SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 2
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 25, 1999
COMMISSION FILE NUMBER 1-9838
NS GROUP, INC.
(Exact name of registrant as specified in its charter)
Kentucky 61-0985936
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
Ninth and Lowell Streets, Newport, Kentucky 41072
(Address of principal executive offices)
Registrant's telephone number, including area code (606) 292-
6809
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on
Common Stock, no par value which registered
Preferred Stock Purchase Rights New York Stock Exchange
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
YES X NO
Indicate by check mark if disclosure of delinquent
Filers pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of
registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K [ ]
Based on the closing sales price of November 29, 1999,
as reported in The Wall Street Journal, the aggregate market
value of the voting stock held by non-affiliates of the
registrant was approximately $174.4 million.
The number of shares outstanding of the registrant's
Common Stock, no par value, was 21,492,708 at November 29,
1999.
Documents Incorporated by Reference
Parts I, II and III incorporate certain information by
reference from the Annual Report to Shareholders for the
fiscal year ended September 25, 1999 ("1999 Annual Report").
Part III also incorporates certain information by reference
from the Company's Proxy Statement dated December 20, 1999
for the Annual Meeting of Shareholders on February 10, 2000
("Proxy").
PART II
The undersigned registrant hereby amends its Form 10-K for
the fiscal year ended September 25, 1999. The amendment
restates the accounting and reporting for the Company's
abandonment of certain equipment in the first quarter of
fiscal 1999. The effect of the restatement is to (1) decrease
fourth quarter and fiscal year 1998 cost of sales by $1.5
million, with a corresponding increase in first quarter and
fiscal year 1999 cost of sales and (2) increase fourth quarter
and fiscal year 1998 tax provision by $0.6 million, with a
corresponding decrease in first quarter and fiscal year 1999
tax provision.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Consolidated Financial Summary
(Dollars in thousands, except per share amounts)
1999 1998 1997 1996 1995
Summary of
Operations
Net sales $242,563 $409,855 $481,170 $409,382 $371,352
Operating
income
(loss) (47,128) 10,236 40,697 12,710 8,147
Operating
income
margin (19.4)% 2.5% 8.5% 3.1% 2.2%
Income (loss)
before extra-
ordinary items (45,553) 3,391 13,185 (8,944) (4,835)
Net income
(loss) (49,390) 4,050 3,929 (8,944) (10,035)
Income (loss)
per diluted
share
before extra-
ordinary items (2.08) .14 .88 (.65) (.35)
Net income
(loss) per
diluted share (2.26) .17 .26 (.65) (.73)
Dividends per
common share - - - - -
Weighted average
shares
outstanding -
diluted (000's) 21,852 24,511 14,969 13,809 13,809
Other Financial and Statistical Data
Working
Capital $ 97,573 $147,454 $229,514 $ 84,007 $74,443
Total assets 359,795 420,849 502,899 303,136 300,086
Long-term debt 72,833 76,325 76,424 164,789 166,528
Common
shareholders'
equity 221,152 279,013 275,398 60,218 69,699
Capital
Expenditures 28,401 32,576 7,139 6,510 12,233
Depreciation
and amorti-
zation 23,278 20,910 23,828 20,902 21,311
EBITDA (21,513) 30,475 59,771 32,614 30,141
Current ratio 2.71 3.77 2.66 2.21 2.30
Debt to total
Capitalization 24.8% 21.5% 21.7% 73.2% 70.5%
Book value per
outstanding
share 10.31 12.14 11.81 4.36 5.05
Product shipments (tons)
Energy
Products 317,000 474,000 616,600 549,500 487,100
Industrial
products -
SBQ 130,500 160,100 152,400 133,700 169,000
Employees 1,619 1,803 1,948 1,774 1,728
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
We make forward-looking statements in this report which
represent our expectations or beliefs about future events and
financial performance. You can identify these statements by
forward-looking words such as "expect," "believe,"
"anticipate," "goal," "plan," "intend," "estimate," "may,"
"will" or similar words. Forward-looking statements are
subject to known and unknown risks, uncertainties and
assumptions, including:
* oil and gas price volatility;
* the level and cyclicality of domestic and
worldwide oil and natural gas drilling;
* fluctuations in industry-wide inventory
levels;
* domestic and foreign competitive
pressures;
* the level of imports and the presence or
absence of governmentally imposed
trade restrictions;
* manufacturing efficiencies;
* steel scrap price volatility;
* costs of compliance with environmental
regulations;
* asserted and unasserted claims;
* general economic conditions;
* our ability and the ability of entities
with which we do business to modify or
redesign our and their computer
systems to work properly in the year
2000; and
* those other risks and uncertainties
described under "Risk Factors"
included in Exhibit 99.1 of our Form
10-K for the fiscal year ended
September 25, 1999.
In light of these risks, uncertainties and assumptions, the
forward-looking events discussed in this report might not
occur. In addition, actual results could differ materially
from those suggested by the forward-looking statements.
Accordingly, you should not place undue reliance on the
forward-looking statements. We undertake no obligation to
publicly update or revise any forward-looking statements,
whether the result of new information, future events or
otherwise.
For a more complete understanding of our business activities
and financial results, you should read the following analysis
of financial condition and results of operations together with
the audited financial statements included in this report.
General
We conduct our business within three business segments, which
are as follows:
The energy products segment
Our products include tubular steel products that are used in
the energy industry. These products include welded and
seamless tubular goods, primarily used in oil and natural gas
drilling and production operations. These products are
referred to as oil country tubular goods, or OCTG. We also
produce welded and seamless line pipe products which are used
in the transmission of oil, natural gas and other fluids. We
also produce a limited amount of other products, including
standard pipe, piling and hot rolled coil.
The industrial products segment - special bar quality
products.
Our products include special bar quality products, or SBQ.
These products are used for a wide variety of industrial
applications, including:
* farm equipment
* metal-working fabrication
* heavy machinery
* construction
* off-road vehicles
* automotive
* oil field tools and supplies
- - The industrial products segment-adhesives products.
Our products include custom water-borne, solvent-borne and hot-
melt adhesives as well as footwear finishes. These products
are used in numerous industrial product assembly applications.
You should read Note 2 to the audited financial statements
included in this report for selected financial information by
business segment.
Results of Operations
Overview
Demand for our OCTG products is cyclical in nature and is
dependent on the number and depth of oil and natural gas wells
being drilled in the United States and globally. The level of
drilling activity is, among other things, dependent on the
current and anticipated prices for oil and natural gas. Also,
shipments by domestic producers of OCTG products may be
positively or negatively affected by the amount of inventory
held by producers, distributors and end users, as well as the
amount of foreign imports of OCTG products.
Demand for our OCTG products began to decline in the second
half of fiscal 1998 and continued to decline significantly in
fiscal 1999. Significant declines in oil and natural gas
prices led to a decline in drilling activity in the United
States throughout most of fiscal 1999. This decline resulted
in excessive industry-wide tubular inventories, which further
negatively affected our OCTG business. The average number of
oil and natural gas drilling rigs in operation in the United
States, which is referred to as "rig count", fell as low as
488 in April 1999, the lowest level in NS Group's 18 year
history. For all of fiscal 1999, the average rig count was
602, also the lowest level in NS Group's history. By
comparison, the average rig count was 905 for fiscal 1998.
The market conditions described above negatively affected our
industry during the latter half of fiscal 1998 and fiscal
1999. Our business experience indicates that oil and natural
gas prices are volatile and can have a substantial effect upon
drilling levels and resulting demand for our energy related
products. Oil and gas prices and drilling activity began to
improve in the fourth quarter of fiscal 1999, and have
continued to improve into fiscal 2000. However, the timing
and extent of such recovery is uncertain and we expect to
incur operating losses in the energy products segment during
the first half of fiscal 2000.
NS Group's net sales, gross profit (loss), operating income
(loss) and tons shipped by business segment for fiscal 1999,
1998 and 1997 are summarized in the following table.
(dollars in thousands) 1999 1998 1997
Net sales
Energy products segment $144,151 $296,690 $372,727
Industrial products
segment SBQ 54,728 72,603 67,502
Industrial products
segment Adhesives 43,684 40,562 40,941
$242,563 $409,855 $481,170
Gross profit (loss)
Energy products segment $(32,924) $ 20,588 $ 50,754
Industrial products
segment SBQ 463 6,942 6,670
Industrial products segment
Adhesives 12,175 11,004 10,630
$(20,286) $ 38,534 $ 68,054
Operating income (loss)
Energy products segment $(42,854) $ 9,116 $ 39,243
Industrial products
segment SBQ (2,707) 4,074 4,246
Industrial products
segment Adhesives 2,179 2,302 1,799
(43,382) 15,492 45,288
Corporate allocations (3,746) (5,256) (4,591)
$(47,128) $10,236 $40,697
Tons shipped
Energy products segment 317,000 474,000 616,600
Industrial products
segment SBQ 130,500 160,100 152,400
447,500 634,100 769,000
Fiscal Year 1999 Compared to Fiscal Year 1998
Total net sales in fiscal 1999 were $242.6 million, a decrease
of 40.8% from fiscal 1998. The decline in net sales was
attributable primarily to our energy products segment and
secondarily to our SBQ products business.
Energy product segment sales in fiscal 1999 were $144.2
million, a decrease of 51.4% from fiscal 1998. Energy product
segment shipments of 317,000 tons declined 33.1% from fiscal
1998. The decrease was substantially attributable to a
decline in OCTG shipments, which resulted from the declining
rig count as well as excessive levels of industry inventory.
The average selling price for our welded tubular products was
$382 per ton, a decrease of 25.0% from fiscal 1998. The
average selling price for our seamless tubular products was
$740 per ton, a decrease of 16.6% from fiscal 1998. The
decrease in average selling price was due primarily to the
market conditions discussed above and a change in mix to lower
priced products.
Since 1995, the U.S. government has been imposing duties on
imports of various OCTG products from certain foreign
countries in response to antidumping and countervailing duty
cases filed by several U.S. steel companies. The duties
primarily pertain to the import of seamless OCTG products and
are subject to annual review by the U.S. Department of
Commerce through 2000. Also, in fiscal 1999, we joined with
certain other line pipe producers to file petitions with the
U.S. government to seek relief from imports of welded and
seamless line pipe products. While these duties and actions
have reduced such imports, we cannot predict the U.S.
government's actions regarding these petitions or any other
future actions regarding import duties or other trade
restrictions on imports of OCTG and line pipe products.
Industrial products segment - SBQ product sales in fiscal 1999
were $54.7 million, a decrease of 24.6% from fiscal 1998.
SBQ product shipments of 130,500 tons declined 18.5% from
fiscal 1998. The average selling price for SBQ product was
$419 per ton, a decline of 7.7% from fiscal 1998. The
decrease in shipments and average selling price was primarily
attributable to heightened competition resulting from new
entrants to the SBQ marketplace.
Industrial products segment - adhesives product sales in
fiscal 1999 were $43.7 million, an increase of 7.7% from
fiscal 1998, primarily as a result of an increase in sales
volume of 8.3%.
The significant decline in shipments and average selling
prices resulted in a gross loss of $32.9 million and an
operating loss of $42.9 million for the energy products
segment. This compares to gross profit of $20.6 million and
operating income of $9.1 million in fiscal 1998. Fiscal 1999
results were also negatively impacted by lower operating
efficiencies that resulted from significantly reduced
operating levels, which was brought about by poor market
demand for our energy products. Our combined melt shop
capacity utilization was 41% in fiscal 1999 compared to 59% in
fiscal 1998. Our combined pipe mill capacity utilization was
37% in fiscal 1999 compared to 57% in fiscal 1998. In
addition, our operating costs were negatively affected in
fiscal 1999 by a six week shutdown at the melt shop of our
welded tubular product facility for final installation of a
new electric arc furnace and subsequent start-up costs
associated with the furnace. As of October 1999, the furnace
was operating at approximately 55% of its expected production
capabilities. Selling, general and administrative expense for
the energy products segment declined 21.1% from fiscal 1998
due to reductions in employment costs and selling related
expenses. However, due to the significant decline in sales as
discussed above, selling, general and administrative expense
increased as a percentage of sales from 5.2% in fiscal 1998 to
8.4% in fiscal 1999.
The industrial products segment - SBQ products had a gross
profit of $0.5 million and an operating loss of $2.7 million
in fiscal 1999 compared to a gross profit of $6.9 million and
operating profit of $4.1 million in fiscal 1998. The decrease
in gross profit and operating income were due primarily to the
decline in average selling price and secondarily to the
decrease in shipments. Selling, general and administrative
expense for the SBQ products business increased as a percent
of sales from 5.2% in fiscal 1998 to 7.6% in fiscal 1999, due
to the decline in sales as discussed above.
The industrial products segment - adhesives products gross
profit increased $1.2 million and operating income decreased
$0.1 million from fiscal 1998. The increase in gross profit
was attributable to improved sales volume. Selling, general
and administrative expense increased $1.4 million and also
increased as a percent of sales from 22.5% in fiscal 1998 to
24.2% in fiscal 1999. The increases were primarily the result
of increased investment in sales personnel to support future
increases in sales.
Investment income decreased $2.5 million from fiscal 1998 due
primarily to a decrease in average invested cash and
investment balances. Interest expense decreased $1.1 million
from fiscal 1998 due to decreases in long-term debt
obligations. Other income, net was $3.5 million in fiscal
1999 and included a $2.8 million favorable claim settlement
with our electrode suppliers relating to purchases from
several prior years.
Our combined federal and state effective tax rate for fiscal
1999 was a benefit of 7.6%. Our tax loss benefits were
limited to available refunds for taxes paid in previous
periods at the alternative minimum tax rate. We exhausted our
refund capability in fiscal 1999, and as such, tax benefits
from any future operating losses will likely be offset by
valuation allowances resulting in no net tax benefits being
recorded for losses.
In the second quarter of fiscal 1999, we recorded an
additional $4.3 million in disposal costs as well as
additional expected insurance recoveries of $0.9 million in
connection with ongoing efforts to dispose of radiation
contaminated dust generated at our welded tubular products
facility in 1993. These amounts were recorded as an
extraordinary charge of $3.4 million, with no income tax
benefit.
In the first quarter of fiscal 1999, we incurred prepayment
costs and wrote off unamortized debt issuance costs in
connection with the early retirement of $4.0 million principal
amount of long-term indebtedness, resulting in an
extraordinary charge of $0.4 million, net of applicable income
tax benefit of $0.1 million.
As a result of the above factors, we reported a net loss of
$49.4 million, or a $2.26 loss per basic and diluted share, in
fiscal 1999 compared to net income of $4.1 million, or $.17
per basic and diluted share, in fiscal 1998. Weighted average
shares outstanding decreased for the comparable periods as a
result of our common stock buyback program that was completed
in the second quarter of fiscal 1999.
Fiscal Year 1998 Compared to Fiscal Year 1997
Total net sales for fiscal 1998 were $409.9 million, a
decrease of 14.8% from fiscal 1997. The decline in net sales
was solely attributable to our energy products segment.
Energy products segment sales were $296.7 million for 1998, a
decrease of 20.4% from fiscal 1997. Energy product segment
shipments of 474,000 tons declined 23.1% from fiscal 1997.
The average selling price for our welded tubular products was
$509 per ton for fiscal 1998, a 1.2% increase from fiscal
1997. The average selling price for our seamless tubular
products for fiscal 1998 was $887 per ton, virtually unchanged
from fiscal 1997. The decline in shipments and net sales
resulted from the precipitous drop in rig count that occurred
in the second half of fiscal 1998. While the rig count for
all of fiscal 1998 of 905 was virtually unchanged from fiscal
1997, rig count fell by over 200 rigs, from a high of 997 in
the first quarter of fiscal 1998, to a low of 794 in the
fourth fiscal quarter.
Industrial products segment - SBQ product sales in fiscal 1998
were $72.6 million, an increase of 7.6% from fiscal 1997. SBQ
product shipments of 160,100 tons increased 5.1%. The average
selling price for SBQ products increased 2.5% from fiscal
1997.
Industrial products segment - adhesives products sales in
fiscal 1998 were $40.6 million, virtually unchanged from
fiscal 1997.
Gross profit for fiscal 1998 decreased 43.4% from fiscal 1997
to $38.5 million. Operating income for fiscal 1998 decreased
$30.5 million from fiscal 1997, to $10.2 million. The decline
in gross profit and operating income were entirely
attributable to the energy products segment.
The decreases in energy product segment gross profit and
operating income were due to the decline in shipments of OCTG
products as well as lower operating efficiencies resulting
from reduced production levels. In addition, we incurred
accelerated depreciation charges of $1.6 million in fiscal
1998 related to the planned abandonment of three electric arc
furnaces that were subsequently replaced with new equipment
in the first quarter of fiscal 1999.
Investment income in fiscal 1998 increased $7.3 million from
fiscal 1997 and interest expense decreased $11.6 million for
the same period. The increase in investment income and the
decrease in interest expense was the result of increased
average cash and investment balances and a decrease in long-
term debt obligations, respectively, which resulted from our
September 1997 public offering and related retirement of long-
term debt.
Other income, net was $0.5 million in fiscal 1998 compared to
$1.5 million in fiscal 1997. Both years included gains from
the sales of certain development property and settlement of
insurance claims.
Our combined federal and state effective tax rate for fiscal
1998 was 47.4%. This rate exceeds the combined statutory tax
rates because we recorded additional valuation allowances for
deferred tax assets.
As a result of the above factors, we reported fiscal 1998
income before extraordinary item of $3.4 million, or $.14 per
basic and diluted share, compared to income before
extraordinary item of $13.2 million, or $.93 per basic share
($.88 diluted), in fiscal 1997.
In connection with an environmental contingency matter
provided for as an extraordinary charge in previous years, we
recorded an extraordinary credit of $0.7 million, net of
applicable income taxes of $0.3 million, or $.03 per basic and
diluted share, in fiscal 1998.
Liquidity and Capital Resources
Working capital at September 25, 1999 was $97.6 million
compared to $147.5 million at September 26, 1998. The decline
in working capital was primarily the result of a reduction in
short-term investments which were used to fund operating
losses, make investments in property, plant and equipment,
retire long-term debt and repurchase common stock. The
current ratio was 2.7 to 1 at September 25, 1999 compared to
3.8 to 1 at September 26, 1998. At September 25, 1999, we had
cash and investments totaling $85.7 million and had no
advances against our $50 million revolving credit facility.
Net cash flows from operating activities were a net use of
$14.5 million in fiscal 1999. We recorded a net loss of
$49.4 million in fiscal 1999. Major sources of cash from
operating activities in fiscal 1999 included $23.3 million in
non-cash depreciation and amortization charges; a $9.4 million
decrease in inventory resulting from the decline in business
activity; a $4.8 million decrease in other current assets
which resulted primarily from the receipt of refundable
federal income taxes; and a $3.8 million increase in accrued
liabilities and other due, in part, to an increase in
estimated costs associated with environmental liabilities.
Accounts receivable increased $3.6 million as a result of an
increase in business activity in our energy products segment
in the last quarter of fiscal 1999.
Net cash flows provided by operating activities totaled $30.6
million in fiscal 1998. We recorded net income of $4.1
million in fiscal 1998. Major sources of cash from operating
activities in fiscal 1998 included $20.9 million in non-cash
depreciation and amortization charges and decreases of $24.7
million and $10.3 million in accounts receivable and
inventory, respectively, resulting from a decline in business
activity. The major uses of cash in operating activities
included a $7.1 million reduction in accrued debt prepayment
fees, and a $25.8 million decrease in accounts payable and
accrued liabilities and other resulting primarily from a
decline in business activity.
Net cash flows provided by operating activities totaled $9.7
million in fiscal 1997. We recorded net income of $3.9
million in fiscal 1997. Major sources of cash from operating
activities in fiscal 1997 included $23.8 million in non-cash
depreciation and amortization charges; a $7.1 million accrual
for debt prepayment penalty; a $4.5 million increase in long-
term deferred taxes and a $9.6 million increase in accounts
payable and accrued liabilities and other due to increased
business activity. The major uses of cash in operating
activities included increases of $11.3 million and $20.7
million in accounts receivable and inventory, respectively,
resulting from an increase in business activity related
primarily to improvements in the OCTG marketplace. Additional
uses of cash in operating activities included a $7.4 million
increase in other current assets primarily related to
increases in our current deferred tax asset and receivables
recorded in connection with certain insurance claims.
We made capital investments totaling $28.4 million in fiscal
1999, $32.6 million in fiscal 1998 and $7.1 million in fiscal
1997. These capital expenditures were primarily related to
improvements to and acquisitions of machinery and equipment in
our energy products segment. Of the total spending in fiscal
1999, $18.3 million pertained to the purchase and installation
of a new AC electric arc furnace. We currently estimate that
fiscal 2000 capital spending will approximate $16.7 million,
the majority of which represents the completion of projects
begun in fiscal 1999 in our energy products segment. Sources
for funding capital expenditures include available cash and
investments, cash flows from operations, as well as available
borrowing sources.
Our long-term investments decreased by $21.1 million from
fiscal 1998 as we used this cash source to fund our operating
activities as well as our capital expenditure program and
financing activities, which included our stock buyback program
and the retirement of debt. Our long-term investments and
long-term debt, all of which are for other than trading
purposes, are subject to interest rate risk. Information
concerning the maturities and fair value of our interest rate
sensitive investments and debt is included in Notes 4, 5 and 6
to the audited financial statements. We utilize professional
investment advisors and consider our net interest rate risk
when selecting the type and maturity of securities to purchase
for our portfolio. Other factors considered include, but are
not limited to, the timing of the expected need for the funds
invested and the repricing and credit risks of the securities.
Repayments on long-term debt in fiscal 1999 were $4.7 million
and include the early retirement of $4.0 million principal
amount of our senior secured notes. We completed a three
million share buyback program in fiscal 1999, repurchasing the
final 1.6 million shares of NS Group's common stock for $7.7
million.
Our annual long-term debt maturities are $0.2 million in
fiscal 2000, $0.2 million in fiscal 2001, $0.1 million in
fiscal 2002, $74.7 million in fiscal 2003 and $0.1 million in
fiscal 2004.
You should read Note 5 to the audited financial statements for
further information concerning our long-term debt and credit
facility.
Earnings before net interest expense, taxes, depreciation and
amortization (EBITDA) were a negative $21.5 million for fiscal
1999 and a positive $30.5 million for fiscal 1998 and $59.8
million for fiscal 1997. EBITDA is calculated as income
before extraordinary items plus net interest expense, taxes,
depreciation and amortization. EBITDA provides additional
information for determining our ability to meet debt service
requirements. EBITDA does not represent and should not be
considered as an alternative to net income, any other measure
of performance as determined by generally accepted accounting
principles, as an indicator of operating performance, as an
alternative to cash flows from operating, investing or
financing activities or as a measure of liquidity.
At September 25, 1999, we had regular tax net operating loss
carryforwards which will fully eliminate the regular tax
liability on approximately $89.5 million of future regular
taxable income. While we may have alternative minimum tax
(AMT) liability, we also have AMT net operating loss
carryforwards which will eliminate 90% of the AMT liability on
approximately $44.0 million of future AMT income. While
future tax provisions will depend in part on our ongoing
assessment of our future ability to utilize our tax benefits,
we expect that the tax provisions that we record on
approximately the next $55 million in pre-tax income will be
substantially less than the amounts at full statutory rates.
You should read Note 11 to the audited financial statements
for further information concerning our federal tax status.
We believe that our current available cash and investments,
our cash flow from operations and our borrowing sources will
be sufficient to meet anticipated operating cash requirements,
including capital expenditures, for at least the next twelve
months.
Year 2000 Readiness Disclosure
The Year 2000 issue results from date sensitive computer
programs that use only the last two digits to refer to a year.
Such computer programs do not properly recognize a year that
begins with "20" instead of "19". This issue impacts us and
virtually every business that relies on a computer. If not
corrected, systems failures or miscalculation could occur
causing disruption of our operations, including, among other
things, a temporary inability to process transactions,
manufacture products or engage in similar normal business
activities.
Our subsidiaries are not dependent on an integrated or
centralized corporate-wide data processing system. As such,
we have formal project teams at each subsidiary to address the
respective subsidiaries' Year 2000 readiness. Information
technology (IT) systems, such as any hardware or software used
to process daily operational data and information, as well as
non-IT systems, such as micro controllers contained in various
manufacturing equipment, have been assessed for Year 2000
compliance.
We have addressed the Year 2000 issue in a four phase process.
The first phase was one of awareness and involved the
inventorying of all IT and non-IT systems. This phase has
been completed. The second phase of our process was an
assessment stage, during which we determined whether each of
our identified systems was Year 2000 compliant. We completed
this phase of the process during the second quarter of fiscal
1999. The remediation and testing phases of our systems are
in various stages of completion. Remediation efforts may
include modification or replacement of software and certain
hardware so that systems will properly utilize dates beyond
December 31, 1999. Approximately 90% of our IT systems have
been remediated while remediation on our non-IT systems is
approximately 98% complete. We currently anticipate
completion of all remediation and testing of our systems prior
to calendar year end.
We also face certain risks to the extent that our customers or
suppliers of products and services do not become Year 2000
compliant. We are continually evaluating the status of
significant customers and suppliers to determine the extent to
which we are vulnerable to non-compliance by these third
parties. Ongoing evaluation will continue through the end of
calendar 1999; however, we believe our broad customer base and
availability of alternative suppliers will mitigate the risks
associated with the readiness of these third parties.
We have developed formal contingency plans in the event we
experience Year 2000 related problems. Back-up measures have
been identified for each system requiring remediation. For
example, the contingency plan for many IT systems would be to
revert to a manual record system and, for many non-IT systems,
internal clocks could be reset to an earlier date.
Costs associated with our Year 2000 efforts were approximately
$1.6 million in fiscal 1999, and estimated costs to complete
are $1.1 million, which include final payments for various new
equipment and software installations. Costs pertain primarily
to system software and hardware replacements and upgrades for
both our IT and non-IT systems.
We believe that with modifications to existing software and
conversions to new software, the Year 2000 issue will not pose
significant operational problems. However, if such
modifications and conversions are not made or are not
completed in time, or if a material third party fails to
properly remediate its Year 2000 issues, or if the costs are
higher than expected, the Year 2000 issue could have a
material effect on our operations. While we are not currently
aware of any significant exposure, there can be no assurance
that the Year 2000 issue will not have a material impact on
our business and operations.
Other Matters
You should read Note 9 to the audited financial statements for
information pertaining to commitments and contingencies.
Item 8. Financial Statements and Supplementary Data
Consolidated Statements of Operations
For the years ended September 25, 1999, September 26, 1998 and
September 27, 1997
(In thousands, except per share amounts)
1999 1998 1997
Net sales $242,563 $409,85 $481,170
Cost of products sold 262,849 371,321 413,116
Selling and administrative
Expenses 26,842 28,298 27,357
Operating income (loss) (47,128) 10,236 40,697
Investment income 5,906 8,358 1,010
Interest expense (11,601) (12,653) (24,261)
Other income, net 3,543 501 1,465
Income (loss) before
income taxes and
extraordinary items (49,280) 6,442 18,911
Provision (credit) for
income taxes (3,727) 3,051 5,726
Income (loss) before
extraordinary items (45,553) 3,391 13,185
Extraordinary items, net of
income taxes (3,837) 659 (9,256)
Net income (loss) $(49,390) $ 4,050 $ 3,929
Per common share (basic)
Income (loss) before
extraordinary items $(2.08) $.14 $ .93
Extraordinary items,
net of income taxes (.18) .03 (.65)
Net income (loss) $(2.26) $.17 $ .28
Per common share (diluted)
Income (loss) before
extraordinary items $(2.08) $.14 $ .88
Extraordinary items, net
of income taxes (.18) .03 (.62)
Net income (loss) $(2.26) $.17 $ .26
Weighted average shares outstanding
Basic 21,852 23,684 14,141
Diluted 21,852 24,511 14,969
See notes to consolidated financial statements
Consolidated Balance Sheets
September 25, 1999 and September 26, 1998
(In thousands)
ASSETS 1999 1998
Current assets
Cash $ 1,073 $ 1,783
Short-term investments 30,032 64,689
Accounts receivable, less
allowance for doubtful
accounts of $837 and $752,
respectively 40,924 37,275
Inventories 56,659 66,041
Operating supplies 12,782 14,211
Deferred tax assets 5,376 8,140
Other current assets 7,935 8,541
Total current assets 154,781 200,680
Property, plant and equipment -- at cost
Land and buildings 32,078 31,570
Machinery and equipment 294,364 264,656
Construction in progress 4,035 13,889
Less -- accumulated depreciation (187,330) (173,372)
Net property, plant and
Equipment 143,147 136,743
Long-term investments 54,560 75,626
Other assets 7,307 7,800
Total assets $359,795 $420,849
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts and notes payable $ 28,923 $ 28,305
Accrued liabilities and other 28,087 24,243
Current portion of long-term debt 198 678
Total current liabilities 57,208 53,226
Long-term debt 72,833 76,325
Deferred taxes 8,602 12,285
Common shareholders' equity
Common stock, no par value,
40,000 shares authorized,
24,364 and 24,334 shares issued,
respectively 280,051 279,886
Treasury stock, 2,917 and 1,354
shares, respectively (23,676) (15,992)
Common stock options and warrants 896 898
Accumulated other comprehensive
income (loss) (3,784) (2,834)
Accumulated earnings (deficit) (32,335) 17,055
Common shareholders' equity 221,152 279,013
Total liabilities and
shareholders' equity $359,795 $420,849
See notes to consolidated financial statements
Consolidated Statements of Cash Flows
For the years ended September 25, 1999, September 26, 1998 and
September 27, 1997
(In thousands) 1999 1998 1997
Cash flows from operating
activities:
Net income (loss) $(49,390) $ 4,050 $ 3,929
Adjustments to reconcile
net income (loss) to net
cash flows from operating
activities:
Depreciation and
Amortization 22,072 19,738 17,609
Amortization of debt
discount and finance
costs 1,206 1,172 6,219
Increase (decrease)
in long-term deferred
taxes (3,683) 530 4,488
(Gain) loss on disposal
of equipment
(262) 55 206
Loss on sales of
investments 705 282 -
(Increase) decrease in
accounts receivable (3,649) 24,676 (11,327)
(Increase) decrease in
inventories 9,382 10,264 (20,721)
(Increase) decrease in
operating supplies and
other current assets 4,799 2,769 (7,393)
Increase (decrease) in
accrued prepayment fees
on debt called for
redemption - (7,079) 7,079
Increase (decrease) in
accounts payable 466 (21,929) 5,820
Increase (decrease) in
accrued liabilities
and other 3,844 (3,883) 3,750
Net cash flows from
operating activities (14,510) 30,645 9,659
Cash flows from investing activities:
Purchases of property,
plant and equipment (28,401) (32,576) (7,139)
Proceeds from sale of
Equipment 580 152 382
Purchases of available
for sale securities (45,053) (112,102) -
Sales of available for
sale securities 32,035 22,019 -
Maturities of available
for sale securities 32,259 16,931 -
(Increase) decrease in
other assets (210) 120 4,053
Net cash flows from
investing activities (8,790) (105,456) (2,704)
Cash flows from financing activities:
Increase (decrease) in
notes payable 152 (480) (157)
Proceeds from issuance of
long-term debt - 55 340
Repayments on long-term debt (4,675) (54,397) (11,994)
Proceeds from issuance of
common stock 140 17,843 182,902
Purchases of treasury stock (7,684) (17,081) -
Net cash flows from
financing activities (12,067) (54,060) 171,091
Net increase (decrease)
in cash and short-term
investments (35,367) (128,871) 178,046
Cash and short-term investments
at beginning of year 66,472 195,343 17,297
Cash and short-term investments
at end of year $ 31,105 $ 66,472 $195,343
Cash paid during the year for:
Interest $ 10,359 $ 12,738 $23,231
Income taxes, net of
refunds received (2,977) 4,493 1,463
See notes to consolidated financial statements
Consolidated Statements of Common Shareholders' Equity
For the years ended September 25, 1999, September 26, 1998 and
September 27, 1997
(In thousands)
Options
Common Stock Treasury Stock and
Shares Amount Shares Amount Warrants
Balance,
September
28, 1996 13,809 $ 49,004 - $ - $2,774
Net income
Unrealized
gain on
investments
Comprehensive
income
Issuance of
common stock 6,000 169,823
Conversion of
11% subor-
dinated deben-
tures 1,665 28,300
Stock option
plans 645 6,327 (12)
Exercise of
common stock
warrants 1,191 7,914 (1,150)
Balance,
September
27, 1997 23,310 261,368 - - 1,612
Net income
Unrealized
loss on
investments
Compre-
hensive
income
Issuance
of common
stock 540 15,340
Purchase of
treasury
stock 1,437 (17,081)
Stock
option
plans 94 1,007 (83) 1,089 (102)
Exercise of
common stock
warrants 390 2,171 (612)
Balance,
September
26, 1998 24,334 279,886 1,354 (15,992) 898
Net loss
Unrealized
loss on
investments
Comprehensive
loss
Purchase of
treasury stock 1,563 (7,684)
Stock option
plans 14 73 24
Exercise of
common stock
warrants 16 92 (26)
Balance,
September
25, 1999 24,364 $280,051 2,917 $23,676)$896
Consolidated Statements of Common Shareholders' Equity
For the years ended September 25, 1999, September 26, 1998 and
September 27, 1997
(In thousands)
Accumulated
Other Accumu Compre-
Comprehensive lated hensive
Income Earnings Income
(Loss) (Deficit) Total (Loss)
Balance,
September
28, 1996 $(1,287) $9,727 $ 60,218
Net income 3,929 3,929 $ 3,929
Unrealized
gain on
investments 49 49 49
Comprehensive
income $ 3,978
Issuance of
common stock 169,823
Conversion of
11% subor-
dinated deben-
tures 28,300
Stock option
plans 6,315
Exercise of
common stock
warrants 6,764
Balance,
September
27, 1997 (1,238) 13,656 275,398
Net income 4,050 4,050 $ 4,050
Unrealized
loss on
investments (1,596) (1,596) (1,596)
Compre-
hensive
income $ 2,454
Issuance
of common
stock 15,340
Purchase of
treasury
stock (17,081)
Stock
option
plans (651) 1,343
Exercise of
common stock
warrants 1,559
Balance,
September
26, 1998 (2,834) 17,055 279,013
Net loss (49,390) (49,390) $(49,390)
Unrealized
loss on
investments (950) (950) (950)
Compre-
Hensive loss $(50,340)
Purchase of
treasury
stock (7,684)
Stock option
Plans 97
Exercise of
common stock
warrants 66
Balance,
September
25, 1999 $(3,784) $(32,335) $221,152
See notes to consolidated financial statements
Notes to Consolidated Financial Statements
Note 1 Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of
NS Group, Inc. and its wholly-owned subsidiaries (the
Company): Newport Steel Corporation (Newport), Koppel Steel
Corporation (Koppel), Erlanger Tubular Corporation (Erlanger),
Imperial Adhesives, Inc. (Imperial) and Northern Kentucky
Management, Inc. All significant intercompany accounts and
transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires that
management make certain estimates and assumptions that affect
the amounts reported in the consolidated financial statements
and accompanying notes. Actual results could differ from
those estimates.
Cash
Cash includes currency on hand and demand deposits with
financial institutions.
Investments
Short-term investments consist primarily of money market
mutual funds, commercial paper and U.S. treasury securities,
for which market value approximates cost. Long-term
investments consist primarily of corporate and government
bonds which are classified as "available for sale" and carried
at fair value, based on quoted market prices. Realized gains
and losses are included in investment income. The cost of
securities sold is based on the specific identification
method. Unrealized gains and losses on available for sale
securities are included, net of tax, in accumulated other
comprehensive income (loss) within common shareholders' equity
until disposition. Other comprehensive income (loss), net of
applicable income taxes, if any, consists of the following:
(In thousands) 1999 1998 1997
Net unrealized holding
gains (losses) for the
period $(1,655) $(1,779) $49
Reclassification adjust-
ment for (gains) losses
realized 705 183 -
Net unrealized gains
(losses), net of income
taxes of $0, $859, and
$(26), respectively $ (950) $(1,596) $49
Inventories
At September 25, 1999 and September 26, 1998, inventories are
stated at the lower of FIFO (first-in, first-out) cost or
market, or the lower of average cost or market. Inventory
costs include labor, material and manufacturing overhead.
Inventories consist of the following:
(In thousands) 1999 1998
Raw materials $ 9,707 $ 7,921
Semi-finished and finished goods 46,952 58,120
Total inventories $56,659 $66,041
Until fiscal 1999, one subsidiary used the LIFO (last-in,
first-out) method to determine inventory cost. Effective
September 27, 1998, the subsidiary changed to the FIFO method.
The change in accounting principle, which has been applied
retroactively, was made to provide a better matching of sales
and expenses given technological changes in various
manufacturing processes. The change in accounting principle
reduced both previously reported income before extraordinary
items and previously reported net income by $2.1 million and
$0.5 million for fiscal 1998 and 1997, respectively, and
reduced the related diluted per share amounts by $.09 and $.04
per share for fiscal 1998 and 1997, respectively.
Property, Plant and Equipment and Depreciation
For financial reporting purposes, plant and equipment are
depreciated on a straight-line method over the estimated
useful lives of the assets. Expenditures for maintenance and
repairs are charged to expense as incurred. Expenditures for
equipment renewals which extend the life or increase the
productivity or capacity of an asset are capitalized.
Following the start-up of a new electric arc furnace in the
second quarter of fiscal 1999, Newport abandoned its existing
three electric arc furnaces together with related property and
equipment. As such, in the fourth quarter of fiscal 1998 and
the first quarter of fiscal 1999, the Company recorded to cost
of products sold accelerated depreciation charges of $1.6
million and $1.5 million, respectively. The assets were
depreciated down to a fair value of $0.2 million based on the
estimated salvage value of the assets. The accelerated
depreciation negatively impacted each of fiscal 1998 and 1999
income/loss before extraordinary items by approximately $1.0
million, or $.04 per diluted share.
The accompanying consolidated financial statements for fiscal
1999 and 1998 have been restated from those previously
reported to reflect the accelerated depreciation discussed
above. Previously, an impairment loss of $3.2 million had
been reflected in the fourth quarter of fiscal 1998. The net
effect of the restatement is to (1) increase 1998 income
before extraordinary items and net income by $0.9 million, or
$.04 per diluted share and (2) increase the 1999 loss before
extraordinary items and net loss by $0.9 million, or $.04 per
diluted share.
Treasury Stock
The Company repurchased 1.6 million shares of its common stock
for $7.7 million during fiscal 1999, completing a three
million share buyback program. The Company's repurchases of
shares of common stock are recorded as treasury stock at cost
and result in a reduction of common shareholders' equity.
When treasury shares are reissued, the Company uses average
cost to value treasury shares and any excess of average cost
over reissuance price is treated as a reduction of retained
earnings.
Revenue Recognition
The Company records revenue from product sales when the
product is shipped from its facilities or, when at the
customer's request, the goods are set aside for storage and
are paid for in full.
Income Taxes
Deferred income tax balances represent the estimated future
tax effects of temporary differences between the financial
reporting basis and the tax basis of certain assets and
liabilities. A valuation allowance is established to reduce
deferred tax assets to amounts that are more likely than not
to be realized.
Environmental Remediation and Compliance
Environmental remediation costs are accrued, except to the
extent capitalizable, when incurrence of such costs are
probable and the costs can be reasonably estimated.
Environmental compliance costs include maintenance and
operating costs associated with pollution control facilities,
costs of ongoing monitoring programs, permit costs and other
similar costs. Such costs are expensed as incurred.
Fiscal Year-End
The Company's fiscal year ends on the last Saturday of
September.
Earnings Per Share
Basic earnings per share is computed by dividing net income by
the weighted-average number of common shares outstanding for
the period. Diluted earnings per share reflects the potential
dilution from securities that could result in additional
common shares being issued which, for the Company, includes
stock options and warrants only.
Securities that could potentially result in dilution of basic
EPS through the issuance of 0.6 million and 1.1 million shares
of the Company's common stock in fiscal 1999 and 1998,
respectively, were not included in the computation of diluted
EPS because they were antidilutive.
Note 2 Business Segment Information
The Company adopted SFAS 131, "Disclosure about Segments of an
Enterprise and Related Information", for fiscal 1999.
Accordingly, segment information for fiscal 1998 and 1997 has
been restated to conform to the new presentation.
The Company has three reportable segments. The Company's
energy products segment consists primarily of (i) welded and
seamless tubular goods used primarily in oil and natural gas
drilling and production operations (oil country tubular goods,
or OCTG); and (ii) line pipe used in the transmission of oil,
natural gas and other fluids. The energy products segment
reflects the aggregation of two business units which have
similar products and services, manufacturing processes,
customers and distribution channels and is consistent with
both internal management reporting and resource and budgetary
allocations. The Company's industrial products segment for
special bar quality (SBQ) products consists of SBQ products
used primarily in the manufacture of heavy industrial
equipment. The Company's industrial products segment for
adhesives products consists of industrial adhesives products
used in various product assembly applications.
The Company evaluates performance and allocates resources on
operating income before interest and income taxes. The
accounting policies of the reportable segments are the same as
those described in Note 1. Corporate assets include primarily
cash, investments and income tax assets. Corporate
allocations include primarily corporate general and
administrative overhead costs.
The operations of all segments are conducted principally in
the United States. The Company grants trade credit to
customers, the most significant of which are distributors
serving the oil and natural gas exploration and production
industries which purchase tubular steel products from the
energy products segment. In fiscal 1997, one energy products
customer accounted for 10.3% of net sales. The following
table sets forth selected financial information by reportable
business segment for fiscal 1999, 1998, and 1997.
(In thousands)
Operating Depreciation
1999 Net Income Total and Capital
Sales (Loss) Assets Amortization
Expenditures
Energy
products
segment $144,151 $(42,854) $204,454 $17,334 $26,598
Industrial
products
segment
- -SBQ 54,728 (2,707) 38,551 4,125 1,220
Industrial
products
segment -
Adhesives 43,684 2,179 15,097 613 583
Corporate
assets and
allocations - (3,746) 101,693 - -
Total
Consoli-
dated $242,563 $(47,128) $359,795 $22,072 $28,401
1998
Energy
products
segment $296,690 $ 9,116 $203,820 $15,376 $31,162
Industrial
products
segment
- - SBQ 72,603 4,074 41,181 3,780 834
Industrial
products
segment -
Adhesives 40,562 2,302 14,570 582 580
Corporate
assets and
allocations - (5,256) 161,278 - -
Total
Consoli-
dated $409,855 $10,236 $420,849 $19,738 $32,576
1997
Energy
products
segment $372,727 $39,243 $228,798 $13,383 $ 6,001
Industrial
products
segment
- - SBQ 67,502 4,246 45,543 3,571 588
Industrial
products
segment -
Adhesives 40,941 1,799 13,505 655 550
Corporate
assets and
allocations - (4,591) 215,053 - -
Total
Consoli-
dated $481,170 $ 40,697 $502,899 $17,609 $ 7,139
Note 3 Accrued Liabilities and Other
Accrued liabilities and other consist of the following:
(In thousands) 1999 1998
Accrued payroll and payroll related items $10,562 $10,554
Accrued environmental remediation 5,364 2,675
Deferred revenue 4,419 635
Workers' compensation 2,305 3,242
Accrued interest 2,151 2,186
Other 3,286 4,951
Note 4 Long-term Investments
At September 25, 1999 and September 26, 1998, the Company's
long-term investments, which are all classified as available
for sale, consist of the following:
(In thousands)
Amortized Gross Unrealized Market
1999 Cost Gains Losses Value
Corporate bonds $49,131 $107 $(2,222) $47,016
U.S. government-backed
Securities 6,035 4 (45) 5,994
$55,166 $111 $(2,267) $53,010
Equity securities $ 4,800 $ - $(3,250) $ 1,550
1998
Corporate bonds $46,945 $163 $(1,393) $45,715
U.S. government-backed
Securities 20,337 176 (10) 20,503
Other debt securities 7,997 11 - 8,008
$75,279 $350 $(1,403) $74,226
Equity securities $ 4,800 $ - $(3,400) $ 1,400
At September 25, 1999, scheduled maturities of the
Company's investments in long-term debt securities were as
follows:
(In thousands) Average Amortized Market
Year End Rate Cost Value
One year or less 6.23 $14,323 $14,261
One year through five years 6.98 11,854 11,706
After five years 9.22 28,989 27,043
$55,166 $53,010
Gross gains and losses of $0.2 million and $0.9 million,
respectively, were realized during fiscal 1999. Fiscal 1998
gross realized gains and losses were $0.1 million and $0.4
million, respectively. There were no realized gains or losses
on available for sale securities in fiscal 1997.
Note 5 Long-term Debt and Credit Facility
Long-term debt of the Company consists of the following:
(In thousands) 1999 1998
13.5% senior secured notes due
July 15, 2003 (Notes), interest
due semi-annually, secured by
property, plant and equipment
(net of unamortized discount of
$3,009 and $3,712, respectively) $71,649 $74,946
Other 1,382 2,057
73,031 77,003
Less current portion (198) (678)
$72,833 $76,325
The Notes are unconditionally guaranteed in full, jointly and
severally, by each of the Company's subsidiaries and are
secured by substantially all of the Company's property, plant
and equipment. The indenture relating to the Notes contains a
number of restrictive covenants including, among other things,
limitations on the ability of the Company to incur additional
indebtedness; create liens; make certain restricted payments,
including dividends; engage in certain transactions with
affiliates; engage in sale and leaseback transactions; dispose
of assets; issue or sell stock of its subsidiaries; enter into
agreements that restrict the ability of its subsidiaries to
pay dividends and make distributions; engage in mergers,
consolidations and transfers of substantially all of the
Company's assets; and make certain investments, loans and
advances. The Notes may be redeemed at the option of the
Company, at any time, in whole or in part, beginning in 2000,
initially at a price of approximately 104%, declining to 100%
in 2002.
The Company has a $50.0 million revolving credit agreement
with interest rates that range from the prime rate to prime
plus .25% with respect to domestic rate loans, and interest
rates on offshore rate loans (based on LIBOR) that range from
the offshore rate plus .375% to the offshore rate plus .875%.
The credit facility contains certain financial covenants that
become applicable if the Company does not maintain specified
levels of cash and investments and earnings (as defined).
These covenants include a maximum ratio of debt to cash flow,
a minimum interest coverage ratio, a maximum outstanding loans
under the line to working capital and a minimum net worth.
The credit facility also has restrictions on capital
expenditures and the sale of certain assets. At September 25,
1999 approximately $1.4 million of the credit facility was
utilized to collateralize letters of credit and $48.6 million
was available for borrowing. The credit facility expires in
fiscal 2003.
During 1999 the Company purchased $4.0 million principal
amount of its Notes on the open market. The Company paid a
premium and wrote off a prorata portion of unamortized debt
discount and debt issuance costs which resulted in an
extraordinary charge of $0.4 million, net of applicable income
tax benefit of $0.1 million, or $.02 per basic and diluted
share.
In connection with the retirement of long-term indebtedness,
the Company incurred prepayment costs and wrote off
unamortized debt discount and debt issuance costs in fiscal
1997, which resulted in an extraordinary charge of $9.3
million, net of applicable income tax benefit of $2.3 million,
or $.65 and $.62 per basic and diluted share, respectively.
Annual long-term debt maturities are $0.2 million in fiscal
2000, $0.2 million in fiscal 2001, $0.1 million in fiscal
2002, $74.7 million in fiscal 2003 and $0.1 million in 2004.
As of September 25, 1999 and September 26, 1998, the weighted-
average interest rate on outstanding notes payable was 5.9%
and 6.1%, respectively.
Note 6 Fair Value of Financial Instruments
The following methods and assumptions were used to estimate
the fair value of financial instruments:
Cash and short-term investments-The carrying amount
approximates fair value because of the short maturity of these
instruments.
Long-term investments-The carrying amount is fair value which
is based upon quoted market prices.
Notes payable-The carrying amount approximates fair value
because of the short maturity of these instruments.
Long-term debt-The fair value of the Company's Notes is based
upon their trading price as of fiscal year-end. The fair
value of other long-term debt was estimated by calculating the
present value of the remaining interest and principal payments
on the debt to maturity. The present value computation uses a
discount rate based upon current market rates.
The carrying amount and fair value of the Company's financial
instruments are as follows:
(In thousands) 1999 1998
Carrying Fair Carrying Fair
Amount Value Amount Value
Cash and short-term
investments $31,105 $31,105 $66,472 $66,472
Long-term investments 54,560 54,560 75,626 75,626
Notes payable 394 394 242 242
Long-term debt 72,833 78,228 76,325 87,012
Note 7 Preferred Stock
The Company's authorized stock includes two million shares of
Class A Preferred Stock, issuable in one or more series. The
rights, preferences, privileges and restrictions of any series
of Class A Preferred Stock; the number of shares constituting
any such series and the designation thereof, are subject to
determination by the Board of Directors.
One million shares of the Class A Preferred Stock has been
designated as Series B Junior Participating Preferred Stock,
par value $10 per share, in connection with a Shareholder
Rights Plan (Plan) adopted in November, 1998. Pursuant to the
Plan, one Preferred Stock Purchase Right (Right) is attached
to each outstanding share of common stock of the Company.
The Plan includes provisions which are intended to protect
shareholders against certain unfair and abusive takeover
attempts by anyone acquiring or tendering for 20% or more of
the Company's common stock. The Company may redeem the Rights
for one-half cent per Right at any time before a 20% position
has been acquired. The Rights expire in November 2008.
Note 8 Stock Options and Warrants
The Company has various stock option plans under which the
Company may grant incentive and nonqualified stock options and
stock appreciation rights to purchase shares of the Company's
common stock. All incentive stock options were granted at
fair market value on the date of grant. Incentive stock
options generally become exercisable beginning one to three
years after the grant date and expire after ten years.
Nonqualified stock options become exercisable according to a
vesting schedule determined at the grant date and expire no
later than ten years after grant. Nonqualified stock options
were granted during fiscal 1999 at exercise prices that were
approximately 87% of the market price on the date of grant.
Nonqualified stock options were granted at exercise prices
approximating the market price on the date of grant during
fiscal 1998. For fiscal 1999 and 1998, the weighted-average
fair value of options granted was $5.96 and $9.29,
respectively. A summary of transactions in the plans follows:
1999 1998 1997
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Outstanding,
beginning
of year 1,378,114 $10.67 896,755 $ 6.73 1,629,330 $7.22
Granted 552,000 7.31 851,950 14.37 - -
Expired (158,075) 13.32 (170,132) 13.56 (87,395) 8.01
Exercised (21,410) 7.55 (200,459) 6.32 (645,180) 7.78
Outstanding,
end of
year 1,750,629 $ 9.41 1,378,114 $10.67 896,755 $6.73
Exercisable,
end of
year 538,157 $ 6.81 445,549 $ 6.32 489,504 $7.73
Available
for grant 938,470 - 333,440 - 1,153,230 -
The Company accounts for these plans in accordance with the
intrinsic value method. Under this method, compensation cost
is recognized over the vesting period for any difference
between the option price and the market price at the date of
grant. Compensation cost for these plans was not material for
fiscal 1999, 1998, and 1997. Unrecognized compensation costs
associated with prior grants that will be recognized in future
periods is $0.6 million at September 25, 1999.
Pro forma compensation cost, net income (loss) and per share
amounts computed as if the Company had accounted for option
grants on the fair value method would have been $1.2 million,
$(50.6) million and $(2.32) basic and diluted, respectively,
for fiscal 1999 and $0.8 million, $3.3 million, and $.14 basic
and $.14 diluted, respectively for fiscal 1998. Amounts for
fiscal 1997 would not have been materially different from
reported amounts.
The fair value of the granted options were determined using
the Black-Scholes option pricing model with the following
assumptions for fiscal 1999 and 1998, respectively: no common
stock dividends; expected volatility of 58% and 59%; risk-free
interest rates of 6.1% and 5.5%; and expected life of 8 years
and 7 years.
A summary of information about stock options outstanding at
September 25, 1999 follows:
Options Outstanding Options Exercisable
Range of Average Average Average
Exercise Exercise Remaining Exercise
Prices Shares Price Life Shares Price
$2.63-$5.94 278,954 $ 4.17 5.4 239,852 $ 4.16
$6.13-$9.53 822,775 7.27 7.7 224,855 7.19
$13.25-$14.38 648,900 14.37 8.3 73,450 14.20
1,750,629 $ 9.40 7.5 538,157 $ 6.81
At September 25, 1999, the Company had common stock warrants
outstanding, exercisable for approximately 272,000 shares of
the Company's common stock at a price of $8.00 per share and
437,000 shares at a price of $4.00 per share. The warrants
expire October 4, 2000 and July 15, 2003, respectively.
Note 9 Commitments and Contingencies
The Company has various commitments for the purchase of
materials, supplies and energy arising in the ordinary course
of business.
The Company has change of control severance agreements with
certain of its key employees. The agreements contain
provisions that would entitle each participant to receive an
amount ranging from two to three times the participant's base
salary plus two to three times the participant's five year
average bonus, and continuation of certain benefits, if there
is a change of control of the Company (as defined) and a
termination of employment.
The Company is subject to various claims, lawsuits and
administrative proceedings arising in the ordinary course of
business with respect to workers' compensation, health care
and product liability coverages (each of which is self-
insured to certain levels), as well as commercial and other
matters. The Company accrues for the cost of such matters
when the incurrence of such costs is probable and can be
reasonably estimated. Based upon its evaluation of available
information, management does not believe that any such matters
are likely, individually or in the aggregate, to have a
material adverse effect upon the Company's consolidated
financial position, results of operations or cash flows.
The Company is subject to federal, state and local
environmental laws and regulations, including, among others,
the Resource Conservation and Recovery Act (RCRA), the Clean
Air Act, the 1990 Amendments to the Clean Air Act and the
Clean Water Act, and all regulations promulgated in connection
therewith. Such laws and regulations include those concerning
the discharge of contaminants as air emissions or waste water
effluents and the disposal of solid and/or hazardous wastes
such as electric arc furnace dust. As such, the Company is
from time to time involved in administrative and judicial
proceedings and administrative inquiries related to
environmental matters.
As with other steel mills in the industry, the Company's steel
mini-mills produce dust which contains lead, cadmium and
chromium, and is classified as a hazardous waste. The Company
currently collects the dust produced by its electric arc
furnace operations through emission control systems and
contracts with a company for treatment and disposal of the
dust at an EPA-approved facility.
In two separate incidents occurring in fiscal 1993 and 1992,
radioactive substances were accidentally melted at Newport,
resulting in the contamination of a quantity of electric arc
furnace dust. The Company has contracted with a company to
dispose of the dust at an EPA - approved facility. The
project is expected to be completed by the second quarter of
fiscal 2000.
The estimated costs associated with these incidents were
initially recorded as extraordinary items. Such estimates
have been adjusted periodically to reflect the most current
information. As such, the Company recorded an extraordinary
credit of $0.7 million, net of taxes of $0.3 million, in
fiscal 1998. In the second quarter of fiscal 1999, the
Company recorded an additional $4.3 million in disposal costs
as well as additional expected insurance recoveries of $0.9
million in connection with its efforts to dispose of the dust.
These amounts were recorded as an extraordinary charge of $3.4
million. The Company believes disposal costs will not exceed
its gross environmental remediation reserves as of September
25, 1999 of $5.3 million. In connection with these incidents,
the Company has an insurance receivable outstanding of $1.6
million as of September 25, 1999.
Subject to the uncertainties concerning the storage of the
radiation contaminated dust, the Company believes that it is
currently in compliance in all material respects with all
applicable environmental regulations. The Company cannot
predict the level of required capital expenditures or
operating costs that may result from compliance with future
environmental regulations.
Capital expenditures for the next twelve months relating to
environmental control facilities are expected to be
approximately $0.8 million. Such expenditures could be
influenced by new or revised environmental regulations and
laws or new information or developments with respect to the
Company's operating facilities.
As of September 25, 1999, the Company had environmental
remediation reserves of $5.4 million attributable primarily to
accrued disposal costs for radiation contaminated dust. Based
upon its evaluation of available information, management does
not believe that any of the environmental contingency matters
discussed above are likely, individually or in the aggregate,
to have a material adverse effect upon the Company's
consolidated financial position, results of operations or cash
flows. However, the Company cannot predict with certainty
that new information or developments with respect to its
environmental contingency matters, individually or in the
aggregate, will not have a material adverse effect on the
Company's consolidated financial position, results of
operations or cash flows.
Note 10 Employee Benefit Plans
The Company has established various profit sharing plans at
the operating companies which are based on the earnings of the
respective companies. Generally, the plans require mandatory
contributions at a specified percentage of pretax profits
(with certain guaranteed minimums based on hours worked) for
the bargaining unit employees, and discretionary contributions
for salaried employees. The Company also has defined
contribution plans covering substantially all of its employees
and a non-qualified deferred compensation plan covering
certain employees. The expense for these plans was
approximately $1.1 million, $3.3 million and $2.8 million in
fiscal years 1999, 1998, and 1997, respectively.
Note 11 Income Taxes
The provision (credit) for income taxes, including ($0.1)
million, $0.3 million and ($2.3) million allocated to
extraordinary items in fiscal 1999, 1998 and 1997,
respectively, consists of the following:
(In thousands) 1999 1998 1997
Current $(2,917) $1,235 $2,780
Deferred (919) 1,694
(649)
Tax benefit of employee
stock option exercises
allocated to equity - 474 1,281
Provision (credit) for
income taxes $(3,836) $3,403 $3,412
The income tax provision (credit) differs from the amount
computed by applying the statutory federal income tax rate to
income (loss), including extraordinary items, before income
taxes for the following reasons:
(In thousands) 1999 1998 1997
Income tax provision
(credit) at statutory
tax rate of 35% $(18,629) $2,607 $2,569
Change in taxes resulting from:
State income taxes,
net of federal effect (334) 510 95
Change in valuation
Allowance 15,603 519 885
Other, net (476) (233)
(137)
Provision (credit) for
income taxes $ (3,836) $3,403 $3,412
The following represents the components of deferred tax
liabilities and assets at September 25, 1999 and September 26,
1998:
(In thousands) 1999 1998
Deferred tax liabilities:
Property, plant and equipment $27,348 $28,235
Other items 171 353
27,519 28,588
Deferred tax assets:
Reserves and accruals 7,332 6,707
Net operating tax loss
Carryforward 31,338 14,076
Alternative minimum tax and
other tax credit carryforwards 3,155 5,933
Unrealized loss on investments 2,010 1,663
Other items 535 538
44,370 28,917
Valuation allowance (20,077) (4,474)
Net deferred tax assets 24,293 24,443
Net deferred tax liability $ 3,226 $ 4,145
For federal income tax purposes, the Company has alternative
minimum tax credit carryforwards of approximately $3.2
million, which are not limited by expiration dates, and net
operating tax loss carryforwards of approximately $89.5
million, which expire beginning in 2008. The Company has
recorded deferred tax assets related to these carryforwards,
net of a deferred tax asset valuation allowance. In
estimating the amount of the valuation allowance required,
the Company has considered future taxable income related to
the reversal of temporary differences in the tax and financial
reporting basis of assets and liabilities.
Note 12 Related Party Transactions
One of the Company's directors has a controlling interest in a
company which purchases secondary and limited service tubular
products from Newport. Sales to this customer were
approximately $11.1 million, $13.2 million and $15.6 million
for fiscal years 1999, 1998 and 1997, respectively. Trade
receivables from this customer were $1.3 million and $1.0
million at the end of fiscal 1999 and 1998, respectively.
Note 13 Quarterly Financial Data (unaudited)
Quarterly results of operations for fiscal 1999 and 1998 are
as follows:
(In thousands, except per share amounts)
First Second Third Fourth
1999 Quarter Quarter Quarter Quarter
Net sales $54,269 $56,460 $59,582 $72,252
Gross loss (6,681) (6,689) (3,604) (3,312)
Loss before extra-
ordinary items (11,382) (14,658) (8,581) (10,932)
Net loss (11,819) (18,058) (8,581) (10,932)
Loss per common share
before extraordinary
items
Basic and diluted (.50) (.67) (.40) (.51)
Net loss per common
share
Basic and diluted (.52) (.83) (.40) (.51)
1998
Net sales $123,733 $123,566 $96,882 $65,674)
Gross profit
(loss) 17,591 16,179 9,753 (4,989)
Income (loss) before
extraordinary item 6,537 5,736 1,189 (10,071)
Net income (loss) 6,537 5,736 1,189 ( 9,412)
Income (loss) per
common share
before extraordinary
item
Basic .27 .24 .05 (.44)
Diluted .26 .23 .05 (.44)
Net income (loss)
per common share
Basic .27 .24 .05 (.41)
Diluted .26 .23 .05 (.41)
Reference is made to Note 1: Summary of Significant
Accounting Policies - Property, Plant and Equipment and
Depreciation regarding the abandonment of certain equipment at
Newport. Also, reference is made to Notes 5 and 9 to the
Consolidated Financial Statements for a discussion of
extraordinary items in fiscal 1999 and 1998.
Note 14 Summarized Financial Information
The Company's Notes are unconditionally guaranteed in full,
jointly and severally, by each of the Company's subsidiaries
(Subsidiary Guarantors), each of which is wholly-owned.
Separate financial statements of the Subsidiary Guarantors are
not presented because they are not deemed material to
investors. The following is summarized financial information
of the Subsidiary Guarantors as of September 25, 1999 and
September 26, 1998 and for each of the three years in the
period ended September 25, 1999. All significant intercompany
accounts and transactions between the Subsidiary Guarantors
have been eliminated.
(In thousands) September 25, 1999 September 26,
1998
Current assets $115,172 $131,227
Noncurrent assets 148,858 142,485
Current liabilities 50,357 44,625
Payable to parent $192,090 $174,895
Other noncurrent
Liabilities 1,184 1,379
Total noncurrent
Liabilities $193,274 $176,274
Fiscal Year Ended
(In thousands) 1999 1998 1997
Net sales $242,563 $409,855 $481,170
Gross profit (loss) (20,286) 38,534 68,054
Income (loss) before
extraordinary items (49,656) 2,164 7,690
Net income (loss) (53,056) 2,823 7,690
Report of Management
The accompanying consolidated financial statements have been
prepared by the management of NS Group, Inc., in conformity
with generally accepted accounting principles and, in the
judgment of management, present fairly and consistently the
Company's consolidated financial position and results of
operations. These statements necessarily include amounts that
are based on management's best estimates and judgments. The
financial information contained elsewhere in this report is
consistent with that contained in the consolidated financial
statements.
In fulfilling its responsibilities for the integrity of
financial information, management maintains accounting systems
and related controls. These controls provide reasonable
assurance, at appropriate costs, that assets are safeguarded
against losses and that financial records are reliable for use
in preparing financial statements. These systems are enhanced
by written policies, an organizational structure that provides
division of responsibilities and careful selection and
training of qualified people.
In connection with their annual audit, independent public
accountants perform an examination in accordance with
generally accepted auditing standards, which includes a review
of the system of internal accounting control and an expression
of an opinion that the consolidated financial statements are
fairly presented in all material respects.
The Board of Directors, through its Audit Committee composed
solely of non-employee directors, reviews the Company's
financial reporting and accounting practices. The independent
public accountants meet regularly with and have access to this
Committee, with or without management present, to discuss the
results of their audit work.
/s/ Clifford R. Borland
Clifford R. Borland
Chairman and Chief
Executive Officer
/s/ Rene, J. Robichaud
Rene, J. Robichaud
President and Chief
Operating Officer
/s/John R. Parker
John R. Parker
Vice President, Treasurer and
Chief Financial Officer
Report of Independent Public Accountants
To the Shareholders of NS Group, Inc.
We have audited the accompanying consolidated balance sheets
of NS Group, Inc. (a Kentucky corporation) and subsidiaries as
of September 25, 1999 and September 26, 1998, and the related
consolidated statements of operations, common shareholders'
equity and cash flows for each of the three years in the
period ended September 25, 1999 (as restated - see Note 1).
These financial statements are the responsibility of the
Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management,
as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial
position of NS Group, Inc. and subsidiaries as of September
25, 1999 and September 26, 1998, and the results of their
operations and their cash flows for each of the three years in
the period ended September 25, 1999 in conformity with
generally accepted accounting principles.
As explained in Note 1 to the consolidated financial
statements, the Company has given retroactive effect to the
change by one of its subsidiaries from the LIFO method to the
FIFO method of inventory costing.
ARTHUR ANDERSEN LLP
Cincinnati, Ohio
April 10, 2000
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of
the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NS GROUP, INC.
Date: April 10, 2000 By: /s/Thomas J. Depenbrock
Thomas J. Depenbrock
Vice President and
Corporate Controller
Exhibit 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to
the incorporation of our reports included or incorporated by
reference in this Form 10-K/A, Amendment No. 2, into the
Company's previously filed Registration Statements, File
Nos. 33-24182, 33-24183, 33,51899, 33-28995, 33-37454, 33-
39695, 33-56637, 333-03657, 333-73161, 333-73163, 333-73169
and 333-85925.
/s/Arthur Andersen LLP
Cincinnati, Ohio Arthur Andersen LLP
April 10, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This exhibit 27 contains summary financial information extracted from NS
Group, Inc.'s consolidated financial statements as of and for the fiscal
year ended September 25, 1999, included in the Company's Annual Report
on Form 10-K/A, Amendment No. 2 and is qualified in its entirety by
reference to such consolidated financial statements.
</LEGEND>
<RESTATED>
<CIK> 0000745026
<NAME> NS GROUP, INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-25-1999
<PERIOD-START> SEP-27-1998
<PERIOD-END> SEP-25-1999
<EXCHANGE-RATE> 1
<CASH> 1,073
<SECURITIES> 30,032
<RECEIVABLES> 41,611
<ALLOWANCES> 687
<INVENTORY> 56,659
<CURRENT-ASSETS> 154,781
<PP&E> 330,477
<DEPRECIATION> 187,330
<TOTAL-ASSETS> 359,795
<CURRENT-LIABILITIES> 57,208
<BONDS> 72,833
0
0
<COMMON> 257,271
<OTHER-SE> (36,119)
<TOTAL-LIABILITY-AND-EQUITY> 359,795
<SALES> 242,563
<TOTAL-REVENUES> 242,563
<CGS> 262,849
<TOTAL-COSTS> 262,849
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 11,601
<INCOME-PRETAX> (49,280)
<INCOME-TAX> (3,727)
<INCOME-CONTINUING> (45,553)
<DISCONTINUED> 0
<EXTRAORDINARY> (3,837)
<CHANGES> 0
<NET-INCOME> (49,390)
<EPS-BASIC> (2.26)
<EPS-DILUTED> (2.26)
</TABLE>
