SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
x SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 24, 1994
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number 1-9838
NS GROUP, INC.
(Exact name of registrant as specified in its charter)
Kentucky 61-0985936
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
Ninth and Lowell Streets, Newport, Kentucky 41072
(Address of principal executive offices)
Registrant's telephone number, including area code (606) 292-6809
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class 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 November 28, 1994, as reported in The
Wall Street Journal, the aggregate market value of the voting stock held
by non-affiliates of the registrant was approximately $42.5 million.
[Cover page 1 of 2 pages]
The number of shares outstanding of the registrant's Common Stock, no
par value, was 13,809,413 at November 28, 1994.
DOCUMENTS INCORPORATED BY REFERENCE
Parts I, II and III incorporate certain information by reference from
the Annual Report to Shareholders for the fiscal year ended September
24, 1994 ("1994 Annual Report To Shareholders"). Part III also
incorporates certain information by reference from the Company's Proxy
Statement dated December 20, 1994 for the Annual Meeting of Shareholders
on February 16, 1995.
[Cover page 2 of 2 pages]
PART I
ITEM 1. BUSINESS
General
The Company was incorporated in Kentucky in 1980 as Newport Steel
Corporation for the purpose of purchasing the operating assets of the
Newport Steel Works from Interlake, Inc. (Interlake). The Company
changed its name to NS Group, Inc. in 1987 and transferred its tubular
manufacturing operations to a subsidiary renamed Newport Steel
Corporation. As used herein, the terms "Company" and "NS Group" refer to
NS Group, Inc. and its subsidiaries, unless otherwise required by the
context.
In October 1990, the Company, through a newly-formed wholly-owned
subsidiary, acquired certain assets now comprising Koppel Steel
Corporation ("Koppel"), a steel mini-mill located in western
Pennsylvania. Koppel manufactures seamless tubular products, special bar
quality (SBQ) products and semi-finished steel products. Koppel operates
melting and casting facilities and a bar mill in Koppel, Pennsylvania as
well as a seamless tube-making facility approximately 20 miles from
Koppel in Ambridge, Pennsylvania. Koppel's seamless tubular products are
used in oil and natural gas drilling and production operations and in the
transmission of oil, natural gas and other fluids. SBQ products are
primarily used by forgers and original equipment manufacturers of heavy
equipment and off-road vehicles.
In October, 1993, the Company sold its wholly-owned subsidiary,
Kentucky Electric Steel Corporation, to a newly formed public company in
exchange for $45.6 million in cash and 400,000 shares (approximately 8%)
of the new public company, then valued at $4.8 million. Kentucky
Electric Steel Corporation was sold in order to enhance the Company's
financial flexibility. Additional information pertaining to this
transaction is incorporated herein by reference from Note 2 to the
Consolidated Financial Statements included in the 1994 Annual Report to
Shareholders, such relevant portion filed herewith under Exhibit 13,
under the caption "Consolidated Financial Statements."
NS Group conducts business in two industry segments.
Specialty Steel -- includes three wholly-owned subsidiaries:
Newport Steel Corporation (Newport), a mini-mill manufacturer of welded
tubular steel products and hot rolled coils, located near Newport,
Kentucky; Erlanger Tubular Corporation (Erlanger), a tubular steel
finishing operation acquired in late fiscal 1986, located near Tulsa,
Oklahoma; and Koppel Steel Corporation (Koppel), a mini-mill manufacturer
of seamless tubular steel products, special bar quality products and
semi-finished steel products, acquired in October, 1990, located in
western Pennsylvania.
Adhesives -- includes the wholly-owned subsidiary, Imperial
Adhesives, Inc. (Imperial), a manufacturer of industrial adhesives
products, located in Cincinnati, Ohio.
Incorporated herein by reference is Note 14 to the Consolidated
Financial Statements included in the 1994 Annual Report to Shareholders
such relevant portion filed herewith under Exhibit 13, under the caption
"Consolidated Financial Statements" for additional information pertaining
to industry segment data.
Specialty Steel Segment
The Company's specialty steel products consist of: (i) seamless and
welded tubular goods primarily used in oil and natural gas drilling and
production operations (oil country tubular goods, or OCTG); (ii) line
pipe used in the transmission of oil, natural gas and other fluids; (iii)
SBQ products primarily used in the manufacture of heavy industrial
equipment and off-road vehicles; and (iv) hot rolled coils which are sold
to service centers and other manufacturers for further processing. The
Company manufactures these specialty steel products at its two mini-
mills, located in Koppel, Pennsylvania and near Newport, Kentucky. The
term mini-mill connotes a smaller, relatively low-cost mill that
typically uses scrap steel as its basic raw material and offers a
relatively limited range of products.
Products
Seamless OCTG Products. The Company's seamless OCTG products are
used as drill pipe, casing and production tubing. Drill pipe is used and
may be reused to drill several wells. 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. Production tubing is placed within the casing and
is used to convey oil and natural gas to the surface. The Company's
seamless OCTG products are sold as a finished threaded and coupled
product in both carbon and alloy grades. Compared to similar welded
products, seamless production tubing and casing are better suited for use
in hostile drilling environments such as off-shore drilling or deeper
wells because of their greater strength and durability.
Welded OCTG Products. The Company's welded OCTG products are used
primarily as casing in oil and natural gas wells during drilling
operations. Welded OCTG products are generally used when higher
strength is not required, typically in wells less than 10,000 feet in
depth. The Company sells its welded OCTG products as both a plain end
and as a finished tubular product in both carbon and alloy grades.
The demand for domestic OCTG products is primarily dependent on the
number and depth of oil and natural gas wells being drilled in the United
States. The level of drilling activity is largely a function of the
current prices of oil and natural gas and the industry's future price
expectations. Demand for OCTG products is also influenced by the levels
of inventory held by producers, distributors and end users. In addition,
the demand for OCTG products produced domestically is also significantly
impacted by the level of foreign imports of OCTG products. The level of
OCTG imports is affected by: (i) the value of the U.S. dollar versus
other key currencies; (ii) overall world demand for OCTG products; (iii)
the production cost competitiveness of domestic producers; (iv) trade
practices of, and government subsidies to, foreign producers; and (v) the
presence or absence of governmentally imposed trade restrictions in the
United States.
Line Pipe Products. The Company's line pipe products are primarily
used 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. The Company's seamless and welded line pipe
products are shipped as a plain end product and welded together on site.
The majority of the Company's line pipe sales are welded products. The
demand for line pipe is only partially dependent on oil and 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.
Special Bar Quality Products. The Company manufactures SBQ products
in a specialized market niche of products ranging in size from 2.875 to
6.0 inches. The Company produces its SBQ products from continuous cast
blooms that enables substantial size reduction in the bloom during
processing and provides heavier strength-to-weight ratios. These SBQ
products are primarily used in critical weight-bearing applications such
a suspension systems, gear blanks, drive axles for tractors and off-road
vehicles, heavy machinery components and hydraulic and pneumatic
cylinders.
Hot Rolled Coils. The Company produces commercial quality grade hot
rolled coils, from 28 to 50 inches in width, between 0.125 and 0.500
inches in gauge, and in 15 ton coil weights. In the past, the Company
typically limited its production of hot rolled coils to the amount
required to supply its welded pipe mills for conversion into welded
tubular products. However, as a result of recent strong demand for hot
rolled coils, the Company has begun to utilize its excess melting and
rolling capacity to produce hot rolled coils for direct sale to third
parties. These products are sold to service centers and to others for
use in high-strength applications.
Other Products. The Company's OCTG products are inspected and
tested to ensure that they meet API specifications. Products that do not
meet specification are classified as secondary or limited service
products and are sold at substantially reduced prices.
Finishing Facilities. The Company processes and finishes a portion
of its own welded and seamless tubular products, and to a lesser extent,
those of other tubular producers, at Erlanger and at its Koppel-owned
facility in Baytown, Texas (Baytown). The finishing processes at
Erlanger include upsetting, which is a forging process that thickens tube
ends; heat treating, which is a furnace operation designed to strengthen
the steel; straightening; coating for rust prevention; and threading.
Currently, Baytown is capable of upsetting, coating and threading. After
finishing, products are either immediately reshipped to customers or
stored as inventory to enable the Company to respond quickly to customer
needs.
Markets and Distribution
The Company sells its specialty steel products to its customers
through an in-house sales force which is supplemented by a number of
independent sales representatives. The primary end markets for the
Company's seamless tubular products has been the southwest United States
and certain foreign markets. Nearly all of the Company's OCTG products
are sold to domestic distributors, some of whom subsequently sell the
Company's products into the international marketplace. The Company has
historically marketed its welded tubular products in the east, central
and southwest regions of the United States, in areas where shallow oil
and gas drilling and exploration activity utilize welded tubular
products. The Company sells its SBQ products to customers located
generally within 400 miles of the Koppel facilities.
All of the Company's steel-making and finishing facilities are
located on or near major rivers or waterways, enabling the Company to
transport its tubular products into the southwest by barge. The Company
ships substantially all of its welded OCTG products destined for the
southwest region by barge, and with the addition of Baytown, the Company
will be shipping substantially all of its seamless OCTG product destined
for the southwest by barge as well.
Customers
The Company has approximately 300 specialty steel product customers.
The Company's OCTG and line pipe products are used by major and
independent oil and natural gas exploration and production companies in
drilling and production applications in the United States, Canada, Mexico
and overseas. Line pipe products are also used by gas utility and
transmission companies. The majority of the Company's OCTG and line pipe
products are sold to domestic distributors and directly to end users.
The Company sells its SBQ products to service centers, cold finishers,
forgers and original equipment manufacturers, and primarily sells its hot
rolled coils to service centers and other manufacturers for further
processing. The Company has long-standing relationships with many of its
larger customers; however, the Company believes that it is not dependent
on any customer and that it could, over time, replace lost sales
attributable to any one customer.
Competition
The markets for the Company's specialty steel products are highly
competitive and cyclical. The Company believes that the principal
competitive factors affecting its business are price, quality and
customer service.
The Company competes with a number of domestic as well as foreign
producers in the welded tubular market, which includes both OCTG and line
pipe products. In the seamless OCTG market, the Company competes
principally with one domestic producer as well as a number of foreign
producers. With respect to its SBQ products, the Company competes with
numerous other domestic steel manufacturers.
Trade Cases. In response to the rising level of foreign imports of
OCTG products, on June 30, 1994, the Company and six other U.S. steel
companies filed antidumping petitions against imports of OCTG products
from seven foreign nations. The cases ask the United States government
to take action to offset injury to the domestic OCTG industry from
unfairly traded imports. The antidumping petitions were filed against
OCTG imports from Argentina, Austria, Italy, Japan, Korea, Mexico and
Spain. The Company also joined in filing countervailing duty cases
charging subsidization of OCTG imports from Austria and Italy. The cases
are being handled by the International Trade Administration of the United
States Department of Commerce, which is investigating the existence and
extent of dumping and subsidization, and by the United States
International Trade Commission which is assessing whether dumping and
subsidization have caused material injury to the United States OCTG
industry. In August 1994, the International Trade Commissioners voted
unanimously that there was reasonable indication of material injury which
warrants further investigation of the petitions. The existence and
extent of unfair trade practices could be determined as early as late
January 1995, and preliminary tariffs could be imposed at that time.
Final determinations regarding unfair trade practices and any injury
caused thereby are expected in the summer of 1995. While the Company
cannot predict the outcome of the cases at this time, the Company
believes that a favorable ruling could decrease foreign shipments of OCTG
products and increase the volume and selling price of the Company's
shipments.
Raw Materials and Supplies
The Company's major raw material is steel scrap, which is generated
principally from industrial, automotive, demolition, railroad and other
steel scrap sources. Steel scrap is purchased by the Company either
through scrap brokers or directly in the open market. The long-term
demand for steel scrap and its importance to the domestic steel industry
may be expected to increase as steel-makers continue to expand steel
scrap-based electric arc furnace and thin slab casting capacities. For
the foreseeable future, however, the Company believes that supplies of
steel scrap will continue to be available in sufficient quantities at
competitive prices. In addition, a number of technologies exist for the
processing of iron ore into forms which may be substituted for steel
scrap in electric arc furnace-based steel-making operations. Such forms
include direct-reduced iron, iron carbide and hot-briquette iron. While
such forms may not be cost competitive with steel scrap at present, a
sustained increase in the price of steel scrap could result in increased
implementation of these alternative technologies.
The Company's steel manufacturing facilities consume large amounts
of electricity. The Company purchases its electricity from utilities
near its steel-making facilities pursuant to contracts that expire in
1995 for Koppel and 2001 for Newport. The contracts contain provisions
that provide for lower priced demand charges during off-peak hours and
known maximums in higher cost firm demand power. Also, the Company
receives discounted demand rates in return for the utilities' right to
periodically curtail service during periods of peak demand. These
curtailments are generally limited to a few hours and historically have
had a negligible impact on the Company's operations. The Company has no
reason to believe that the utility contract expiring at Koppel in 1995
will not be renewed upon substantially similar terms.
The Company also consumes smaller quantities of additives, alloys
and flux which are purchased from a number of suppliers.
Adhesives Segment
Imperial is a manufacturer of industrial adhesives products.
Imperial maintains over 900 active formulas for the manufacture of water-
borne, solvent-borne, and hot-melt adhesives, which are used in product
assembly applications, including footwear, foam bonding, marine and
recreational vehicles, and consumer packaging. Raw materials are
available from multiple sources and consist primarily of petrochemical-
based materials. Pricing generally follows trends in the petrochemical
markets.
Imperial markets its adhesives products throughout the United States
and Caribbean basin through an in-house sales force as well as numerous
independent sales representatives. Products are distributed from four
manufacturing sites, a warehouse in Puerto Rico, and a number of public
warehouses across the United States.
Competition in the industrial adhesives products market is highly-
fragmented. The Company believes that it competes in this market on the
basis of price, product performance and customer service. Imperial
competes with numerous small or comparably-sized companies, as well as
major adhesives producers.
Environmental Matters
The Company's specialty steel and adhesives operations are subject
to various federal, state and local environmental laws and regulations,
including, among others, the Clean Air Act, the 1990 Amendments to the
Clean Air Act (the 1990 Amendments), the Clean Water Act and the Resource
Conservation and Recovery Act (RCRA) and all regulations promulgated in
connection therewith, including, among others, those concerning the
discharge of contaminants as air emissions or waste water effluents and
the disposal of solid and/or hazardous wastes such as electric arc
furnace dust. The Company is from time to time involved in
administrative and judicial proceedings and administrative inquiries
related to environmental matters.
As with other similar mills in the industry, the Company's steel
mini-mills produce dust which contains lead, cadmium and chromium, and is
classified as a hazardous waste. The Company currently collects the dust
resulting from its electric arc furnace operations through emission
control systems and recycles it through a waste recycling firm using EPA-
approved processes. The Company also has on its property at Newport a
permitted hazardous waste disposal facility. In the event of a release
of a hazardous substance generated by the Company, the Company could be
responsible for the remediation of contamination associated with such
release.
During the fourth quarter of fiscal 1993, Newport shut down its melt
shop operations for 19 days when it was discovered that a radioactive
substance was accidentally melted, resulting in the contamination of the
melt shop's electric arc furnace emission control facility, or "baghouse
facility". A similar incident, having occurred in the third quarter of
fiscal 1992, shut down Newport's melt shop facilities for 23 days. The
source of the radiation in these incidents was contained in incoming
shipments of steel scrap, and was not detected by monitors that check
incoming steel scrap. In response, the Company has installed additional
state-of-the-art radiation detection systems in various locations
throughout the Newport plant.
The Company incurred estimated losses as a result of the extended
outages and costs to restore the melt shop and related facilities back to
operation, including estimated costs to dispose of the radiation
contaminated baghouse dust, of $7.2 million and $4.1 million in fiscal
1993 and 1992, respectively. The Company has recovered $3.5 million
through insurance and expects to recover and has recorded as a receivable
an additional $2.3 million in insurance claims for the fiscal 1993
incident. No recovery has been made nor recorded for the fiscal 1992
incident and the Company is assessing the possibility of legal remedies
against certain parties. The losses and costs attributable to these
incidents, net of insurance claims, resulted in an extraordinary charge
of $1.1 million, net of applicable income tax benefit of $0.7 million, or
an $.08 loss per share, in fiscal 1993 and an extraordinary charge of
$2.5 million, net of applicable income tax benefit of $1.6 million, or a
$.19 loss per share, in fiscal 1992. To date, the occurrence of the
accidental melting of radioactive materials has not resulted in any
notice of violations from federal or state environmental regulatory
agencies.
The Company is investigating and evaluating various issues
concerning storage, treatment and disposal of the radiation contaminated
baghouse dust; however, a final determination as to method of treatment
and disposal, cost and further regulatory requirements cannot be made at
this time. Depending on the ultimate timing and method of treatment and
disposal, which will require appropriate federal and state regulatory
approval, the actual cost of disposal could substantially exceed current
estimates and the Company's insurance coverage. As of September 24,
1994, claims recorded in connection with disposal costs substantially
exhaust available insurance coverage. Based on current knowledge,
management believes the recorded reserves of $4.4 million for disposal
costs pertaining to these incidents are adequate and the ultimate outcome
will not have a material adverse effect on the Company's consolidated
financial position. The ultimate effect of these matters on the
Company's consolidated results of operations cannot be predicted because
any such effect depends on the amount and timing of charges to operations
resulting from new information as it becomes available.
In September 1994, the Company received a proposed Consent Agreement
from the Environmental Protection Agency (EPA) relating to an April 1990
RCRA facility assessment (the Assessment) completed by the EPA and the
Pennsylvania Department of Environmental Resources. The Assessment was
performed in connection with a RCRA Part B permit pertaining to a
landfill that is adjacent to the Koppel facilities and owned by Babcock &
Wilcox Company (B&W), the former owner of the Koppel facilities. The
Assessment identified potential releases of hazardous constituents into
the environment from numerous Solid Waste Management Units (SWMU's) and
Areas of Concern (AOC's). The SWMU's and AOC's identified during the
Assessment and the EPA's follow-up investigations are located at and
adjacent to the Company's Koppel facilities. The proposed Consent
Agreement establishes a schedule for investigating, monitoring, testing
and analyzing the potential releases. Contamination documented as a
result of the investigation may require cleanup measures. Pursuant to
various agreements entered into among the Company, B&W and PMAC, Ltd.
(PMAC) at the time of the Company's acquisition of the Koppel facilities,
B&W and PMAC agreed to indemnify the Company against various known and
unknown environmental matters. While reserving its rights against B&W,
PMAC has accepted full financial responsibility for the matters covered
by the proposed Consent Agreement other than with respect to a 1987
release of hazardous constituents (the 1987 Release) that the Company
believes could represent the most significant component of any potential
cleanup, and other than with respect to hazardous constituents generated
by Koppel after its acquisition by the Company, if any. B&W, PMAC and
Koppel are in dispute as to whether the indemnification provisions
related to the 1987 Release expire in October 1995. Although B&W has not
acknowledged responsibility for any cleanup measures that may be required
as a result of any investigation (other than with respect to the 1987
Release, in the event certain actions are taken by the EPA prior to
October 1995), B&W and PMAC have agreed to jointly retain an
environmental consultant to assist in negotiating the Consent Agreement
and to conduct the required investigation. Prior to the completion of
the site analysis to be performed in connection with any Consent
Agreement, the Company cannot predict the expected cleanup cost for the
SWMU's and AOC's covered by the proposed Consent Agreement. The Company
believes that it is entitled to full indemnity for all of the matters
covered by the proposed Consent Agreement from B&W and/or PMAC. Pursuant
to its contractual arrangements with PMAC, the Company has a right of
offset against $15 million principal amount of Subordinated Convertible
Debentures due October 2000 through 2005 issued to PMAC which are held in
escrow to secure PMAC's indemnification obligations to the Company.
Subject to the uncertainties concerning the proposed Consent
Agreement and the storage and disposal of the radiation contaminated
baghouse dust, the Company believes it is in compliance in all material
respects with all applicable environmental regulations. Regulations
resulting from the 1990 Amendments that will pertain to the Company's
electric arc furnace operations are currently not expected to be
promulgated until 1997 or later. The Company cannot predict the level of
required capital expenditures resulting from future environmental
regulations such as those forthcoming as a result of the 1990 Amendments,
however, the Company believes that while the 1990 Amendments may require
additional expenditures, such expenditures will not have a material
impact on the Company's business or consolidated financial position for
the foreseeable future. Capital expenditures for the Company's
environmental control facilities are anticipated to total approximately
$1.0 million through fiscal 1997, however such expenditures could be
influenced by new and revised environmental laws and regulations.
Employees
As of September 24, 1994, the Company had 1,568 employees, of whom
384 were salaried and 1,184 were hourly. Substantially all of the
Company's hourly employees are represented by the United Steelworkers of
America under contracts expiring in 1997 for Erlanger; 1999 for Newport
and Koppel; and 1995 for Imperial.
ITEM 2. PROPERTIES
The Company's principal operating properties are listed in the table
below. The Company believes its facilities are adequate and suitable for
its present level of operations.
Location and Properties
Specialty Steel Segment:
Newport, Kentucky - The Company owns approximately 250 acres of
real estate upon which are located a melt shop, hot strip mill,
two welded pipe mills, machine and fabricating shops and
storage and repair facilities aggregating approximately 636,000
square feet, as well as the Company's administrative offices.
Koppel, Pennsylvania - The Company owns approximately 227 acres
of real estate upon which are located a melt shop, bar mill,
blooming mill, pickling facility, machine and fabricating
shops, storage and repair facilities and administrative offices
aggregating approximately 900,000 square feet.
Ambridge, Pennsylvania - The Company owns approximately 45
acres of real estate upon which are located a seamless tube
making facility and seamless tube finishing facilities
aggregating approximately 659,000 square feet.
Tulsa, Oklahoma - The Company leases approximately 36 acres of
real estate upon which are 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.
Baytown, Texas - The Company owns approximately 40 acres of
real estate upon which is located a tubular processing
facility. The facility is located adjacent to accessible barge
facilities. Located on the property are eight buildings
aggregating approximately 65,000 square feet which house the
various finishing operations.
Adhesives Segment:
Cincinnati, Ohio; Kalamazoo, Michigan; Lynchburg,
Virginia; Nashville, Tennessee - The Company owns
approximately seven acres of property in Cincinnati, Ohio,
five acres of property in Kalamazoo, Michigan, and 1.5
acres of property in Lynchburg, Virginia for use in its
adhesives operations. The Cincinnati properties contain
five buildings aggregating approximately 150,000 square
feet; the Kalamazoo property consists of one 24,000 square
foot building; and the Lynchburg property consists of one
10,000 square foot building. The Company also leases
approximately 3.1 acres in Nashville, Tennessee for use in
its adhesives operations, including one building
aggregating approximately 60,000 square feet.
Other:
Newport, Kentucky - The Company owns approximately 40 acres of
partially developed land near Newport, Kentucky, acquired in
fiscal 1989, for use as investment property.
Information regarding encumbrances on the Company's properties is
incorporated herein by reference from Note 5 to the Consolidated
Financial Statements, included in the 1994 Annual Report to Shareholders,
such relevant portion filed herewith under Exhibit 13, under the caption
"Consolidated Financial Statements."
Capacity Utilization
The Company's capacity utilization for fiscal 1994 was as follows:
Rated Capacity
Facility (in tons) Tons Produced Percent
Koppel facilities
Melt shop ............... 400,000 278,300 69.6%
Bar mill ................ 200,000 169,900 85.0%
Seamless tube mill ...... 200,000 100,900 50.5%
Newport facilities
Melt shop ............... 700,000 367,300 52.5%
Hot strip rolling mill .. 750,000 353,200 47.1%
Welded pipe mills ....... 580,000 269,900 46.5%
ITEM 3. LEGAL PROCEEDINGS
In September 1994, the Company received a proposed Consent Agreement
from the EPA. See "Environmental Matters."
Newport is a co-defendant in a claim for breach of implied warranty
in the United States District Court for the Southern District of Texas
arising from the failure of two joints of welded pipe during testing of
an off-shore pipeline. The plaintiff is seeking damages in excess of $5
million for costs associated with replacing the entire pipeline and lost
production revenues. The Company believes that it has meritorious
defenses to this claim, although no assurances can be given as to the
outcome of this case. Insurance may be available for a portion, but not
all, of any award for damages.
In addition, the Company is subject to various other claims,
lawsuits and administrative proceedings arising in the ordinary course of
business with respect to commercial, product liability and other matters
which seek remedies or damages. The Company believes it has meritorious
defenses with respect to these claims and litigation and that the
ultimate disposition of any of the proceedings to which the Company is
currently a party will not have a material adverse effect on its
consolidated financial position. There can be no assurance, however, as
to the ultimate disposition of these matters.
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, Inc. is listed on the New York Stock Exchange, trading
symbol, NSS.
Stock Price
Fiscal 1994 High Low
First Quarter $ 9 1/2 $ 5 7/8
Second Quarter 7 3/4 6 1/4
Third Quarter 7 1/8 4 7/8
Fourth Quarter 7 5 7/8
Fiscal 1993 High Low
First Quarter $ 5 $ 3 1/2
Second Quarter 6 3/8 3 5/8
Third Quarter 8 7/8 5
Fourth Quarter 10 3/4 7 5/8
Additional information pertaining to dividends is incorporated
herein by reference from Note 5 to the Consolidated Financial Statements
included in the 1994 Annual Report to Shareholders, such relevant portion
filed herewith under Exhibit 13, under the caption "Consolidated
Financial Statements".
As of November 28, 1994, there were approximately 310 record holders
of Common Stock.
ITEM 6. SELECTED FINANCIAL DATA
Incorporated herein by reference from the 1994 Annual Report to
Shareholders are Note 2 to the Consolidated Financial Statements and
selected financial data, such relevant portions filed herewith under
Exhibit 13, under the captions "Consolidated Financial Statements" and
"Consolidated Historical Summary", respectively.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Incorporated herein by reference from the 1994 Annual Report to
Shareholders, such relevant portion filed herewith under Exhibit 13,
under the caption "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Incorporated herein by reference from the 1994 Annual Report to
Shareholders, such relevant portion filed herewith under Exhibit 13,
under the caption "Consolidated Financial Statements."
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 Company's Proxy Statement
dated December 20, 1994 for the Annual Meeting of Shareholders on
February 16, 1995, under the caption "I. Election of Directors" -
"Nominees for Election as Directors"; "Committees of the Board"; and
"Executive Compensation".
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference from the Company's Proxy Statement
dated December 20, 1994 for the Annual Meeting of Shareholders on
February 16, 1995, under the caption "I. Election of Directors" -
"Director Compensation"; "Executive Compensation"; and "Compensation
Committee Interlocks and Insider Participation".
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated herein by reference from the Company's Proxy Statement
dated December 20, 1994 for the Annual Meeting of Shareholders on
February 16, 1995, "Securities Ownership of Certain Beneficial Owners and
Management".
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated herein by reference from the Company's Proxy Statement
dated December 20, 1994 for the Annual Meeting of Shareholders on
February 16, 1995, under the caption "I. Election of Directors" -
"Compensation Committee Interlocks and Insider Participation" and
"Certain Transactions".
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM
8-K
(a) 1. Consolidated Financial Statements - The following Consolidated
Financial Statements included in the 1994 Annual Report to
Shareholders for the fiscal year ended September 24, 1994, are
incorporated by reference in Item 8:
- Consolidated Statements of Income
- Consolidated Balance Sheets
- Consolidated Statements of Cash Flows
- Consolidated Statements of Common Shareholders' Equity
- Notes to Consolidated Financial Statements
- Report of Independent Public Accountants
(a) 2. Consolidated Financial Statement Schedules - The following
schedules are included herein:
- Report of Independent Public Accountants on Financial
Statement Schedules
- Schedule I - Marketable Securities - Other Investments
- Schedule V - Property, Plant and Equipment
- Schedule VI - Accumulated Depreciation and Amortization
of Property, Plant and Equipment
- Schedule VIII - Valuation and Qualifying Accounts
- Schedule IX - Short-Term Borrowings
- Schedule X - Supplementary Income Statement Information
(a) 3. Exhibits
Reference is made to the Index to Exhibits, which is
incorporated herein by reference.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter
ended September 24, 1994.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULES
To NS Group, Inc.:
We have audited in accordance with generally accepted auditing
standards the consolidated financial statements included in NS Group,
Inc. and subsidiaries annual report to shareholders incorporated by
reference in this Form 10-K, and have issued our report thereon dated
October 31, 1994. Our audit was made for the purpose of forming an
opinion on the basic financial statements taken as a whole. The
schedules listed in Item 14(a) 2 are the responsibility of the Company's
management and are presented for purposes of complying with the
Securities and Exchange Commission's rules and are not part of the basic
financial statements. These schedules have been subjected to the
auditing procedures applied in the audit of the basic financial
statements and, in our opinion, fairly state in all material respects the
financial data required to be set forth therein in relation to the basic
financial statements taken as a whole.
Cincinnati, Ohio ARTHUR ANDERSEN LLP
October 31, 1994
SCHEDULE I
NS GROUP, INC. AND SUBSIDIARIES
___________________
MARKETABLE SECURITIES - OTHER INVESTMENTS
(Dollars in thousands)
Amount at
Which Shown
Market in Balance
Type of Investment Cost Value Sheet
At September 25, 1993
Fixed Rate Obligations:
Corporate notes......................... $ 527 $ 503 $ 503
Variable Rate Preferred Stocks............ 1,000 1,000 1,000
U.S. Treasury Securities.................. 1,954 1,954 1,954
Total short-term investments at
September 25, 1993.................... $ 3,481 $ 3,457 $ 3,457
At September 24, 1994
Fixed Rate Obligations:
Corporate notes......................... $ 527 $ 500 $ 500
Variable Rate Preferred Stocks:
Utilities
Duke Power Company .................. 1,500 1,500 1,500
Houston Industries, Inc. ............ 1,500 1,500 1,500
Kansas City Power & Light Company ... 1,500 1,500 1,500
Virginia Electric & Power Company ... 1,500 1,500 1,500
Other Utilities ..................... 6,000 6,000 6,000
Financial
Northern Trust Corp. ................ 1,500 1,500 1,500
Konica Capital....................... 1,000 1,000 1,000
Transamerica Corporation............. 1,500 1,500 1,500
Other Financial...................... 6,000 6,000 6,000
Industrial.............................. 3,000 3,000 3,000
Other Variable Rate Investments:
Provident Institutional Funds
Tempcash Fund..................... 11,995 11,995 11,995
Other............................... 2,576 2,576 2,576
Total short-term investments at
September 24, 1994................... $40,098 $40,071 $40,071
SCHEDULE V
NS GROUP, INC. AND SUBSIDIARIES
______________________
PROPERTY, PLANT AND EQUIPMENT
(Dollars in thousands)
<TABLE>
<CAPTION>
Balance at Balance
Beginning Additions at End
Classification of Year at Cost Retirements Other(a) of Year
<S> <C> <C> <C> <C> <C>
For the Year Ended
September 26, 1992:
Land and land improvements.. $ 8,320 $ 50 $ (122) $ - $8,248
Buildings................... 17,788 1,251 (23) - 19,016
Machinery and equipment..... 226,498 4,900 (1,863) - 229,535
Construction in progress.... 6,046 (2,053)(b) - - 3,993
$258,652 $ 4,148 $(2,008) $ - $260,792
For the Year Ended
September 25, 1993:
Land and land improvements.. $ 8,248 $ 186 $ (12) $ - $ 8,422
Buildings................... 19,016 121 - - 19,137
Machinery and equipment..... 229,535 6,404 1,767) - 234,172
Construction in progress.... 3,993 (631)(b) - - 3,362
$260,792 $ 6,080 $(1,779) $ - $265,093
For the Year Ended
September 24, 1994:
Land and land improvements.. $ 8,422 $ 1,210 $ - $ (682) $ 8,950
Buildings................... 19,137 756 (283) (719) 18,891
Machinery and equipment..... 234,172 9,389 (3,993) (8,185) 231,383
Construction in progress.... 3,362 405 (b) - (270) 3,497
$265,093 $ 11,760 $(4,276) $(9,856) $262,721
</TABLE>
_____________________________
(a) Reductions due to the sale of subsidiary.
(b) Net change in construction in progress for the year.
SCHEDULE VI
NS GROUP, INC. AND SUBSIDIARIES
___________________
ACCUMULATED DEPRECIATION AND AMORTIZATION OF
PROPERTY, PLANT AND EQUIPMENT
(Dollars in thousands)
[CAPTION]
<TABLE>
Additions
Balance at Charged to Balance
Beginning Costs and at End
Classification of Year Expenses Retirements Other(a) of Year
For the Year Ended
September 26, 1992:
<S> <C> <C> <C> <C> <C>
Land and land improvements.. $ 602 $ 189 $ - $ - $ 791
Buildings................... 2,213 444 (1) - 2,656
Machinery and equipment..... 53,772 17,485 (380) - 70,877
$56,587 $18,118 $ (381) $ - $ 74,324
For the Year Ended
September 25, 1993:
Land and land improvements.. $ 791 $ 197 $ - $ - $ 988
Buildings................... 2,656 1,015 - - 3,671
Machinery and equipment..... 70,877 16,928 (837) - 86,968
$74,324 $18,140 $ (837) $ - $ 91,627
For the Year Ended
September 24, 1994:
Land and land improvements.. $ 988 $ 192 $ - $ (22) $ 1,158
Buildings................... 3,671 434 (217) (134) 3,754
Machinery and equipment..... 86,968 17,409 (3,659) (3,448) 97,270
$91,627 $18,035 $(3,876) $(3,604) $102,182
</TABLE>
_____________________________
(a) Reductions due to the sale of subsidiary.
SCHEDULE VIII
NS GROUP, INC. AND SUBSIDIARIES
_____________________
VALUATION AND QUALIFYING ACCOUNTS
(Dollars in thousands)
Reserves Deducted from
Assets in Balance Sheets
Allowance
for Allowance
Doubtful for Cash
Accounts(1) Discounts(1)
BALANCE, September 28, 1991....... $ 1,138 $ 97
Additions:
Charged to costs and expenses.. 632 1,903
Deductions:
Net charges of nature for which
reserves were created......... ( 463) (1,792)
BALANCE, September 26, 1992....... $ 1,307 $ 208
Additions:
Charged to costs and expenses.. 572 2,338
Deductions:
Net charges of nature for which
reserves were created......... (1,060) (2,293)
BALANCE, September 25, 1993....... $ 819 $ 253
Additions:
Charged to costs and expenses.. 343 2,298
Deductions:
Sale of subsidiary............. (305) -
Net charges of nature for which
reserves were created......... (220) (2,245)
BALANCE, September 24, 1994....... $ 637 $ 306
_______________________
(1) Deducted from accounts receivable
SCHEDULE IX
NS GROUP, INC. AND SUBSIDIARIES
____________________
SHORT-TERM BORROWINGS
(Dollars in thousands)
[CAPTION]
<TABLE>
Maximum
Amount Average Weighted
Weighted Outstanding Amount Average
Balance Average at Month-end Outstanding Interest
Category of Aggregate at End Interest During During Rate During
Short-Term Borrowings(1) of Year Rate the Year the Year(2) the Year(2)
<S> <C> <C> <C> <C> <C>
For the Year Ended
September 26, 1992:
Lines of credit.... $20,279 7.29% $31,744 $24,127 7.62%
Other notes........ 402 5.58 608 297 5.58
$20,681 7.26 $32,352 $24,424 7.59
For the Year Ended
September 25, 1993:
Lines of credit.... $26,229 7.30% $29,729 $25,333 7.30%
Other notes........ 738 5.58 1,137 533 5.58
$26,967 7.27 $30,866 $25,866 7.27
For the Year Ended
September 24, 1994:
Lines of credit.... $28,197 9.05% $33,353 $29,011 7.89%
Other notes........ 675 5.29 855 490 5.58
$28,872 8.96 $34,208 $29,501 7.86
</TABLE>
____________________________
(1) Short-term borrowings were under various bank line of credit agreements
and short-term demand notes which are used to finance various insurance
contracts.
(2) Computed on a monthly weighted average basis.
SCHEDULE X
NS GROUP, INC. AND SUBSIDIARIES
__________________
SUPPLEMENTARY INCOME STATEMENT INFORMATION
(Dollars in thousands)
Charged to
Costs and
Item Expenses
For the Year Ended September 26, 1992:
Maintenance and repairs.............................. $23,904
For the Year Ended September 25, 1993:
Maintenance and repairs.............................. $21,703
For the Year Ended September 24, 1994:
Maintenance and repairs.............................. $21,249
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 9, 1994 By: /s/Clifford R. Borland
Clifford R. Borland, President
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Clifford R. Borland and John R.
Parker, and each of them, his true and lawful attorneys-in-fact and
agents, with full power of substitution and resubstitution, for him and
in his name, place and stead, in any and all capacities to sign any and
all amendments to this Annual Report on Form 10-K and any other documents
and instruments incidental thereto, and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact
and agents, and each of them, full power and authority to do and perform
each and every act and thing requisite or necessary to be done in and
about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents and/or any of them, or their or his
substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
Date: December 9, 1994 By: /s/Clifford R. Borland
Clifford R. Borland, President,
Chief Executive Officer and Director
Date: December 9, 1994 /s/John R. Parker
John R. Parker, Vice President and
Treasurer, Principal Financial
Officer
Date: December 9, 1994 /s/Thomas J. Depenbrock
Thomas J. Depenbrock
Corporate Controller
Date: December 9, 1994 /s/Ronald R. Noel
Ronald R. Noel, Director
Date: December 9, 1994 /s/John B. Lally
John B. Lally, Director
Date: December 9, 1994 /s/Patrick J. B. Donnelly
Patrick J. B. Donnelly, Director
Date: December 9, 1994 /s/R. Glen Mayfield
R. Glen Mayfield, Director
INDEX TO EXHIBITS
Number Description
3(a) Amended and Restated Articles of Incorporation of Registrant,
filed as Exhibit 3(a) to Registrant's Form 10-K for the fiscal
year ended September 30, 1989, File No. 1-9838, and
incorporated herein by this reference
3(b) Amended and Restated By-Laws of Registrant, dated November 14,
1991, filed as Exhibit 3(b) to Registrant's Form 10-K for the
fiscal year ended September 28, 1991, File No. 1-9838, and
incorporated herein by this reference
4(a) Note Agreement dated as of November 15, 1989 and amended as of
October 3, 1990, between Newport Steel Corporation and the
Purchasers named therein and related agreements, filed as
Exhibit 4(a) to Registrant's Form 10-K for the fiscal year
ended September 30, 1989, File No. 1-9838, and incorporated
herein by this reference; Second and Third Amendment
Agreements, dated May 11, 1992 and November 24, 1992,
respectively, filed as Exhibit 4(a) to Registrant's Form 10-K
for the fiscal year ended September 26, 1992, File No. 1-9838,
and incorporated herein by this reference; Fourth Amendment
Agreement dated February 8, 1993, filed as Exhibit 4(a) to
Registrant's Form 10-Q for the quarterly period ended March 27,
1993, File No. 1-9838, and incorporated herein by this
reference; and Fifth Amendment Agreement dated August 17, 1994,
filed herewith
4(b) Form of 11% Subordinated Convertible Debenture due 2005, filed
as Exhibit 4.1 to Registrant's Current Report on Form 8-K dated
October 18, 1990, File No. 1-9838, and incorporated herein by
this reference
4(c) Form of Warrant dated October 4, 1990, filed as Exhibit 4.2 to
Registrant's Current Report on Form 8-K dated October 18, 1990,
File No. 1-9838, and incorporated herein by this reference; and
First Amendment to Warrant dated September 26, 1992, filed as
Exhibit 4(c) to Registrant's Form 10-K for the fiscal year
ended September 26, 1992, File No. 1-9838, and incorporated
herein by this reference
4(d) Loan Agreement dated as of October 4, 1990 between Koppel Steel
Corporation and General Electric Capital Corporation, filed as
Exhibit 4.3 to Registrant's Current Report on Form 8-K dated
October 18, 1990, File No. 1-9838, and incorporated herein by
this reference; amendment dated September 27, 1991, filed as
Exhibit 4(d) to Registrant's Form 10-K for the fiscal year
ended September 28, 1991, File No. 1-9838, and incorporated
herein by this reference; Second Amendment to Loan Agreement
dated September 26, 1992, filed as Exhibit 4(d) to Registrant's
Form 10-K for the fiscal year ended September 26, 1992, File
No. 1-9838, and incorporated herein by this reference; and
Third Amendment to Loan Agreement, dated September 24, 1993,
filed herewith
No other long-term debt instrument issued by the Registrant
exceeds 10% of the consolidated total assets of the Registrant
and its subsidiaries. The Registrant will furnish to the
Commission upon request copies of such instruments and related
agreements.
10(a) Registrant's Amended Employee Incentive Stock Option Plan,
filed as Exhibit 10(a) to Registrant's Form 10-K for the fiscal
year ended September 30, 1989, File No. 1-9838, and
incorporated herein by this reference
10(b) Registrant's Executive Bonus Plan, filed as Schedule B to
Exhibit 10.4 to Registrant's Registration Statement on Form S-
18, File No. 2-90643, and incorporated herein by this reference
10(c) Registrant's Non-Qualified Stock Option and Stock Appreciation
Rights Plan of 1988, filed as Exhibit 1 to Registrant's Proxy
Statement dated January 13, 1989, File No. 1-9838, and
incorporated herein by this reference
10(d) Rights Agreement dated as of November 17, 1988 between
Registrant and Pittsburgh National Bank, filed as Exhibit 1 to
Registrant's Form 8-K dated November 17, 1988, File No. 1-9838,
and incorporated herein by this reference; and Appointment and
Amendment Agreement dated July 29, 1994 between Registrant and
Registrar and Transfer Company, filed as Exhibit 10(d) to
Registrant's Form 10-Q dated May 29, 1994, File No. 1-9838, and
incorporated herein by this reference.
10(e) Registrant's 1993 Incentive Stock Option Plan, filed as Exhibit
1 to Registrant's Proxy Statement dated December 22, 1992, File
No. 1-9838, and incorporated herein by this reference
10(f) Transfer Agreement, dated September 29, 1993, filed on
September 28, 1993 as Exhibit 10.2 to the Amendment No. 2 to
the Registration Statement on Form S-1 of Kentucky Electric
Steel, Inc., File No. 33-67140, and incorporated herein by this
reference
10(g) Tax Agreement, dated October 6, 1993, by and among NS Group,
Inc., Kentucky Electric Steel, Inc. and NSub I, Inc. (formerly
Kentucky Electric Steel Corporation), filed as Exhibit 10(h) to
the Registrant's Form 10-K for the fiscal year ended September
25, 1993, File No. 1-9838, and incorporated herein by this
reference
10(h) Registration Rights Agreement dated October 6, 1993 among
Kentucky Electric Steel, Inc., NS Group, Inc. and NSub I, Inc.
filed as Exhibit 10(i) to the Registrant's Form 10-K for the
fiscal year ended September 25, 1993, File No. 1-9838, and
incorporated herein by this reference
13 Excerpted portion of the 1994 Annual Report to Shareholders
which are expressly incorporated by reference, filed herewith
21 Subsidiaries of Registrant
23 Consent of Independent Public Accountants
24 Power of Attorney (contained on Signature Page)
Exhibit 4(a)
NS GROUP, INC.
NEWPORT STEEL CORPORATION
Ninth and Lowell Streets
Newport, Kentucky 41072
FIFTH AMENDMENT AGREEMENT
August 17, 1994
To the Trustee and Noteholders
Whose Names are set forth on the
Signature Pages hereto:
Ladies and Gentlemen:
Reference is made to (i) those certain Note Agreements dated
as of November 15, 1989 as amended by those certain Amendment
Agreements dated as of October 3, 1990, May 11, 1992, November
24, 1992 and February 8, 1993 (the "Amendment Agreements" and, as
so amended, the "Note Agreement") between Newport Steel
Corporation (the "Company") and the respective purchasers of
$45,000,000 in aggregate principal amount of the Company's 10.40%
Senior Secured Notes due November 15, 1999 (the "Notes"), and
(ii) that certain Guaranty Agreement dated as of November 15,
1989 as amended by the Amendment Agreements (the "Guaranty
Agreement") pursuant to which NS Group, Inc. (the "Guarantor")
has guaranteed, inter alia, payment of the Notes. The Company
and the Guarantor have requested the Noteholders named on the
signature pages hereto (the "Noteholders") and the Trustee to
agree to a further amendment to the Note Agreement and to the
Guaranty Agreement to waive certain rights thereunder; and the
Noteholders and the Trustee have agreed to such amendment and
waiver on the terms and conditions hereinafter set forth.
In consideration of the foregoing and of the mutual
covenants hereinafter set forth, the Company, the Guarantor, the
Trustee and the Noteholders agree as follows:
1. Section 10.1 of the Note Agreement and Section 11.1 of
the Guaranty Agreement are each modified by inserting in the
correct alphabetical order the following new definition:
"Cash Equivalents" shall mean (i) marketable direct
obligations issued or unconditionally guaranteed by the United
States of America or any agency thereof maturing within one year
from the date of acquisition thereof, (ii) commercial paper
maturing no more than one year from the date of creation thereof
and currently having the highest rating obtainable from either
Standard & Poor's Corporation or Moody's Investors Service, Inc.,
August 17, 1994
Page Two
(iii) certificates of deposit, maturing no more than one year
from the date of creation thereof, issued by commercial banks
incorporated under the laws of the United States of America, each
having combined capital, surplus and undivided profits not less
than $200,000,000.00 and having a rating of "A": or better by a
nationally recognized rating agency, (iv) money market preferred
stocks which, at the date of acquisition and at all times
thereafter, are accorded either of the two highest ratings
obtainable from either Standard & Poors Corporation or Moody's
Investor Service, Inc., and (v) time deposits maturing no more
than thirty (30) days from the date of creation thereof with
commercial banks or savings banks or savings and loan
associations each having membership in the Federal Deposit
Insurance Corporation and in amounts not exceeding the maximum
amounts of insurance thereunder."
2. Section 10.1 of the Note Agreement is modified by inserting
at the end of the definition of "Funded Debt" the following
additional paragraph which shall be part of such definition:
Notwithstanding the foregoing, any borrowings by the Company
(or any guaranty by the Company of borrowings) pursuant to a
revolving loan agreement, working capital agreement or line of
credit that at any time or from time to time may constitute
Funded Debt pursuant to the terms hereof shall, for purposes
of calculating Funded Debt hereunder, be reduced by the
aggregate amount of cash and Cash Equivalents held by the
Company, the Guarantor and each Guarantor Subsidiary at the
time of such calculation.
3. Section 11.1 of the Guaranty Agreement is modified by
inserting at the end of the definition of "Funded Debt" the
following additional paragraph which shall be part of such
definition:
Notwithstanding the foregoing, any borrowings by the
Guarantor (or any Guaranty by the Guarantor of borrowings)
pursuant to a revolving loan agreement, working capital agreement
or line of credit that at any time or form time to time may
constitute Funded Debt pursuant to the terms hereof shall
nonetheless, for purposes of calculating Funded Debt hereunder,
be reduced by the aggregate amount of cash and Cash Equivalents
held by the Guarantor and its Subsidiaries at the time of such
calculation.
4. The Company and the Guarantor have entered into a certain
Amended and Restated Senior Secured Revolving Credit Agreement
with PNC Bank, Ohio, National Association and The Fifth Third
Bank with respect to the renewal of a certain revolving credit
facility in favor of the Company and its affiliate, Erlanger
Tubular Corporation (the "Renewed Revolving Credit"). In order
to clarify
August 17, 1994
Page Three
the intent of the parties with respect to the Renewed Revolving
Credit, the Noteholders and the Trustee acknowledge that they
have no objection to the Renewed Revolving Credit and further
acknowledge that compliance by the Company and the Guarantor with
Section 7.8 of the Note Agreement and Section 6.6 of the Guaranty
Agreement, respectively, was not required in connection
therewith. Accordingly, to the extent applicable, the Noteholders
and the Trustee hereby waive any Event of Default under section
7.8 of the Note Agreement or Section 6.6 of the Guaranty
Agreement with respect to the Renewed Revolving Credit.
5. The modifications and waiver set forth herein shall
become effective upon the occurrence of the following:
(i) each Noteholder and the Trustee shall have signed and
returned to the Company and the Guarantor a copy of this Fifth
Amendment Agreement;
(ii) all proceedings taken in connection with the execution
of this Fifth Amendment Agreement and all documents and papers
relating thereto shall be satisfactory to each Noteholder and its
counsel; and each Noteholder and its counsel shall have received
copies of such documents and papers as it or they may reasonably
request in connection therewith, all in form and substance
satisfactory to each Noteholder and its counsel.
6. Except as specifically modified hereby, the Note
Agreement and the Guaranty Agreement shall remain in full force
and effect in accordance with the terms thereof.
7. Each reference in the Note Agreement to "the Note
Agreement," "the Agreement," "herein," "hereof," or other words
of like import referred to the Note Agreement shall mean the Note
Agreement as amended by this Agreement; and each reference in the
Guaranty Agreement to "the Guaranty Agreement," "the Agreement",
"this Agreement,", "herein," "hereof," or other words of like
import referring to the Guaranty Agreement shall not mean the
Guaranty Agreement as amended by this Agreement.
NS Group, Inc.
By John R. Parker
Name: John R. Parker
Title: Vice President & Treasurer
August 17, 1994
Page Four
Newport Steel Corporation
By John R. Parker
Name: John R. Parker
Title: Vice President & Treasurer
Agreed and Accepted
Noteholders:
MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY
By _______________________________________
Name:
Title:
LIFE INSURANCE COMPANY OF NORTH AMERICA
By: CIGNA Investments, Inc.
By: Thomas P. Shea
Name:
Title:
INSURANCE COMPANY OF NORTH AMERICA
By: CIGNA Investments, Inc.
By: Thomas P. Shea
Name:
Title:
CONNECTICUT GENERAL LIFE INSURANCE COMPANY
(on behalf of one or more separate accounts)
By: CIGNA Investments, Inc.
By: Thomas P. Shea
Name:
Title:
August 17, 1994
Page Five
CONNECTICUT GENERAL LIFE INSURANCE COMPANY
By: CIGNA Investments, Inc.
By: Thomas P. Shea
Name:
Title:
CIGNA PROPERTY AND CASUALTY INSURANCE COMPANY
By: CIGNA Investments, Inc.
By: Thomas P. Shea
Name:
Title:
THE OHIO NATIONAL LIFE INSURANCE COMPANY
By: ____________________________________
Name:
Title:
COLONIAL PENN LIFE INSURANCE COMPANY
By: ____________________________________
Name:
Title:
SOUTHERN FARM BUREAU ANNUITY INSURANCE COMPANY
By: ____________________________________
Name:
Title:
WASHINGTON NATIONAL INSURANCE COMPANY
By: ____________________________________
Name:
Title:
UNITED COMPANIES LIFE INSURANCE COMPANY
By: ____________________________________
Name:
Title:
August 17, 1994
Page Six
Trustee:
HUNTINGTON NATIONAL BANK OF KENTON COUNTY, INC.
By: ______________________________________
Name:
Title:
Exhibit 4(d)
THIRD AMENDMENT TO LOAN AGREEMENT
THIS THIRD AMENDMENT ("Amendment"), made and entered into as of
the 24th day of September, 1993 by and between KOPPEL STEEL
CORPORATION, a Pennsylvania corporation ("Borrower"), and GENERAL
ELECTRIC CAPITAL CORPORATION, a New York corporation ("GE
Capital"), as "Agent" and sole "Lender" under the Loan Agreement
referred to hereinafter (as such capitalized terms are defined
therein);
W I T N E S S E T H:
WHEREAS, Borrower and GE Capital, as Agent and sole Lender, are
parties to a certain Loan Agreement, dated as of October 4, 1990
(as heretofore amended, the "Loan Agreement"; capitalized terms
used herein and not defined herein shall have the meanings
ascribed to them in the Loan Agreement); and
WHEREAS, pursuant to the Loan Agreement GE Capital makes
available certain Capital Expenditure Loans to Borrower the
proceeds of which are to be used by Borrower to finance Capital
Expenditures under Borrower's Capital Expenditures Program; and
WHEREAS, Borrower has advised GE Capital that it intends to
obtain a Capital Expenditure Loan in the amount of $8,000,000 on
or about the date hereof and has requested that GE Capital permit
it to use the proceeds of such Loan to pay in full its
obligations to PMAC under the Capital Improvements Note and,
subject to the terms and conditions set forth herein and in the
Loan Agreement, GE Capital is willing to do so; and
WHEREAS, Borrower and GE Capital wish to enter into this
Amendment in order to memorialize their mutual understanding in
regard to such Capital Expenditure Loan and certain related
modifications to the Loan Agreement;
NOW, THEREFORE, in consideration of the premises, the terms and
conditions contained herein and other good and valuable
consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereby agree as follows:
1. Refinancing Capital Expenditure Loan. Notwithstanding the
restrictions set forth in Sections 2.04 and 2.07 of the Loan
Agreement regarding the use of proceeds of Capital Expenditure
Loans, GE Capital hereby consents to Borrower's use of the
proceeds of an $8,000,000 Capital Expenditure Loan which Borrower
anticipates obtaining on or about the date hereof (herein the
"Refinancing Capital Expenditure Loan") to pay in full all of its
obligations to PMAC under the Capital Improvements Note;
provided, however, that GE Capital's consent is subject to each
of the following conditions:
(a) Except as expressly set forth hereinabove regarding the use
of proceeds thereof, the Refinancing Capital Expenditure Loan
will be subject to all terms and conditions of the Loan Agreement
applicable to Capital Expenditure Loans. Without limitation of
the foregoing (i) Borrower will comply with all provisions of
Section 2.04 of the Loan Agreement in regard to its request for
the Refinancing Capital Expenditure Loan; (ii) the Refinancing
Capital Expenditure Loan will be repaid as provided in Section
2.04(c) of the Loan Agreement and will bear interest as provided
in Section 2.09(d) or (f), as applicable, of the Loan Agreement,
(iii) concurrently with its receipt of the Refinancing Capital
Expenditure Loan Borrower will pay to GE Capital a Funding Fee in
the amount of $80,000 as required by Section 2.12 of the Loan
Agreement and (iv) each of the conditions precedent to the making
of Capital Expenditure Loans set forth in Article 3 of the Loan
Agreement shall have been satisfied prior to funding of the
Refinancing Capital Expenditure Loan (except that Borrower shall
not be required to certify that the proceeds of such Refinancing
Capital Expenditure Loan will be used to fund Capital
Expenditures).
(b) Prior to the funding of the Refinancing Capital Expenditure
Loan, each of the following additional conditions precedent shall
have been satisfied:
(i) By execution of this Amendment, Borrower shall have agreed
with GE Capital that effective on the date of execution of this
Amendment, the Loan Agreement shall be deemed to be amended in
the manner set forth in Section 2 hereof.
(ii) Borrower shall have caused to be delivered to GE Capital UCC
termination statements, mortgage releases and other releases, in
form and substance satisfactory to GE Capital, signed by PMAC,
releasing all Liens of PMAC in the assets of Borrower securing
the Capital Improvements Note.
(iii) NS Group and Borrower shall have entered into an amendment
to the Take or Pay Note or a replacement Take or Pay Note, in
form and substance satisfactory to GE Capital, which shall
provide that, in addition to any other prepayments required under
the Take or Pay Note, in the event that NS Group's wholly-owned
subsidiary, Kentucky Electric Steel Corporation ("Kentucky
Electric"), shall issue pursuant to a public offering or private
placement any shares of any equity security of Kentucky Electric
(other than pursuant to the conversion or exercise of any
existing security, option or right, any existing or future
employee stock option plan of Kentucky Electric, a dividend
payable in stock, or any other issuance of equity securities for
a consideration other than cash or marketable securities), NS
Group shall, within ten (10) days after receipt by Kentucky
Electric of the net cash proceeds of such issuance, prepay the
principal amount of the Take or Pay Note, and all accrued and
unpaid interest thereon, in the amount of such net cash proceeds
(net of all costs and expenses directly attributable to the
offering, including, but not limited to, attorneys' fees,
underwriting discounts or commissions, placement fees or other
professional fees, and stock transfer taxes paid or payable in
connection therewith) up to the then outstanding principal amount
of the Take or Pay Note and all accrued and unpaid interest
thereon.
(iv) Borrower shall have paid all fees, costs and expenses
incurred by GE Capital in connection with the preparation,
execution and delivery of this Amendment and any other Loan
Documents contemplated hereby (including the reasonable fees and
expenses of its counsel retained in connection with this
Amendment).
(v) NS Group and Borrower shall have delivered to GE Capital
certified resolutions of their respective boards of directors
authorizing the execution, delivery and performance by each such
entity of this Amendment and the other Loan Documents
contemplated hereby to the extent that each is party thereto.
(vi) Borrower shall have delivered to GE Capital all
environmental, health and safety Permits necessary for Borrower
to conduct its operations on the Q&T Property in compliance with
all applicable Environmental Laws.
(vii) NS Group and Borrower shall have executed and delivered to
GE Capital such other documents, instruments and agreements as GE
Capital shall reasonably request in connection with the
transactions contemplated hereby.
In the event that all conditions precedent set forth hereinabove
and in the Loan Agreement with regard to the funding of the
Refinancing Capital Expenditure Loan are not satisfied on or
prior to September 30, 1993, and the Refinancing Capital
Expenditure Loan is not made on or prior to such date, the
consent set forth herein shall be void and of no further force or
effect. The consent set forth herein is limited to the matter
set forth herein and shall not be deemed to waive or modify any
provision of the Loan Agreement (except as expressly set forth
above in regard to the use of proceeds of the Refinancing Capital
Expenditure Loan) or the other Loan Documents or to serve as a
consent to any other matter prohibited by the terms and
conditions thereof.
2. Amendments to Loan Agreement. Effective upon the execution
of this Amendment by Borrower and GE Capital the Loan Agreement
shall be deemed to be amended in the following respects:
(a) Amendment to Section 6.03 of the Loan Agreement. Section
6.03 of the Loan Agreement shall be deemed to be amended by
deleting clause (d) thereof in its entirety and substituting in
lieu thereof the following revised clause (d):
(d) not make, or permit its Subsidiaries to make, Capital
Expenditures except in accordance with the Capital Expenditure
Program and the Capital Expenditures budget approved by the
Required Lenders pursuant to Section 5.01(f)(ii); provided that,
(i) during its 1994 Fiscal Year Borrower shall make, or commit in
writing (with suppliers, contractors and similar Persons) to
make, Capital Expenditures of at least Five Million Dollars
($5,000,000) in accordance with the Capital Expenditure Program
and the Capital Expenditures budget approved by the Required
Lenders for such Fiscal Year and (ii) during the first ninety
(90) days of its 1995 Fiscal Year Borrower shall make any Capital
Expenditures committed to be made by Borrower in its 1994 Fiscal
Year, as provided in the preceding clause (i), but not actually
made in such Fiscal Year.
(b) Amendment to Section 9.01 of the Loan Agreement. Section
9.01 of the Loan Agreement is hereby amended by adding at the end
thereof a new clause (p) to read as follows:
(p) NS Group shall fail to prepay the Take or Pay Note (and
accrued and unpaid interest thereon) within ten (10) days after
the receipt by Kentucky Electric Steel Corporation ("Kentucky
Electric") of the proceeds of any public offering or private
placement of any shares of any equity security of Kentucky
Electric (other than pursuant to the conversion or exercise of
any existing security, option or right, any existing or future
employee stock option plan of Kentucky Electric, a dividend
payable in stock, or any other issuance of equity securities for
a consideration other than cash or marketable securities), in an
amount equal to the cash proceeds of such offering or placement
(net of all costs and expenses directly attributable to the
offering or placement, including, but not limited to, attorneys'
fees, underwriting discounts or commissions, placement fees or
other professional fees and stock transfer taxes paid or payable
in connection therewith) up to the then outstanding principal
amount of the Take or Pay Note and all accrued and unpaid
interest thereon.
3. Representations and Warranties. Borrower hereby represents
and warrants in favor of GE Capital as follows:
(a) The execution, delivery and performance by NS Group and
Borrower of this Amendment and any other Loan Documents
contemplated hereby and the amendment to the Take or Pay Note or
the Replacement Take or Pay Note contemplated by Section 1 hereof
(the "Take or Pay Note Amendment"), to the extent that each is
party thereto, (i) are within NS Group's and Borrower's
corporate power; (ii) have been duly authorized by all necessary
or proper corporate action; (iii) are not in contravention of any
provision of NS Group's or Borrower's respective certificates or
articles of incorporation or by-laws; (iv) will not violate any
law or regulation, or any order or decree of any court or
governmental instrumentality; (v) will not conflict with or
result in the breach or termination of, constitute a default
under or accelerate any performance required by, any indenture,
debenture, mortgage, deed of trust, lease, agreement, guaranty or
other document or instrument to which NS Group or Borrower is a
party or by which NS Group or Borrower or any of their respective
properties is bound (including, without limitation, the documents
described in Section 5.01(o) of the Loan Agreement and the Loan
Agreement, dated as of January 21, 1992, between Borrower and the
Commonwealth of Pennsylvania, acting by and through its
Department of Commerce (the "Sunny Day Loan Agreement")); (vi)
will not result in the creation or imposition of any Lien upon
any of the property of NS Group or Borrower other than those in
favor of GE Capital, all pursuant to the Loan Documents, and
Permitted Encumbrances; and (vii) do not require the consent,
authorization or approval of, or any declaration, notification,
filing or registration with, any governmental body, agency,
authority or any other Person, which have not been fully
obtained, made or complied with.
(b) This Amendment and each of the other Loan Documents
contemplated hereby and the Take or Pay Note Amendment have been
duly executed and delivered for the benefit of or on behalf of NS
Group or Borrower, as the case may be, and this Amendment, each
of such other Loan Documents and the Take or Pay Note Amendment
constitute the legal, valid and binding obligations of NS Group
and Borrower, to the extent each is party thereto, enforceable
against NS Group and Borrower in accordance with their respective
terms.
(c) Borrower is not presently in default under any indenture,
debenture, mortgage, deed of trust, lease, agreement or other
instrument to which Borrower is party, including, without
limitation, the Sunny Day Loan Agreement.
(d) (i) The operations of Borrower and each of its Subsidiaries,
with respect to the Q&T Property, comply in all material respects
with all applicable Environmental Laws; (ii) Borrower and each of
its Subsidiaries have obtained all environmental, health and
safety Permits necessary for Borrower to operate its business at
the Q&T Property, and all such Permits are valid, in good
standing and not subject to any modification or revocation
proceeding and Borrower and each of its Subsidiaries are in
compliance in all material respects with all terms and conditions
of such Permits; (iii) Borrower and each of its Subsidiaries and
its past and present operations at the Q&T Property, are not
subject to any outstanding written order or agreement with any
governmental authority or private party respecting (A) any
Environmental Laws, (B) any Remedial Actions, or (C) any
Environmental Claims arising from the Release or potential
Release of a Contaminant into the environment; (iv) none of the
present or past operations of Borrower or any of its Subsidiaries
with respect to Q&T Property is subject to any judicial or
administrative proceeding alleging a violation of any
Environmental Law; (v) none of the past or present operations of
Borrower or any of its Subsidiaries with respect to the Q&T
Property is the subject of any federal or state investigation
evaluating whether any Remedial Action is needed to respond to a
Release or potential Release of any Contaminant into the
environment under any applicable law; (vi) except as described on
Exhibit "A" attached hereto and incorporated herein by reference,
neither Borrower nor any of its Subsidiaries has filed any notice
under any Environmental Law indicating past or present treatment,
storage, or disposal of a hazardous or solid waste or reporting a
spill or Release of a Contaminant into the environment at, from
or under the Q&T Property under any applicable law; (vii) neither
Borrower nor any of its Subsidiaries, with respect to the Q&T
Property, has contingent liabilities in connection with Releases
or potential Releases of any Contaminant at or from the Q&T
Property into the environment; (viii) none of Borrower's or any
of its Subsidiary's operations at the Q&T Property will involve
or have involved, the generation, transportation, treatment,
recycling, reclamation, handling, use or disposal of hazardous
waste, as defined under 40 C.F.R. Parts 260-270 or any state
equivalent, except such hazardous waste generated in the normal
course of business and transported, treated, recycled, reclaimed,
handled, used or disposed of in compliance with all applicable
Environmental Laws; (ix) none of Borrower, Borrower's
Subsidiaries, or, to our knowledge, any other prior owner, any
lessee, or any other person has disposed of any Contaminant by
placing it in any disposal unit or in or on the ground or waters
of the Q&T Property; (x) except as described on Exhibit "A", no
underground storage tanks or surface impoundments are on, at or
under the Q&T Property; and (xi) no Lien in favor of any
governmental authority for (A) any liability under Environmental
Laws, or (B) damages arising from or costs incurred by such
governmental authority in response to a Release of a Contaminant
into the environment, has been filed or attached to the Q&T
property.
4. Additional Mortgage. At GE Capital's request at any time
hereafter, Borrower shall deliver to GE Capital (a) such written
representations and warranties regarding the compliance of the Q
& T Property and Borrower's operations thereon with all
applicable Environmental Laws as GE Capital shall request in
addition to the representations and warranties set forth at
Section 3(d) above and, if appropriate, a statement or schedule
setting forth in detail the reasons that Borrower cannot make
some or all of the requested representations and warranties
without qualification, (b) Mortgages and Assignments of Rents and
Leases, or amendments to the Mortgages and Assignments of Rents
and Leases delivered by Borrower to GE Capital on the Closing
Date, in either case, in form and substance satisfactory to GE
Capital, granting to GE Capital first priority Liens on the Q & T
Property, as further security for the Obligations, (c) title and
extended coverage insurance, in amounts satisfactory to GE
Capital, covering the Q & T Property and (d) an opinion of local
Pennsylvania counsel, in form and substance satisfactory to GE
Capital, as to the enforceability of the documents executed by
Borrower pursuant to the preceding clause (b) and such related
matters as GE Capital shall request.
5. Miscellaneous.
(a) Restatement of Representations and Warranties. Subject to
those matters (if any) set forth on Exhibit "B" attached hereto
and incorporated herein by reference, Borrower hereby restates
and renews each and every representation and warranty heretofore
made by it under, or in connection with, the execution and
delivery of the Loan Agreement and the other Loan Documents
except the representations and warranties set forth at Sections
4.18, 4.19 and 4.27 of the Loan Agreement.
(b) Effect of Amendment. All terms of the Loan Agreement, as
amended hereby, and the other Loan Documents, shall be and remain
in full force and effect from and after the date hereof and shall
constitute the legal, valid, binding and enforceable obligations
of Borrower to GE Capital. All references to the "Loan
Agreement" in the other Loan Documents shall be deemed references
to the Loan Agreement, as amended hereby. This Amendment shall
constitute a "Loan Document" for all purposes of the Loan
Agreement.
(c) Ratification. Borrower hereby restates, ratifies and
reaffirms each and every term and condition set forth in the Loan
Agreement, as amended hereby, and the other Loan Documents
effective as of the date hereof.
(d) Estoppel. To induce GE Capital to enter into this Amendment
and to continue to make financial accommodations to Borrower
under the Loan Agreement, Borrower hereby acknowledges and agrees
that, as of the date hereof, there exists no defense, right of
offset, claim, counterclaim or objection in favor of Borrower as
against GE Capital with respect to the Obligations.
(e) GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK
AND ALL APPLICABLE FEDERAL LAWS OF THE UNITED STATES OF AMERICA.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment
to be executed by their respective officers thereunto duly
authorized, as of the date first above written.
KOPPEL STEEL CORPORATION
By: /s/ Clifford R. Borland
Name: Clifford R. Borland
Title: Chairman
GENERAL ELECTRIC CAPITAL CORPORATION, individually and as Agent
By: /s/ John M. Greely
Name: John M. Greely
Title:Manager - Operations
ACKNOWLEDGMENT OF NS GROUP
The undersigned, NS Group, Inc., hereby (a) acknowledges its
receipt of a copy of, and agreement with the terms of, the within
and foregoing Third Amendment to Loan Agreement and ratifies and
affirms each provision thereto applicable to it, (b) agrees that
the NS Group Guaranty Documents, the NS Group Put Agreement and
the NS Group Take or Pay Agreement (as such terms are defined in
the Loan Agreement referenced in the within and foregoing Third
Amendment to Loan Agreement) will continue in full force and
effect without diminution or impairment notwithstanding the
execution and delivery of the within and foregoing Third
Amendment to Loan Agreement, and (c) certifies that, as of the
date hereof, there exists no defense, right of offset, claim,
counterclaim or objection to the payment and performance by the
undersigned of the terms of the NS Group Guaranty Documents, the
NS Group Take or Pay Agreement or the NS Group Put Agreement.
IN WITNESS WHEREOF, the undersigned has set its hand and seal as
of the 24th day of September, 1993.
NS GROUP, INC.
By: /s/ Clifford R. Borland
Name: Clifford R. Borland
Title: President and CEO
Exhibit 13
The following are the excerpted portions of the NS Group, Inc.
Annual Report to Shareholders for the fiscal year ended September
24, 1994 which are expressly incorporated by reference into Form
10-K.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
The Company operates in two separate business segments:
specialty steel and industrial adhesives. Within the specialty
steel segment are the operations of Newport Steel Corporation
(Newport), a manufacturer of welded tubular steel products and
hot rolled coils; Koppel Steel Corporation (Koppel), a
manufacturer of seamless tubular steel products, special bar
quality (SBQ) products and semi-finished steel products; and
Erlanger Tubular Corporation (Erlanger), a tubular steel product
finishing operation. The Company's specialty steel products
consist of: (i) seamless and welded tubular goods primarily used
in oil and natural gas drilling and production operations, (oil
country tubular goods, or OCTG); (ii) line pipe used in the
transmission of oil, gas and other fluids; (iii) special bar
quality products primarily used in the manufacture of heavy
industrial equipment; and (iv) hot rolled coils which are sold to
service centers and other manufacturers for further processing.
Within the adhesives segment are the operations of Imperial
Adhesives, Inc. (Imperial), a manufacturer of industrial
adhesives products. See Note 14 to the Consolidated Financial
Statements included herein for selected financial information by
business segment for the fiscal years 1994, 1993 and 1992.
In October 1993, the Company sold Kentucky Electric Steel
Corporation (KES), a manufacturer of SBQ products, to a newly
formed public company in exchange for $45,626,000 in cash and
400,000 shares (approximately 8%) of the newly formed public
company, then valued at $4,800,000. Reference is made to Note 2
to the Consolidated Financial Statements included herein
concerning the Company's sale of KES and its pro forma effect on
the Company's financial position and results of operations. The
following discussion includes the results of operations of KES
for the comparative prior year periods.
Results of Operations
The Company's net sales, cost of products sold and operating
results by industry segment for each of the three fiscal years in
the period ended September 24, 1994 were as follows:
(In thousands) 1994 1993 1992
Net sales
Specialty steel,
excluding KES $270,441 $234,460 $175,921
KES - 90,547 80,439
Total specialty
steel segment 270,441 325,007 256,360
Adhesives segment 32,939 28,075 24,882
$303,380 $353,082 $281,242
Cost of products
sold
Specialty steel
excluding KES $252,880 $217,215 $168,371
KES - 71,468 62,248
Total specialty
steel segment 252,880 288,683 230,619
Adhesives segment 25,281 21,903 19,570
$278,161 $310,586 $250,189
Operating income (loss)
Specialty steel,
excluding KES $ 2,909 $ 4,094 $ (5,074)
KES - 9,285 8,425
Total specialty
steel segment 2,909 13,379 3,351
Adhesives segment 1,150 1,059 533
Corporate allocations
and income (3,370) (2,766) (2,483)
$ 689 $11,672 $ 1,401
Sales data for the Company's specialty steel segment for each of
the three fiscal years in the period ended September 24, 1994
were as follows:
1994 1993 1992
Tons shipped
Welded tubular 277,600 308,000 246,500
Seamless tubular 92,300 76,900 45,400
SBQ, excluding KES 147,900 102,500 72,000
Other 43,200 16,400 9,400
KES - 244,400 217,900
561,000 748,200 591,200
Net sales ($000's)
Welded tubular $117,214 $125,132 $103,479
Seamless tubular 72,675 62,535 37,819
SBQ, excluding KES 64,858 40,561 28,756
Other 15,694 6,232 5,867
KES - 90,547 80,439
$270,441 $325,007 $256,360
Fiscal Year Ended September 24, 1994 Compared with Fiscal Year
Ended September 25, 1993
Fiscal 1994 specialty steel net sales, excluding KES, increased
$36.0 million, or 15.3% from fiscal 1993. Total specialty steel
net sales declined $54.6 million, or 16.8% from fiscal 1993,
primarily due to the sale of KES in October 1993.
Welded tubular net sales declined $7.9 million, or 6.3% on a
volume decline of 9.9%. Fiscal 1994 welded tubular net sales
were negatively impacted by a decline in second quarter shipments
that resulted primarily from customers' resistance to announced
price increases. Second quarter welded tubular net sales
declined $7.9 million on a volume decline of 29.8% from the
second quarter of fiscal 1993. The Company adjusted its selling
prices in response to the decline and volume increased in the
third quarter. Fiscal 1994 average selling prices for all welded
tubular products increased 3.9% from 1993.
Seamless tubular net sales increased $10.1 million, or 16.2% on a
volume increase of 20.0%. The increase in seamless tubular net
sales resulted primarily from an increase in shipments of
seamless OCTG due in part to Koppel's increased recognition in
the marketplace. Fiscal 1994 average selling prices for all
seamless tubular products declined 3.2% due in part to an
increased level of foreign imports of seamless OCTG in fiscal
1994.
Price and volume levels in the domestic tubular market are
primarily dependent on the level of drilling activity in the
United States and abroad, the level of foreign imports as well as
general economic conditions. The average number of oil and
natural gas drilling rigs in operation in the United States (rig
count) increased 3.4%, from 757 for fiscal 1993 to 783 for fiscal
1994. The effects of this increase were offset by an increased
level of imported tubular products resulting in downward pressure
on tubular product prices for most of fiscal 1994.
On June 30, 1994, the Company, and six other U.S. steel companies
filed antidumping petitions against imports of OCTG products from
seven foreign nations. The cases ask the U.S. government to take
action to offset injury to the domestic OCTG industry from
unfairly traded imports. The antidumping petitions were filed
against OCTG imports from Argentina, Austria, Italy, Japan,
Korea, Mexico and Spain. The Company also joined in filing
countervailing duty cases charging subsidization of OCTG imports
from Austria and Italy. The cases are being handled by the
International Trade Administration of the U.S. Department of
Commerce, which is investigating the existence and extent of
dumping and subsidization, and by the U.S. International Trade
Commission, which is assessing whether dumping and subsidization
have caused material injury to the U.S. industry. In August
1994, the International Trade Commissioners voted unanimously
that there was reasonable indication of material injury which
warrants further investigation of the petitions. The existence
and extent of unfair trade practices could be determined as early
as late January 1995, and preliminary tariffs could be imposed at
that time. Final determinations regarding unfair practices and
any injury caused thereby are expected in the Summer of 1995.
While the Company cannot predict the outcome of the cases at this
time, the Company believes that a favorable ITC ruling could
decrease foreign shipments of OCTG products and increase the
volume and average selling prices of the Company's shipments.
Price increases and improvements in tubular product shipments
will continue to also be highly dependent on the level of
drilling activity in the United States and abroad as well as the
level of activity in the steel industry and the general state of
the economy.
SBQ product net sales, excluding KES, increased $24.3 million, or
59.9% on a volume increase of 44.3%. SBQ product average selling
prices increased 10.9% from fiscal 1993. SBQ product volume and
prices have increased as a result of stronger market demand over
the prior year, combined with Koppel's increased recognition in
the marketplace. The increase in net sales of "other" products
is primarily attributable to an increase in shipments of hot
rolled coils, which is a result of stronger market demand for
this product over the prior year. Continued improvements in
shipments and net sales of SBQ products and hot rolled coils will
be largely dependent on the general state of the economy and the
overall strength of the steel industry.
Adhesives segment net sales increased $4.9 million, or 17.3%.
The increase in adhesives segment net sales over the prior year
was primarily the result of expansion of product lines acquired
in fiscal 1993.
Consolidated gross profit decreased $17.3 million from fiscal
1993 for a gross profit margin of 8.3% compared to 12.0% in
fiscal 1993. The decline in gross profit and margin was
primarily due to the sale of KES. Gross profit for the specialty
steel segment, excluding KES, increased $316,000 from fiscal 1993
for a gross profit margin of 6.5% compared to 7.4% in fiscal
1993. The decline in gross profit margin was partially
attributable to a 20.6% increase in the Company's average steel
scrap costs over fiscal 1993. The Company has recovered a portion
of the increase through higher selling prices for its SBQ
products and hot rolled coils; however, it was generally
unsuccessful in passing the increases in scrap costs through to
tubular product customers. Newport and Erlanger's gross profit
declined $5.3 million primarily as a result of increased steel
scrap costs and the decline in welded tubular shipments as
previously discussed as well as increased maintenance costs due
to severe winter weather in the second fiscal quarter. Koppel's
gross profit increased $5.4 million which was primarily
attributable to improved operating efficiencies due to greater
production and sales volume of SBQ and seamless tubular products,
as previously discussed. These improvements were partially
offset by increased steel scrap costs, lower seamless tubular
average selling prices and the effects of severe winter weather
conditions in the second fiscal quarter.
The adhesives segment gross profit increased $1.5 million from
fiscal 1993 for a gross profit margin of 23.2%, compared to 22.0%
in fiscal 1993. The increase in gross profit and margin was
primarily due to increased volume and improved selling prices.
Selling and administrative expenses declined primarily as a
result of the sale of KES and declined as a percentage of net
sales from 8.7% in fiscal 1993 to 8.1% in fiscal 1994.
As a result of the above factors, the specialty steel segment,
excluding KES, earned an operating profit of $2.9 million in
fiscal 1994 compared to $4.1 million in fiscal 1993. Of the $2.9
million specialty steel operating profit, Newport and Erlanger
incurred a $6.1 million operating loss, compared to a $751,000
loss in fiscal 1993; and Koppel earned a $9.0 million operating
profit, compared to a $4.8 million operating profit in fiscal
1993. The adhesives segment earned an operating profit of $1.2
million, virtually unchanged from fiscal 1993.
Interest income increased $1.5 million primarily due to an
increase in average cash and short-term investment balances that
resulted primarily from the sale of KES. Interest expense
decreased $1.1 million, primarily as a result of a decrease in
long-term debt obligations, partially offset by an increase in
the average borrowings and interest rates under the Company's
lines of credit. Other income increased $1.3 million primarily
due to income on the sale of equipment.
The sale of KES in the first quarter of fiscal 1994 resulted in a
pre-tax gain of $35.3 million and increased net income and
earnings per common share by $21.5 million and $1.56,
respectively. See Note 2 to the Consolidated Financial
Statements included herein.
In the first quarter of fiscal 1994, the Company recorded an
increase to net income of $1.7 million, or $.12 per share, for
the cumulative effect of the adoption of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes"
(Statement 109). The adoption of Statement 109 had no impact on
cash flow for fiscal 1994. A valuation allowance has not been
recorded against deferred tax assets as it is estimated that such
deferred tax assets will be realized through a reduction of taxes
otherwise payable upon the reversal of existing taxable temporary
differences. See Note 12 to the Consolidated Financial
Statements included herein.
During the first quarter of fiscal 1994, the Company also adopted
the provisions of Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investments in Debt and Equity
Securities" (Statement 115). Statement 115 requires the Company
to mark certain of its investments to market either through the
income statement or directly to common shareholders' equity,
depending on the nature of the investment. The impact on the
Company's financial statements from the adoption of Statement 115
was not material.
Fiscal Year Ended September 25, 1993 Compared with Fiscal Year
Ended September 26, 1992
Net sales in fiscal 1993 increased $71.8 million, or 25.5% from
fiscal 1992, to $353.1 million. The specialty steel segment net
sales increased $68.6 million and the adhesives segment net sales
increased $3.2 million.
Welded tubular net sales increased $21.7 million, or 20.9% on a
volume increase of 24.9%. The increase in welded tubular
shipments resulted generally from an increase in market share as
well as an increase in market activity, as evidenced by a modest
increase in the number of oil and natural gas drilling rigs in
operation in the United States. The rig count, which on average
was 701 for fiscal 1992, increased approximately 8% to an average
of 757 for fiscal 1993. Overall average selling prices of welded
tubular products declined 3.3% from fiscal 1992; however, prices
generally improved quarter to quarter during fiscal 1993.
Seamless tubular net sales increased $24.7 million, or 65.4% on a
volume increase of 69.4%. Seamless tubular product shipments
increased for reasons similar to those for the increase in welded
tubular shipments. Average selling prices for seamless tubular
products declined approximately 2.4%.
SBQ product net sales, excluding KES, increased $11.8 million, or
41.1% on a volume increase of 42.4%. SBQ product shipments
improved as a result of stronger market demand over the prior
year. Average selling prices, however, remained virtually
unchanged.
KES's net sales increased $10.1 million, or 12.6% on a 12.2%
increase in volume. Average selling prices remained virtually
unchanged from fiscal 1992. The increase in shipments resulted
from continued improvement in the various markets served by KES.
Imperial's net sales increased $3.2 million, or 12.8%, primarily
the result of the acquisition of new product lines as well as
price increases.
Consolidated gross profit increased $11.4 million from fiscal
1992 to $42.5 million, or a 12.0% gross profit margin compared to
11.0% in fiscal 1992. Specialty steel gross profit, excluding
KES, increased $9.7 million from fiscal 1992 for a gross profit
margin of 7.4% compared to 4.3% in fiscal 1992.
Newport and Erlanger's gross profit increased $2.1 million from
fiscal 1992. The increase was primarily due to improved operating
efficiencies resulting from increased production volumes, offset
by increased steel scrap costs and lower overall selling prices.
Gross profit at Koppel increased $7.6 million as a result of
significant improvements in production efficiencies due to
increased production volume for seamless tubular and SBQ products
over fiscal 1992. Gross profit at Koppel was also negatively
impacted by lower average selling prices and higher steel scrap
costs compared to fiscal 1992. KES's gross profit increased
$888,000, primarily as a result of increased volume as previously
discussed, partially offset by increases in the cost of steel
scrap.
The adhesives segment gross profit increased $860,000 for a gross
profit margin of 22.0% compared to 21.3% in fiscal 1992. The
increase in gross profit and margin was primarily due to
increased sales volume and operating efficiencies.
Selling and administrative expenses increased $1.2 million, or
4.0% and declined as a percentage of sales from 10.5% in fiscal
1992 to 8.7% in fiscal 1993. The overall increase in selling and
administrative expenses was primarily attributable to increased
production and sales volumes.
As a result of the above factors, the specialty steel segment
earned an operating profit of $13.4 million in fiscal 1993
compared to $3.4 million in fiscal 1992. Of the $13.4 million
specialty steel segment operating profit, Newport and Erlanger
incurred a $751,000 loss, compared to a $2.0 million loss in
fiscal 1992; Koppel earned a $4.8 million profit, compared to a
$3.0 million loss in fiscal 1992 and KES earned a $9.3 million
profit, compared to an $8.4 million profit in fiscal 1992. The
adhesives segment earned an operating profit of $1.1 million in
fiscal 1993 compared to $533,000 in fiscal 1992.
Interest expense decreased $701,000 primarily as a result of a
reduction in long-term debt obligations.
During the fourth quarter of fiscal 1993, Newport shut down its
melt shop operations for nineteen days when it was discovered
that a radioactive substance was accidentally melted, resulting
in the contamination of the melt shop's electric arc furnace
emission control facility, or "baghouse" facility. A similar
incident, having occurred in the third quarter of fiscal 1992,
shut down Newport's melt shop facilities for twenty-three days.
The source of the radiation in these incidents was contained in
incoming shipments of scrap metal and was not detected by
monitors that check incoming steel scrap. In response, the
Company has installed additional state-of-the-art radiation
detection systems in various locations throughout the Newport
plant.
The Company incurred estimated losses as a result of the extended
outages and costs to restore the melt shop and related facilities
back to operations, including estimated costs to dispose of the
radiation contaminated baghouse dust, of $7.2 million and $4.1
million, in fiscal 1993 and 1992, respectively. The Company has
recovered $3.5 million through insurance and expects to recover
and has recorded as a receivable an additional $2.3 million in
insurance claims for the fiscal 1993 incident. No recovery has
been made nor recorded for the fiscal 1992 incident and the
Company is assessing the possibility of legal remedies against
certain parties. The losses and costs attributable to these
incidents, net of insurance claims, resulted in an extraordinary
charge of $1.1 million, net of applicable income tax benefit of
$662,000, or an $.08 loss per share, in fiscal 1993 and an
extraordinary charge of $2.5 million, net of applicable income
tax benefit of $1.6 million, or a $.19 loss per share, in fiscal
1992. The occurrences of accidental melting of radioactive
materials have not resulted in any notice of violations from
federal or state environmental regulatory agencies.
The Company is investigating and evaluating various issues
concerning storage, treatment and disposal of the radiation
contaminated baghouse dust; however, a final determination as to
method of treatment and disposal, cost and further regulatory
requirements cannot be made at this time. Depending on the
ultimate timing and method of treatment and disposal, which will
require appropriate federal and state regulatory approval, the
actual cost of disposal could substantially exceed current
estimates and the Company's insurance coverage. As of September
24, 1994, claims recorded in connection with disposal costs
substantially exhausts available insurance coverage. Based on
current knowledge, management believes the recorded reserves of
$4.4 million for disposal costs pertaining to these incidents are
adequate and the ultimate outcome will not have a material
adverse effect on the Company's consolidated financial position.
The ultimate effect of these matters on the Company's
consolidated results of operations cannot be predicted because
any such effect depends on the amount and timing of charges to
operations resulting from new information as it becomes
available.
Liquidity and Capital Resources
Working capital at September 24, 1994 was $45.2 million compared
to $39.1 million at September 25, 1993. The current ratio at
September 24, 1994 was 1.50 to 1 compared to 1.45 to 1 at
September 25, 1993. At September 24, 1994, the Company had cash
and short-term investments totaling $44.5 million compared to
$9.3 million at September 25, 1993. At September 24, 1994, the
Company had aggregate lines of credit available for borrowing of
$34.9 million, including a $16.2 million line of credit
restricted for use at Koppel, of which a total of $28.2 was
outstanding. These lines expire in fiscal 1995 and 1996. At
September 24, 1994, approximately $8.3 million in cash and
short-term investments were restricted, primarily in connection
with cash collateralized letters of credit. The Company is
negotiating a new three year, $45.0 million working capital
facility which would replace its existing credit line agreements.
There can be no assurance that the new facility will be entered
into, however; the Company believes that it will have sufficient
credit facilities to meet its working capital needs for the next
twelve months.
Cash flow used in operating activities totaled $4.3 million.
Major components include a net loss before the effect of the gain
on the sale of KES and the adoption of Statement 109 of $10.0
million, a $7.9 million increase in accounts receivable, a $1.2
million decrease in long-term deferred taxes and a $3.2 million
increase in inventories. Partially offsetting these uses of
operating cash flow were non-cash depreciation and amortization
charges of $18.8 million, a decrease in refundable income taxes
and other current assets of $2.6 million and $2.7 million,
respectively, and an increase in accounts payable of $5.8
million. The increases in accounts receivable, inventories and
accounts payable were primarily attributable to the increase in
business activity in the specialty steel segment. Other current
assets decreased primarily due to the receipt of insurance claims
recorded in fiscal 1993. Cash flows from operating activities
were also reduced by $4.9 million for income taxes paid, which
resulted from the sale of KES.
As a result of the sale of KES, the Company received $45.6
million in cash and $4.8 million in common stock of the new
entity. In addition, the Company received $6.8 million in cash
from the new entity in satisfaction of a dividend declared by KES
prior to the sale. A portion of the cash proceeds have been
utilized to fund the current year's operating loss. Remaining
cash proceeds are invested in short-term investments.
The Company incurred $11.8 million in capital expenditures during
fiscal 1994, an increase of $5.7 million over fiscal 1993. The
Company currently estimates that capital spending in fiscal 1995
will increase over fiscal 1994 spending.
Net cash flows used by financing activities was $4.4 million.
During the fiscal year, the Company made payments on long-term
debt obligations of $7.2 million and increased its borrowings
under its lines of credit by $1.9 million. Scheduled long-term
debt maturities are $15.5 million, $19.0 million and $18.6
million for fiscal 1995, 1996 and 1997, respectively. However,
the Company is pursuing a refinancing of a significant portion of
its long-term debt. See "Other Matters".
Certain of the Company's loan agreements contain covenants
restricting the payment of dividends to its shareholders. Under
the most restrictive of these covenants, retained earnings
available for dividends is computed under a formula which is
based in part on the earnings and losses of the Company after
fiscal 1988. Under this covenant, the Company is currently
prohibited from paying dividends to its shareholders.
The Company believes that its current available cash and
short-term investments, its cash flow from operations and
borrowing sources will be sufficient to meet its anticipated
operating cash requirements, including capital expenditures, for
at least the next twelve months.
Inflation
The Company believes that inflation has not had a material effect
on its results of operations to date. Generally, the Company
experiences inflationary increases in its costs of raw materials,
energy, supplies, salaries and benefits and selling and
administrative expenses. Except with respect to significant
increases in steel scrap prices as discussed herein, the Company
has generally been able to pass these inflationary increases
through to its customers.
Impact of Recently Issued Accounting Standards
Statement of Financial Accounting Standards No. 112, "Employers'
Accounting for Postemployment Benefits" (Statement 112) was
issued in November, 1992 and requires companies to accrue, during
the period an employee renders service, the expense of providing
certain postemployment benefits. Currently, the Company
recognizes the expense of such benefits, to the extent provided,
at the time payment is deemed probable. Adoption of Statement
112 is required in fiscal 1995. Management does not expect
adoption of Statement 112 to have a material impact on the
Company's financial condition or results of operations.
Other Matters
Newport is a co-defendant in a claim for breach of implied
warranty arising from the failure of two joints of welded pipe
during testing of an off-shore pipeline. The plaintiff is
seeking damages in excess of $5 million for costs associated with
replacing the entire pipeline and lost production revenues. The
Company believes that it has meritorious defenses to this claim,
although no assurances can be given as to the outcome of this
case. Insurance may be available for a portion, but not all, of
any award for damages. The Company is subject to various other
claims, lawsuits and administrative proceedings arising in the
ordinary course of business with respect to commercial, product
liability and other matters, which seek remedies or damages.
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 business or consolidated financial position. There can
be no assurance, however, as to the ultimate disposition of these
matters.
The Company is subject to federal, state and local environmental
laws and regulations, including, among others, the Resource
Conservation and Recovery Act (RCRA), the Clean Air Act, the 1990
Amendments to the Clean Air Act (the 1990 Amendments), the Clean
Water Act and all regulations promulgated in connection
therewith, 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 similar mills in the industry, the Company's steel
mini-mills produce dust which contains lead, cadmium and
chromium, and is classified as a hazardous waste. The Company
currently collects the dust resulting from its electric arc
furnace operations through emission control systems and recycles
it through a waste recycling firm using EPA-approved processes.
The Company also has on its property at Newport a permitted
hazardous waste disposal facility.
In September, 1994, the Company received a proposed Consent
Agreement from the EPA relating to an April 1990 RCRA facility
assessment (the Assessment) completed by the EPA and the
Pennsylvania Department of Environmental Resources. The
Assessment was performed in connection with a permit application
pertaining to a landfill that is adjacent to the Koppel
facilities. The Assessment identified potential releases of
hazardous constituents at or adjacent to the Koppel facilities
prior to the Company's acquisition of the Koppel facilities. The
proposed Consent Agreement establishes a schedule for
investigating, monitoring, testing and analyzing the potential
releases. Any contamination documented as a result of the
investigation may require remediation. Pursuant to various
indemnity provisions in agreements entered into at the time of
the Company's acquisition of the Koppel facilities in 1991,
certain parties agreed to indemnify the Company against various
known and unknown environmental matters. While such parties have
not at this time acknowledged full responsibility for potential
costs under the proposed Consent Agreement, the Company believes
that the indemnity provisions provide for it to be fully
indemnified against all matters covered by the proposed Consent
Agreement, including all associated costs, claims and
liabilities.
Subject to the uncertainties concerning the proposed Consent
Agreement and the storage and disposal of the radiation
contaminated baghouse dust, the Company believes it is in
compliance in all material respects with all applicable
environmental regulations.
Regulations resulting from the 1990 Amendments that will pertain
to the Company's electric arc furnace operations are currently
not expected to be promulgated until 1997 or later. The Company
cannot predict the level of required capital expenditures
resulting from future environmental regulations such as those
forthcoming as a result of the 1990 Amendments. However, the
Company believes that while the 1990 Amendments may require
additional expenditures, such expenditures will not have a
material impact on the Company's business or consolidated
financial position for the foreseeable future. Capital
expenditures during fiscal 1995 for the Company's environmental
control facilities are not expected to be material; however, such
expenditures could be influenced by new and revised environmental
laws and regulations.
The Company is currently pursuing a refinancing of a significant
portion of its long-term debt through a proposed sale of $125
million senior secured notes due 2003 (the Offering). Completion
of the Offering would substantially reduce principal amortization
requirements until the maturity of the senior secured notes.
Completion of the Offering is subject to the Securities and
Exchange Commission allowing the registration of the senior
secured notes to become effective, the entering into a firm
commitment with the underwriters and the existence of market
conditions acceptable to the Company.
CONSOLIDATED FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF INCOME
For the years ended September 24, 1994, September 25, 1993 and
September 26, 1992
(Dollars in thousands, except per share amounts)
1994 1993 1992
Net sales $303,380 $353,082 $281,242
Cost of products sold 278,161 310,586 250,189
Selling and administrative
expenses 24,530 30,824 29,652
Operating income 689 11,672 1,401
Interest income 1,733 277 722
Interest expense (20,030) (21,096) (21,797)
Other income (expense) 1,191 (131) 258
Gain on sale of subsidiary 35,292 - -
Income (loss) before income
taxes, extraordinary items
and cumulative effect of a
change in accounting principle 18,875 (9,278) (19,416)
Provision (credit) for income
taxes 7,382 (3,382) (6,058)
Income (loss) before extraordi-
nary items and cumulative
effect of a change in
accounting principle 11,493 (5,896) (13,358)
Extraordinary items,
net of income taxes - (1,095) (2,542)
Cumulative effect of a change
in accounting principle 1,715 - -
Net income (loss) $ 13,208 $ (6,991) $ (15,900)
Per common share
Income (loss) before extraordi-
nary items and cumulative
effect of a change in
accounting principle $.84 $(.44) $ (.99)
Extraordinary items - (.08) (.19)
Cumulative effect of a change
in accounting principle .12 - -
Net income (loss) $.96 $(.52) $(1.18)
Weighted average shares
outstanding 13,789,265 13,552,838 13,483,247
See notes to consolidated financial statements
CONSOLIDATED BALANCE SHEETS
September 24, 1994 and September 25, 1993
(Dollars in thousands)
ASSETS 1994 1993
Current assets
Cash and cash equivalents $ 4,405 $ 5,797
Short-term investments 40,071 3,457
Accounts receivable, less
allowance for doubtful accounts
of $637 and $819, respectively 42,651 48,602
Refundable income taxes 195 2,813
Inventories 32,290 41,691
Operating supplies and other
current assets 11,721 18,358
Deferred tax assets 4,877 6,004
Total current assets 136,210 126,722
Property, plant and equipment
-- at cost
Land and buildings 27,841 27,559
Machinery and equipment 231,383 234,172
Construction in progress 3,497 3,362
Less -- accumulated depreciation (102,182) (91,627)
Net property, plant and equipment 160,539 173,466
Other assets 18,578 17,054
Total assets $315,327 $317,242
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Notes payable $ 28,872 $ 26,967
Accounts payable 27,312 28,300
Accrued liabilities 19,281 23,263
Current portion of long-term debt 15,543 9,132
Total current liabilities 91,008 87,662
Long-term debt 138,110 156,056
Deferred taxes 9,745 10,902
Common shareholders' equity
Common stock, no par value,
40,000,000 shares authorized,
13,809,413 and 13,696,104
shares issued and outstanding,
respectively 48,988 48,284
Common stock options and warrants 262 208
Unrealized gain (loss) on
available for sale securities (124) -
Retained earnings 27,338 14,130
Common shareholders' equity 76,464 62,622
Total liabilities and shareholders'
equity $315,327 $317,242
See notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended September 24, 1994, September 25, 1993 and
September 26, 1992
(Dollars in thousands) 1994 1993 1992
Cash flows from operating activities:
Net income (loss) $13,208 $ (6,991) $(15,900)
Adjustments to reconcile net
income (loss) to net cash flows
from operating activities:
Depreciation and amortization 18,789 19,093 18,711
Decrease in long-term deferred
taxes (1,157) (1,998) (1,675)
Gain on sale of subsidiary (35,292) - -
(Gain) loss on disposal of
equipment (230) 323 381
Increase in accounts receivable,
net (7,921) (11,461) (11,498)
(Increase) decrease in
inventories (3,168) 906 1,430
Decrease in refundable
income taxes 2,618 2,012 7,067
(Increase) decrease in other
current assets 2,691 (7,203) (33)
Increase in accounts payable 5,782 958 6,442
Increase in accrued liabilities 351 6,753 3,590
Net cash flows from operating
activities (4,329) 2,392 8,515
Cash flows from investing activities:
Proceeds from sale of subsidiary 50,426 - -
Cash dividend from sold
subsidiary 6,818 - -
Purchases of property, plant and
equipment (11,760) (6,080) (4,148)
Proceeds from sale of equipment 631 619 1,246
(Increase) decrease in other
assets (2,122) 999 (774)
(Increase) decrease in short-
term investments (36,614) 208 2,303
Net cash flows from investing
activities 7,379 (4,254) (1,373)
Cash flows from financing activities:
Increase in notes payable 1,905 6,286 3,989
Proceeds from issuance of
long-term debt 431 2,012 6,379
Repayments on long-term debt (7,246) (9,896) (12,960)
Increase in debt issuance costs (236) (388) (259)
Proceeds from issuance of common
stock 704 931 133
Dividends paid on common stock - - (808)
Net cash flows from financing
activities (4,442) (1,055) (3,526)
Net increase (decrease) in cash
and cash equivalents (1,392) (2,917) 3,616
Cash and cash equivalents at
beginning of year 5,797 8,714 5,098
Cash and cash equivalents at
end of year $ 4,405 $ 5,797 $ 8,714
Cash paid during the year for:
Interest $18,964 $18,434 $18,448
Income taxes $ 4,868 $ 291 $ 177
See notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY
For the years ended September 24, 1994, September 25, 1993 and
September 26, 1992
(Dollars in thousands)
Unrealized Gain
Options (Loss) on
Common Stock and Available for Retained
Shares Amount Warrants Sale Securities Earnings Total
Balance,
September
28,1991 13,454,982 $47,220 $100 $37,829 $85,149
Stock
option
plans 49,575 133 133
Net
loss (15,900)(15,900)
Common
stock
dividends
($.06 per
share) (808) (808)
Balance,
September
26,1992 13,504,557 $47,353 $100 $21,121 $68,574
Stock
option
plans 48,750 181 108 289
Common
stock
issuance 142,797 750 750
Net loss (6,991) (6,991)
Balance,
September
25,
1993 13,696,104 $48,284 $208 $ - $14,130 $62,622
Stock
option
plans 56,145 290 54 344
Common
stock
issuance 57,164 414 414
Unrealized
losses on
investments (124) (124)
Net income 13,208 13,208
Balance,
September 24,
1994 13,809,413 $48,988 $262 $(124) $27,338 $76,464
See notes to consolidated financial statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of NS
Group, Inc. and its wholly-owned subsidiaries (the Company):
Newport Steel Corporation (Newport), Koppel Steel Corporation
(Koppel), Erlanger Tubular Corporation (Erlanger), Imperial
Adhesives, Inc. (Imperial), Northern Kentucky Management, Inc.,
Northern Kentucky Air, Inc. and NSub I, Inc., formerly known as
Kentucky Electric Steel Corporation. See Note 2. All
significant intercompany accounts and transactions have been
eliminated.
Cash and Cash Equivalents
Cash includes currency on hand and demand deposits with financial
institutions. Cash equivalents consist of investments with
original maturities of three months or less. Amounts are stated
at cost, which approximates market value.
Short-Term and Other Investments
Short-term investments consist primarily of auction rate
preferred stocks and money market mutual funds, for which market
value approximates cost. At September 24, 1994, approximately
$8,309,000 in short-term investments were restricted, primarily
in connection with cash collateralized letters of credit. During
the first quarter of fiscal 1994, the Company adopted Statement
of Financial Accounting Standards No. 115, Accounting for Certain
Investments in Debt and Equity Securities (Statement 115). Under
Statement 115, certain of the Company's investments are
classified as available for sale and are recorded at current
market value with an offsetting adjustment to common shareholders
equity. The impact on the Company's consolidated financial
statements from the adoption of Statement 115 was not material.
Inventories
At September 24, 1994 and September 25, 1993, inventories stated
at the lower of LIFO (last-in, first-out) cost or market
represent approximately 27% and 23% of total inventories before
the LIFO reserve, respectively. All other inventories are stated
at the lower of average cost or market, or the lower of FIFO cost
or market. Inventory costs include labor, material and
manufacturing overhead. Inventories consist of the following
components:
(In thousands) 1994 1993
Raw materials $ 6,699 $ 5,736
Semi-finished and finished goods 27,695 37,830
34,394 43,566
LIFO reserve (2,104) (1,875)
Total inventories $ 32,290 $41,691
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. Depreciation claimed for income tax
purposes is computed by use of accelerated methods. Expenditures
for maintenance and repairs are charged to expense as incurred.
Expenditures for equipment renewals which extend the life of an
asset are capitalized. Included in property, plant and equipment
at September 24, 1994, are assets with a net book value of
approximately $5,910,000 which are not currently being used in
the business. In managements opinion, the values assigned to
such assets are realizable.
Income Taxes
At September 24, 1994, deferred income tax balances represent
the tax effect of temporary differences between the financial
reporting basis and the tax basis of certain assets and
liabilities. In fiscal 1993 and 1992, the provision for
deferred income taxes represents the tax effect of income and
expense items reported in one period for financial statement
purposes and in another period for tax reporting purposes. See
Note 12.
Environmental Remediation and Compliance
Environmental remediation costs are accrued, except to the extent
capitalizable, when incurrence of such costs is 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.
Recently Issued Accounting Standards
Statement of Financial Accounting Standards No.112, Employers
Accounting for Postemployment Benefits (Statement 112) was issued
in November, 1992 and requires companies to accrue, during the
period an employee renders service, the expense of providing
certain postemployment benefits. Currently, the Company
recognizes the expense of such benefits, to the extent provided,
at the time payment is deemed probable. Adoption of Statement
112 is required in fiscal 1995. Management does not expect
adoption of Statement 112 to have a material impact on the
Companys consolidated financial condition or results of
operations.
Fiscal Year-End
The Companys fiscal year ends on the last Saturday of September.
Earnings Per Share
Earnings per share are calculated using the weighted average
number of shares outstanding during the period. The effect of
common stock equivalents arising from stock options and warrants
on the computation of earnings per share is not significant.
Note 2: Sale of Subsidiary
On October 6, 1993, the Company sold all of the assets and
liabilities of its wholly-owned subsidiary, Kentucky Electric
Steel Corporation (KES), to a newly formed public company in
exchange for $45,626,000 in cash and 400,000 shares
(approximately 8%) of the new entity, valued at $4,800,000. In
addition, the Company received $6,818,000 in cash from the new
entity in satisfaction of a dividend declared by KES prior to the
sale.
Subsequent to the sale, the Company changed the name of KES to
NSub I, Inc., which currently holds a portion of the proceeds
from the sale. The accompanying consolidated financial
statements include the financial position, results of operations
and changes in cash flows of KES for the periods prior to the
sale.
The sale of KES resulted in a pre-tax gain of $35,292,000. After
giving effect to the elimination of the pre-tax gain of
$35,292,000, the related tax effect of $13,764,000 and $123,000
of net income of KES for the eleven days of fiscal 1994 prior to
sale, the Companys pro forma net loss before cumulative effect of
a change in accounting principle for the fiscal year ended
September 24, 1994 is $10,158,000, or a $.74 loss per share.
Note 3: Other Assets
Other assets at September 24, 1994 and September 25, 1993
includes approximately $10,528,000 and $13,274,000, respectively,
in costs associated with land near Newport, Kentucky, for use as
development property. Other assets also include marketable
equity securities totaling $4,600,000.
Note 4: Accrued Liabilities
Accrued liabilities consist of the following:
(In thousands) 1994 1993
Accrued payroll and payroll taxes $ 5,032 $ 6,339
Accrued interest 4,072 4,131
Accrued environmental remediation 4,563 5,766
Accrued income taxes 711 -
Other 4,903 7,027
$ 19,281 $23,263
Note 5: Long-term Debt and Lines of Credit
Long-term debt of the Company consists of the following:
(In thousands) 1994 1993
Term loans due a non-bank financial
institution, interest ranging from
11.54% to 12.54%, due in varying
quarterly installments through 2001,
secured by property, plant and
equipment $ 59,125 $ 61,125
Senior Secured Notes due various
insurance companies, interest at
10.65%, due in equal quarterly
installments through 1999,
secured by property, plant and
equipment 32,729 37,200
11% Subordinated Convertible
Debentures, due in annual
installments from October,
2000 through 2005 29,000 29,000
Capital Expenditure Loans due a
non-bank financial institution,
interest ranging from 7.99% to
11.54%, due in equal quarterly
installments beginning December,
1994 through 2001, secured by
property, plant and equipment 14,626 14,626
Term loans due various states and
municipalities, interest ranging
from 3% to 11%, due in varying
monthly or quarterly installments
through 2010, secured by junior
mortgages on property, plant and
equipment 11,613 16,470
Other 6,560 6,767
153,653 165,188
Less - Current portion (15,543) (9,132)
$138,110 $156,056
Certain of the loan agreements contain a number of restrictive
covenants including, among other things, maintenance of minimum
net worth, minimum fixed charge coverage ratios, maximum ratios
of indebtedness to total capitalization, minimum current ratio
and working capital requirements and restrictions on transferring
assets between affiliated companies. Certain term loans also
require mandatory prepayments in the event Koppel's cash flow
exceeds certain defined levels. In addition, certain of the
loan agreements allow for redemption prior to maturity, at the
option of the Company, at amounts in excess of par.
Certain of the loan agreements contain covenants restricting the
payment of dividends to its shareholders. Under the most
restrictive of these covenants, retained earnings available for
dividends is computed under a formula which is based in part on
the earnings and losses of the Company after fiscal 1988. Under
this covenant, the Company is currently prohibited from paying
dividends to its shareholders.
The Subordinated Convertible Debentures are unsecured obligations
of the Company and are convertible into common shares of the
Company at a price of $17 per share, or approximately 1,706,000
shares. Interest is payable quarterly. The Debentures are
redeemable by the Company at 110% of par.
Annual long-term debt maturities are $15,543,000 in fiscal 1995,
$18,952,000 in fiscal 1996, $18,644,000 in fiscal 1997,
$21,792,000 in fiscal 1998 and $21,747,000 in fiscal 1999.
The Company is currently pursuing a refinancing of a significant
portion of its long-term debt through a proposed sale of $125
million senior secured notes due 2003 ( the Offering).
Completion of the Offering would substantially reduce principal
amortization requirements until the maturity of the senior
secured notes. Completion of the Offering is subject to the
Securities and Exchange Commission allowing the registration of
the senior secured notes to become effective, the entering into a
firm commitment with the underwriters and the existence of market
conditions satisfactory to the Company.
The Company has consolidated line of credit agreements with
various lenders totaling $34,915,000, including a $16,165,000
line of credit agreement restricted for use at Koppel. The lines
are secured by inventory and accounts receivable, with interest
rates ranging from 1/2% to 1 1/2% over prime. Borrowings are due
on demand and are limited under the agreements to defined
percentages of eligible inventory and receivable balances, as
well as by certain restrictive covenants. At September 24,
1994, $34,915,000 of the Companys consolidated lines of credit
were available for borrowing, of which $28,197,000 was
outstanding. These credit lines expire in fiscal 1995 and 1996.
Note 6: Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the
fair value of financial instruments:
Cash, cash equivalents and short-term investments - The
carrying amount approximates fair value because of the short
maturity of those instruments.
Other investments - Other investments, consisting of marketable
equity securities totaling $4,600,000, are reported in other
assets and are carried at market value.
Notes payable - The carrying amount approximates fair value
because of the short maturity and because such instruments
contain interest rates that vary with the prime rate.
Long-term debt - The fair value of the Companys 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
equal to Treasury rates with similar terms at the end of the
reporting period plus or minus the spread between the Treasury
rates and the rate negotiated on the debt at the inception of the
loan. The carrying amounts and fair values of the Companys
long-term debt at September 24, 1994 were $153,653,000 and
$154,649,000, respectively.
Note 7: Preferred Stock
The Companys authorized stock includes 2,000,000 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.
Four hundred thousand shares of the Class A Preferred Stock has
been designated as Series A Junior Participating Preferred
Stock, par value $10 per share, in connection with the
Shareholders Protection Rights Plan (Plan) adopted in fiscal
1989. 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 30% or more of the Companys
common stock. The Company may redeem the Rights for one cent per
Right at any time before a 30% position has been acquired. The
Rights will expire in November 1998.
Note 8: Stock Options and Warrants
The Company has Employee Incentive Stock Option Plans which
provide for the issuance of shares of common stock of the Company
upon exercise of options granted to certain employees. Under the
terms of these plans, options have been granted at fair market
value at the grant date and are exercisable on a pro rata basis
over a period of nine years beginning one year after the date of
grant. At September 24, 1994, options outstanding are priced in
a range from $3.25 to $14.125 per share. Of the options expired
in fiscal 1994, 295,030 options expired in connection with the
sale of KES.
A summary of transactions in the plans for fiscal 1994 and 1993
follows:
1994 1993
Options outstanding, beginning of year 1,185,525 960,020
Options granted 289,050 332,550
Options expired (369,725) (58,295)
Options exercised (56,145) (48,750)
Options outstanding, end of year 1,048,705 1,185,525
Options exercisable, end of year 509,525 644,500
Available for grant 488,580 674,250
Under the NS Group, Inc. Non-Qualified Stock Option and Stock
Appreciation Rights Plan of 1988 the Company may grant to key
employees options to purchase (or stock appreciation awards
corresponding to) an aggregate of 500,000 shares of the Companys
common stock. Options are to be issued at no less than 50% of
market value on the date of grant, are exercisable in yearly
increments as determined by the Stock Option Committee and expire
ten years from the date of grant. At September 24, 1994, options
outstanding are priced in a range from $3.75 to $13.43 per share.
Grant prices have ranged from 64% to 110% of the market price at
the date of grant.
A summary of transactions in the plan for fiscal 1994 and 1993
follows:
1994 1993
Options outstanding beginning of year 366,760 262,000
Options granted 135,085 125,760
Options expired (26,220) (21,000)
Options exercised - -
Options outstanding, end of year 475,625 366,760
Options exercisable, end of year 106,700 61,200
Available for grant 24,375 133,240
The Company has common stock warrants outstanding, issued in
connection with the financing of the Koppel acquisition. The
warrants are exercisable for approximately 772,000 shares of the
Companys common stock, at a price of $8.00 per share and expire
October 4, 2000.
Note 9: Commitments and Contingencies
The Company has various commitments for the purchase of
materials, supplies and energy arising in the ordinary course of
business.
Newport is a co-defendant in a claim for breach of implied
warranty arising from the failure of two joints of welded pipe
during testing of an off-shore pipeline. The plaintiff is
seeking damages in excess of $5 million for costs associated with
replacing the entire pipeline and lost production revenues. The
Company believes that it has meritorious defenses to this claim.
Insurance may be available for a portion, but not all, of any
award for damages. The Company is subject to various other
claims, lawsuits and administrative proceedings arising in the
ordinary course of business with respect to commercial, product
liability and other matters, which seek remedies or damages.
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
Companys business or consolidated financial position.
The Company is subject to federal, state and local environmental
laws and regulations, including, among others, the Resource
Conservation and Recovery Act (RCRA), the Clean Air Act, the 1990
Amendments to the Clean Air Act (the 1990 Amendments), the Clean
Water Act and all regulations promulgated in connection
therewith, 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 similar mills in the industry, the Company's steel
mini-mills produce dust which contains lead, cadmium and
chromium, and is classified as a hazardous waste. The Company
currently collects the dust resulting from its electric arc
furnace operations through emission control systems and recycles
it through a waste recycling firm using EPA-approved processes.
The Company also has on its property at Newport a permitted
hazardous waste disposal facility. Reference is made to Note 10
for information regarding the disposal of radiation contaminated
dust at Newport.
In September 1994, the Company received a proposed Consent
Agreement from the EPA relating to an April 1990 RCRA facility
assessment (the Assessment) completed by the EPA and the
Pennsylvania Department of Environmental Resources. The
Assessment was performed in connection with a permit application
pertaining to a landfill that is adjacent to the Koppel
facilities. The Assessment identified potential releases of
hazardous constituents at or adjacent to the Koppel facilities
prior to the Company's acquisition of the Koppel facilities. The
proposed Consent Agreement establishes a schedule for
investigating, monitoring, testing and analyzing the potential
releases. Any contamination documented as a result of the
investigation may require remediation. Pursuant to various
agreements entered into at the time of the Company's acquisition
of the Koppel facilities in 1991, certain parties agreed to
indemnify the Company against various known and unknown
environmental matters. The Company believes that such agreements
provide for it to be fully indemnified against all matters
covered by the proposed Consent Agreement, including all
associated costs, claims and liabilities.
Subject to the uncertainties concerning the proposed Consent
Agreement and the storage and disposal of the radiation
contaminated dust, as discussed in Note 10, the Company believes
that it is currently in compliance with all known material and
applicable environmental regulations.
Regulations under the 1990 Amendments to the Clean Air Act that
will pertain to the Companys operations are currently not
expected to be promulgated until 1997 or later. The Company
cannot predict the level of required capital expenditures or
operating costs resulting from future environmental regulations
such as those forthcoming as a result of the 1990 Amendments.
However, the Company believes that while the 1990 Amendments may
require additional expenditures, such expenditures will not have
a material impact on the Companys business or consolidated
financial position for the foreseeable future.
Capital expenditures for the succeeding fiscal year relating to
environmental control facilities are not expected to be material,
however, such expenditures could be influenced by new and revised
environmental regulations and laws.
Note 10: Extraordinary Items
During the fourth quarter of fiscal 1993, Newport shut down its
melt shop operations for nineteen days when it was discovered
that a radioactive substance was accidentally melted, resulting
in the contamination of the melt shop's electric arc furnace
emission control facility, or "baghouse facility". A similar
incident, having occurred in the third quarter of fiscal 1992,
shut down Newport's melt shop facilities for twenty-three days.
The source of the radiation in these incidents was contained in
incoming shipments of scrap steel and was not detected by
monitors that check incoming steel scrap. In response, the
Company has installed additional state-of-the-art radiation
detection systems in various locations throughout the Newport
plant.
The Company incurred estimated losses as a result of the extended
outages and costs to restore the melt shop and related facilities
back to operation, including estimated costs to dispose of the
radiation contaminated baghouse dust, of $7,156,000 and
$4,100,000, in fiscal 1993 and 1992, respectively. The
Company has recovered $3,460,000 through insurance and expects to
recover and has recorded as a receivable an additional $2,302,000
in insurance claims for the fiscal 1993 incident. No recovery
has been made nor recorded for the fiscal 1992 incident and the
Company is assessing the possibility of legal remedies against
certain parties. The losses and costs attributable to these
incidents, net of insurance claims, resulted in an extraordinary
charge of $1,095,000, net of applicable income tax benefit of
$662,000, or an $.08 loss per share, in fiscal 1993 and an
extraordinary charge of $2,542,000, net of applicable income tax
benefit of $1,558,000, or a $.19 loss per share, in fiscal 1992.
The occurrences of accidental melting of radioactive materials
have not resulted in any notice of violations from federal or
state environmental regulatory agencies.
The Company is investigating and evaluating various issues
concerning storage, treatment and disposal of the radiation
contaminated baghouse dust; however, a final determination as to
method of treatment and disposal, cost and further regulatory
requirements cannot be made at this time. Depending on the
ultimate timing and method of treatment and disposal, which will
require appropriate federal and state regulatory approval, the
actual cost of disposal could substantially exceed current
estimates and the Companys insurance coverage. As of September
24, 1994, claims recorded in connection with disposal costs
substantially exhaust available insurance coverage. Based on
current knowledge, management believes the recorded reserves of
$4,354,000 for disposal costs pertaining to these incidents are
adequate and the ultimate outcome will not have a material
adverse effect on the Companys consolidated financial position.
The ultimate effect of these matters on the Company's
consolidated results of operations cannot be predicted because
any such effect depends on the amount and timing of charges to
operations resulting from new information as it becomes
available.
Note 11: Profit Sharing 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 a
guaranteed minimum based on hours worked at Newport) for the
bargaining unit employees, and allow for a discretionary
contribution set by the Board of Directors for salaried
employees. Expense for contributions was approximately $497,000,
$1,244,000 and $1,119,000 in fiscal years 1994, 1993 and 1992,
respectively.
Note 12: Income Taxes
Effective September 26, 1993, the Company adopted the provisions
of Statement of Financial Accounting Standards No.109,
"Accounting for Income Taxes ("Statement 109"). Prior to
adoption of Statement 109, deferred tax expense was based on
items of income and expense that were reported in different years
in the financial statements and tax returns and were measured at
the tax rate in effect in the year the difference originated.
Under Statement 109, deferred tax liabilities and assets are
based upon differences in the basis of assets and liabilities for
financial statements and tax returns and are determined based on
the enacted tax rates and laws that will be in effect when the
differences are expected to reverse. The cumulative effect of
the change in accounting increased net income by $1,715,000, or
$.12 per share.
The provision (credit) for income taxes, including $662,000 and
$1,558,000 allocated to extraordinary items in fiscal 1993 and
1992, respectively, consists of the following:
(In thousands) 1994 1993 1992
Current:
Federal $5,100 $(2,000) $(4,000)
State 323 (851) (287)
5,423 (2,851) (4,287)
Deferred:
Federal 739 (1,526) (3,470)
State 1,220 333 141
1,959 (1,193) (3,329)
Provision (credit) for income taxes $7,382 $(4,044) $(7,616)
The income tax provision (credit) differs from the amount
computed by applying the statutory federal income tax rate to
income (loss), including extraordinary items, before income taxes
for the following reasons:
(In thousands) 1994 1993 1992
Income tax provision (credit) at
statutory tax rate of 35% in
fiscal 1994 and 34% in fiscal
1993 and 1992 $6,606 $(3,752) $(7,995)
Change in taxes resulting from:
State income taxes, net of
federal effect 1,003 (342) (96)
Dividend income exclusion (200) (6) (14)
Other, net (27) 56 489
Total provision (credit) for income
taxes $7,382 $(4,044) $(7,616)
The following represents the components of deferred tax
liabilities and assets at September 24, 1994. A valuation
allowance has not been recorded against deferred tax assets as it
is estimated that such deferred tax assets will be realized
through a reduction of taxes otherwise payable upon the reversal
of existing taxable temporary differences.
(In thousands) 1994
Deferred tax liabilities:
Property, plant and equipment $27,774
Other items 2,222
29,996
Deferred tax assets:
Reserves and accruals 3,904
Net operating tax loss carryforward 11,690
Alternative minimum tax and other
tax credit carryforwards 7,629
Other items 1,905
25,128
Net deferred tax liability $ 4,868
For federal income tax purposes, the Company has alternative
minimum tax credit carryforwards of approximately $7,237,000,
which are not limited by expiration dates, and other tax credit
carryforwards of approximately $392,000, which expire beginning
in 2000. The Company also has net operating tax loss
carryforwards of approximately $33,399,000, which expire
beginning in 2007.
The components of the credit for deferred income taxes for fiscal
1993 and 1992 are as follows:
(In thousands) 1993 1992
Excess of tax over book depreciation $ 4,097 $ 7,778
Koppel start-up costs deferred for
income tax purposes 177 533
Reserves and accruals not currently
deductible (299) (1,439)
Alternative minimum tax and other tax
credit carryforwards 1,684 (780)
Net operating tax loss carryforward (7,034) (8,134)
Other, net 182 (1,287)
Total $(1,193) $(3,329)
Note 13: Related Party Transactions
One of the Companys directors/shareholders has a controlling
interest in a company which purchases certain reject and limited
service tubular products from Newport. Sales to this customer
were approximately $10,984,000, $10,914,000 and $10,356,000 for
fiscal years 1994, 1993, and 1992, respectively. Trade
receivables from this customer were $958,000 and $582,000 at the
end of fiscal 1994 and 1993, respectively.
Note 14: Business Segment Information
The Company operates primarily in two separate business segments:
Specialty Steel Products - Includes welded tubular steel
products and hot rolled coils manufactured at a mini-mill located
near Newport, Kentucky; seamless tubular steel products, special
bar quality products and semi-finished steel products
manufactured at a mini-mill located in western Pennsylvania and a
pipe finishing operation located near Tulsa, Oklahoma.
Adhesive Products - Includes industrial adhesives manufactured
principally at plants in Cincinnati, Ohio and Nashville,
Tennessee.
The operations of both 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 Specialty Steel Products segment.
The following table sets forth selected financial information by
business segment for fiscal 1994, 1993 and 1992.
(In thousands)
Depre-
Oper- ciation
ating Identi- and Capital
Net Income fiable Amorti- Expen-
1994 Sales (Loss) Assets zation ditures
Specialty
steel
products $270,441 $ 2,909 $246,295 $18,373 $11,380
Adhesives
products 32,939 1,150 12,486 416 380
Corporate
assets and
allocations - (3,370) 56,546 - -
Total
consoli-
dated $303,380 $ 689 $315,327 $18,789 $11,760
1993
Specialty
steel
products $325,007 $13,379 $271,968 $18,691 $ 5,798
Adhesives
products 28,075 1,059 12,228 402 282
Corporate
assets and
allocations - (2,766) 33,046 - -
Total
consoli-
dated $353,082 $11,672 $317,242 $19,093 $ 6,080
1992
Specialty
steel
products $256,360 $ 3,351 $271,477 $18,296 $ 3,948
Adhesives
products 24,882 533 10,845 415 200
Corporate
assets and
allocations - (2,483) 36,757 - -
Total
consoli-
dated $281,242 $ 1,401 $319,079 $18,711 $ 4,148
Note 15: Quarterly Financial Data (Unaudited)
Quarterly results of operations for 1994 and 1993 are as follows:
(In thousands, except per share amounts)
First Second Third Fourth
1994 Quarter Quarter Quarter Quarter
Net sales $71,959 $66,012 $80,807 $84,602
Gross profit 7,791 1,831 7,203 8,394
Income (loss) before
cumulative effect
of a change in
accounting principle 20,026 (5,583) (1,990) (960)
Net income (loss) 21,741 (5,583) (1,990) (960)
Income (loss) per
common share before
cumulative effect
of a change in
accounting principle 1.46 (.40) (.14) (.07)
Net income (loss) per
common share 1.58 (.40) (.14) (.07)
1993
Net sales $77,779 $86,735 $95,363 $93,205
Gross profit 7,366 10,282 12,686 12,162
Income (loss) before
extraordinary item (3,355) (2,115) 11 (437)
Net income (loss) (3,355) (2,115) 11 (1,532)
Income (loss) per
common share before
extraordinary item (.25) (.16) - (.03)
Net income (loss)
per common share (.25) (.16) - (.11)
The sale of KES increased fiscal 1994 first quarter net income by
$21,528,000. In addition, in the fiscal 1994 first quarter, the
Company recorded the cumulative effect of the adoption of FAS No.
109, "Accounting for Income Taxes", which increased net income by
$1,715,000.
REPORT OF MANAGEMENT
The accompanying 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 Companys
consolidated financial position and results of operations.
These statements necessarily include amounts that are based on
managements best estimates and judgments. The financial
information contained elsewhere in this annual 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.
The Board of Directors, through its Audit Committee composed
solely of non-employee directors, reviews the Companys 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.
Clifford R. Borland
President and Chief Executive Officer
John R. Parker
Vice President, Treasurer and
Chief Financial Officer
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To NS Group, Inc.
We have audited the accompanying consolidated balance sheets of
NS Group, Inc. (a Kentucky corporation) and subsidiaries as of
September 24, 1994 and September 25, 1993, and the related
consolidated statements of income, common shareholders equity and
cash flows for each of the three years in the period ended
September 24, 1994. These financial statements are the
responsibility of the Companys management. Our responsibility is
to express an opinion on these financial statements based on our
audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of NS Group, Inc. and subsidiaries as of September 24, 1994 and
September 25, 1993, and the results of their operations and their
cash flows for each of the three years in the period ended
September 24, 1994 in conformity with generally accepted
accounting principles.
As explained in Note 12 to the consolidated financial statements,
the Company changed its method of accounting for income taxes
effective September 26, 1993.
Cincinnati, Ohio
October 31, 1994 ARTHUR ANDERSEN LLP
CONSOLIDATED HISTORICAL SUMMARY
(Dollars in thousands except per share amounts)
1994 1993 1992 1991 1990
Summary of Operations
Net sales $303,380 $353,082 $281,242 $212,471 $249,871
Operating
income
(loss) 689 11,672 1,401 (18,177) 19,370
Operating
income
margin .2% 3.3% .5% (8.6)% 7.8%
Net income
(loss)
before
extraor-
dinary items 13,208 (5,896) (13,358) (20,603) 13,047
Net income
(loss) 13,208 (6,991) (15,900) (20,603) 13,047
Income (loss)
per share
before extra-
ordinary items .96 (.44) (.99) (1.53) .97
Net income
(loss) per
share .96 (.52) (1.18) (1.53) .97
Dividends per
common share - - .06 .12 .11
Weighted average
shares out-
standing
(000's) 13,789 13,553 13,483 13,449 13,419
Shareholders
of record 313 332 327 315 233
Other Financial and Statistical Data
Working
capital $ 45,202 $ 39,060 $ 40,676 $ 48,411 $ 64,858
Capital
expendi-
tures 11,760 6,080 4,148 112,573 45,011
Depreci-
ation and
amorti-
zation 18,789 19,093 18,711 15,725 6,879
Total
assets 315,327 317,242 319,079 329,889 220,856
Long-
term
debt 153,653 165,188 173,072 179,653 70,165
Common
share-
holders'
equity 76,464 62,622 68,574 85,149 107,226
Book
value
per share 5.54 4.57 5.08 6.33 7.98
Current
ratio 1.50 1.45 1.55 1.79 2.90
Debt-to
- -equity ratio 2.01 2.64 2.52 2.11 .65
Steel mill shipments (tons)
Tubular
products 370,000 385,000 292,000 215,000 285,000
Special
bar
quality
products
and other 191,000 363,000 299,000 212,000 239,000
Employees 1,568 1,995 1,770 1,705 1,479
1989 1988** 1987 1986 1985 1984
$219,414 $239,175 $157,201 $ 66,320 $ 70,221 $ 73,426
18,469 36,668 14,252 (2,879) 3,649 11,140
8.4% 15.3% 9.1% (4.3)% 5.2% 15.2%
12,773 20,238 3,673 (5,939) (302) 6,651
12,773 17,493 6,665 (5,939) (2,317) 7,269
.95 1.73 .38 (.61) (.03) .69
.95 1.49 .69 (.61) (.24) .75
.05 - - - - -
13,387 11,690 9,621 9,688 9,687 9,686
179 115 - - - -
$ 55,714 $ 76,683 $ 26,993 $ 12,978 $ 24,173 $ 16,020
28,081 3,340 2,838 13,297 7,222 12,642
6,080 6,585 6,614 6,103 5,395 2,756
177,292 153,525 105,094 86,184 87,020 77,874
29,192 24,489 49,163 57,392 45,737 37,000
95,490 83,327 19,628 13,126 19,068 21,389
7.13 6.23 2.06 1.35 1.97 2.21
2.30 3.47 1.97 1.82 2.96 1.99
.31 .29 2.50 4.37 2.40 1.73
209,000 262,000 235,000 133,000 165,000 178,000
262,000 255,000 138,000 - - -
1,457 1,336 1,192 719 536 514
1983 1982 1981*
$ 44,592 $ 61,982 $ 41,644
3,797 14,441 13,429
8.5% 23.3% 32.2%
1,247 6,334 5,844
1,247 6,334 5,844
.13 .65 .63
.13 .65 .63
- - -
9,685 9,685 9,685
- - -
$ 7,065 $ 15,199 $ 14,664
10,751 7,302 252
2,493 2,286 779
54,569 50,379 55,247
27,467 29,667 30,017
14,117 12,870 6,536
1.46 1.33 .67
1.60 3.04 1.82
1.95 2.31 4.59
111,000 123,000 74,000
- - -
448 523 561
*Represents a 5 1/2 month period, the Company's start-up year.
**The Company's stock began trading following an initial public
offering on March 4, 1988.
Exhibit 21
SUBSIDIARIES OF NS GROUP, INC.
(all are wholly-owned)
State of
Name Incorporation
Erlanger Tubular Corporation Oklahoma
Imperial Adhesives, Inc. Ohio
Koppel Steel Corporation Pennsylvania
NSub I, Inc. Kentucky
Newport Steel Corporation Kentucky
Northern Kentucky Management, Inc. Kentucky
Northern Kentucky Air, Inc. Kentucky
Exhibit 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation of our reports included or incorporated by
reference in this Form 10-K, into the Company's previously filed
Registration Statements, File Nos. 33-24182, 33-24183, 33-24184,
33-28995, 33-37454 and 33-39695.
Cincinnati, Ohio ARTHUR ANDERSEN LLP
December 15, 1994
