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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE YEAR ENDED DECEMBER 31, 2002 COMMISSION FILE NUMBER 1-9838
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NS GROUP, INC.
(Exact name of registrant as specified in its charter)
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KENTUCKY 61-0985936
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(State of Incorporation) (I.R.S. Employer Identification Number)
530 WEST NINTH STREET, NEWPORT, KENTUCKY 41071
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(Address of principal executive offices)
Registrant's telephone number, including area code (859) 292-6809
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each class Name of each exchange on which registered
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COMMON STOCK, NO PAR VALUE NEW YORK STOCK EXCHANGE
PREFERRED STOCK PURCHASE RIGHTS NEW YORK STOCK EXCHANGE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE
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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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [x ]
Based on the closing sales price of February 28, 2003, as reported in The
Wall Street Journal, the aggregate market value of the voting stock held by
non-affiliates of the registrant was approximately $148.8 million.
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2. YES X NO
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The number of shares outstanding of the registrant's Common Stock, no par
value, was 20,668,641, at February 28, 2003.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates certain information by reference from the Company's
Proxy Statement dated March 14, 2003 for the Annual Meeting of Shareholders on
May 14, 2003 ("Proxy").
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Table of Contents
PART I
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Page
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Item 1. Business......................................................................... 3
Item 2. Properties ...................................................................... 9
Item 3. Legal Proceedings ............................................................... 10
Item 4. Submission of Matters to a Vote of Security Holders.............................. 10
PART II
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Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters...................................................... 11
Item 6. Selected Consolidated Financial Data............................................. 12
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations ............................................... 13
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk..................................................................... 25
Item 8. Financial Statements and Supplementary Data...................................... 26
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure...................................... 58
PART III
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Item 10. Directors and Executive Officers of the Registrant................................ 58
Item 11. Executive Compensation............................................................ 58
Item 12. Security Ownership of Certain Beneficial Owners
and Management........................................................... 58
Item 13. Certain Relationships and Related Transactions.................................... 58
Item 14. Controls and Procedures........................................................... 58
PART IV
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Item 15. Exhibits, Financial Statement Schedules and Reports on
Form 8-K................................................................. 59
2
The matters discussed or incorporated by reference in this Report on Form
10-K that are forward-looking statements (as defined in the Private Securities
Litigation Reform Act of 1995) involve risks and uncertainties. These risks and
uncertainties may cause the actual results or performance of NS Group, Inc. to
differ materially from any future results or performance expressed or implied by
such forward-looking statements. See the introductory paragraph of Management's
Discussion and Analysis of Financial Condition and Results of Operations
included in Item 7 of this report and Exhibit 99.1 to this Form 10-K for a
discussion of risks and uncertainties.
PART I
ITEM1. BUSINESS
NS Group, Inc. was incorporated in Kentucky in 1980. As used herein, the
terms "Company", "NS Group," "we," "us" and "our" refer to NSGroup, Inc. and its
wholly-owned subsidiaries - Newport Steel Corporation (Newport or Welded),
Koppel Steel Corporation (Koppel or Seamless), Erlanger Tubular Corporation
(Erlanger), and Northern Kentucky Management, Inc.
CHANGE IN FISCAL YEAR
Our fiscal years prior to October 1, 2000 ended on the last Saturday of
September. Thereafter, we changed our fiscal year-end to a calendar year ending
on December 31. As a result of the fiscal year-end change, the period from
October 1, 2000 through December 31, 2000, which we refer to as the "Transition
Period", preceded the start of the 2001 calendar year. The period for the fiscal
year from September 26, 1999 through September 30, 2000 is referred to in this
Form 10-K as "2000" and contains fifty-three weeks.
RESTRUCTURING
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 discontinued the production of hot-rolled coils by
closing the melt shop and hot strip mill operations at our welded tubular
facilities in Wilder, Kentucky effective March 31, 2001. In addition, we decided
to cease the manufacturing of special bar quality products by June 30, 2001,
which was operated from our Koppel, Pennsylvania facility. See Note 2 to the
Consolidated Financial Statements.
CHANGES IN SEGMENT REPORTING
Since September 30, 2000, we have conducted and reported our business in
two industry segments: the Energy Products Segment and the Industrial Products
Segment. Our special bar quality (which we refer to as "SBQ") business, which
constituted our Industrial Products Segment, ceased operations in June 2001. As
of September 30, 2000, we had discontinued segment reporting for our Industrial
Products - Adhesives business, consisting of our subsidiary, Imperial Adhesives,
Inc. (Imperial), which we sold in October 2000. See Note 3 to the Consolidated
Financial Statements for additional information. See the segment data included
in Management's Discussion and Analysis of Financial Condition and Results of
Operations and Note 4 to the Consolidated Financial Statements, which contain
additional information pertaining to industry segment data.
3
ENERGY PRODUCTS SEGMENT
GENERAL
Our Energy Products Segment includes welded and seamless tubular goods,
primarily used in oil and natural gas drilling and production operations,
referred to as oil country tubular goods, or OCTG. We also produce welded and
seamless line pipe products used in the transmission of oil and natural gas, as
well as a limited amount of other tubular products.
OCTG products are produced in numerous diameter sizes, gauges, grades and
end finishes. We manufacture most of our OCTG products to American Petroleum
Institute ("API") specifications. The grade of pipe used in a particular
application depends on technical requirements for strength, corrosion resistance
and other performance qualities. OCTG products are generally classified into
groupings of carbon and alloy grades. Carbon grades of OCTG products have lower
yield strength than alloy grades and, therefore, are generally used in shallower
oil and natural gas wells than alloy grades. The majority of our welded tubular
products are carbon grade and the majority of our seamless products are alloy
grade. In 2002, approximately 51% of our Energy Products Segment net sales were
alloy grade compared to 55% in 2001.
Carbon and alloy grades of OCTG products are manufactured by both welded
and seamless producers. Welded products are produced by processing flat rolled
steel into strips that are cold-formed, welded, seam-annealed, heat-treated, and
end-finished with threads and couplings. Seamless products are produced by
individually heating and piercing solid steel billets into pipe and then end
finishing the pipe in a manner similar to welded pipe. The seamless
manufacturing process involves higher costs than the welded process and, as a
result, seamless products are generally priced higher than comparably sized
welded products.
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 has been historically a function of
the current and anticipated prices of oil and natural gas. 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 imports of OCTG products.
The average number of oil and gas drilling rigs operating in the United
States, domestic shipments of OCTG products (excluding exports) and imports of
OCTG products for 2002, 2001 and 2000 were as follows:
2002 2001 2000
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Average U.S. drill
rig count 830 1,156 844
OCTG shipments
(millions of tons ) 1.6 2.2 2.1
OCTG imports
(millions of tons) 0.5 0.9 0.7
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(Source: Baker Hughes, Preston Pipe and Tube Report and Company estimates)
Demand for line pipe is only partially dependent on oil and natural gas
drilling activities. Line pipe demand is also dependent on factors such as the
level of pipeline construction activity, line pipe replacement requirements, new
residential construction and gas utility purchasing programs. Overall, total
shipments by domestic line pipe producers(excluding exports) were 1.5 million
tons in 2002, 1.9 million tons in 2001, and 1.4 million tons in 2000. Total
domestic shipments of line pipe product 16 inches in diameter and smaller, the
product sizes that we produce, were 0.7 million tons in 2002, 1.2 million tons
in 2001 and 1.1 million tons in 2000. (Source for line pipe data: Preston Pipe
and Tube Report)
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 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. In response, we, together with other domestic oil country
tubular goods producers, sought relief from unfair trade by filing petitions
with the ITC against certain countries. In May 2002 the ITC voted against our
suit and the case was terminated. As a result of these actions, we expect to see
continued high levels of competition from imports.
4
On March 5, 2002, the President of the United States announced his remedy
decision in response to the International Trade Commission's Section 201
investigation on steel imports. Under the remedy decision, effective March 21,
2002, tariffs of 30%, 24% and 18% are applied to imports of hot-rolled coil, the
raw material for our Welded operations, for the next three years, respectively.
Imports from Canada, Mexico and certain other countries are exempt from the
tariffs.
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. The ITC's
decision has been appealed by the affected countries and decisions are 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 was in the form of tariffs applied to
certain imports of line pipe from countries other than Canada and Mexico. The
tariffs expired on March 1, 2003.
We cannot predict the U.S. government's future actions regarding these
duties and tariffs or any other future actions regarding import duties or other
trade restrictions on imports of OCTG and line pipe products.
PRODUCTS
Our welded OCTG products are used primarily as casing in oil and natural
gas wells during drilling operations. Casing forms the structural wall of oil
and natural gas wells to provide support and prevent caving during drilling
operations and is generally not removed after it has been installed in a well.
Welded OCTG products are generally used in wells less than 10,000 feet in depth.
We sell our welded OCTG products in both a plain end (unthreaded) condition as
well as a threaded and coupled product in both carbon and alloy grades. Our
welded tubular products range in size from 4.5 to 16.0 inches in outside
diameter.
Our seamless OCTG products are used as production tubing, casing and as
drill pipe. Production tubing is placed within the well and is used to convey
oil and natural gas to the surface. Drill pipe is used and may be reused to
drill several wells. Our seamless OCTG products are primarily sold as a finished
upset, threaded and coupled product in both carbon and alloy grades. Compared to
similarly sized welded products, seamless production tubing and casing are
better suited for use in hostile drilling environments, such as deeper wells or
off-shore drilling. The majority of our seamless OCTG product sales are of
production tubing. Our seamless products range in size from 1.9 inches to 5
inches in outside diameter.
Our line pipe products are used primarily in gathering lines for the
transportation of oil and natural gas at the drilling site and in transmission
lines by both gas utility and transmission companies. Line pipe products are
coated and shipped as a plain end product.
Our OCTG products are inspected and tested to ensure that they meet or
exceed API specifications. Products that do not meet specification are
classified as less than prime products and are sold for use in other
applications at substantially reduced prices.
In addition, we also sell a limited amount of other products, including
standard pipe and piling.
MARKETS AND DISTRIBUTION
We sell our energy related tubular products to customers through an
in-house sales force. Nearly all of our OCTG products are sold to domestic
distributors, some of whom subsequently sell our products into the international
marketplace. The primary geographic markets for our seamless OCTG products have
been the southwest United States as well as various foreign markets, including
offshore applications. We have historically marketed our welded OCTG products
primarily in the southwest regions, as well as the east and central regions of
the United States. In these areas, shallow oil and natural gas drilling and
exploration activity utilize our carbon welded tubular products.
5
CUSTOMERS
Our OCTG and line pipe products are used by super-major, major and
independent oil and natural gas exploration and production companies in drilling
and production applications. Line pipe products are also used by gas utility and
transmission companies. Substantially all of our OCTG products are sold to
domestic distributors. Line pipe products are sold to both domestic distributors
and directly to end users. We have long-standing relationships with many of our
larger customers; however, we believe that we are not dependent on any one
customer and that we could, over time, replace lost sales attributable to any
one customer. Bourland and Leverich Supply Co. Inc. and Champions Pipe & Supply,
Inc., our two largest customers, accounted for approximately 17% and 12%,
respectively, of total sales in 2002.
COMPETITION
The markets for our tubular products are highly competitive and cyclical.
Principal competitors in our primary markets include domestic and foreign
integrated producers, mini-mills and welded tubular product processing
companies. We believe that the principal competitive factors affecting our
business are price, quality and customer service.
Our principal competitors in the welded tubular market are Lone Star Steel
Company, Maverick Tube Corporation, IPSCO Steel, Inc. and foreign producers. In
the small diameter seamless OCTG market in which we compete, our principal
competitors include the U.S. Steel Group and a number of foreign producers.
MANUFACTURING
We manufacture welded tubular products at our facilities located in
Wilder, Kentucky. Our seamless tubular products are manufactured at our
facilities located in Ambridge, Pennsylvania. During 2002, we made capital
investments of $2.4 million in our Energy Products business segment, which
primarily represented replacement and rehabilitation projects. The rated annual
capacities of our welded and seamless tubular facilities are 570,000 tons and
250,000 tons, respectively. Capacity utilization of the welded tubular
facilities during 2002 was 30% compared to 52% in 2001 and capacity utilization
for the seamless tubular facilities was 54% compared to 78% during 2001.
We process and finish our tubular products at facilities located at (i)
the Port of Catoosa, near Tulsa, Oklahoma; (ii) Baytown, Texas, located near
Houston, Texas; and (iii) the Seamless facilities located in Ambridge,
Pennsylvania. Our finishing processes include upsetting, which is a forging
process that thickens tube ends; heat treating, which is a furnace operation
designed to strengthen the steel; straightening; non-destructive testing;
coating for rust prevention; and threading.
All of our tube-making and finishing facilities are located on or near
major rivers or waterways, enabling us to transport our tubular products into
the southwest by barge. We ship substantially all of our seamless and welded
OCTG products destined for the southwest region by barge, which is a lower cost
alternative to rail and truck shipping.
We manufacture our seamless tubular products in a mini-mill environment.
The term mini-mill connotes a mill that typically uses steel scrap as its basic
raw material and offers a limited range of products. At our Seamless facilities,
steel scrap is melted in electric arc furnaces and poured into continuous
casting machines which cast tube rounds. These tube rounds are reheated, pierced
and rolled to specific size and wall thickness. The Seamless facility's melt
shop is rated at an annual capacity of 450,000 tons and capacity utilization in
2002 was 32% compared to 57% in 2001.
At our Welded facility, the manufacturing process begins by unrolling and
slitting steel coils, if necessary, into narrower bands sized to the
circumference of the finished product. Each band is re-coiled and fed into the
material handling equipment at the front end of one of two welded pipe-making
facilities where they are fed through a series of rolls that cold-form it into a
tubular configuration. The resultant tube is welded in-line by a high-frequency
electric resistance welder and cut into designated lengths. After exiting the
mill, the products are straightened, inspected, tested and end-finished.
6
RAW MATERIALS AND ENERGY
The primary raw material used in our Seamless facility is steel scrap,
which is generated principally from industrial, automotive, demolition, railroad
and other steel scrap sources. We purchase steel scrap either through scrap
brokers or directly in the open market. The long-term demand for steel scrap in
the domestic steel industry may increase as steel-makers continue to expand
steel scrap-based electric arc furnace and thin slab casting capacities. For the
foreseeable future, however, we believe that supplies of steel scrap will
continue to be available in sufficient quantities at competitive prices. In
addition, a number of technologies exist for the processing of iron ore into
forms which may be substituted for steel scrap in electric arc furnace-based
steel-making operations. Such forms include direct-reduced iron, iron carbide
and hot-briquetted iron.
At our Welded facility, purchased hot-rolled coils are the primary raw
material used. We purchase hot-rolled steel coil from a number of domestic steel
producers, the majority of which is purchased from Nucor Corporation. We order
steel according to our business forecasts for our Welded operations. Purchased
steel represents the major cost component of cost of sales for our welded
products. The steel industry is highly cyclical in nature and steel prices are
influenced by numerous factors beyond our control, including general economic
conditions, raw material, energy costs, import duties and other trade
restrictions.
The melt shop at our Seamless facility consumes a significant amount of
electricity. We currently purchase electricity for our Seamless facility
pursuant to a contract that provides for unlimited power demand and discounted
rates in return for the utilities' right to periodically curtail service during
periods of peak demand. These curtailments are generally limited to a few hours
and historically have had a negligible impact on our operations.
INDUSTRIAL PRODUCTS SEGMENT -
SPECIAL BAR QUALITY PRODUCTS
GENERAL
As previously noted, we ceased the manufacturing of our SBQ products in
the second quarter of 2001.
The bar product market represents the second largest segment of the steel
market. Bar products are generally categorized into merchant bar quality
products and SBQ products. SBQ products are used for a wide variety of
industrial applications including automotive, metal-working fabrication,
construction, farm equipment, heavy machinery and trucks and off-road vehicles.
We competed in relatively small segments of the SBQmarket. Unlike the majority
of SBQ products, which are primarily used by passenger car manufacturers, heavy
SBQ products such as those we produced were primarily used in the manufacture of
heavy industrial products.
At our Koppel facility, we manufactured SBQ products in sizes ranging from
2.875 to 6.0 inches in diameter for a specialized niche of the market. We
produced SBQ products from continuous cast blooms. These SBQ products were
primarily used in critical weight-bearing applications such as suspension
systems, gear blanks, drive axles for tractors and off-road vehicles, heavy
machinery components and hydraulic and pneumatic cylinders. The demand for SBQ
products is cyclical in nature and is sensitive to general economic conditions.
MARKETS, DISTRIBUTION, CUSTOMERS AND COMPETITION
We sold our SBQ products to service centers, cold finishers, forgers and
original equipment manufacturers located generally within 400 miles of our
Koppel, Pennsylvania facilities.
We competed with a number of SBQ manufacturers, including CSC Industries,
Inc., Republic Technologies, Inc., Ispat Inland, Inc., Qualitech, Inc., Mac
Steel Division of Quanex Corporation, North Star Steel Company, Inc. and the
Timken Company.
MANUFACTURING PROCESS
Our SBQ products mill utilized the Koppel facility's melt shop to produce
9 inch square blooms. Blooms were reheated and passed through a series of rolls
in the bar mill, where they were reshaped into round bars. SBQ products were
available in both carbon and alloy grades in sizes measuring 2.875 to 6 inches
in diameter. The bar mill's rated annual capacity is 200,000 tons.
7
ENVIRONMENTAL MATTERS
Our business 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 with those laws.
Such laws and regulations include those concerning the discharge of contaminants
as air emissions or waste water effluents and the disposal of solid and/or
hazardous wastes, such as electric arc furnace dust. As such, we are 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 its
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 was 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. We
believe that we have defenses against these allegations and intend to pursue
resolution with the EPA. We believe resolution of these claims will not have a
material adverse effect on our consolidated financial position, results of
operations or cash flows. However, there can be no assurance that we will reach
a settlement with the EPA and the Department of Justice.
We have a hazardous waste landfill on our property in Wilder, Kentucky,
which is no longer utilized. In connection with our March 2001 restructuring
actions, in which we closed Newport's melt shop and hot strip mill operations,
we 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. We received final approval of our closure/post-closure plan
from the Kentucky Division of Waste Management in December 2002. As a result, we
increased our estimate of post-closure costs and they are included in
restructuring charges for the fourth quarter of 2002. We expect closure of the
landfill will be completed by the end of 2003.
We operate a steel mini-mill that produces dust that contains lead,
cadmium and chromium, and is classified as a hazardous waste. Dust produced by
our electric arc furnace is collected through emission control systems and
recycled at EPA-approved facilities.
In late 2001, the EPA designated Imperial Adhesives, Inc., a former
subsidiary of the Company, as one of a number of potentially responsible parties
(PRP) 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 our liability exposure. We believe
that the reasonably foreseeable resolution of this matter will not have a
material adverse effect on our financial statements. See Note 3 to the
Consolidated Financial Statements for further discussion of the sale of
Imperial.
We believe that we are currently in compliance in all material respects
with all applicable environmental regulations. We cannot predict the level of
required capital expenditures or operating costs that may result from compliance
with future environmental regulations.
Capital expenditures for the next twelve months relating to environmental
control facilities are expected to be approximately $0.3 million; however, such
expenditures could be influenced by new or revised environmental regulations and
laws or new information or developments with respect to our operating
facilities.
8
We have accrued for environmental remediation obligations $5.2 million and
$4.3 million, respectively, at December 31, 2002 and 2001. Based upon evaluation
of available information, we do not believe that any of the environmental
contingency matters discussed above are likely, individually or in the
aggregate, to have a material adverse effect upon our consolidated financial
position, results of operations or cash flows. However, we cannot predict with
certainty that new information or developments with respect to our environmental
contingency matters, individually or in the aggregate, will not have a material
adverse effect on our consolidated financial position, results of operations or
cash flows.
EMPLOYEES
As of December 31, 2002, we had approximately 1,150 employees comprised of
213 salaried employees with the remainder being hourly employees. Substantially
all of our hourly employees are represented by the United Steelworkers of
America under contracts which expire in April 2005 and May 2007 for the Newport
and Koppel operations, respectively, and in May 2003 for Erlanger.
AVAILABLE INFORMATION
The Company files annual, quarterly, and current reports, proxy
statements, and other documents with the Securities and Exchange Commission
(SEC) under the Securities Exchange Act of 1934. The public may read and copy
any materials that the Company files with the SEC at the SEC's Public Reference
Room at 450 Fifth Street, NW, Washington, DC 20549. The public may obtain
information on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. Also, the SEC maintains an Internet website that contains
reports, proxy and information statements, and other information regarding
issuers, including the Company, that file electronically with the SEC. The
public can obtain any documents that the Company files with the SEC at
http://www.sec.gov.
The Company also makes available free of charge on or through its Internet
website (www.nsgrouponline.com) the Company's Annual Report on Form 10-K,
Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and, if applicable,
amendments to those reports filed or furnished pursuant to Section 13(a) of the
Exchange Act as soon as reasonably practicable after the Company electronically
files such material with, or furnishes it to, the SEC.
ITEM 2. PROPERTIES
Our principal operating properties are listed below. We believe our
facilities are adequate and suitable for our present level of operations.
LOCATION AND PROPERTIES
Energy Products Segment
Wilder, Kentucky - We own approximately 250 acres of real estate upon
which are located two welded pipe mills, a barge facility, machine and
fabricating shops and storage and repair facilities aggregating approximately
675,000 square feet, as well as administrative offices. The facilities are also
located adjacent to rail lines.
Tulsa, Oklahoma - We lease approximately 36 acres of real estate upon
which is located our Erlanger tubular processing facility. The facility is
located at the Tulsa Port of Catoosa where barge facilities are in close
proximity. Located on this property are six buildings aggregating approximately
119,000 square feet, which house the various finishing operations.
Koppel, Pennsylvania - We own approximately 160 acres of real estate upon
which are located a melt shop, machine and fabricating shops, storage and repair
facilities and administrative offices aggregating approximately 500,000 square
feet. The facilities are located adjacent to rail lines. The melt shop and
administrative offices support the Seamless operations. They also supported the
Industrial Products Segment for SBQ products until it was closed in the second
quarter of 2001.
9
Ambridge, Pennsylvania - We own approximately 45 acres of real estate upon
which are located a seamless tube making facility and seamless tube finishing
facilities aggregating approximately 659,000 square feet. The facilities are
located adjacent to rail lines and river barge facilities.
Baytown, Texas - We own approximately 55 acres of real estate upon which
are located a tubular processing facility and barge facilities. Located on the
property are eight buildings aggregating approximately 82,000 square feet which
house the various finishing operations.
Industrial Products Segment
Koppel, Pennsylvania - We own approximately 67 acres of real estate upon
which are located a bar mill, machine and fabricating shops and storage repair
facilities aggregating approximately 400,000 square feet. All Industrial
Products Segment machinery, equipment and related facilities and supplies,
except for real estate, have been designated as Assets Held For Sale in our
consolidated balance sheet.
Other
Newport, Kentucky - We own approximately 12 acres of partially developed
land near Newport, Kentucky, which is held as investment property and is listed
for sale.
Assets Held for Sale
In connection with our restructuring decisions in 2001, certain equipment
and facilities were designated as held for sale. At our Wilder, Kentucky
location, our melt shop, which includes an electric arc furnace and related
storeroom supplies and spare parts are not being utilized and have been
designated as available for sale. The hot strip mill equipment idled in 2001 was
sold in 2002. At our Koppel, Pennsylvania facility, our bar mill equipment used
to make SBQ products and other equipment and supplies are not being used and
have also been designated as available for sale. An outside company is currently
marketing all of the assets.
Information regarding encumbrances on our properties is included in Note 7
to the Consolidated Financial Statements.
ITEM 3. LEGAL PROCEEDINGS
We are 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. Reference is made to
Part I, Item 1., Environmental Matters, concerning certain proceedings we are
involved in with the EPA and the United States Department of Justice. Based upon
evaluation of available information, we do not believe that any such matters
will have, individually or in the aggregate, a material adverse effect upon our
consolidated financial position, results of operations or cash flows.
In March 2001, in connection with its restructuring, Newport Steel
Corporation closed its electric arc furnace operation and as such, ceased using
oxygen and argon that was provided under a supply agreement with Air Products
and Chemicals, Inc. ("Air Products"). On December 31, 2001, Air Products filed a
civil action against Newport and NS Group, Inc. in the United States District
Court for the Eastern District of Pennsylvania, Civil Action No. 01-7227,
seeking damages for breach of contract. On August 5, 2002, the action against NS
Group, Inc. was dismissed without prejudice, however, the action against Newport
is still pending. Based on current information, we believe that the resolution
of this matter will not have a material adverse affect on our consolidated
financial position, results of operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
10
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock and associated preferred stock purchase rights are listed
on the New York Stock Exchange under the trading symbol NSS. As of February 28,
2003, there were 194 holders of record of our common stock. The following table
sets forth, for the calendar quarters indicated, the high and low closing sales
prices of our common stock as reported on the New York Stock Exchange.
STOCK PRICE
- ------------------------------------------------------------------------------
2002 HIGH LOW
- ------------------------------------------------------------------------------
1st Quarter $ 9.35 $ 6.66
2nd Quarter 10.61 7.60
3rd Quarter 9.55 5.75
4th Quarter 7.10 5.43
- ------------------------------------------------------------------------------
2001 High Low
- ------------------------------------------------------------------------------
1st Quarter $12.75 $ 7.70
2nd Quarter 17.60 10.78
3rd Quarter 13.76 5.30
4th Quarter 7.70 5.30
Information regarding restrictions on common stock dividends and warrants
to purchase our common stock is included in Notes 7 and 10 to the Consolidated
Financial Statements.
Securities authorized for issuance under equity compensation plans at
December 31, 2002 are as follows:
NUMBER OF SECURITIES NUMBER OF SECURITIES
TO BE ISSUED UPON WEIGHTED-AVERAGE REMAINING AVAILABLE
EXERCISE OF EXERCISE PRICE OF FOR FUTURE ISSUANCE
OUTSTANDING OPTIONS OUTSTANDING OPTIONS UNDER EQUITY
PLAN CATEGORY AND RIGHTS AND RIGHTS COMPENSATION PLANS(a)
- ---------------------------------------------------------------------------------------------------------------------------------
Equity compensation plans
approved by security holders 1,723,290 $10.81 580,745
Equity compensation plans not
approved by security holders 84,000 $10.86 66,000
- ----------------------------------------------------------------------------------------------------------------------------------
Total 1,807,290 $10.82 646,745
==================================================================================================================================
(a) Excludes securities reflected in the first column, "Number of Securities
to be issued upon exercise of outstanding options and rights".
See Note 10 to the consolidated financial statements for additional information.
11
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Three Months
YEAR ENDED Ended
DECEMBER 31, December 31, Fiscal Year Ended in September
(Dollars in thousands, ------------------ ------------ ---------------------------------
except per share amounts) 2002 2001 2000 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
SUMMARY OF OPERATIONS
- ---------------------------------------------------------------------------------------------------------------------------
Net sales $192,408 $315,458 $73,357 $358,705 $200,424 $372,911
- ---------------------------------------------------------------------------------------------------------------------------
Restructuring charges 2,046 56,224 -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
Operating income (loss) (34,140) (50,167) (4,960) (18,566) (49,307) 7,933
- ---------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations (39,315) (55,918) (4,065) (24,048) (46,766) 2,108
- ---------------------------------------------------------------------------------------------------------------------------
Income (loss) before extraordinary items (39,315) (55,918) 6,890 (22,899) (45,553) 3,391
- ---------------------------------------------------------------------------------------------------------------------------
Net income (loss) (39,930) (55,977) 7,790 (22,899) (49,390) 4,050
- ---------------------------------------------------------------------------------------------------------------------------
Per common share - diluted
Income (loss) from continuing operations (1.90) (2.68) (0.19) (1.11) (2.14) 0.09
- ---------------------------------------------------------------------------------------------------------------------------
Income (loss) before extraordinary items (1.90) (2.68) 0.32 (1.06) (2.08) 0.14
- ---------------------------------------------------------------------------------------------------------------------------
Net income (loss) (1.93) (2.68) 0.36 (1.06) (2.26) 0.17
- ---------------------------------------------------------------------------------------------------------------------------
Dividends per common share -- -- -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
Average shares outstanding - diluted (000's) 20,647 20,889 21,620 21,651 21,852 24,511
- ---------------------------------------------------------------------------------------------------------------------------
OTHER FINANCIAL AND STATISTICAL DATA
- ---------------------------------------------------------------------------------------------------------------------------
Working capital $42,993 $126,690 $129,186 $121,527 $96,976 $145,910
- ---------------------------------------------------------------------------------------------------------------------------
Total assets 180,294 260,484 318,926 345,337 353,598 415,046
- ---------------------------------------------------------------------------------------------------------------------------
Current portion of long-term debt 33,555 33 110 110 144 624
- ---------------------------------------------------------------------------------------------------------------------------
Long-term debt 482 68,070 68,207 72,915 72,321 75,762
- ---------------------------------------------------------------------------------------------------------------------------
Common shareholders' equity 104,383 143,662 196,478 198,845 221,152 279,013
- ---------------------------------------------------------------------------------------------------------------------------
Capital expenditures 2,422 2,198 586 7,499 27,818 31,996
- ---------------------------------------------------------------------------------------------------------------------------
Depreciation and amortization 12,281 14,681 6,060 22,691 22,665 20,538
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities (20,558) 28,887 3,226 (24,587) (15,372) 29,966
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities 10,846 4,173 26,706 22,323 (8,192) (105,127)
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities (35,787) (3,355) (14,397) 1,996 (12,168) (54,072)
- ---------------------------------------------------------------------------------------------------------------------------
Product shipments (tons)
Energy products 323,300 478,900 101,700 574,200 317,000 474,000
Industrial products -- 23,900 14,200 136,200 130,500 160,100
- ---------------------------------------------------------------------------------------------------------------------------
Employees 1,150 1,198 1,624 1,636 1,417 1,597
===========================================================================================================================
The following notes to the consolidated statements contain further information:
Note 1 concerning the change in fiscal year-end.
Note 2 concerning restructuring charges in 2002 and 2001.
Note 3 concerning the effects of discontinued operations on reported amounts.
12
ITEM 7. 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 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 under "Risk Factors"
included in Exhibit 99.1 of this report.
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 analysis of financial condition and results of
operations together with the audited financial statements included in this
report.
GENERAL
CHANGE IN FISCAL YEAR-END
Our fiscal years prior to October 1, 2000 ended on the last Saturday of
September. Thereafter, we changed our fiscal year-end to a calendar year ending
on December 31. As a result of the fiscal year-end change, the period from
October 1, 2000 through December 31, 2000, which we refer to as the "Transition
Period", precedes the start of the 2001 calendar year. The period for the fiscal
year from September 26, 1999 through September 30, 2000 is referred to in this
Form 10-K as "2000" and contains fifty-three weeks.
RESTRUCTURING OF OPERATIONS
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
at our welded tubular facilities 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.
The restructuring was initiated to give us a lower, more flexible cost
structure. We believe we are achieving the expected benefits and cost savings
from the restructuring.
In the March 2001 quarter, we recorded total restructuring charges of
$56.2 million, including $43.4 million of charges resulting primarily from the
write-down of fixed assets and $0.6 million recorded to cost of products sold
related to inventories. The closures resulted in total workforce reductions of
approximately 270 positions at the welded tubular operations in Wilder, Kentucky
and the SBQ products operations in Koppel, Pennsylvania.
13
In the fourth quarter of 2002, we recorded $2.0 million of additional
restructuring charges related to the March 2001 restructuring. The charges
included a $1.2 million impairment loss on the assets being held for sale and
$0.8 million primarily related to an increase in our estimate of post-closure
costs for our closed landfill. The impairment loss was based on an independent
appraisal of the assets held for sale at December 31, 2002.
DISCONTINUED OPERATIONS
On October 12, 2000, we sold our wholly-owned subsidiary, Imperial
Adhesives, Inc. As a result, the sales, costs and expenses, and cash flows of
the former Industrial Products - Adhesives Segment have been classified as
discontinued operations in our consolidated financial statements. See Note 3 to
the Consolidated Financial Statements. Accordingly, the discussion and analysis
that follow focus on the continuing operations of our remaining segments.
SEGMENTS
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 business 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 4 to the Consolidated Financial Statements included
in this report for additional information pertaining to industry segment data.
RESULTS OF OPERATIONS
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.
The average number of oil and natural gas drilling rigs in operation in
the United States is referred to as "rig count". Rig count averaged 830 for 2002
compared to 1,156 for 2001 and 844 for 2000. 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. However, natural gas prices began to fall
as the slowdown in the economy, milder weather and 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 going into 2002. Consequently,
rig count in 2002 fell 28% from 2001 and demand for our OCTG products fell for
the comparable periods as well.
Natural gas prices rose steadily in the second half of 2002 as a result of
low drilling levels during the year and increased demand, driven primarily by
the weather. As such, we expect rig count will increase during the course of
2003 and our shipments of OCTG will increase accordingly.
14
According to published industry reports, imports of OCTG products in 2002
were an estimated 23% of the total domestic market, compared to 30% in 2001 and
26% in 2000. 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 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. In response, we, together with other domestic oil country
tubular goods producers, sought relief from unfair trade by filing petitions
with the ITC against certain countries. In May 2002, the ITC voted against our
suit and the case was terminated. As a result, we expect to continue to
experience high levels of competition from imports.
On March 5, 2002, the President of the United States announced his remedy
decision in response to the International Trade Commission'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 increased the
cost of imported hot-rolled coils, which we believe in turn has increased the
cost of domestic hot-rolled coils.
In addition to the impact from imports, our purchased coil costs are also
affected by domestic supply and demand factors, freight costs and general
economic conditions. Increases in our steel costs adversely affect our financial
results if we are not able to successfully raise the price of our products to
compensate for the increased costs. Our purchased coil costs for 2002 increased
by 8.5% over 2001.
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. The ITC's
decision has been appealed by the affected countries and decisions are 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 was in the form of tariffs applied to
imports of welded line pipe that is 16 inch or less in diameter, from all
countries excluding Canada and Mexico. The tariffs expired on March 1, 2003.
We cannot predict the U.S. government's future actions regarding duties
and tariffs or any other future actions regarding import duties or other trade
restrictions on imports of OCTG and line pipe products.
15
Our net sales, gross profit (loss), operating loss and tons shipped by
business segment for the years ended December 31, 2002 and 2001, the Transition
Period and 2000 are summarized in the following table:
=======================================================================================
Transition
(Dollars in thousands) 2002 2001 Period 2000
- ---------------------------------------------------------------------------------------
Net sales
Energy products $192,408 $305,609 $67,503 $302,583
Industrial products - SBQ -- 9,849 5,854 56,122
- ---------------------------------------------------------------------------------------
$192,408 $315,458 $73,357 $358,705
=======================================================================================
Gross profit (loss)
Energy products $(14,585) $28,025 $2,522 $6,545
Industrial products - SBQ -- (2,625) (2,278) (4,526)
- ---------------------------------------------------------------------------------------
$(14,585) $25,400 $244 2,019
=======================================================================================
Operating income (loss)
Energy products (1) $(26,878) $(28,300) (341) $(5,527)
Industrial Products - SBQ (2) -- (12,769) (3,001) (6,645)
- ---------------------------------------------------------------------------------------
(26,878) (41,069) (3,342) (12,172)
Corporate allocations (3) (7,262) (9,098) (1,618) (6,394)
- ---------------------------------------------------------------------------------------
$(34,140) $(50,167) $(4,960) $(18,566)
=======================================================================================
Tons shipped
Energy products
Welded products 196,100 293,200 59,400 420,200
Seamless products 127,200 185,700 42,300 154,000
- ---------------------------------------------------------------------------------------
323,300 478,900 101,700 574,200
Industrial products - SBQ -- 23,900 14,200 136,200
- ---------------------------------------------------------------------------------------
323,300 502,800 115,900 710,400
=======================================================================================
Average U.S. drill rig count 830 1,156 1,076 844
- ---------------------------------------------------------------------------------------
See Note 2: Restructuring Charges to the Consolidated Financial Statements.
(1) Includes restructuring charges of $2.0 million and $45.3 million for 2002
and 2001, respectively.
(2) Includes restructuring charges of $9.7 million for 2001.
(3) Includes restructuring charges of $1.2 million for 2001.
16
YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001
Net sales for 2002 were $192.4 million compared to $315.5 million in 2001,
a decrease of $123.1 million, or 39.0%.
The operating loss for 2002 was $34.1 million compared to an operating
loss of $50.2 million in 2001, including restructuring charges of $2.0 million
in 2002 and $56.2 million in 2001, respectively.
In 2002, we reported a $39.9 million net loss, or a $1.93 loss per diluted
share, compared to a $56.0 million net loss, or a $2.68 loss per diluted share
in 2001. Included in the 2002 results are $2.0 million of restructuring charges
which increased the loss by $0.10 per diluted share and extraordinary charges
for the early extinguishment of debt of $0.6 million, or $0.03 per diluted
share. Results for 2001 included restructuring charges which increased the net
loss by $53.7 million, or $2.57 per diluted share.
ENERGY PRODUCTS
Energy Products segment sales of $192.4 million in 2002 were $113.2
million, or 37.0%, less than the $305.6 million reported for 2001. Product
shipments of 323,300 tons in 2002 were 155,600 tons, or 32.5%, less than the
478,900 tons in 2001. The significant decreases in sales and shipments were
experienced by both our seamless and welded products. The decrease in shipments
was a direct result of the lower rig count in 2002. Also, distributors lowered
their inventories in 2002, which further negatively impacted our shipments. In
addition, the level of imports negatively impacted our shipments of OCTG
products. The average revenue per ton for our welded tubular products was $445
per ton, a decrease of 9.2% from 2001. The average revenue per ton for our
seamless tubular products was $826 per ton, a decrease of 5.3% from 2001. The
decreases in average revenue per ton were due primarily to the weak market
conditions in 2002.
The Energy Product segment reported a gross loss of $14.6 million and an
operating loss of $26.9 million in 2002, which includes $2.0 million of
restructuring charges. In 2001 the segment reported a gross profit of $28.0
million and operating loss of $28.3 million, which includes $45.3 million of
restructuring charges. The decline in profitability from 2001 was primarily the
result of the significant decline in shipments, lower pricing for our products
and an increase in purchased steel costs. In addition, due to lower operating
levels in 2002, our margins were negatively impacted due to lower fixed cost
absorption.
Selling, general and administrative expenses for the Energy Product
segment in 2002 decreased $0.8 million, or 6.8%, from 2001 primarily as a result
of reduced employee and related costs due to the restructuring, as well as
general cost reduction efforts implemented in 2002.
INDUSTRIAL PRODUCTS - SBQ
As mentioned previously, the Industrial Products - SBQ segment was closed
in June 2001. The segment recorded sales of $9.8 million and gross losses of
$2.6 million and operating losses of $12.8 million in the first six months of
2001. Included in the operating losses for 2001 are $9.7 million of
restructuring charges. SBQ product shipments for the first six months of
2001were 23,900 tons.
INVESTMENT INCOME, INTEREST EXPENSE, OTHER INCOME
We recorded net investment income of $0.7 million in 2002 compared to net
investment losses of $2.1 million in 2001. Losses were recognized for the
impairment of certain long-term investments of $1.0 million and $6.2 million, in
2002 and 2001, respectively. In addition, the interest rates earned on our
invested cash and investment balances declined throughout 2002 from those earned
in 2001.
Interest expense in 2002 was $2.2 million, or 20.9% lower than 2001 as a
result of our early extinguishment of $35.0 million of our senior notes in July
2002.
Other income net, for 2002 and 2001 include $0.8 million and $1.3 million,
respectively, of cash receipts from favorable claim settlements with electrode
suppliers relating to purchases in prior years.
INCOME TAXES
We exhausted our federal income tax refund capability in fiscal 1999, and
as such, tax benefits from operating losses are offset by valuation allowances
resulting in no net federal tax benefit being recorded for losses.
17
The $0.9 million tax benefit recorded in the fourth quarter of 2002
resulted primarily from refund claims filed in connection with recently enacted
federal income tax law changes. The tax benefit of $3.9 million recorded in 2001
resulted primarily from state income tax benefits associated with the
restructuring charges and the investment impairment losses.
CALENDAR YEAR ENDED DECEMBER 31, 2001 COMPARED TO FISCAL YEAR ENDED
SEPTEMBER 30, 2000
Total net sales in 2001 were $315.5 million compared to $358.7 million in
2000, a decrease of $43.2 million, or 12.1%. The entire decrease can be
attributed to our decision to exit our SBQ business by June 2001. As a result,
Industrial Products segment sales were $46.3 million lower in 2001.
The operating loss for 2001 was $50.2 million, including restructuring
charges of $56.2 million, compared to an operating loss of $18.6 million for
2000.
Losses from continuing operations in 2001 were $55.9 million, or a $2.68
loss per diluted share compared to a $24.0 million, or a $1.11 loss per diluted
share in 2000. Included in the 2001 results are restructuring charges totaling
$53.7 million after tax, or $2.57 per diluted share.
Net loss for 2001 was $56.0 million, or $2.68 per diluted share, compared
to a net loss of $22.9 million or a loss of $1.06 per diluted share in 2000.
ENERGY PRODUCTS
Energy Products segment sales in 2001 were $305.6 million compared to
$302.6 million for 2000. Total segment shipments were 478,900 tons compared to
574,200 tons in 2000. The slight increase in sales and the decrease of 95,300
tons in shipments were attributable to a decrease of 127,000 tons in shipments
of our welded tubular products, partially offset by an increase in seamless
tubular shipments and higher revenue per ton for both welded and seamless
products. The decrease in welded product shipments resulted from a focus by
distributors to lower inventories as a result of the decreasing rig count in the
second half of 2001. In addition, the level of imports negatively impacted our
shipments of welded OCTG products. Shipments of our seamless products increased
by 31,700 tons primarily as a result of an increase in new product offerings.
The average revenue per ton for our welded tubular products was $490 per ton, an
increase of 14.0% from 2000. The average revenue per ton for our seamless
tubular products was $872 per ton, an increase of 14.3% from 2000. The increases
in average revenue per ton were due primarily to the improved market conditions
in the first half of 2001 and a change in mix to higher priced products.
The Energy Product segment reported a gross profit of $28.0 million and an
operating loss of $28.3 million in 2001 compared to a gross profit of $6.5
million and an operating loss of $5.5 million in 2000. The operating loss in
2001 included $45.3 million of restructuring charges. The improvements in gross
profit and operating income before restructuring charges from 2000 were
primarily the result of our decision to buy hot-rolled coils rather than
manufacture them, as well as improved revenue per ton discussed above.
Selling, general and administrative expenses for the Energy Product
segment in 2001 decreased $1.1 million, or 8.9%, from 2000 primarily as a result
of reduced employee and related costs due to the March 2001 restructuring.
INDUSTRIAL PRODUCTS - SBQ
Industrial Products segment sales in 2001 were $9.8 million, down from
$56.1 million in 2000. The decrease in the SBQ business is the result of our
decision in March 2001 to close the operations by the end of June 2001. SBQ
product shipments were 23,900 tons compared to 136,200 tons in 2000. The average
revenue per ton for SBQ products was $412 per ton compared to $410 per ton in
2000.
The Industrial Products segment incurred a gross loss of $2.6 million and
an operating loss of $12.8 million compared to a $4.5 million gross loss and an
operating loss of $6.6 million in 2000. The operating loss in 2001 included $9.7
million of restructuring charges. Selling, general and administrative expenses
for the segment decreased $1.0 million, or 48.6%, from 2000 because of cost
reductions resulting from the decision to exit the business.
18
INVESTMENT INCOME, INTEREST EXPENSE, OTHER INCOME
Investment losses in 2001 were $2.1 million, compared to income of $3.1
million in 2000. The primary reason for the decrease was the recognition of $6.2
million of impairment losses on certain long-term investments in the fourth
quarter of 2001. In addition, the interest rates earned on our invested cash and
investment balances declined throughout 2001 from those earned in 2000.
Interest expense was slightly lower in 2001 as a result of our purchasing
$5.0 million of our senior notes in the open market in the fourth quarter of
calendar 2000 and an additional $0.9 million in the first quarter of 2001.
Other income, net was $2.8 million in 2001 compared to $2.5 million in
2000. The amounts reported for 2001 and 2000 include $1.3 million and $1.7
million, respectively, of cash receipts from favorable claim settlements with
electrode suppliers relating to purchases in prior years.
TRANSITION PERIOD ENDED DECEMBER 31, 2000 COMPARED TO QUARTER ENDED JANUARY 1,
2000
Net sales in the Transition Period were $73.4 million, a decrease of 3.6%
from the fourth quarter of 2000. We reported a loss from continuing operations
before extraordinary items of $4.1 million, or a $0.19 loss per diluted share,
in the Transition Period. In the quarter ended January 1, 2000, we reported a
loss from continuing operations before extraordinary items of $13.1 million, or
a $0.61 loss per diluted share. Income from discontinued operations, net of
income taxes, for the Transition Period was $11.0 million, or $0.51 per diluted
share, and primarily consisted of the gain on the sale of our Adhesives business
in October 2000. Extraordinary items recognized in the Transition Period
increased net income by $0.9 million, net of income taxes, or $0.04 per diluted
share. The extraordinary items consisted of an extraordinary credit of $1.2
million related to a reversal of environmental liability accruals which was
partially offset by a $0.3 million extraordinary charge resulting from the early
retirement of debt.
ENERGY PRODUCTS
Energy Products segment sales were $67.5 million in the Transition Period,
an increase of 9.6% from the comparable period ended January 1, 2000. The
increase in Energy Product segment sales was attributable to an increase in
selling prices and an increase in shipments of seamless tubular products, offset
by a decline in welded tubular product shipments.
Total shipments of energy products for the Transition Period were 101,700
tons, a decrease of 23.6% from the comparable prior year period. The decrease
was the result of a decrease in shipments of our welded energy products, which
declined 41.2% from the comparable prior year period. The decline in welded
energy product shipments resulted primarily from a focus by distributors on
slowing the growth in inventories of welded carbon grade OCTG products. In
addition, the level of imports negatively impacted our shipments of welded OCTG
products. Shipments of our seamless products, which are substantially alloy
grade products, increased 30.6% from the prior year comparable quarter.
The average revenue per ton during the Transition Period for our welded
and seamless tubular products was $498 and $891 per ton, respectively. This was
an increase of 30.1% for welded products and a 25.5% increase for seamless
products from the comparable prior year period. The improved pricing was
directly related to the improvement in the rig count.
The Energy Products segment recorded a gross profit of $2.5 million and an
operating loss of $0.3 million in the Transition Period compared to a gross loss
and operating loss of $5.8 million and $8.8 million, respectively, in the
quarter ended January 1, 2000. The reduction in losses from the prior year
period was primarily the result of improved pricing for welded and seamless
tubular products and an increase in seamless energy product shipments.
Selling, general and administrative expense for the Energy Products
segment in the Transition Period increased $0.4 million from the quarter ended
January 1, 2000.
19
INDUSTRIAL PRODUCTS - SBQ
The Industrial Products segment sales were $5.9 million for the Transition
Period, a decrease of 59.6% from the quarter ended January 1, 2000. SBQ product
shipments for the Transition Period decreased 60.9% from the comparable prior
year period. The average selling price for SBQ products for the quarter was $412
per ton, a 3.0% increase over the comparable prior year period.
The Industrial Products segment recorded a gross loss of $2.3 million and
an operating loss of $3.0 million in the Transition Period compared to a gross
loss of $1.0 million and an operating loss of $1.7 million, in the quarter ended
January 1, 2000. The increase in the gross loss and the operating loss was the
result of the significant decline in shipments resulting from a decrease in
end-user demand and high service center inventory levels.
INVESTMENT INCOME, INTEREST EXPENSE, OTHER
Investment income for the Transition Period was $1.2 million, a $0.2
million decrease from the comparable prior year period, which resulted from
lower average invested cash and investment balances and realized losses on
available-for-sale securities.
INCOME TAXES
Accounting pronouncements require that income tax expense or benefit be
allocated among continuing operations, discontinued operations, and
extraordinary items. The net effect of the allocation of the gain on the sale of
Imperial in the Transition Period was to provide a provision for taxes on the
income from discontinued operations, which was offset by an income tax benefit
being recorded for the losses from continuing operations. The net recorded
amounts for income taxes in the quarter ended January 1, 2000 represented state
and local income taxes.
LIQUIDITY AND CAPITAL RESOURCES
Working capital at December 31, 2002 was $43.0 million compared to $126.7
million at December 31, 2001, and the ratio of current assets to current
liabilities at December 31, 2002 was 1.6 to 1, compared to a ratio of 4.2 to 1
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 2002. Our working capital was also reduced by the $33.4 million
current maturities of our senior notes due in July 2003. At December 31, 2002,
we had cash and investments totaling $33.2 million compared to $91.7 million at
December 30, 2001.
Net cash flows used by operating activities were $20.6 million in 2002. We
recorded a net loss of $39.9 million in 2002. Major components of cash from
operating activities in 2002 included $12.3 million in depreciation and
amortization charges; $2.0 million in restructuring charges; and a decrease in
accounts receivable and accounts payable of $10.5 million and $5.7 million,
respectively, resulting primarily from a decline in business activity in 2002.
Net cash flows provided by operating activities totaled $28.9 million in
2001. We recorded a net loss of $56.0 million in 2001. Major components of cash
from operating activities in 2001 included $14.7 million in depreciation and
amortization charges; restructuring charges of $42.8 million represented charges
primarily for the write-down of fixed assets; a $6.2 million impairment loss on
investments; and a decrease in accounts receivable and inventories of $22.2
million and $3.2 million, respectively, resulting primarily from a decline in
business activity in the second half of 2001 and the effect of exiting the SBQ
business. The decrease in accrued liabilities of $9.8 million resulted primarily
from a lower balance of deferred revenue at December 31, 2001.
We recorded a net loss from continuing operations of $4.1 million in the
Transition Period. In addition, income from discontinued operations, net of
income taxes, was $11.0 million and was mainly the result of recognizing the
gain on the sale of Imperial in the quarter. Cash flows from operating
activities totaled $3.2 million in the period. Major components of cash from
operating activities from continuing operations included $6.1 million in
depreciation and amortization charges and a $12.9 million and $10.4 million
decrease in accounts
20
receivable and inventory, respectively, resulting from the decline in business
activity. Accounts payable decreased $22.1 million primarily as a result of the
decline in business activity.
Net cash flows used by operating activities was $24.6 million in 2000. We
recorded a net loss from continuing operations of $24.0 million in 2000. Major
components of cash from operating activities in 2000 included $22.7 million in
depreciation and amortization charges; a $4.6 million decrease in operating
supplies and other current assets which resulted primarily from the receipt of
refundable federal income taxes; and a $4.5 million increase in accrued
liabilities and other as a result of a higher balance of deferred revenue,
partially offset by a decrease in accrued environmental liabilities. Major uses
of cash included a $23.1 million increase in accounts receivable and a $19.6
million increase in inventories resulting from an increase in business activity
in our Energy Products segment in the last half of 2000.
We made capital investments totaling $2.4 million in 2002, $2.2 million in
2001, $0.6 million in the Transition Period and $7.5 million in 2000. These
capital expenditures were primarily related to improvements to our Energy
Products Segment facilities. We currently estimate that 2003 capital spending
will be in the range of $2 million to $5 million. Our sources of funding capital
expenditures include available cash and investments, available cash flows from
operations, and our available borrowing sources and the amount ultimately spent
will depend upon the availability of these resources.
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. In addition, repayments of long-term debt in 2001 and the Transition
Period included the early retirement of $0.9 million and $5.0 million,
respectively, of principal amount of our senior secured notes. Long-term debt
maturities for each of the next five years are less than $0.1 million except for
the remaining $33.4 million of our senior notes that come due in July 2003. We
are currently evaluating new financing proposals with potential lenders to
refinance the notes; however, we believe we will have sufficient resources to
meet the senior notes obligation from current sources of liquidity.
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; however,
at December 31, 2002, $4.8 million of letters of credit were issued against the
credit line for workers compensation purposes. The facility is secured by a
first priority lien on all inventories, accounts receivable and related
intangibles of the Company. As of December 31, 2002, the Company had
approximately $12.2 million in borrowing availability under the agreement, based
on eligible receivable and inventory balances and net of outstanding letters of
credit on such date.
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 SECin September
2002. We have not sold any securities pursuant to the shelf registration. See
Note 7 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 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.
21
In February 2002, our board of directors authorized the repurchase of up
to two million shares of our common stock through the period ending March 31,
2003. Repurchases were 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. No shares were repurchased in 2002 under
this authorization. During 2001, we repurchased 376,300 of our outstanding
shares in open market transactions for $2.3 million and 1.1 million shares for
approximately $9.4 million in the Transition Period. We did not purchase any of
our common shares during 2000.
In October 2000, we received $26.7 million cash for the sale of Imperial.
You should read Note 3 to the Consolidated Financial Statements for further
information concerning the sale of Imperial.
We do not have any off-balance sheet arrangements other than immaterial
operating leases.
At December 31, 2002, we had regular tax net operating loss carryforwards
which will fully eliminate the regular tax liability on approximately $122.2
million of future regular taxable income. While we may have alternative minimum
tax (AMT) liability, we also have AMT net operating loss carryforwards which
will eliminate 90% of the AMT liability on approximately $88.1 million of future
AMT income. While future tax provisions will depend in part on our ongoing
assessment of our future ability to utilize our tax benefits, we expect that the
tax provisions that we record on approximately the next $100.0 million in
pre-tax income will be substantially less than the amounts at full statutory
rates. You should read Note 13 to the Consolidated Financial Statements for
further information concerning our federal tax status.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of consolidated financial statements in accordance with
accounting principles generally accepted in the United States of America
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 doubtful accounts, inventories,
investments, long-lived assets, income taxes, customer claims, product
liability, workers compensation claims, 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. We believe the following critical accounting policies
affect our more significant judgments and estimates used in the preparation of
our consolidated financial statements.
Revenue Recognition
We recognize revenue from product sales when the product is shipped from
our facilities and risk of loss and title has passed to the customer or, at the
customer's request, the goods are set aside in storage and are paid for in full.
For transactions where we have not obtained customer acceptance, revenue is
deferred until the terms of acceptance are satisfied.
Accounts Receivable Allowances
We maintain allowances for doubtful accounts for estimated losses resulting
from the inability of our customers to make required payments. If the financial
condition of our customers were to deteriorate, resulting in an impairment of
their ability to make payments, additional allowances may be required.
Inventory Valuation
We value our inventories principally at the lower of cost or market and
regularly review the book value to determine if items are properly valued. We
record adjustments to the value of our inventory based on sales and production
forecasts. These adjustments are estimates, which can vary significantly, either
favorably or unfavorably, from actual amounts if future costs or levels of
business activity differ from our expectations. Generally, we do not experience
issues with slow-moving or obsolete inventory due to the nature of our products.
If we are not able to achieve our expectations of the net realizable value of
the inventory at its current value, we would have to adjust our reserves
accordingly.
22
Long-Term Investments
We have investments in debt securities that are classified as available
for sale, some of which are publicly traded and have a volatile share price or
quoted market price. We record an investment impairment charge when we believe
an investment has experienced a decline in value that is other than temporary.
Future adverse changes in market conditions or poor operating results of
underlying investments could result in losses or an inability to recover the
carrying value of the investments that may not be reflected in an investment's
current carrying value, thereby possibly requiring an impairment charge in the
future.
Long-Lived Asset Impairment
We perform impairment analysis of our long-lived assets whenever events
and circumstances indicate that they may be impaired. When the undiscounted cash
flows, without interest or tax charges, are less than the carrying value of the
assets being reviewed for impairment, the assets are written down to fair market
value. During 2002 and 2001, we recorded long-lived asset impairment provisions
that resulted from the restructuring of our operations.
Reserves for Contingencies
We have numerous other potential exposures, such as restructuring
liabilities, workers compensation claims, environmental claims, product
liability, litigation and recoverability of deferred income taxes. Establishing
loss reserves or valuation allowances for these matters requires us to estimate
and make judgments in regards to risk exposure and ultimate liability. We
establish accruals for these exposures; however, if our exposure exceeds our
estimates, we could be required to record additional charges.
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 adopted the statement on
January 1, 2003, and it did not have a material impact on our results of
operations and financial condition.
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 requires
gains and losses on early extinguishment of debt to not be classified 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 adopted SFAS 145 effective January 1,
2003 and will reclassify the losses on early extinguishments of debt recognized
in 2002 and 2001 to interest expense.
23
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 apply
the provisions of SFAS 146 to exit or disposal activities that are initiated
after December 31, 2002.
In November 2002, the FASB issued FASB Interpretation (FIN) No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN 45 requires that a liability
be recorded in the guarantor's balance sheet upon issuance of a guarantee. In
addition, FIN 45 requires disclosures about the guarantees that an entity has
issued, including a rollforward of the entity's product warranty liabilities. We
have no guarantees that would be required to be disclosed at December 31, 2002.
In November 2002, the EITF reached a consensus on Issue No. 00-21,
"Revenue Arrangements with Multiple Deliverables." EITF Issue No. 00-21 provides
guidance on how to account for arrangements that involve the delivery or
performance of multiple products, services and/or rights to use assets. The
provisions of EITF Issue No. 00-21 will apply to revenue arrangements entered
into in 2003. We are currently evaluating the effect that the adoption of EITF
Issue No. 00-21 will have on our results of operations, cash flows and financial
condition.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation, Transition and Disclosure." SFAS No. 148 provides
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. SFAS No. 148 also
requires that disclosures of the pro forma effect of using the fair value method
of accounting for stock-based employee compensation be displayed more
prominently and in a tabular format. Additionally, SFAS No. 148 requires
disclosure of the pro forma effect in interim financial statements. The annual
disclosure requirements of SFAS No. 148 are effective for us for December 31,
2002. The interim disclosure requirements are effective for the first quarter of
2003. We do not expect SFAS No. 148 to have a material effect on our results of
operations, cash flows or financial condition.
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51."
FIN 46 requires certain variable interest entities to be consolidated by the
primary beneficiary of the entity if the equity investors in the entity do not
have the characteristics of a controlling financial interest or do not have
sufficient equity at risk for the entity to finance its activities without
additional subordinated financial support from other parties. FIN 46 is
effective for all new variable interest entities created or acquired after
January 31, 2003. For variable interest entities created or acquired prior to
February 1, 2003, the provisions of FIN 46 must be applied for the first interim
or annual period beginning after June 15, 2003. We have never utilized such
entities in the past and we expect the adoption of FIN 46 will have no effect on
our results of operations, cash flows and financial condition.
OTHER MATTERS
You should read Note 11 to the Consolidated Financial Statements for
information pertaining to commitments and contingencies.
24
ITEM 7A. 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 had and will continue to 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. Information concerning
the maturities and fair value of our interest rate sensitive investments and
debt is included in Notes 6, 7 and 8 to the Consolidated Financial Statements.
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 December 31, 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.
We purchase natural gas for our operations and, therefore, have a limited
market risk in gas prices related to gas purchases in the open market at spot
prices. The prices of such gas purchases and futures positions are subject to
wide fluctuations at times due to unpredictable factors such as weather,
government policies and demand for natural gas and competitive fuels. As a
result, our earnings could be affected by changes in the price and availability
of such gas. As market conditions dictate, we from time to time will lock-in
future gas prices using fixed price contracts. We do not use financial
instruments for trading purposes and are not a party to any leveraged
derivatives.
25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE
Consolidated Financial Statements
---------------------------------
Report of Management................................................................................... 27
Report of Independent Public Accountants............................................................... 28
Consolidated Statements of Operations.................................................................. 30
Consolidated Balance Sheets............................................................................ 31
Consolidated Statements of Cash Flows.................................................................. 32
Consolidated Statements of Common
Shareholders' Equity............................................................................... 33
Notes to Consolidated Financial Statements............................................................. 34
Financial Statement Schedule
----------------------------
Schedule II............................................................................................ 57
26
REPORT OF MANAGEMENT
The accompanying consolidated financial statements have been prepared by
the management of NS Group, Inc., in conformity with accounting principles
generally accepted in the United States of America and, in the judgment of
management, present fairly and consistently the Company's consolidated financial
position and results of operations. These statements necessarily include amounts
that are based on management's best estimates and judgments. The financial
information contained elsewhere in this report is consistent with that contained
in the consolidated financial statements.
In fulfilling its responsibilities for the integrity of financial
information, management maintains accounting systems and related controls. These
controls provide reasonable assurance, at appropriate costs, that assets are
safeguarded against losses and that financial records are reliable for use in
preparing financial statements. These systems are enhanced by written policies,
an organizational structure that provides division of responsibilities and
careful selection and training of qualified people.
In connection with their annual audit, independent public accountants
perform an examination in accordance with auditing standards generally accepted
in the United States of America which includes a review of the system of
internal accounting control and an expression of an opinion that the
consolidated financial statements are fairly presented in all material respects.
The board of directors, through its audit committee composed solely of
independent non-employee directors, reviews the Company's financial reporting
and accounting practices. The independent public accountants meet regularly with
and have access to the audit committee, with or without management present, to
discuss the results of their audit work.
/s/ RENE J. ROBICHAUD
Rene J. Robichaud
President and Chief Executive Officer
/s/ THOMAS J. DEPENBROCK
Thomas J. Depenbrock
Vice President, Treasurer and
Chief Financial Officer
27
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF NS GROUP, INC.
Newport, Kentucky
We have audited the accompanying consolidated balance sheet of NS Group,
Inc. and subsidiaries as of December 31, 2002, and the related consolidated
statements of operations, common shareholders' equity, and cash flows for the
year then ended. Our audit also included the consolidated financial statement
schedule listed in the Index at Item 15 for the year ended December 31, 2002.
These consolidated financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the 2002 consolidated financial statements and financial statement
schedule based on our audit. The consolidated financial statements and financial
statement schedule of the Company as of and for the year ended December 31,
2001, the three-month period ended December 31, 2000, and the year ended
September 30, 2000 were audited by other auditors who have ceased operations.
Those auditors expressed an unqualified opinion on those consolidated financial
statements and included an explanatory paragraph that stated that the schedule
fairly stated in all material respects the financial data required to be set
forth therein in relation to the basic financial statements taken as a whole in
their report dated February 5, 2002 (except for Note 17, as to which the date is
March 15, 2002).
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such 2002 consolidated financial statements present
fairly, in all material respects, the financial position of the Company at
December 31, 2002, and the results of its operations and its cash flows for the
year then ended in conformity with accounting principles generally accepted in
the United States of America. Also, in our opinion, such 2002 consolidated
financial statement schedule, when considered in relation to the basic 2002
consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
/s/DELOITTE & TOUCHE LLP
Cincinnati, Ohio
February 7, 2003
28
The following report is a copy of a previously issued Arthur Andersen LLP
("Andersen") report, and the report has not been reissued by Andersen. The
Andersen report refers to the consolidated balance sheet as of September 30,
2000 and the consolidated statements of operations, common shareholders' equity
and cash flows for the year ended September 25, 1999, which are no longer
included in the accompanying financial statements.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE SHAREHOLDERS OF NS GROUP, INC.:
We have audited the accompanying consolidated balance sheets of NS Group,
Inc. (a Kentucky corporation) and subsidiaries as of December 31, 2001 and
September 30, 2000, and the related consolidated statements of operations,
common shareholders' equity and cash flows for the year ended December 31, 2001,
the three-month period ended December 31, 2000, and the years ended September
30, 2000 and September 25, 1999. These financial statements and the schedule
referred to below, are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of NS Group, Inc. and
subsidiaries as of December 31, 2001 and September 30, 2000, and the results of
their operations and their cash flows for the year ended December 31, 2001, the
three-month period ended December 31, 2000, and the years ended September 30,
2000 and September 25, 1999 in conformity with accounting principles generally
accepted in the United States.
Our audit was made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the Index to
Consolidated Financial Statements is presented for purposes of complying with
the Securities and Exchange Commission's rules and is not part of the basic
financial statements. The schedule has been subjected to the auditing procedures
applied in the audit of the basic financial statements and, in our opinion,
fairly states in all material respects the financial data required to be set
forth therein in relation to the basic financial statements taken as a whole.
Cincinnati, Ohio /s/ARTHUR ANDERSEN LLP
February 5, 2002 (except for Note 17, as to which the date is March 15, 2002)
29
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE
MONTHS ENDED YEAR ENDED
YEAR ENDED DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
----------------------- ------------ -----------
(In thousands, except per share amounts) 2002 2001 2000 2000
=========================================================================================================================
NET SALES $192,408 $315,458 $73,357 $358,705
COST OF PRODUCTS SOLD 206,993 290,058 73,113 356,686
- -------------------------------------------------------------------------------------------------------------------------
Gross profit (loss) (14,585) 25,400 244 2,019
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 17,509 19,982 5,204 20,585
RESTRUCTURING CHARGES 2,046 55,585 -- --
- -------------------------------------------------------------------------------------------------------------------------
Operating loss (34,140) (50,167) (4,960) (18,566)
INVESTMENT INCOME (LOSS) 737 (2,114) 1,169 3,147
INTEREST EXPENSE (8,180) (10,342) (2,804) (11,745)
OTHER INCOME, NET 1,410 2,788 56 2,526
- -------------------------------------------------------------------------------------------------------------------------
Loss from continuing operations
before income taxes and extraordinary items (40,173) (59,835) (6,539) (24,638)
PROVISION (BENEFIT) FOR INCOME TAXES (858) (3,917) (2,474) (590)
- -------------------------------------------------------------------------------------------------------------------------
Loss from continuing operations
before extraordinary items (39,315) (55,918) (4,065) (24,048)
INCOME FROM DISCONTINUED OPERATIONS,
NET OF INCOME TAXES -- -- 10,955 1,149
- -------------------------------------------------------------------------------------------------------------------------
Income (loss) before extraordinary items (39,315) (55,918) 6,890 (22,899)
EXTRAORDINARY ITEMS, NET OF INCOME TAXES (615) (59) 900 --
- -------------------------------------------------------------------------------------------------------------------------
Net income (loss) $(39,930) $(55,977) $7,790 $(22,899)
=========================================================================================================================
Other comprehensive income (loss), net of taxes:
Net unrealized gain (loss) on investments 514 5,416 (840) (1,634)
- -------------------------------------------------------------------------------------------------------------------------
Comprehensive income (loss) $(39,416) $(50,561) $6,950 $(24,533)
=========================================================================================================================
PER COMMON SHARE - BASIC
Loss from continuing operations $(1.90) $(2.68) $(0.19) $(1.11)
Income from discontinued operations -- -- 0.52 0.05
Extraordinary items, net of income taxes (0.03) -- 0.04 --
- -------------------------------------------------------------------------------------------------------------------------
Net income (loss) $(1.93) $(2.68) $0.37 $(1.06)
=========================================================================================================================
PER COMMON SHARE - DILUTED
Loss from continuing operations $(1.90) $(2.68) $(0.19) $(1.11)
Income from discontinued operations -- -- 0.51 0.05
Extraordinary items, net of income taxes (0.03) -- 0.04 --
- -------------------------------------------------------------------------------------------------------------------------
Net income (loss) $(1.93) $(2.68) $0.36 $(1.06)
=========================================================================================================================
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 20,647 20,889 21,243 21,651
Diluted 20,647 20,889 21,620 21,651
See notes to consolidated financial statements
30
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
--------------------------
(In thousands) 2002 2001
===========================================================================================
ASSETS
- -------------------------------------------------------------------------------------------
CURRENT ASSETS
Cash and equivalents $ 29,357 $ 74,856
Accounts receivable, less allowances
of $591 and $1,490, respectively 12,653 23,161
Inventories 55,874 55,329
Operating supplies and prepaids 10,968 10,033
Deferred income taxes 332 3,015
Other current assets 782 132
- -------------------------------------------------------------------------------------------
Total current assets 109,966 166,526
- -------------------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT, NET 51,651 60,196
LONG-TERM INVESTMENTS 3,848 16,833
- -------------------------------------------------------------------------------------------
OTHER ASSETS 5,416 5,482
- -------------------------------------------------------------------------------------------
ASSETS HELD FOR SALE 9,413 11,447
- -------------------------------------------------------------------------------------------
Total assets $180,294 $260,484
===========================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
- -------------------------------------------------------------------------------------------
CURRENT LIABILITIES
Accounts payable $ 8,600 $ 14,303
Accrued liabilities and other 20,162 19,205
Accrued restructuring liabilities 4,656 6,295
Current portion of long-term debt 33,555 33
- -------------------------------------------------------------------------------------------
Total current liabilities 66,973 39,836
- -------------------------------------------------------------------------------------------
LONG-TERM DEBT 482 68,070
- -------------------------------------------------------------------------------------------
DEFERRED INCOME TAXES 332 3,203
- -------------------------------------------------------------------------------------------
OTHER LONG-TERM LIABILITIES 8,124 5,713
- -------------------------------------------------------------------------------------------
COMMON SHAREHOLDERS' EQUITY
Common stock, no par value, 40,000 shares authorized 282,935 282,928
Treasury stock, at cost (35,572) (35,578)
Common stock options and warrants 759 635
Accumulated other comprehensive loss (328) (842)
Accumulated deficit (143,411) (103,481)
- -------------------------------------------------------------------------------------------
Common shareholders' equity 104,383 143,662
- -------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $180,294 $260,484
===========================================================================================
See notes to consolidated financial statements
31
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE
MONTHS ENDED YEAR ENDED
YEAR ENDED DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
----------------------- ------------ -------------
(In thousands) 2002 2001 2000 2000
===================================================================================================================================
CASH FLOWS - OPERATING ACTIVITIES
Net income (loss) $(39,930) $(55,977) $ 7,790 $(22,899)
Less: income from discontinued
operations, net of income taxes -- -- 10,955 1,149
- -----------------------------------------------------------------------------------------------------------------------------------
Net loss from continuing operations (39,930) (55,977) (3,165) (24,048)
Adjustments to reconcile net loss to net
cash flows provided (used) by operating activities:
Depreciation and amortization 11,272 13,604 5,535 21,550
Amortization of debt discount and
finance costs 1,009 1,077 525 1,141
Impairment loss on investments 1,000 4,718 -- --
Restructuring charges, including asset impairment 2,046 42,820 -- --
Extraordinary charges 615 59 -- --
Loss on sales of securities 86 511 -- 1,399
Change in long-term deferred income taxes (2,871) (2,360) (2,426) (1,461)
Other, net 662 308 (6) (26)
Changes in operating assets and liabilities:
Accounts receivable, net 10,508 22,193 12,925 (23,052)
Inventories (545) 3,155 10,382 (19,646)
Other current assets 808 1,332 691 4,609
Accounts payable (5,703) 941 (22,118) 10,463
Accrued liabilities 957 (9,789) 883 4,484
Restructuring liabilities (472) 6,295 -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash flows provided (used) by operating
activities (20,558) 28,887 3,226 (24,587)
===================================================================================================================================
CASH FLOWS - INVESTING ACTIVITIES
Purchases of property, plant and equipment (2,422) (2,198) (586) (7,499)
Proceeds from sales of assets held for sale 834 2,144 -- --
Proceeds from sales of equipment -- -- -- 95
Proceeds from sale of subsidiary -- -- 26,532 --
Purchases of available-for-sale securities -- -- -- (7,878)
Maturities of available-for-sale securities 2,844 -- -- 22,739
Sales of available-for-sale securities 9,455 3,752 753 14,556
Changes in other assets 135 475 7 310
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash flows provided by investing
activities 10,846 4,173 26,706 22,323
===================================================================================================================================
CASH FLOWS - FINANCING ACTIVITIES
Repayments of long-term debt (35,033) (962) (5,049) (146)
Proceeds from issuance of common stock 11 328 43 2,142
Purchase of treasury stock -- (2,721) (9,391) --
Payment of financing costs (765) -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash flows provided (used) by financing
activities (35,787) (3,355) (14,397) 1,996
===================================================================================================================================
Cash provided (used) by discontinued operations -- -- (1,289) 68
Increase (decrease) in cash and equivalents (45,499) 29,705 14,246 (200)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 74,856 45,151 30,905 31,105
- -----------------------------------------------------------------------------------------------------------------------------------
CASH AND EQUIVALENTS AT END OF PERIOD $ 29,357 $ 74,856 $45,151 $ 30,905
===================================================================================================================================
Supplemental disclosure of cash flow information:
Cash paid during the period for interest $ 9,295 $ 9,362 $ 4 $ 10,095
Cash recovered during the period for income taxes $ 50 $ 1,326 $ 634 $ 2,187
See notes to consolidated financial statements
32
CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY
=================================================================================================================================
Accumulated
Common Stock Treasury Stock Options Other Accumulated
------------------ ------------------- and Comprehensive Earnings
(In thousands) Shares Amount Shares Amount Warrants Income (Loss) (Deficit) Total
=================================================================================================================================
Balance, September 25, 1999 24,364 $280,051 2,917 $(23,676) $896 $(3,784) $(32,335) $221,152
Net loss (22,899) (22,899)
Net unrealized loss on
investments (1,634) (1,634)
Stock options plans 165 1,558 62 1,620
Exercise of common stock
warrants 250 1,098 (151) 32 (492) (32) 606
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 2000 24,779 $282,707 2,766 $(23,644) $466 $(5,418) $(55,266) $198,845
Net income 7,790 7,790
Net unrealized loss on
investments (840) (840)
Purchase of treasury stock 1,092 (9,392) (9,392)
Stock options plans 7 43 - 1 31 75
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 24,786 $282,750 3,858 $(33,035) $497 $(6,258) $(47,476) $196,478
Net loss (55,977) (55,977)
Net unrealized gain on
investments 187 187
Reclassification of investment
losses to income statement 5,229 5,229
Purchase of treasury stock 376 (2,721) (2,721)
Stock option plans 73 178 (20) 178 138 (28) 466
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 24,859 $282,928 4,214 $(35,578) $635 $ (842) $(103,481) $143,662
NET LOSS (39,930) (39,930)
NET UNREALIZED LOSS ON
INVESTMENTS (552) (552)
RECLASSIFICATION OF INVESTMENT
LOSSES TO INCOME STATEMENT 1,066 1,066
STOCK OPTION PLANS 1 7 (1) 6 124 137
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2002 24,860 $282,935 4,213 $(35,572) $759 $ (328) $(143,411) $104,383
=================================================================================================================================
See notes to consolidated financial statements
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of NS Group,
Inc. and its wholly-owned subsidiaries (the Company): Newport Steel Corporation
(Newport), Koppel Steel Corporation (Koppel), Erlanger Tubular Corporation
(Erlanger), and Northern Kentucky Management, Inc. All significant intercompany
accounts and transactions have been eliminated.
The consolidated financial statements of NS Group, Inc. have been restated
to reflect the disposition of Imperial Adhesives, Inc. (Imperial) that was sold
in October 2000. Accordingly, the revenues, cost and expenses and cash flows of
Imperial have been excluded from the respective captions in the Consolidated
Statements of Income and Consolidated Statements of Cash Flows, and have been
reported as "Income from discontinued operations" and as "Cash provided (used)
by discontinued operations". See Note 3 for additional information.
CHANGE IN FISCAL YEAR-END
The Company's fiscal years prior to October 1, 2000 ended on the last
Saturday of September. Thereafter, the Company changed its fiscal year-end to a
calendar year ending on December 31. As a result of the fiscal year-end change,
the period from October 1, 2000 through December 31, 2000 (the "Transition
Period") preceded the start of the 2001 calendar year. The results previously
reported for the fiscal year from September 26, 1999 through September 30, 2000,
is referred to in these statements as "2000" or as the year ended in September
2000 and contained fifty-three weeks.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires that management make
certain estimates and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes. Actual results could
differ from those recorded estimates.
CASH AND EQUIVALENTS
Cash includes currency on hand and demand deposits with financial
institutions. Cash equivalents consist primarily of money market mutual funds,
commercial paper and U.S. treasury securities with an original term of three
months or less.
LONG-TERM INVESTMENTS
Long-term investments consist of corporate bonds and a retained equity
investment in a former subsidiary of the Company that are classified as
available for sale and carried at fair value, based on quoted market prices.
Realized gains and losses are included in investment income. The cost of
securities sold is based on the specific identification method. Unrealized gains
and losses on available for sale securities are included, net of tax, in
accumulated other comprehensive income (loss) within common shareholders' equity
until sold.
All long-term investments are periodically reviewed to determine if
declines in fair value below cost basis are other-than-temporary. Significant
and sustained decreases in quoted market prices, a series of historic and
projected operating losses by the investee or other factors are considered as
part of the review. If the decline in fair value has been determined to be
other-than-temporary, an impairment loss is recorded in investment income and
the individual security is written down to a new cost basis. The Company
recognized impairment losses of $1.0 million and $6.2 million in 2002 and 2001,
respectively.
34
Other comprehensive income (loss), net of applicable income taxes, if any,
consists of the following:
====================================================================================================================
Transition
(In thousands) 2002 2001 Period 2000
- --------------------------------------------------------------------------------------------------------------------
Net unrealized holding
gains (losses) for the period $(552) $ 187 $(840) $(3,033)
Reclassification adjustment for
impairment losses included in
income, net of income taxes 980 4,718 -- --
Reclassification adjustment for
losses realized in income 86 511 -- 1,399
- --------------------------------------------------------------------------------------------------------------------
Other comprehensive income (loss) $ 514 $ 5,416 $(840) $(1,634)
====================================================================================================================
INVENTORIES
Inventories are stated at the lower of FIFO (first-in, first-out) cost or
market, or the lower of average cost or market. The Company records a provision
for excess and obsolete inventory whenever such an impairment has been
identified. Inventory costs include labor, material and manufacturing overhead.
Inventories at December 31, 2002 and 2001 consist of the following:
- -------------------------------------------------------------------
(In thousands) 2002 2001
- -------------------------------------------------------------------
Raw materials $20,108 $9,358
Finished and semi-
finished products 35,766 45,971
- -------------------------------------------------------------------
$55,874 $55,329
===================================================================
PROPERTY, PLANT AND EQUIPMENT AND DEPRECIATION
Property, plant and equipment are stated on a cost basis. Expenditures for
additions, betterments and renewals are capitalized. Maintenance and repair
expenditures, which do not improve or extend productive life, are expensed as
incurred. For financial reporting purposes, plant and equipment are depreciated
on a straight-line method over the estimated useful lives of the assets. Useful
lives of the assets are 30 to 40 years for buildings and 5 to 12 years for
machinery and equipment. The Company periodically reviews property, plant and
equipment for indicators of potential impairment, which would be measured by
comparing book value against the estimated undiscounted future cash flows. Any
such impairment loss is included in the statement of operations. See Note 2
regarding asset write-downs and reclassifications as a result of the Company's
restructuring initiatives in 2001.
Property, plant and equipment at December 31, 2002 and 2001consist of the
following:
- -----------------------------------------------------------------------------
(In thousands) 2002 2001
- -----------------------------------------------------------------------------
Land and improvements $ 8,836 $ 8,761
Buildings 16,195 16,195
Machinery and equipment 171,418 167,749
Construction in progress 1,302 1,702
- -----------------------------------------------------------------------------
197,751 194,407
Accumulated depreciation (146,100) (134,211)
- -----------------------------------------------------------------------------
$ 51,651 $ 60,196
=============================================================================
TREASURY STOCK
The Company's repurchases of shares of common stock are recorded as
treasury stock at cost and result in a reduction of common shareholders' equity.
When treasury shares are reissued, the Company uses average cost to value
treasury shares and any excess of average cost over reissuance price is treated
as a reduction of retained earnings. The Company purchased 376,300 shares in the
open market for $2.3 million in the year ended December 31, 2001. During the
Transition Period, the Company purchased 1.1 million of its shares for $9.4
million. See Note 10 for additional information.
REVENUE RECOGNITION
The Company records revenue from product sales when the product is shipped
from its facilities and risk of loss and the title has passed to the customer
or, at the customer's request, the goods are set aside in storage and are paid
for in full. For transactions where we have not obtained customer acceptance,
revenue is deferred until the terms of the acceptance are satisfied.
35
STOCK-BASED COMPENSATION
As allowed under SFAS No. 123, "Accounting for Stock-Based Compensation,"
the Company accounts for stock-based compensation using the intrinsic value
method in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations. Stock
options granted during 2002, 2001 and 2000 were exercisable at prices equal to
the fair market value of the Company's common stock on the dates the options
were granted; accordingly, no compensation expense has been recognized for the
stock options granted.
If the Company accounted for stock-based compensation using the fair value
recognition provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation", net income (loss) and basic and diluted earnings (loss) per share
would have been reduced to the pro forma amounts indicated below:
- ----------------------------------------------------------------------------------------------------------------------------------
Transition
(In thousands, except per share amounts) 2002 2001 Period 2000
- ----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) as reported $(39,930) $(55,977) $7,790 $(22,899)
Less: Stock-based employee compensation
expense determined under the fair value
method for all awards, net of related tax effects (3,034) (3,687) (954) (2,635)
- ----------------------------------------------------------------------------------------------------------------------------------
Pro forma net income (loss) $(42,964) $(59,664) $6,836 $(25,534)
==================================================================================================================================
Earnings (loss) per share:
Basic - as reported $(1.93) $(2.68) $0.37 $(1.06)
Diluted - as reported $(1.93) $(2.68) $0.36 $(1.06)
Basic - proforma $(2.08) $(2.86) $0.33 $(1.18)
Diluted - proforma $(2.08) $(2.86) $0.32 $(1.18)
The fair values of the granted options were determined using the
Black-Scholes option pricing model with the following weighted average
assumptions for 2002, 2001 and 2000, respectively; no common stock dividends;
expected volatility of 62%, 75% and 63%; risk-free interest rates of 4.7%, 5.1%
and 6.7%; and expected life of 7 years, 7 years and 8 years. There were no stock
option grants in the Transition Period.
INCOME TAXES
Deferred income tax balances represent the estimated future tax effects of
temporary differences between the financial reporting basis and the tax basis of
certain assets and liabilities. A valuation allowance is established to reduce
deferred tax assets to amounts that are more likely than not to be realized.
ENVIRONMENTAL REMEDIATION AND COMPLIANCE
Environmental remediation costs are accrued, except to the extent
capitalizable, when incurrence of such costs are probable and the costs can be
reasonably estimated. Environmental compliance costs include maintenance and
operating costs associated with pollution control facilities, costs of ongoing
monitoring programs, permit costs and other similar costs. Such costs are
expensed as incurred.
EARNINGS (LOSS) PER SHARE
Basic earnings or loss per share is computed by dividing net income or
loss by the weighted-average number of common shares outstanding for the period.
Diluted earnings or loss per share is computed by dividing net income or loss by
the weighted average number of common shares outstanding and dilutive
equivalents, which, for the Company, includes stock options and warrants only.
Because the Company reported net losses in 2002, 2001, and 2000, potentially
dilutive securities of 2.2 million shares were not included in the computation
of diluted earnings or loss per share for the periods because they would be
antidilutive.
36
NOTE 2: RESTRUCTURING CHARGES
During the quarter ended March 31, 2001, the Company implemented
restructuring initiatives involving certain operations of its business. One
initiative was to purchase hot-rolled coils rather than manufacture them at the
Company's welded tubular operations. As a result, the Company discontinued the
production of hot-rolled coils and closed its melt shop and hot strip mill
operations at its welded tubular facilities in Wilder, Kentucky, effective March
31, 2001. In addition, the Company decided to exit the special bar quality
business by June 30, 2001, which was operated from its Koppel, Pennsylvania
facility.
Consequently, in the first quarter of 2001, the Company recorded $56.2
million of restructuring charges, including $43.4 million resulting primarily
from asset impairment losses related to machinery, equipment and related spare
parts inventories to be sold. The asset impairment loss was determined based
upon an independent appraisal. The restructuring charges include a $0.6 million
write-down of special bar quality finished goods inventories that was included
in costs of products sold.
In the fourth quarter of 2002, the Company recorded $2.0 million of
additional restructuring charges related to the March 2001 restructuring. The
charges included a $1.2 million impairment loss on the assets being held for
sale and $0.8 million primarily related to an increase in the estimate of
post-closure costs for the Company's closed landfill, net of employee separation
accrual reversals. The impairment loss was based on an independent appraisal of
the assets held for sale at December 31, 2002.
Following is a summary of the accrued restructuring liabilities and
activity through December 31, 2002:
- ----------------------------------------------------------------------------------
FACILITY
EMPLOYEE CLOSING
(In thousands) SEPARATION AND OTHER TOTAL
- ----------------------------------------------------------------------------------
Initial reserves $ 4,941 $7,824 $12,765
Cash payments (4,238) (2,232) (6,470)
Accruals (reversals) (548) 548 --
- ----------------------------------------------------------------------------------
December 31, 2001 $ 155 $6,140 $6,295
- ----------------------------------------------------------------------------------
Cash payments (2) (470) (472)
Accruals (reversals) (153) 999 846
- ----------------------------------------------------------------------------------
DECEMBER 31, 2002 $ -- $6,669 $6,669
==================================================================================
In 2001, the Company paid severance to the 205 hourly and 65 salaried
employees whose positions were eliminated by the restructuring. The
restructuring liabilities for facility closing and other costs consist primarily
of estimated cancellation costs of operating contracts and environmental
remediation costs. Payments for contract cancellation costs and environmental
costs related to the landfill closure costs are expected to be paid during 2003.
Accrued restructuring liabilities of $2.0 million, primarily related to
post-closure costs of the Company's closed landfill, has been classified as
Other Long-term Liabilities as the payments will be made over the next thirty
years.
ASSETS HELD FOR SALE
Assets of the closed operations, consisting of machinery and equipment,
related raw materials, spare parts and supply inventories, are classified as
Assets Held for Sale in the Company's consolidated balance sheet. The assets
include the Company's best estimates of the amounts expected to be realized on
the sale of the assets. While the estimates are based on an analysis of the
facilities, including valuations by independent appraisers, there have been
limited recent sales of comparable machinery and equipment to consider in
preparing such valuations. The amounts the Company will ultimately realize could
differ materially from the amounts assumed in calculating the impairment loss on
the assets at December 31, 2002. The assets have and are being actively marketed
by an outside broker. Through December 31, 2002, the Company had received $3.0
million in net proceeds from sales of these assets and the sale prices
approximated the net book value of the assets sold.
37
NOTE 3: DISCONTINUED OPERATIONS
On October 12, 2000, pursuant to a stock purchase agreement dated
September 13, 2000, the Company sold its investment in its wholly-owned
subsidiary, Imperial Adhesives, Inc. for $26.7 million in cash.
The Company and the buyer entered into various agreements that provide,
among other things, that the Company will indemnify the buyer for certain
matters, including certain environmental contingencies. Accrued liabilities
associated with these matters were $1.9 million at December 31, 2002 and 2001.
See Note 11 for further discussion of environmental contingencies.
Income from discontinued operations, net of income taxes consists of the
following:
- --------------------------------------------------------------------------
Transition
(In thousands) Period 2000
- --------------------------------------------------------------------------
Pre-tax income $115 $1,883
Provision for taxes (19) (734)
- --------------------------------------------------------------------------
Income from operations
of Imperial, net of
income taxes 96 1,149
- --------------------------------------------------------------------------
Gain on sale of Imperial 13,284 --
Provision for taxes (2,425) --
- --------------------------------------------------------------------------
Gain on sale, net of
income taxes 10,859 --
- --------------------------------------------------------------------------
Income from discontinued
operations, net of
income taxes $10,955 $1,149
==========================================================================
NOTE 4: BUSINESS SEGMENT INFORMATION
The Company has historically reported its operations in two reportable
segments. The Company's Energy Products Segment consists primarily of (i) welded
and seamless tubular goods 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 Energy
Products Segment reflects the aggregation of two business units 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. The Company's Industrial Products
Segment consisted of Special Bar Quality (SBQ) products used primarily in the
manufacture of heavy industrial equipment. As discussed in Note 2, the Company
exited the SBQ business and as such, the assets of this segment at December 31,
2002 are classified as Assets Held for Sale.
The Company evaluates performance and allocates resources on operating
income before interest and income taxes. The accounting policies of the
reportable segments are the same as those described in Note 1. Corporate assets
are primarily cash, investments, and income tax assets. Corporate expenses are
general and administrative overhead costs.
Concentrations
The operations of the segments are conducted principally in the United
States. The Company grants trade credit to customers, the most significant of
which are distributors serving the oil and natural gas exploration and
production industries which purchase tubular steel products from the Energy
Products Segment. Sales to a customer of the Company's energy products accounted
for approximately 17%, 16%, 18% and 14%, respectively, of total Energy Products
segment sales for 2002, 2001, the Transition Period and 2000. Another customer
of the Company's energy products accounted for 12% and 14% of total Energy
Products segment sales for 2002 and 2001. The Company's welded tubular
operations depends on three suppliers for its steel coils with one supplier
accounting for the majority of its purchases. If the Company would suffer the
loss of a significant customer or supplier, the effect could result in reduced
sales or a delay in manufacturing and would adversely affect operating results.
38
The following table sets forth selected financial information by reportable
business segment for 2002, 2001, the Transition Period and 2000.
- ---------------------------------------------------------------------------------------------------------------------------------
ENERGY INDUSTRIAL
(In thousands) PRODUCTS PRODUCTS CORPORATE TOTAL
- ---------------------------------------------------------------------------------------------------------------------------------
2002
- ---------------------------------------------------------------------------------------------------------------------------------
NET SALES $192,408 $ -- $ -- $192,408
OPERATING INCOME (LOSS) (26,878)(1) -- (7,262) (34,140)(1)
ASSETS 137,025 1,127 42,142 180,294
DEPRECIATION AND AMORTIZATION 11,272 -- -- 11,272
CAPITAL EXPENDITURES 2,422 -- -- 2,422
- ---------------------------------------------------------------------------------------------------------------------------------
2001
- ---------------------------------------------------------------------------------------------------------------------------------
Net sales $305,609 $ 9,849 $ -- $ 315,458
Operating income (loss) (2) (28,300) (12,769) (9,098) (50,167)
Assets 162,295 1,186 97,003 260,484
Depreciation and amortization 12,663 941 -- 13,604
Capital expenditures 2,198 -- -- 2,198
- ---------------------------------------------------------------------------------------------------------------------------------
Transition Period
- ---------------------------------------------------------------------------------------------------------------------------------
Net sales $67,503 $ 5,854 $ -- $ 73,357
Operating income (loss) (341) (3,001) (1,618) (4,960)
Assets 216,783 26,636 75,507 318,926
Depreciation and amortization 4,688 847 -- 5,535
Capital expenditures 586 -- -- 586
- ---------------------------------------------------------------------------------------------------------------------------------
2000
- ---------------------------------------------------------------------------------------------------------------------------------
Net sales $302,583 $ 56,122 $ -- $358,705
Operating income (loss) (5,527) (6,645) (6,394) (18,566)
Assets 240,250 30,895 74,192 345,337
Depreciation and amortization 18,294 3,256 -- 21,550
Capital expenditures 7,243 256 -- 7,499
- ---------------------------------------------------------------------------------------------------------------------------------
Transition
2002 2001 Period 2000
- ---------------------------------------------------------------------------------------------------------------------------------
Energy Product Sales
Welded tubular products $ 87,306 $ 143,540 $ 29,800 $181,808
Seamless tubular products 105,102 162,069 37,703 120,775
- ---------------------------------------------------------------------------------------------------------------------------------
$192,408 $ 305,609 $ 67,503 $302,583
=================================================================================================================================
(1) Includes restructuring charges of $2.0 million.
(2) Includes restructuring charges of $45.3 million for Energy Products
Segment, $9.7 million for Industrial Products Segment and $1.2 million for
Corporate, for a total of $56.2 million.
39
NOTE 5: ACCRUED LIABILITIES AND OTHER
Accrued liabilities and other at December 31, 2002 and 2001 consist of the
following:
- ----------------------------------------------------------------------------------------------------------------
(In thousands) 2002 2001
- ----------------------------------------------------------------------------------------------------------------
Accrued payroll and benefits $ 5,907 $ 5,752
Accrued interest 2,089 4,260
Deferred revenue 2,663 3,088
Accrued environmental remediation 2,081 1,969
Workers' compensation 3,225 1,956
Other 4,197 2,180
- ----------------------------------------------------------------------------------------------------------------
$ 20,162 $ 19,205
================================================================================================================
NOTE 6: LONG-TERM INVESTMENTS
At December 31, 2002 and 2001, the Company's long-term investments, which
are all classified as available for sale, consist of the following:
- ---------------------------------------------------------------------------------------
AMORTIZED GROSS UNREALIZED MARKET
---------------------
(In thousands) COST GAINS LOSSES VALUE
- ---------------------------------------------------------------------------------------
2002
=======================================================================================
Corporate bonds $ 4,475 $ -- $(627) $ 3,848
- ---------------------------------------------------------------------------------------
2001
- ---------------------------------------------------------------------------------------
Corporate bonds $17,465 $ 187 $(983) $ 16,669
Equity securities $400 $ -- $(236) $ 164
At December 31, 2002, scheduled maturities of the Company's investments in
long-term debt securities were as follows:
- -------------------------------------------------------------------------------
AVERAGE YEAR AMORTIZED MARKET
(In thousands) END RATE COST VALUE
- -------------------------------------------------------------------------------
1 to 5 years 9.72% $1,651 $1,500
After five years 9.24% 2,824 2,348
- -------------------------------------------------------------------------------
$4,475 $3,848
- -------------------------------------------------------------------------------
Gross realized gains and losses for 2002, 2001, Transition Period and 2000 were
as follows:
- --------------------------------------------------------------------------------------------------------------------------
Transition
(In thousands) 2002 2001 Period 2000
- --------------------------------------------------------------------------------------------------------------------------
Realized gains $328 $ 69 $ - $ 134
Realized losses $414 $ 580 $ - $ 1,533
- --------------------------------------------------------------------------------------------------------------------------
In addition, see Note 1 - Long-term investments regarding the impairment
losses on investments which the Company recognized in 2002 and 2001.
40
NOTE 7: LONG-TERM DEBT AND CREDIT FACILITY
Long-term debt of the Company at December 31, 2002 and 2001 consists of
the following:
- ------------------------------------------------------------------------------------------------------------------
(In thousands) 2002 2001
- ------------------------------------------------------------------------------------------------------------------
13.5% senior secured notes due July 15, 2003 (Notes), interest due
semi-annually, secured by property, plant and equipment (net of
unamortized discount of $247 and $1,214,
respectively) $33,521 $67,554
Other 516 549
- ------------------------------------------------------------------------------------------------------------------
34,037 68,103
Less current portion (33,555) (33)
- ------------------------------------------------------------------------------------------------------------------
$ 482 $68,070
==================================================================================================================
The Notes are unconditionally guaranteed in full, jointly and severally,
by each of the Company's subsidiaries and are secured by substantially all of
the Company's property, plant and equipment. The indenture relating to the Notes
contains a number of restrictive covenants including, among other things,
limitations on the ability of the Company to incur additional indebtedness;
create liens; make certain restricted payments, including dividends; engage in
certain transactions with affiliates; engage in sale and leaseback transactions;
dispose of assets; issue or sell stock of its subsidiaries; enter into
agreements that restrict the ability of its subsidiaries to pay dividends and
make distributions; engage in mergers, consolidations and transfers of
substantially all of the Company's assets; and make certain investments, loans
and advances. The Notes may be redeemed at the option of the Company, at any
time, in whole or in part, at par.
On July 15, 2002, the Company completed an early redemption call for $35.0
million in principal of its Notes. The redemption was at par plus accrued
interest and was funded from existing cash balances. An extraordinary charge of
$0.6 million, or $0.03 per diluted share, was recorded in the third quarter of
2002, for the write-off of associated original discount and issue costs.
In the first quarter 2001, the Company purchased $0.9 million in principal
amount of its 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. During the Transition Period, the Company
purchased $5.0 million in principal amount of its Notes in open market
transactions. In connection with the purchases, the Company recorded an
extraordinary charge of $0.3 million, net of $0.1 million of applicable income
tax benefit, or $0.02 per diluted share, for the premium incurred and write-off
of associated original discount and deferred finance charges.
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. At December 31, 2002, $4.8 million of letters of credit were
issued against the credit line for workers compensation purposes. The facility
is secured by a first priority lien on all inventories, accounts receivable and
related intangibles of the Company. As of December 31, 2002, the Company had
approximately $12.2 million in borrowing availability under the agreement, based
on eligible receivable and inventory balances and net of outstanding letters of
credit on such date.
41
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. No securities have been sold pursuant to the shelf registration. 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.
Maturities of long-term debt are $33.6 million at July 15, 2003 and $0.1
million for each of the next four years thereafter.
NOTE 8: FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of financial instruments:
Cash and equivalents and current portion of long-term debt -- The carrying
amounts approximate fair value because of the short maturity of these
instruments.
Long-term investments -- The carrying amount is fair value which is based
upon quoted market prices.
Long-term debt -- The fair value of other long-term debt was estimated by
calculating the present value of the remaining interest and principal payments
on the debt to maturity. The present value computation uses a discount rate
based upon current market rates.
The carrying amount and fair value of the Company's financial instruments
at December 31, 2002 and 2001 are as follows:
2002 2001
- ---------------------------------------------------------------------------------------
CARRYING FAIR CARRYING FAIR
(In thousands) AMOUNT VALUE AMOUNT VALUE
- ---------------------------------------------------------------------------------------
Cash and equivalents $29,357 $29,357 $74,856 $74,856
Long-term investments 3,848 3,848 16,833 16,833
Current portion of
long-term debt 33,555 33,555 33 33
Long-term debt 482 326 68,070 70,946
=======================================================================================
NOTE 9: PREFERRED STOCK
The Company's authorized stock includes two million shares of Class A
Preferred Stock, issuable in one or more series. The rights, preferences,
privileges and restrictions of any series of Class A Preferred Stock, the number
of shares constituting any such series and the designation thereof, are subject
to determination by the Board of Directors.
One million shares of the Class A Preferred Stock have been designated as
Series B Junior Participating Preferred Stock, par value $10 per share, in
connection with a Shareholder Rights Plan (Plan) adopted in November 1998.
Pursuant to the Plan, one Preferred Stock Purchase Right (Right) is attached to
each outstanding share of common stock of the Company.
The Plan includes provisions which are intended to protect shareholders
against certain unfair and abusive takeover attempts by anyone acquiring or
tendering for 20% or more of the Company's common stock. The Company may redeem
the Rights for one-half cent per Right at any time before a 20% position has
been acquired. The Rights expire in November 2008.
NOTE 10: STOCK OPTIONS AND WARRANTS
The Company has various stock option plans under which the Company may
grant incentive and non-qualified stock options and stock appreciation rights to
purchase shares of the Company's common stock. All incentive stock options were
granted at fair market value on the date of grant. Incentive stock options
generally become exercisable beginning one to three years after the grant date
and expire after ten years.
42
Non-qualified stock options become exercisable according to a vesting
schedule determined at the grant date and expire no later than ten years after
grant. Non-qualified stock option grants were granted at exercise prices
approximating the market price on the date of grant. A summary of transactions
in the plans follows:
- ---------------------------------------------------------------------------------------------------------------------------------
2002 2001 Transition Period 2000
- ---------------------------------------------------------------------------------------------------------------------------------
AVERAGE Average Average Average
EXERCISE Exercise Exercise Exercise
SHARES PRICE Shares Price Shares Price Shares Price
- ---------------------------------------------------------------------------------------------------------------------------------
Outstanding, beginning of
period 1,883,819 $11.75 2,005,021 $11.89 2,061,609 $ 11.89 1,750,629 $ 9.41
Granted 182,000 8.24 206,250 8.30 - - 695,100 17.45
Expired (256,739) 15.85 (146,878) 15.18 (49,278) 10.42 (188,730) 14.28
Exercised (1,790) 6.25 (180,574) 7.28 (7,310) 6.15 (195,390) 7.01
- ---------------------------------------------------------------------------------------------------------------------------------
Outstanding, end of period 1,807,290 $10.82 1,883,819 $11.75 2,005,021 $11.89 2,061,609 $11.89
- ---------------------------------------------------------------------------------------------------------------------------------
Exercisable, end of period 1,106,247 $10.91 670,582 $ 9.01 516,166 $ 7.04 537,474 $ 7.17
- ---------------------------------------------------------------------------------------------------------------------------------
Available for grant 646,745 572,006 631,378 582,100
- ---------------------------------------------------------------------------------------------------------------------------------
Weighted average fair value
of options granted $ 5.34 $ 6.18 $ - $12.00
- ---------------------------------------------------------------------------------------------------------------------------------
A summary of information about stock options outstanding at December 31,
2002 follows:
- ------------------------------------------------------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ------------------------------------------------------------------------------------------------------
AVERAGE AVERAGE AVERAGE
RANGE OF EXERCISE REMAINING EXERCISE
EXERCISE PRICES SHARES PRICE LIFE SHARES PRICE
- ------------------------------------------------------------------------------------------------------
$ 2.63 - $ 7.30 725,124 $ 6.66 5.5 501,657 $ 6.40
$ 7.77 - $16.63 697,016 11.37 7.0 310,978 11.83
$17.63 - $19.09 385,150 17.64 7.4 293,612 17.64
- ------------------------------------------------------------------------------------------------------
1,807,290 $10.82 6.5 1,106,247 $ 10.91
======================================================================================================
In the first quarter of 2001, treasury stock was acquired in consideration
for common shares issued as a result of cashless stock option transactions. The
options were exercisable at prices ranging from $3.75 to $14.375 per share for
131,733 common shares of the Company, resulting in the issuance of 44,241 common
shares. In connection with the transactions, the Company incurred $0.4 million
of costs which was included in the cost of treasury shares.
At December 31, 2002, the Company had common stock warrants outstanding,
exercisable for approximately 187,000 shares of the Company's common stock at a
price of $4.00 per share. The warrants expire July 15, 2003. In the third
quarter of 2000, warrants exercisable at a price of $8.00 per share for 272,481
common shares of the Company were exercised on a cashless basis resulting in the
issuance of 151,125 treasury shares.
43
NOTE 11: COMMITMENTS AND CONTINGENCIES
The Company is subject to various claims, lawsuits and administrative
proceedings arising in the ordinary course of business with respect to
environmental matters, 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.
In March 2001, in connection with its restructuring, Newport closed its
electric arc furnace operation and as such, ceased using oxygen and argon that
was provided under a supply agreement with Air Products and Chemicals, Inc.
("Air Products"). On December 31, 2001, Air Products filed a civil action
against Newport and NS Group, Inc. in the United States District Court for the
Eastern District of Pennsylvania, Civil Action No. 01-7227, seeking damages for
breach of contract. On August 5, 2002, the action against NS Group, Inc. was
dismissed without prejudice; however, the action against Newport is still
pending. Based on current information, the Company believes that the resolution
of this matter will not have a material adverse affect on the Company's
consolidated financial position, results of operations or cash flows.
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 waste water 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.
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.
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 was 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.
44
The Company has a hazardous waste landfill on its property in Wilder,
Kentucky, which it no longer utilizes. In connection with the March 2001
restructuring actions, in which the Company 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 received final approval of its
closure/post-closure plan from the Kentucky Division of Waste Management in
December 2002. As a result, the Company increased its estimate of post-closure
costs by $1.0 million and they are included in restructuring charges for the
fourth quarter of 2002. The Company expects closure of the landfill will be
completed by the end of 2003.
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 (PRP) 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 on our consolidated financial statements.
The estimated costs associated with radioactive substances accidentally
melted at the Company's welded tubular facility were recorded as extraordinary
items in 1993. Such estimates had been adjusted periodically to reflect the most
current information. During the quarter ended December 31, 2000, the Company
received final regulatory notice of clean closure and no further costs are
anticipated. Therefore, the Company removed the remaining accrual for these
costs in the Transition Period and recorded an extraordinary credit of $1.2
million, net of income taxes of $0.3 million, or $0.06 per diluted share.
At December 31, 2002 and 2001, the Company has accrued for environmental
remediation obligations $5.2 million and $4.3 million, respectively. Based upon
its evaluation of available information, management does not believe that any of
the environmental contingency matters discussed above are likely, individually
or in the aggregate, to have 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.
The Company has change of control severance agreements with certain of its
key employees. The agreements contain provisions that would entitle each
participant to receive an amount ranging from two to three times the
participant's base salary plus two to three times the participant's five year
average bonus, and continuation of certain benefits, if there is a change of
control of the Company (as defined) and a termination of employment. In
addition, concurrent with a change of control of the Company, amounts that are
sufficient to pay the benefits due under the deferred compensation agreements
and SCAs, would be required to be funded by the Company.
45
NOTE 12: EMPLOYEE BENEFIT PLANS
Defined Contribution Plans
The Company has established various profit sharing plans at the operating
companies which are based on the earnings of the respective companies.
Generally, the plans require mandatory contributions at a specified percentage
of pretax profits (with certain guaranteed minimums based on hours worked) for
the bargaining unit employees, and discretionary contributions for salaried
employees. The Company also has defined contribution plans covering
substantially all of its employees. The expense of these plans were $0.7
million, $0.8 million, $0.2 million and $0.8 million for 2002, 2001, the
Transition Period and 2000, respectively.
Deferred Compensation Agreements
Certain retirees employees of the Company have individual deferred
compensation agreements that provide for monthly payments that will be paid for
life, with payments for a minimum of ten years. The net present value of the
benefits expected to be provided to the employee under the agreements were
accrued over the period of the employee's active employment from the time the
contract was signed to the employee's retirement date using a discount rate of
eleven percent which approximates the Company's incremental borrowing rate. As
of December 31, 2002 and 2001, the Company had accrued liabilities for benefits
payable under these agreements of $5.1 million and $5.3 million, respectively,
and recorded expense of $0.6 million, $0.6 million, $0.2 million and $1.9
million for these agreements in 2002, 2001, the Transition Period and 2000,
respectively.
Salary Continuation Agreements and Postretirement Heath Benefits
The Company and certain active senior managers have entered into Salary
Continuation Agreements (SCA). The SCA provides for monthly payments that begin
at the employee's retirement date and are calculated as a percentage of the
employee's salary and will be paid for life, with a minimum of ten years. The
projected unit credit cost method is used for determining the cost of these
agreements for financial reporting purposes. The benefits do not vest until
retirement.
Retirees who are receiving payments under their deferred compensation
agreement and the employees who have an SCA, are also eligible to receive
postretirement health care benefits from their retirement date until age 65.
46
SCA and postretirement health expense and other information as of and for
the year ended December 31, 2001 and prior was determined by the Company not to
be material. SCA and post-retirement benefit costs for 2002 are as follows:
- -------------------------------------------------------------------------------------------------------------------------
(In thousands) SCA HEALTH
- -------------------------------------------------------------------------------------------------------------------------
Service cost (benefits earned during the period) $ 34 $10
Interest cost on projected benefit obligation 82 24
Amortization of:
Transition obligation - 28
Net loss 212 -
- -------------------------------------------------------------------------------------------------------------------------
Actuarial expense for 2002 $ 328 $62
=========================================================================================================================
Reconciliation of the beginning and ending balances of the SCA and
post-retirement health plans funded status were:
=========================================================================================================================
(In thousands) SCA HEALTH
- -------------------------------------------------------------------------------------------------------------------------
Change in benefit obligation:
Benefit obligation at January 1, 2002 $ 747 $ 364
Service cost 34 10
Interest cost 82 24
Actuarial loss 835 15
Benefits paid - (47)
- -------------------------------------------------------------------------------------------------------------------------
Benefit obligation at December 31, 2002 $ 1,698 $ 366
- -------------------------------------------------------------------------------------------------------------------------
Reconciliation to balance sheet:
Funded (unfunded) status $ (1,698) $ (366)
Unrecognized transition obligation - 336
Unrecognized net loss 96 15
- -------------------------------------------------------------------------------------------------------------------------
Net liability recognized at December 31, 2002 $ (1,602) $ (15)
=========================================================================================================================
The projected benefit obligations of both the SCAand post-retirement
health plans were discounted using a discount rate of 6.75%. The SCA
calculations assumed a 3.0% compensation growth rate.
The assumed health care cost trend rate used to measure the postretirement
health benefit obligation at December 31, 2002, was 10.0% and is assumed to
decrease gradually to 8.0% by the year 2007. In addition, a one-percentage point
change in assumed health care cost trend rates would have the following effect
on the postretirement costs and obligation:
- -------------------------------------------------------------------------------------------------------------------------
(In thousands) 1% Increase 1% Decrease
- -------------------------------------------------------------------------------------------------------------------------
2002 service and interest costs $ 38 $ 32
Postretirement benefit obligation
at December 31, 2002 $ 388 $ 347
- -------------------------------------------------------------------------------------------------------------------------
In addition, concurrent with a change of control of the Company, amounts
that are sufficient to pay the benefits under the deferred compensation
agreements and SCAs, would be required to be funded by the Company.
47
NOTE 13: INCOME TAXES
The provision (benefit) for income taxes, including $2.4 million and $0.7
million allocated to discontinued operations in the Transition Period and 2000,
respectively, and $0.2 million allocated to extraordinary items in the
Transition Period consists of the following:
- --------------------------------------------------------------------------------------------------------------
Transition
(In thousands) 2002 2001 Period 2000
- --------------------------------------------------------------------------------------------------------------
Current $ (670) $ - $ 174 $ 658
- --------------------------------------------------------------------------------------------------------------
Deferred (188) (3,917) (1) (514)
- --------------------------------------------------------------------------------------------------------------
Provision (benefit) for
income taxes $ (858) $ (3,917) $ 173 $ 144
- --------------------------------------------------------------------------------------------------------------
The income tax provision (benefit) differs from the amount computed by
applying the statutory federal income tax rate to income (loss), including
extraordinary items and discontinued operations, before income taxes for the
following reasons:
- ---------------------------------------------------------------------------------------------------------
Transition
(In thousands) 2002 2001 Period 2000
- ---------------------------------------------------------------------------------------------------------
Income tax provision (benefit)
at statutory tax rate of 35% $(14,075) $(20,963) $2,786 $(7,964)
Change in taxes resulting from:
State income taxes, net of
federal effect (1,286) (1,947) 398 (1,158)
Change in valuation allowance 15,057 17,010 (2,550) 10,773
Rate differential on reclassification
of other comprehensive income -- 899 -- --
Other, net (554) 1,084 (461) (1,507)
- ---------------------------------------------------------------------------------------------------------
Provision (benefit) for income taxes $ (858) $ (3,917) $ 173 $ 144
=========================================================================================================
The following represents the components of deferred tax liabilities and
assets at December 31, 2002 and 2001:
- -------------------------------------------------------------------------------
(In thousands) 2002 2001
- -------------------------------------------------------------------------------
Deferred tax liabilities:
Property, plant and equipment $ 1,368 $ 2,618
- -------------------------------------------------------------------------------
Deferred tax assets:
Reserves and accruals 10,195 9,500
Net operating tax loss carryforward 46,757 32,214
Alternative minimum tax and other
tax credit carryforwards 2,707 3,370
Unrealized loss on investments 2,076 1,722
Other items -- 934
- -------------------------------------------------------------------------------
61,735 47,740
Valuation allowance (60,367) (45,310)
- -------------------------------------------------------------------------------
Net deferred tax assets 1,368 2,430
- -------------------------------------------------------------------------------
Net deferred tax liability $ -- $ 188
===============================================================================
For federal income tax purposes, the Company has alternative minimum tax
credit carryforwards of approximately $2.6 million, which are not limited by
expiration dates, and net operating tax loss carryforwards of approximately
$122.2 million, which expire beginning in 2008. The Company has recorded
deferred tax assets related to these carryforwards, net of a deferred tax asset
valuation allowance. In estimating the amount of the valuation allowance
required, the Company has considered future taxable income related to the
reversal of temporary differences in the tax financial reporting basis of assets
and liabilities.
48
NOTE 14: RELATED PARTY TRANSACTIONS
A director of the Company who resigned in July 2000 has a controlling
interest in a company which purchases secondary and limited service tubular
products from Newport. Sales to this customer were $16.9 million in 2000.
NOTE 15: QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly results of operations for the years ended December 31, 2002 and
2001 were as follows:
- ------------------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts) FIRST SECOND THIRD FOURTH
2002 QUARTER QUARTER QUARTER QUARTER
- ------------------------------------------------------------------------------------------------------------------
Net sales $38,848 $54,851 $57,297 $41,412
Gross profit (loss) (8,233) 2,253 (318) (8,287)
Loss before extraordinary items (14,307) (3,919) (6,843) (14,246)
Net loss (14,307) (3,919) (7,458) (14,246)
Net loss per common share
before extraordinary items
Basic and diluted (0.69) (0.19) (0.33) (0.69)
Net loss per common share
Basic and diluted (0.69) (0.19) (0.36) (0.69)
- ------------------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts) First Second Third Fourth
2001 Quarter Quarter Quarter Quarter
- ------------------------------------------------------------------------------------------------------------------
Net sales $82,114 $102,727 $78,908 $51,709
Gross profit (loss) 7,397 15,459 5,056 (2,512)
Income (loss) before extraordinary items (54,398) 8,895 (441) (9,974)
Net income (loss) (54,457) 8,895 (441) (9,974)
Net income (loss) per common share
before extraordinary items
Basic (2.60) 0.42 (0.02) (0.48)
Diluted (2.60) 0.41 (0.02) (0.48)
Net income (loss) per common share
Basic (2.60) 0.42 (0.02) (0.48)
Diluted (2.60) 0.41 (0.02) (0.48)
- ------------------------------------------------------------------------------------------------------------------
Reference is made to Note 1: Summary of Significant Accounting Policies
- - Long-term Investments, regarding impairment losses of $6.2 million in the
fourth quarter of 2001. Also see Note 2: Restructuring Charges, regarding
restructuring charges of $2.0 million in the fourth quarter of 2002 and $56.2
million in the first quarter of 2001. Reference is also made to Note 7:
Long-term Debt and Credit Facility, and Note 11: Commitments and Contingencies
for a discussion of extraordinary items in the third quarter of 2002 and the
first quarter of 2001.
49
NOTE 16: SUPPLEMENTARY INFORMATION CONDENSED CONSOLIDATING FINANCIAL STATEMENTS
The Company's Notes are unconditionally guaranteed in full, jointly and
severally, by each of the Company's subsidiaries (Subsidiary Guarantors), each
of which is wholly-owned. Set forth below are the condensed consolidating
financial statements of NS Group, Inc. and the Subsidiary Guarantors. The
Subsidiary Guarantors include all subsidiaries of the Company (Newport Steel
Corporation, Koppel Steel Corporation, Erlanger Tubular Corporation and
Northern Kentucky Management, Inc.).
The following condensed consolidating financial statements present the
results of operations, financial position and cash flows of (a) NSGroup, 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 consolidated financial statements of NS
Group. All significant intercompany accounts and transactions have been
eliminated.
50
NS Group, Inc. and Subsidiaries
Condensed Consolidating Balance Sheet
December 31, 2002
==========================================================================================================
GUARANTOR
(In thousands) PARENT SUBSIDIARIES ELIMINATIONS CONSOLIDATED
- ----------------------------------------------------------------------------------------------------------
Cash and equivalents $ 29,307 $ 50 $ -- $ 29,357
Accounts receivable, net 208 12,445 -- 12,653
Inventories -- 55,874 -- 55,874
Other current assets 2,647 9,435 -- 12,082
- ----------------------------------------------------------------------------------------------------------
Total current assets 32,162 77,804 -- 109,966
Property, plant & equipment, net -- 51,651 -- 51,651
Long-term investments 3,848 -- -- 3,848
Investment in subsidiaries (91,054) -- 91,054 --
Intercompany, net 202,658 -- (202,658) --
Other assets 2,750 2,666 -- 5,416
Assets held for sale -- 9,413 -- 9,413
- ----------------------------------------------------------------------------------------------------------
Total assets $150,364 $141,534 $(111,604) $180,294
==========================================================================================================
Accounts payable $ -- $8,600 $ -- $8,600
Accrued liabilities and other 6,017 14,145 -- 20,162
Accrued restructuring liabilities -- 4,656 -- 4,656
Current portion of long-term debt 33,521 34 -- 33,555
- ----------------------------------------------------------------------------------------------------------
Total current liabilities 39,538 27,435 -- 66,973
Long-term debt -- 482 -- 482
Intercompany, net -- 202,658 (202,658) --
Deferred income taxes 332 -- -- 332
Other long-term liabilities 6,111 2,013 -- 8,124
Common shareholders' equity 104,383 (91,054) 91,054 104,383
- ----------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $ 150,364 $141,534 $(111,604) $180,294
==========================================================================================================
51
NS Group, Inc. and Subsidiaries
Unaudited Condensed Consolidating Balance Sheet
December 31, 2001
=================================================================================================
GUARANTOR
(In thousands) PARENT SUBSIDIARIES ELIMINATIONS CONSOLIDATED
- -------------------------------------------------------------------------------------------------
Cash and equivalents $72,206 $2,650 $ -- $74,856
Accounts receivable, net 655 22,506 -- 23,161
Inventories -- 55,329 -- 55,329
Other current assets 4,696 8,484 -- 13,180
- -------------------------------------------------------------------------------------------------
Total current assets 77,557 88,969 -- 166,526
Property, plant & equipment, net -- 60,196 -- 60,196
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
=================================================================================================
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
Common shareholders' equity 143,662 (60,247) 60,247 143,662
- -------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $228,119 $163,481 $(131,116) $260,484
=================================================================================================
52
NS Group, Inc. and Subsidiaries
Condensed Consolidating Statements of Operations
For the year ending December 31, 2002
- -------------------------------------------------------------------------------------------------------
GUARANTOR
(In thousands) PARENT SUBSIDIARIES ELIMINATIONS CONSOLIDATED
- -------------------------------------------------------------------------------------------------------
Net sales $ -- $192,408 $ -- $192,408
Cost of products sold -- 206,993 -- 206,993
Selling, general and administrative -- 17,509 -- 17,509
Restructuring charges -- 2,046 -- 2,046
- -------------------------------------------------------------------------------------------------------
Operating loss -- (34,140) -- (34,140)
Equity in earnings of subsidiaries (31,152) -- 31,152 --
Investment income (loss) 1,007 (270) -- 737
Interest expense (8,169) (11) -- (8,180)
Intercompany interest, net 14,189 (14,189) -- --
Other income, net 511 899 -- 1,410
- -------------------------------------------------------------------------------------------------------
Loss before extraordinary charges
and income taxes (23,614) (47,711) 31,152 (40,173)
Provision (benefit) for income taxes 15,701 (16,559) -- (858)
- -------------------------------------------------------------------------------------------------------
Loss before extraordinary items (39,315) (31,152) 31,152 (39,315)
Extraordinary charges, net of income tax (615) -- -- (615)
- -------------------------------------------------------------------------------------------------------
Net income (loss) $(39,930) $(31,152) $31,152 $(39,930)
=======================================================================================================
For the year ending December 31, 2001 (Unaudited)
- ----------------------------------------------------------------------------------------------------------
GUARANTOR
(In thousands) PARENT SUBSIDIARIES ELIMINATIONS CONSOLIDATED
- ----------------------------------------------------------------------------------------------------------
Net sales $ -- $315,458 $ -- $315,458
Cost of products sold -- 290,058 -- 290,058
Selling, general and administrative -- 19,982 -- 19,982
Restructuring charges 1,201 54,384 -- 55,585
- ----------------------------------------------------------------------------------------------------------
Operating income (loss) (1,201) (48,966) -- (50,167)
Equity in earnings of subsidiaries (45,604) -- 45,604 --
Investment income (loss) 2,156 (4,270) -- (2,114)
Interest expense (10,330) (12) -- (10,342)
Intercompany interest, net 18,554 (18,554) -- --
Other income, net 414 2,374 -- 2,788
- ----------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (36,011) (69,428) 45,604 (59,835)
Provision (benefit) for income taxes 19,907 (23,824) -- (3,917)
- ----------------------------------------------------------------------------------------------------------
Income (loss) before extra-
ordinary charges (55,918) (45,604) 45,604 (55,918)
Extraordinary charges, net of income tax (59) -- -- (59)
- ----------------------------------------------------------------------------------------------------------
Net income (loss) $(55,977) $(45,604) $45,604 $(55,977)
==========================================================================================================
53
NS Group, Inc. and Subsidiaries
Unaudited Condensed Consolidating Statements of Operations
FOR THE THREE MONTHS ENDED DECEMBER 31, 2000
- ---------------------------------------------------------------------------------------------------------------------------------
GUARANTOR
(In thousands) PARENT SUBSIDIARIES ELIMINATIONS CONSOLIDATED
- ---------------------------------------------------------------------------------------------------------------------------------
Net sales $ -- $73,357 $ -- $73,357
Cost of products sold -- 73,113 -- 73,113
Selling, general and administrative 310 4,894 -- 5,204
- ---------------------------------------------------------------------------------------------------------------------------------
Operating loss (310) (4,650) -- (4,960)
Equity in earnings of subsidiaries (5,666) -- 5,666 --
Investment income 1,149 20 -- 1,169
Interest expense (2,800) (4) -- (2,804)
Intercompany interest, net 5,367 (5,367) -- --
Other income, net -- 56 -- 56
- ---------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations
before income taxes and
extraordinary items (2,260) (9,945) 5,666 (6,539)
Provision (benefit) for income taxes 483 (2,957) -- (2,474)
- ---------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations
before extraordinary items (2,743) (6,988) 5,666 (4,065)
Income from discontinued
operations, net of income taxes 10,858 97 -- 10,955
- ---------------------------------------------------------------------------------------------------------------------------------
Income before extraordinary items 8,115 (6,891) 5,666 6,890
Extraordinary items, net of income tax (325) 1,225 -- 900
- ---------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $7,790 $(5,666) $5,666 $7,790
=================================================================================================================================
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2000
- -------------------------------------------------------------------------------------------------------------------------------
GUARANTOR
(In thousands) PARENT SUBSIDIARIES ELIMINATIONS CONSOLIDATED
- -------------------------------------------------------------------------------------------------------------------------------
Net sales $ -- $358,705 $ -- $358,705
Cost of products sold -- 356,686 -- 356,686
Selling, general and administrative -- 20,585 -- 20,585
- -------------------------------------------------------------------------------------------------------------------------------
Operating loss -- (18,566) -- (18,566)
Equity in earnings of subsidiaries (21,774) -- 21,774 --
Investment income 3,027 120 -- 3,147
Interest expense (11,728) (17) -- (11,745)
Intercompany interest, net 19,056 (19,056) -- --
Other income, net 193 2,333 -- 2,526
- -------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations
before income taxes (11,226) (35,186) 21,774 (24,638)
Provision (benefit) for income taxes 11,673 (12,263) -- (590)
- -------------------------------------------------------------------------------------------------------------------------------
Income (loss) from continuing operations (22,899) (22,923) 21,774 (24,048)
Income from discontinued operations -- 1,149 -- 1,149
- -------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $(22,899) $(21,774) $21,774 $(22,899)
===============================================================================================================================
54
NS Group, Inc. and Subsidiaries
Condensed Consolidating Statements of Cash Flows
FOR THE YEAR ENDED DECEMBER 31, 2002
===============================================================================================================================
GUARANTOR
(In thousands) PARENT SUBSIDIARIES ELIMINATIONS CONSOLIDATED
- -------------------------------------------------------------------------------------------------------------------------------
Net Cash from Operating Activities $(19,579) $ (979) $ -- $(20,558)
- -------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Purchases of property, plant & equipment -- (2,422) -- (2,422)
Proceeds from assets held for sale -- 834 -- 834
Maturities of available-for-sale securities 2,844 -- -- 2,844
Sales of available-for-sale securities 9,455 -- -- 9,455
Changes in other assets 135 -- -- 135
- -------------------------------------------------------------------------------------------------------------------------------
Net cash from investing activities 12,434 (1,588) -- 10,846
- -------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Repayments of long-term debt (35,000) (33) -- (35,033)
Proceeds from issuance of common stock 11 -- -- 11
Payments of financing costs (765) -- -- (765)
- -------------------------------------------------------------------------------------------------------------------------------
Net cash from financing activities (35,754) (33) -- (35,787)
- -------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and equivalents (42,899) (2,600) -- (45,499)
Cash and equivalents - beginning of period 72,206 2,650 -- 74,856
- -------------------------------------------------------------------------------------------------------------------------------
Cash and equivalents - end of period $ 29,307 $ 50 $ -- $ 29,357
===============================================================================================================================
Supplemental disclosure of cash flows information:
Cash paid (recovered) during the period for:
Interest $ 9,284 $ 11 $ -- $ 9,295
Income taxes $ (50) $ -- $ -- $ (50)
FOR THE YEAR ENDED DECEMBER 31, 2001 (UNAUDITED)
===============================================================================================================================
GUARANTOR
(In thousands) PARENT SUBSIDIARIES ELIMINATIONS CONSOLIDATED
- -------------------------------------------------------------------------------------------------------------------------------
Net Cash from Operating Activities $ 29,194 $ (307) $ -- $28,887
- -------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Purchases of property, plant & equipment -- (2,198) -- (2,198)
Proceeds from sales of assets held for sale -- 2,144 -- 2,144
Sales of available-for-sale securities 3,752 -- -- 3,752
Change in other assets -- 475 -- 475
- -------------------------------------------------------------------------------------------------------------------------------
Net cash from investing activities 3,752 421 -- 4,173
- -------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Repayments of long-term debt (890) (72) -- (962)
Proceeds from issuance of common stock 328 -- -- 328
Purchases of treasury stock (2,721) -- -- (2,721)
- -------------------------------------------------------------------------------------------------------------------------------
Net cash from financing activities (3,283) (72) -- (3,355)
- -------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and equivalents 29,663 42 -- 29,705
Cash and equivalents - beginning of period 43,832 1,319 -- 45,151
- -------------------------------------------------------------------------------------------------------------------------------
Cash and equivalents - end of period $ 72,206 $2,650 $ -- $74,856
===============================================================================================================================
Supplemental disclosure of cash flows information:
Cash paid (recovered) during the period for:
Interest $ 9,350 $ 12 $ -- $ 9,362
Income taxes $ (1,326) $ -- $ -- $(1,326)
55
NS Group, Inc. and Subsidiaries
Unaudited Condensed Consolidating Statements of Cash Flows
FOR THE THREE MONTHS ENDED DECEMBER 31, 2000
================================================================================================================================
GUARANTOR
(In thousands) PARENT SUBSIDIARIES ELIMINATIONS CONSOLIDATED
- --------------------------------------------------------------------------------------------------------------------------------
Net Cash from Operating Activities $ 2,403 $ 823 $ -- $ 3,226
- --------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Purchases of property, plant & equipment -- (586) -- (586)
Proceeds from sale of subsidiary 26,532 -- -- 26,532
Sales of available-for-sale securities 753 -- -- 753
Change in other assets 7 -- -- 7
- --------------------------------------------------------------------------------------------------------------------------------
Net cash from investing activities 27,292 (586) -- 26,706
- --------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Repayments of long-term debt (5,000) (49) -- (5,049)
Proceeds from issuance of common stock 43 -- -- 43
Purchases of treasury stock (9,391) -- -- (9,391)
- --------------------------------------------------------------------------------------------------------------------------------
Net cash from financing activities (14,348) (49) -- (14,397)
- --------------------------------------------------------------------------------------------------------------------------------
Net cash used by discontinued operations -- (1,289) -- (1,289)
Net increase (decrease) in cash and equivalents 15,347 (1,101) -- 14,246
Cash and equivalents - beginning of period 28,485 2,420 -- 30,905
- --------------------------------------------------------------------------------------------------------------------------------
Cash and equivalents - end of period $43,832 $ 1,319 $ -- $45,151
================================================================================================================================
Supplemental disclosure of cash flows information:
Cash paid (recovered) during the period for:
Interest $ -- $ 4 $ -- $ 4
Income taxes $ (634) $ -- $ -- $ (634)
FOR THE FISCAL YEAR END SEPTEMBER 30, 2000
================================================================================================================================
GUARANTOR
(In thousands) PARENT SUBSIDIARIES ELIMINATIONS CONSOLIDATED
================================================================================================================================
Net Cash from Operating Activities $(31,681) $7,094 $ -- $(24,587)
- -------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Purchases of property, plant & equipment -- (7,499) -- (7,499)
Proceeds from sales of equipment -- 95 -- 95
Purchases of available-for-sale securities (7,878) -- -- (7,878)
Sales and maturities of available-for-sale securities 37,295 -- -- 37,295
Change in other assets (209) 519 -- 310
- -------------------------------------------------------------------------------------------------------------------------------
Net cash from investing activities 29,208 (6,885) -- 22,323
- -------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Financing Activities:
Repayments of long-term debt -- (146) -- (146)
Proceeds from issuance of common stock 2,142 -- -- 2,142
- -------------------------------------------------------------------------------------------------------------------------------
Net cash from financing activities 2,142 (146) -- 1,996
- -------------------------------------------------------------------------------------------------------------------------------
Net cash provided by discontinued operations -- 68 -- 68
Net increase (decrease) in cash and equivalents (331) 131 -- (200)
Cash and equivalents - beginning of period 28,816 2,289 -- 31,105
- -------------------------------------------------------------------------------------------------------------------------------
Cash and equivalents - end of period $ 28,485 $2,420 $ -- $ 30,905
================================================================================================================================
Supplemental disclosure of cash flows information:
Cash paid (recovered) during the period for:
Interest $ 10,078 $ 17 $ -- $ 10,095
Income taxes $ (2,187) $ -- $ -- $ (2,187)
56
SCHEDULE II
NS GROUP, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
Reserves Deducted from
Assets in Balance Sheets
------------------------
Allowance Allowance
for Doubtful for Cash
(In thousands) Accounts(1) Discounts(1)
- ------------------------------------------------------------------------------------------------------------------
Balance, September 25, 1999 $ 610 $ 254
Additions charged to costs and expenses 1,455 5,271
Deductions (2) (1,448) (4,923)
- ------------------------------------------------------------------------------------------------------------------
Balance, September 30, 2000 $ 617 $ 602
Additions charged to cost and expenses 1,057 1,210
Deductions (2) (733) (1,315)
- ------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 $ 941 $ 497
Additions charged to costs and expenses 3,229 5,493
Deductions (2) (3,049) (5,621)
- ------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2001 $ 1,121 $ 369
Additions charged to costs and expenses 1,596 3,302
Deductions (2) (2,310) (3,487)
- ------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2002 $ 407 $ 184
- ------------------------------------------------------------------------------------------------------------------
(1) Deducted from accounts receivable
(2) Net charges of nature for which reserves were created
57
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated herein by reference from the Proxy under the caption
"Proposals of the Board, Item 1 - Election of Three Class II Directors,"
"Securities Ownership of Management, footnote (3)"; "The Board of Directors,
Board Committees and Meeting Attendance"; and "Securities Ownership of
Management, Section 16(a) Beneficial Ownership Reporting Compliance".
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference from the Proxy under the caption
"Compensation of Directors"; and "Compensation of Executive Officers".
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference from the Proxy under the caption
"Securities Ownership of Management" and "Securities Ownership of Certain
Beneficial Owners". Also refer to "Equity Compensation Plan Information" under
Part II - Item 5 above.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference from the Proxy under the captions
"Compensation Committee Interlocks and Insider Participation" and "Certain
Relationships and Related Transactions."
ITEM 14. CONTROLS AND PROCEDURES
Our Chief Executive Officer and the Chief Financial Officer have reviewed
our disclosure controls and procedures as of a date within the 90-day period
prior to the filing of this annual report (the "Evaluation Date"). Based on that
review, they have concluded that, as of the Evaluation Date, these controls and
procedures were, in design and operation, effective to assure that the
information required to be included in this report has been properly collected,
processed, and timely communicated to those responsible in order that it may be
included in this report.
Subsequent to the Evaluation Date, there have been no significant changes,
including corrective actions, in our internal controls or in other factors that
could significantly affect the disclosure controls and procedures.
58
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Consolidated Financial Statements - Audited consolidated
financial statements required by this item are presented and listed in Part II,
Item 8.
2. Consolidated Financial Statement Schedule - The financial
statement schedule required to be filed as a part of this report is presented
and listed in Part II, Item 8.
3. Exhibits - Reference is made to the Index to Exhibits, which is
included herein as part of this report.
(b) Reports on Form 8-K
Current Report on Form 8-K dated October 14, 2002 furnishing under Item 9
the Company's press release regarding conference call to review the results for
the September 2002 quarter to be held on October 22, 2002.
Current Report on Form 8-K dated October 17, 2002 furnishing under Item 9
the Company's earnings press release for the quarter ended September 30, 2002.
Current report on Form 8-K dated November 18, 2002 reporting under Item 5
the Company's press release regarding the ratification of a new labor agreement
for its hourly employees in Pennsylvania.
59
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: March 12, 2003 By: /s/Thomas J. Depenbrock
------------------- --------------------------------------
Thomas J. Depenbrock, Vice President,
Treasurer and Chief Financial Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Rene J. Robichaud and Thomas J. Depenbrock, and
each of them, his true and lawful attorneys-in-fact and agents, with full power
of substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities to sign any and all amendments to this Annual Report on
Form 10-K and any other documents and instruments incidental thereto, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite or necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents and/or any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Date: March 12, 2003 By: /s/Rene J. Robichaud
------------------- -----------------------------------------
Rene J. Robichaud, President and
Chief Executive Officer and Director
Date: March 12, 2003 By: /s/Thomas J. Depenbrock
------------------- -------------------------------------
Thomas J. Depenbrock, Vice President,
Treasurer and Chief Financial Officer
(Principal Financial and Accounting Officer)
60
Date: March 12, 2003 By: /s/Clifford R. Borland
---------------- --------------------------------------------
Clifford R. Borland
Chairman of the Board, Director
Date: March 12, 2003 By: /s/Paul C. Borland, Jr.
------------------ -------------------------------------
Paul C. Borland, Jr., Director
Date: March 12, 2003 By: /s/David A. B. Brown
----------------- --------------------------------------
David A. B. Brown, Director
Date: March 12, 2003 By: /s/J. C. Burton
----------------- --------------------------------------
J. C. Burton, Director
Date: March 12, 2003 By: /s/Patrick J. B. Donnelly
------------------ --------------------------------------
Patrick J. B. Donnelly, Director
Date: March 12, 2003 By: /s/George A. Helland,Jr.
----------------- --------------------------------------
George A. Helland, Jr., Director
Date: March 12, 2003 By: /s/Gary L. Kott
------------------ --------------------------------------
Gary L. Kott, Director
Date: March 12, 2003 By: /s/John F. Schwarz
----------------- --------------------------------------
John F. Schwarz, Director
61
CERTIFICATIONS
I, Rene J. Robichaud, certify that:
1. I have reviewed this annual report on Form 10-K of NS Group, Inc.;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual report;
4. The registrant's other certifying officer and I am responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
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 annual 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 annual report (the "Evaluation Date"); and
c) presented in this annual 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 functions):
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
annual report whether 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: March 12, 2003 /s/ Rene J. Robichaud
----------------------- -------------------------
Rene J. Robichaud
Chief Executive Officer
62
CERTIFICATIONS
I, Thomas J. Depenbrock, certify that:
1. I have reviewed this annual report on Form 10-K of NS Group, Inc.;
2. Based on my knowledge, this annual 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 annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual
report;
4. The registrant's other certifying officer and I am responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
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 annual
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 annual report (the "Evaluation Date"); and
c) presented in this annual 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 functions):
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
annual report whether 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: March 12, 2003 /s/ Thomas J. Depenbrock
------------------ ------------------------------
Thomas J. Depenbrock
Chief Financial Officer
63
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 Registrants' 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
Exhibits 4.1 through 4.17 were filed as exhibits under their
respective exhibit numbers to the Company's Form10-Q for the
quarterly period ended July 1, 1995, File No. 1-9838, and are
incorporated herein by reference.
4.1 Indenture (including form of Senior Secured Note) between the Company
and The Huntington National Bank, as trustee (the "Trustee")
4.2 Leasehold and Fee Mortgage, Assignment of Rents and Leases and
Security Agreement from Newport to the Trustee (Kentucky)
4.3 Mortgage, Assignment of Rents and Leases and Security Agreement from
Koppel to the Trustee (Pennsylvania)
4.4 Deed of Trust, Assignment of Rents and Leases and Security Agreement
from Koppel to the Trustee (Texas)
4.5 Leasehold Mortgage, Assignment of Rents and Leases and Security
Agreement from Erlanger to the Trustee (Oklahoma)
4.6 Junior Leasehold and Fee Mortgage, Assignment of Rents and Leases and
security Agreement from Newport to the Company (Kentucky)
4.7 Junior Mortgage, Assignment of Rents and Leases and Security
Agreement from Koppel to the Company (Pennsylvania)
4.8 Junior Deed of Trust, Assignment of Rents and Leases and Security
Agreement from Koppel to the Company (Texas)
4.9 Junior Leasehold Mortgage, Assignment of Rents and Leases and
Security Agreement from Erlanger to the Company (Oklahoma)
4.10 Subsidiary Security Agreement between Newport and the Trustee
4.11 Subsidiary Security Agreement between Koppel and the Trustee
4.12 Subsidiary Security Agreement between Erlanger and the Trustee
64
4.13 ICN Security Agreement between Newport and the Company
4.14 ICN Security Agreement between Koppel and the Company
4.15 ICN Security Agreement between Erlanger and the Company
4.16 Pledge and Security Agreement between the Company and the Trustee
4.17 Subsidiary Guarantee
4.18 Warrant Agreement between the Company and The Huntington National
Bank, as warrant agent, filed as Exhibit 4.22 to the Company's Form
10-Q for the quarterly period ended July 1, 1995, File No. 1-9838,
and incorporated herein by this reference
4.19 Financing and Security Agreement Between Newport Steel Corporation
and Koppel Steel Corporation and The CIT Group/Business Credit, Inc.
dated March 29, 2002, filed as Exhibit 4.1 to the Company's Form 10-Q
for the quarterly period ended March 31, 2002, File No. 1-9838, and
incorporated by this reference
4.20 Guaranty of Company, Erlanger Tubular Corporation and Northern
Kentucky Management, Inc. dated March 29, 2002, filed as Exhibit 4.1
to the Company's Form 10-Q for the quarterly period ended March 31,
2002, File No. 1-9838, and incorporated by this reference
4.21 Intercreditor Agreement between Huntington National Bank and The CIT
Group/Business Credit Inc, dated March 29, 2002, filed as Exhibit 4.1
to the Company's Form 10-Q for the quarterly period ended March 31,
2002, File No. 1-9838, and incorporated by this reference
10.1 Company's Amended Employee Incentive Stock Option Plan, filed as
Exhibit 10(a) to Company's Form 10-K for the fiscal year ended
September 30, 1989, File No. 1-9838, and incorporated herein by this
reference*
10.2 Company's Executive Bonus Plan, filed as Schedule B to Exhibit 10.4
to Company's Registration Statement on Form S-18, File No. 2-90643,
and incorporated herein by this reference*
10.3 Company's Non-Qualified Stock Option and Stock Appreciation Rights
Plan of 1988, filed as Exhibit 1 to the Company's Proxy Statement
dated January 13, 1989, File No. 1-9838, and incorporated herein by
this reference*
10.4 Rights Agreement dated November 17, 1998 between the Company and
Registrar and Transfer Company, filed as Exhibit 1 to the Company's
Form 8-K dated November 5, 1998, File No. 1-9838, and incorporated
herein by this reference
10.5 Company's 1993 Incentive Stock Option Plan, filed as Exhibit 1 to the
Company's Proxy Statement dated December 22, 1992, File No. 1-9838,
and incorporated herein by this reference*
65
10.6 Registration Rights Agreement dated October 6, 1993 among Kentucky
Electric Steel, Inc., NS Group, Inc. and NSub I, Inc. (formerly
Kentucky Electric Steel Corporation), filed as Exhibit 10(i) to the
Company's Form 10-K for fiscal year ended September 25, 1993, File
No. 1-9838, and incorporated herein by this reference
10.7 Company's Amended and Restated 1995 Stock Option and Stock
Appreciation Rights Plan, filed as Exhibit A to the Company's Proxy
Statement dated December 21, 1998, File No. 1-9838, and incorporated
herein by this reference*
10.8 Form of Change of Control Severance Agreement, filed herewith*
10.9 Form of Salary Continuation Agreement, filed herewith*
10.10 Employment Agreement between the Company and Rene J. Robichaud, dated
March 1, 2002, filed as Exhibit 10.1 to the Company's Form 10-Q for
quarterly period ended March 31, 2002, File No. 1-9838 and
incorporated herein by this reference*
10.11 Separation and Release Agreement between the Company an William W.
Beible, Jr., dated September 20, 2002 filed as Exhibit 10.1 to the
Company's Form 10-Q for the three months ended September 30, 2002 and
incorporated herein by this reference*
10.12 Company's Amended and Restated 2000 Non-Employee Director Stock
Option Plan (amended and restated as of February 2002) filed as
Exhibit 10.4 to the Company's Form 10-Q for the three months ended
June 30, 2002 and incorporated herein by this reference*
10.13 Trust Under NS Group, Inc., Salary Continuation Plan, between NS
Group, Inc. and Huntington National Bank, Trustee, dated August 8,
2001 filed as Exhibit 10.1 to the Company's Form 10-Q for the three
months ended September 30, 2001 and incorporated herein by this
reference*
12.1 Computation of Ratio of Earnings to Fixed Charges, filed herewith
21 Subsidiaries of Registrant, filed herewith
23.1 Independent Auditor's Consent, filed herewith
23.2 Notice of Inability to Obtain Consent from Arthur Andersen LLP, filed
herewith
24 Power of Attorney (contained on Signature Page)
99.1 Risk Factors, filed herewith
99.2 Certification Pursuant to Section 906 Of the Sarbanes-Oxley Act of
2002, filed herewith
99.3 Certification Pursuant to Section 906 Of the Sarbanes-Oxley Act of
2002, filed herewith
* Indicates management contracts or compensatory plans or arrangements in which
one or more directors or executive officers of the Company participates or is a
party.
66