-----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, JJPRZiAMxYrau+HPl6DaZR+g5qHeKqWwemX/sn3c7Wc/urWphJ/W/9Cd+4WtesF1 L80sfq+SdgSQpFFqsipQAw== 0000745026-99-000052.txt : 19991217 0000745026-99-000052.hdr.sgml : 19991217 ACCESSION NUMBER: 0000745026-99-000052 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 19990925 FILED AS OF DATE: 19991216 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 SEC ACT: SEC FILE NUMBER: 001-09838 FILM NUMBER: 99775925 BUSINESS ADDRESS: STREET 1: NINTH & LOWELL STS CITY: NEWPORT STATE: KY ZIP: 41072 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 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K 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"). Table of Contents PART I Page Item 1. Business 3 Item 2. Properties 11 Item 3. Legal Proceedings 12 Item 4. Submission of Matters to a Vote of Security Holders 12 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 13 Item 6. Selected Consolidated Financial Data 13 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 13 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 13 Item 8. Financial Statements and Supplementary Data 13 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 13 PART III Item 10. Directors and Executive Officers of the Registrant 14 Item 11. Executive Compensation 14 Item 12. Security Ownership of Certain Beneficial Owners and Management 14 Item 13. Certain Relationships and Related Transactions 14 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 15 The matters discussed or incorporated by reference in this Report on Form 10-K that are forward-looking statements (as defined in the Private Securities Litigation Reform Act of 1995) involve risks and uncertainties. These risks and uncertainties may cause the actual results or performance of the Company to differ materially from any future results or performance expressed or implied by such forward-looking statements. Reference is made to the introductory paragraph of "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in the 1999 Annual Report and incorporated herein by reference and to Exhibit 99.1 to this Form 10-K for a discussion of risks and uncertainties. PART I ITEM 1. BUSINESS The Company was incorporated in Kentucky in 1980. As used herein, the terms "Company" and "NS Group" refer to NS Group, Inc. and its wholly-owned subsidiaries - Newport Steel Corporation (Newport or Welded), Koppel Steel Corporation (Koppel or Seamless), Erlanger Tubular Corporation (Erlanger), Imperial Adhesives, Inc. (Imperial) and Northern Kentucky Management, Inc. NS Group conducts business in three industry segments: the energy products segment, the industrial products segment - special bar quality (SBQ) products and the industrial products segment -adhesives. Incorporated herein by reference from the 1999 Annual Report is the segment data included in "Management's Discussion and Analysis of Financial Condition and Result of Operations" and "Note 2 to the Consolidated Financial Statements", which contains additional information pertaining to industry segment data. Energy Products Segment General The Company is a producer of tubular steel products used in the energy industry. Products produced by the Company include welded and seamless tubular goods, primarily used in oil and natural gas drilling and production operations, referred to as oil country tubular goods (OCTG); and welded and seamless line pipe, used in the transmission of oil, natural gas and other fluids. OCTG products are produced in numerous sizes, weights, grades and end finishes. The Company manufactures most of its OCTG products to American Petroleum Institute ("API") specifications. The grade of pipe used in a particular application depends on technical requirements for strength, corrosion resistance and other performance qualities. OCTG products are generally classified into groupings of "carbon" and "alloy" grades. Carbon grades of OCTG products have less yield strength than alloy grades and are therefore generally used in shallower oil and natural gas wells than alloy grades. Carbon and alloy grades of OCTG products are manufactured by both welded and seamless producers. Welded products are produced by processing flat rolled steel into strips that are cold-formed, welded, heat-treated or seam-annealed and end- finished with threads and couplings. Seamless products are produced by individually heating and piercing solid steel billets into pipe and then end finishing the pipe into OCTG products in a manner similar to welded pipe. The seamless manufacturing process involves higher costs than the welded process and, as a result, seamless products are generally priced higher than comparably sized welded products. Demand for the Company's OCTG products is cyclical in nature, being dependent on the number and depth of oil and natural gas wells being drilled in the United States and globally. The level of drilling activity is largely a function of the current and anticipated prices of oil and natural gas. In addition, shipments by domestic producers of OCTG products are influenced by the levels of inventory held by producers, distributors and end users as well as the level of foreign imports of OCTG products. The average number of oil and natural gas drilling rigs in operation in the United States was 602 in fiscal 1999, 905 in fiscal 1998, and 906 in fiscal 1997. Demand for the Company's OCTG products in fiscal 1999 declined significantly from fiscal 1998. The decline was attributable to decreased domestic drilling activity coupled with excess industry-wide inventories. U.S. domestic shipments (excluding exports) of OCTG products in fiscal 1999, 1998 and 1997 were 915,000 tons, 1.8 million tons, and 2.5 million tons, respectively. Demand for line pipe is only partially dependent on oil and natural gas drilling activities. Line pipe demand is also dependent on factors such as the level of pipeline construction activity, line pipe replacement requirements, new residential construction and gas utility purchasing programs. Overall, total shipments by domestic line pipe producers (excluding exports) were 1.9 million tons in fiscal 1999, 1.9 million tons in fiscal 1998, and 1.6 million tons in fiscal 1997. Total domestic shipments of line pipe product 16 inches in diameter and smaller, the product sizes that the Company produces, were 709,000 tons in fiscal 1999, 879,000 tons in fiscal 1998 and 852,000 tons in fiscal 1997. 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, the Company, together with certain other line pipe producers, recently filed petitions with the U.S. government seeking relief from imports of welded and seamless line pipe products. The Company 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. Products The Company's welded OCTG products are used primarily as casing in oil and natural gas wells during drilling operations. Casing forms the structural wall of oil and natural gas wells to provide support and prevent caving during drilling operations and is generally not removed after it has been installed in a well. Welded OCTG products are generally used when higher strength is not required, typically in wells less than 10,000 feet in depth. The Company sells its welded OCTG products in both a plain end (unthreaded) product as well as a threaded and coupled product in both carbon and alloy grades. The Company's welded tubular products range in size from 4.5 to 16.0 inches in outside diameter. The Company's seamless OCTG products are used as drill pipe, casing and production tubing. Drill pipe is used and may be reused to drill several wells. Production tubing is placed within the well and is used to convey oil and natural gas to the surface. The Company's seamless OCTG products are sold as a finished threaded and coupled product in both carbon and alloy grades. Compared to similarly sized welded products, seamless production tubing and casing are better suited for use in hostile drilling environments such as deeper wells or off-shore drilling because of their greater strength and durability. The majority of the Company's seamless OCTG product sales are of production tubing in sizes ranging from 1.9 inches to 5 inches in outside diameter. The Company's line pipe products are used primarily in gathering lines for the transportation of oil and natural gas at the drilling site and in transmission lines by both gas utility and transmission companies. Line pipe products are coated and shipped as a plain end product. The majority of the Company's line pipe sales are of welded products. The Company's OCTG products are inspected and tested to ensure that they meet or exceed API specifications. Products that do not meet specification are classified as less than prime products and are sold at substantially reduced prices. In addition, the Company also sells a limited amount of other products, including standard pipe, piling and hot rolled coil. Markets and Distribution The Company sells its energy related tubular products to its customers through an in-house sales force. Nearly all of the Company's OCTG products are sold to domestic distributors, some of whom subsequently sell the Company's products into the international marketplace. The primary geographic markets for the Company's seamless OCTG products have been the southwest United States and various foreign markets, including offshore applications. The Company has historically marketed its welded OCTG products in the east, central and southwest regions of the United States. In these areas, shallow oil and natural gas drilling and exploration activity utilize welded tubular products. Customers The Company has approximately 185 tubular product customers. The Company's OCTG and line pipe products are used by major and independent oil and natural gas exploration and production companies in drilling and production applications. Line pipe products are also used by gas utility and transmission companies. Substantially all of the Company's OCTG products are sold to domestic distributors. Line pipe products are sold to both domestic distributors and directly to end users. The Company has long-standing relationships with many of its larger customers; however, the Company believes that it is not dependent on any one customer and that it could, over time, replace lost sales attributable to any one customer. In fiscal 1999, no one customer accounted for more than 10% of total net sales. Competition The markets for the Company's tubular products are highly competitive and cyclical. The Company's principal competitors in its primary markets include domestic and foreign integrated producers, mini-mills and welded tubular product processing companies. The Company believes that the principal competitive factors affecting its business are price, quality and customer service. In the welded OCTG and line pipe market, the Company competes against certain manufacturers who purchase hot rolled coils for further processing into welded OCTG and line pipe products. The cost of finished tubular products for these manufacturers is largely dependent on the market price of hot rolled coils. Depending on market demand for hot rolled coils, these tubular manufacturers may purchase hot rolled coils at a lower or higher cost than the Company's cost to manufacture hot rolled coils. Increases or decreases in imports of hot rolled coils can also impact the market price for hot rolled coils. The Company's principal domestic competitors in the welded tubular market are Lone Star Steel Company, Maverick Tube Corporation, LTV Corporation and IPSCO Steel, Inc. In the small diameter seamless OCTG market in which the Company competes, its principal competitors include the USS/Kobe Steel Company and a number of foreign producers. Manufacturing The Company manufactures welded tubular products at its facilities located near Newport, Kentucky and manufactures seamless tubular products at its facilities located in Ambridge, Pennsylvania. During fiscal 1999, the Company made capital investments of $26.6 million ($31.2 million in fiscal 1998) in its energy products business segment to increase productivity and expand product range. The rated annual capacities of the Company's welded and seamless tubular facilities are 570,000 tons and 250,000 tons, respectively. Capacity utilization of the welded tubular facilities during fiscal 1999 was 41% and capacity utilization for the seamless tubular facilities during fiscal 1999 was 27%. The Company processes and finishes its tubular products at facilities located at (i) the Port of Catoosa, near Tulsa, Oklahoma, (ii) Baytown, Texas, located near Houston, Texas; and (iii) the Seamless facilities located in Ambridge, Pennsylvania. The finishing processes include upsetting, which is a forging process that thickens tube ends; heat treating, which is a furnace operation designed to strengthen the steel; straightening; non-destructive testing; coating for rust prevention; and threading. All of the Company's tube-making and finishing facilities are located on or near major rivers or waterways, enabling the Company to transport its tubular products into the southwest by barge. The Company ships substantially all of its seamless and welded OCTG products destined for the southwest region by barge, which is a lower cost alternative to rail and truck shipping. The Company manufactures its tubular products in a mini- mill environment. The term mini-mill connotes a smaller, relatively low cost mill that typically uses steel scrap as its basic raw material and offers a limited range of products. At the Company's Welded and Seamless facilities, steel scrap is melted in electric arc furnaces and poured into continuous casting systems. A hot strip rolling mill converts continuous cast slabs into hot rolled coils at the Welded facility. Hot rolled coils are slit and formed into welded tubular products at two welded pipe-making facilities. At the Seamless facility, billets are reheated to form tube rounds which are pierced and rolled to specific size and wall thickness. The Company believes that its mini-mill operations can produce hot rolled coil (which are used to manufacture welded tubular products) and billets (which are used to manufacture seamless tubular products) at a cost lower than the cost to purchase those items over the term of our markets' cycles. In February 1999, the Company completed the installation of a new ultra-high powered AC electric arc furnace at its Welded facility that replaced three older, less efficient furnaces. The new furnace is expected to increase productivity and significantly reduce unit operating costs. As of October, 1999, the furnace was operating at approximately 55% of its expected production capabilities. The Welded and Seamless melt shops rated annual capacities are 700,000 tons and 450,000 tons, respectively. Capacity utilization in fiscal 1999 was 37% for the welded facility and 48% for the Seamless facility. Raw Materials and Supplies The primary raw material used in the energy products segment is steel scrap, which is generated principally from industrial, automotive, demolition, railroad and other steel scrap sources. Steel scrap is purchased by the Company either through scrap brokers or directly in the open market. The long-term demand for steel scrap in the domestic steel industry may increase as steel-makers continue to expand steel scrap-based electric arc furnace and thin slab casting capacities. For the foreseeable future, however, the Company believes that supplies of steel scrap will continue to be available in sufficient quantities at competitive prices. In addition, a number of technologies exist for the processing of iron ore into forms which may be substituted for steel scrap in electric arc furnace-based steel-making operations. Such forms include direct-reduced iron, iron carbide and hot- briquetted iron. The Company's melt shop facilities consume significant amounts of electricity. The Company currently purchases its electricity from utility companies located near its mini-mill facilities pursuant to various contracts. The contracts provide for unlimited power demand and discounted rates in return for the utilities' right to periodically curtail service during periods of peak demand. These curtailments are generally limited to a few hours and historically have had a negligible impact on the Company's operations. Industrial Products Segment - Special Bar Quality Products General The bar product market represents the second largest segment of the steel market. Total fiscal 1999 shipments by domestic producers of hot rolled bar (which include the Company's SBQ products) were approximately 7.4 million tons. Bar products are generally categorized into merchant bar quality products and SBQ products. SBQ products are used for a wide variety of industrial applications including automotive, metal-working fabrication, construction, farm equipment, heavy machinery and trucks and off-road vehicles. The Company competes in relatively small segments of the SBQ market. Unlike the majority of SBQ products, which are primarily used by passenger car manufacturers, heavy SBQ products such as those produced by the Company are primarily used in the manufacture of heavy industrial products. Special Bar Quality Products The Company manufactures products for a specialized niche of the SBQ products market at its Koppel facility in sizes ranging from 2.875 to 6.0 inches in diameter. The Company produces its SBQ products from continuous cast blooms that enable substantial size reduction in the bloom during processing and provides greater strength-to-weight ratios. These SBQ products are primarily used in critical weight- bearing applications such as suspension systems, gear blanks, drive axles for tractors and off-road vehicles, heavy machinery components and hydraulic and pneumatic cylinders. The Company's SBQ products are ISO 9002 certified. The demand for the Company's SBQ products is cyclical in nature and is sensitive to general economic conditions. Markets and Distribution The Company sells its SBQ products to approximately 50 customers located generally within 400 miles of its Koppel, Pennsylvania facilities. Customers The Company sells its SBQ products to service centers, cold finishers, forgers and original equipment manufacturers. Competition The Company competes with a number of SBQ manufacturers, including CSC Industries, Inc., Republic Technologies, Inc., Ispat Inland, Inc., Qualitech, Inc., Mac Steel Division of Quanex Corporation, North Star Steel Company, Inc. and the Timkin Company. Manufacturing The SBQ products mill utilizes the Koppel facility's melt shop to produce 9 inch square blooms. Blooms are reheated and passed through a series of rolls in the bar mill, where they are reshaped into round bars. SBQ products are available in both carbon and alloy grades in sizes measuring 2.875 to 6 inches in diameter. The bar mill's rated annual capacity is 200,000 tons and it operated at 71% of capacity in fiscal 1999. Industrial Products Segment - Adhesives Products General The Company manufactures custom water-borne, solvent- borne and hot-melt adhesives and footwear finishes. These products are manufactured at plants located in Cincinnati, Ohio and Nashville, Tennessee. Products and Markets The Company maintains approximately 700 active formulae for the manufacture of water-borne, solvent-borne and hot-melt adhesives products and approximately 500 active formulae for the manufacture of footwear finishes. The Company's multiple product lines are used primarily in product assembly applications in the footwear, foam bonding, marine and recreational vehicles, consumer packaging, construction, furniture, and transportation industries. The Company's industrial adhesives products are marketed throughout the United States and Caribbean basin through an in-house sales force as well as independent sales representatives. Products are distributed from the Company's manufacturing sites and a number of public warehouses across the United States and in Puerto Rico. Competition Competition in the industrial adhesives industry includes several major producers, as well as numerous small and mid- sized companies comparable to Imperial. The Company competes on the basis of price, product performance and customer service and believes that its diversity and ability to develop applications to meet customer specific needs allows it to compete effectively with substantially all adhesives producers. Manufacturing Process The Company's adhesives products are manufactured by combining and mixing predetermined quantities of raw materials. The raw materials are measured according to specific formulae and mixed in numerous specially designed industrial mixers. Raw materials are available from multiple sources and consist primarily of petrochemical-based materials. Pricing of raw materials generally follows trends in the petrochemical markets. The physical properties of finished formulae are measured and monitored by a statistical process control system. The Company works closely with its customers to develop adhesives applications designed to meet their specific product requirements. Environmental Matters The Company is subject to federal, state and local environmental laws and regulations, including, among others, the Resource Conservation and Recovery Act (RCRA), the Clean Air Act, the 1990 Amendments to the Clean Air Act and the Clean Water Act, and all regulations promulgated in connection therewith. Such laws and regulations include those concerning the discharge of contaminants as air emissions or 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 Company believes disposal costs will not exceed its gross environmental remediation reserves 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; however, 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 the 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. Employees As of September 25, 1999, the Company had 1,619 employees, of whom 389 were salaried and 1,230 were hourly. Substantially all of the Company's hourly employees are represented by the United Steelworkers of America under contracts expiring in 2000 for Erlanger; 2001 for Imperial and 2002 for the Welded and Seamless operations. ITEM 2. PROPERTIES The Company's principal operating properties are listed below. The Company believes its facilities are adequate and suitable for its present level of operations. Location and Properties Energy Products Segment Newport, Kentucky - The Company owns approximately 250 acres of real estate upon which is located a melt shop, hot strip mill, two welded pipe mills, a barge facility, machine and fabricating shops and storage and repair facilities aggregating approximately 675,000 square feet, as well as administrative offices. The facilities are also located adjacent to rail lines. Tulsa, Oklahoma - The Company leases approximately 36 acres of real estate upon which is located a tubular processing facility. The facility is located at the Tulsa Port of Catoosa where barge facilities are in close proximity. Located on this property are six buildings aggregating approximately 119,000 square feet which house the various finishing operations. Koppel, Pennsylvania - The Company owns approximately 160 acres of real estate upon which are located a melt shop, machine and fabricating shops, storage and repair facilities and administrative offices aggregating approximately 500,000 square feet. The facilities are located adjacent to rail lines. The melt shop and administrative offices support the Seamless operations and the industrial products segment for SBQ products. Ambridge, Pennsylvania - The Company owns approximately 45 acres of real estate upon which are located a seamless tube making facility and seamless tube finishing facilities aggregating approximately 659,000 square feet. The facilities are located adjacent to rail lines and river barge facilities. Baytown, Texas - The Company owns approximately 55 acres of real estate upon which are located a tubular processing facility and barge facilities. Located on the property are eight buildings aggregating approximately 82,000 square feet which house the various finishing operations. Industrial Products Segment-SBQ Koppel, Pennsylvania - The Company owns approximately 67 acres of real estate upon which are located a bar mill, machine and fabricating shops and storage repair facilities aggregating approximately 400,000 feet. The melt shop and administrative offices support the energy products Seamless operations and the SBQ products operations. Industrial Products Segment-Adhesives Cincinnati, Ohio and Nashville, Tennessee - The Company owns approximately seven acres of property in Cincinnati, Ohio; and 3.1 acres in Nashville, Tennessee for use in its adhesives and finishes operations. The Cincinnati properties contain five buildings aggregating approximately 150,000 square feet. The Nashville property contains one building aggregating approximately 60,000 square feet. Other Newport, Kentucky - The Company owns approximately 19 acres of partially developed land near Newport, Kentucky, which is held as investment property and is listed for sale. Information regarding encumbrances on the Company's properties is included in Note 5 to the Consolidated Financial Statements of the 1999 Annual Report, and is incorporated herein by reference. ITEM 3. LEGAL PROCEEDINGS 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. 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. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Incorporated herein by reference from the 1999 Annual Report, "Corporate and Shareholder Information - Stock Market Information" and "Corporate and Shareholder Information - Stock Price" and Note 5 to the Consolidated Financial Statements. As of November 29, 1999 there were approximately 229 record holders of Common Stock. ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA Incorporated herein by reference from the 1999 Annual Report, "Consolidated Financial Summary". ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Incorporated herein by reference from the 1999 Annual Report, "Management's Discussion and Analysis of Financial Condition and Results of Operations". ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Incorporated herein by reference from the 1999 Annual Report, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources" and Notes 4, 5 and 6 to the Consolidated Financial Statements. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Incorporated herein by reference from the 1999 Annual Report, "Consolidated Statements of Operations"; "Consolidated Balance Sheets"; "Consolidated Statements of Cash Flows"; Consolidated Statements of Common Shareholders' Equity"; "Notes to Consolidated Financial Statements"; "Report of Management" and "Report of Independent Public Accountants". ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Incorporated herein by reference from the Proxy under the caption "Proposals of the Board, Item 1 - Election of Directors," "Securities Ownership of Management, footnote (6)"; "The Board of Directors, Board Committees and Meeting Attendance"; and "Securities Ownership of Management, Section 16(a) Beneficial Ownership Reporting Compliance". ITEM 11. EXECUTIVE COMPENSATION Incorporated herein by reference from the Proxy under the caption "Compensation of Directors"; and "Compensation of Executive Officers". ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Incorporated herein by reference from the Proxy under the caption "Securities Ownership of Management" and "Securities Ownership of Certain Beneficial Owners". ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Incorporated herein by reference from the Proxy under the caption "Compensation of Executive Officers, Compensation Committee Interlocks and Insider Participation" and "Certain Relationships and Related Transactions." PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8 (a) 1. Consolidated Financial Statements - Audited consolidated financial statements required by this item are incorporated by reference and listed in Part II, Item 8. 2. Consolidated Financial Statement Schedule - The financial statement schedule required to be filed as a part of this report is included herein: - Report of Independent Public Accountants on Financial Statement Schedule - Schedule II - Valuation and Qualifying Accounts 3. Exhibits - Reference is made to the Index to Exhibits, which is included herein as part of this report. (b) Reports on Form 8-K Current Report on Form 8-K dated July 15, 1999 and filed July 16, 1999 reporting under Item 5 the announcement of the appointment of a director. Report of Independent Public Accountants on Financial Statement Schedule To NS Group, Inc. We have audited in accordance with generally accepted auditing standards the consolidated financial statements included in NS Group, Inc. and subsidiaries annual report to shareholders incorporated by reference in this Form 10-K, and have issued our report thereon dated November 1, 1999. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in Item 14(a) 2 is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /s/Arthur Andersen LLP Cincinnati, Ohio ARTHUR ANDERSEN LLP November 1, 1999 SCHEDULE II NS GROUP, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS (Dollars in thousands) Reserves Deducted from Assets in Balance Sheets Allowance for Allowance Doubtful for Cash Accounts(1) Discounts(1) BALANCE, September 28, 1996 $ 757 $ 341 Additions: Charged to costs and expenses 1,050 7,414 Deductions: Net charges of nature for which reserves were created (1,095) (7,124) BALANCE, September 27, 1997 $ 712 $ 631 Additions: Charged to costs and expenses 1,319 5,143 Deductions: Net charges of nature for which reserves were created (1,279) (5,622) BALANCE, September 26, 1998 $ 752 $ 152 Additions: Charged to costs and expenses Deductions: 1,598 2,502 Net charges of nature for which reserves were created (1,513) (2,400) BALANCE, September 25, 1999 $ 837 $ 254 (1) Deducted from accounts receivable 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: December 10, 1999 By: /s/John R. Parker John R. Parker, Vice President, Treasurer and Chief Financial Officer KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Clifford R. Borland and John R. Parker, and each of them, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities to sign any and all amendments to this Annual Report on Form 10-K and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in- fact and agents and/or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Date: December 10, 1999 /s/Clifford R. Borland Clifford R. Borland Chief Executive Officer and Director Date: December 10, 1999 /s/Rene J. Robichaud Rene J. Robichaud, President, Chief Operating Officer and Director Date: December 10, 1999 /s/John R. Parker John R. Parker, Vice President, Treasurer and Chief Financial Officer (Principal Financial Officer) Date: December 10, 1999 /s/Thomas J. Depenbrock Thomas J. Depenbrock Vice President and Corporate Controller (Principal Accounting Officer) Date: December 10, 1999 /s/Ronald R. Noel Ronald R. Noel Vice President and Director Date: December 10, 1999 /s/Paul C. Borland, Jr. Paul C. Borland, Jr., Director Date: December 10, 1999 /s/Patrick J. B. Donnelly Patrick J. B. Donnelly, Director Date: December 10, 1999 /s/John B. Lally John B. Lally, Director Date: December 10, 1999 /s/R. Glen Mayfield R. Glen Mayfield, Director INDEX TO EXHIBITS Number Description 3.1 Amended and Restated Articles of Incorporation of Registrant, filed as Exhibit 3.1 to Amendment No. 1 to Registrants' Form S-1 dated January 17, 1995, File No. 33- 56637, and incorporated herein by this reference 3.2 Amended and restated By-Laws of Registrant, dated December 4, 1995, filed as Exhibit 3.2 to Company's Form 10-K for the fiscal year ended September 30, 1995, File No. 1-9838, and incorporated herein by this reference Exhibit 4.1 through 4.17 were filed as exhibits under their respective Exhibit numbers to the Company's Form 10-Q for the quarterly period ended July 1, 1995, File No. 1- 9838, and are incorporated herein by this reference 4.1 Indenture (including form of Senior Secured Note) between the Company and The Huntington National Bank, as trustee (the "Trustee") 4.2 Leasehold and Fee Mortgage, Assignment of Rents and Leases and Security Agreement from Newport to the Trustee (Kentucky) 4.3 Mortgage, Assignment of Rents and Leases and Security Agreement from Koppel to the Trustee (Pennsylvania) 4.4 Deed of Trust, Assignment of Rents and Leases and Security Agreement from Koppel to the Trustee (Texas) 4.5 Leasehold Mortgage, Assignment of Rents and Leases and Security Agreement from Erlanger to the Trustee (Oklahoma) 4.6 Junior Leasehold and Fee Mortgage, Assignment of Rents and Leases and Security Agreement from Newport to the Company (Kentucky) 4.7 Junior Mortgage, Assignment of Rents and Leases and Security Agreement from Koppel to the Company (Pennsylvania) 4.8 Junior Deed of Trust, Assignment of Rents and Leases and Security Agreement from Koppel to the Company (Texas) 4.9 Junior Leasehold Mortgage, Assignment of Rents and Leases and Security Agreement from Erlanger to the Company (Oklahoma) 4.10 Subsidiary Security Agreement between Newport and the Trustee 4.11 Subsidiary Security Agreement between Koppel and the Trustee 4.12 Subsidiary Security Agreement between Erlanger and the Trustee 4.13 ICN Security Agreement between Newport and the Company 4.14 ICN Security Agreement between Koppel and the Company 4.15 ICN Security Agreement between Erlanger and the Company 4.16 Pledge and Security Agreement between the Company and the Trustee 4.17 Subsidiary Guarantee 4.18 Warrant Agreement between the Company and The Huntington National Bank, as warrant agent, filed as Exhibit 4.22 to the Company's Form 10-Q for the quarterly period ended July 1, 1995, File No. 1-9838, and incorporated herein by this reference 4.19 Credit Agreement between the Company and Bank of America National Trust and Savings Association, dated July 31, 1998, filed as Exhibit 4.20 to the Company's Form 10-K for the fiscal year ended September 26, 1998, File No. 1-9838, and incorporated herein by this reference; and Amendment No. 1 dated March 25, 1999, filed as Exhibit 4.20 to the Company's Form 10-Q for the quarterly period ended March 27, 1999, File No. 1-9838, and incorporated herein by this reference 10.1 Company's Amended Employee Incentive Stock Option Plan, filed as Exhibit 10(a) to Company's Form 10-K for the fiscal year ended September 30, 1989, File No. 1-9838, and incorporated herein by this reference* 10.2 Company's Executive Bonus Plan, filed as Schedule B to Exhibit 10.4 to Company's Registration Statement on Form S- 18, File No. 2-90643, and incorporated herein by this reference* 10.3 Company's Non-Qualified Stock Option and Stock Appreciation Rights Plan of 1988, filed as Exhibit 1 to the Company's Proxy Statement dated January 13, 1989, File No. 1- 9838, and incorporated herein by this reference* 10.4 Rights Agreement dated November 17, 1998 between the Company and Registrar and Transfer Company, filed as Exhibit 1 to the Company's Form 8-K dated November 5, 1998, File No. 1- 9838, and incorporated herein by this reference 10.5 Company's 1993 Incentive Stock Option Plan, filed as Exhibit 1 to the Company's Proxy Statement dated December 22, 1992, File No. 1-9838, and incorporated herein by this reference* 10.6 Registration Rights Agreement dated October 6, 1993 among Kentucky Electric Steel, Inc., NS Group, Inc. and NSub I, Inc. (formerly Kentucky Electric Steel Corporation), filed as Exhibit 10(i) to the Company's Form 10-K for fiscal year ended September 25, 1993, File No. 1-9383, and incorporated herein by this reference 10.7 Form of Warrant dated October 4, 1990, filed as Exhibit 4.2 to the Company's Form 8-K dated October 18, 1990, File No. 1-9838, and incorporated herein by reference; and First Amendment to Warrant dated September 26, 1992, filed as Exhibit 4(c) to the Company's Form 10-K for the fiscal year ended September 26, 1992, File No. 1-9838, and incorporated herein by this reference 10.8 Company's Amended and Restated 1995 Stock Option and Stock Appreciation Rights Plan, filed as Exhibit A to the Company's Proxy Statement dated December 21, 1998, File No. 1- 9838, and incorporated herein by this reference* 10.9 Form of Change of Control Severance Agreement, filed herewith* 10.10 Form of Salary Continuation Agreement, filed herewith* 10.11 Employment Agreement between the Company and Ren, J. Robichaud, dated June 21, 1999, filed herewith* 13 1999 Annual Report to Shareholders (not deemed "filed" except for portions which are expressly incorporated by reference), filed herewith 21 Subsidiaries of Registrant, filed herewith 23 Consent of Independent Public Accountants, filed herewith 24 Power of Attorney (contained on Signature Page) 27 Financial Data Schedule, filed herewith 27.1 Restated Financial Data Schedule, filed herewith 27.2 Restated Financial Data Schedule, filed herewith 27.3 Restated Financial Data Schedule, filed herewith 99.1 Risk Factors, filed herewith * Indicates management contracts or compensatory plans or arrangements in which one or more directors or executive officers of the Company participates or is a party. EX-10 2 Exhibit 10.9 FORM OF CHANGE OF CONTROL SEVERANCE AGREEMENT AGREEMENT by and between NS Group, Inc., a Kentucky Corporation (the "Company"), and ____________________ (the "Employee"), dated as of the _______ day of ________________. The Company wishes to assure that it will have the continued dedication of the Employee, notwithstanding the possibility, threat or occurrence of a Change of Control (as defined below) of the Company. The Company believes it is imperative to diminish the inevitable distraction of the Employee by virtue of the personal uncertainties and risks created by a pending or threatened Change of Control, to encourage the Employee's full attention and dedication to the Company upon a Change of Control, and to provide the Employee with compensation arrangements upon a Change of Control which provide the Employee with individual financial security and which are competitive with those of other corporations and, in order to accomplish these objectives, the Company desires to enter into this Agreement. NOW, THEREFORE, IT IS HEREBY AGREED AS FOLLOWS: Certain Definitions (a) "Affiliate" of any specified Person means (i) any other Person which, directly or indirectly, is in control of, is controlled by or is under common control with such specified Person or (ii) any other person who is a director or officer (A) of such specified Person, (B) of any subsidiary of such specified Person or (C) of any Person described in clause (i) above or (iii) any person in which such Person has, directly or indirectly, a 5 percent or greater voting or economic interest or the power to control. For the purposes of this definition, "control" of a Person means the power, direct or indirect, to direct or cause the direction of the management or policies of such Person whether through the ownership of voting securities, or by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. (b) "Agreement Period" shall mean the period as defined in Section 2 of this Agreement. (c) "Board of Directors" shall mean the Board of Directors of the Company as constituted from time to time. (d) "Change of Control" shall mean: (i) the direct or indirect sale, lease, exchange or other transfer of all or substantially all of the assets of the Company to any Person or entity or group of Persons or entities acting in concert as a partnership or other group (a "Group of Persons") other than a Person described in clause (i) of the definition of Affiliate: (ii) the consummation of any consolidation or merger of the Company with or into another corporation with the effect that the stockholders of the Company immediately prior to the date of the consolidation or merger hold less than 51% of the combined voting power of the outstanding voting securities of the surviving entity of such merger or the corporation resulting from such consolidation ordinarily having the right to vote in the election of directors (apart from rights accruing under special circumstances) immediately after such merger or consolidation; (iii) the stockholders of the Company shall approve any plan or proposal for the liquidation or dissolution of the Company; (iv) a Person or Group of Persons acting in concert as a partnership, limited partnership, syndicate or other group shall, as a result of a tender or exchange offer, open market purchases, privately negotiated purchases or otherwise, have become the direct or indirect beneficial owner (within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934, as amended ("the Exchange Act")) ("Beneficial Owner") of securities of the Company representing 30% or more of the combined voting power of the then outstanding securities of the Company ordinarily (and apart from rights accruing under special circumstances) having the right to vote in the election of directors; (v) a Person or Group of Persons, together with any Affiliates thereof, shall succeed in having a sufficient number of its nominees elected to the Board of Directors of the Company such that such nominees, when added to any existing director remaining on the Board of Directors of the Company after such election who is an Affiliate of such Person or Group of Persons, will constitute a majority of the Board of Directors of the Company; provided that the Person or Group of Persons referred to in clauses (i), (iv) and (v) shall not mean Clifford Borland or any Group of Persons with respect to which Clifford Borland is the Beneficial Owner of the majority of the voting equity interests. (e) "Cause" for termination of the Employee's employment shall be deemed to exist if the Board of Directors of the Company should determine that the Employee has committed any of the following: (i) fraud; (ii) misappropriation of Company property or funds; (iii) embezzlement; (iv) malfeasance in office; (v) misfeasance in office which is willful or grossly negligent; or (vi) nonfeasance in office which is willful or grossly negligent. (f) "Company" as used herein includes NS Group, Inc. and any of its subsidiaries and divisions and, as provided by Section 12(b) hereof, any successor. (g) "Date of Termination" shall be the date on which the Notice of Termination is actually perceived by the addressee, or alternatively, if the Notice of Termination specifies a date other than the date of receipt of such notice then that specified date shall be the Date of Termination. (h) "Effective Date" shall mean the first date on which a Change of Control occurs; provided, however, that if the Employee's employment is terminated by the Company prior to the date on which a Change of Control occurs, and the Employee can reasonably demonstrate that such termination by the Company was in contemplation of a Change of Control, then for all purposes of this Agreement the "Effective Date" shall mean the date immediately prior to the date of such termination. (i) "Good Reason" means: (i) any material change in compensation; (ii) substantial decrease in the nature or scope of the Employee's duties, responsibilities, powers, authority, title, position or status; (iii) unreasonable travel requirements; (iv) any relocation required on the part of Employee, without his consent, outside of a 50-mile radius from the place of his employment on the Effective Date; or (v) material breach by the Company of an employment, compensation or similar agreement between the Employee and the Company. (j) "Person" means any individual, corporation, partnership, joint venture, association, joint-stock company, trust, unincorporated organization, government or any agency or political subdivision thereof or any other entity within the meaning of Section 13(d)(3) or 14(d) (2) of the Exchange Act. (k) "Reduce Amount" as used herein shall mean the maximum amount which could be paid to the Employee under this Agreement without any portion of such amount being nondeductible by the Company by virtue of Section 280G of the Internal Revenue Code of 1986, as amended. (l) "Voting Power" shall mean the voting power of all securities of a Person then outstanding generally entitled to vote for the election of directors of the Person (or, where appropriate, for the election of persons performing similar functions). 2. Agreement Period The Company hereby agrees to provide the Employee with the protections and benefits enumerated in Section 3 of this Agreement for the period commencing on the Effective Date and ending on the second anniversary of the Effective Date. 3. Obligations of the Company Upon Termination (a) Notice of Termination. Any termination after the Effective Date by the Company or by the Employee shall be communicated by Notice of Termination, within ten (10) business days after the later of the date of employment termination or the date of Change of Control, to the other party hereto given in accordance with Section 13(c) of this Agreement. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Employee's employment, and (ii) if the termination date is other than the date of receipt of such notice, specifies the termination date. (b) Termination by the Company for Cause; Termination by the Employee for Other Than Good Reason. If during the Agreement Period, the Employee's employment is terminated by the Company for Cause, by the Employee other than for Good Reason, or by reason of death or disability, this Agreement shall terminate without further obligation to the Employee. (c) Termination by the Employee for Good Reason: Termination by the Company for Other Than for Cause. If, during the Agreement Period, the Company shall terminate the Employee's employment other than for Cause, or the employment of the Employee shall be terminated by the Employee for Good Reason, the Employee shall be entitled to the following payments and benefits: (i) The Company shall pay to the Employee in a lump sum in cash within thirty (30) days after the Date of Termination the aggregate of two (2) times the amount of the Employee=s base salary in effect on the Date of Termination and two (2) times the average amount of the Employee's bonus payments made in the five (5) years prior to the Date of Termination, plus a payment equal to a pro rata portion (based on the whole number of months worked in the fiscal year by the Employee prior to the Date of Termination and, if applicable performance targets have not been met on the Date of Termination, based on a reasonable estimate of the amount of bonus to be earned for the full year) of the Employee's annual bonus for the year of termination. (ii) For two (2) years after the Date of Termination, the Company shall continue providing medical, dental, life and disability insurance benefits to the Employee in an amount equivalent to that which would have been provided to the Employee had the Employee's employment not been terminated. The Employee shall not be obligated to pay higher fees for such benefits than he or she was paying at the Date of Termination. In the event it is not possible to provide this continued coverage, the Company shall provide the Employee with a cash payment in the amount necessary for the Employee to purchase equivalent insurance for two (2) years after the Date of Termination. (iii) Within ten (10) business days after the later of the date of employment termination or the date of Change of Control, the Company shall provide, at no cost to the Employee, individual outside assistance for the Employee in finding other employment. Such obligation may be fulfilled by the Company through the retention of an outplacement service for use by the Employee. 4. Reduction of Termination Benefits In the event the Company's independent auditors (the "Accounting Firm") shall determine that any payment or distribution by the Company to or for the benefit of the Employee made pursuant to Section 3 of this Agreement would be nondeductible by the Company for Federal income tax purposes because of Section 280G of the Internal Revenue Code of 1986, as amended, then the aggregate present value of amounts payable or distributable to or for the benefit of the Employee pursuant to this Agreement shall be limited to the Reduced Amount. If the Accounting Firm makes such a determination, the Company shall promptly provide the Employee with notice to that effect as well as a copy of both the detailed calculation thereof and the Reduced Amount. 5. Funding of Grantor Trust The Board of Directors of the Company shall have the option to establish a so-called "Rabbi Trust" upon the occurrence, or in anticipation, of a Change of Control to secure for the Employee the benefits provided pursuant to Section 3 of this Agreement. If the Board of Directors elects to do so, the Company shall, immediately upon the occurrence of a Change of Control, make an irrevocable contribution to the Rabbi Trust in an amount that is sufficient to pay the Employee the benefits to which such Employee would be entitled pursuant to the terms of this Agreement as of the date on which the Change of Control occurred. 6. Non-exclusivity of Rights Nothing in this Agreement shall prevent or limit the Employee's continuing or future participation in any benefit, bonus, incentive or other plan or program provided by the Company or any of its affiliated companies and for which the Employee may qualify, nor shall anything herein limit or otherwise affect such rights that the Employee may have under any stock option or other agreements with the Company. Amounts which are vested benefits or which the Employee is otherwise entitled to receive under any plan or program of the Company at or subsequent to the Date of Termination shall be payable in accordance with such plan or program. 7. No Setoff; Cooperation The Company's obligation to make the payments provided for in this Agreement and otherwise to perform its obligations hereunder shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action which the Company may have against the Employee or others. 8. Confidential Information The Employee shall hold in a fiduciary capacity for the benefit of the Company all secret or confidential information, knowledge or data relating to the Company and its businesses, which shall have been obtained by the Employee during the Employee's employment by the Company and which shall not be public knowledge. After termination of the Employee's employment with the Company, the Employee shall not, without the prior written consent of the Company, communicate or divulge any secret or confidential information, knowledge or data to anyone other than the Company and those designated by it. 9. Non-Solicitation (a) The Employee agrees that, during the Agreement Period, the Employee will not: (i) solicit, raid, entice, or induce any present or prospective employee of the Company to be employed by any competitor of the Company, or (ii) assist a competitor in taking such action. (b) Remedies. The Employee agrees that any breach or threatened breach or alleged breach or alleged threatened breach by the Employee of any provision of Sections 8 or 9 will entitle the Company, in addition to any other legal remedies available to it, to apply to any court of competent jurisdiction to enjoin the breach or threatened breach or alleged breach or alleged threatened breach, it being acknowledged and agreed that any such material breach will cause irreparable injury to the Company and that any damages will not provide adequate remedies to the Company. The parties understand and intend that each restriction agreed to by the Employee will be construed as separable and divisible from every other restriction, and that the unenforceability, in whole or in part, of any restriction will not affect the enforceability of the remaining restrictions and that one or more or all of such restrictions may be enforced in whole or in part as the circumstances warrant. No waiver of any one breach of the restrictions contained herein will be deemed a waiver of any future breach. 10. Exclusive Remedy The Employee's rights to severance benefits pursuant to Section 3 hereof shall be the Employee's sole and exclusive remedy for any termination of the Employee's employment by the Company without Cause or by the Employee for Good Reason. The payments, severance benefits and severance protections provided to the Employee pursuant to this Agreement are provided in lieu of any severance payments, severance benefits and severance protections provided in any other plan or policy of the Company, except as may be expressly provided in writing under the terms of any plan or policy of the Company, or in a written agreement between the Company and the employee entered into after the date of this Agreement. In no event shall the Employee be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Employee under any of the provisions of this Agreement. 11. Statement of Intention It is the intention of the parties hereto that, prior to the Effective Date, this Agreement shall not create any rights or obligations in the Employee or the Company , or require any payments by the Company to the Employee. 12. Successors (a) The Employee. This Agreement is personal to the Employee and without the prior written consent of the Company shall not be assignable by the Employee otherwise than by will or the laws of descent and distribution. This Agreement shall inure to the benefit of and be enforceable by the Employee's legal representatives. (b) The Company. This Agreement shall inure to the benefit of and be binding upon the Company and its successors. The Company will require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business and/or assets of the Company to expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform it if no such succession had taken place. As used in this Agreement, "Company" shall include any successor to its business and/or assets as aforesaid which assumes and agrees to perform this Agreement by operation of law, or otherwise. 13. Miscellaneous (a) Interpretation. This Agreement shall be governed by and construed in accordance with the laws of the State of Kentucky, without reference to principles of conflict of laws. The captions of this Agreement are not part of the provisions hereof and shall have no force or effect. (b) Legal Fees. In the event of any litigation involving this Agreement, and if the Employee is successful in such litigation, the Company will reimburse the Employee for all legal fees and expenses paid by the Employee in prosecuting or defending such litigation. (c) Notices. All notices and other communications hereunder shall be in writing and shall be given by hand delivery to the other party or by registered or certified mail, return receipt requested, postage prepaid, addressed to the Employee at the Employee's address on the payroll records of the Company and to the Company as follows: NS Group, Inc. Ninth & Lowell Streets P.O. Box 1670 Newport, Kentucky 41072 Attention: President And to such other address as either party shall have furnished to the other in writing in accordance herewith. Notice and communications shall be effective when actually received by the addressee. (d) Severability. The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement. (e) Withholding Taxes. The Company may withhold from any amounts payable under this Agreement such Federal, state or local taxes as shall be required to be withheld pursuant to any applicable law or regulation. (f) No Waiver. The failure of the Employee or the Company to insist upon strict compliance with any provision hereof shall not be deemed to be a waiver of such provision or any other provision thereof. (g) Entire Agreement. This Agreement contains the entire understanding of the Company and the Employee with respect to the subject matter hereof. This Agreement may not be amended or modified otherwise than by a written agreement executed by the parties hereto or their respective successors and legal representatives. (h) Dispute to Resolution Procedures. If any question shall arise in regard to the interpretation of any provision of this Agreement or as to the rights and obligations of either of the parties hereunder, the Employee and a designated representative of the Company shall meet with each other to negotiate and attempt to resolve such question in good faith. The Employee and such representative may, if they so desire, consult outside experts for assistance in arriving at a resolution. In the event that a resolution is not achieved within fifteen (15) days after their first meeting, then either party may submit the question for final resolution by binding arbitration in accordance with the rules and procedures of the American Arbitration Association applicable to commercial transactions, and judgment upon any award thereon may be entered in any court having jurisdiction thereof. The arbitration shall be held in Covington, Kentucky. In the event of any arbitration, the Employee shall select one arbitrator, the Company shall select one arbitrator and the two arbitrators so selected shall select a third arbitrator, any two of which arbitrators together shall make the necessary determinations. All out-of-pocket costs and expenses of the parties in connection with such arbitration, including, without limitation, the fees of the arbitrators and any administration fees and reasonable attorney=s fees and expenses, shall be borne by the parties in such proportions as the arbitrators shall decide that such expenses should, in equity, be apportioned. IN WITNESS WHEREOF, the Employee and the Company have executed this Agreement as of the day and year first above written. I HAVE READ THIS CHANGE OF CONTROL SEVERANCE AGREEMENT AND, UNDERSTANDING ALL ITS TERMS, INCLUDING THAT THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE ENFORCED BY THE PARTIES, I SIGN IT AS MY FREE ACT AND DEED. Employee: _________________________________ Company: NS GROUP, INC. ___________________________ SCHEDULE OF DOCUMENTS OMITTED The following agreements are substantially identical to the Form of Change of Control Severance Agreement shown here, except for the identity of the employee, dates of execution and, except that under paragraph 3.(c)(i), Messrs. C.R. Borland and R. J. Robichaud's payment would be the aggregate of three times the amount of his then current base salary and three times the average amount of his bonus payments in the prior five years. These documents are not filed as separate documents in accordance with Exchange Act rule 12b- 31. Employee: Clifford R. Borland Ronald R. Noel John R. Parker Rene J. Robichaud EX-10 3 Exhibit 10.10 FORM OF SALARY CONTINUATION AGREEMENT This Agreement is entered into between NS Group, Inc., a corporation having its corporate office in Newport, Kentucky ("Company"), and _______("Participant"), effective ________. WITNESSETH WHEREAS, Participant is employed by the Company, and by reason thereof, has acquired experience and knowledge of considerable value to the Company; and WHEREAS, the Company wishes to offer an inducement to Participant to remain in its employ by compensating him beyond his regular salary for services which he had rendered or will hereafter render; and WHEREAS, Participant is willing to continue in the employ of the Company until his retirement, or until it is mutually agreed by both the Company and Participant that his services are no longer necessary. NOW THEREFORE, it is mutually agreed as follows: 1. As of the date of this Agreement, Participant is employed by the Company, and Participant hereby agrees to continue such employment upon the terms and conditions set forth in this Agreement. Participant is an "at will" employee of the Company and this Agreement does not impose any obligation for the employment relationship to continue for a specified period of time. 2. As compensation for his services, the Company hereby agrees to pay Participant and Participant hereby agrees to accept from the Company, a yearly salary to be determined by the Board of Directors of the Company. 3. Subject to the limitations set forth in paragraphs 9 and 11 below, in the event that Participant retires from active employment with the Company after attaining age 62, the Company shall pay Participant _______ per month (the "Monthly Payments") for life commencing on the first day of the month following the date of such retirement. Notwithstanding the foregoing, if the Company requests that Participant retire from active employment with the Company before attaining age 62 (for any reason other than for "cause" as defined in paragraph 9 of this Agreement) and Participant agrees to do so, the Company may, in its sole discretion, provide that Participant may begin receiving the benefits provided for in this Agreement immediately, subject to such actuarial reductions as the Company may deem appropriate to reflect the early commencement of benefits. 4. In the event that Participant dies (a) while in the active employ of the Company, or (b) after becoming fully vested in the benefits provided pursuant to this Agreement because of either a permanent disability or a Change of Control (as provided for in paragraphs 6 and 7) but prior to the commencement of payments hereunder, Participant's spouse at the time of death shall be entitled to receive Monthly Payments commencing on the first day of the month following Participant's death and ending on the earlier of (i) the first day of the month during which the spouse dies and (ii) the date on which the 120th Monthly Payment is made. In the event that Participant dies (and is survived by a spouse) while receiving Monthly Payments hereunder but prior to receipt of at least 120 such payments, the spouse shall be entitled to continue receiving such payments until the earlier of (i) the first day of the month during which the spouse dies and (ii) the date on which the 120th Monthly Payment is made. 5. Upon retirement from the Company at or following attainment of age 62, continued health insurance coverage shall be provided for Participant and the person (if any) who is his spouse at the time of retirement. The coverage will be the same as that which may be provided from time to time to active employees, and will be paid for by the Company. Such coverage will continue for Participant until Participant reaches the age at which he is eligible for Medicare and for Participant's spouse until she reaches the age at which she is eligible for Medicare. 6. In the event that Participant becomes permanently disabled (as defined in the Company's long-term disability plan which covers the Participant) while in the active employ of the Company, Participant shall become fully vested in the benefits provided pursuant to paragraph 3 of this Agreement, and shall begin receiving such benefits at the later of age 62 or when long-term disability benefits are no longer payable to Participant. 7. In the event of a "Change of Control" of the Company while Participant is in the active employ of the Company, Participant shall become fully vested in the benefits provided pursuant to paragraph 3 of this Agreement. Participant must wait until age 62 to begin receiving these benefits. For purposes of this Agreement, "Change of Control" shall mean the happening of any of the following: (a) the direct or indirect sale, lease, exchange or other transfer of all or substantially all of the assets of the Company to any Person (i.e., individual, corporation, partnership, joint venture, association, joint- stock company, trust, unincorporated organization, government or any agency or political subdivision thereof or any other entity within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934) or entity or group of Persons or entities acting in concert as a partnership or other group (a "Group of Persons") other than a Person described in clause (i) of the definition of "Affiliate," as set forth below. For purposes of the definition of Change of Control, an "Affiliate" of any specified Person means: (i) any other Person which, directly or indirectly, is in control of, is controlled by or is under common control with such specified Person or (ii) any other Person who is a director or officer (a) of such specified Person, (b) of any subsidiary of such specified Person or (c) of any Person described in clause (i) above or (iii) any Person in which such Person has, directly or indirectly, a 5 % or greater voting or economic interest or the power to control. For the purposes of this definition, "control" of a Person means the power, direct or indirect, to direct or cause the direction of the management or policies of such Person whether through the ownership of voting securities, or by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing; (b) the consummation of any consolidation or merger of the Company with or into another corporation with the effect that the stockholders of the Company immediately prior to the date of the consolidation or merger hold less than 51% of the combined voting power of the outstanding voting securities of the surviving entity of such merger or the corporation resulting from such consolidation ordinarily having the right to vote in the election of directors (apart from rights accruing under special circumstances) immediately after such merger or consolidation; (c) the stockholders of the Company shall approve any plan or proposal for the liquidation or dissolution of the Company; (d) a Person or Group of Persons acting in concert as a partnership, limited partnership, syndicate or other group shall, as a result of a tender or exchange offer, open market purchases, privately negotiated purchases or otherwise, have become the direct or indirect beneficial owner (within the meaning of Rule 13d-3 under the Securities Exchange Act of 1934, as amended) ("Beneficial Owner") of securities of the Company representing 30% or more of the combined voting power of the then outstanding securities of the Company ordinarily (and apart from rights accruing under special circumstances) having the right to vote in the election of directors; (e) a Person or Group of Persons, together with any Affiliates thereof, shall succeed in having a sufficient number of its nominees elected to the Board of Directors of the Company such that such nominees, when added to any existing director remaining on the Board of Directors of the Company after such election who is an Affiliate of such Person or Group of Persons, will constitute a majority of the Board of Directors of the Company; provided that the Person or Group of Persons referred to in clauses (a), (d) and (e) shall not mean Clifford Borland or any Group of Persons with respect to which Clifford Borland is the Beneficial Owner of the majority of the voting equity interests. 8. Notwithstanding any other provision of this Agreement, the Company has an unconditional right to offset any amounts which Participant owes the Company against amounts due under this Agreement. 9. Participant agrees that if his employment with the Company is terminated with "cause" (regardless of whether Participant has attained the age of 62) Participant shall not be entitled to any benefits whatsoever provided under this Agreement and the Company shall have no liability or obligation to provide any such benefits to Participant pursuant to this Agreement. The termination of Participant's employment with the Company shall be deemed with "cause" if the Company should determine that Participant has committed any of the following: (i) fraud; (ii) misappropriation of Company property or funds; (iii) embezzlement; or (iv) malfeasance, misfeasance or nonfeasance in office which is willful or grossly negligent. 10. Participant agrees that, without the written consent of the board of directors of the Company, he will not, during the term of his employment with the Company or any business entity controlling, controlled by or under common control with the Company (an "Affiliate"), directly or indirectly (a) engage in any activity, or in any manner be connected with or employed by any person, firm, corporation, or any other entity, in competition with the Company or any Affiliate, or (b) call upon, solicit, divert, or take away or attempt to solicit, divert, or take away any of the customers or employees of the Company or any Affiliate. The parties agree that these restrictions against competition and solicitation will continue to apply after Participant's employment with the Company ends if and only if Participant's benefits are vested (i.e. Participant is entitled to receive Monthly Payments hereunder either immediately or upon the attainment of age 62), and in such event will remain in effect for 5 years after Participant's termination of employment. Participant further agrees that he will not, during the term of his employment with the Company or any Affiliate and for a period of 5 years thereafter, use or disclose to anyone not legally entitled thereto any confidential or proprietary information or trade secrets relating to the business of the Company. 11. Participant agrees that, if he breaches any covenant of paragraph 10 above, no further payments shall be due or payable by the Company hereunder either to Participant or to Participant's spouse and the Company shall have no further liability or obligation hereunder. 12. The benefits provided hereunder shall not affect the right of the Participant to participate in any current or future Company retirement plan or in any supplemental compensation arrangement which constitutes a part of the Company's regular compensation structure. Upon Participant's termination of employment, his annual base salary and other benefits shall cease upon commencement of the benefits provided hereunder, except as required by applicable law or the applicable benefit plan. 13. It is agreed that neither Participant nor Participant's spouse shall have any right to commute, sell, assign, transfer or otherwise convey the right to receive any payments hereunder, which payments and the right thereto are expressly declared to be non-transferable. In the event that Participant or Participant's spouse takes any action or agrees to take any action in violation of this paragraph, the Company shall have no further liability or obligation hereunder. 14. If the Company acquires an insurance policy or any other asset in connection with the liabilities assumed by it hereunder, it is expressly understood by Participant and agreed to by him that neither Participant nor Participant's spouse shall have any right with respect to, or claim against, such policy or asset. Such policy or asset: (a) shall not be deemed to be held under any trust for the benefit of Participant or Participant's spouse; (b) shall not be held in any way as collateral security for the fulfillment of the obligations of the Company under this Agreement; and (c) shall be, and remain, a general unpledged, unrestricted asset of the Company. 15. This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors, permitted assigns and other legal representatives. Nothing in this Agreement, whether expressed or implied, is intended to confer any rights or remedies under or by reason of this Agreement on any other persons other than the Company, each of the Company's Affiliates, Participant or Participant's spouse, and their respective successors, permitted assigns and other legal representatives. 16. This Agreement sets forth the entire agreement and understanding of the parties in respect of the transactions contemplated hereby and supersedes all prior agreements, arrangements and understandings relating to the subject matter hereof. 17. This Agreement may be executed simultaneously in two counterparts, each of which shall be deemed an original but both of which taken together shall constitute one and the same instrument. 18. If any provision of this Agreement is determined by a court of competent jurisdiction to be unenforceable because it is overbroad, the other provisions hereof shall not be effected, and this agreement shall be modified to the extent necessary to make the invalid or unenforceable provision valid and enforceable to the maximum extent permissible under applicable law. This Agreement shall be construed in accordance with the laws of the State of Kentucky, and Participant and the Company hereby consent to the filing and conduct of any litigation concerning this Agreement exclusively in the State of Kentucky. 19. Whenever the singular number is used herein it shall include the plural if the context so requires and reference to the masculine gender herein shall be deemed to refer to all genders. 20. The Company, or any successor thereto, may not amend or terminate this Agreement, without the written consent of Participant. 21. The Company shall use its best efforts to cause this Agreement to be assumed by any successor to the Company by virtue of a sale of substantially all of its assets or otherwise. 22. This Agreement shall supersede any previous agreement between Participant and the Company with regard to salary continuation benefits, which is deemed to be terminated. IN WITNESS WHEREOF, Participant and the Company, by its duly authorized officer, have executed this Agreement as of ___________________, NS Group, Inc. By: Title: Participant Schedule of Documents Omitted The following agreements are substantially identical to the Form of Salary Continuation Agreement shown here, except for the identity of the employees, dates of execution and the amount of the monthly benefit. These documents are not filed as separate documents in accordance with Exchange Act rule 12b-31. Employee Monthly Benefit Clifford R. Borland $16,406 Paul C. Borland, Jr. $ 9,000 Ronald R. Noel $ 8,333 John R. Parker $ 7,438 Rene J. Robichaud $12,500 EX-10 4 Exhibit 10.11 EMPLOYMENT AGREEMENT Agreement made as of the 21st day of June 1999 between NS Group, Inc., a Kentucky corporation ("Employer"), and Rene J. Robichaud ("Employee"). WITNESSETH: WHEREAS, Employer desires to employ Employee in an executive position with significant executive and administrative responsibilities and Employee desires to be employed by Employer in such capacity upon the terms and conditions hereinafter provided; and WHEREAS, Employee shall serve Employer in the executive capacity specified by the Board of Directors of NS Group, Inc., a Kentucky corporation; and WHEREAS, in such capacity Employee will develop or have access to all of the business methods and confidential information relating to Employer, including, but not limited to, its financial matters, its sales and distribution organization and methods, its designs and procedures for the manufacture of its products, its market development, its personnel training and development programs and its customer and supplier relationships; and WHEREAS, Employee and Employer are desirous of entering into this Employment Agreement which sets forth the rights and obligations of the parties during the continuation of such employment, as well as following any termination thereof; NOW THEREFORE, in consideration of the mutual covenants and promises herein contained and in pursuance of the above, Employee and Employer agree as follows: 1. EMPLOYMENT Employer shall employ Employee as President and Chief operating Officer or in such other executive capacity as the Board of Directors of NS Group shall specify, to perform all duties that are customarily performed by one holding such position or as otherwise designated by the Board of Directors of NS Group, and Employee agrees to such employment, subject to the general supervision and direction by Employer and pursuant to the terms and conditions hereof. Employee covenants and agrees that he will, at all times, faithfully and industriously perform any and all duties conferred upon him by Employer, and Employee further agrees that he will devote all necessary working time and attention thereto. 2. TERM; TERMINATION Employee's employment with Employer will commence on June 21, 1999 and shall continue for a period of three (3) years thereafter, subject to the right of Employer to terminate this Employment Agreement for just cause, upon thirty (30) days prior written notice to Employee, and the right of Employee to terminate this Employment Agreement for any reason or no reason upon thirty (30) days prior written notice to Employer. 3. COMPENSATION; EMPLOYEE BENEFITS Employer shall pay Employee for Employee's services hereunder a salary at the rate of not less than $300,000 per annum. Employee shall also be entitled to participate in a bonus participation plan, stock option program, and other fringe benefits available to other employees of NS Group or any of its subsidiaries who are similarly situated in terms of (i) position with NS Group or any of its subsidiaries, (ii) seniority and (iii) geographical location of employment. Employee's participation in such plans, benefits and programs shall be subject to the rules, regulations and amendments pertaining to eligibility and participation therein. In addition, Employee shall be eligible to receive vacation as follows: Length of Service Vacation Entitlement Six months, but less than 1 year 1 week One year, but less than 15 years 3 weeks 4. OTHER EMPLOYMENT Employee shall devote substantially all of his normal working time, attention, knowledge, and skills solely to the business and interest of Employer. Employee shall not, directly, or indirectly in any manner whatsoever, solicit, accept or serve, on behalf of himself or any other third party, any similar or related business without Employer's approval. Furthermore, Employee shall not, directly or indirectly, act for the benefit or on behalf of any competitor of Employer or in any way inconsistent with Employer's best interest. This provision shall not be construed to prohibit Employee from devoting non-business hours to the passive pursuit of personal business interests not competitive with the business of Employer or NS Group, or any subsidiary or affiliate of Employer or NS Group, provided such interests do not interfere with Employee's duties and responsibilities owed to Employer. 5. REPRODUCTION OF DOCUMENTS Employee shall not (except in the performance of his duties hereunder) at any time or in any manner make or cause to be made any copies, pictures, duplicates, facsimiles or other reproductions or recordings or any abstracts or summaries of any reports, studies, memoranda, correspondence, manuals, records, plans or other written, printed or otherwise recorded materials of any kind whatsoever belonging to or in the possession of Employer or NS Group, or any subsidiary or affiliate of Employer or NS Group. Employee shall have no right, title or interest in any such material, and Employee agrees that (except in the performance of his duties hereunder) he will not, without the prior written consent of Employer, remove any such material from any premises of Employer or NS Group, or any subsidiary or affiliate of Employer or NS Group, and that he will surrender all such material to Employer, immediately upon the termination of his employment or at any time prior thereto upon the request of Employer. 6. NON-DISCLOSURE OF INFORMATION Employee specifically agrees that he will not at any time, whether during his employment or for a period of two (2) years after such employment ends for any reason, disclose or communicate to any third party any secret, private or confidential information or trade secret relating to the business of Employer or NS Group, or any subsidiary or affiliate of Employer or NS Group, including business methods and techniques, research data, marketing and sales information, customer lists, know-how, and any other information, process or technique or information concerning the business of Employer or NS Group, or any subsidiary or affiliate of Employer or NS Group, their manner and method of operation, their plans or other data not disclosed to the general public or known with the industry, regardless of whether such information or trade secret was acquired prior to or after execution of this Employment Agreement. 7. COVENANT NOT TO COMPETE Employer and Employee recognize that Employer's industry is highly competitive and that Employee will acquire special knowledge from Employer. Employee, therefore, agrees that for twelve (12) months after the employment relationship ends for any reason; (a) He shall not, either directly or indirectly, by or for himself, or as agent of another, or through others as his agent, in any way seek to induce, bring about, promote, facilitate or encourage the discontinuance of or in any way solicit for himself or others, those persons or entities who are customers or employees of Employer or NS Group, or any subsidiary or affiliate of Employer or NS Group; (b) He shall not engage in, or become an owner, stockholder, partner, lender, investor, director, officer, employee, consultant or act in any other capacity with respect to any entity which engages in, a business that competes with, or is substantially similar to, the business currently being conducted by Employer or NS Group, or any subsidiary or affiliate of Employer or NS Group, and located within North America; and (c) If he fails to comply with any of the provisions of this paragraph 7, Employee shall forthwith pay over to the Employer the lesser of all benefits received by Employee or Employer's actual damages resulting from such violation of these covenants, together with all sums expended or costs incurred by Employer to enforce the provisions of this covenant, including Employer's reasonable attorneys' fees. 8. INJUNCTIVE RELIEF In addition to, and not in lieu of, any other remedy to which Employer may otherwise be entitled, the parties agree that a breach by Employee of any covenant set forth in paragraphs 1, 4, 5, 6, 7, or 9 of this Employment Agreement shall result in irreparable injury, harm and damage to Employer for which there is no adequate remedy at law, and the parties further agree that, in the event of any violation or breach by Employee of any of those provisions of this Employment Agreement, Employer shall be entitled to an immediate injunction and restraining order through proper action filed in a court of competent jurisdiction to prevent such violation or breach. Employee agrees to indemnify and hold Employer harmless for any costs and expenses, including reasonable attorneys' fees, which Employer may incur to remedy any violation or breach by Employee of any covenant set forth in paragraphs 1, 4, 5, 6, 7, or 9 hereof. 9. INVENTIONS Employee agrees that any and all inventions and discoveries, whether or not patentable, which Employee has conceived or may conceive and which pertain to work or business which he has performed or may perform on behalf of Employer, whether or not during working hours, shall be the sole and exclusive property of Employer. Employee further agrees to inform Employer of all inventions and discoveries promptly after they have been conceived or made in detail sufficient to permit Employer to understand such inventions and discoveries and practice them without the exercise of further inventive skill. When requested to do so, Employee agrees, whether during the term of this Employment Agreement or within three (3) years thereafter, to execute any and all documents necessary or desirable to convey title to such inventions and discoveries to Employer and to assist Employer in perfecting and enforcing Employer's right in and to any such invention or discovery, including filing patent applications regarding such inventions or discoveries in the United States or in foreign countries. Employee agrees that any invention, product design, product improvement or technological innovation which Employee, either individually or jointly with others, has already conceived or during the term of this Employment Agreement may conceive, develop, create or suggest that directly results from any work which Employee does or has done for Employer or NS Group, or any subsidiary or affiliate of Employer or NS Group, shall be the absolute property of Employer and shall promptly be disclosed by Employee to Employer. 10. REPRESENTATIONS BY EMPLOYEE Employee represents that he is neither restricted nor prohibited in any manner from employment and performance of duties on behalf of Employer as herein provided. 11. SEVERABILITY Employer and Employee agree that should any provision of this Employment Agreement be held to be illegal, invalid or unenforceable for any reason, such term or provision shall be deemed to be modified to the extent necessary to permit its enforcement to the maximum extent permitted by applicable law, and any court making such determination shall have power to modify any and all such provisions, and such provisions shall then be applicable in modified form. If any provision of this Employment Agreement is invalid or unenforceable for any reason, the remainder of this Employment Agreement and all other provisions herein shall not be affected thereby. 12. ENTIRE AGREEMENT AND AMENDMENTS Employer and Employee agree that this Agreement constitutes the entire agreement between them with respect to the subject matter hereof and that any and all prior discussions, negotiations, commitments and understandings relating thereto are hereby superseded and merged herein. The terms and provisions of this Agreement shall not be changed, amended, waived, modified or terminated in any respect whatsoever except by a written instrument executed by Employer and Employee. 13. INTERPRETATION This Employment Agreement shall be interpreted as written jointly by Employer and Employee. 14. GOVERNING LAW, FORUM SELECTION and CONSENT TO PERSONAL JURISDICTION Employer and Employee hereby consent that any action to enforce any provision of this Employment Agreement shall be brought only in a state or federal court located in the Commonwealth of Kentucky. This Agreement shall be interpreted, governed and enforced in accordance with the laws of the Commonwealth of Kentucky. 15. ASSIGNMENT This Employment Agreement shall be binding upon and inure to the benefit of Employer, its successors and assigns, and to the benefit of Employee, his heirs, administrators and legal representatives, except that Employee's duties to perform services hereunder are non-transferable. 16. NO WAIVER OF RIGHTS Neither failure nor delay on the part of a party in exercising any right, power or privilege herein contained shall operate as a waiver thereof on the part of such part, nor shall a single or partial exercise thereof preclude any other or further exercise of any right, power or privilege by a party to this Employment Agreement. 17. AMENDMENT A More specific conditions of employment are described in the attached Amendment A to this Employment Agreement. IN WITNESS WHEREOF, the Employer and Employee have agreed upon and executed this Employment Agreement on the day and year first written above. WITNESSES: /s/Susan Vaughn /s/ Rene J. Robichaud Rene J. Robichaud NS GROUP, INC. By: /s/ Clifford R. Borland Its: Chairman and CEO Attachment: Amendment A AMENDMENT A CONDITIONS OF EMPLOYMENT EMPLOYMENT - The position of President and Chief Operating Officer of NS Group, Inc. All subsidiary companies of NS Group will report to you. In addition, all corporate staff functions including Finance and Treasurer, human resource management, capital planning and environmental policy will report to you. You will be expected to lead the Company's strategic planning and development activities to include the direction taken by its' existing businesses as well as potential acquisitions to achieve diversification. SALARY - The starting base salary will be $300,000 per year. In addition, you will have a bonus opportunity equal to 100% of your annual base salary. The bonus will be based on the financial results of NS Group, Inc. STOCK OPTIONS - The Compensation Committee of the Board of Directors is prepared to offer you, on your acceptance of the position, 500,000 options of common stock of NS Group, Inc. The options will be exercisable in five equal segments on the first through the fifth anniversary of the date of the award. (The award of 550,000 options at $7.30 per share was awarded on June 22, 1999.) DIRECTORSHIP - As President of NS Group, Inc. you will be appointed a director of the Company at the Board Meeting scheduled for July 15, 1999. RETIREMENT - Should you remain with NS Group until age 62, you will be eligible for a retirement benefit of $12,500 per month. This payment is payable for life. In the event of your death prior to the payment of 120 monthly payments, the balance (120 less the payments received) would be payable to your spouse or other person designated by you. PROMOTION - The Board review of your performance leading to promotion to Chief Executive Officer will begin with the six- month anniversary of your employment. SAVINGS PLAN - You will be eligible to participate in the Company's Salaried Employee Retirement Savings Plan. As a highly compensated employee, your contribution will be limited to $10,000 per year. NS Group matches employee contributions to your account equivalent to 50% of the first 4% of gross earnings. AUTOMOTIVE STIPEND - You will be provided with an automotive stipend of $15,000 per year or $1,250 per month. This benefit is designed to cover the cost of a leased company car, all fuel, oil and maintenance requirements, and the tax gross-up for this taxable benefit. The Company will cover insurance costs on its liability policy. GOLF OR COUNTRY CLUB FEES - The Company will pay the initiation and membership fees associated with your joining a golf or country club of your choice once you have relocated your family to the Greater Cincinnati/Northern Kentucky areas. OTHER FRINGE BENEFITS - Other benefits include health care and dental benefits for you and your family, employee life insurance, sickness and accident salary continuation and long-term disability, supplemental sickness and accident benefits, educational assistance, as well as paid vacations and holidays. Also included are relocation benefits covering moving of household goods, real estate commissions on selling your existing home, and other costs related to relocating your family to the Greater Cincinnati area. CONTRACT GUARANTEE - With this contract your salary and any bonuses earned during the three years are guaranteed in the event your employment is terminated for reasons other than "cause", suicide, or leaving for other employment. In addition, sixty percent of the June 22, 1999 option award will vest at termination if cause, suicide, or other employment are not involved. CHANGE OF CONTROL SEVERANCE AGREEMENT - A Change of Control Severance Agreement offering individual financial security in the event a Change of Control occurs provides benefits which generally would exceed the guarantees of this contract. The benefits are not additive. The conditions prevailing would dictate which contract or agreement would apply. EX-13 5 Exhibit 13 The following are the excerpted portions of the NS Group, Inc. Annual Report to Shareholders for the fiscal year ended September 25, 1999 which are expressly incorporated by reference into Form 10-K. 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 $(31,381) $ 19,045 $ 50,754 Industrial products segment SBQ 463 6,942 6,670 Industrial products segment Adhesives 12,175 11,004 10,630 $(18,743) $ 36,991 $ 68,054 Operating income (loss) Energy products segment $(41,311) $ 7,573 $ 39,243 Industrial products segment SBQ (2,707) 4,074 4,246 Industrial products segment Adhesives 2,179 2,302 1,799 (41,839) 13,949 45,288 Corporate allocations (3,746) (5,256) (4,591) $(45,585) $ 8,693 $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 $31.4 million and an operating loss of $41.3 million for the energy products segment. This compares to gross profit of $19.0 million and operating income of $7.6 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 6.6%. 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 $48.4 million, or a $2.22 loss per basic and diluted share, in fiscal 1999 compared to net income of $3.1 million, or $.13 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 45.6% from fiscal 1997 to $37.0 million. Operating income for fiscal 1998 decreased $32.0 million from fiscal 1997, to $8.7 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 a one-time, non-cash asset impairment loss of $3.2 million in fiscal 1998 related to the abandonment of three electric arc furnaces that were subsequently replaced with new equipment. 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 50.5%. 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 $2.4 million, or $.10 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 $48.4 million in fiscal 1999. Major sources of cash from operating activities in fiscal 1999 included $21.7 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 $3.1 million in fiscal 1998. Major sources of cash from operating activities in fiscal 1998 included $19.2 million in non-cash depreciation and amortization charges and $3.2 million in a non-cash asset impairment loss; 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. 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 $409,855 $481,170 Cost of products sold 261,306 372,864 413,116 Selling and administrative Expenses 26,842 28,298 27,357 Operating income (loss) (45,585) 8,693 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 (47,737) 4,899 18,911 Provision (credit) for income taxes (3,148) 2,472 5,726 Income (loss) before extraordinary items (44,589) 2,427 13,185 Extraordinary items, net of income taxes (3,837) 659 (9,256) Net income (loss) $(48,426) $ 3,086 $ 3,929 Per common share (basic) Income (loss) before extraordinary items $(2.04) $.10 $ .93 Extraordinary items, net of income taxes (.18) .03 (.65) Net income (loss) $(2.22) $.13 $ .28 Per common share (diluted) Income (loss) before extraordinary items $(2.04) $.10 $ .88 Extraordinary items, net of income taxes (.18) .03 (.62) Net income (loss) $(2.22) $.13 $ .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 294,364 261,441 Construction in progress 4,035 13,889 Less -- accumulated depreciation (187,330) (171,700) Net property, plant and Equipment 143,147 135,200 Long-term investments 54,560 75,626 Other assets 7,307 7,800 Total assets $359,795 $419,306 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 11,706 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) 16,091 Common shareholders' equity 221,152 278,049 Total liabilities and shareholders' equity $359,795 $419,306 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) $(48,426) $ 3,086 $ 3,929 Adjustments to reconcile net income (loss) to net cash flows from operating activities: Depreciation and Amortization 20,529 18,066 17,609 Write-down of assets to be disposed - 3,215 - Amortization of debt discount and finance costs 1,206 1,172 6,219 Increase (decrease) in long-term deferred taxes (3,104) (49) 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 3,086 3,086 $ 3,086 Unrealized loss on investments (1,596) (1,596) (1,596) Compre- hensive income $ 1,490 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) 16,091 278,049 Net loss (48,426) (48,426) $(48,426) Unrealized loss on investments (950) (950) (950) Compre- Hensive loss $(49,376) 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 manufact-uring 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, the Company recorded to cost of products sold a non-cash impairment loss of $3.2 million. The impaired assets were written down to a fair value of $0.2 million based on the estimated salvage value of the assets. The write-down negatively im-pacted fiscal 1998 income before extraordinary items by $2.0 million, or $.08 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 $(41,311) $204,454 $15,791 $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 $(45,585) $359,795 $20,529 $28,401 1998 Energy products segment $296,690 $ 7,573 $202,277 $13,704 $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 $ 8,693 $419,306 $18,066 $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, $(49.6) million and $(2.28) basic and diluted, respectively, for fiscal 1999 and $0.8 million, $2.3 million, and $.10 basic and $.09 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 (340) 1,115 (649) Tax benefit of employee stock option exercises allocated to equity - 474 1,281 Provision (credit) for income taxes $(3,257) $2,824 $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% $(18,089) $2,067 $2,569 Change in taxes resulting from: State income taxes, net of federal effect (295) 471 95 Change in valuation Allowance 15,603 519 885 Other, net (476) (233) (137) Provision (credit) for income taxes $ (3,257) $2,824 $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 $28,862 Other items 171 353 27,519 29,215 Deferred tax assets: Reserves and accruals 7,332 7,913 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 30,123 Valuation allowance (20,077) (4,474) Net deferred tax assets 24,293 25,649 Net deferred tax liability $ 3,226 $ 3,566 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 (5,138) (6,689) (3,604) (3,312) Loss before extra- ordinary items (10,418) (14,658) (8,581) (10,932) Net loss (10,855) (18,058) (8,581) (10,932) Loss per common share before extraordinary items Basic and diluted (.46) (.67) (.40) (.51) Net loss per common share Basic and diluted (.48) (.83) (.40) (.51) 1998 Net sales $123,733 $123,566 $96,882 $65,674 Gross profit (loss) 17,591 16,179 9,753 (6,532) Income (loss) before extraordinary item 6,537 5,736 1,189 (11,035) Net income (loss) 6,537 5,736 1,189 (10,376) Income (loss) per common share before extraordinary item Basic .27 .24 .05 (.48) Diluted .26 .23 .05 (.48) Net income (loss) per common share Basic .27 .24 .05 (.45) Diluted .26 .23 .05 (.45) Reference is made to Note 1: Summary of Significant Accounting Policies - Property, Plant and Equipment and Depreciation regarding a fiscal 1998 fourth quarter asset impairment loss. 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 148,858 140,942 Current liabilities 50,357 44,625 Payable to parent $192,090 $174,316 Other noncurrent Liabilities 1,184 1,379 Total noncurrent Liabilities $193,274 $175,695 Fiscal Year Ended (In thousands) 1999 1998 1997 Net sales $242,563 $409,855 $481,170 Gross profit (loss) (18,743) 36,991 68,054 Income (loss) before extraordinary items (48,692) 1,200 7,690 Net income (loss) (52,092) 1,859 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. 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 November 1, 1999 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) (45,586) 8,693 40,697 12,710 8,147 Operating income margin (18.8)% 2.1% 8.5% 3.1% 2.2% Income (loss) before extra- ordinary items (47,737) 4,899 18,911 (8,944) (4,835) Net income (loss) (48,426) 3,086 3,929 (8,944) (10,035) Income (loss) per diluted share before extra- ordinary items (2.04) .10 .88 (.65) (.35) Net income (loss) per diluted share (2.22) .13 .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 359,795 419,306 502,899 303,136 300,086 Long-term debt 72,833 76,325 76,424 164,789 166,528 Common shareholders' equity 221,152 278,049 275,398 60,218 69,699 Capital Expenditures 28,401 32,576 7,139 6,510 12,233 Depreciation and amorti- zation 21,735 19,238 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 12.10 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 Stock Market Information NS Group, Inc. is listed on the New York Stock Exchange (Symbol: NSS). Stock Price Fiscal 1999 High Low First Quarter $7 13/16 $4 Second Quarter 6 1/2 3 13/16 Third Quarter 9 3/16 4 3/8 Fourth Quarter 13 11/16 8 Fiscal 1998 High Low First Quarter $41 1/4 $13 1/4 Second Quarter 18 12 5/8 Third Quarter 15 7/16 8 5/16 Fourth Quarter 10 1/4 5 1/2 EX-21 6 Exhibit 21 SUBSIDIARIES OF NS GROUP, INC. (all are wholly-owned) Name State of Incorporation Erlanger Tubular Corporation Oklahoma Imperial Adhesives, Inc. Ohio Koppel Steel Corporation Pennsylvania Newport Steel Corporation Kentucky Northern Kentucky Management Kentucky EX-23 7 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, 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 December 14, 1999 EX-27 8
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 and is qualified in its entirety by reference to such consolidated financial statements. 0000745026 NS GROUP, INC. 1,000 U.S. 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) 359,795 242,563 242,563 261,306 261,306 0 0 11,601 (47,737) (3,148) (44,589) 0 (3,837) 0 (48,426) (2.22) (2.22)
EX-27 9
5 This Exhibit 27.1,together with Exhibits 27.2 and 27.3, Restated Financial Data Schedules, contains restated information for all applicable periods in accordance with Regulation S-K, Item 601(c) (2) (iii) to reflect an accounting principle change for inventory costing from the LIFO (last-in, first-out) method to the FIFO (first-in, first-out) method at one of the Company's subsidiaries. 0000745026 NS GROUP, INC. 1,000 U.S. YEAR 3-MOS 6-MOS 9-MOS SEP-28-1996 SEP-27-1997 SEP-27-1997 SEP-27-1997 OCT-01-1995 SEP-29-1996 SEP-29-1996 SEP-26-1996 SEP-28-1996 DEC-28-1996 MAR-29-1997 JUN-28-1997 1 1 1 1 3,442 2,881 1,744 5,028 13,855 25,910 18,057 16,155 52,581 50,263 51,423 62,744 757 847 854 930 56,419 55,583 67,343 75,557 153,577 162,505 163,692 187,812 272,286 273,132 274,641 275,659 138,512 142,875 146,762 150,988 303,136 307,554 305,060 325,660 69,570 73,521 70,974 86,041 164,789 164,381 163,722 162,689 0 0 0 0 0 0 0 0 51,778 51,785 51,829 53,047 8,440 8,452 10,458 15,551 303,136 307,554 305,060 325,660 409,382 105,167 216,277 349,130 409,382 105,167 216,277 349,130 368,928 92,804 188,197 301,696 368,928 92,804 188,197 301,696 0 0 0 0 0 0 0 0 24,375 6,063 12,168 18,298 (10,384) 292 3,294 10,088 (1,440) 5 876 2,740 (8,944) 287 2,418 7,348 0 0 0 0 0 0 0 0 0 0 0 0 (8,944) 287 2,418 7,348 (.65) .02 .18 .53 (.65) .02 .18 .47
EX-27 10
5 This Exhibit 27.2, together with Exhibits 27.1 and 27.3, Financial Data Schedules, contains restated information for all applicable periods in accordance with Regulation S-K, Item 601(c) (2) (iii) to reflect an accounting principle change for inventory costing from the LIFO (last-in, first-out) method to the FIFO (first-in, first-out) method at one of the Company's subsidiaries. 0000745026 NS GROUP, INC. 1,000 U.S. YEAR 3-MOS 6-MOS SEP-27-1997 SEP-26-1998 SEP-26-1998 SEP-29-1996 SEP-28-1997 SEP-28-1997 SEP-27-1997 DEC-27-1997 MAR-28-1998 1 1 1 6,998 5,646 3,471 188,345 154,969 71,731 63,863 62,745 71,395 712 700 646 76,305 82,193 83,842 367,504 333,709 258,908 278,779 283,425 292,481 154,962 159,262 163,490 502,899 468,178 455,584 137,990 81,586 65,205 76,424 76,330 76,106 0 0 0 0 0 0 262,980 279,553 279,588 12,418 18,305 24,594 502,899 468,178 455,584 481,170 123,733 247,299 481,170 123,733 247,299 413,116 106,142 213,529 413,116 106,142 213,529 0 0 0 0 0 0 24,261 3,559 6,581 18,911 9,546 18,111 5,726 3,009 5,838 13,185 6,537 12,273 0 0 0 (9,256) 0 0 0 0 0 3,929 6,537 12,273 .28 .27 .51 .26 .26 .49
EX-27 11
5 This Exhibit 27.3,together with Exhibits 27.1 and 27.2, Restated Financial Data Schedules, contains restated information for all applicable periods in accordance with Regulation S-K, Item 601 (c) (2) (iii) to reflect an accounting principle change for inventory costing from the LIFO (last-in, first-out) method to the FIFO (first-in, first-out) method at one of the Company's subsidiaries. 0000745026 NS GROUP, INC. 1,000 U.S. 9-MOS YEAR SEP-26-1998 SEP-26-1998 SEP-28-1997 SEP-28-1997 JUN-27-1998 SEP-26-1998 1 1 2,781 1,783 67,283 64,689 52,604 38,027 702 752 72,593 66,041 225,031 200,680 301,157 306,900 167,918 171,700 433,744 419,306 52,530 53,226 76,193 76,325 0 0 0 0 280,359 264,792 11,597 13,257 433,744 419,306 344,181 409,855 344,181 409,855 300,658 372,864 300,658 372,864 0 0 0 0 9,629 12,653 19,942 4,899 6,480 2,472 13,462 2,427 0 0 0 659 0 0 13,462 3,086 .56 .13 .54 .13
EX-99 12 2 Exhibit 99.1 RISK FACTORS Investing in our common stock will provide you with an equity ownership in NS Group. Performance of your shares will reflect the performance of our business, which is impacted by, among other things, industry conditions, general economic conditions and competition. The price of our stock may decline and could lower the value of your investment. You should carefully consider the following factors before deciding whether to invest in shares of our common stock. FLUCTUATIONS IN OIL AND NATURAL GAS PRICES COULD ADVERSELY AFFECT US BECAUSE WE SELL A SIGNIGICANT PORTION OF OUR PRODUCTS TO THE ENERGY INDUSTRY. Our energy products segment consists of tubular steel products, primarily oil country tubular goods, or OCTG, and line pipe. These products are sold to companies in the energy industry and constitute the most significant source of our revenues. Our energy product segment sales accounted for 59% of total sales in fiscal 1999, 72% of total sales in fiscal 1998 and 77% of total sales in fiscal 1997. Demand for these products depends primarily upon the number of oil and natural gas wells being drilled in the United States and Canada as well as worldwide drilling activity. The level of drilling activity is primarily dependent on current and anticipated oil and natural gas prices. Many factors, such as the supply and demand for oil and natural gas, general economic conditions and global weather patterns, affect these prices. As a result, the future level and volatility of oil and natural gas prices are uncertain, which may adversely affect sales of our products. FLUCTUATIONS IN ECONOMIC CONDITIONS IN CERTAIN INDUSTRIES COULD ADVERSELY AFFECT THE SALE OF OUR SPECIAL BAR QUALITY PRODUCTS. The demand for our Special Bar Quality, or SBQ, products is cyclical and is sensitive to general economic conditions. The demand for and the pricing of our SBQ products is also affected by economic trends in industries to which we provide our products, such as: * commercial and residential construction * off-road vehicles * heavy machinery components * industrial investment in new plants and facilities. Future economic downturns may adversely affect the sale of our SBQ products. OUR OPERATIONS REQUIRE CONTINUAL CAPITAL INVESTMENT THAT WE MAY NOT ALWAYS BE ABLE TO SUSTAIN. We operate in an industry that requires substantial capital investment. In order to remain competitive, we must continually upgrade our facilities. We believe our foreign and domestic competitors will continue to invest heavily in their facilities in order to achieve increased production efficiencies and improve product quality. We cannot be certain that we will have sufficient internally generated cash or available acceptable external financing to make necessary capital expenditures in the future. WE MAY LOSE BUSINESS TO COMPETITORS WHO ARE LARGER THAN US. We compete with foreign and domestic producers, including both integrated and mini-mill producers. Many of these competitors have substantially greater assets and larger sales organizations than us. These companies may be better able to successfully endure protracted downturns in either the energy or industrial sectors. As a result, there may be periods of time where we are at a competitive disadvantage and lose business to one or more of these competitors. WE MAY LOSE BUSINESS TO COMPETITORS WHO DO NOT PRODUCE THEIR OWN STEEL. In the welded OCTG and line pipe markets, we compete against certain manufacturers who purchase hot rolled coils for further processing into welded OCTG and line pipe products. Since these tubular manufacturers purchase their principal raw material from other producers, they avoid the substantial investment required to build and operate a melt shop and hot strip mill. The cost of finished tubular products for these manufacturers is largely dependent on the market price of hot rolled coils. During periods of low demand for hot rolled coil, these tubular manufacturers may purchase hot rolled coils at a lower cost than our cost to manufacture hot rolled coils. As a result, there may be periods of time where we are at a competitive disadvantage and lose business to one or more of these competitors. THE LEVEL OF IMPORTS OF OIL COUNTRY TUBULAR GOODS AND LINE PIPE INTO OUR MARKETS AFFECTS DEMAND FOR OUR PRODUCTS. The level of imports of OCTG and line pipe, which has varied significantly over time, affects the results of our energy products segment. High levels of imports reduce the volume sold by domestic producers and tend to suppress selling prices, both of which have an adverse impact on our business. We believe that domestic import levels are affected by, among other things: * U.S. and overall world demand for OCTG and line pipe; * the trade practices and government subsidies to producers; and * the presence or absence of antidumping duty orders. Since 1995, the level of imports of various OCTG products from Argentina, Italy, Japan, Korea and Mexico have been reduced by the existence of antidumping duty orders covering imports from these countries. We and certain other line pipe producers have recently filed joint petitions with the U.S. government seeking relief from imports of welded and seamless line pipe products. We cannot predict the U.S. government's actions regarding these petitions or any future actions regarding import duties or other trade restrictions on imports of OCTG and line pipe products. Antidumping duty orders require special duties to be imposed in an amount designed to offset the affect of dumping. Once an order is in place, each year foreign producers, importers, domestic producers and other interested parties may request an "administrative review" to determine the duty assessment rates for imports during the preceding year, as well as the future duty deposit rates for the foreign producers and exporters covered by the review. In addition, a foreign producer or exporter that did not ship to the United States during the original period examined by the U.S. government may request "new shipper review" to obtain its own duty rate on an expedited basis. Antidumping duty orders may be revoked as a result of periodic "sunset reviews." The U.S. government is scheduled to conduct sunset reviews of the orders with respect to Argentina, Italy, Japan, Korea and Mexico in 2000. An individual foreign exporter may seek to have its own orders revoked under certain circumstances. If the orders are revoked in full or in part or the duty rates lowered, we could be exposed to increased competition from imports that could have a material adverse effect on our business. THE VOLATILITY OF STEEL SCRAP PRICES MAY ADVERSELY AFFECT OUR BUSINESS. The market for steel scrap, the principal raw material used in our operations, is highly competitive and subject to price volatility. It is influenced by supply and demand factors, freight costs, speculation by scrap brokers and other market conditions largely beyond our control. We may attempt to increase the price of our finished products in response to future increases in scrap costs. However, increases in the prices of our products may not fully compensate for such scrap price increases and generally lag several months behind increases in steel scrap prices. As a result, we may be unable to fully recover future increases in steel scrap prices and our business may be adversely affected. INDUSTRY-WIDE INVENTORY LEVELS AFFECT OUR SALES AND NET INCOME. Industry-wide inventory levels of our products, and in particular, oil country tubular goods, can change significantly from period to period. These changes can have a direct adverse effect on the demand for new production of energy and industrial products when customers draw from inventory rather than purchase new products. Above normal industry inventory levels and upward fluctuations in months of supply of inventory, which defines the level of inventory in terms of current monthly demand, have had in past years, and may continue to have, an adverse impact on us. SEASONAL FLUCTUATIONS WHICH AFFECT OUR CUSTOMERS MAY AFFECT DEMAND FOR OUR PRODUCTS. We and our competitors may experience seasonal fluctuations in demand for our oil country tubular goods products due to weather conditions during the first half of the calendar year. During this period, drilling operations may be more difficult and therefore, domestic drilling activity and the corresponding demand for our oil country tubular goods generally may be lower during our second and third fiscal quarters. MANAGEMENT CAN EXERCISE SIGNIFICANT INFLUENCE OVER WHO IS ELECTED TO THE BOARD OF DIRECTORS. Three of our seven directors are executive officers of NS Group. Executive officers and directors of NS Group, as a group, beneficially own 22.4% of the common stock of NS Group as of October 1999. As a result, they have sufficient voting power to influence the election of the board of directors and the policies of NS Group. COMPLIANCE WITH AND CHANGES TO LAWS REGULATING THE OPERATION OF OUR BUSINESS COULD ADVERSELY AFFECT OUR PERFORMANCE. Our business is subject to numerous local, state and federal laws and regulations concerning environmental and safety matters. We cannot assure you that future changes and compliance within these laws and regulations will not have a material effect on our operations. OUR DEBT INSTRUMENTS CONTAIN RESTRICTIVE COVENANTS THAT MAY PUT US AT A COMPETITIVE DISADVANTAGE WITH OUR COMPETITORS. The indenture under which our 13 1/2% Senior Secured Notes due 2003 were issued contains restrictive covenants that, among other things, limit our ability to incur additional indebtedness, pay dividends or distributions, make investments, create liens, engage in transactions with affiliates, engage in sale and leaseback transactions, dispose of assets, issue or sell stock of our subsidiaries and engage in mergers, consolidations and transfers of substantially all of our assets. These restrictions may place us at a competitive disadvantage in relation to our competitors. THE USE OF OUR PRODUCTS BY OUR CUSTOMERS EXPOSE US TO POTENTIAL PRODUCT LIABILITY CLAIMS. Certain losses may result or be alleged to result from defects in our products, thereby subjecting us to claims for damages. Drilling for oil and natural gas, in particular, involves a variety of risks. We warrant certain of our OCTG, line pipe and SBQ products to be free of certain defects. We maintain insurance coverage against potential product liability claims in amounts we believe to be adequate. However, we may incur product liability in excess of our insurance coverage or incur other uninsured costs, and we may not be able to maintain insurance with adequate coverage levels in the future. PROVISIONS IN OUR CORPORATE DOCUMENTS AND KENTUCKY LAW COULD DELAY OR PREVENT A CHANGE IN CONTROL OF NS GROUP, EVEN IF THAT CHANGE WOULD BE BENEFICIAL TO OUR SHAREHOLDERS. The existence of some provisions in our corporate documents and Kentucky law could delay or prevent a change in control of NS Group. Our articles of incorporation and bylaws contain provisions that may make acquiring control of NS Group difficult, including: * provisions limiting the right to call special meetings of our stockholders; * provisions regulating the ability of our shareholders to bring matters for action at annual meetings of our shareholders; and * the authorization to issue and set the terms of preferred stock. In addition, we have adopted a stockholder rights plan that would cause extreme dilution to any person or group who attempts to acquire a significant interest in NS Group without advance approval of our board of directors. -----END PRIVACY-ENHANCED MESSAGE-----