SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2000
COMMISSION FILE NUMBER 1-9838
NS GROUP, INC
(Exact name of registrant as specified in its charter)
Kentucky 61-0985936
(State of Incorporation) (I.R.S. Employer Identification Number)
530 West Ninth Street, Newport, Kentucky 41071
(Address of principal executive offices)
Registrant's telephone number, including area code (859) 292-6809
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, no par value New York Stock Exchange
Preferred Stock Purchase Rights 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 [x ]
Based on the closing sales price of December 1, 2000, as
reported in The Wall Street Journal, the aggregate market
value of the voting stock held by non-affiliates of the
registrant was approximately $116.1 million.
The number of shares outstanding of the registrant's
Common Stock, no par value, was 20,927,482 at December 1,
2000.
Documents Incorporated by Reference
Part III incorporates certain information by reference
from the Company's Proxy Statement dated December 26, 2000 for
the Annual Meeting of Shareholders on February 15, 2001
("Proxy").
Table of Contents
PART I Page
Item 1. Business 3
Item 2. Properties 10
Item 3. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of
Security Holders 11
PART II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters 12
Item 6. Selected Consolidated Financial Data 13
Item 7. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 14
Item 7A. Quantitative and Qualitative
Disclosures About Market Risk 24
Item 8. Financial Statements and Supplementary
Data 24
Item 9. Changes in and Disagreements with
Accountants on Accounting and
Financial Disclosure 58
PART III
Item 10. Directors and Executive Officers of
the Registrant 58
Item 11. Executive Compensation 58
Item 12. Security Ownership of Certain Beneficial
Owners and Management 58
Item 13. Certain Relationships and Related
Transactions 58
PART IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K 59
The matters discussed or incorporated by reference in
this Report on Form 10-K that are forward-looking statements
(as defined in the Private Securities Litigation Reform Act of
1995) involve risks and uncertainties. These risks and
uncertainties may cause the actual results or performance of
the Company to differ materially from any future results or
performance expressed or implied by such forward-looking
statements. See the introductory paragraph of Management's
Discussion and Analysis of Financial Condition and Results of
Operations included in Item 7 of this report and Exhibit 99.1
to this Form 10-K for a discussion of risks and uncertainties.
PART I
ITEM 1. BUSINESS
The Company was incorporated in Kentucky in 1980. As used
herein, the terms "Company" and "NS Group" refer to NS Group,
Inc. and its wholly-owned subsidiaries - Newport Steel
Corporation (Newport or Welded), Koppel Steel Corporation
(Koppel or Seamless), Erlanger Tubular Corporation (Erlanger),
Imperial Adhesives, Inc. (Imperial) and Northern Kentucky
Management, Inc.
In October 2000 we sold our wholly-owned subsidiary,
Imperial Adhesives, Inc. for approximately $26.7 million in
cash. See Note 2 to the Consolidated Financial Statements for
additional information.
We conduct business in two industry segments: the Energy
Products Segment and the Industrial Products Segment. See the
segment data included in Management's Discussion and Analysis
of Financial Condition and Result of Operations and Note 3 to
the Consolidated Financial Statements, which contains
additional information pertaining to industry segment data.
Energy Products Segment
General
Our Energy Products Segment includes welded and seamless
tubular goods, primarily used in oil and natural gas drilling
and production operations, referred to as oil country tubular
goods, or OCTG. We also produce welded and seamless line pipe
products used in the transmission of oil and natural gas.
Further, we produce a limited amount of other tubular products
and hot rolled coils.
OCTG products are produced in numerous diameter sizes,
gauges, grades and end finishes. We manufacture most of our
OCTG products to American Petroleum Institute ("API")
specifications. The grade of pipe used in a particular
application depends on technical requirements for strength,
corrosion resistance and other performance qualities. OCTG
products are generally classified into groupings of "carbon"
and "alloy" grades. Carbon grades of OCTG products have lower
yield strength than alloy grades and therefore are generally
used in shallower oil and natural gas wells than alloy grades.
The majority of our welded tubular products are carbon grade
and the majority of our seamless products are alloy grade.
Carbon and alloy grades of OCTG products are manufactured
by both welded and seamless producers. Welded products are
produced by processing flat rolled steel into strips that are
cold-formed, welded, heat-treated or seam-annealed and end-
finished with threads and couplings. Seamless products are
produced by individually heating and piercing solid steel
billets into pipe and then end finishing the pipe in a manner
similar to welded pipe. The seamless manufacturing process
involves higher costs than the welded process and, as a
result, seamless products are generally priced higher than
comparably sized welded products.
Demand for our OCTG products is cyclical in nature, being
dependent on the number and depth of oil and natural gas wells
being drilled in the United States and globally. The level of
drilling activity is largely a function of the current and
anticipated prices of oil and natural gas. In addition,
shipments by domestic producers of OCTG products may be
positively or negatively affected by the amount of inventory
held by producers, distributors and end users, as well as
imports of OCTG products from foreign producers.
The average number of oil and gas drilling rigs operating
in the United States, U.S. domestic shipments of OCTG products
(excluding exports) and imports of OCTG products for the last
three fiscal years were as follows (Source: Baker Hughes,
Preston Pipe Report and Company estimates.):
2000 1999 1998
Average U.S. drilling rig count 844 602 905
OCTG shipments (millions of tons) 2.1 0.9 1.8
OCTG imports (million of tons) 0.6 0.1 0.4
Demand for line pipe is only partially dependent on oil
and natural gas drilling activities. Line pipe demand is also
dependent on factors such as the level of pipeline
construction activity, line pipe replacement requirements, new
residential construction and gas utility purchasing programs.
Overall, total shipments by domestic line pipe producers
(excluding exports) were 1.4 million tons in fiscal 2000, 1.9
million tons in each fiscal 1999 and fiscal 1998. Total
domestic shipments of line pipe product 16 inches in diameter
and smaller, the product sizes that we produce, were 1.1
million tons in fiscal 2000, 0.7 million tons in fiscal 1999
and 0.9 million tons in fiscal 1998.
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. pipe manufacturing companies. The
U.S. government is currently conducting "sunset reviews" of
the duties to determine whether such orders should be revoked.
These reviews are expected to be completed by July 2001.
In response to petitions filed with the U.S. government
by us and certain other line pipe producers, import relief was
granted to the line pipe industry effective March 1, 2000.
This relief is in the form of tariffs applied for three years
to certain imports of line pipe from countries other than
Canada and Mexico.
While the above mentioned actions have benefited domestic
OCTG and line pipe producers, we cannot predict the U.S.
government's future actions regarding these duties and tariffs
or any other future actions regarding import duties or other
trade restrictions on imports of OCTG and line pipe products.
Products
Our welded OCTG products are used primarily as casing in
oil and natural gas wells during drilling operations. Casing
forms the structural wall of oil and natural gas wells to
provide support and prevent caving during drilling operations
and is generally not removed after it has been installed in a
well. Welded OCTG products are generally used when higher
strength is not required, typically in wells less than 10,000
feet in depth. We sell our welded OCTG products in both a
plain end (unthreaded) condition as well as a threaded and
coupled product in both carbon and alloy grades. Our welded
tubular products range in size from 4.5 to 16.0 inches in
outside diameter.
Our seamless OCTG products are used as drill pipe, casing
and production tubing. Drill pipe is used and may be reused
to drill several wells. Production tubing is placed within
the well and is used to convey oil and natural gas to the
surface. Our seamless OCTG products are primarily sold as a
finished threaded and coupled product in both carbon and alloy
grades. Compared to similarly sized welded products, seamless
production tubing and casing are better suited for use in
hostile drilling environments such as deeper wells or off-
shore drilling because of their greater strength and
durability. The majority of our seamless OCTG product sales
are of production tubing in sizes ranging from 1.9 inches to 5
inches in outside diameter.
Our line pipe products are used primarily in gathering
lines for the transportation of oil and natural gas at the
drilling site and in transmission lines by both gas utility
and transmission companies. Line pipe products are coated and
shipped as a plain end product. The majority of our line pipe
sales are welded products.
Our OCTG products are inspected and tested to ensure that
they meet or exceed API specifications. Products that do not
meet specification are classified as less than prime products
and are sold for use in other applications at substantially
reduced prices.
In addition, we also sell a limited amount of other
products, including standard pipe, piling and hot rolled coil.
Markets and Distribution
We sell our energy related tubular products to customers
through an in-house sales force. Nearly all of our OCTG
products are sold to domestic distributors, some of whom
subsequently sell our products into the international
marketplace. The primary geographic markets for our seamless
OCTG products have been the southwest United States and
various foreign markets, including offshore applications. We
have historically marketed our welded OCTG products in the
east, central and southwest regions of the United States. In
these areas, shallow oil and natural gas drilling and
exploration activity utilize welded tubular products.
Customers
We have approximately 185 tubular product customers. Our
OCTG and line pipe products are used by super-major, major and
independent oil and natural gas exploration and production
companies in drilling and production applications. Line pipe
products are also used by gas utility and transmission
companies. Substantially all of our OCTG products are sold to
domestic distributors. Line pipe products are sold to both
domestic distributors and directly to end users. We have long-
standing relationships with many of our larger customers;
however, we believe that we are not dependent on any one
customer and that we could, over time, replace lost sales
attributable to any one customer. In fiscal 2000, Bourland &
Leverich, a distributor of our products, accounted for 14% of
our total net sales.
Competition
The markets for our tubular products are highly
competitive and cyclical. Principal competitors in our
primary markets include domestic and foreign integrated
producers, mini-mills and welded tubular product processing
companies. We believe that the principal competitive factors
affecting our business are price, quality and customer
service.
In the welded OCTG and line pipe market, we compete
against certain manufacturers who purchase hot rolled coils
for further processing into welded OCTG and line pipe
products. The cost of finished tubular products for these
manufacturers is largely dependent on the market price of hot
rolled coils. Depending on market supply and demand for hot
rolled coils, these tubular manufacturers may purchase hot
rolled coils at a lower or higher cost than our cost to
manufacture hot rolled coils. Increases or decreases in
imports of hot rolled coils can also impact the market price
for hot rolled coils.
Our principal domestic competitors in the welded tubular
market are Lone Star Steel Company, Maverick Tube Corporation,
LTV Corporation and IPSCO Steel, Inc. In the small diameter
seamless OCTG market in which we compete, our principal
competitors include the U.S. Steel Group and a number of
foreign producers.
Manufacturing
We manufacture welded tubular products at our facilities
located near Newport, Kentucky. Our seamless tubular products
are manufactured at our facilities located in Ambridge,
Pennsylvania. During fiscal 2000, we made capital investments
of $7.2 million ($26.6 million in fiscal 1999) in our energy
products business segment to improve quality, increase
productivity and expand product range. The rated annual
capacities of our welded and seamless tubular facilities are
570,000 tons and 250,000 tons, respectively. Capacity
utilization of the welded tubular facilities during fiscal
2000 was 73%, and capacity utilization for the seamless
tubular facilities during fiscal 2000 was 69%.
We process and finish our tubular products at facilities
located at (i) the Port of Catoosa, near Tulsa, Oklahoma, (ii)
Baytown, Texas, located near Houston, Texas; and (iii) the
Seamless facilities located in Ambridge, Pennsylvania. Our
finishing processes include upsetting, which is a forging
process that thickens tube ends; heat treating, which is a
furnace operation designed to strengthen the steel;
straightening; non-destructive testing; coating for rust
prevention; and threading.
All of our tube-making and finishing facilities are
located on or near major rivers or waterways, enabling us to
transport our tubular products into the southwest by barge.
We ship substantially all of our seamless and welded OCTG
products destined for the southwest region by barge, which is
a lower cost alternative to rail and truck shipping.
We manufacture our tubular products in a mini-mill
environment. The term mini-mill connotes a smaller,
relatively low cost mill that typically uses steel scrap as
its basic raw material and offers a limited range of products.
At our Welded and Seamless facilities, steel scrap is melted
in electric arc furnaces and poured into continuous casting
machines. A hot strip rolling mill converts continuous cast
slabs into hot rolled coils at the Welded facility. Hot
rolled coils are slit and formed into welded tubular products
at two welded pipe-making facilities. At the Seamless
facility, continuous cast tube rounds are reheated, pierced
and rolled to specific size and wall thickness.
The Welded and Seamless melt shops rated annual
capacities are 700,000 tons and 450,000 tons, respectively.
Capacity utilization in fiscal 2000 was 56% for the Welded
facility and 76% for the Seamless facility.
Raw Materials and Supplies
The primary raw material used in our energy products
segment is steel scrap, which is generated principally from
industrial, automotive, demolition, railroad and other steel
scrap sources. We purchase steel scrap either through scrap
brokers or directly in the open market. The long-term demand
for steel scrap in the domestic steel industry may increase as
steel-makers continue to expand steel scrap-based electric arc
furnace and thin slab casting capacities. For the foreseeable
future, however, we believe that supplies of steel scrap will
continue to be available in sufficient quantities at
competitive prices.
In addition, a number of technologies exist for the
processing of iron ore into forms which may be substituted for
steel scrap in electric arc furnace-based steel-making
operations. Such forms include direct-reduced iron, iron
carbide and hot-briquetted iron.
Our melt shop facilities consume significant amounts of
electricity. We currently purchase electricity from utility
companies located near our mini-mill facilities pursuant to
various contracts. The contracts provide for unlimited power
demand and discounted rates in return for the utilities' right
to periodically curtail service during periods of peak demand.
These curtailments are generally limited to a few hours and
historically have had a negligible impact on our operations.
Industrial Products Segment - Special Bar Quality Products
General
The bar product market represents the second largest
segment of the steel market. Total fiscal 2000 shipments by
domestic producers of hot rolled bar (which includes our SBQ
products) were approximately 8.4 million tons. Bar products
are generally categorized into merchant bar quality products
and SBQ products. SBQ products are used for a wide variety of
industrial applications including automotive, metal-working
fabrication, construction, farm equipment, heavy machinery and
trucks and off-road vehicles. We compete in relatively small
segments of the SBQ market. Unlike the majority of SBQ
products, which are primarily used by passenger car
manufacturers, heavy SBQ products such as those we produce are
primarily used in the manufacture of heavy industrial
products.
At our Koppel facility, we manufacture SBQ products in
sizes ranging from 2.875 to 6.0 inches in diameter for a
specialized niche of the market. We produce SBQ products from
continuous cast blooms. These SBQ products are primarily used
in critical weight-bearing applications such as suspension
systems, gear blanks, drive axles for tractors and off-road
vehicles, heavy machinery components and hydraulic and
pneumatic cylinders. Our SBQ products are ISO 9002 certified.
The demand for our SBQ products is cyclical in nature and is
sensitive to general economic conditions.
Markets and Distribution
We sell our SBQ products to approximately 50 customers
located generally within 400 miles of our Koppel, Pennsylvania
facilities.
Customers
We sell our SBQ products to service centers, cold
finishers, forgers and original equipment manufacturers.
Competition
We compete with a number of SBQ manufacturers, including
CSC Industries, Inc., Republic Technologies, Inc., Ispat
Inland, Inc., Qualitech, Inc., Mac Steel Division of Quanex
Corporation, North Star Steel Company, Inc. and the Timken
Company.
Manufacturing Process
Our SBQ products mill utilizes the Koppel facility's melt
shop to produce 9 inch square blooms. Blooms are reheated and
passed through a series of rolls in the bar mill, where they
are reshaped into round bars. SBQ products are available in
both carbon and alloy grades in sizes measuring 2.875 to 6
inches in diameter. The bar mill's rated annual capacity is
200,000 tons and it operated at 68% of capacity in fiscal
2000.
Environmental Matters
Our business 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, we are 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, our steel mini-
mills produce dust which contains lead, cadmium and chromium,
and is classified as a hazardous waste. Dust produced by our
electric arc furnace operations is collected through emission
control systems and disposed at EPA-approved facilities.
In two separate incidents occurring in fiscal 1993 and
1992, radioactive substances were accidentally melted at our
welded tubular facility, resulting in the contamination of a
quantity of electric arc furnace dust. The dust has been
disposed at an EPA-approved facility and we are awaiting final
clean closure approvals.
We believe that we are currently in compliance in all
material respects with all applicable environmental
regulations. We 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 $2.1 million; however, such expenditures could
be influenced by new or revised environmental regulations and
laws or new information or developments with respect to our
operating facilities.
Based upon evaluation of available information, we do 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 NS Group's consolidated
financial position, results of operations or cash flows.
However, we cannot predict with certainty that new information
or developments with respect to our environmental contingency
matters, individually or in the aggregate, will not have a
material adverse effect on NS Group's consolidated financial
position, results of operations or cash flows.
Employees
As of September 30, 2000, we had 1,636 employees, of whom
390 were salaried and 1,246 were hourly. Substantially all of
our hourly employees are represented by the United
Steelworkers of America under contracts expiring in 2002 for
the Newport and Koppel operations and in 2003 for Erlanger.
ITEM 2. PROPERTIES
Our principal operating properties are listed below. We
believe our facilities are adequate and suitable for our
present level of operations.
Location and Properties
Energy Products Segment
Newport, Kentucky - We own approximately 250 acres of
real estate upon which is located a melt shop, hot strip mill,
two welded pipe mills, a barge facility, machine and
fabricating shops and storage and repair facilities
aggregating approximately 675,000 square feet, as well as
administrative offices. The facilities are also located
adjacent to rail lines.
Tulsa, Oklahoma - We lease approximately 36 acres of real
estate upon which is located a tubular processing facility.
The facility is located at the Tulsa Port of Catoosa where
barge facilities are in close proximity. Located on this
property are six buildings aggregating approximately 119,000
square feet which house the various finishing operations.
Koppel, Pennsylvania - We own approximately 160 acres of
real estate upon which are located a melt shop, machine and
fabricating shops, storage and repair facilities and
administrative offices aggregating approximately 500,000
square feet. The facilities are located adjacent to rail
lines. The melt shop and administrative offices support the
Seamless operations and the industrial products segment for
SBQ products.
Ambridge, Pennsylvania - We own approximately 45 acres of
real estate upon which are located a seamless tube making
facility and seamless tube finishing facilities aggregating
approximately 659,000 square feet. The facilities are located
adjacent to rail lines and river barge facilities.
Baytown, Texas - We own approximately 55 acres of real
estate upon which are located a tubular processing facility
and barge facilities. Located on the property are eight
buildings aggregating approximately 82,000 square feet which
house the various finishing operations.
Industrial Products Segment
Koppel, Pennsylvania - We own approximately 67 acres of
real estate upon which are located a bar mill, machine and
fabricating shops and storage repair facilities aggregating
approximately 400,000 feet. The melt shop and administrative
offices support the energy products Seamless operations and
the SBQ products operations.
Other
Newport, Kentucky - We own approximately 12 acres of
partially developed land near Newport, Kentucky, which is held
as investment property and is listed for sale.
Information regarding encumbrances on the Company's
properties is included in Note 6 to the Consolidated Financial
Statements.
ITEM 3. LEGAL PROCEEDINGS
We are subject to various claims, lawsuits and
administrative proceedings arising in the ordinary course of
business with respect to workers compensation, health care and
product liability coverages (each of which is self-insured to
certain levels), as well as commercial and other matters.
Based upon evaluation of available information, we do not
believe that any such matters are likely, individually or in
the aggregate, to have a material adverse effect upon NS
Group's consolidated financial position, results of operations
or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
NS Group is listed on the New York Stock Exchange under
the trading symbol NSS. As part of the NYSE decimal pilot
program, we began trading in decimals on September 25, 2000.
As of December 1, 2000 there were approximately 192 record
holders of common stock. The following table sets forth, for
the fiscal periods indicated, the high and low selling prices
of our common stock as reported on the New York Stock
Exchange.
Stock Price
Fiscal 2000 High Low
1st Quarter $12.63 $ 6.50
2nd Quarter 15.75 6.75
3rd Quarter 21.00 12.88
4th Quarter 21.38 13.13
Fiscal 1999 High Low
1st Quarter $ 7.81 $ 4.00
2nd Quarter 6.50 3.81
3rd Quarter 9.19 4.38
4th Quarter 13.69 8.00
Information regarding restrictions on common stock
dividends and warrants to purchase our common stock is
included in Notes 6 and 9 to the Consolidated Financial
Statements.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
(Dollars in thousands, except per share amounts)
2000 1999 1998 1997 1996
Summary of Operations
Net sales $355,086 $198,879 $369,293 $440,22 $369,466
Operating
income
(loss) (18,566) (49,307) 7,933 38,898 11,107
Operating
income
margin (5.2%) (24.8%) 2.1% 8.8% 3.0%
Income
(loss)
from
continuing
operations (24,048) (46,766) 2,108 12,213 (9,814)
Income
(loss)
before
extraordinary
items (22,899) (45,553) 3,391 13,185 (8,944)
Net
Income
(loss) (22,899) (49,390) 4,050 3,929 (8,944)
Per common
share
(diluted)
Income
(loss) from
continuing
operations (1.11) (2.14) .09 .82 (.71)
Income (loss)
before
extraordinary
items (1.06) (2.08) .14 .88 (.65)
Net
income (loss) (1.06) (2.26) .17 .26 (.65)
Dividends per
common share - - - - -
Weighted average
shares
outstanding-
diluted
(000's) 21,651 21,852 24,511 14,969 13,809
Other
Financial
and Statistical
Data
Working
Capital $116,562 $ 93,289 $143,997 $227,181 $ 74,579
Total
Assets 345,337 353,598 415,046 496,625 296,332
Long-term
Debt 72,915 72,321 75,762 75,861 164,518
Common
shareholders'
equity 198,845 221,152 279,013 275,398 60,218
Capital
Expenditures 7,499 27,818 31,996 6,589 6,279
Depreciation
and
amortization 22,691 22,665 20,538 23,170 20,237
EBITDA 8,049 (21,513) 30,475 59,771 32,614
Current ratio 2.75 2.80 3.99 2.72 2.18
Debt to total
Capitalization 27% 25% 21% 22% 73%
Book value per
outstanding
share $9.03 $10.31 $12.14 $11.81 $4.36
Product shipments
(tons)
Energy
Products 574,200 317,000 474,000 616,600 549,500
Industrial
Products 136,200 130,500 160,100 152,400 133,700
Employees 1,636 1,417 1,597 1,751 1,577
See Notes 1 and 2 to the consolidated financial statements
concerning the effects of discontinued operations on reported
amounts.
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;
* those other risks and uncertainties described under "Risk
Factors" included in Exhibit 99.1 of this report.
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 analysis
of financial condition and results of operations together with
the audited financial statements included in this report.
GENERAL
We conduct our business within two business segments,
which are as follows:
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 and natural gas. We also produce a
limited amount of other products, including standard pipe,
piling and hot rolled coil.
Industrial Products Segment
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
Discontinued Operations
On September 12, 2000, we announced that our Board of
Directors approved a plan to sell the stock of our wholly-
owned subsidiary, Imperial Adhesives, Inc. As a result, the
sales, costs and expenses, assets and liabilities, and cash
flows of the Industrial Products - Adhesives segment have been
classified as discontinued operations in our financial
statements. See Note 2 to the financial statements.
Accordingly, the discussion and analysis that follow focus on
the continuing operations of our remaining segments.
You should read Note 3 to the Consolidated Financial
Statements included in this report for additional information
pertaining to industry segment data.
RESULTS OF OPERATIONS
Overview
Demand for our OCTG products is cyclical in nature, being
dependent on the number and depth of oil and natural gas wells
being drilled in the United States and globally. The level of
drilling activity is largely a function of the current and
anticipated prices of oil and natural gas. In addition,
shipments by domestic producers of OCTG products may be
positively or negatively affected by the amount of inventory
held by producers, distributors and end users, as well as by
imports of OCTG products by foreign producers.
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.
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
throughout fiscal 1999. However, demand for our OCTG products
rose steadily throughout fiscal 2000 as increasing oil and
natural gas prices led to an increase in domestic drilling
activity. Rig count averaged 844 for fiscal 2000 and rose to
985 for the fourth quarter of fiscal 2000. As such, our
financial results improved throughout fiscal 2000 and the
Company returned to profitability in the fourth quarter of
fiscal 2000. See Note 14 for quarterly financial data.
Our December 31, 2000 quarter shipments will decline
significantly from the fourth quarter of fiscal 2000 levels as
a result of an increase in imports and higher inventory levels
of carbon grade OCTG products in the marketplace.
Specifically affected will be our welded OCTG shipments. We
expect to incur operating losses in the Energy Products
Segment in the December 31, 2000 quarter.
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 U.S.
government is currently conducting "sunset reviews" of the
duties to determine whether they should be revoked. These
reviews are expected to be completed by July 2001.
In response to petitions filed with the U.S. government
by us and certain other line pipe producers, import relief was
granted to the line pipe industry effective March 1, 2000.
This relief is in the form of tariffs applied for three years
to certain imports of line pipe from countries other than
Canada and Mexico.
While the above mentioned actions have benefited
domestic OCTG and line pipe producers, we cannot predict the
U.S. government's future actions regarding these duties and
tariffs or any other future actions regarding import duties or
other trade restrictions on imports of OCTG and line pipe
products.
The marketplace for our SBQ products has become
increasingly competitive. Selling prices have declined
significantly for the last two years, demand has declined and
service center inventories remain high. We expect to incur
operating losses in the Industrial Products Segment in the
December 31, 2000 quarter.
NS Group's net sales, gross profit (loss), operating
income (loss) and tons shipped by business segment for fiscal
2000, 1999 and 1998 are summarized in the following table:
(In thousands) 2000 1999 1998
Net sales
Energy products $ 299,235 $144,151 $296,690
Industrial products 55,851 54,728 72,603
$ 355,086 $198,879 $369,293
Gross profit (loss)
Energy products $ 6,737 $(32,924) $ 20,588
Industrial products (4,526) 463 6,942
$ 2,211 $(32,461) $ 27,530
Operating income (loss)
Energy products $ (5,527) $(42,854) $ 9,116
Industrial products (6,645) (2,707) 4,074
(12,172) (45,561) 13,190
Corporate allocations (6,394) (3,746) (5,257)
$ (18,566) $(49,307) $ 7,933
Tons shipped
Energy products
Seamless 154,000 64,500 152,000
Welded 420,200 252,500 322,000
574,200 317,000 474,000
Industrial products 136,200 130,500 160,100
710,400 447,500 634,100
Fiscal Year 2000 Compared to Fiscal Year 1999
Total net sales in fiscal 2000 were $355.1 million, an
increase of 78.5% from fiscal 1999. The increase in net sales
was attributable primarily to our Energy Products Segment. We
reported a net loss of $22.9 million, or a $1.06 loss per
basic and diluted share, in fiscal 2000 compared to a net loss
of $49.4 million, or a $2.26 loss per basic and diluted share
in fiscal 1999.
Energy Products
Energy Products Segment sales in fiscal 2000 were $299.2
million, an increase of 107.6% from fiscal 1999. Energy
Product Segment shipments of 574,200 tons increased 81.1% from
fiscal 1999. The increase was substantially attributable to
an increase in OCTG shipments, which resulted from the
increasing rig count. The average selling price for our
welded tubular products was $430 per ton, an increase of 12.6%
from fiscal 1999. The average selling price for our seamless
tubular products was $763 per ton, an increase of 3.1% from
fiscal 1999. The increase in average selling price was due
primarily to the market conditions discussed above and a
change in mix to higher priced products.
The Energy Product Segment recorded a gross profit of
$6.7 million and an operating loss of $5.5 million in fiscal
2000 compared to a gross loss and operating loss of $32.9
million and $42.9 million, respectively, in fiscal 1999. The
reduction in losses from the prior year was the result of a
significant increase in shipments, improved operating
efficiencies resulting from an increase in production levels
and improved pricing for welded and seamless tubular products.
Selling, general and administrative expense for the
Energy Product Segment in fiscal 2000 increased $2.3 million
from fiscal 1999, but due to the significant increase in
sales, it decreased to 4.1% of sales from 6.9% of sales in
fiscal 1999.
Industrial Products
Industrial Products Segments sales in fiscal 2000 were
$55.9 million, an increase of 2.1% from fiscal 1999. SBQ
product shipments of 136,200 tons increased 4.4% from fiscal
1999. The average selling price for SBQ product was $410 per
ton, a decrease of 2.1% from fiscal 1999.
The Industrial Products Segment incurred a gross loss of
$4.5 million and an operating loss of $6.6 million in fiscal
2000 compared to a gross profit of $0.5 million and an
operating loss of $2.7 million in fiscal 1999. The decrease
in gross profit and operating income were due primarily to the
decline in average selling price and an increase in steel
scrap raw material costs. Selling, general and administrative
expense for the SBQ products business decreased as a
percentage of sales from 5.8% in fiscal 1999 to 3.8% in fiscal
2000, due to cost reduction efforts.
Investment Income, Interest Expense, Other
Investment income decreased $2.7 million from fiscal 1999
due primarily to a decrease in average invested cash and
investment balances. Interest expense was basically unchanged
from fiscal 1999. Other income, net was $2.5 million in
fiscal 2000 and $3.7 million in fiscal 1999. The amounts
reported for fiscal year 2000 and 1999, include $1.7 million
and $2.8 million of cash receipts from favorable claim
settlements with our electrode suppliers relating to purchases
from several prior years.
Income Taxes
We exhausted our federal income tax refund capability in
fiscal 1999, and as such, tax benefits from operating losses
are offset by valuation allowances resulting in no net federal
tax benefit being recorded for losses. All recorded amounts
for income taxes in fiscal 2000 represent certain state and
local income taxes.
Fiscal Year 1999 Compared to Fiscal Year 1998
Total net sales in fiscal 1999 were $198.9 million, a
decrease of 46.1% from fiscal 1998. The decline in net sales
was attributable primarily to our Energy Products Segment. 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 $0.17 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.
In the second quarter of fiscal 1999, we recorded an
additional $4.3 million in disposal costs as well as an
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 and 1992. 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.
These amounts were recorded as extraordinary charges of $3.8
million, net of applicable income tax benefit of $0.1 million.
Energy Products
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.
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. 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 expenses increased as a
percentage of sales from 5.2% in fiscal 1998 to 8.4% in fiscal
1999.
Industrial Products
Industrial Products Segment 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.
The Industrial Products Segment 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.
Investment Income, Interest Expense, Other
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 $3.7 million in fiscal
1999 and included a $2.8 million favorable claim settlement
with our electrode suppliers relating to purchases from
several prior years.
Income Taxes
Our tax loss benefits in fiscal 1999 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.
LIQUIDITY AND CAPITAL RESOURCES
Working capital at September 30, 2000 was $116.6 million
compared to $93.3 million at September 25, 1999. The increase
in working capital was primarily the result of an increase in
accounts receivable and inventories more than offsetting an
increase in accounts payable and accrued liabilities. The
current ratio was 2.8 to 1 at both September 30, 2000 and
September 25, 1999. At September 30, 2000, we had cash and
investments totaling $52.9 million and had no advances against
our $50 million revolving credit facility.
Net cash flows from operating activities were a net use
of $24.6 million in fiscal 2000. We recorded a net loss from
continuing operations of $24.0 million in fiscal 2000. Major
sources of cash from operating activities in fiscal 2000
included $22.7 million in depreciation and amortization
charges; a $4.6 million decrease in operating supplies and
other current assets which resulted primarily from the receipt
of refundable federal income taxes; and a $4.5 million
increase in accrued liabilities and other as a result of a
higher balance of deferred revenue partially offset by a
decrease in accrued environmental liabilities. Major uses of
cash include a $23.0 million increase in accounts receivable
and a $19.6 million increase in inventories resulting from an
increase in business activity in our Energy Products Segment
in the last half of fiscal 2000.
Net cash flows from operating activities were a net use
of $15.4 million in fiscal 1999. We recorded a net loss from
continuing operations of $50.6 million in fiscal 1999. Major
sources of cash from operating activities in fiscal 1999
included $22.7 million in depreciation and amortization
charges; a $10.1 million decrease in inventory resulting from
the decline in business activity; a $5.2 million decrease in
other current assets which resulted primarily from the receipt
of refundable federal income taxes; and a $4.3 million
increase in accrued liabilities and other due, in part, to an
increase in estimated costs associated with environmental
liabilities. Accounts receivable increased $3.8 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
$30.0 million in fiscal 1998. We recorded income from
continuing operations of $2.8 million in fiscal 1998. Major
sources of cash from operating activities in fiscal 1998
included $20.5 million in depreciation and amortization
charges and decreases of $25.6 million and $10.4 million in
accounts receivable and inventory, respectively, resulting
from a decline in business activity. Major uses of cash from
operating activities was to reduce accounts payable by $22.4
million and accrued liabilities and other by $11.2 million.
Included in the decrease in accrued liabilities and other, was
a $7.1 million reduction in accrued debt repayment fees that
were paid in fiscal 1999.
We made capital investments totaling $7.5 million in
fiscal 2000, $27.8 million in fiscal 1999, and $32.0 million
in fiscal 1998. These capital expenditures were primarily
related to improvements to our Energy Products Segment
facilities. We currently estimate that fiscal 2001 capital
spending will approximate $13 million, the majority of which
represents the expansion and improvement to our Energy
Products Segment facilities. Sources for funding capital
expenditures include available cash and investments, cash
flows from operations, as well available borrowing sources.
Our long-term investments decreased by $29.4 million from
fiscal 1999 as we used this cash source to fund our operating
activities and our capital expenditure program.
Repayments on long-term debt in fiscal 1999 were $4.6
million and include the early retirement of $4.0 million
principal amount of our senior secured notes. At September
30, 2000, our long-term debt maturities are $0.1 million in
fiscal 2001, $0.2 million in fiscal 2002, $0.1 million in
fiscal 2003, $74.7 million in fiscal 2004 and $0.1 million in
fiscal 2005. You should read Note 6 to the audited financial
statements for further information concerning our long-term
debt and credit facility.
The Company did not purchase any of its common shares
during fiscal 2000, but did purchase 1.6 million shares for
$7.7 million in fiscal 1999 and 1.4 million of its shares for
$17.1 million in fiscal year 1998. On February 10, 2000, the
Company's board authorized the repurchase of up to two million
shares of the Company's common stock over the next twelve
months.
In October 2000, the Company received $26.7 million cash
for the sale of Imperial. Also in October and November 2000,
we purchased $5.0 million in face value of our senior secured
notes and 1.1 million of our common shares for approximately
$9.4 million.
Earnings before net interest expense, taxes, depreciation
and amortization (EBITDA) were $8.0 million for fiscal 2000, a
negative $21.5 million for fiscal 1999 and $30.5 million for
fiscal 1998. 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 30, 2000, we had regular tax net operating
loss carryforwards which will fully eliminate the regular tax
liability on approximately $104.5 million of future regular
taxable income. While we may have alternative minimum tax
(AMT income) liability, we also have AMT net operating loss
carryforwards which will eliminate 90% of the AMT liability on
approximately $65 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 $81 million in pre-tax income will be substantially less
than the amounts at full statutory rates. You should read
Note 12 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.
RECENTLY ISSUED ACCOUNTING STANDARDS
The SEC recently issued Staff Accounting Bulletin No.
101, Revenue Recognition in Financial Statements, which
provides guidance on the recognition, presentation, and
disclosure of revenue in financial statements. This bulletin
will become effective for us in periods subsequent to
September 30, 2000. We are currently evaluating the impact of
this pronouncement, and we do not believe its application will
have a material effect on our financial statements.
The Financial Accounting Standards Board has issued FASB
Statement No. 133, Accounting for Derivative Instruments and
Hedging Activities (as amended by Statements No. 137 and 138).
These pronouncements, which become effective in fiscal 2001,
are not expected to have a material effect on the Company's
financial position or results of operations because we do not
presently use derivatives or engage in hedging activities.
The Company will adopt EITF 00-10, "Accounting for
Shipping and Handling Fees and Costs" for periods subsequent
to September 30, 2000. EITF 00-10 requires that a seller of
goods should classify in the income statement amounts billed
to a customer for shipping and handling as revenue and should
classify in the income statement costs incurred for shipping
and handling as an expense. One of our Company's subsidiaries
has reported shipping charges billed to customers as revenue,
net of the actual costs incurred. Upon adoption, we will
report the actual costs incurred to ship its products as a
component of cost of sales and prior periods amounts will be
reclassified to conform with the new presentations. This
change will have no effect on the Company's gross profit
margins. The effects of EITF 00-10 on the Company's reported
revenues and cost of sales were not material as of September
30, 2000.
OTHER MATTERS
You should read Note 10 to the audited financial
statements for information pertaining to commitments and
contingencies.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
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 5, 6 and 7 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. For additional
information, see Notes 5, 6 and 7 to the Consolidated
Financial Statements.
As of September 30, 2000, we were not engaged in any
activities which would cause exposure to the risk of material
earnings or cash flow loss due to changes in interest rates,
foreign currency exchange rates or market commodity prices.
We purchase natural gas for our operations and therefore
have a limited market risk in gas prices related to gas
purchases in the open market at spot prices. The prices of
such gas purchases and futures positions are subject to wide
fluctuations at times due to unpredictable factors such as
weather, government policies and demand for natural gas and
competitive fuels. As a result, our earnings could be
affected by changes in the price and availability of such gas.
As market conditions dictate, we from time to time will lock-
in future gas prices using fixed price contracts. We do not
use financial instruments for trading purposes and are not a
party to any leveraged derivatives.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements and Schedule
Consolidated Financial Statements
Report of Management 25
Report of Independent Public Accountants 26
Consolidated Statements of Operations 27
Consolidated Balance Sheets 28
Consolidated Statements of Cash Flows 29
Consolidated Statements of Common Shareholders' Equity 30
Notes to Consolidated Financial Statements 31
Financial Statement Schedule
Schedule II 57
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/Rene J. Robichaud
Rene J. Robichaud
President and Chief Executive Officer
/s/Thomas J. Depenbrock
Thomas J. Depenbrock
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 30, 2000 and September 25, 1999,
and the related consolidated statements of operations, common
shareholders' equity and cash flows for each of the three
years in the period ended September 30, 2000. 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 auditing
standards generally accepted in the United States. 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
30, 2000 and September 25, 1999, and the results of their
operations and their cash flows for each of the three years in
the period ended September 30, 2000 in conformity with
accounting principles generally accepted in the United States.
Our audit was made for the purpose of forming an opinion
on the basic financial statements taken as a whole. The
schedule listed in the Index to Consolidated Financial
Statements is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of
the basic financial statements. The schedule has been
subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly
states in all material respects the financial data required to
be set forth therein in relation to the basic financial
statements taken as a whole.
/s/Arthur Andersen LLP
Cincinnati, Ohio ARTHUR ANDERSEN LLP
November 6, 2000
Consolidated Statements of Operations
For the years ended September 30, 2000, September 25, 1999,
and September 26, 1998
(In thousands, except per share amounts)
2000 1999 1998
Net sales $355,086 $198,879 $369,293
Cost of products sold 352,875 231,340 341,763
Selling and administrative
Expenses 20,777 16,846 19,597
Operating income
(loss) (18,566) (49,307) 7,933
Investment income 3,147 5,829 8,334
Interest expense (11,745) (11,551) (12,605)
Other income, net 2,526 3,746 677
Income (loss) from
continuing operations
before income taxes
and extraordinary
items (24,638) (51,283) 4,339
Provision (benefit) for
income taxes (590) (4,517) 2,231
Income (loss) from
continuing operations
before extraordinary
items (24,048) (46,766) 2,108
Income from discontinued
operations,
net of income taxes 1,149 1,213 1,283
Income (loss) before
extraordinary items (22,899) (45,553) 3,391
Extraordinary items, net of
income taxes - (3,837) 659
Net income (loss) $ (22,899) $(49,390) $ 4,050
Other comprehensive income
(loss), net of taxes:
Unrealized gain (loss)
on investments $ (1,634) $ (950) $(1,596)
Comprehensive income
(loss) $ (24,533) $(50,340) $ 2,454
Per common share (basic
and diluted)
Income (loss) from
continuing operations $(1.11) $(2.14) $.09
Income from discontinued
operations, net of
income taxes .05 .06 .05
Extraordinary items,
net of income taxes - (.18) .03
Net income (loss) $(1.06) $(2.26) $.17
Weighted average shares
outstanding
Basic 21,651 21,852 23,684
Diluted 21,651 21,852 24,511
See notes to consolidated financial statements
Consolidated Balance Sheets
September 30, 2000 and September 25, 1999
(In thousands)
ASSETS 2000 1999
Current assets
Cash and cash equivalents $ 960 $ 1,073
Short-term investments 29,945 30,032
Accounts receivable,
less allowance for doubtful
accounts of $617 and $610,
respectively 58,077 35,025
Inventories 70,850 51,468
Operating supplies 17,200 17,857
Deferred tax assets 4,429 5,376
Other current assets 1,701 4,145
Total current assets 183,162 144,976
Property, plant and equipment -
at cost
Land and buildings 29,668 29,528
Machinery and equipment 299,143 288,961
Construction in progress 1,367 4,033
Less -- accumulated depreciation (204,205) (182,877)
Net property, plant
and equipment 125,973 139,645
Long-term investments 22,010 54,560
Other assets 6,093 6,838
Net assets of discontinued operations 8,099 7,579
Total assets $345,337 $353,598
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and
notes payable $ 34,608 $ 24,145
Accrued liabilities and other 31,882 27,398
Current portion of long-term debt 110 144
Total current liabilities 66,600 51,687
Long-term debt 72,915 72,321
Deferred taxes 6,977 8,438
Common shareholders' equity
Common stock, no par value,
40,000 shares authorized,
24,779 and 24,364 shares issued,
respectively 282,707 280,051
Treasury stock, 2,766 and 2,917
shares, respectively (23,644) (23,676)
Common stock options and warrants 466 896
Accumulated other comprehensive
income (loss) (5,418) (3,784)
Accumulated earnings (deficit) (55,266) (32,335)
Common shareholders' equity 198,845 221,152
Total liabilities and
shareholders' equity $345,337 $353,598
See notes to consolidated financial statements
Consolidated Statements of Cash Flows
For the Years Ended September 30, 2000, September 25,
1999 and September 26, 1998
(In thousands) 2000 1999 1998
Cash flows from operating
activities:
Net income (loss) $(22,899) $(49,390) $ 4,050
Less: income from
discontinued
operations, net of
income taxes 1,149 1,213 1,283
Income (loss) from
continuing operations (24,048) (50,603) 2,767
Adjustments to reconcile
net income (loss) to
net cash from operating
activities:
Depreciation and
Amortization 21,550 21,459 19,368
Amortization of
debt discount and
finance costs 1,141 1,206 1,170
Increase (decrease)
in long-term
deferred taxes (1,461) (3,683) 530
(Gain) loss on
disposal of
equipment (26) (277) 57
Loss on sales of
Investments 1,399 705 282
(Increase) decrease
in accounts
receivable (23,052) (3,787) 25,626
(Increase)
decrease in
inventories (19,646) 10,126 10,441
Decrease in
operating supplies
and other current
assets 4,609 5,223 3,168
Increase (decrease)
in accounts
payable 10,463 218 (22,366)
Increase
(decrease) in
income taxes
payable - (253) 104
Increase (decrease)
in accrued
liabilities and
other 4,484 4,294 (11,181)
Net cash flows
from operating
activities (24,587) (15,372) 29,966
Cash flows from investing activities:
Purchases of
property, plant and
equipment (7,499) (27,818) (31,996)
Proceeds from sale
of equipment 95 576 143
Purchases of available
for sale securities (7,878) (45,053) (112,102)
Maturities of
available for sale
securities 22,739 32,035 22,019
Sales of available
for sale securities 14,556 32,259 16,931
(Increase) decrease
in other assets 310 (191) (122)
Net cash flows
from investing
activities 22,323 (8,192) (105,127)
Cash flows from financing activities:
Repayment on notes
payable - - (480)
Repayments on
long-term debt (146) (4,624) (54,354)
Proceeds from
issuance of common
stock 2,142 140 17,843
Purchases of
treasury stock - (7,684) (17,081)
Net cash flows
from financing
activities 1,996 (12,168) (54,072)
Net cash provided by
discontinued operations 68 365 363
Net increase (decrease) in
cash and short-term
investments (200) (35,367) (128,870)
Cash and short-term
investments - beginning
of period 31,105 66,472 195,342
Cash and short-term
investments - end of
period $ 30,905 $ 31,105 $ 66,472
Cash paid (received)
during the year for:
Interest $ 10,095 $ 10,309 $ 12,692
Income taxes,
net of refunds
received (2,187) (3,141) 4,348
See notes to consolidated financial statements
Consolidated Statements of Common Shareholders' Equity
For the years ended September 30, 2000, September 25, 1999,
and September 26, 1998
(In thousands)
Common Stock Treasury Stock
Shares Amount Shares Amount
Balance,
September 27, 1997 23,310 $261,368 - $ -
Net income 4,050 4,050
Unrealized loss on
investments
Issuance of common
Stock 540 15,340
15,340
Purchase of treasury
stock 1,437 (17,081)
Stock option plans 94 1,007 (83) 1,089
Exercise of common stock
Warrants 390 2,171
Balance,
September 26, 1998 24,334 279,886 1,354 (15,992)
Net loss
Unrealized loss
on investments
Purchase of treasury
stock 1,563 (7,684)
Stock option plans 14 73
Exercise of common
stock warrants 16 92
Balance, September
25, 1999 24,364 280,051 2,917 (23,676)
Net loss
Unrealized loss
on investments
Stock option
Plans 165 1,558
Exercise of
common stock
warrants 250 1,098 (151) 32
Balance,
September
30, 2000 24,779 $282,707 2,766 (23,644)
Consolidated Statements of Common Shareholders' Equity
For the years ended September 30, 2000, September 25, 1999,
and September 26, 1998
(In thousands)
Accumulated
Other
Compre-
Options hensive Accumulated
and Income Earnings
Warrants (Loss) (Deficit) Total
Balance,
September 27,
1997 $ 1,612 $(1,238) $ 13,656 $275,398
Net income 4,050 4,050
Unrealized loss
on investments (1,596) (1,596)
Issuance of common
Stock 15,340
Purchase of treasury
stock (17,081)
Stock option plans (102) (651) 1,343
Exercise of common
stock Warrants 612 1,559
Balance,
September 26, 1998 898 (2,834) 17,055 279,013
Net loss (49,390) (49,390)
Unrealized loss
on investments (950) (950)
Purchase of treasury
stock (7,684)
Stock option plans 24 97
Exercise of common
stock warrants (26) 66
Balance, September
25, 1999 896 (3,784) (32,335) 221,152
Net loss (22,899) (22,899)
Unrealized loss
on investments (1,634) (1,634)
Stock option
Plans 62 1,620
Exercise of
common stock
warrants (492) (32) 606
Balance,
September
30, 2000 $ 466 $(5,418) $(55,266) $198,845
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), and Northern Kentucky Management, Inc. All
significant intercompany accounts and transactions have been
eliminated.
Pursuant to Accounting Principles Board Opinion No. 30,
the consolidated financial statements of NS Group, Inc. have
been restated to reflect the disposition of Imperial
Adhesives, Inc. which was sold subsequent to September 30,
2000. Accordingly, the revenues, cost and expenses, assets
and liabilities, and cash flows of Imperial have been excluded
from the respective captions in the Consolidated Statements of
Income, Consolidated Balance Sheets and Consolidated
Statements of Cash Flows, and have been reported as "Income
from discontinued operations"; as "Net assets of discontinued
operations"; and as "Net cash provided by discontinued
operations." See Note 2 for additional information.
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 of corporate 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) 2000 1999 1998
Net unrealized holding
gains (losses) for
the period $(3,033) $(1,655) $(1,779)
Reclassification
adjustment for (gains)
losses realized 1,399 705 183
Net unrealized gains
(losses), net of
income taxes of
$0, $0, and $859,
respectively $(1,634) $ (950) $(1,596)
Inventories
At September 30, 2000 and September 25, 1999, 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) 2000 1999
Raw materials $10,133 $ 7,490
Semi-finished and finished goods 60,717 43,978
Total inventories $70,850 $ 51,468
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 for
fiscal 1998 and reduced the related diluted per share amounts
by $0.09.
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 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 $0.04 per diluted share.
Treasury Stock
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. The Company did
not purchase any of its common shares during fiscal 2000, but
did purchase 1.6 million shares for $7.7 million in fiscal
1999 and 1.4 million of its shares for $17.1 million in fiscal
year 1998.
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 for all periods shown ended on
the last Saturday of September. Fiscal year 2000 contains
fifty-three weeks while fiscal years 1999 and 1998 contain
fifty-two weeks. In November 2000, the Company announced that
it will change its fiscal year-end to December 31. The
Company will report the period from October 1, 2000 to
December 31, 2000 as a transition period, with the next full
fiscal year being for the twelve months ended December 31,
2001.
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 2.2 million, 0.6 million and
1.1 million shares of the Company's common stock in fiscal
2000, 1999 and 1998 respectively, were not included in the
computation of diluted EPS because they were antidilutive.
In October and November 2000, the Company repurchased 1.1
million of its common shares in open market transactions.
NOTE 2: DISCONTINUED OPERATIONS
On October 12, 2000, pursuant to a stock purchase
agreement dated as of September 13, 2000, the Company sold its
investment in its wholly-owned subsidiary, Imperial Adhesives,
Inc. for $26.7 million in cash. The Company will recognize a
gain in its quarter ended December 31, 2000, subject to
certain adjustments for changes in working capital amounts.
Summarized financial information for the discontinued
operations is as follows:
(In thousands)
Fiscal Year Ended 2000 1999 1998
Results of Operations
Revenues $44,427 $43,684 $40,562
Income before income taxes 1,883 2,003 2,103
Income taxes 734 790 820
Net income 1,149 1,213 1,283
September 30, September 25,
Financial Position 2000 1999
Current assets $ 9,748 $ 9,805
Total assets 13,115 13,776
Current liabilities 4,510 5,521
Total liabilities 5,016 6,197
Net assets of discontinued
Operations 8,099 7,579
The Company and buyer entered into various agreements
that provide, among other things, that the Company will
indemnify the buyer for certain matters, including certain
environmental contingencies. In addition, the Company has
other agreements with Imperial and the buyer regarding
federal, state and local tax allocation and sharing, provided
between the Company and Imperial.
NOTE 3: BUSINESS SEGMENT INFORMATION
The Company has two 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
consists of Special Bar Quality (SBQ) products used primarily
in the manufacture of heavy industrial equipment.
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 are primarily
cash, investments, net assets of discontinued operations and
income tax assets. Corporate expenses are general and
administrative overhead costs.
The operations of the 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 2000, sales to a customer
of the Company's energy products, accounted for approximately
14% of total sales. The following table sets forth selected
financial information by reportable business segment for
fiscal 2000, 1999 and 1998.
(In thousands) Energy Industrial
2000 Products Products Corporate Total
Net sales $299,235 $55,851 $ - $355,086
Operating income
(loss) (5,527) (6,645) (6,394 (18,566)
Assets 240,250 30,895 74,192 345,337
Depreciation and
Amortization 18,294 3,256 - 21,550
Capital
Expenditures 7,243 256 - 7,499
1999
Net sales $144,151 $54,728 $ - $198,879
Operating income
(loss) (42,854) (2,707) (3,746) (49,307)
Assets 204,454 38,551 110,593 353,598
Depreciation and
Amortization 17,672 3,787 - 21,459
Capital
Expenditures 26,598 1,220 - 27,818
1998
Net sales $296,690 $72,603 $ - $369,293
Operating income
(loss) 9,116 4,074 (5,257) 7,933
Assets 203,820 41,181 170,045 415,046
Depreciation and
Amortization 15,588 3,780 - 19,368
Capital
Expenditures 31,162 834 - 31,996
NOTE 4: ACCRUED LIABILITIES AND OTHER
Accrued liabilities and other consist of the following:
(In thousands) 2000 1999
Accrued payroll and payroll related
Items $12,546 $10,053
Accrued environmental remediation 1,500 5,291
Deferred revenue 12,095 4,419
Workers' compensation 1,482 2,305
Accrued interest 2,176 2,151
Other 2,083 3,179
$31,882 $27,398
NOTE 5: LONG-TERM INVESTMENTS
At September 30, 2000 and September 25, 1999, the Company's
long-term investments, which are all classified as available
for sale, consist of the following:
(In thousands) Amortized Gross Unrealized Market
2000 Cost Gains Losses Value
Corporate bonds $24,249 $ - $(2,889) $21,360
Equity securities 4,800 - (4,150) 650
1999
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
At September 30, 2000, scheduled maturities of the
Company's investments in long-term debt securities were as
follows:
(In thousands) Average Year Amortized Market
End Rate Cost Value
One year through
five years 9.87% $ 1,718 $ 1,406
After five years 11.66% 22,531 19,954
$24,249 $21,360
Gross realized gains and losses were as follows:
(In thousands) 2000 1999 1998
Realized gains $ 134 $178 $ 82
Realized losses 1,533 884 411
NOTE 6: LONG-TERM DEBT AND CREDIT FACILITY
Long-term debt of the Company consists of the following:
(In thousands) 2000 1999
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 $2,303
and $3,009, respectively) $72,355 $71,649
Other 670 816
73,025 72,465
Less current portion (110) (144)
$72,915 $72,321
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, 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 30, 2000 approximately $2.2 million of the credit
facility was utilized to collateralize letters of credit and
$47.8 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 pro rata 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.
Annual long-term debt maturities are $0.1 million in
fiscal 2001, $0.3 million in fiscal 2002, $74.7 million in
fiscal 2003 and $0.4 million in both fiscal 2004 and 2005.
NOTE 7: 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) 2000 1999
Carrying Fair Carrying Fair
Amount Value Amount Value
Cash and short-term
Investments $30,905 $30,905 $31,105 $31,105
Long-term investments 22,010 22,010 54,560 54,560
Notes payable - - 394 394
Long-term debt 72,915 77,092 72,321 77,812
NOTE 8: 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 9: 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
option grants during fiscal years 2000 and 1998 were granted
at exercise prices approximating the market price on the date
of grant. During fiscal 1999, nonqualified stock options were
granted at exercise prices that were approximately 87% of the
market price on the date of grant. A summary of transactions
in the plans follows:
2000
Average
Exercise
Shares Price
Outstanding, beginning of year 1,750,629 $ 9.41
Granted 695,100 17.45
Expired (188,730) 14.28
Exercised (195,390) 7.01
Outstanding, end of year 2,061,609 $11.89
Exercisable, end of year 537,474 $ 7.17
Available for grant 582,100 -
Weighted average fair value
of options granted $ 12.00
1999
Average
Exercise
Shares Price
Outstanding, beginning of year 1,378,114 $10.67
Granted 552,000 7.31
Expired (158,075) 13.32
Exercised (21,410) 7.55
Outstanding, end of year 1,750,629 $ 9.41
Exercisable, end of year 538,157 $ 6.81
Available for grant 938,470 -
Weighted average fair value
of options granted $ 5.96
1998
Average
Exercise
Shares Price
Outstanding, beginning of year 896,755 $ 6.73
Granted 851,950 14.37
Expires (170,132) 13.56
Exercised (200,459) 6.32
Outstanding, end of year 1,378,114 $10.67
Exercisable, end of year 445,549 $ 6.32
Available for grant 333,440 -
Weighted average fair value
of options granted $ 9.29
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 2000, 1999, and 1998. Unrecognized compensation costs
associated with prior grants that will be recognized in future
periods is $0.5 million at September 30, 2000.
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 $2.6
million, $(25.5) million and $(1.18) basic and diluted,
respectively, for fiscal 2000 and $1.2 million, $(50.6)
million, and $(2.1) basic and diluted, respectively for fiscal
1999 and $0.8 million, $3.3 million, and $0.14 basic and
diluted, respectively for fiscal 1998.
The fair values of the granted options were determined
using the Black-Scholes option pricing model with the
following assumptions for fiscal 2000, 1999 and 1998,
respectively: no common stock dividends; expected volatility
of 63%, 58% and 59%; risk-free interest rates of 6.7%, 6.1%
and 5.5%; and expected life of 7 years, 8 years and 7 years.
A summary of information about stock options outstanding
at September 30, 2000 follows:
Options Outstanding Options Exercisable
Range of Average Average Average
Exercise Exercise Remaining Exercise
Prices Shares Price Life Shares Price
$ 2.63 -
$ 5.94 208,909 $ 4.15 4.7 196,241 $ 4.13
$ 6.13 -
$ 7.40 706,900 7.21 7.5 255,567 7.07
$13.44 -
$19.09 1,145,800 16.20 8.7 85,666 14.41
2,061,609 $11.89 7.9 537,474 $ 7.18
In the third quarter of fiscal year 2000, warrants
exercisable at a price of $8.00 per share for 272,481 common
shares of the Company were exercised on a cashless basis
resulting in the issuance of 151,125 treasury shares. At
September 30, 2000, the Company had common stock warrants
outstanding, exercisable for approximately 187,000 shares of
the Company's common stock at a price of $4.00 per share. The
warrants expire July 15, 2003.
NOTE 10: 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. Dust
produced by its electric arc furnace operations is collected
through emission control systems and disposed at EPA-approved
facilities.
In two separate incidents occurring in fiscal 1993 and
1992, radioactive substances were accidentally melted at the
Company's welded tubular facility, resulting in the
contamination of a quantity of electric arc furnace dust. The
dust has been disposed at an EPA-approved facility and the
Company is awaiting final clean closure approvals.
The estimated costs associated with these incidents were
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 and an additional
$0.9 million of expected insurance recoveries in connection
with its efforts to dispose of the dust. These amounts were
recorded as an extraordinary charge of $3.4 million.
The Company had environmental remediation reserves of
$5.3 million at September 25, 1999. Cash payments during
fiscal 2000 have reduced the reserves to $1.5 million as of
September 30, 2000. 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 $2.1 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.
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 11: 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 $2.4 million, $1.0 million and $3.2 million in
fiscal years 2000, 1999, and 1998, respectively.
NOTE 12: INCOME TAXES
The provision (benefit) for income taxes, including $0.7
million, $0.8 million and $0.8 million allocated to
discontinued operations in fiscal 2000, 1999, and 1998,
respectively, and ($0.1) million and $0.3 million allocated to
extraordinary items in fiscal 1999 and 1998, respectively,
consists of the following:
(In thousands) 2000 1999 1998
Current $ 658 $ (2,917) $1,235
Deferred (514) (919) 1,694
Tax benefit of employee
stock option exercises
allocated to equity - - 474
Provision (benefit) for
income taxes $ 144 $(3,836) $3,403
The income tax provision (benefit) differs from the
amount computed by applying the statutory federal income tax
rate to income (loss), including extraordinary items and
discontinued operations, before income taxes for the following
reasons:
(In thousands) 2000 1999 1998
Income tax provision
(benefit) at statutory
tax rate of 35% $(7,964) $(18,629) $2,607
Change in taxes
resulting from:
State income taxes,
net of federal effect (1,158) (334) 510
Change in valuation
Allowance 10,773 15,603 519
Other, net (1,507) (476) (233)
Provision (benefit)
for income taxes $ 144 $ (3,836) $3,403
The following represents the components of deferred tax
liabilities and assets at September 30, 2000 and September 25,
1999:
(In thousands) 2000 1999
Deferred tax liabilities:
Property, plant and equipment $22,183 $27,184
Other items 106 171
22,298 27,355
Deferred tax assets:
Reserves and accruals 7,849 7,332
Net operating tax loss
Carryforward 36,711 31,338
Alternative minimum tax and other
tax credit carryforwards 3,155 3,155
Unrealized loss on investments 2,612 2,010
Other items 273 535
50,600 44,370
Valuation allowance (30,850) (20,077)
Net deferred tax assets 19,750 24,293
Net deferred tax liability $ 2,548 $ 3,062
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 $104.5
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 13: RELATED PARTY TRANSACTIONS
A director of the Company who resigned in July 2000 has a
controlling interest in a company which purchases secondary
and limited service tubular products from Newport. Sales to
this customer were approximately $16.9 million, $11.1 million
and $13.2 million for fiscal years 2000, 1999, and 1998,
respectively. Trade receivables from this customer were $0.9
million and $1.3 million at the end of fiscal 2000 and 1999,
respectively.
NOTE 14: QUARTERLY FINANCIAL DATA (Unaudited)
Quarterly results of operations for fiscal 2000 and 1999
are as follows:
(In thousands, except per share amounts)
First Second Third Fourth
2000 Quarter Quarter Quarter Quarter
Net sales $ 75,342 $89,354 $95,689 $94,701
Gross profit
(loss) (7,318) (1,102) 829 9,802
Income (loss)
from continuing
operations before
extraordinary
items (13,099) (8,537) (4,577) 2,165
Income from
discontinued
operations, net
of income taxes 165 306 460 218
Net income (loss) (12,934) (8,231) (4,117) 2,383
Income (loss) per
common share from
continuing operations
Basic (.61) (.40) (.21) .11
Diluted (.61) (.40) (.21) .10
Net income (loss)
per common share
Basic (.60) (.38) (.19) .11
Diluted (.60) (.38) (.19) .10
1999
Net sales $ 43,239 $45,878 $48,243 $61,519)
Gross profit
(loss) (9,857) (9,577) (6,901) (6,126)
Loss from
continuing
operations
before
extraordinary
items (11,660) (14,838) (9,184) (11,084)
Income from
discontinued
operations,
net of income
taxes 278 180 603 152
Loss before
Extraordinary
items (11,382) (14,658) (8,581) (10,932)
Extraordinary
items, net
of income taxes (437) (3,400) - -
Net loss (11,819) (18,058) (8,581) (10,932)
Loss per common
share from continuing
operations before
extraordinary items
Basic and
diluted (.51) (.68) (.43) (.52)
Net loss per
common share
Basic and
Diluted (.52) (.83) (.40) (.51)
Reference is made to Note 1: Summary of Significant
Accounting Policies - Property, Plant and Equipment and
Depreciation regarding accelerated depreciation charges in the
first quarter of fiscal 1999. Reference is also made to Note
2: Discontinued Operations and Notes 6 and 10 for a
discussion of extraordinary items in fiscal 1999.
NOTE 15: SUPPLEMENTARY INFORMATION CONDENSED CONSOLIDATING
FINANCIAL STATEMENTS (Unaudited)
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. Set
forth below are the condensed consolidating financial
statements of NS Group, Inc. including the Subsidiary
Guarantors. The Subsidiary Guarantors include all
subsidiaries of the Company (Newport Steel Corporation, Koppel
Steel Corporation, Imperial Adhesives, Inc., Erlanger Tubular
Corporation and Northern Kentucky Management, Inc.) Separate
financial statements and other disclosures relating to the
Guarantor Subsidiaries have not been presented because the
management has determined that this information would not be
material.
The following unaudited condensed consolidating financial
statements present the results of operations, financial
position and cash flows of (a) NS Group, Inc. (Parent),
reflecting investments in its consolidated subsidiaries under
the equity method of accounting, (b) the guarantor
subsidiaries of the Parent and (c) the eliminations necessary
to arrive at the information for the Parent on a consolidated
basis. Income tax expense (benefit) is allocated among the
consolidating entities based upon taxable income (loss) within
the companies. These condensed consolidating financial
statements should be read in conjunction with the accompanying
consolidated financial statements of NS Group. All
significant intercompany accounts and transactions have been
eliminated.
NS Group, Inc. and Subsidiaries
Unaudited Condensed Consolidating Balance Sheet
September 30, 2000
(In thousands) Guarantor
Parent Subsidiaries Eliminations Consolidated
Cash and
Investments $ 28,485 $ 2,420 $ - $ 30,905
Accounts
Receivable 660 57,417 - 58,077
Inventories - 70,850 - 70,850
Other current
Assets 6,279 17,051 - 3,330
Total
Current
Assets 35,424 147,738 - 183,162
Property,
plant and
equipment - 330,178 - 330,178
Accumulated
Depreciation - (204,205) - (204,205)
Long-term
Investments 21,360 650 - 22,010
Investment in
Subsidiaries (2,315) - 2,315 -
Intercompany,
Net 229,638 - (229,638) -
Other assets 2,920 3,173 - 6,093
Net assets of
discontinued
operations - 8,099 - 8,099
Total
Assets $287,027 $285,633 $(227,323) $345,337
Accounts
Payable $ - $ 34,608 $ - $ 34,608
Accrued
Liabilities
And other 8,686 23,196 - 31,882
Current portion
of long-term
debt - 110 - 110
Total
current
liabilities 8,686 57,914 - 66,600
Long-term
Debt 72,355 560 - 72,915
Intercompany,
Net - 229,638 (229,638) -
Deferred
Taxes 7,141 (164) - 6,977
Stockholders'
Equity 198,845 (2,315) 2,315 198,845
Total
current
liabilities
and
stockholders'
equity $287,027 $285,633 $(227,323) $345,337
NS Group, Inc. and Subsidiaries
Unaudited Condensed Consolidating Balance Sheet
September 25, 1999
(In thousands) Guarantor
Parent Subsidiaries Eliminations consolidated
Cash and
Investments $ 28,816 $ 2,289 $ - $ 31,105
Accounts
Receivable 1,267 33,758 - 35,025
Inventories - 51,468 - 51,468
Other current
Assets 9,528 17,850 - 27,378
Total
current
assets 39,611 105,365 - 144,976
Property,
Plant and
Equipment - 322,522 - 322,522
Accumulated
Depreciation - (182,877) - (182,877)
Long-term
Investments 53,010 1,550 - 54,560
Investment in
Subsidiaries 19,459 - (19,459) -
Intercompany,
Net 192,094 - (192,094) -
Other assets 3,139 3,699 - 6,838
Net assets
of discontinued
operations - 7,579 - 7,579
Total
Assets $307,313 $257,838 $(211,553) $353,598
Accounts
Payable $ - $ 24,145 $ - $ 24,145
Accrued
liabilities
and other 5,910 21,488 - 27,398
Current
portion of
long-term
debt - 144 - 144
Total
current
liabilities 5,910 45,777 - 51,687
Long-term debt 71,649 672 - 72,321
Intercompany,
Net - 192,094 (192,094) -
Deferred taxes 8,602 (164) - 8,438
Stockholders'
Equity 221,152 19,459 (19,459) 221,152
Total
curent
liabilities
and
stockholders'
equity $307,313 $257,838 $(211,553) $353,598
NS Group, Inc. and Subsidiaries
Unaudited Condensed Consolidating Statement of Operations
For the fiscal year ended September 30, 2000
(In thousands) Guarantor
Parent Subsidiaries Eliminations Consolidated
Net sales $ - $355,086 $ - $355,086
Cost of
products sold - 352,875 - 352,875
Selling and
administrative
expenses - 20,777 - 20,777
Operating
income
(loss) - (18,566) - (18,566)
Equity in
earnings of
subsidiaries (21,774) - 21,774 -
Investment
Income 3,027 120 - 3,147
Interest
Expense (11,728) (17) - (11,745)
Intercompany
interest,
net 19,056 (19,056) - -
Other income,
Net 193 2,333 - 2,526
Income (loss)
from continuing
operations
before income
taxes (11,226) (35,186) 21,774 (24,638)
Provision
(benefit)
for income
taxes 11,673 (12,263) - (590)
Income (loss)
from
continuing
operations (22,899) (22,923) 21,774 (24,048)
Income from
discontinued
operations - 1,149 - 1,149
Net income
(loss) $(22,899) $(21,774) $ 21,774 $ (22,899)
NS Group, Inc. and Subsidiaries
Unaudited Condensed Consolidating Statement of Operations
For the fiscal year ended September 25, 1999
(In thousands) Guarantor
Parent Subsidiaries Eliminations Consolidated
Net sales $ - $198,879 $ - $198,879
Cost of
products sold - 231,340 - 231,340
Selling and
administrative
expenses - 16,846 - 16,846
Operating income
(loss) - (49,307) - (49,307)
Equity in
earnings of
subsidiaries (39,086) - 39,086 -
Investment
Income 5,637 192 - 5,829
Interest
Expense (11,486) (65) - (11,551)
Intercompany
interest,
net 13,368 (13,368) - -
Other income,
Net 190 3,556 - 3,746
Income (loss)
from
continuing
operations
before
income
taxes (31,377) (58,992) 39,086 (51,283)
Provision
(benefit)
for income
taxes 17,576 (22,093) - (4,517)
Income (loss)
from continuing
operations (48,953) (36,899) 39,086 (46,766)
Income from
discontinued
operations,
net of
income taxes - 1,213 - 1,213
Income (loss)
before
extraordinary
items (48,953) (35,686) 39,086 (45,553)
Extraordinary
items,
net of income
taxes (437) (3,400) - (3,837)
Net income
(loss) $(49,390) $ (39,086) $39,086 $(49,390)
NS Group, Inc. and Subsidiaries
Unaudited Condensed Consolidating Statement of Operations
For the fiscal year ended September 26, 1998
(In thousands) Guarantor
Parent Subsidiaries Eliminations Consolidated
Net sales $ - $369,293 $ - $369,293
Cost of
products
sold - 341,763 - 341,763
Selling and
administrative
expenses - 19,597 - 19,597
Operating
income
(loss) - 7,933 - 7,933
Equity in
earnings of
subsidiaries (1,286) - 1,286 -
Investment
Income 7,710 624 - 8,334
Interest
Expense (12,452) (153) - (12,605)
Intercompany
interest,
net 11,695 (11,695) - -
Other
income,
net 233 444 - 677
Income (loss)
from continuing
operations
before income
taxes 5,900 (2,847) 1,286 4,339
Provision
(benefit)
for income
taxes 1,850 381 - 2,231
Income (loss)
from continuing
operations 4,050 (3,228) 1,286 2,108
Income from
discontinued
operations,
net of income
taxes - 1,283 - 1,283
Income (loss)
before
extraordinary
items 4,050 (1,945) 1,286 3,391
Extraordinary
items, net
of income
taxes - 659 - 659
Net income
(loss) $ 4,050 $ (1,286) $1,286 $ 4,050
NS Group, Inc. and Subsidiaries
Unaudited Condensed Consolidating Statement of Cash Flows
For the fiscal year ended September 30, 2000
(In thousands) Guarantor
Parent Subsidiaries Eliminations Consolidated
Net Cash
from
Operating
Activities $(31,681) $ 7,094 $ - $(24,587)
Cash Flows from Investing Activities:
Purchases of
property,
plant and
equipment - (7,499) - (7,499)
Proceeds
from sales
of equipment - 95 - 95
Purchases of
available-
for-sale
securities (7,878) - - (7,878)
Maturities
of available-
for-sale
securities 22,739 - - 22,739
Sales of
available-
for-sale
securities 14,556 - - 14,556
(Increase)
decrease in
other assets (209) 519 - 310
Net cash from
Investing
Activities 29,208 (6,885) - 22,323
Cash Flows from Financing Activities:
Repayments
of long-term
debt - (146) - (146)
Proceeds from
issuance of
common stock 2,142 - - 2,142
Net cash from
financing
activities 2,142 (146) - 1,996
Net cash
provided by
discontinued
operations - 68 - 68
Net increase
(decrease) in
cash and
short-term
investments (331) 131 - (200)
Cash and
short-term
investments
- beginning
of period 28,816 2,289 - 31,105
Cash and
short-term
investments
- end of
period $ 28,485 $ 2,420 $ - $30,905
Cash paid
(received)
during the
year for:
Interest $ 10,078 $ 17 $ - $10,095
Income
Taxes (2,187) - - (2,187)
NS Group, Inc. and Subsidiaries
Unaudited Condensed Consolidating Statement of Cash Flows
For the fiscal year ended September 25, 1999
(In thousands) Guarantor
Parent Subsidiaries Eliminations Consolidated
Net Cash
from
Operating
Activities $(33,941) $18,569 $ - $(15,372)
Cash Flows from Investing Activities:
Purchases
of property,
plant and
equipment - (27,818) - (27,818)
Proceeds
from sales
of equipment - 576 - 576
Purchases of
available-for-
sale
securities (45,053) - - (45,053)
Maturities
of available
for-sale
securities 32,035 - - 32,035
Sales of
available-
for-sale
securities 32,259 - - 32,259
(Increase)
decrease
in other
assets (191) - - (191)
Net cash
from
investing
activities 19,050 (27,242) - (8,192)
Cash Flows
from Financing
Activities:
Repayments
of long-term
debt (4,000) (624) - (4,624)
Proceeds
from
issuance of
common
stock 40 - - 140
Purchases
of
treasury
stock (7,684) - - (7,684)
Net cash
from
financing
activities (11,544) (624) - (12,168)
Net cash
provided by
discontinued
operations - 365 - 365
Net increase
(decrease) in
cash and
short-term
investments (26,435) (8,932) - (35,367)
Cash and
short-term
investments
- beginning
of period 55,25 11,221 - 66,472
Cash and
short-term
investments
-end of
period $28,816 $ 2,289 $ - $31,105
Cash paid
(received)
during the
year for:
Interest $10,234 $ 75 - $10,309
Income
taxes (3,286) 145 - (3,141)
NS Group, Inc. and Subsidiaries
Unaudited Condensed Consolidating Statement of Cash Flows
For the fiscal year ended September 26, 1998
(In thousands) Guarantor
Parent Subsidiaries Eliminations Consolidated
Net Cash
from
Operating
Activities $(4,273) $ 34,239 $ - $ 29,966
Cash Flows from Investing Activities:
Purchases
of property,
plant and
equipment - (31,996) - (31,996)
Proceeds
from sales
of equipment - 143 - 143
Purchases of
available-
for-sale
securities (112,102) - - (112,102)
Maturities
of available-
for-sale
securities 22,019 - - 22,019
Sales of
available-
for-sale
securities 16,931 - - 16,931
(Increase)
decrease
in other
assets (433) 311 - (122)
Net cash
from
investing
activities (73,585) (31,542) - (105,127)
Cash Flows from Financing Activities:
Increase
(decrease)
in notes
payable (480) - - (480)
Proceeds
from
issuance
of long-
term debt - - - -
Repayments
of long-
term debt (52,438) (1,916) - (54,354)
Proceeds
from
issuance
of common
stock 17,843 - - 17,843
Purchases of
treasury
stock (17,081) - - (17,081)
Net cash
from
financing
activities (52,156) (1,916) - (54,072)
Net cash
provided by
discontinued
operations - 363 - 363
Net increase
(decrease)
in cash and
short-term
investments (130,014) 1,144 - (128,870)
Cash and
short-term
investments
- beginning
of period 185,265 10,077 - 195,342
Cash and
short-term
investments
- end of
period $55,251 $ 11,221 $ - $66,472
Cash paid during the year for:
Interest $12,566 $ 126 - $12,692
Income
taxes 4,075 273 - 4,348
SCHEDULE II
NS GROUP, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
Reserves Deducted from
Assets in Balance Sheets
Allowance Allowance
for Doubtful for Cash
(In thousands) Accounts(1) Discounts(1)
Balance, September 27, 1997 $ 517 $ 631
Additions charged to
costs and expenses: 1,218 5,143
Deductions (2): (1,195) (5,622)
Balance, September 26, 1998 $ 540 $ 152
Additions charged to
costs and expenses: 1,582 2,502
Deductions (2): (1,512) (2,400)
Balance, September 25, 1999 $ 610 $ 254
Additions charged to
costs and expenses: 1,455 5,271
Deductions (2): (1,448) (4,923)
Balance, September 30, 2000 $ 617 $ 602
(1) Deducted from accounts receivable
(2) Net charges of nature for which reserves were created
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated herein by reference from the Proxy under the
caption "Proposals of the Board, Item 1 - Election of
Directors," "Securities Ownership of Management, footnote
(1)"; "The Board of Directors, Board Committees and Meeting
Attendance"; and "Securities Ownership of Management, Section
16(a) Beneficial Ownership Reporting Compliance".
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference from the Proxy under the
caption "Compensation of Directors"; and "Compensation of
Executive Officers".
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Incorporated herein by reference from the Proxy under
the caption "Securities Ownership of Management" and
"Securities Ownership of Certain Beneficial Owners".
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference from the Proxy under the
captions "Compensation Committee Interlocks and Insider
Participation" and "Certain Relationships and Related
Transactions."
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
ON FORM 8-K
(a) 1. Consolidated Financial Statements - Audited
consolidated financial statements required by this item are
presented and listed in Part II, Item 8.
2. Consolidated Financial Statement Schedule - The
financial statement schedule required to be filed as a part of
this report is presented and listed in Part II, Item 8.
3. Exhibits - Reference is made to the Index to
Exhibits, which is included herein as part of this report.
(b) Reports on Form 8-K
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of
the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NS GROUP, INC.
Date: December 14, 2000 By:/s/Thomas J. Depenbrock
Thomas J. Depenbrock,
Vice President, Treasurer and
Chief Financial Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints Rene J.
Robichaud and Thomas J. Depenbrock, and each of them, his true
and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities to sign any and all
amendments to this Annual Report on Form 10-K and any other
documents and instruments incidental thereto, and to file the
same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents,
and each of them, full power and authority to do and perform
each and every act and thing requisite or necessary to be done
in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying
and confirming all that said attorneys-in-fact and agents
and/or any of them, or their or his substitute or substitutes,
may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange
Act of 1934, this report has been signed below by the
following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
Date: December 14, 2000 By: /s/Rene J. Robichaud
Rene J. Robichaud, President and
Chief Executive Officer and
Director
Date: December 14, 2000 By: /s/Thomas J. Depenbrock
Thomas J. Depenbrock, Vice
President, Treasurer and Chief
Financial Officer (Principal
Financial and Accounting
Officer)
Date: December 14, 2000 By: /s/Clifford R. Borland
Clifford R. Borland
Chairman of the Board
Director
Date: December 14, 2000 By: /s/Paul C. Borland, Jr.
Paul C. Borland, Jr., Director
Date: December 14, 2000 By: /s/David A.B. Brown
David A. B. Brown, Director
Date: December 14, 2000 By: /s/Patrick J. B. Donnelly
Patrick J. B. Donnelly, Director
Date: December 14, 2000 By: /s/George A. Helland, Jr.
George A. Helland, Jr., Director
Date: December 14, 2000 By: /s/Gary L. Kott
Gary L. Kott, Director
INDEX TO EXHIBITS
Number Description
3.1 Amended and Restated Articles of Incorporation of
Registrant, filed as Exhibit 3.1 to Amendment No. 1 to
Registrants' Form S-1 dated January 17, 1995, File No. 33-
56637, and incorporated herein by this reference
3.2 Amended and Restated By-Laws of Registrant, dated
November 4, 1999, filed as Exhibit 3.2 to Company's Form 10-Q
for th fiscal quarter ended January 1, 2000, File No. 1-9838,
and incorporated herein by this reference
4.1 Indenture (including form of Senior Secured Note) between
the Company and The Huntington National Bank, as trustee (the
"Trustee")
4.2 Leasehold and Fee Mortgage, Assignment of Rents and
Leases and Security Agreement from Newport to the Trustee
(Kentucky)
4.3 Mortgage, Assignment of Rents and Leases and Security
Agreement from Koppel to the Trustee (Pennsylvania)
4.4 Deed of Trust, Assignment of Rents and Leases and
Security Agreement from Koppel to the Trustee (Texas)
4.5 Leasehold Mortgage, Assignment of Rents and Leases and
Security Agreement from Erlanger to the Trustee (Oklahoma)
4.6 Junior Leasehold and Fee Mortgage, Assignment of Rents
and Leases and Security Agreement from Newport to the Company
(Kentucky)
4.7 Junior Mortgage, Assignment of Rents and Leases and
Security Agreement from Koppel to the Company (Pennsylvania)
4.8 Junior Deed of Trust, Assignment of Rents and Leases and
Security Agreement from Koppel to the Company (Texas)
4.9 Junior Leasehold Mortgage, Assignment of Rents and Leases
and Security Agreement from Erlanger to the Company (Oklahoma)
4.10 Subsidiary Security Agreement between Newport and the
Trustee
4.11 Subsidiary Security Agreement between Koppel and the
Trustee
4.12 Subsidiary Security Agreement between Erlanger and the
Trustee
4.13 ICN Security Agreement between Newport and the Company
4.14 ICN Security Agreement between Koppel and the Company
4.15 ICN Security Agreement between Erlanger and the Company
4.16 Pledge and Security Agreement between the Company and the
Trustee
4.17 Subsidiary Guarantee
4.18 Warrant Agreement between the Company and The Huntington
National Bank, as warrant agent, filed as Exhibit 4.22 to the
Company's Form 10-Q for the quarterly period ended July
1, 1995, File No. 1-9838, and incorporated herein by this
reference
4.19 Credit Agreement between the Company and Bank of America
National Trust and Savings Association, dated July 31, 1998,
filed as Exhibit 4.20 to the Company's Form 10-K for the
fiscal year ended September 26, 1998, File No. 1-9838, and
incorporated herein by this reference; Amendment No. 1 dated
March 25, 1999, filed as Exhibit 4.20 to the Company's
Form 10-Q for the quarterly period ended March 27, 1999, File
No. 1-9838, and incorporated herein by this reference; and
Amendment No. 2 dated October 10, 2000 filed herewith
10.1 Company's Amended Employee Incentive Stock Option Plan,
filed as Exhibit 10(a) to Company's Form 10-K for the fiscal
year ended September 30, 1989, File No. 1-9838, and
incorporated herein by this reference*
10.2 Company's Executive Bonus Plan, filed as Schedule B to
Exhibit 10.4 to Company's Registration Statement on Form S-18,
File No. 2-90643, and incorporated herein by this reference*
10.3 Company's Non-Qualified Stock Option and Stock
Appreciation Rights Plan of 1988, filed as Exhibit 1 to the
Company's Proxy Statement dated January 13, 1989, File No. 1-
9838, and incorporated herein by this reference*
10.4 Rights Agreement dated November 17, 1998 between the
Company and Registrar and Transfer Company, filed as Exhibit 1
to the Company's Form 8-K dated November 5, 1998, File No. 1-
9838, and incorporated herein by this reference
10.5 Company's 1993 Incentive Stock Option Plan, filed as
Exhibit 1 to the Company's Proxy Statement dated December 22,
1992, File No. 1-9838, and incorporated herein by this
reference*
10.6 Registration Rights Agreement dated October 6, 1993
among Kentucky Electric Steel, Inc., NS Group, Inc. and
NSub I, Inc. (formerly Kentucky Electric Steel Corporation),
filed as Exhibit 10(i) to the Company's Form 10-K for fiscal
year ended September 25, 1993, File No. 1-9383, and
incorporated herein by this reference
10.7 Company's Amended and Restated 1995 Stock Option and
Stock Appreciation Rights Plan, filed as Exhibit A to the
Company's Proxy Statement dated December 21, 1998, File No. 1-
9838, and incorporated herein by this reference*
10.8 Form of Change of Control Severance Agreement, filed
herewith*
10.9 Form of Salary Continuation Agreement, filed herewith*
10.10 Employment Agreement between the Company and Rene J.
Robichaud, dated June 21, 1999, filed as Exhibit 10.11 to
the Company's Form 10-K for fiscal year ended September 25,
1999, File No. 1-9838 and incorporated herein by this
reference*
10.11 Employment Agreement between the Company an William W.
Beible, Jr., dated May 8, 2000 filed as Exhibit 10.1 to the
Company's Form 10-Q for the three months ended July 1, 2000
and incorporated herein by this reference*
10.12 Company's 2000 Non-Employee Director Stock Option Plan
filed as Exhibit 10.4 to the Company's Form 10-Q for the three
months ended July 1, 2000 and incorporated herein by this
reference*
21 Subsidiaries of Registrant, filed herewith
23 Consent of Independent Public Accountants, filed herewith
24 Power of Attorney (contained on Signature Page)
27 Financial Data Schedule, filed herewith
99.1 Risk Factors, filed herewith
* Indicates management contracts or compensatory plans or
arrangements in which one or more directors or executive
officers of the Company participates or is a party.
