UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter Ended June 30, 2003
Commission File Number 0-22206
NIAGARA CORPORATION
-------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 59-3182820
- ------------------------------ --------------------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
667 Madison Avenue
New York, New York 10021
----------------------------------------
(Address of Principal Executive Offices)
(212) 317-1000
------------------------
(Registrant's Telephone
Number, Including Area Code)
N/A
------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report.)
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____.
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes ____ No __X__
There were 8,238,517 shares of the registrant's Common Stock
outstanding as of June 30, 2003.
NIAGARA CORPORATION
INDEX TO JUNE 2003 FORM 10-Q
- --------------------------------------------------------------------------
PAGE
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED):
NIAGARA CORPORATION
CONSOLIDATED BALANCE SHEETS............................... 3
CONSOLIDATED STATEMENTS OF OPERATIONS..................... 4
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY............ 6
CONSOLIDATED STATEMENTS OF CASH FLOWS..................... 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS................ 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS...........................................22
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK .........32
ITEM 4. CONTROLS AND PROCEDURES ............................................33
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS .................................................33
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS..........................34
ITEM 3. DEFAULTS UPON SENIOR SECURITIES....................................34
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ...............34
ITEM 5. OTHER INFORMATION .................................................34
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ..................................34
SIGNATURES..................................................................35
NIAGARA CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- ---------------------------------------------------------------------------------------------------------------------------------
December 31, June 30,
2002 2003
- ------------------------------------------------------------------------------ ------------------------ -------------------------
(unaudited)
ASSETS
CURRENT:
Cash and cash equivalents $ 5,561,090 $ 2,842,657
Trade accounts receivable, net of allowance for doubtful accounts of
$1,347,000 and $1,115,000 34,283,089 42,862,855
Inventories 55,662,799 57,676,746
Deferred income taxes 1,953,000 2,049,791
Other current assets 3,146,316 3,679,402
- ------------------------------------------------------------------------------ ------------------------ -------------------------
TOTAL CURRENT ASSETS 100,606,294 109,111,451
Property, plant and equipment, net of accumulated depreciation and
amortization of $50,619,348 and $55,679,837 85,775,275 82,838,511
Goodwill 1,904,499 1,904,499
Deferred financing costs, net of accumulated amortization of $627,252
and $682,596 147,748 92,404
Intangible pension asset 318,000 292,000
Other assets 444,333 320,804
- ------------------------------------------------------------------------------ ------------------------ -------------------------
$ 189,196,149 $194,559,669
- ------------------------------------------------------------------------------ ------------------------ -------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 37,656,820 $ 45,621,580
Accrued expenses 11,455,990 14,114,280
Current maturities of long-term debt 7,509,462 7,989,341
- ------------------------------------------------------------------------------ ------------------------ -------------------------
TOTAL CURRENT LIABILITIES 56,622,272 67,725,201
OTHER:
Long-term debt, less current maturities 63,816,781 56,716,621
Accrued pension cost 6,729,000 5,840,500
Accrued other postretirement benefits 4,747,067 4,742,870
Deferred income taxes 9,602,000 9,602,000
Other noncurrent liabilities 250,667 226,077
- ------------------------------------------------------------------------------ ------------------------ -------------------------
TOTAL LIABILITIES 141,767,787 144,853,269
- ------------------------------------------------------------------------------ ------------------------ -------------------------
STOCKHOLDERS' EQUITY:
- ------------------------------------------------------------------------------ ------------------------ -------------------------
Preferred stock, $.001 par value - 500,000 shares authorized; none
outstanding - -
Common stock, $.001 par value - 15,000,000 shares authorized;
9,997,455 issued 9,998 9,998
Additional paid-in capital 50,111,675 50,111,675
Retained earnings 13,525,271 15,517,548
Accumulated other comprehensive loss (7,968,898) (7,683,137)
- ------------------------------------------------------------------------------ ------------------------ -------------------------
55,678,046 57,956,084
Treasury stock, at cost, 1,758,938 shares (8,249,684) (8,249,684)
- ------------------------------------------------------------------------------ ------------------------ -------------------------
TOTAL STOCKHOLDERS' EQUITY 47,428,362 49,706,400
- ------------------------------------------------------------------------------ ------------------------ -------------------------
$ 189,196,149 $ 194,559,669
- ------------------------------------------------------------------------------ ------------------------ -------------------------
See accompanying notes to consolidated financial statements.
NIAGARA CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------------------------
Three months ended June 30, 2002 2003
- -------------------------------------------------------- -------------------------------------------- ---------------------------
NET SALES $ 66,601,860 $73,002,583
COST OF PRODUCTS SOLD 58,545,977 64,703,508
- -------------------------------------------------------- -------------------------------------------- ---------------------------
GROSS PROFIT 8,055,883 8,299,075
OPERATING EXPENSES:
Selling, general and administrative 6,306,048 6,578,661
- -------------------------------------------------------- -------------------------------------------- ---------------------------
INCOME FROM OPERATIONS 1,749,835 1,720,414
OTHER INCOME (EXPENSE):
Interest expense (895,191) (792,545)
Other income 163,841 140,324
- -------------------------------------------------------- -------------------------------------------- ---------------------------
INCOME BEFORE INCOME TAXES 1,018,485 1,068,193
PROVISION FOR INCOME TAXES 905,000 500,000
- -------------------------------------------------------- -------------------------------------------- ---------------------------
NET INCOME $ 113,485 $ 568,193
- -------------------------------------------------------- -------------------------------------------- ---------------------------
NET INCOME PER SHARE (BASIC AND DILUTED) $ .01 $ .07
- -------------------------------------------------------- -------------------------------------------- ---------------------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
(BASIC AND DILUTED) 8,238,517 8,238,517
- -------------------------------------------------------- -------------------------------------------- ---------------------------
- -------------------------------------------------------- -------------------------------------------- ---------------------------
See accompanying notes to consolidated financial statements.
NIAGARA CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
- ---------------------------------------------------------------------------------------------------------------------------------
Six months ended June 30, 2002 2003
- -------------------------------------------------------- -------------------------------------------- ---------------------------
NET SALES $129,573,099 $152,750,998
COST OF PRODUCTS SOLD 114,687,668 134,888,744
- -------------------------------------------------------- -------------------------------------------- ---------------------------
GROSS PROFIT 14,885,431 17,862,254
OPERATING EXPENSES:
Selling, general and administrative 12,410,268 13,398,618
- -------------------------------------------------------- -------------------------------------------- ---------------------------
INCOME FROM OPERATIONS 2,475,163 4,463,636
OTHER INCOME (EXPENSE):
Interest expense (1,817,574) (1,616,500)
Other income 212,208 165,141
- -------------------------------------------------------- -------------------------------------------- ---------------------------
INCOME BEFORE INCOME TAXES 869,797 3,012,277
PROVISION FOR INCOME TAXES 945,000 1,020,000
- -------------------------------------------------------- -------------------------------------------- ---------------------------
NET (LOSS) INCOME $ (75,203) $ 1,992,277
- -------------------------------------------------------- -------------------------------------------- ---------------------------
NET (LOSS) INCOME PER SHARE (BASIC AND DILUTED) $ (.01) $ .24
- -------------------------------------------------------- -------------------------------------------- ---------------------------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
(BASIC AND DILUTED) 8,238,517 8,238,517
- -------------------------------------------------------- -------------------------------------------- ---------------------------
See accompanying notes to financial statements.
NIAGARA CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
- ---------------------------------------------------------------------------------------------------------
Six months ended June 30, 2003
- ---------------------------------------------------------------------------------------------------------
Common Stock
-------------------------
Number of Amount Additional Retained
shares paid-in capital earnings
- ----------------------------------------------------------------------------------------------
BALANCE, JANUARY 1, 2003 9,997,455 $9,998 $50,111,675 $13,525,271
Comprehensive income:
Net income for the period - - - 1,992,277
Foreign currency
translation adjustment (Note 2) - - - -
- ----------------------------------------------------------------------------------------------
Total comprehensive income - - - -
- ----------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 2003 9,997,455 $9,998 $50,111,675 $15,517,548
- ----------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
[Table continued] NIAGARA CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(UNAUDITED)
- ---------------------------------------------------------------------------------------------------------
Six months ended June 30, 2003
- ---------------------------------------------------------------------------------------------------------
Common Stock
-------------------------
Accumulated Total
other comprehensive Treasury stock stockholders'
income (loss) at cost equity
- -------------------------------------------------------------------------------------------------
BALANCE, JANUARY 1, 2003 $(7,968,898) $(8,249,684) $47,428,362
Comprehensive income:
Net income for the period - - 1,992,277
Foreign currency
translation adjustment (Note 2) 285,761 - 285,761
- -------------------------------------------------------------------------------------------------
Total comprehensive income - - 2,278,038
- -------------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 2003
$(7,683,137) $(8,249,684) $49,706,400
- -------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
NIAGARA CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
- -------------------------------------------------------------------------------------------------------------------------------
Six months ended June 30, 2002 2003
- -------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (75,203) $ 1,992,277
- -----------------------------------------------------------------------------------------------------------------------
Adjustments to reconcile net (loss) income to net cash provided by
operating activities:
Depreciation and amortization 4,631,707 4,703,966
Provision for doubtful accounts 21,021 (65,230)
Pension costs (666,500) (888,500)
Other postretirement benefits (432,671) (4,197)
Loss on disposal and write-off of equipment -- 114,819
Changes in assets and liabilities:
(Increase) in accounts receivable (137,287) (7,780,286)
(Increase) in inventories (4,167,446) (1,446,017)
(Increase) in other assets, net (1,816,740) (497,269)
Increase in trade accounts payable, accrued
expenses and other non-current liabilities 8,207,576 9,797,270
- ------------------------------------------------------------------------------------------------------------------------
TOTAL ADJUSTMENTS 5,639,660 3,934,556
- ------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 5,564,457 5,926,833
- ------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment (635,210) (1,413,587)
- ------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (635,210) (1,413,587)
- ------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of long-term debt, net (5,571,951) (7,312,041)
- ------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN FINANCING ACTIVITIES (5,571,951) (7,312,041)
- ------------------------------------------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 113,171 80,362
- ------------------------------------------------------------------------------------------------------------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (529,533) (2,718,433)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 1,692,070 5,561,090
- ------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,162,537 $ 2,842,657
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
NIAGARA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - INFORMATION AS OF
JUNE 30, 2003 AND FOR THE PERIODS ENDED
JUNE 30, 2002 AND 2003 IS UNAUDITED.
- -------------------------------------------------------------------------------
1. BASIS OF BASIS OF PRESENTATION
PRESENTATION AND
CRITICAL ACCOUNTING The accompanying condensed consolidated
POLICIES financial statements of Niagara Corporation
("Niagara") and its subsidiaries (together with
Niagara, the "Company"), Niagara LaSalle
Corporation ("Niagara LaSalle"), LaSalle Steel
Company ("LaSalle," and together with Niagara
LaSalle, "Niagara US") and Niagara LaSalle (UK)
Limited ("Niagara UK"), are unaudited; however, in
the opinion of management, all adjustments
necessary for a fair statement of financial
position and results for the stated periods have
been included. These adjustments are of a normal
recurring nature. Selected information and
footnote disclosures normally included in
financial statements prepared in accordance with
generally accepted accounting principles have been
condensed or omitted. Results for interim periods
are not necessarily indicative of the results to
be expected for an entire fiscal year. It is
suggested that these condensed consolidated
financial statements be read in conjunction with
the Company's audited financial statements and
accompanying notes for the year ended December 31,
2002.
CRITICAL ACCOUNTING POLICIES
On December 12, 2001, the Securities and Exchange
Commission (the "SEC") issued Financial Reporting
Release No. 60 which requires a discussion of the
critical accounting policies used by companies in
the preparation of their financial statements.
Note 1 to the Company's audited financial
statements for the year ended December 31, 2002
includes a summary of the significant accounting
policies used by the Company in the preparation of
its financial statements. The Company believes
that the following critical accounting policies
affect the significant judgments and estimates
used in the preparation of the Company's condensed
consolidated financial statements.
The preparation of these financial statements
requires that management make estimates and
assumptions that affect the reported amounts of
assets and liabilities, revenues and expenses and
the related disclosure of contingent assets and
liabilities. On an ongoing basis, management
evaluates these estimates, including those related
to inventory reserves, taxes, doubtful accounts,
intangible assets, insurance, litigation,
environmental compliance and other contingencies.
Management bases its estimates on historical data,
when available, professional advice, experience
and various assumptions that are believed to be
reasonable under the circumstances, the combined
results of which form the basis for making
judgments about the carrying values of assets and
liabilities. Actual results could differ from
these estimates.
Revenue from the sale of products is recorded at
the time the goods are shipped and title and risk
of loss has transferred. Revenue from freight
charged to customers is recognized when products
are shipped. Provisions for discounts, customer
returns and other adjustments are provided for in
the period the related sales are recorded based
upon historical data.
The Company reviews the carrying values of its
long-lived and identifiable intangible assets for
possible impairment whenever events or changes in
circumstances indicate that the carrying amount of
the assets may not be recoverable. The Company
assesses recoverability of these assets by
estimating future nondiscounted cash flows. Any
long-lived assets held for disposal are reported
at the lower of their carrying amounts or fair
value less cost to sell.
EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS
In August 2001, the Financial Accounting Standards
Board (the "FASB") issued Statement of Financial
Accounting Standards ("SFAS") No. 143, "Accounting
for Asset Retirement Obligations," which addresses
financial accounting and reporting for obligations
associated with the retirement of tangible
long-lived assets and the associated asset
retirement costs. This statement is required to be
applied for fiscal years beginning after June 15,
2002. The adoption of this statement as of January
1, 2003 did not have an effect on the Company's
financial statements.
In April 2002, the FASB issued SFAS No. 145,
"Rescission of FASB Statements No. 4, 44 and 64,
and Amendment of FASB Statement No. 13, and
Technical Corrections." This statement, among
other things, rescinds SFAS No. 4, "Reporting
Gains and Losses from Extinguishment of Debt,"
which required that all gains and losses from the
extinguishment of debt be aggregated and, if
material, classified as an extraordinary item, net
of related income tax effect. As a result, the
criteria in Accounting Principles Board ("APB")
Opinion No. 30, "Reporting the Results of
Operations - Reporting the Effects of Disposal of
a Segment of a Business, and Extraordinary,
Unusual and Infrequently Occurring Events and
Transactions," will now be used to classify such
gains and losses. SFAS No. 145 also amends SFAS
No. 13 to require that certain lease modifications
that have economic effects similar to
sale-leaseback transactions be accounted for in
the same manner as sale-leaseback transactions.
Such provisions of SFAS No. 145 are required to be
applied in fiscal years beginning after May 15,
2002. The adoption of this statement as of January
1, 2003 did not have an effect on the Company's
financial statements.
In July 2002, the FASB issued SFAS No. 146,
"Accounting for Costs Associated with Exit or
Disposal Activities." This statement requires that
a liability for a cost associated with an exit or
disposal activity be recognized when the liability
is incurred, as opposed to prior guidance which
provided that liability for such exit costs be
recognized at the date of an entity's commitment
to an exit or disposal plan. This statement is
required to be applied to exit or disposal
activities that are initiated after December 31,
2002. The adoption of this statement as of January
1, 2003 did not have an effect on the Company's
financial statements.
In November 2002, the FASB issued Interpretation
No. 45, "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Guarantees
of the Indebtedness of Others," which interprets
the guidance in FASB Statement No. 5, "Accounting
for Contingencies," relating to a guarantor's
accounting for, and disclosure of, certain types
of guarantees. Interpretation No. 45 requires that
a guarantor recognize, at the inception of a
guarantee, a liability for the fair value of the
obligation undertaken in issuing the guarantee.
Under Interpretation No. 45, the recognition of
the liability is required even if it is not
probable that payments will be required under the
guarantee. Previously, SFAS No. 5 required
recognition of a liability only for a probable
loss. The recognition requirements of
Interpretation No. 45 apply to guarantees issued
or modified after December 31, 2002. The
disclosure requirements are effective for interim
and annual financial statements ending after
December 15, 2002. The adoption of Interpretation
No. 45 as of January 1, 2003 did not have an
effect on the Company's financial statements.
In December 2002, the FASB issued SFAS No. 148,
"Accounting for Stock-Based
Compensation--Transition and Disclosure--an
amendment of FASB Statement No. 123," which amends
the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and
interim financial statements about the method of
accounting for stock-based employee compensation
and the effect on the method used on reported
results. The adoption of this statement as of
January 1, 2003 did not have an effect on the
Company's financial statements.
The Company accounts for its stock option plan in
accordance with the provisions of APB Opinion No.
25, "Accounting for Stock Issued to Employees,"
and related interpretations. APB No. 25 provides
that compensation expense would be recorded on the
date of grant only if the current market price of
the underlying stock exceeded the exercise price
of the option. SFAS No. 123, "Accounting for
Stock-Based Compensation," permits entities to
recognize as expense over the vesting period the
fair value of all stock-based awards on the date
of grant. Alternatively, SFAS No. 123 allows
entities to continue to apply the provisions of
APB No. 25 and provide pro forma net income and
pro forma earnings per share disclosures for
employee stock compensation as if the
fair-value-based method defined in SFAS No. 123
had been applied. The Company has elected to
continue to apply the provisions of APB No. 25 and
provide the pro forma disclosures required of SFAS
No. 123 for options issued to employees.
The following table illustrates the effect on net
income (loss) and net income (loss) per share if
the Company had applied the fair value recognition
provisions of SFAS No. 123, as amended by SFAS No.
148, to stock-based employee compensation:
Three months ended June 30, 2002 2003
----------------------------------------------------------------------------------------
Net income, as reported $ 113,485 $ 568,193
Deduct: Total stock-based compensation
expense determined under fair-value
based method for all awards, net of
related tax effects (94,531) (90,000)
----------------------------------------------------------------------------------------
Pro-forma net income $ 18,954 $ 478,193
----------------------------------------------------------------------------------------
Net income per share (basic and diluted):
As reported $ .01 $ .07
Pro forma - .06
-----------------------------------------------------------------------------------------
Six months ended June 30, 2002 2003
----------------------------------------------------------------------------------------
Net (loss) income, as reported $ (75,203) $1,992,277
Deduct: Total stock-based compensation
expense determined under fair-value
based method for all awards, net of
related tax effects (189,062) (180,000)
----------------------------------------------------------------------------------------
Pro-forma net (loss) income $ (264,265) $ 1,812,277
----------------------------------------------------------------------------------------
Net (loss) income per share (basic and
diluted):
As reported $ (.01) $ .24
Pro forma (.03) .22
----------------------------------------- ------------------------ -----------------------
In January 2003, the FASB issued Interpretation
No. 46, "Consolidation of Variable Interest
Entities, an interpretation of Accounting Research
Bulletin (ARB) No. 51" which defines when a
business enterprise must consolidate a variable
interest entity. Interpretation No. 46 applies in
the first fiscal year or interim period beginning
after June 15, 2003 to entities in which an
enterprise holds a variable interest that it
acquired before February 1, 2003 and applies
immediately to variable interest entities created
after January 31, 2003. The Company did not have
any variable interest entities as of June 30,
2003.
In April 2003, the FASB issued SFAS No. 149,
"Amendment of Statement 133 on Derivative
Instruments and Hedging Activities." SFAS No. 149
amends SFAS No. 133 for certain decisions made by
the FASB and is effective for contracts entered
into or modified after June 30, 2003 and for
hedging relationships designated after June 30,
2003. SFAS No. 149 is to be applied prospectively.
The provisions of SFAS No. 149 that relate to SFAS
No. 133 implementation issues that have been
effective for fiscal quarters that began prior to
June 15, 2003 continue to be applicable in
accordance with their respective effective dates.
The adoption of this statement is not expected to
have a material effect on the Company's financial
statements.
In May 2003, the FASB issued SFAS No. 150,
"Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity"
which establishes standards for classifying and
measuring certain financial instruments with
characteristics of both a liability and equity.
SFAS No. 150 is effective for financial
instruments entered into or modified after May 31,
2003, and is otherwise effective at the beginning
of the first interim period beginning after June
15, 2003. The adoption of this statement is not
expected to have a material effect on the
Company's financial statements.
2. FOREIGN CURRENCY Niagara UK, an English company, uses
TRANSLATION AND British pounds sterling ("(pound)") as its
TRANSACTIONS functional currency and its accounts are translated
to United States dollars in conformity with SFAS
No. 52, "Foreign Currency Translation." Assets and
liabilities of this subsidiary are translated at
the exchange rate in effect at the balance sheet
dates and the related revenues and expenses have
been translated at the average rates for the
periods. Translation adjustments arising from the
use of different exchange rates from period to
period are included as accumulated other
comprehensive income (loss) within the Statement
of Stockholders' Equity. Gains and losses
resulting from foreign currency transactions are
included in other income within the Statements of
Operations.
3. INVENTORIES Inventories consisted of the following:
December 31, June 30,
2002 2003
------------------------------------------------------------------
Raw materials $14,749,119 $18,986,786
Work-in-process 4,071,318 3,917,692
Finished goods 36,842,362 34,772,268
------------------------------------------------------------------
$55,662,799 $57,676,746
------------------------------------------------------------------
At June 30, 2003, Niagara US inventories were
$38,820,049 determined using the LIFO method and
Niagara UK inventories were $18,856,697 determined
using the FIFO method.
4. LONG-TERM DEBT At the Company's request, a number of amendments
were made to Niagara UK's credit facilities during
August 2003. These amendments included (i) the
extension of the maturity dates on Niagara UK's
revolving credit facility and secured invoice
discount agreement to July 31, 2005 and (ii) a
reduction in the size of Niagara UK's revolving
credit facility from(pound)2.5 million
(approximately $4.1 million) to(pound)1.25 million
(approximately $2.1 million). See Management's
Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital
Resources.
5. CONTINGENCIES Niagara US and Niagara UK are subject to extensive
environmental laws and regulations concerning,
among other matters, water and air emissions and
waste disposal. Under such laws, including the
Comprehensive Environmental Response, Compensation
and Liability Act of 1980 as amended, Niagara US
and Niagara UK may be responsible for parts of the
costs required to remove or remediate previously
disposed wastes or hazardous substances at the
locations they own or operate or at the locations
which they arranged for disposal of such
materials. The costs expended through June 30,
2003 have been largely covered by insurance.
Management believes that the resolution of these
matters will not have a material adverse effect on
the Company's financial position or results of
operations.
Under the Company's insurance programs, coverage
is obtained for catastrophic exposures as well as
those risks required to be insured by law or
contract. In connection with these programs,
Niagara US has provided certain insurance carriers
with irrevocable standby letters of credit
totaling $1,545,000 as of June 30, 2003. It is the
policy of the Company to retain a portion of
certain expected losses. These relate primarily to
workers' compensation, physical loss to property,
business interruption resulting from such loss,
and comprehensive general, product, vehicle,
medical and life benefits and liability.
Provisions for losses expected under these
programs are recorded based upon the Company's
estimates of the aggregate liability for claims.
Such estimates utilize certain actuarial
assumptions followed in the insurance industry and
are included in accrued expenses.
6. SEGMENTS AND RELATED The Company operates in two reportable segments:
INFORMATION (i) Niagara US which has operations in the United
States and (ii) Niagara UK which has operations in
the United Kingdom. Management operates these
segments as separate strategic business units and
measures their performance based on earnings
before interest, taxes, depreciation and
amortization ("Adjusted EBITDA"). Management
believes that Adjusted EBITDA provides the best
measurement of segment performance, in as much as
it is based on a widely accepted measure of
financial performance and cash flows, and
management regularly calculates Adjusted EBITDA in
order to determine compliance with financial
covenants in the Company's credit facilities.
Niagara UK uses British pounds sterling as its
functional currency and its accounts are
translated to United States dollars in conformity
with SFAS No. 52, "Foreign Currency Translation."
Assets and liabilities of this subsidiary have
been translated at the exchange rates in effect on
June 30, 2002 and 2003, and the related revenues
and expenses have been translated at average rates
for the periods.
Niagara US sells its products primarily to
customers in the United States.
Approximately 67% of Niagara UK's sales to
unaffiliated customers during the six months ended
June 30, 2003 were within the United Kingdom with
20% to continental Europe and 13% to the rest of
the world. These amounts were 68%, 18% and 14%,
respectively, for the six months ended June 30,
2002. Niagara UK's sales to any one foreign
country, other than the United States, for these
periods represented less than 5% of its total
sales.
The following tables set forth certain performance and other
information by each of the Company's reportable segments:
At and for the three months ended June 30, 2002
Corporate/
Niagara US Niagara UK Eliminations Consolidated
-------------------------------------------------------------------------------------------------------------------------
Net sales $46,395,745 $21,793,373 $ (1,587,258) $ 66,601,860
Intersegment sales - 1,587,258 (1,587,258) -
Net sales to unaffiliated customers 46,395,745 20,206,115 - 66,601,860
Segment profit (loss) (Adjusted EBITDA) 4,697,006 (263,237) (341,269) 4,092,500
Depreciation and amortization 1,864,952 406,228 19,373 2,290,553
Interest expense 494,841 400,350 - 895,191
Net income (loss) 1,365,343 (1,304,655) 52,797 113,485
Accounts receivable, net 17,033,258 22,086,115 - 39,119,373
Long-lived assets 75,404,737 11,518,307 512,940 87,435,984
Goodwill 1,904,499 - - 1,904,499
Segment assets 131,698,253 53,161,856 990,623 185,850,732
Acquisition of property and equipment 192,590 11,243 - 203,833
-------------------------------------------------------------------------------------------------------------------------
At and for the six months ended June 30, 2002
Corporate/
Niagara US Niagara UK Eliminations Consolidated
-------------------------------------------------------------------------------------------------------------------
Net sales $87,704,978 $ 45,385,494 $ (3,517,373) $129,573,099
Intersegment sales - 3,517,373 (3,517,373) -
Net sales to unaffiliated customers 87,704,978 41,868,121 - 129,573,099
Segment profit (loss) (Adjusted EBITDA) 8,370,841 (398,691) (723,106) 7,249,044
Depreciation and amortization 3,701,725 881,334 48,648 4,631,707
Interest expense 1,039,581 777,993 - 1,817,574
Net income (loss) 2,022,049 (2,170,555) 73,303 (75,203)
Accounts receivable, net 17,033,258 22,086,115 - 39,119,373
Long-lived assets 75,404,737 11,518,307 512,940 87,435,894
Goodwill 1,904,499 - - 1,904,499
Segment assets 131,698,253 53,161,856 990,623 185,850,732
Acquisition of property and equipment 427,115 208,095 - 635,210
-------------------------------------------------------------------------------------------------------------------
At and for the three months ended June 30, 2003
Corporate/
Niagara US Niagara UK Eliminations Consolidated
---------------------------------------------------------------------------------------------------------------------
Net sales $48,070,535 $ 28,277,193 $ (3,345,145) $ 73,002,583
Intersegment sales - 3,345,145 (3,345,145) -
Net sales to unaffiliated customers 48,070,535 24,932,048 - 73,002,583
Segment profit (loss) (Adjusted EBITDA) 3,802,929 756,050 (528,863) 4,030,116
Depreciation and amortization 1,863,928 427,693 20,000 2,311,621
Interest expense 410,962 381,583 - 792,545
Net income (loss) 811,826 54,365 (297,998) 568,193
Accounts receivable, net 17,585,179 25,277,676 - 42,862,855
Long-lived assets 72,728,845 10,471,755 343,119 83,543,719
Goodwill 1,904,499 - - 1,904,499
Segment assets 135,815,308 58,303,889 440,471 194,559,669
Acquisition of property and equipment, net 911,721 317,308 (330,600) 898,429
---------------------------------------------------------------------------------------------------------------------
At and for the six months ended June 30, 2003
Corporate/
Niagara US Niagara UK Eliminations Consolidated
--------------------------------------------------------------------------------------------------------------------------
Net sales $100,288,737 $ 58,655,791 $ (6,193,530) $152,750,998
Intersegment sales - 6,193,530 (6,193,530) -
Net sales to unaffiliated customers 100,288,737 52,462,261 - 152,750,998
Segment profit (loss) (Adjusted EBITDA) 7,953,244 2,237,891 (1,023,746) 9,167,389
Depreciation and amortization 3,731,070 932,896 40,000 4,703,966
Interest expense 866,364 750,136 - 1,616,500
Net income (loss) 1,736,029 662,450 (406,202) 1,992,277
Accounts receivable, net 17,585,179 25,277,676 - 42,862,855
Long-lived assets 72,728,845 10,471,755 343,119 83,543,719
Goodwill 1,904,499 - - 1,904,499
Segment assets 135,815,308 58,303,889 440,471 194,559,669
Acquisition of property and equipment 1,271,864 469,671 (327,948) 1,413,587
--------------------------------------------------------------------------------------------------------------------------
The following tables provide a reconciliation of the Company's segment
profit (loss) (Adjusted EBITDA) for the three and six month periods
ending June 30, 2002 and 2003, to the respective net income (loss) for
such periods attributable to each reportable segment:
Three months ended June 30, 2002 2003
---------------------------------------- -----------------------------------
Niagara US Niagara UK Niagara US Niagara UK
-----------------------------------------------------------------------------------------------------------------------
Segment profit (loss) (Adjusted EBITDA) $4,697,006 $ (263,237) $ 3,802,929 $ 756,050
Depreciation and amortization (1,864,952) (406,228) (1,863,928) (427,693)
Interest expense (494,841) (400,350) (410,962) (381,583)
Intercompany interest income (expense) 101,712 (101,712) - -
Other income 163,841 - 140,324 107,591
Provision for doubtful accounts (27,000) (28,202) - -
Management fees (337,500) (109,695) (337,500) -
(Provision) benefit for income taxes (872,923) 4,769 (519,037) -
-----------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 1,365,343 $ (1,304,655) $ 811,826 $ 54,365
-----------------------------------------------------------------------------------------------------------------------
Six months ended June 30, 2002 2003
-------------------------------------- -----------------------------------
Niagara US Niagara UK Niagara US Niagara UK
------------------------------------------------------------------------------------------------------------------------
Segment profit (loss) (Adjusted EBITDA) $ 8,370,841 $ (398,691) $ 7,953,244 $ 2,237,891
Depreciation and amortization (3,701,725) (881,334) (3,731,070) (932,896)
Interest expense (1,039,581) (777,993) (866,364) (750,136)
Intercompany interest income (expense) 202,091 (202,091) - -
Other income 212,208 - 165,141 107,591
Provision for doubtful accounts (54,000) (87,478) - -
Management fees (675,000) (216,765) (675,000) -
(Provision) benefit for income taxes (1,292,785) 393,797 (1,109,922) -
------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ 2,022,049 $ (2,170,555) $ 1,736,029 $ 662,450
------------------------------------------------------------------------------------------------------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Niagara was organized in April of 1993. In August 1995, Niagara
acquired Niagara LaSalle. With plants in Buffalo, New York and Chattanooga,
Tennessee, Niagara LaSalle was an established cold finished steel bar producer
in the northeast and southeast regions of the United States.
In January 1996, Niagara LaSalle acquired Southwest Steel Company,
Inc. ("Southwest"), the leading cold drawn steel bar producer servicing the
southwest region of the United States. During 1996, Southwest completed
construction of a new plant in Midlothian, Texas and relocated its Tulsa,
Oklahoma operations to this new facility.
In April 1997, Niagara LaSalle acquired LaSalle, which had plants in
Hammond and Griffith, Indiana. This acquisition gave Niagara LaSalle a strong
market position in the midwest region of the United States and broadened
Niagara LaSalle's product range by adding thermal treated and chrome plated
bars. With this acquisition, Niagara US became the largest independent
producer of cold drawn steel bars in the United States.
On May 21, 1999, Niagara UK purchased the equipment, inventory and
certain other assets of the eight steel bar businesses of Glynwed Steels
Limited ("Glynwed Steels"). These steel bar businesses are engaged in hot
rolling, cold finishing and distribution and represent the largest independent
steel bar concern in the United Kingdom.
In November 1999 and September 2001, the Company announced
restructuring plans for its hot rolling operations in the United Kingdom.
Under the 1999 plan, Niagara UK closed its Ductile Hot Mill facility in
Willenhall, terminated its lease of the real property, transferred most of the
production from this facility to its W Wesson facility in Moxley (which was
renamed Ductile Wesson) and invested approximately $1.5 million in its
remaining hot rolling businesses. During the same period, Niagara UK
reorganized the management structures in each of its three operating divisions
(hot rolling, cold finishing and distribution). Under the 2001 plan, Niagara
UK closed its Dudley Port hot rolling facility in Tipton and transferred most
of its production to its two other hot rolling facilities. On March 15, 2002,
Niagara UK entered into an agreement to sell this leased property for
(pound)3,600,000 ($5,413,572), which Niagara UK had an option to purchase for
(pound)1,495,000 ($2,248,136). On September 30, 2002, Niagara UK completed
this transaction. In connection with this transaction, Niagara UK purchased a
parcel of land in the fourth quarter of 2002 which it subsequently sold during
this period to the purchaser of the property. These sales resulted in a
pre-tax gain of (pound)2,063,022 ($3,102,311).
In the fourth quarter of 2002, Niagara LaSalle completed significant
purchases of equipment and related assets from two companies after having
prevailed at auctions held in connection with such companies' bankruptcy
proceedings. On October 8, 2002, Niagara LaSalle purchased certain production
equipment and related assets of Moltrup Steel Products Company for $375,000.
Niagara US has relocated the majority of these assets to its other operating
facilities. On November 19, 2002, Niagara LaSalle purchased from Republic
Technologies International, LLC ("Republic") all of the equipment and supplies
located at Republic's Harvey, Illinois facility for $2,225,000. Management has
not yet determined where this equipment will be deployed.
On May 30, 2003, Niagara UK entered into an agreement to sell its GB
Longmore property in Darlaston. Production at this site has been shifted to GB
Longmore's Willenhall facility. Under the agreement, Niagara UK would receive
(pound)925,000 (approximately $1,526,000) for the sale of this leased real
property, which Niagara UK has an option to purchase for (pound)413,000
(approximately $681,000). The transaction is subject to the buyer receiving
approval from the local planning authority of its plans to build residential
properties at this site. The planning authority has put this matter on the
agenda for its September 2003 meeting.
RESULTS OF OPERATIONS
The Company's results of operations for the three and six months
ended June 30, 2003 improved markedly when compared to those of the comparable
period in 2002. Net sales by the Company's U.S. and U.K. operations increased
due to improved business conditions and modest price increases on certain of
the Company's products. During the first half of 2003, management continued to
review all operations for additional opportunities for reductions in costs and
improvements in operating efficiencies.
Three months ended June 30, 2003 compared with June 30, 2002
The Company's net sales for the three months ended June 30, 2003 were
$73,002,583, representing an increase of $6,400,723, or 9.6%, over the same
period in 2002. Net sales by the Company's U.S. operations for the period
increased by $1,674,790 or 3.6%, and net sales by the Company's U.K.
operations for the period increased by $4,725,932 or 23.4%. The increase in
net sales attributable to the Company's U.S. operations was due primarily to
an increase in prices (4.5%) which was partially offset by a decrease in sales
volume (2.6%). The increase in net sales attributable to the Company's U.K.
operations was due primarily to an increase in sales volume (6.0%) and, to a
lesser extent, an increase in prices (5.6%). Net sales by the Company's U.K.
operations also reflect a 10.7% increase in the value of the British pound to
the U.S. dollar for the three months ended June 30, 2003, as compared to the
same period in 2002. The Company's U.K. operations use British pounds as its
functional currency and its net sales were translated from British pounds into
U.S. dollars at higher relative levels for the three months ended June 30,
2003 as compared to the same period in 2002 as a result of this change in
value.
Cost of products sold for the three months ended June 30, 2003
increased by $6,157,531 to $64,703,508, representing an increase of 10.5% over
the same period in 2002. Cost of products sold attributable to the Company's
U.S. and U.K. operations increased by $2,603,585 and $3,553,945, respectively.
The increases incurred by the Company's U.S. and U.K. operations were
primarily attributable to an increase in the price of raw materials and an
increase in sales volume, respectively.
Gross margins for the three months ended June 30, 2003 decreased by
0.7% compared to the same period in 2002. Gross margins attributable to the
Company's U.S. operations decreased by 2.4% due to an increase in the price of
raw materials. This decrease was partially offset by a 2.6% increase in gross
margins attributable to the Company's U.K. operations as a result of an
increase in sales volume and prices.
Selling, general and administrative expenses for the three months
ended June 30, 2003 increased by $272,613 to $6,578,661, or 9.0% of net sales,
compared to 9.5% of sales for the same period in 2002. The increase in dollar
amount and the decrease as a percentage of net sales were primarily
attributable to the increase in net sales by the Company's operations.
Interest expense for the three months ended June 30, 2003 decreased
by $102,646 to $792,545, due to decreased levels of borrowing and lower
interest rates.
The Company's net income for the three months ended June 30, 2003 was
$568,193, compared to net income of $113,485 for the comparable period in the
prior year. Net income for the three months ended June 30, 2003 attributable
to the Company's U.K. operations was $54,365, an increase of $1,359,020 as
compared to the net loss of $1,304,655 incurred by such operations during the
three months ended June 30, 2002. The improvement was primarily due to higher
gross margins, lower selling, general and administrative costs and lower
interest expense. Net income attributable to the Company's U.S. operations for
the three months ended June 30, 2003 was $513,828, a decrease of $904,312 over
the same period in 2002. This decrease was due primarily to a reduction in
gross margins attributable to such operations. Net income attributable to the
Company's U.S. operations for the three months ended June 30, 2002 and 2003
reflects statutory tax rates applied against income before income taxes,
whereas no tax benefit, given the uncertainty of its realization, was
recognized for the loss attributable to the Company's U.K. operations for the
three months ended June 30, 2002. Net income attributable to the Company's
U.K. operations for the three months ended June 30, 2003 also reflects no tax
provision, as a valuation allowance had been recorded to offset Niagara UK's
deferred tax benefits as of December 31, 2002. The taxes that would have
otherwise been provided against Niagara UK's income before income taxes for
the three months ended June 30, 2003 have reduced the balance of this
valuation allowance.
Six months ended June 30, 2003 compared with June 30, 2002
The Company's net sales for the six months ended June 30, 2003 were
$152,750,998, representing an increase of $23,177,899, or 17.9%, over the same
period in 2002. Net sales by the Company's U.S. operations for the period
increased by $12,583,759 or 14.3%, and net sales by the Company's U.K.
operations for the period increased by $10,594,140 or 25.3%. The increase in
net sales attributable to the Company's U.S. and U.K. operations was due
primarily to an increase in sales volume (9.3% and 5.1%, respectively) and, to
a lesser extent, an increase in prices (3.8% and 6.1%, respectively). Net
sales by the Company's U.K. operations also reflect an 11.5% increase in the
value of the British pound to the U.S. dollar for the six months ended June
30, 2003, as compared to the same period in 2002. The Company's U.K.
operations use British pounds as its functional currency and its net sales
were translated from British pounds into U.S. dollars at higher relative
levels for the six months ended June 30, 2003 as compared to the same period
in 2002 as a result of this change in value.
Cost of products sold for the six months ended June 30, 2003
increased by $20,201,076 to $134,888,744, representing an increase of 17.6%
over the same period in 2002. Cost of products sold attributable to the
Company's U.S. and U.K. operations increased by $12,556,620 and $7,644,456,
respectively. This increase was primarily attributable to the increase in
sales volume.
Gross margins for the six months ended June 30, 2003 increased by
2.0% compared to the same period in 2002. Gross margins attributable to the
Company's U.K. operations increased by 3.4% due to an increase in sales volume
and prices. This increase was partially offset by a 1.4% decrease in gross
margins for the Company's U.S. operations, primarily as a result of an
increase in the price of raw materials.
Selling, general and administrative expenses for the six months ended
June 30, 2003 increased by $988,350 to $13,398,618, or 8.8% of net sales,
compared to 9.6% of sales for the same period in 2002. The increase in dollar
amount and the decrease as a percentage of net sales were primarily
attributable to the increase in net sales by the Company's operations.
Interest expense for the six months ended June 30, 2003 decreased by
$201,074 to $1,616,500, due to decreased levels of borrowing and lower
interest rates.
The Company's net income for the six months ended June 30, 2003 was
$1,992,277, compared to a net loss of $75,203 for the comparable period in the
prior year. Net income attributable to the Company's U.K. operations for the
six months ended June 30, 2003 was $662,450, an increase of $2,833,005 as
compared to the net loss of $2,170,555 incurred by such operations during the
six months ended June 30, 2002. The improvement was primarily due to higher
gross margins, lower selling, general and administrative costs and lower
interest expense. Net income attributable to the Company's U.S. operations for
the six months ended June 30, 2003 was $1,329,827, a decrease of $765,525 over
the same period in 2002 due primarily to a reduction in gross margins
attributable to such operations. Net income attributable to the Company's U.S.
operations for the six months ended June 30, 2002 and 2003 reflects statutory
tax rates applied against income before income taxes, whereas no tax benefit,
given the uncertainty of its realization, was recognized for the loss
attributable to the Company's U.K. operations for the quarter ended June 30,
2002. Net income attributable to the Company's U.K. operations for the six
months ended June 30, 2003 reflects no tax provision, as a valuation
allowance had been recorded to offset Niagara UK's deferred tax benefits as of
December 31, 2002. The taxes that would have otherwise been provided against
Niagara UK's income before income taxes for the six months ended June 30, 2003
have reduced the balance of this valuation allowance.
LIQUIDITY AND CAPITAL RESOURCES
The Company's short-term liquidity requirements for day-to-day
operating expenses has been, and is expected to continue to be, funded by cash
provided by operations, borrowings under its revolving credit facilities and
advances under its invoice discounting agreement. The Company's principal
long-term liquidity requirement has been, and is expected to continue to be,
the repayment of debt and the funding of capital expenditures to modernize,
improve and expand its facilities, machinery and equipment. Capital
expenditures for the six months ended June 30, 2003 totaled $1,413,587, as
compared to $635,210 for the same period in 2002. This increase was
attributable to increased purchases of machinery and equipment by the
Company's U.S. and U.K. operations in response to improved business
conditions.
Cash flows provided by operating activities were $5,926,833 for the
six months ended June 30, 2003, an increase of $362,376 as compared to cash
flows provided by operating activities of $5,564,457 for the same period in
2002. This increase was largely attributable to an increase in net income (net
income of $1,992,277 in 2003 as compared to net loss of $75,203 in 2002), an
increase in accounts payable, accrued expenses and other non-current
liabilities in 2003 as compared to 2002 (an increase of $9,797,270 in 2003 as
compared to an increase of $8,207,576 in 2002), a smaller increase in
inventories as compared to 2002 (an increase of $1,446,017 in 2003 as compared
to an increase of $4,167,446 in 2002) and a smaller increase in other assets
as compared to 2002 (an increase of $497,269 in 2003 as compared to an
increase of $1,816,740 in 2002). These were partially offset by a larger
increase in accounts receivable in 2003 as compared to 2002 (an increase of
$7,780,286 in 2003 as compared to an increase of $137,287 in 2002). Cash and
cash equivalents at June 30, 2003 were $2,842,657, a decrease of $2,718,433 as
compared to December 31, 2002. This decrease was primarily attributable to the
timing of customer cash collections at December 31, 2002 and June 30, 2003.
Such funds are used for working capital and other corporate purposes.
On April 18, 1997 and in connection with the acquisition of LaSalle,
Niagara US entered into a revolving credit and term loan agreement (as
amended, the "Credit Agreement") and Niagara LaSalle terminated its previously
existing credit agreements. The other parties to the Credit Agreement are
Manufacturers and Traders Trust Company ("M&T"), Comerica Bank, Citizens Bank
of Pennsylvania, and PNC Bank. The obligations of Niagara US under the Credit
Agreement are guaranteed by Niagara and secured by substantially all of the
assets and a pledge of all outstanding capital stock of Niagara US.
At the Company's request, a number of amendments were made to the
Credit Agreement effective September 1, 2002. The revolving credit facility
was reduced from $50,000,000 to $35,000,000 and the balance owed under the
term loan was increased from $14,333,356 to $18,000,000. Principal payments
under the term loan were reduced to $375,000 from $666,666 per month. In
addition, the maturity date of the term loan and revolving credit loans made
pursuant to the Credit Agreement was extended to July 31, 2004.
Interest on the term loan is payable in monthly installments either
at the LIBOR rate (for a period specified by Niagara US from time to time)
plus 2.85%, or M&T's prime rate plus 1.00% (effective rate of 3.96% at June
30, 2003). Revolving credit loans made pursuant to the Credit Agreement are
based on a percentage of eligible accounts receivable and inventory. Interest
on such loans is payable in monthly installments at a rate that is either
2.50% above the LIBOR rate (for a period specified by Niagara US from time to
time) or M&T's prime rate plus 0.75% (effective rate of 3.66% at June 30,
2003).
The Credit Agreement carries restrictions on, among other things,
indebtedness, liens, capital expenditures, dividends, asset dispositions,
cross-defaults and changes in control of Niagara and Niagara US, and requires
minimum levels of net worth through maturity. Also included in this agreement
are requirements regarding the ratio of consolidated current assets to
consolidated current liabilities, the ratio of net income before interest,
taxes, depreciation and amortization ("EBITDA") to debt service and capital
expenditures, and the ratio of senior secured indebtedness to EBITDA. Niagara
US was in compliance with all of these requirements as of June 30, 2003.
On May 20, 1998, Niagara's Board of Directors authorized the
repurchase, from time to time, of up to one million shares of Niagara Common
Stock in open market and privately negotiated transactions. On October 6,
1999, Niagara's Board authorized the repurchase of an additional one million
Niagara shares. Such repurchases are subject to market and other conditions
and are financed with internally generated funds and borrowings under the
Company's credit facilities. Shares of Niagara Common Stock repurchased are
held as treasury stock and are available for use in the Company's benefit
plans and for general corporate purposes. As of June 30, 2003, Niagara had
repurchased 1,758,938 shares of its Common Stock at a cost of $8,249,684. No
shares were repurchased during the six months ended June 30, 2003.
On May 21, 1999 and in connection with the acquisition of the steel
bar businesses from Glynwed Steels, Niagara UK entered into a bank facilities
agreement (the "Facilities Agreement") with National Westminster Bank Plc
("National Westminster") providing for a (pound)10 million (approximately
$16.5 million) term loan and a (pound)9.8 million (approximately $16.2
million) revolving credit facility. The obligations of Niagara UK under the
Facilities Agreement are secured by standby letters of credit issued by M&T to
National Westminster (respectively, the "Term Letter of Credit" and the
"Revolving Letter of Credit," and, together, the "Letters of Credit") and
substantially all of the assets of Niagara UK (for the benefit of M&T).
Niagara UK's agreement to reimburse M&T for drawdowns under the Letters of
Credit is guaranteed by Niagara and Niagara US, which guarantees are secured
by substantially all of the assets of Niagara US on a second priority basis.
As consideration for the issuance of the Letters of Credit, Niagara UK paid
M&T a total of (pound)178,400 (approximately $285,440) at the time of issuance
and agreed to pay further annual fees (in monthly installments) of 2.5% and
2.75% in respect of the Revolving and Term Letters of Credit, respectively.
Principal of the term loan under the Facilities Agreement amortizes
in monthly installments commencing on May 31, 2000 and ending on August 31,
2005. The principal repayment installments on the term loan escalate from
(pound)125,000 to (pound)213,333 (approximately $206,000 to $352,000)
throughout its term. Revolving credit loans made pursuant to the Facilities
Agreement are based upon a percentage of eligible inventory. On August 8,
2003, the maturity date on these revolving credit loans was extended to July
31, 2005. Interest on the term and revolving credit loans under the Facilities
Agreement accrue at the BBA LIBOR rate (for periods specified by Niagara UK
from time to time) plus 0.15% (effective rate of 3.86% at June 30, 2003) and
is payable at the conclusion of such interest periods.
The purchase of the U.K. steel bar businesses was also financed
pursuant to (i) a (pound)3.75 million (approximately $6 million) equity
investment by Niagara in Niagara UK (the "Equity Investment"), (ii) a
(pound)3.75 million (approximately $6 million) subordinated loan from Niagara
to Niagara UK which accrued interest at 7.5% per annum (the "Subordinated
Loan") and (iii) a (pound)2.5 million (approximately $4 million) non-interest
bearing short-term loan from Niagara to Niagara UK (the "Short-Term Loan").
The Equity Investment, the Subordinated Loan and the Short-Term Loan were
financed by borrowings under the Credit Agreement. The Short-Term Loan was
repaid in 1999. The Subordinated Loan was capitalized to equity during the
fourth quarter of 2002.
On August 23, 1999, Niagara UK entered into an Invoice Discounting
Agreement (the "Discount Agreement") with Royal Bank of Scotland Invoice
Discounting Limited ("RBID") (formerly known as Lombard Natwest Discounting
Limited) providing for advances to Niagara UK based upon a formula tied to the
receivables purchased by RBID. The obligations of Niagara UK under the
Discount Agreement are guaranteed by Niagara and secured by substantially all
of the assets of Niagara UK. In connection with the execution of the Discount
Agreement, the Revolving Letter of Credit and the revolving credit facility
under the Facilities Agreement were reduced to (pound)4.9 million
(approximately $8.1 million) and subsequently reduced to (pound)2.5 million
(approximately $4.1 million) as of December 31, 1999 and (pound)1.25 million
(approximately $2.1 million) on August 8, 2003.
At the Company's request, a number of amendments were made to the
Discount Agreement effective August 23, 2002. These amendments included (i) a
reduction in the maximum amount of advances to Niagara UK from (pound)20
million (approximately $33.0 million) to (pound)15.0 million (approximately
$24.8 million), (ii) a reduction in the interest rate applicable to such
advances from 2.25% to 2.0% above Royal Bank of Scotland's base rate
(effective rate of 5.24% at June 30, 2003) and (iii) the extension of the
maturity date on such advances to July 31, 2004. In connection with these
amendments, Niagara and Niagara UK agreed to capitalize the Subordinated Loan,
which occurred during the fourth quarter of 2002. On August 11, 2003, the
maturity date for advances made pursuant to the Discount Agreement was further
extended to July 31, 2005.
The Facilities and Discount Agreements carry restrictions on, among
other things, security interests, borrowed money, asset dispositions,
dividends, transactions with affiliates, capital expenditures, cross-defaults,
changes in control of Niagara UK and mergers and acquisitions. Also included
in these agreements are requirements regarding tangible net worth, the ratio
of Adjusted EBITDA to fixed charges and the ratio of current assets to current
liabilities. Niagara UK was in compliance with all of these requirements as of
June 30, 2003.
In connection with the execution of the Facilities and Discount
Agreements, Niagara and Niagara UK entered into intercreditor agreements
which, among other things restrict the payment of dividends in respect of the
Niagara UK shares.
As a result of depressed conditions in the manufacturing sector in
the United Kingdom including within the overall steel industry, and conditions
within the insurance industry following the events of September 11, 2001, the
market for credit insurance in the United Kingdom deteriorated during 2002.
This has necessitated Niagara guaranteeing, on a short-term basis, certain
trade payables of Niagara UK in the aggregate amount of up to (pound)7.15
million (approximately $11.8 million) in order to ensure an orderly supply of
raw materials.
At June 30, 2003, the Company had borrowed or been advanced
$41,847,000 under its revolving credit facilities and the Discount Agreement
and had approximately $19,000,000 in available credit thereunder, and the
outstanding balance of its term loans was $22,232,000. Working capital of the
Company at June 30, 2003 was $41,386,250.
CRITICAL ACCOUNTING POLICIES
On December 12, 2001, the SEC issued Financial Reporting Release No.
60 which requires a discussion of the critical accounting policies used by
companies in the preparation of their financial statements. Note 1 to the
Company's audited financial statements for the year ended December 31, 2002
includes a summary of the significant accounting policies used by the Company
in the preparation of its financial statements. The Company believes that the
following critical accounting policies affect the significant judgments and
estimates used in the preparation of the Company's condensed financial
statements.
The discussion and analysis of the Company's financial condition and
results of operations are based upon the Company's condensed consolidated
financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States of America. The preparation
of these financial statements requires that management make estimates and
assumptions that affect the reported amounts of assets and liabilities,
revenues and expenses and the related disclosure of contingent assets and
liabilities. On an ongoing basis, management evaluates these estimates,
including those related to inventory reserves, taxes, doubtful accounts,
intangible assets, insurance, litigation, environmental compliance and other
contingencies. Management bases its estimates on historical data, when
available, professional advice, experience and various assumptions that are
believed to be reasonable under the circumstances, the combined results of
which form the basis for making judgments about the carrying values of assets
and liabilities. Actual results could differ from these estimates.
Revenue from the sale of products is recorded at the time the goods
are shipped and title and risk of loss has transferred. Revenue from freight
charged to customers is recognized when products are shipped. Provisions for
discounts, customer returns and other adjustments are provided for in the
period the related sales are recorded based upon historical data.
The Company reviews the carrying values of its long-lived and
identifiable intangible assets for possible impairment whenever events or
changes in circumstances indicate that the carrying amount of the assets may
not be recoverable. The Company assesses recoverability of these assets by
estimating future nondiscounted cash flows. Any long-lived assets held for
disposal are reported at the lower of their carrying amounts or fair value
less cost to sell.
EFFECTS OF RECENT ACCOUNTING PRONOUNCEMENTS
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," which addresses financial accounting and reporting
for obligations associated with the retirement of tangible long-lived assets
and the associated asset retirement costs. This statement is required to be
applied for fiscal years beginning after June 15, 2002. The adoption of this
statement as of January 1, 2003 did not have an effect on the Company's
financial statements.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, and Amendment of FASB Statement No. 13, and
Technical Corrections." This statement, among other things, rescinds SFAS No.
4, "Reporting Gains and Losses from Extinguishment of Debt," which required
that all gains and losses from the extinguishment of debt be aggregated and,
if material, classified as an extraordinary item, net of related income tax
effect. As a result, the criteria in APB Opinion No. 30, "Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," will now be used to classify such gains and losses. SFAS No.
145 also amends SFAS No. 13 to require that certain lease modifications that
have economic effects similar to sale-leaseback transactions be accounted for
in the same manner as sale-leaseback transactions. Such provisions of SFAS No.
145 are required to be applied in fiscal years beginning after May 15, 2002.
The adoption of this statement as of January 1, 2003 did not have an effect on
the Company's financial statements.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." This statement requires that a
liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred, as opposed to prior guidance which
provided that liability for such exit costs be recognized at the date of an
entity's commitment to an exit or disposal plan. This statement is required to
be applied to exit or disposal activities that are initiated after December
31, 2002. The adoption of this statement as of January 1, 2003 did not have an
effect on the Company's financial statements.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Guarantees of
the Indebtedness of Others," which interprets the guidance in FASB Statement
No. 5, "Accounting for Contingencies," relating to a guarantor's accounting
for, and disclosure of, certain types of guarantees. Interpretation No. 45
requires that a guarantor recognize, at the inception of a guarantee, a
liability for the fair value of the obligation undertaken in issuing the
guarantee. Under Interpretation No. 45, the recognition of the liability is
required even if it is not probable that payments will be required under the
guarantee. Previously, SFAS No. 5 required recognition of a liability only for
a probable loss. The recognition requirements of Interpretation No. 45 apply
to guarantees issued or modified after December 31, 2002. The disclosure
requirements are effective for interim and annual financial statements ending
after December 15, 2002. The adoption of Interpretation No. 45 as of January
1, 2003 did not have an effect on the Company's financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation--Transition and Disclosure--an amendment of FASB
Statement No. 123," which amends the disclosure requirements of SFAS No. 123
to require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee
compensation and the effect on the method used on reported results. The
adoption of this statement as of January 1, 2003 did not have an effect on the
Company's financial statements.
In January 2003, the FASB issued Interpretation No. 46,
"Consolidation of Variable Interest Entities, an interpretation of Accounting
Research Bulletin (ARB) No. 51" which defines when a business enterprise must
consolidate a variable interest entity. Interpretation No. 46 applies in the
first fiscal year or interim period beginning after June 15, 2003 to entities
in which an enterprise holds a variable interest that it acquired before
February 1, 2003 and applies immediately to variable interest entities created
after January 31, 2003. The Company did not have any variable interest
entities as of June 30, 2003.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities." SFAS No. 149 amends
SFAS No. 133 for certain decisions made by the FASB and is effective for
contracts entered into or modified after June 30, 2003 and for hedging
relationships designated after June 30, 2003. SFAS No. 149 is to be applied
prospectively. The provisions of SFAS No. 149 that relate to SFAS No. 133
implementation issues that have been effective for fiscal quarters that began
prior to June 15, 2003 continue to be applicable in accordance with their
respective effective dates. The adoption of this statement is not expected to
have a material effect on the Company's financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity"
which establishes standards for classifying and measuring certain financial
instruments with characteristics of both a liability and equity. SFAS No. 150
is effective for financial instruments entered into or modified after May 31,
2003, and is otherwise effective at the beginning of the first interim period
beginning after June 15, 2003. The adoption of this statement is not expected
to have a material effect on the Company's financial statements.
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for certain forward-looking statements. Some of the statements in this
Form 10-Q, including, without limitation, in "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS," may constitute
forward-looking statements. When used in this Form 10-Q, the words "may,"
"will," "should," "could," "expects," "plans," "anticipates," "intends,"
"believes," "estimates," "predicts," "projects," "potential," "likely" or
"continue" and other similar expressions are intended to identify such
forward-looking statements. These statements involve known and unknown risks,
uncertainties and other factors, many of which are beyond the control of the
Company, that may cause the Company's actual results to be materially
different from those expressed or implied by such forward-looking statements,
in future filings by Niagara with the SEC, in the Company's press releases or
in oral statements made by authorized officers of the Company. The factors
discussed under "CAUTIONARY STATEMENT FOR PURPOSES OF THE `SAFE HARBOR'
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995" in
Niagara's Report on Form 10-K for the fiscal year ended December 31, 2002,
among others, could cause actual results to differ materially from those
contained in forward-looking statements made in this Form 10-Q.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary market risks include fluctuations in interest
rates, variability in interest rate spreads (i.e., prime to LIBOR spreads),
exchange rate variability, the credit risk of its customers and the
availability to its suppliers of credit insurance on their receivables from
the Company. The Company does not trade in derivative financial instruments.
Substantially all of the Company's non-trade indebtedness relates to loans
made pursuant to the Credit and Facilities Agreements and advances under the
Discount Agreement. Interest on the term loan under the Credit Agreement
accrues at either the LIBOR rate (for a period specified by Niagara US from
time to time) plus 2.85%, or M&T's prime rate plus 1.00%. Interest on
revolving credit loans made pursuant to such agreement accrues at either 2.50%
above the LIBOR rate (for a period specified by Niagara US from time to time)
or M&T's prime rate plus 0.75%. Interest on the term and revolving credit
loans under the Facilities Agreement accrues at the BBA LIBOR rate (for a
period specified by Niagara UK from time to time) plus 0.15%. Interest on
advances under the Discount Agreement accrues at Royal Bank of Scotland's base
rate plus 2.0%. Management attempts to reduce market risks associated with the
fluctuations in interest rates through the selection of LIBOR periods under
the Credit and Facilities Agreements and advance amounts under the Discount
Agreement (see "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- Liquidity and Capital Resources").
The Company sells its products primarily to customers in North
America and Europe. Revenues from sales by Niagara US are collected
exclusively in U.S. dollars. Niagara UK's revenues are generally collected in
the local currency of its customers. In order to reduce its exposure to
fluctuations in exchange rates, Niagara UK purchased foreign exchange
contracts in amounts and with expiration dates in line with customer orders.
Following the adoption of the Euro, Niagara UK's exposure to such fluctuations
was substantially reduced. As a result, Niagara UK discontinued its practice
of purchasing foreign exchange contracts in February 2002.
The Company is subject to the economic conditions affecting its
customers. The Company's exposure to losses on trade accounts receivable is
principally dependent on each customer's financial condition. The Company
monitors its exposure for credit losses and maintains allowances for
anticipated losses after giving consideration to current delinquency data,
historical loss experience, and economic conditions impacting steel service
centers and original equipment manufacturers. Management continuously reviews
information concerning the financial condition of the Company's customers and
believes that the Company's allowance for doubtful accounts is sufficient to
cover such risks. In addition, Niagara UK has insured substantially all of its
accounts receivable to further reduce its customer credit risk. Generally,
these insurance policies provide for payments to Niagara UK of 80% of the
unpaid invoiced amounts.
As a result of depressed conditions in the manufacturing sector in
the United Kingdom including within the overall steel industry, and conditions
within the insurance industry following the events of September 11, 2001, the
market for credit insurance in the United Kingdom deteriorated during 2002.
This has necessitated Niagara guaranteeing, on a short-term basis, certain
trade payables of Niagara UK in the aggregate amount of up to (pound)7.15
million (approximately $11.8 million) in order to ensure an orderly supply of
raw materials.
ITEM 4. CONTROLS AND PROCEDURES
An evaluation was performed under the supervision and with the
participation of the Company's management, including the Chief Executive
Officer and the Chief Financial Officer, of the effectiveness of the design
and operation of the Company's disclosure controls and procedures. Based on
such evaluation, such individuals have concluded that as of June 30, 2003, the
Company's disclosure controls and procedures are effective in timely alerting
them to material information relating to the Company (including its
consolidated subsidiaries) required to be included in the Company's periodic
SEC reports. There have been no significant changes in the Company's
disclosure controls and procedures or in other factors that could
significantly affect disclosure controls and procedures subsequent to the date
of their evaluation.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Niagara US and Niagara UK are subject to extensive environmental laws
and regulations concerning, among other matters, water and air emissions and
waste disposal. Under such laws, including the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended ("CERCLA"),
Niagara US and Niagara UK may be responsible for parts of the costs required
to remove or remediate previously disposed wastes or hazardous substances at
locations they own or operate or at locations owned or operated by third
parties where they, or a company from which they acquired assets, arranged for
the disposal of such materials. Claims for such costs have been made against
LaSalle with respect to six such third-party sites. Management believes that,
in five cases, the volumes of the waste allegedly attributable to LaSalle and
the share of costs for which it may be liable are de minimis. In three of
these cases, LaSalle has entered into de minimis settlement agreements
resolving the pending claims of liability. In connection with the fourth site,
the United States Environmental Protection Agency (the "EPA") has notified
LaSalle that it does not intend to seek cost recovery from it at this time. In
the one non-de minimis case, LaSalle has entered into an agreement with a
group of other companies alleged to be responsible for remediation of the site
in an effort to share proportionately the costs of remediation. LaSalle and
this group of companies have also signed an Administrative Order on Consent
with the EPA and performed a limited remediation at the site. LaSalle has
received insurance settlements in amounts that largely cover the financial
contributions it has made for these sites through June 30, 2003. Because
liability under CERCLA and analogous state laws is generally joint and
several, and because further remediation work may be required at these sites,
LaSalle may be required to contribute additional funds. However, based on its
volumetric share of wastes disposed and the participation of other potentially
liable parties, management believes that LaSalle's share of the additional
costs will not have a material adverse effect on the Company's financial
position or results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
4.1 Fifth Amendment, dated August 8, 2003, to the Bank Facilities
Agreement between National Westminster Bank Plc and Niagara
LaSalle (UK) Limited.
4.2 Sixth Amendment, dated August 11, 2003, to the Invoice
Discounting Agreement between Niagara LaSalle (UK) Limited,
Royal Bank of Scotland Invoice Discounting Limited and Niagara
Corporation.
31.1 Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification of Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K.
During the quarter ended June 30, 2003, Niagara filed three Current
Reports on Form 8-K. The first report, dated April 10, 2003,
announced the change in Niagara's independent accountants. The second
report, dated May 22, 2003, related to the announcement of the
Company's results of operations for the three months ended March 31,
2003. The third report, dated June 13, 2003, related to the execution
of an agreement by Niagara UK to sell its GB Longmore property in
Darlaston. Niagara amended this last report on June 23, 2003.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NIAGARA CORPORATION
--------------------
(Registrant)
Date: August 14, 2003 /s/ Michael Scharf
----------------------------
Michael Scharf, Chairman, President &
Chief Executive Officer
Date: August 14, 2003 /s/ Anthony J. Verkruyse
-----------------------------
Anthony J. Verkruyse, Vice President,
Treasurer & Chief Financial Officer