2003 and will
reclassify previously reported gains or losses on extinguishments of debt as
income or loss from operations. We believe the adoption of the standard will not
have a material impact on our results of operations, cash flows or financial
position.
28
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which addresses financial
accounting and reporting for costs associated with exit or disposal activities
and supersedes Emerging Issues Task Force (EITF) Issue 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." SFAS 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. Under EITF 94-3, a
liability for an exit cost as defined in EITF 94-3 was recognized at the date of
an entity's commitment to an exit plan. SFAS 146 also establishes that the
liability should initially be measured and recorded at fair value. We will adopt
the provisions of SFAS 146 for exit or disposal activities that are initiated
after December 31, 2002.
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
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.
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.
As of September 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.
29
ITEM 4. CONTROLS AND PROCEDURES
Within the 90 days prior to the date of this report, we carried out an
evaluation, under the supervision and with the participation of the Company's
management, including our President and Chief Executive Officer, along with our
Chief Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based
upon that evaluation, our President and Chief Executive Officer along with our
Chief Financial Officer concluded that our disclosure controls and procedures
are effective in timely alerting them to material information relating to the
Company (including its consolidated subsidiaries) required to be included in our
periodic SEC filings.
There have been no significant changes in our internal controls or in other
factors that could significantly affect internal controls subsequent to the date
we carried out this evaluation.
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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 July 10, 2002 reporting under Item 9
the Company's press release regarding continuing labor negotiations at
its Pennsylvania facilities.
Current Report on Form 8-K dated July 16, 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
June 30, 2002.
Current Report on Form 8-K dated July 19, 2002 reporting under Item 9
the Company's earnings press release for the quarter ended June 30,
2002.
Current Report on Form 8-K dated September 19, 2002 reporting under
Item 9 the Company's press release announcing its estimate of earnings
for the quarter ended September 30, 2002.
Current Report on Form 8-K dated September 23, 2002 reporting under
Item 9 the Company's press release regarding corporate officer
changes.
30
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: November 7, 2002 By: /s/ Rene J. Robichaud
-------------------- ------------------------------------
Rene J. Robichaud
President and Chief Executive Officer
Date: November 7, 2002 By: /s/ Thomas J. Depenbrock
------------------- -------------------------------
Thomas J. Depenbrock
Vice President, Treasurer and Chief
Financial Officer
31
CERTIFICATIONS
I, Rene J. Robichaud, certify that:
1. I have reviewed this quarterly report on Form 10-Q of NS Group, Inc.;
2. Based on my knowledge, this quarterly 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
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures 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 quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 7, 2002 By: /s/ Rene J. Robichaud
-------------------- ------------------------------
Rene J. Robichaud
President and Chief Executive
Officer
32
CERTIFICATIONS
I, Thomas J. Depenbrock, certify that:
1. I have reviewed this quarterly report on Form 10-Q of NS Group, Inc.;
2. Based on my knowledge, this quarterly 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
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures 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 quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 7, 2002 By: /s/ Thomas J. Depenbrock
-------------------- ------------------------------
Thomas J. Depenbrock
Vice President, Chief Financial
Officer
33
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
this 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 Separation and Release Agreement between the Company and William
W. Beible, Jr, dated September 20, 2002, filed herewith*
12.1 Computation of Ratio of Earnings to Fixed Charges, 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.
34