SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 26, 1998
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to _________
Commission file number 1-9838
NS GROUP, INC.
Exact name of registrant as specified in its charter
KENTUCKY 61-0985936
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
Ninth and Lowell Streets, Newport, Kentucky 41072
(Address of principal executive offices)
Registrant's telephone number, including area code (606)
292-6809
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO ____
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest
practicable date.
Common stock, no par value 22,012,474
(Class) (Outstanding at January 29, 1999)
NS GROUP, INC.
INDEX
PART I FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Consolidated Statements of Operations 3
Condensed Consolidated Balance Sheets 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of
Operations 12
Item 3 - Quantitative and Qualitative Disclosures
About Market Risk 20
PART II OTHER INFORMATION
Item 1 - Legal Proceedings 21
Item 6 - Exhibits and Reports on Form 8-K 21
NS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTH PERIODS ENDED
DECEMBER 26, 1998 AND DECEMBER 27, 1997
(In thousands, except per share amounts)
(Unaudited)
December 26, December 27,
1 9 9 8 1 9 9 7
NET SALES $ 54,269 $123,733
COST AND EXPENSES
Cost of products sold 59,407 106,142
Selling and administrative
expenses 6,832 6,841
Operating income (loss) (11,970) 10,750
OTHER INCOME (EXPENSE)
Investment income 1,715 2,341
Interest expense (2,923) (3,559)
Other, net 160 14
Income (loss) before income taxes
and extraordinary item (13,018) 9,546
PROVISION (CREDIT) FOR INCOME TAXES (2,600) 3,009
Income (loss) before extraordinary
item (10,418) 6,537
EXTRAORDINARY ITEM,
NET OF INCOME TAXES (437) -
Net income (loss) $ (10,855) $ 6,537
PER COMMON SHARE (BASIC)
Income (loss) before
extraordinary item $(.46) $.27
Extraordinary item, net
of income taxes (.02) -
Net income (loss) $(.48) $.27
PER COMMON SHARE (DILUTED)
Income (loss) before
extraordinary item $(.46) $.26
Extraordinary item, net
of income taxes (.02) -
Net income (loss) $(.48) $.26
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 22,709 23,983
Diluted 22,709 25,393
The accompanying notes to condensed consolidated financial
statements are an integral part of these statements.
NS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 26, 1998 AND SEPTEMBER 26, 1998
(Dollars in thousands) (Unaudited)
September 26,
1 9 9 8
CURRENT ASSETS December 26, (Restated - See
1 9 9 8 Note 4)
Cash $ 877 $ 1,783
Short-term investments 23,015 64,689
Accounts receivable, less
allowance for doubtful
accounts of $615 and $752,
respectively 30,141 37,840
Inventories 69,971 66,041
Other current assets 25,263 29,692
Total current assets 149,267 200,045
PROPERTY, PLANT AND EQUIPMENT 319,529 306,900
Less - accumulated depreciation (176,421) (171,700)
143,108 135,200
LONG-TERM INVESTMENTS 88,574 75,626
OTHER ASSETS 7,658 7,800
Total assets $388,607 $418,671
CURRENT LIABILITIES
Accounts and notes payable $ 22,033 $ 28,305
Accrued liabilities 21,398 23,608
Current portion of long-term debt 208 678
Total current liabilities 43,639 52,591
LONG-TERM DEBT 72,582 76,325
DEFERRED TAXES 8,771 11,706
COMMON SHAREHOLDERS' EQUITY
Common stock, no par value 279,928 279,886
Treasury stock (20,157) (15,992)
Common stock options and warrants 885 898
Unrealized loss on available
for sale securities (2,278) (2,834)
Retained earnings 5,237 16,091
Total common shareholders'
equity 263,615 278,049
Total liabilities and
shareholders' equity $388,607 $418,671
The accompanying notes to condensed consolidated financial
statements are an integral part of these statements.
NS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTH PERIODS ENDED
DECEMBER 26, 1998 AND DECEMBER 27, 1997
(Dollars in thousands) (Unaudited)
December 26, December 27,
CASH FLOWS FROM OPERATING 1 9 9 8 1 9 9 7
ACTIVITIES
Net income (loss) $ (10,855) $ 6,537
Adjustments to reconcile net
income (loss)to net cash
flows from operating activities:
Depreciation and amortization 4,783 4,414
Amortization of debt discount
and finance costs 501 331
Decrease in long-term deferred
taxes (2,935) (333)
Loss on sales of investments 217 -
Decrease in accounts receivable,
net 7,699 1,106
Increase in inventories (3,930) (5,888)
Decrease in other current assets 4,429 3,891
Increase (decrease) in accounts
payable (6,192) 854
Decrease in accrued liabilities (2,210) (4,462)
Net cash flows from operating
activities (8,493) 6,450
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant and
equipment, net (12,629) (4,736)
Net purchases of long-term
investments (12,622) -
(Increase) decrease in other
assets (91) 16
Net cash flows from investing
activities (25,342) (4,720)
CASH FLOWS FROM FINANCING ACTIVITIES
Decrease in notes payable (80) (358)
Repayments on long-term debt (4,531) (52,669)
Proceeds from issuance of common
stock 31 16,569
Purchases of treasury stock (4,165) -
Net cash flows from financing
activities (8,745) (36,458)
Net decrease in cash and
short-term investments (42,580) (34,728)
CASH AND SHORT-TERM INVESTMENTS AT
BEGINNING OF YEAR 66,472 195,343
CASH AND SHORT-TERM INVESTMENTS AT
END OF PERIOD $ 23,892 $160,615
Cash paid during the period for:
Interest $ 181 $ 1,998
Income taxes, net of refunds $ (3,265) $ 167
The accompanying notes to condensed consolidated financial
statements are an integral part of these statements.
NS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1: Summary of Significant Accounting Policies
Basis of Presentation
The condensed consolidated financial statements include
the accounts of NS Group, Inc. and its wholly-owned
subsidiaries (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 balances and transactions have been
eliminated.
The accompanying information reflects, in the opinion
of management, all adjustments (which consist only of normal
recurring adjustments) necessary to present fairly the
results for the interim periods. 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 condensed consolidated financial statements and
accompanying notes. Actual results could differ from those
estimates. Reference should be made to NS Group, Inc.'s
Form 10-K for the fiscal year ended September 26, 1998 for
additional footnote disclosure, including a summary of
significant accounting policies.
Earnings Per Share
Basic earnings per share is computed by dividing net
income (loss) 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, are comprised of stock options and
warrants.
Securities that could potentially result in dilution of
basic EPS through the issuance of 2.1 million shares of the
Company's common stock were not included in the computation
of diluted EPS in the first quarter of fiscal 1999 because
the Company incurred a loss before extraordinary item.
Approximately 1.9 million of such shares were not
in-the-money at December 26, 1998.
Fiscal Year-End
The Company's fiscal year ends on the last Saturday of
September.
Note 2: Comprehensive Income
The Company adopted Statement of Financial Accounting
Standards No. 130, Reporting Comprehensive Income (SFAS
130), in the first quarter of fiscal 1999. SFAS 130
requires the Company to report "other comprehensive income,"
as defined, that is not otherwise presented in its Condensed
Consolidated Statements of Operations. Currently, the
Company's other comprehensive income consists solely of
unrealized gains/losses on available for sale securities.
Comprehensive income was as follows:
Three Months Ended
December 26, December 27,
1998 1997
Net income (loss) $(10,855) $6,537
Unrealized gains (losses)
on available for sale
securities 730 (650)
Comprehensive income (loss) $(10,125) $5,887
Note 3: Extraordinary Item
In the first quarter of fiscal 1999, the Company
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. As
a result, the Company incurred an extraordinary charge of
$0.4 million, net of applicable income tax benefit of $0.1
million, or $.02 per basic and diluted share.
Note 4: Inventories
Inventories are stated at the lower of FIFO (first-in,
first-out) cost or market, or the lower of average cost or
market. Until fiscal 1999, one subsidiary used the LIFO
(last-in, first-out) method to determine cost. Effective
September 27, 1998 the subsidiary changed to the FIFO
method. The change in accounting principle was made to
provide a better matching of sales and expenses and has been
applied retroactively. This change increased inventories by
$0.6 million and retained earnings by $0.5 million,
respectively, as of September 26, 1998. This change had no
effect on the Company's results of operations and cash flows
for the first quarter of fiscal 1998. At December 26, 1998
and September 26, 1998, inventories consisted of the following
components ($000's):
December 26, September 26,
1 9 9 8 1 9 9 8
Raw materials $14,311 $ 7,921
Semi-finished and
finished goods 55,660 58,120
$69,971 $66,041
Note 5: Commitments and Contingencies
The Company has various commitments for the purchase of
materials, supplies and energy arising in the ordinary
course of business.
Legal Matters
The Company is subject to various claims, lawsuits and
administrative proceedings arising in the ordinary course of
business with respect to workers compensation, health care
and product liability coverages (each of which is
self-insured to certain levels), as well as commercial and
other matters. The Company accrues for the cost of such
matters when the incurrence of such costs is probable and
can be reasonably estimated. Based upon its evaluation of
available information, management does not believe that any
such matters 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.
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, the Clean
Water Act, and all regulations promulgated in connection
therewith, including, among others, 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 resulting
from 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 March 1995, Koppel and the EPA signed a Consent
Order relating to an April 1990 RCRA facility assessment
completed by the EPA and the Pennsylvania Department of
Environmental Resources. Koppel has completed all tasks
required by the Consent Order and received notification from
the EPA that no further action is required and the Consent
Order was terminated.
In August 1998, Newport received separate Notices of
Violation (NOV) from the Kentucky Division of Waste
Management and the Kentucky Division of Water related to a
release of oil into the Licking River and certain related
actions taken by Newport in connection therewith. The
Company understands that there is a federal criminal
investigation underway relating to this matter. Based upon
the information available to date, the Company is unable to
determine the extent of civil penalties which may be
assessed or whether criminal charges will be filed in
connection with this incident.
In November 1996, Koppel received an NOV from the EPA
alleging violations of the Clean Air Act and the
Pennsylvania State Implementation Plan. The violations
allegedly occurred during 1995 and 1996 and pertain to air
emissions from Koppel's electric arc furnace operations.
The conditions which contributed to the alleged violations
were corrected and Koppel has demonstrated compliance with
air emissions regulations. At this time, the Company is
unable to determine the extent of any civil penalties which
the EPA may assess.
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
and disposal is expected to be completed by the second
quarter of fiscal 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 future environmental
regulations.
Capital expenditures for the next twelve months
relating to environmental control facilities are expected to
be approximately $3.2 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 December 26, 1998, the Company had environmental
remediation reserves of $1.5 million which pertain almost
exclusively 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 6: Credit Facility
The Company's $50.0 million revolving credit facility
(Credit Facility) contains certain financial covenants
including, among other things, a maximum ratio of debt to
cash flow and a minimum interest coverage ratio. While the
Company is currently in compliance with all covenants, it
will likely be unable to comply with these covenants, as
they currently exist, as of the end of the second quarter of
fiscal 1999. As such, the Company is presently in
discussions with its lender to renegotiate certain
covenants. While the Company believes that it will be able
to satisfactorily renegotiate the covenant requirements or,
at a minimum, obtain waivers, there can be no assurance that
this will occur. At December 26, 1998, the Company had no
advances against its Credit Facility.
Note 7: Summarized Financial Information
The Company's Senior Secured 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. All
significant intercompany accounts and transactions between
the Subsidiary Guarantors have been eliminated.
December 26, September 26,
1998 1998
(Dollars in thousands)
Current assets $117,513 $130,708
Non-current assets $148,567 $140,942
Current liabilities $ 34,847 $ 43,990
Payable to parent $187,762 $174,432
Other non-current
liabilities 1,318 1,379
Total non-current
liabilities $189,080 $175,811
Three Months Ended
December 26, December 27,
1998 1997
(Dollars in thousands)
Net sales $ 54,269 $123,733
Gross profit (loss) $ (5,138) $ 17,591
Net income (loss) $(11,165) $ 6,136
NS GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The matters discussed or incorporated by reference in
this Report on Form 10-Q that are forward-looking statements
(as defined in the Private Securities Litigation Reform Act
of 1995) involve risks and uncertainties. Such risks and
uncertainties include, but are not limited to: (i) the
level and cyclicality of domestic as well as worldwide oil
and natural gas drilling activity; (ii) general economic
conditions; (iii) product demand, inventory levels and
industry capacity; (iv) industry pricing; (v) the level of
imports and the presence or absence of governmentally
imposed trade restrictions; (vi) manufacturing efficiencies;
(vii) volatility in raw material costs, particularly steel
scrap; (viii) costs of compliance with environmental
regulations; and (ix) product liability or other claims.
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.
The following analysis of financial condition and
results of operations of the Company should be read in
conjunction with the unaudited Condensed Consolidated
Financial Statements and related Notes of the Company.
General
The Company operates in two business segments:
specialty steel and industrial adhesives. Within the
specialty steel segment are the operations of Newport, a
manufacturer of welded tubular steel products and hot rolled
coils, and Koppel, a manufacturer of seamless tubular steel
products and special bar quality (SBQ) products. The
Company's specialty steel products consist of: (i) welded
and seamless oil country tubular goods (OCTG) used primarily
in oil and natural gas drilling and production operations;
(ii) line pipe used in the transmission of oil, gas and
other fluids; (iii) SBQ products used primarily in the
manufacture of heavy industrial equipment; and (iv) hot
rolled coils which are sold to service centers and other
manufacturers for further processing. Within the adhesives
segment are the operations of Imperial, a manufacturer of
industrial adhesives products.
Results of Operations
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 prices of oil and natural gas and
expectations regarding future prices. 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.
Demand for the Company's OCTG products in the first
quarter of fiscal 1999 declined significantly from the first
quarter of fiscal 1998. The decline was attributable to a
decline in U.S. drilling activity coupled with excess
industry-wide OCTG and line pipe inventories. The average
number of oil and natural gas drilling rigs in operation in
the United States (rig count) in the first quarter of fiscal
1999 was 692, a decline of 30.7% from the first quarter of
fiscal 1998. At the end of January 1999, rig count was
approximately 560. The Company anticipates that, at least
for the next two quarters of fiscal 1999, energy market
conditions will continue to be weak, resulting in continued
low levels of shipments and operations, particularly as
compared to fiscal 1998.
The Company's net sales, gross profit (loss) and
operating income (loss) by business segment for the three
month periods ended December 26, 1998 and December 27, 1997
are summarized below.
Three Months Ended
December 26, December 27,
1998 1997
(Dollars in thousands)
Net sales
Specialty steel segment
Newport $ 19,719 $ 54,781
Koppel 23,520 59,428
43,239 114,209
Adhesives segment 11,030 9,524
$ 54,269 $123,733
Gross profit (loss)
Specialty steel segment
Newport $ (3,855) $ 8,053
Koppel (4,459) 7,114
(8,314) 15,167
Adhesives segment 3,176 2,424
$ (5,138) $ 17,591
Operating income (loss)
Specialty steel segment
Newport $ (5,410) $ 6,262
Koppel (6,209) 5,465
(11,619) 11,727
Adhesives segment 519 307
Corporate allocations (870) (1,284)
$(11,970) $ 10,750
Sales data for the Company's specialty steel segment
for the three month periods ended December 26, 1998 and
December 27, 1997 were as follows:
Three Months Ended
December 26, December 27,
1998 1997
Tons shipped
Newport
Welded tubular 44,100 97,600
Hot rolled coils and
other products 1,100 7,000
Koppel
Seamless tubular 13,300 46,500
SBQ 29,500 36,800
88,000 187,900
Net sales ($000's)
Newport
Welded tubular $ 19,205 $ 51,806
Hot rolled coils and
other products 514 2,975
Koppel
Seamless tubular 10,485 42,855
SBQ 13,035 16,573
$ 43,239 $114,209
Net sales for the first quarter of fiscal 1999
decreased $69.5 million, or 56.1%, from the first quarter of
fiscal 1998 to $54.3 million. Specialty steel segment net
sales decreased $71.0 million, or 62.1%, over the same
period. The overall decrease in specialty steel segment net
sales was primarily attributable to a decline in shipments
and average selling prices of the Company's tubular products
as more fully discussed below. The adhesives segment net
sales increased $1.5 million, or 15.8%, on a volume increase
of 25.8%.
Welded tubular product net sales decreased $32.6
million, or 62.9%, on a volume decrease of 54.8%, from the
first quarter of fiscal 1998. Average selling price for all
welded tubular products decreased 18.1% from the prior
fiscal year first quarter. The decline in shipments and
average selling price were attributable to decreases in
shipments and selling prices of welded OCTG products, which
was driven by the decline in drilling activity as well as
excessive industry-wide inventory levels as compared to the
prior year period. Welded tubular product net sales were
also negatively impacted by a decline in welded line pipe
shipments and selling prices, which was driven, in part, by
an increase in imports of welded line pipe.
Seamless tubular product net sales decreased $32.4
million, or 75.5%, on a volume decrease of 71.4%, from the
first quarter of fiscal 1998. Average selling price for
seamless tubular products declined 14.4% from the comparable
prior year period. Like welded tubular product, the decline
in seamless tubular product shipments and selling price was
attributable primarily to OCTG products, caused by the
decline in drilling activity and excessive industry-wide
inventory levels.
Since 1995, the U.S. government has been imposing
duties on the 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. Imports of
welded OCTG and line pipe in the first quarter of fiscal
1999 increased as a percentage of total domestic shipments
over the comparable prior year period, negatively affecting
product pricing and shipments. The Company cannot predict
the U.S. government's future actions regarding import duties
or other trade restrictions on imports of OCTG and line pipe
products.
SBQ product net sales decreased $3.5 million, or 21.3%,
on a volume decrease of 19.8%, from the comparable fiscal
quarter of a year ago. Average selling price for the
comparable quarterly periods decreased 1.8%. The demand for
the Company's SBQ products is cyclical in nature and is
generally sensitive to general economic conditions.
The significant decline in shipments and average
selling prices resulted in a gross loss and an operating
loss of $8.3 million and $11.6 million, respectively, for
the specialty steel segment in the first quarter of fiscal
1999, compared to a gross profit and an operating profit of
$15.2 million and $11.7 million, respectively, in the
comparable quarter of a year ago. The fiscal 1999 first
quarter results were also negatively impacted by low
operating efficiencies due to significantly reduced
operating levels at both Newport and Koppel in response to
poor market demand. Newport's melt shop and pipe mill
capacity utilization was 38.8% and 32.1%, respectively, in
the first quarter of fiscal 1999 compared to 59.8% and 73.4%
for the first quarter of fiscal 1998. Koppel's melt shop
and tube mill capacity utilization was 37.9% and 20.7%,
respectively, in the first quarter of fiscal 1999 compared
to 97.6% and 84.0%, respectively, for the first quarter of
fiscal 1998.
The adhesives segment gross profit was $3.2 million in
the current quarter and gross profit margin increased from
25.5% in the first quarter of fiscal 1998 to 28.8% in the
first quarter of fiscal 1999. The increase in gross profit
and margin was primarily a result of improved sales volume
and operating efficiencies.
Fiscal 1999 first quarter selling and administrative
expenses were virtually unchanged from the first quarter of
fiscal 1998 as declines in specialty steel segment expenses
were offset by higher adhesives segment selling expenses,
which were incurred to support increased adhesives segment
sales.
Fiscal 1999 first quarter investment income decreased
$0.6 million from the first quarter of fiscal 1998 due
primarily to a decrease in average invested cash and
investment balances. Interest expense decreased $0.6
million due to a decrease in long-term debt obligations.
The Company's combined federal and state effective tax
rate for the first quarter of fiscal 1999 was 20% and was
limited to available refunds for taxes paid in previous
periods at the alternative minimum tax rate of 20%. The
Company has substantially exhausted such refund capability
and as such, any future tax benefits from operating losses
will be offset by valuation allowances resulting in no net
tax benefits for losses in future periods.
As a result of the above factors, the Company reported
a net loss before extraordinary item of $10.4 million, or
$.46 per basic and diluted share, in the first quarter of
fiscal 1999 compared to net income of $6.5 million, or $.27
per basic share ($.26 diluted), in the first quarter of
fiscal 1998.
In the first quarter of fiscal 1999, the Company
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. As
a result, the Company incurred an extraordinary charge of
$0.4 million, net of applicable income tax benefit of $0.1
million, or $.02 per basic and diluted share.
Liquidity and Capital Resources
Working capital at December 26, 1998 was $105.6 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 and long-term investments, and to retire long-term
debt and purchase treasury stock. The current ratio was 3.4
to 1 at December 26, 1998 compared to 3.8 to 1 at September
26, 1998. At December 26, 1998, the Company had cash and
investments totaling $112.5 million. The Company's $50.0
million revolving credit facility (Credit Facility) contains
certain financial covenants including, among other things, a
maximum ratio of debt to cash flow and a minimum interest
coverage ratio. While the Company is currently in
compliance with all covenants, it will likely be unable to
comply with these covenants, as they currently exist, as of
the end of the second quarter of fiscal 1999. As such, the
Company is presently in discussions with its lender to
renegotiate certain covenants. While the Company believes
that it will be able to satisfactorily renegotiate the
covenant requirements or, at a minimum, obtain waivers,
there can be no assurance that this will occur. At December
26, 1998, the Company had no advances against its Credit
Facility.
Net cash flows from operating activities were a net use
of $8.5 million in the first quarter of fiscal 1999 compared
to a net source of $6.4 million in the comparable prior
fiscal year period. The Company recorded a net loss of
$10.9 million in the first quarter of fiscal 1999 compared
to net income of $6.5 million in the first quarter of fiscal
1998.
Major sources of cash from operating activities in the
first quarter of fiscal 1999 included $5.3 million in
non-cash depreciation and amortization charges; a $7.7
million decrease in accounts receivable resulting from the
decline in business activity; and a $4.4 million decrease in
other current assets which resulted primarily from the
receipt of refundable federal income taxes. During the
quarter, inventories increased $3.9 million as steel scrap
inventories were increased to take advantage of favorable
market prices. Accounts payable decreased $6.2 million
primarily as a result of the decline in business activity.
Major sources of cash from operating activities in the
first quarter of fiscal 1998 included $4.7 million in
non-cash depreciation and amortization charges and a $3.9
million decrease in other current assets which resulted
primarily from the receipt of certain insurance claims filed
by the Company. The major uses of cash in operating
activities included a $5.9 million increase in inventories
which occurred partly in anticipation of a scheduled repair
and maintenance shut-down at Koppel's seamless tubular
facilities. Accrued liabilities decreased $4.5 million due
to the payment of accrued interest and debt prepayment
penalty in connection with the redemption of $52.4 million
principal amount of the Company's 13.5% Senior Secured Notes
(Notes) in October 1997.
The Company invested $12.6 million in capital
expenditures during the first quarter of fiscal 1999,
primarily related to the specialty steel segment. Of the
total spent, $9.3 million pertained to the purchase and
installation of a new AC electric arc furnace at Newport.
The Company has remaining commitments of approximately $7.1
million to complete this project, with start-up scheduled
for the second quarter of fiscal 1999. The Company
currently estimates that total capital spending for fiscal
1999 will approximate $31.0 million, primarily in the
specialty steel segment.
The Company also used cash and short-term investments
to make net investments of $12.6 million in long-term
investments, primarily government and corporate bonds. The
Company's long-term investments and long-term debt, all of
which are for other than trading purposes, are subject to
interest rate risk. The Company utilizes professional
investment advisors and considers its net interest rate risk
when selecting the type and maturity of securities to
purchase for its 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 the first quarter of
fiscal 1999 were $4.5 million and included the early
retirement of $4.0 million principal amount of the Company's
Notes. Also, during the quarter, the Company repurchased
0.8 million shares of the Company's common stock for $4.2
million.
Earnings before interest expense, taxes, depreciation
and amortization (EBITDA) were a negative $5.3 million in
the first quarter of fiscal 1999 compared to $17.5 million
in the comparable period of fiscal 1998. EBITDA is
calculated as income before extraordinary items plus
interest expense, taxes, depreciation and amortization.
EBITDA provides additional information for determining the
Company's 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.
The Company believes that its current available cash
and investments, its cash flow from operations and its
borrowing sources will be sufficient to meet anticipated
operating cash requirements, including capital expenditures,
for at least the next twelve months.
Inflation
The Company believes that inflation has not had a
material effect on its results of operations to date.
Generally, the Company experiences inflationary increases in
its costs of raw materials, energy, supplies, salaries and
benefits and selling and administrative expenses. The
Company has generally been able to pass these inflationary
increases through to its customers.
Impact of Year 2000 Issue
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 the Company and virtually every business that relies
on a computer. If not corrected, system failures or
miscalculation could occur causing disruption of the
Company's operations, including, among other things, a
temporary inability to process transactions, manufacture
products or engage in similar normal business activities.
The Company's subsidiaries operate autonomously and are
not dependent on an integrated or centralized corporate-wide
data processing system. As such, project teams have been
formed 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, are being assessed for Year
2000 compliance.
The Company is addressing the Year 2000 issue in a four
phase process. The first phase is one of awareness and
involves the inventorying of all IT and non-IT systems. The
Company has completed identifying all of its IT and non-IT
systems. The second phase of the Company's process is an
assessment stage, where it is determined whether each of its
identified systems are Year 2000 compliant. The Company is
approximately 85% complete in assessing its IT systems and
approximately 90% complete in assessing its non-IT systems.
Assessment of all systems, together with plans of
remediation for those systems found to be Year 2000
non-compliant, is scheduled to be completed by the second
quarter of fiscal 1999. The remediation and testing phases
of the Company's systems are in various stages of
completion. Remediation efforts may include modifications
or replacement of its software and certain hardware so that
those systems will properly utilize dates beyond December
31, 1999. Approximately 65% of the Company's IT systems
have been remediated while remediation on its non-IT systems
is approximately 50% complete. The Company currently
anticipates completion of all remediation and testing of its
systems by October 1999.
The Company also faces certain risks to the extent that
its customers or suppliers of products and services do not
become Year 2000 compliant. The Company is evaluating the
status of significant customers and suppliers to determine
the extent to which the Company is vulnerable to these third
parties. Ongoing evaluation will continue through 1999;
however, the Company believes its broad customer base and
availability of alternative suppliers will mitigate the
risks associated with the readiness of these third parties.
The Company has not yet developed a formal contingency
plan in the event its Year 2000 efforts are not completed in
a timely manner; however, back-up measures are being
identified as systems are assessed to determine the most
likely contingency plan 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. A formal contingency plan will be
developed, as required, as remediation and testing
procedures are completed in 1999.
Costs associated with the Company's Year 2000 efforts
were approximately $0.5 million in the first quarter of
fiscal 1999 and estimated costs to complete are $2.1
million. Costs pertain primarily to system software and
hardware replacements and upgrades for both its IT and
non-IT systems.
Although the Company has not yet completed all the
necessary phases of its Year 2000 program, it believes that
with modifications to existing software and conversions to
new software, the Year 2000 issue will not pose significant
operational problems for its computer systems. 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 the Company's operations. While the
Company is not currently aware of any significant exposure,
there can be no assurance that the Year 2000 issue will not
have a material impact on the business and operations of the
Company.
Other Matters
See "Note 5: Commitments and Contingencies" to the
Notes to Condensed Consolidated Financial Statements.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital
Resources."
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
See "Note 5: Commitments and Contingencies -
Environmental Matters" to the Notes to Condensed
Consolidated Financial Statements regarding the Final Consent
Order received by Koppel from the EPA in the first quarter of
fiscal 1999, the NOV's received by Newport from the Commonwealth
of Kentucky in August 1998, and the NOV received by Koppel from
the EPA in November 1996.
ITEM 6. Exhibits and Reports on Form 8-K
a) Exhibits - Reference is made to the
Index to Exhibits, which is incorporated herein by
reference.
b) Reports on Form 8-K.
Current Report on Form 8-K dated and
filed November 5, 1998, reporting under Item 5 the declaration of
a dividend distribution of Preferred Stock Purchase Rights,
and under Item 7(c) the Company's Rights Agreement, dated as of
November 17, 1998, and the Company's press release dated November
5, 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly
authorized.
NS GROUP, INC.
Date: February 1, 1999 By: /s/Clifford R. Borland
Clifford R. Borland
President and Chief
Executive Officer
Date: February 1, 1999 By: /s/John R. Parker
John R. Parker
Vice President and
Treasurer
INDEX TO EXHIBITS
Number Description
3.1 Amended and Restated Articles of Incorporation of
Registrant, filed as Exhibit 3.1 to Amendment No. 1 to
Registrant's Form S-1 dated January 17, 1995, File No.
33-56637, and incorporated herein by this reference
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
18 Letter Regarding Change in Accounting Principles, filed
herewith
27 Financial Data Schedule
Exhibit 18
February 2, 1999
NS Group, Inc.
Ninth & Lowell Streets
Post Office Box 1670
Newport, Kentucky 41072
RE: Form 10-Q Report for the quarter ended December 26, 1998
Ladies and Gentlemen:
This letter is written to meet the requirements of
Regulation S-K calling for a letter from a registrant's
independent accountants whenever there has been a change in
accounting principle or practice.
We have been informed that, as of September 27, 1998, the
Company changed from the LIFO method of accounting for
inventory at its Newport Steel Corporation subsidiary to the
FIFO method. According to the management of the Company,
this change was made to more appropriately cost inventory in
light of continuing decreases in prices for scrap steel, a
significant raw material component of inventory, as well as
technological innovations in recent years that have
significantly altered, or will significantly alter,
production costs on a permanent basis, including the
expected impact of the new electric arc furnace installed at
Newport in February 1999.
A complete coordinated set of financial and reporting
standards for determining the preferability of accounting
principles among acceptable alternative principles has not
been established by the accounting profession. Thus, we
cannot make an objective determination of whether the change
in accounting described in the preceding paragraph is to a
preferable method. However, we have reviewed the pertinent
factors, including those related to financial reporting, in
this particular case on a subjective basis, and our opinion
stated below is based on our determination made in this
manner.
We are of the opinion that the Company's change in method of
accounting is to an acceptable alternative method of
accounting, which, based upon the reasons stated for the
change and our discussions with you, is also preferable
under the circumstances in this particular case. In
arriving at this opinion, we have relied on the business
judgment and business planning of your management.
We have not audited the application of this change to the
financial statements of any period. Further, we have not
examined and do not express any opinion with respect to
your financial statements as of and for the three months
ended December 26, 1998.
Very truly yours,
ARTHUR ANDERSEN LLP
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted
from NS Group, Inc.'s condensed consolidated financial statements
as of and for the three month period ended December 26, 1998,
included in the Company's Quarterly Report on Form 10-Q and is
qualified in its entirety by reference to such condensed
consolidated financial statements.
</LEGEND>
<CIK> 0000745026
<NAME> NS GROUP, INC.
<MULTIPLIER> 1
<CURRENCY> U.S.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-25-1999
<PERIOD-START> SEP-27-1998
<PERIOD-END> DEC-26-1998
<EXCHANGE-RATE> 1
<CASH> 877
<SECURITIES> 23,015
<RECEIVABLES> 30,756
<ALLOWANCES> 615
<INVENTORY> 69,971
<CURRENT-ASSETS> 149,267
<PP&E> 319,529
<DEPRECIATION> 176,421
<TOTAL-ASSETS> 388,607
<CURRENT-LIABILITIES> 43,639
<BONDS> 72,582
0
0
<COMMON> 260,656
<OTHER-SE> 2,959
<TOTAL-LIABILITY-AND-EQUITY> 388,607
<SALES> 54,269
<TOTAL-REVENUES> 54,269
<CGS> 59,407
<TOTAL-COSTS> 59,407
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,923
<INCOME-PRETAX> (13,018)
<INCOME-TAX> (2,600)
<INCOME-CONTINUING> (10,418)
<DISCONTINUED> 0
<EXTRAORDINARY> (437)
<CHANGES> 0
<NET-INCOME> (10,855)
<EPS-PRIMARY> (.46)
<EPS-DILUTED> (.48)
</TABLE>
