-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, RJSgAURYgeHB+QSadO/Ndd7Axi7qnIWOODqywvzRo8WLEFiU0XEXTkUSE3m3i4dO pqR8Cv2Z7hhyKiMkpLhNPQ== 0000745026-00-000037.txt : 20000419 0000745026-00-000037.hdr.sgml : 20000419 ACCESSION NUMBER: 0000745026-00-000037 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990925 FILED AS OF DATE: 20000418 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NS GROUP INC CENTRAL INDEX KEY: 0000745026 STANDARD INDUSTRIAL CLASSIFICATION: STEEL WORKS, BLAST FURNACES ROLLING MILLS (COKE OVENS) [3312] IRS NUMBER: 610985936 STATE OF INCORPORATION: KY FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: SEC FILE NUMBER: 001-09838 FILM NUMBER: 604122 BUSINESS ADDRESS: STREET 1: 530 WEST NINTH ST CITY: NEWPORT STATE: KY ZIP: 41071 BUSINESS PHONE: 6062926809 MAIL ADDRESS: STREET 1: PO BOX 1670 CITY: NEWPORT STATE: KY ZIP: 41072 FORMER COMPANY: FORMER CONFORMED NAME: NEWPORT STEEL CORP/KY DATE OF NAME CHANGE: 19870514 10-K/A 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K/A AMENDMENT NO. 2 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED SEPTEMBER 25, 1999 COMMISSION FILE NUMBER 1-9838 NS GROUP, INC. (Exact name of registrant as specified in its charter) Kentucky 61-0985936 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification Number) Ninth and Lowell Streets, Newport, Kentucky 41072 (Address of principal executive offices) Registrant's telephone number, including area code (606) 292- 6809 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on Common Stock, no par value which registered Preferred Stock Purchase Rights New York Stock Exchange New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None 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 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 [ ] Based on the closing sales price of November 29, 1999, as reported in The Wall Street Journal, the aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $174.4 million. The number of shares outstanding of the registrant's Common Stock, no par value, was 21,492,708 at November 29, 1999. Documents Incorporated by Reference Parts I, II and III incorporate certain information by reference from the Annual Report to Shareholders for the fiscal year ended September 25, 1999 ("1999 Annual Report"). Part III also incorporates certain information by reference from the Company's Proxy Statement dated December 20, 1999 for the Annual Meeting of Shareholders on February 10, 2000 ("Proxy"). PART II The undersigned registrant hereby amends its Form 10-K for the fiscal year ended September 25, 1999. The amendment restates the accounting and reporting for the Company's abandonment of certain equipment in the first quarter of fiscal 1999. The effect of the restatement is to (1) decrease fourth quarter and fiscal year 1998 cost of sales by $1.5 million, with a corresponding increase in first quarter and fiscal year 1999 cost of sales and (2) increase fourth quarter and fiscal year 1998 tax provision by $0.6 million, with a corresponding decrease in first quarter and fiscal year 1999 tax provision. ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA Consolidated Financial Summary (Dollars in thousands, except per share amounts) 1999 1998 1997 1996 1995 Summary of Operations Net sales $242,563 $409,855 $481,170 $409,382 $371,352 Operating income (loss) (47,128) 10,236 40,697 12,710 8,147 Operating income margin (19.4)% 2.5% 8.5% 3.1% 2.2% Income (loss) before extra- ordinary items (45,553) 3,391 13,185 (8,944) (4,835) Net income (loss) (49,390) 4,050 3,929 (8,944) (10,035) Income (loss) per diluted share before extra- ordinary items (2.08) .14 .88 (.65) (.35) Net income (loss) per diluted share (2.26) .17 .26 (.65) (.73) Dividends per common share - - - - - Weighted average shares outstanding - diluted (000's) 21,852 24,511 14,969 13,809 13,809 Other Financial and Statistical Data Working Capital $ 97,573 $147,454 $229,514 $ 84,007 $74,443 Total assets 359,795 420,849 502,899 303,136 300,086 Long-term debt 72,833 76,325 76,424 164,789 166,528 Common shareholders' equity 221,152 279,013 275,398 60,218 69,699 Capital Expenditures 28,401 32,576 7,139 6,510 12,233 Depreciation and amorti- zation 23,278 20,910 23,828 20,902 21,311 EBITDA (21,513) 30,475 59,771 32,614 30,141 Current ratio 2.71 3.77 2.66 2.21 2.30 Debt to total Capitalization 24.8% 21.5% 21.7% 73.2% 70.5% Book value per outstanding share 10.31 12.14 11.81 4.36 5.05 Product shipments (tons) Energy Products 317,000 474,000 616,600 549,500 487,100 Industrial products - SBQ 130,500 160,100 152,400 133,700 169,000 Employees 1,619 1,803 1,948 1,774 1,728 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: * oil and gas price volatility; * the level and cyclicality of domestic and worldwide oil and natural gas drilling; * fluctuations in industry-wide inventory levels; * domestic and foreign competitive pressures; * the level of imports and the presence or absence of governmentally imposed trade restrictions; * manufacturing efficiencies; * steel scrap price volatility; * costs of compliance with environmental regulations; * asserted and unasserted claims; * general economic conditions; * our ability and the ability of entities with which we do business to modify or redesign our and their computer systems to work properly in the year 2000; and * those other risks and uncertainties described under "Risk Factors" included in Exhibit 99.1 of our Form 10-K for the fiscal year ended September 25, 1999. 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. We undertake no obligation to publicly update or revise any forward-looking statements, whether the result of new information, future events or otherwise. For a more complete understanding of our business activities and financial results, you should read the following analysis of financial condition and results of operations together with the audited financial statements included in this report. General We conduct our business within three business segments, which are as follows: The energy products segment Our products include 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, natural gas and other fluids. We also produce a limited amount of other products, including standard pipe, piling and hot rolled coil. The industrial products segment - special bar quality products. Our products include special bar quality products, or SBQ. These products are used for a wide variety of industrial applications, including: * farm equipment * metal-working fabrication * heavy machinery * construction * off-road vehicles * automotive * oil field tools and supplies - - The industrial products segment-adhesives products. Our products include custom water-borne, solvent-borne and hot- melt adhesives as well as footwear finishes. These products are used in numerous industrial product assembly applications. You should read Note 2 to the audited financial statements included in this report for selected financial information by business segment. Results of Operations Overview Demand for our OCTG products is cyclical in nature and is 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 prices for oil and natural gas. Also, 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 the amount of foreign imports of OCTG products. Demand for our OCTG products began to decline in the second half of fiscal 1998 and continued to decline significantly in fiscal 1999. Significant declines in oil and natural gas prices led to a decline in drilling activity in the United States throughout most of fiscal 1999. This decline resulted in excessive industry-wide tubular inventories, which further negatively affected our OCTG business. The average number of oil and natural gas drilling rigs in operation in the United States, which is referred to as "rig count", fell as low as 488 in April 1999, the lowest level in NS Group's 18 year history. For all of fiscal 1999, the average rig count was 602, also the lowest level in NS Group's history. By comparison, the average rig count was 905 for fiscal 1998. The market conditions described above negatively affected our industry during the latter half of fiscal 1998 and fiscal 1999. Our business experience indicates that oil and natural gas prices are volatile and can have a substantial effect upon drilling levels and resulting demand for our energy related products. Oil and gas prices and drilling activity began to improve in the fourth quarter of fiscal 1999, and have continued to improve into fiscal 2000. However, the timing and extent of such recovery is uncertain and we expect to incur operating losses in the energy products segment during the first half of fiscal 2000. NS Group's net sales, gross profit (loss), operating income (loss) and tons shipped by business segment for fiscal 1999, 1998 and 1997 are summarized in the following table. (dollars in thousands) 1999 1998 1997 Net sales Energy products segment $144,151 $296,690 $372,727 Industrial products segment SBQ 54,728 72,603 67,502 Industrial products segment Adhesives 43,684 40,562 40,941 $242,563 $409,855 $481,170 Gross profit (loss) Energy products segment $(32,924) $ 20,588 $ 50,754 Industrial products segment SBQ 463 6,942 6,670 Industrial products segment Adhesives 12,175 11,004 10,630 $(20,286) $ 38,534 $ 68,054 Operating income (loss) Energy products segment $(42,854) $ 9,116 $ 39,243 Industrial products segment SBQ (2,707) 4,074 4,246 Industrial products segment Adhesives 2,179 2,302 1,799 (43,382) 15,492 45,288 Corporate allocations (3,746) (5,256) (4,591) $(47,128) $10,236 $40,697 Tons shipped Energy products segment 317,000 474,000 616,600 Industrial products segment SBQ 130,500 160,100 152,400 447,500 634,100 769,000 Fiscal Year 1999 Compared to Fiscal Year 1998 Total net sales in fiscal 1999 were $242.6 million, a decrease of 40.8% from fiscal 1998. The decline in net sales was attributable primarily to our energy products segment and secondarily to our SBQ products business. Energy product segment sales in fiscal 1999 were $144.2 million, a decrease of 51.4% from fiscal 1998. Energy product segment shipments of 317,000 tons declined 33.1% from fiscal 1998. The decrease was substantially attributable to a decline in OCTG shipments, which resulted from the declining rig count as well as excessive levels of industry inventory. The average selling price for our welded tubular products was $382 per ton, a decrease of 25.0% from fiscal 1998. The average selling price for our seamless tubular products was $740 per ton, a decrease of 16.6% from fiscal 1998. The decrease in average selling price was due primarily to the market conditions discussed above and a change in mix to lower priced products. Since 1995, the U.S. government has been imposing duties on imports of various OCTG products from certain foreign countries in response to antidumping and countervailing duty cases filed by several U.S. steel companies. The duties primarily pertain to the import of seamless OCTG products and are subject to annual review by the U.S. Department of Commerce through 2000. Also, in fiscal 1999, we joined with certain other line pipe producers to file petitions with the U.S. government to seek relief from imports of welded and seamless line pipe products. While these duties and actions have reduced such imports, we cannot predict the U.S. government's actions regarding these petitions or any other future actions regarding import duties or other trade restrictions on imports of OCTG and line pipe products. Industrial products segment - SBQ product sales in fiscal 1999 were $54.7 million, a decrease of 24.6% from fiscal 1998. SBQ product shipments of 130,500 tons declined 18.5% from fiscal 1998. The average selling price for SBQ product was $419 per ton, a decline of 7.7% from fiscal 1998. The decrease in shipments and average selling price was primarily attributable to heightened competition resulting from new entrants to the SBQ marketplace. Industrial products segment - adhesives product sales in fiscal 1999 were $43.7 million, an increase of 7.7% from fiscal 1998, primarily as a result of an increase in sales volume of 8.3%. The significant decline in shipments and average selling prices resulted in a gross loss of $32.9 million and an operating loss of $42.9 million for the energy products segment. This compares to gross profit of $20.6 million and operating income of $9.1 million in fiscal 1998. Fiscal 1999 results were also negatively impacted by lower operating efficiencies that resulted from significantly reduced operating levels, which was brought about by poor market demand for our energy products. Our combined melt shop capacity utilization was 41% in fiscal 1999 compared to 59% in fiscal 1998. Our combined pipe mill capacity utilization was 37% in fiscal 1999 compared to 57% in fiscal 1998. In addition, our operating costs were negatively affected in fiscal 1999 by a six week shutdown at the melt shop of our welded tubular product facility for final installation of a new electric arc furnace and subsequent start-up costs associated with the furnace. As of October 1999, the furnace was operating at approximately 55% of its expected production capabilities. Selling, general and administrative expense for the energy products segment declined 21.1% from fiscal 1998 due to reductions in employment costs and selling related expenses. However, due to the significant decline in sales as discussed above, selling, general and administrative expense increased as a percentage of sales from 5.2% in fiscal 1998 to 8.4% in fiscal 1999. The industrial products segment - SBQ products had a gross profit of $0.5 million and an operating loss of $2.7 million in fiscal 1999 compared to a gross profit of $6.9 million and operating profit of $4.1 million in fiscal 1998. The decrease in gross profit and operating income were due primarily to the decline in average selling price and secondarily to the decrease in shipments. Selling, general and administrative expense for the SBQ products business increased as a percent of sales from 5.2% in fiscal 1998 to 7.6% in fiscal 1999, due to the decline in sales as discussed above. The industrial products segment - adhesives products gross profit increased $1.2 million and operating income decreased $0.1 million from fiscal 1998. The increase in gross profit was attributable to improved sales volume. Selling, general and administrative expense increased $1.4 million and also increased as a percent of sales from 22.5% in fiscal 1998 to 24.2% in fiscal 1999. The increases were primarily the result of increased investment in sales personnel to support future increases in sales. Investment income decreased $2.5 million from fiscal 1998 due primarily to a decrease in average invested cash and investment balances. Interest expense decreased $1.1 million from fiscal 1998 due to decreases in long-term debt obligations. Other income, net was $3.5 million in fiscal 1999 and included a $2.8 million favorable claim settlement with our electrode suppliers relating to purchases from several prior years. Our combined federal and state effective tax rate for fiscal 1999 was a benefit of 7.6%. Our tax loss benefits were limited to available refunds for taxes paid in previous periods at the alternative minimum tax rate. We exhausted our refund capability in fiscal 1999, and as such, tax benefits from any future operating losses will likely be offset by valuation allowances resulting in no net tax benefits being recorded for losses. In the second quarter of fiscal 1999, we recorded an additional $4.3 million in disposal costs as well as additional expected insurance recoveries of $0.9 million in connection with ongoing efforts to dispose of radiation contaminated dust generated at our welded tubular products facility in 1993. These amounts were recorded as an extraordinary charge of $3.4 million, with no income tax benefit. In the first quarter of fiscal 1999, we incurred prepayment costs and wrote off unamortized debt issuance costs in connection with the early retirement of $4.0 million principal amount of long-term indebtedness, resulting in an extraordinary charge of $0.4 million, net of applicable income tax benefit of $0.1 million. As a result of the above factors, we reported a net loss of $49.4 million, or a $2.26 loss per basic and diluted share, in fiscal 1999 compared to net income of $4.1 million, or $.17 per basic and diluted share, in fiscal 1998. Weighted average shares outstanding decreased for the comparable periods as a result of our common stock buyback program that was completed in the second quarter of fiscal 1999. Fiscal Year 1998 Compared to Fiscal Year 1997 Total net sales for fiscal 1998 were $409.9 million, a decrease of 14.8% from fiscal 1997. The decline in net sales was solely attributable to our energy products segment. Energy products segment sales were $296.7 million for 1998, a decrease of 20.4% from fiscal 1997. Energy product segment shipments of 474,000 tons declined 23.1% from fiscal 1997. The average selling price for our welded tubular products was $509 per ton for fiscal 1998, a 1.2% increase from fiscal 1997. The average selling price for our seamless tubular products for fiscal 1998 was $887 per ton, virtually unchanged from fiscal 1997. The decline in shipments and net sales resulted from the precipitous drop in rig count that occurred in the second half of fiscal 1998. While the rig count for all of fiscal 1998 of 905 was virtually unchanged from fiscal 1997, rig count fell by over 200 rigs, from a high of 997 in the first quarter of fiscal 1998, to a low of 794 in the fourth fiscal quarter. Industrial products segment - SBQ product sales in fiscal 1998 were $72.6 million, an increase of 7.6% from fiscal 1997. SBQ product shipments of 160,100 tons increased 5.1%. The average selling price for SBQ products increased 2.5% from fiscal 1997. Industrial products segment - adhesives products sales in fiscal 1998 were $40.6 million, virtually unchanged from fiscal 1997. Gross profit for fiscal 1998 decreased 43.4% from fiscal 1997 to $38.5 million. Operating income for fiscal 1998 decreased $30.5 million from fiscal 1997, to $10.2 million. The decline in gross profit and operating income were entirely attributable to the energy products segment. The decreases in energy product segment gross profit and operating income were due to the decline in shipments of OCTG products as well as lower operating efficiencies resulting from reduced production levels. In addition, we incurred accelerated depreciation charges of $1.6 million in fiscal 1998 related to the planned abandonment of three electric arc furnaces that were subsequently replaced with new equipment in the first quarter of fiscal 1999. Investment income in fiscal 1998 increased $7.3 million from fiscal 1997 and interest expense decreased $11.6 million for the same period. The increase in investment income and the decrease in interest expense was the result of increased average cash and investment balances and a decrease in long- term debt obligations, respectively, which resulted from our September 1997 public offering and related retirement of long- term debt. Other income, net was $0.5 million in fiscal 1998 compared to $1.5 million in fiscal 1997. Both years included gains from the sales of certain development property and settlement of insurance claims. Our combined federal and state effective tax rate for fiscal 1998 was 47.4%. This rate exceeds the combined statutory tax rates because we recorded additional valuation allowances for deferred tax assets. As a result of the above factors, we reported fiscal 1998 income before extraordinary item of $3.4 million, or $.14 per basic and diluted share, compared to income before extraordinary item of $13.2 million, or $.93 per basic share ($.88 diluted), in fiscal 1997. In connection with an environmental contingency matter provided for as an extraordinary charge in previous years, we recorded an extraordinary credit of $0.7 million, net of applicable income taxes of $0.3 million, or $.03 per basic and diluted share, in fiscal 1998. Liquidity and Capital Resources Working capital at September 25, 1999 was $97.6 million compared to $147.5 million at September 26, 1998. The decline in working capital was primarily the result of a reduction in short-term investments which were used to fund operating losses, make investments in property, plant and equipment, retire long-term debt and repurchase common stock. The current ratio was 2.7 to 1 at September 25, 1999 compared to 3.8 to 1 at September 26, 1998. At September 25, 1999, we had cash and investments totaling $85.7 million and had no advances against our $50 million revolving credit facility. Net cash flows from operating activities were a net use of $14.5 million in fiscal 1999. We recorded a net loss of $49.4 million in fiscal 1999. Major sources of cash from operating activities in fiscal 1999 included $23.3 million in non-cash depreciation and amortization charges; a $9.4 million decrease in inventory resulting from the decline in business activity; a $4.8 million decrease in other current assets which resulted primarily from the receipt of refundable federal income taxes; and a $3.8 million increase in accrued liabilities and other due, in part, to an increase in estimated costs associated with environmental liabilities. Accounts receivable increased $3.6 million as a result of an increase in business activity in our energy products segment in the last quarter of fiscal 1999. Net cash flows provided by operating activities totaled $30.6 million in fiscal 1998. We recorded net income of $4.1 million in fiscal 1998. Major sources of cash from operating activities in fiscal 1998 included $20.9 million in non-cash depreciation and amortization charges and decreases of $24.7 million and $10.3 million in accounts receivable and inventory, respectively, resulting from a decline in business activity. The major uses of cash in operating activities included a $7.1 million reduction in accrued debt prepayment fees, and a $25.8 million decrease in accounts payable and accrued liabilities and other resulting primarily from a decline in business activity. Net cash flows provided by operating activities totaled $9.7 million in fiscal 1997. We recorded net income of $3.9 million in fiscal 1997. Major sources of cash from operating activities in fiscal 1997 included $23.8 million in non-cash depreciation and amortization charges; a $7.1 million accrual for debt prepayment penalty; a $4.5 million increase in long- term deferred taxes and a $9.6 million increase in accounts payable and accrued liabilities and other due to increased business activity. The major uses of cash in operating activities included increases of $11.3 million and $20.7 million in accounts receivable and inventory, respectively, resulting from an increase in business activity related primarily to improvements in the OCTG marketplace. Additional uses of cash in operating activities included a $7.4 million increase in other current assets primarily related to increases in our current deferred tax asset and receivables recorded in connection with certain insurance claims. We made capital investments totaling $28.4 million in fiscal 1999, $32.6 million in fiscal 1998 and $7.1 million in fiscal 1997. These capital expenditures were primarily related to improvements to and acquisitions of machinery and equipment in our energy products segment. Of the total spending in fiscal 1999, $18.3 million pertained to the purchase and installation of a new AC electric arc furnace. We currently estimate that fiscal 2000 capital spending will approximate $16.7 million, the majority of which represents the completion of projects begun in fiscal 1999 in our energy products segment. Sources for funding capital expenditures include available cash and investments, cash flows from operations, as well as available borrowing sources. Our long-term investments decreased by $21.1 million from fiscal 1998 as we used this cash source to fund our operating activities as well as our capital expenditure program and financing activities, which included our stock buyback program and the retirement of debt. 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 4, 5 and 6 to the audited 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. Repayments on long-term debt in fiscal 1999 were $4.7 million and include the early retirement of $4.0 million principal amount of our senior secured notes. We completed a three million share buyback program in fiscal 1999, repurchasing the final 1.6 million shares of NS Group's common stock for $7.7 million. Our annual long-term debt maturities are $0.2 million in fiscal 2000, $0.2 million in fiscal 2001, $0.1 million in fiscal 2002, $74.7 million in fiscal 2003 and $0.1 million in fiscal 2004. You should read Note 5 to the audited financial statements for further information concerning our long-term debt and credit facility. Earnings before net interest expense, taxes, depreciation and amortization (EBITDA) were a negative $21.5 million for fiscal 1999 and a positive $30.5 million for fiscal 1998 and $59.8 million for fiscal 1997. EBITDA is calculated as income before extraordinary items plus net interest expense, taxes, depreciation and amortization. EBITDA provides additional information for determining our ability to meet debt service requirements. EBITDA does not represent and should not be considered as an alternative to net income, any other measure of performance as determined by generally accepted accounting principles, as an indicator of operating performance, as an alternative to cash flows from operating, investing or financing activities or as a measure of liquidity. At September 25, 1999, we had regular tax net operating loss carryforwards which will fully eliminate the regular tax liability on approximately $89.5 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 $44.0 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 $55 million in pre-tax income will be substantially less than the amounts at full statutory rates. You should read Note 11 to the audited financial statements for further information concerning our federal tax status. We believe that our current available cash and investments, our cash flow from operations and our borrowing sources will be sufficient to meet anticipated operating cash requirements, including capital expenditures, for at least the next twelve months. Year 2000 Readiness Disclosure The Year 2000 issue results from date sensitive computer programs that use only the last two digits to refer to a year. Such computer programs do not properly recognize a year that begins with "20" instead of "19". This issue impacts us and virtually every business that relies on a computer. If not corrected, systems failures or miscalculation could occur causing disruption of our operations, including, among other things, a temporary inability to process transactions, manufacture products or engage in similar normal business activities. Our subsidiaries are not dependent on an integrated or centralized corporate-wide data processing system. As such, we have formal project teams at each subsidiary to address the respective subsidiaries' Year 2000 readiness. Information technology (IT) systems, such as any hardware or software used to process daily operational data and information, as well as non-IT systems, such as micro controllers contained in various manufacturing equipment, have been assessed for Year 2000 compliance. We have addressed the Year 2000 issue in a four phase process. The first phase was one of awareness and involved the inventorying of all IT and non-IT systems. This phase has been completed. The second phase of our process was an assessment stage, during which we determined whether each of our identified systems was Year 2000 compliant. We completed this phase of the process during the second quarter of fiscal 1999. The remediation and testing phases of our systems are in various stages of completion. Remediation efforts may include modification or replacement of software and certain hardware so that systems will properly utilize dates beyond December 31, 1999. Approximately 90% of our IT systems have been remediated while remediation on our non-IT systems is approximately 98% complete. We currently anticipate completion of all remediation and testing of our systems prior to calendar year end. We also face certain risks to the extent that our customers or suppliers of products and services do not become Year 2000 compliant. We are continually evaluating the status of significant customers and suppliers to determine the extent to which we are vulnerable to non-compliance by these third parties. Ongoing evaluation will continue through the end of calendar 1999; however, we believe our broad customer base and availability of alternative suppliers will mitigate the risks associated with the readiness of these third parties. We have developed formal contingency plans in the event we experience Year 2000 related problems. Back-up measures have been identified for each system requiring remediation. For example, the contingency plan for many IT systems would be to revert to a manual record system and, for many non-IT systems, internal clocks could be reset to an earlier date. Costs associated with our Year 2000 efforts were approximately $1.6 million in fiscal 1999, and estimated costs to complete are $1.1 million, which include final payments for various new equipment and software installations. Costs pertain primarily to system software and hardware replacements and upgrades for both our IT and non-IT systems. We believe that with modifications to existing software and conversions to new software, the Year 2000 issue will not pose significant operational problems. However, if such modifications and conversions are not made or are not completed in time, or if a material third party fails to properly remediate its Year 2000 issues, or if the costs are higher than expected, the Year 2000 issue could have a material effect on our operations. While we are not currently aware of any significant exposure, there can be no assurance that the Year 2000 issue will not have a material impact on our business and operations. Other Matters You should read Note 9 to the audited financial statements for information pertaining to commitments and contingencies. Item 8. Financial Statements and Supplementary Data Consolidated Statements of Operations For the years ended September 25, 1999, September 26, 1998 and September 27, 1997 (In thousands, except per share amounts) 1999 1998 1997 Net sales $242,563 $409,85 $481,170 Cost of products sold 262,849 371,321 413,116 Selling and administrative Expenses 26,842 28,298 27,357 Operating income (loss) (47,128) 10,236 40,697 Investment income 5,906 8,358 1,010 Interest expense (11,601) (12,653) (24,261) Other income, net 3,543 501 1,465 Income (loss) before income taxes and extraordinary items (49,280) 6,442 18,911 Provision (credit) for income taxes (3,727) 3,051 5,726 Income (loss) before extraordinary items (45,553) 3,391 13,185 Extraordinary items, net of income taxes (3,837) 659 (9,256) Net income (loss) $(49,390) $ 4,050 $ 3,929 Per common share (basic) Income (loss) before extraordinary items $(2.08) $.14 $ .93 Extraordinary items, net of income taxes (.18) .03 (.65) Net income (loss) $(2.26) $.17 $ .28 Per common share (diluted) Income (loss) before extraordinary items $(2.08) $.14 $ .88 Extraordinary items, net of income taxes (.18) .03 (.62) Net income (loss) $(2.26) $.17 $ .26 Weighted average shares outstanding Basic 21,852 23,684 14,141 Diluted 21,852 24,511 14,969 See notes to consolidated financial statements Consolidated Balance Sheets September 25, 1999 and September 26, 1998 (In thousands) ASSETS 1999 1998 Current assets Cash $ 1,073 $ 1,783 Short-term investments 30,032 64,689 Accounts receivable, less allowance for doubtful accounts of $837 and $752, respectively 40,924 37,275 Inventories 56,659 66,041 Operating supplies 12,782 14,211 Deferred tax assets 5,376 8,140 Other current assets 7,935 8,541 Total current assets 154,781 200,680 Property, plant and equipment -- at cost Land and buildings 32,078 31,570 Machinery and equipment 294,364 264,656 Construction in progress 4,035 13,889 Less -- accumulated depreciation (187,330) (173,372) Net property, plant and Equipment 143,147 136,743 Long-term investments 54,560 75,626 Other assets 7,307 7,800 Total assets $359,795 $420,849 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Accounts and notes payable $ 28,923 $ 28,305 Accrued liabilities and other 28,087 24,243 Current portion of long-term debt 198 678 Total current liabilities 57,208 53,226 Long-term debt 72,833 76,325 Deferred taxes 8,602 12,285 Common shareholders' equity Common stock, no par value, 40,000 shares authorized, 24,364 and 24,334 shares issued, respectively 280,051 279,886 Treasury stock, 2,917 and 1,354 shares, respectively (23,676) (15,992) Common stock options and warrants 896 898 Accumulated other comprehensive income (loss) (3,784) (2,834) Accumulated earnings (deficit) (32,335) 17,055 Common shareholders' equity 221,152 279,013 Total liabilities and shareholders' equity $359,795 $420,849 See notes to consolidated financial statements Consolidated Statements of Cash Flows For the years ended September 25, 1999, September 26, 1998 and September 27, 1997 (In thousands) 1999 1998 1997 Cash flows from operating activities: Net income (loss) $(49,390) $ 4,050 $ 3,929 Adjustments to reconcile net income (loss) to net cash flows from operating activities: Depreciation and Amortization 22,072 19,738 17,609 Amortization of debt discount and finance costs 1,206 1,172 6,219 Increase (decrease) in long-term deferred taxes (3,683) 530 4,488 (Gain) loss on disposal of equipment (262) 55 206 Loss on sales of investments 705 282 - (Increase) decrease in accounts receivable (3,649) 24,676 (11,327) (Increase) decrease in inventories 9,382 10,264 (20,721) (Increase) decrease in operating supplies and other current assets 4,799 2,769 (7,393) Increase (decrease) in accrued prepayment fees on debt called for redemption - (7,079) 7,079 Increase (decrease) in accounts payable 466 (21,929) 5,820 Increase (decrease) in accrued liabilities and other 3,844 (3,883) 3,750 Net cash flows from operating activities (14,510) 30,645 9,659 Cash flows from investing activities: Purchases of property, plant and equipment (28,401) (32,576) (7,139) Proceeds from sale of Equipment 580 152 382 Purchases of available for sale securities (45,053) (112,102) - Sales of available for sale securities 32,035 22,019 - Maturities of available for sale securities 32,259 16,931 - (Increase) decrease in other assets (210) 120 4,053 Net cash flows from investing activities (8,790) (105,456) (2,704) Cash flows from financing activities: Increase (decrease) in notes payable 152 (480) (157) Proceeds from issuance of long-term debt - 55 340 Repayments on long-term debt (4,675) (54,397) (11,994) Proceeds from issuance of common stock 140 17,843 182,902 Purchases of treasury stock (7,684) (17,081) - Net cash flows from financing activities (12,067) (54,060) 171,091 Net increase (decrease) in cash and short-term investments (35,367) (128,871) 178,046 Cash and short-term investments at beginning of year 66,472 195,343 17,297 Cash and short-term investments at end of year $ 31,105 $ 66,472 $195,343 Cash paid during the year for: Interest $ 10,359 $ 12,738 $23,231 Income taxes, net of refunds received (2,977) 4,493 1,463 See notes to consolidated financial statements Consolidated Statements of Common Shareholders' Equity For the years ended September 25, 1999, September 26, 1998 and September 27, 1997 (In thousands) Options Common Stock Treasury Stock and Shares Amount Shares Amount Warrants Balance, September 28, 1996 13,809 $ 49,004 - $ - $2,774 Net income Unrealized gain on investments Comprehensive income Issuance of common stock 6,000 169,823 Conversion of 11% subor- dinated deben- tures 1,665 28,300 Stock option plans 645 6,327 (12) Exercise of common stock warrants 1,191 7,914 (1,150) Balance, September 27, 1997 23,310 261,368 - - 1,612 Net income Unrealized loss on investments Compre- hensive income Issuance of common stock 540 15,340 Purchase of treasury stock 1,437 (17,081) Stock option plans 94 1,007 (83) 1,089 (102) Exercise of common stock warrants 390 2,171 (612) Balance, September 26, 1998 24,334 279,886 1,354 (15,992) 898 Net loss Unrealized loss on investments Comprehensive loss Purchase of treasury stock 1,563 (7,684) Stock option plans 14 73 24 Exercise of common stock warrants 16 92 (26) Balance, September 25, 1999 24,364 $280,051 2,917 $23,676)$896 Consolidated Statements of Common Shareholders' Equity For the years ended September 25, 1999, September 26, 1998 and September 27, 1997 (In thousands) Accumulated Other Accumu Compre- Comprehensive lated hensive Income Earnings Income (Loss) (Deficit) Total (Loss) Balance, September 28, 1996 $(1,287) $9,727 $ 60,218 Net income 3,929 3,929 $ 3,929 Unrealized gain on investments 49 49 49 Comprehensive income $ 3,978 Issuance of common stock 169,823 Conversion of 11% subor- dinated deben- tures 28,300 Stock option plans 6,315 Exercise of common stock warrants 6,764 Balance, September 27, 1997 (1,238) 13,656 275,398 Net income 4,050 4,050 $ 4,050 Unrealized loss on investments (1,596) (1,596) (1,596) Compre- hensive income $ 2,454 Issuance of common stock 15,340 Purchase of treasury stock (17,081) Stock option plans (651) 1,343 Exercise of common stock warrants 1,559 Balance, September 26, 1998 (2,834) 17,055 279,013 Net loss (49,390) (49,390) $(49,390) Unrealized loss on investments (950) (950) (950) Compre- Hensive loss $(50,340) Purchase of treasury stock (7,684) Stock option Plans 97 Exercise of common stock warrants 66 Balance, September 25, 1999 $(3,784) $(32,335) $221,152 See notes to consolidated financial statements 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), Imperial Adhesives, Inc. (Imperial) and Northern Kentucky Management, Inc. All significant intercompany accounts and transactions have been eliminated. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles 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 estimates. Cash Cash includes currency on hand and demand deposits with financial institutions. Investments Short-term investments consist primarily of money market mutual funds, commercial paper and U.S. treasury securities, for which market value approximates cost. Long-term investments consist primarily of corporate and government bonds which 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 disposition. Other comprehensive income (loss), net of applicable income taxes, if any, consists of the following: (In thousands) 1999 1998 1997 Net unrealized holding gains (losses) for the period $(1,655) $(1,779) $49 Reclassification adjust- ment for (gains) losses realized 705 183 - Net unrealized gains (losses), net of income taxes of $0, $859, and $(26), respectively $ (950) $(1,596) $49 Inventories At September 25, 1999 and September 26, 1998, inventories are stated at the lower of FIFO (first-in, first-out) cost or market, or the lower of average cost or market. Inventory costs include labor, material and manufacturing overhead. Inventories consist of the following: (In thousands) 1999 1998 Raw materials $ 9,707 $ 7,921 Semi-finished and finished goods 46,952 58,120 Total inventories $56,659 $66,041 Until fiscal 1999, one subsidiary used the LIFO (last-in, first-out) method to determine inventory cost. Effective September 27, 1998, the subsidiary changed to the FIFO method. The change in accounting principle, which has been applied retroactively, was made to provide a better matching of sales and expenses given technological changes in various manufacturing processes. The change in accounting principle reduced both previously reported income before extraordinary items and previously reported net income by $2.1 million and $0.5 million for fiscal 1998 and 1997, respectively, and reduced the related diluted per share amounts by $.09 and $.04 per share for fiscal 1998 and 1997, respectively. Property, Plant and Equipment and Depreciation For financial reporting purposes, plant and equipment are depreciated on a straight-line method over the estimated useful lives of the assets. Expenditures for maintenance and repairs are charged to expense as incurred. Expenditures for equipment renewals which extend the life or increase the productivity or capacity of an asset are capitalized. Following the start-up of a new electric arc furnace in the second quarter of fiscal 1999, Newport abandoned its existing three electric arc furnaces together with related property and equipment. As such, in the fourth quarter of fiscal 1998 and the first quarter of fiscal 1999, the Company recorded to cost of products sold accelerated depreciation charges of $1.6 million and $1.5 million, respectively. The assets were depreciated down to a fair value of $0.2 million based on the estimated salvage value of the assets. The accelerated depreciation negatively impacted each of fiscal 1998 and 1999 income/loss before extraordinary items by approximately $1.0 million, or $.04 per diluted share. The accompanying consolidated financial statements for fiscal 1999 and 1998 have been restated from those previously reported to reflect the accelerated depreciation discussed above. Previously, an impairment loss of $3.2 million had been reflected in the fourth quarter of fiscal 1998. The net effect of the restatement is to (1) increase 1998 income before extraordinary items and net income by $0.9 million, or $.04 per diluted share and (2) increase the 1999 loss before extraordinary items and net loss by $0.9 million, or $.04 per diluted share. Treasury Stock The Company repurchased 1.6 million shares of its common stock for $7.7 million during fiscal 1999, completing a three million share buyback program. 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. Revenue Recognition The Company records revenue from product sales when the product is shipped from its facilities or, when at the customer's request, the goods are set aside for storage and are paid for in full. 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. Fiscal Year-End The Company's fiscal year ends on the last Saturday of September. Earnings Per Share Basic earnings per share is computed by dividing net income by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution from securities that could result in additional common shares being issued which, for the Company, includes stock options and warrants only. Securities that could potentially result in dilution of basic EPS through the issuance of 0.6 million and 1.1 million shares of the Company's common stock in fiscal 1999 and 1998, respectively, were not included in the computation of diluted EPS because they were antidilutive. Note 2 Business Segment Information The Company adopted SFAS 131, "Disclosure about Segments of an Enterprise and Related Information", for fiscal 1999. Accordingly, segment information for fiscal 1998 and 1997 has been restated to conform to the new presentation. The Company has three 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 for special bar quality (SBQ) products consists of SBQ products used primarily in the manufacture of heavy industrial equipment. The Company's industrial products segment for adhesives products consists of industrial adhesives products used in various product assembly applications. 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 include primarily cash, investments and income tax assets. Corporate allocations include primarily corporate general and administrative overhead costs. The operations of all 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. In fiscal 1997, one energy products customer accounted for 10.3% of net sales. The following table sets forth selected financial information by reportable business segment for fiscal 1999, 1998, and 1997. (In thousands) Operating Depreciation 1999 Net Income Total and Capital Sales (Loss) Assets Amortization Expenditures Energy products segment $144,151 $(42,854) $204,454 $17,334 $26,598 Industrial products segment - -SBQ 54,728 (2,707) 38,551 4,125 1,220 Industrial products segment - Adhesives 43,684 2,179 15,097 613 583 Corporate assets and allocations - (3,746) 101,693 - - Total Consoli- dated $242,563 $(47,128) $359,795 $22,072 $28,401 1998 Energy products segment $296,690 $ 9,116 $203,820 $15,376 $31,162 Industrial products segment - - SBQ 72,603 4,074 41,181 3,780 834 Industrial products segment - Adhesives 40,562 2,302 14,570 582 580 Corporate assets and allocations - (5,256) 161,278 - - Total Consoli- dated $409,855 $10,236 $420,849 $19,738 $32,576 1997 Energy products segment $372,727 $39,243 $228,798 $13,383 $ 6,001 Industrial products segment - - SBQ 67,502 4,246 45,543 3,571 588 Industrial products segment - Adhesives 40,941 1,799 13,505 655 550 Corporate assets and allocations - (4,591) 215,053 - - Total Consoli- dated $481,170 $ 40,697 $502,899 $17,609 $ 7,139 Note 3 Accrued Liabilities and Other Accrued liabilities and other consist of the following: (In thousands) 1999 1998 Accrued payroll and payroll related items $10,562 $10,554 Accrued environmental remediation 5,364 2,675 Deferred revenue 4,419 635 Workers' compensation 2,305 3,242 Accrued interest 2,151 2,186 Other 3,286 4,951 Note 4 Long-term Investments At September 25, 1999 and September 26, 1998, the Company's long-term investments, which are all classified as available for sale, consist of the following: (In thousands) Amortized Gross Unrealized Market 1999 Cost Gains Losses Value Corporate bonds $49,131 $107 $(2,222) $47,016 U.S. government-backed Securities 6,035 4 (45) 5,994 $55,166 $111 $(2,267) $53,010 Equity securities $ 4,800 $ - $(3,250) $ 1,550 1998 Corporate bonds $46,945 $163 $(1,393) $45,715 U.S. government-backed Securities 20,337 176 (10) 20,503 Other debt securities 7,997 11 - 8,008 $75,279 $350 $(1,403) $74,226 Equity securities $ 4,800 $ - $(3,400) $ 1,400 At September 25, 1999, scheduled maturities of the Company's investments in long-term debt securities were as follows: (In thousands) Average Amortized Market Year End Rate Cost Value One year or less 6.23 $14,323 $14,261 One year through five years 6.98 11,854 11,706 After five years 9.22 28,989 27,043 $55,166 $53,010 Gross gains and losses of $0.2 million and $0.9 million, respectively, were realized during fiscal 1999. Fiscal 1998 gross realized gains and losses were $0.1 million and $0.4 million, respectively. There were no realized gains or losses on available for sale securities in fiscal 1997. Note 5 Long-term Debt and Credit Facility Long-term debt of the Company consists of the following: (In thousands) 1999 1998 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 $3,009 and $3,712, respectively) $71,649 $74,946 Other 1,382 2,057 73,031 77,003 Less current portion (198) (678) $72,833 $76,325 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, beginning in 2000, initially at a price of approximately 104%, declining to 100% in 2002. The Company has a $50.0 million revolving credit agreement with interest rates that range from the prime rate to prime plus .25% with respect to domestic rate loans, and interest rates on offshore rate loans (based on LIBOR) that range from the offshore rate plus .375% to the offshore rate plus .875%. The credit facility contains certain financial covenants that become applicable if the Company does not maintain specified levels of cash and investments and earnings (as defined). These covenants include a maximum ratio of debt to cash flow, a minimum interest coverage ratio, a maximum outstanding loans under the line to working capital and a minimum net worth. The credit facility also has restrictions on capital expenditures and the sale of certain assets. At September 25, 1999 approximately $1.4 million of the credit facility was utilized to collateralize letters of credit and $48.6 million was available for borrowing. The credit facility expires in fiscal 2003. During 1999 the Company purchased $4.0 million principal amount of its Notes on the open market. The Company paid a premium and wrote off a prorata portion of unamortized debt discount and debt issuance costs which resulted in an extraordinary charge of $0.4 million, net of applicable income tax benefit of $0.1 million, or $.02 per basic and diluted share. In connection with the retirement of long-term indebtedness, the Company incurred prepayment costs and wrote off unamortized debt discount and debt issuance costs in fiscal 1997, which resulted in an extraordinary charge of $9.3 million, net of applicable income tax benefit of $2.3 million, or $.65 and $.62 per basic and diluted share, respectively. Annual long-term debt maturities are $0.2 million in fiscal 2000, $0.2 million in fiscal 2001, $0.1 million in fiscal 2002, $74.7 million in fiscal 2003 and $0.1 million in 2004. As of September 25, 1999 and September 26, 1998, the weighted- average interest rate on outstanding notes payable was 5.9% and 6.1%, respectively. Note 6 Fair Value of Financial Instruments The following methods and assumptions were used to estimate the fair value of financial instruments: Cash and short-term investments-The carrying amount approximates 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. Notes payable-The carrying amount approximates fair value because of the short maturity of these instruments. Long-term debt-The fair value of the Company's Notes is based upon their trading price as of fiscal year-end. 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 are as follows: (In thousands) 1999 1998 Carrying Fair Carrying Fair Amount Value Amount Value Cash and short-term investments $31,105 $31,105 $66,472 $66,472 Long-term investments 54,560 54,560 75,626 75,626 Notes payable 394 394 242 242 Long-term debt 72,833 78,228 76,325 87,012 Note 7 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 has 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 8 Stock Options and Warrants The Company has various stock option plans under which the Company may grant incentive and nonqualified 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. Nonqualified stock options become exercisable according to a vesting schedule determined at the grant date and expire no later than ten years after grant. Nonqualified stock options were granted during fiscal 1999 at exercise prices that were approximately 87% of the market price on the date of grant. Nonqualified stock options were granted at exercise prices approximating the market price on the date of grant during fiscal 1998. For fiscal 1999 and 1998, the weighted-average fair value of options granted was $5.96 and $9.29, respectively. A summary of transactions in the plans follows: 1999 1998 1997 Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price Outstanding, beginning of year 1,378,114 $10.67 896,755 $ 6.73 1,629,330 $7.22 Granted 552,000 7.31 851,950 14.37 - - Expired (158,075) 13.32 (170,132) 13.56 (87,395) 8.01 Exercised (21,410) 7.55 (200,459) 6.32 (645,180) 7.78 Outstanding, end of year 1,750,629 $ 9.41 1,378,114 $10.67 896,755 $6.73 Exercisable, end of year 538,157 $ 6.81 445,549 $ 6.32 489,504 $7.73 Available for grant 938,470 - 333,440 - 1,153,230 - The Company accounts for these plans in accordance with the intrinsic value method. Under this method, compensation cost is recognized over the vesting period for any difference between the option price and the market price at the date of grant. Compensation cost for these plans was not material for fiscal 1999, 1998, and 1997. Unrecognized compensation costs associated with prior grants that will be recognized in future periods is $0.6 million at September 25, 1999. Pro forma compensation cost, net income (loss) and per share amounts computed as if the Company had accounted for option grants on the fair value method would have been $1.2 million, $(50.6) million and $(2.32) basic and diluted, respectively, for fiscal 1999 and $0.8 million, $3.3 million, and $.14 basic and $.14 diluted, respectively for fiscal 1998. Amounts for fiscal 1997 would not have been materially different from reported amounts. The fair value of the granted options were determined using the Black-Scholes option pricing model with the following assumptions for fiscal 1999 and 1998, respectively: no common stock dividends; expected volatility of 58% and 59%; risk-free interest rates of 6.1% and 5.5%; and expected life of 8 years and 7 years. A summary of information about stock options outstanding at September 25, 1999 follows: Options Outstanding Options Exercisable Range of Average Average Average Exercise Exercise Remaining Exercise Prices Shares Price Life Shares Price $2.63-$5.94 278,954 $ 4.17 5.4 239,852 $ 4.16 $6.13-$9.53 822,775 7.27 7.7 224,855 7.19 $13.25-$14.38 648,900 14.37 8.3 73,450 14.20 1,750,629 $ 9.40 7.5 538,157 $ 6.81 At September 25, 1999, the Company had common stock warrants outstanding, exercisable for approximately 272,000 shares of the Company's common stock at a price of $8.00 per share and 437,000 shares at a price of $4.00 per share. The warrants expire October 4, 2000 and July 15, 2003, respectively. Note 9 Commitments and Contingencies The Company has various commitments for the purchase of materials, supplies and energy arising in the ordinary course of business. 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. The Company is subject to various claims, lawsuits and administrative proceedings arising in the ordinary course of business with respect to workers' compensation, health care and product liability coverages (each of which is self- insured to certain levels), as well as commercial and other matters. The Company accrues for the cost of such matters when the incurrence of such costs is probable and can be reasonably estimated. Based upon its evaluation of available information, management does not believe that any such matters 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. 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. As with other steel mills in the industry, the Company's steel mini-mills produce dust which contains lead, cadmium and chromium, and is classified as a hazardous waste. The Company currently collects the dust produced by its electric arc furnace operations through emission control systems and contracts with a company for treatment and disposal of the dust at an EPA-approved facility. In two separate incidents occurring in fiscal 1993 and 1992, radioactive substances were accidentally melted at Newport, resulting in the contamination of a quantity of electric arc furnace dust. The Company has contracted with a company to dispose of the dust at an EPA - approved facility. The project is expected to be completed by the second quarter of fiscal 2000. The estimated costs associated with these incidents were initially recorded as extraordinary items. Such estimates have been adjusted periodically to reflect the most current information. As such, the Company recorded an extraordinary credit of $0.7 million, net of taxes of $0.3 million, in fiscal 1998. In the second quarter of fiscal 1999, the Company recorded an additional $4.3 million in disposal costs as well as additional expected insurance recoveries of $0.9 million in connection with its efforts to dispose of the dust. These amounts were recorded as an extraordinary charge of $3.4 million. The Company believes disposal costs will not exceed its gross environmental remediation reserves as of September 25, 1999 of $5.3 million. In connection with these incidents, the Company has an insurance receivable outstanding of $1.6 million as of September 25, 1999. Subject to the uncertainties concerning the storage of the radiation contaminated dust, the Company believes that it is currently in compliance in all material respects with all applicable environmental regulations. The Company cannot predict the level of required capital expenditures or operating costs that may result from compliance with future environmental regulations. Capital expenditures for the next twelve months relating to environmental control facilities are expected to be approximately $0.8 million. Such expenditures could be influenced by new or revised environmental regulations and laws or new information or developments with respect to the Company's operating facilities. As of September 25, 1999, the Company had environmental remediation reserves of $5.4 million attributable primarily to accrued disposal costs for radiation contaminated dust. 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. Note 10 Employee Benefit 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 and a non-qualified deferred compensation plan covering certain employees. The expense for these plans was approximately $1.1 million, $3.3 million and $2.8 million in fiscal years 1999, 1998, and 1997, respectively. Note 11 Income Taxes The provision (credit) for income taxes, including ($0.1) million, $0.3 million and ($2.3) million allocated to extraordinary items in fiscal 1999, 1998 and 1997, respectively, consists of the following: (In thousands) 1999 1998 1997 Current $(2,917) $1,235 $2,780 Deferred (919) 1,694 (649) Tax benefit of employee stock option exercises allocated to equity - 474 1,281 Provision (credit) for income taxes $(3,836) $3,403 $3,412 The income tax provision (credit) differs from the amount computed by applying the statutory federal income tax rate to income (loss), including extraordinary items, before income taxes for the following reasons: (In thousands) 1999 1998 1997 Income tax provision (credit) at statutory tax rate of 35% $(18,629) $2,607 $2,569 Change in taxes resulting from: State income taxes, net of federal effect (334) 510 95 Change in valuation Allowance 15,603 519 885 Other, net (476) (233) (137) Provision (credit) for income taxes $ (3,836) $3,403 $3,412 The following represents the components of deferred tax liabilities and assets at September 25, 1999 and September 26, 1998: (In thousands) 1999 1998 Deferred tax liabilities: Property, plant and equipment $27,348 $28,235 Other items 171 353 27,519 28,588 Deferred tax assets: Reserves and accruals 7,332 6,707 Net operating tax loss Carryforward 31,338 14,076 Alternative minimum tax and other tax credit carryforwards 3,155 5,933 Unrealized loss on investments 2,010 1,663 Other items 535 538 44,370 28,917 Valuation allowance (20,077) (4,474) Net deferred tax assets 24,293 24,443 Net deferred tax liability $ 3,226 $ 4,145 For federal income tax purposes, the Company has alternative minimum tax credit carryforwards of approximately $3.2 million, which are not limited by expiration dates, and net operating tax loss carryforwards of approximately $89.5 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 and financial reporting basis of assets and liabilities. Note 12 Related Party Transactions One of the Company's directors has a controlling interest in a company which purchases secondary and limited service tubular products from Newport. Sales to this customer were approximately $11.1 million, $13.2 million and $15.6 million for fiscal years 1999, 1998 and 1997, respectively. Trade receivables from this customer were $1.3 million and $1.0 million at the end of fiscal 1999 and 1998, respectively. Note 13 Quarterly Financial Data (unaudited) Quarterly results of operations for fiscal 1999 and 1998 are as follows: (In thousands, except per share amounts) First Second Third Fourth 1999 Quarter Quarter Quarter Quarter Net sales $54,269 $56,460 $59,582 $72,252 Gross loss (6,681) (6,689) (3,604) (3,312) Loss before extra- ordinary items (11,382) (14,658) (8,581) (10,932) Net loss (11,819) (18,058) (8,581) (10,932) Loss per common share before extraordinary items Basic and diluted (.50) (.67) (.40) (.51) Net loss per common share Basic and diluted (.52) (.83) (.40) (.51) 1998 Net sales $123,733 $123,566 $96,882 $65,674) Gross profit (loss) 17,591 16,179 9,753 (4,989) Income (loss) before extraordinary item 6,537 5,736 1,189 (10,071) Net income (loss) 6,537 5,736 1,189 ( 9,412) Income (loss) per common share before extraordinary item Basic .27 .24 .05 (.44) Diluted .26 .23 .05 (.44) Net income (loss) per common share Basic .27 .24 .05 (.41) Diluted .26 .23 .05 (.41) Reference is made to Note 1: Summary of Significant Accounting Policies - Property, Plant and Equipment and Depreciation regarding the abandonment of certain equipment at Newport. Also, reference is made to Notes 5 and 9 to the Consolidated Financial Statements for a discussion of extraordinary items in fiscal 1999 and 1998. Note 14 Summarized Financial Information 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. Separate financial statements of the Subsidiary Guarantors are not presented because they are not deemed material to investors. The following is summarized financial information of the Subsidiary Guarantors as of September 25, 1999 and September 26, 1998 and for each of the three years in the period ended September 25, 1999. All significant intercompany accounts and transactions between the Subsidiary Guarantors have been eliminated. (In thousands) September 25, 1999 September 26, 1998 Current assets $115,172 $131,227 Noncurrent assets 148,858 142,485 Current liabilities 50,357 44,625 Payable to parent $192,090 $174,895 Other noncurrent Liabilities 1,184 1,379 Total noncurrent Liabilities $193,274 $176,274 Fiscal Year Ended (In thousands) 1999 1998 1997 Net sales $242,563 $409,855 $481,170 Gross profit (loss) (20,286) 38,534 68,054 Income (loss) before extraordinary items (49,656) 2,164 7,690 Net income (loss) (53,056) 2,823 7,690 Report of Management The accompanying consolidated financial statements have been prepared by the management of NS Group, Inc., in conformity with generally accepted accounting principles 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 generally accepted auditing standards, 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 non-employee directors, reviews the Company's financial reporting and accounting practices. The independent public accountants meet regularly with and have access to this Committee, with or without management present, to discuss the results of their audit work. /s/ Clifford R. Borland Clifford R. Borland Chairman and Chief Executive Officer /s/ Rene, J. Robichaud Rene, J. Robichaud President and Chief Operating Officer /s/John R. Parker John R. Parker Vice President, Treasurer and Chief Financial Officer 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 September 25, 1999 and September 26, 1998, and the related consolidated statements of operations, common shareholders' equity and cash flows for each of the three years in the period ended September 25, 1999 (as restated - see Note 1). These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. 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 September 25, 1999 and September 26, 1998, and the results of their operations and their cash flows for each of the three years in the period ended September 25, 1999 in conformity with generally accepted accounting principles. As explained in Note 1 to the consolidated financial statements, the Company has given retroactive effect to the change by one of its subsidiaries from the LIFO method to the FIFO method of inventory costing. ARTHUR ANDERSEN LLP Cincinnati, Ohio April 10, 2000 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: April 10, 2000 By: /s/Thomas J. Depenbrock Thomas J. Depenbrock Vice President and Corporate Controller EX-23 2 Exhibit 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included or incorporated by reference in this Form 10-K/A, Amendment No. 2, into the Company's previously filed Registration Statements, File Nos. 33-24182, 33-24183, 33,51899, 33-28995, 33-37454, 33- 39695, 33-56637, 333-03657, 333-73161, 333-73163, 333-73169 and 333-85925. /s/Arthur Andersen LLP Cincinnati, Ohio Arthur Andersen LLP April 10, 2000 EX-27 3
5 This exhibit 27 contains summary financial information extracted from NS Group, Inc.'s consolidated financial statements as of and for the fiscal year ended September 25, 1999, included in the Company's Annual Report on Form 10-K/A, Amendment No. 2 and is qualified in its entirety by reference to such consolidated financial statements. 0000745026 NS GROUP, INC. 1,000 U.S. DOLLARS YEAR SEP-25-1999 SEP-27-1998 SEP-25-1999 1 1,073 30,032 41,611 687 56,659 154,781 330,477 187,330 359,795 57,208 72,833 0 0 257,271 (36,119) 359,795 242,563 242,563 262,849 262,849 0 0 11,601 (49,280) (3,727) (45,553) 0 (3,837) 0 (49,390) (2.26) (2.26)
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