SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 28, 1996
COMMISSION FILE NUMBER 1-9838
NS GROUP, INC.
(Exact name of registrant as specified in its charter)
Kentucky
(State or other jurisdiction of incorporation or
organization)
61-0985936
(I.R.S. Employer 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 December 2, 1996,
as reported in The Wall Street Journal, the aggregate market
value of the voting stock held by non-affiliates of the
registrant was approximately $31.9 million.
The number of shares outstanding of the registrant's
Common Stock, no par value, was 13,809,413 at December 2,
1996.
Documents Incorporated by Reference
Part III incorporates certain information by reference from
the Company's Proxy Statement dated December 23, 1996 for
the Annual Meeting of Shareholders on February 13, 1997.
Table of Contents
PART I
Page
Item 1. Business 3
Item 2. Properties 11
Item 3. Legal Proceedings 12
Item 4. Submission of Matters
to a Vote of Security
Holders 12
PART II
Item 5. Market for Registrant's
Common Equity and Related
Stockholder Matters 13
Item 6. Selected Consolidated
Financial Data 14
Item 7. Management's Discussion
and Analysis of Financial
Condition and Results of
Operation 15
Item 8. Financial Statements and
Supplementary Data 23
Item 9. Changes in and Disagreements
with Accountants on
Accounting and Financial
Disclosure 44
PART III
Item 10. Directors and Executive
Officers of the Registrant 44
Item 11. Executive Compensation 44
Item 12. Security Ownership of
Certain Beneficial Owners
and Management 44
Item 13. Certain Relationships and
Related Transactions 44
PART IV
Item 14. Exhibits, Financial
Statement Schedules and
Reports on Form 8-K 45
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. The Company changed its name to NS Group, Inc. in 1987
and transferred its welded tubular manufacturing operations
to a subsidiary renamed Newport Steel Corporation (Newport).
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.
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 of the new public company. See Note 2
to the Consolidated Financial Statements for additional
information pertaining to this transaction.
NS Group conducts business in two industry segments,
the speciality steel segment and the adhesives segment. See
the segment data included in Management's Discussion and
Analysis of Financial Condition and Results of Operations in
"Results of Operations" and Note 13 to the Consolidated
Financial Statements, for additional information pertaining
to industry segment data.
Specialty Steel Segment
The Company produces a diverse group of specialty steel
products at its two mini-mills, Koppel and Newport. These
products include seamless and welded tubular goods,
primarily used in oil and natural gas drilling and
production operations, referred to as oil country tubular
goods (OCTG); and line pipe, used in the transmission of
oil, natural gas and other fluids. Both Koppel and Newport
are certified by the American Petroleum Institute (API) for
production of these products. The Company also produces
special bar quality products, primarily used in the
manufacture of heavy industrial equipment; and hot rolled
coils, which are sold to service centers and other
manufacturers for further processing.
The following table sets forth certain operating
information with respect to Koppel and Newport for the
periods indicated.
<TABLE>
<S> <C> <C> <C>
(In thousands) 1996 1995 1994
Net sales
Koppel
Seamless tubular
products $133,446 $ 90,926 $ 72,675
SBQ products 62,405 82,954 64,858
Newport
Welded tubular
products 157,385 145,330 117,214
Hot rolled coils and
other products 16,230 16,673 15,694
$369,466 $335,883 $270,441
Operating income (loss)
before corporate allocations
Koppel $ 19,741 $ 16,136 $ 9,042
Newport (4,855) (5,708) (6,133)
$ 14,886 $ 10,428 $ 2,909
</TABLE>
Manufacturing Facilities and Processes - Specialty Steel
Segment
Koppel Facilities
The Company manufactures seamless OCTG, line pipe
products and SBQ products at its facilities located in
Koppel and Ambridge, Pennsylvania and Baytown, Texas. The
operations consist of a melting and casting facility and bar
mill located in Koppel and a seamless tubemaking facility
located approximately 20 miles away in Ambridge.
The melting and casting facilities at Koppel consist of
an 80-ton Ultra-High Powered (UHP) electric arc furnace, a
ladle refining station and a computer-controlled four-strand
continuous bloom/billet caster. Select grades of steel
scrap are melted utilizing the UHP furnace. Once the molten
steel reaches temperatures of approximately 3,000 degrees
Fahrenheit, it is tapped from the UHP furnace into a ladle
and transported to the ladle refining station. The ladle
refining station allows for the addition of alloys, thereby
providing precise chemical compositions, and it maintains
the molten steel at proper temperatures for the caster.
Once the chemistries are analyzed and conformed to
metallurgical standards, the ladle is carried by crane
to the continuous caster. The continuous caster is capable
of casting 9 inch square blooms or 51/2 inch round billets.
Blooms and billets are further processed at the
tubemaking facilities into seamless tubular products or at
the bar facilities into SBQ products, or they can be sold as
"as cast" (semi-finished) product.
Koppel's tubemaking facility includes a highly
automated rotary hearth furnace where round billets (tube
rounds) are reheated to temperatures over 2,200 degrees
Fahrenheit. Tube rounds exit the furnace to a piercer where
a hollow tube is formed. Hollow tubes are then rolled
to a specific size and wall thickness by passing through
either the mandrell mill or transval mill. Seamless tubular
products are produced in both carbon and alloy grades in
sizes ranging from 1 7/8 to 8 1/2 inches in outside
diameter.
At Koppel's bar mill, blooms are reheated in a highly
automated rotary hearth furnace to temperatures over 2,200
degrees Fahrenheit. Blooms, upon exiting the furnace, pass
through a series of rolls, where they are reshaped into
round bars. SBQ products are available in both carbon and
alloy grades in sizes measuring 2 7/8 to 6 inches in
diameter.
Newport Facilities
The Company manufactures welded OCTG and line pipe
products and hot rolled coils at its facilities located near
Newport, Kentucky. The production process for Newport's
welded tubular products includes three separate operations:
melting, rolling and pipe-making.
Steel scrap is melted into molten steel utilizing three
100-ton electric arc furnaces. Molten steel, reaching 3,000
degrees Fahrenheit, is tapped from the furnaces into ladles.
The ladles are then moved to an auxiliary stir station where
an argon lance stir process improves steel quality through
consistent metal deoxidation and desulfurization. Steel
refining continues at the ladle metallurgical station (LMS).
The LMS, which serves a dual role, allows for the precise
control of temperature and chemistry and enables continuous
production sequencing of the molten steel to the continuous
slab caster, thereby optimizing melt shop productivity. Once
strict metallurgical standards have been met, the molten
steel is "cast" into slabs that range in size from 7 to 10
inches in thickness, 28 to 55 inches in width and 15 to 34
feet in length. Slabs are cut to length and lifted onto
specially designed rail cars for transportation to the
adjacent reheat furnace. From time to time, when
economically advantageous, Newport also purchases
slabs from third parties. In fiscal 1996, Newport purchased
approximately 109,000 tons of slabs for use in the
production of coil and pipe.
At Newport's hot strip rolling mill, slabs are
processed through the walking beam slab reheat furnace where
they are evenly heated to temperatures over 2,400 degrees
Fahrenheit. Slabs exit directly from the reheat furnace onto
the hot strip rolling mill where they are reduced to desired
thickness and rolled into coils in sizes up to a maximum of
50 inches in width. Coils are then either slit and formed
into welded tubular products at one of the two pipe-making
facilities or are sold as hot rolled coils. Newport's
welded tubular products range in size from 4 1/2 to 13 3/8
inches in outside diameter and are available in both carbon
and alloy grades.
Finishing Facilities
The Company processes and finishes a portion of its
welded and seamless tubular products at facilities located
at the Port of Catoosa, near Tulsa, Oklahoma (Erlanger
Tubular Corporation, or "Erlanger") and at Baytown, Texas,
located near Houston, Texas (Baytown). The finishing
processes include upsetting, which is a forging process that
thickens tube ends; heat treating, which is a furnace
operation designed to strengthen the steel; straightening;
non-destructive testing; coating for rust prevention; and
threading.
Products - Specialty Steel Segment
Seamless OCTG Products
The Company's seamless OCTG products, which are
produced by Koppel, 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. The production of seamless tubular
products with these properties requires a more costly and
specialized manufacturing process than does the production
of welded tubular products. The majority of the Company's
seamless OCTG product sales are production tubing in sizes
ranging from 1.9 inches to 5 inches in outside diameter.
Welded OCTG Products
The Company's welded OCTG products, which are produced
by Newport, 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 the Company's OCTG products is cyclical
in nature, being dependent on the number and depth of oil
and natural gas wells being drilled in the United States and
globally. The level of drilling activity is largely a
function of the current prices of oil and natural gas and
expectations of future prices. 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, which are produced by
both Koppel and Newport, 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. Line pipe products are
coated and 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 a specialized market niche of
SBQ products at Koppel in sizes ranging 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
greater strength-to-weight ratios. These SBQ products are
primarily used in critical weight-bearing applications such
as suspension systems, gear blanks, drive axles for
tractors and off-road vehicles, heavy machinery components
and hydraulic and pneumatic cylinders. The demand for the
Company's SBQ and hot rolled coil products is also cyclical
in nature and is sensitive to general economic conditions.
Hot Rolled Coils
The Company produces commercial quality grade hot
rolled coils at Newport, from 28 to 50 inches in width,
between 0.125 and 0.500 inches in gauge, and in 15 ton coil
weights. 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.
Markets and Distribution - Specialty Steel Segment
The Company sells its specialty steel products to its
customers through an in-house sales force. The primary end
markets for the Company's seamless tubular products have
been the southwest United States and certain foreign
markets, including offshore applications. 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. 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 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 seamless and welded OCTG products destined for the
southwest region by barge.
Customers - Specialty Steel Segment
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. Line pipe products are also
used by gas utility and transmission companies. The
majority of the Company's OCTG products are sold to domestic
distributors. Line pipe products are sold to both domestic
distributors and directly to end users. The Company sells
its SBQ products to service centers, cold finishers,
forgers and original equipment manufacturers. Hot rolled
coils are sold primarily 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. In
fiscal 1996, the Company's top five customers accounted for
approximately 28% of total net sales, and no one customer
accounted for more than 9% of total net sales.
Competition - Specialty Steel Segment
The markets for the Company's specialty steel products
are highly competitive and cyclical. The Company's
principal competitors in its primary markets include
integrated producers, mini-mills and welded tubular product
processing companies, as well as foreign steel producers,
many of which have substantially greater assets and larger
sales organizations than the Company. The Company believes
that the principal competitive factors affecting its
business are price, quality and customer service.
In the seamless OCTG market, Koppel's principal
competitors include the USS/Kobe Steel Company in Lorain,
Ohio, and a number of foreign producers. With respect to
its SBQ products, Koppel competes with a number of steel
manufacturers, including USX Corporation, CSC Industries,
Inc., Republic Engineered Steels, Inc., Inland Steel
Industries, Inc., MacSteel Division of Quanex Corporation,
North Star Steel Company, Inc. and The Timken Company.
Newport's principal domestic competitors in the welded
tubular market are Lone Star Steel Company, LTV Corporation,
IPSCO Steel, Inc. and Maverick Tube Corporation.
In the welded OCTG and line pipe market, the Company
competes against certain manufacturers who purchase hot
rolled coils for further processing into welded OCTG and
line pipe products. The cost of finished tubular products
for these manufacturers is largely dependent on the market
price of hot rolled coils. Depending on market demand for
hot rolled coil, these tubular manufacturers may purchase
hot rolled coils at a lower or higher cost than the
Company's cost to manufacture hot rolled coils. Also,
additional new hot rolled manufacturing capacity is
anticipated over the next twelve months which may also
impact the market price for hot rolled coils.
In July 1995, the United States imposed duties on the
imports of various OCTG products from certain foreign
countries in response to antidumping and countervailing duty
cases filed by several U.S. steel companies. Several
foreign OCTG producers, as well as certain U.S. producers,
have appealed the determinations to international courts or
panels. The Company believes the imposition of the duties
have had a positive effect on its shipments and pricing of
certain of its seamless tubular products; however, it cannot
predict the outcome or timing of these appeals at this time.
Raw Materials and Supplies - Specialty Steel Segment
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 separate contracts entered into by Koppel and
Newport. Koppel's contract, which expired in 1996, has been
extended while a new supply contract is being negotiated.
Newport's contract expires in 2001. 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 also consumes smaller quantities of
additives, alloys and flux which are purchased from a number
of suppliers.
Adhesives Segment
The Company, through its wholly-owned subsidiary,
Imperial Adhesives, Inc. (Imperial), is a custom
manufacturer of water-borne, solvent borne and hot melt
adhesives products and footwear finishes products. These
products are manufactured at plants located in Cincinnati,
Ohio; Nashville, Tennessee and Lynchburg, Virginia.
Manufacturing Process - Adhesives Segment
Imperial's adhesives products are manufactured by
combining and mixing predetermined quantities of raw
materials. The raw materials are measured according to
specific formulas and mixed in numerous specially designed
industrial mixers. Raw materials are available from
multiple sources and consist primarily of
petrochemical-based materials. Pricing of raw
materials generally follows trends in the petrochemical
markets. The physical properties of finished formulas are
measured and monitored by a statistical process control
system. Imperial works closely with its customers to
develop adhesive applications designed to meet their
specific product requirements.
Products and Markets - Adhesives Segment
Imperial maintains approximately 1,000 active formulas
for the manufacture of water-borne, solvent-borne and
hot-melt adhesives products and approximately 1,000 active
formulas for the manufacture of footwear finishes. Its
multiple product lines are used primarily in product
assembly applications within such industries as footwear,
foam bonding, marine and recreational vehicles, consumer
packaging, construction, furniture, and transportation. In
fiscal 1996, approximately 21% of Imperial's sales were to
the footwear industry. The Company's industrial adhesives
products are marketed throughout the United States and
Caribbean basin through an in-house sales force as well as a
number of independent sales representatives. Products are
distributed from Imperial's manufacturing sites and a number
of public warehouses across the United States and in Puerto
Rico.
Competition in the industrial adhesives industry
includes several major producers, as well as numerous small
and mid-sized companies comparable to Imperial. Imperial
competes on the basis of price, product performance and
customer service and believes that its diversity and
ability to develop applications to meet customers' specific
needs allows it to compete effectively with all adhesives
producers in its markets.
Environmental Matters
The Company is subject to federal, state and local
environmental laws and regulations, including, among others,
the Resource Conservation and Recovery Act (RCRA), the Clean
Air Act, the 1990 Amendments to the Clean Air Act, the Clean
Water Act and all regulations promulgated in connection
therewith, including, among others, those concerning the
discharge of contaminants as air emissions or waste water
effluents and the disposal of solid and/or hazardous
wastes such as electric arc furnace dust. As such, the
Company is from time to time involved in administrative and
judicial proceedings and administrative inquiries related to
environmental matters.
As with other steel mills in the industry, Koppel and
Newport produce dust which contains lead, cadmium and
chromium, and is classified as a hazardous waste. The
Company currently collects the dust resulting from its
electric arc furnace operations through emission control
systems and contracts with a company for treatment and
disposal of the dust at an EPA-approved facility.
The Company has on its property at Newport a permitted
hazardous waste disposal facility. Newport's permit for
operating the hazardous waste disposal facility requires
that it investigate, test, and analyze for potential
releases of hazardous constituents from its closed loop
water recirculation system. Any contamination documented as
a result of the investigation would require certain cleanup
measures; however, the Company believes that the cost of any
such cleanup measures will not be material.
In March 1995, Koppel and the EPA signed a Consent
Order 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
Consent Order establishes a schedule for investigating,
monitoring, testing and analyzing the potential releases.
Contamination documented as a result of the investigation
requires cleanup measures and certain remediation has begun.
Pursuant to various indemnity provisions in agreements
entered into at the time of the Company's acquisition of the
Koppel facilities, certain parties have agreed to indemnify
the Company against various known and unknown environmental
matters. The Company believes that the indemnity provisions
provide for it to be fully indemnified against all matters
covered by the Consent Order, including all associated
costs, claims and liabilities.
In November 1996, Koppel received a Notice of Violation
(NOV) from the EPA alleging violations of the Clean Air Act
and the Pennsylvania State Implementation Plan. The
violations allegedly occurred during 1995 and 1996 and
pertain to air emissions from Koppel's electric arc
furnace operations. At this time, the Company is unable to
determine if the EPA will assess civil penalties as a result
of the alleged violations, or the extent of any such
potential penalties.
In two separate incidents occurring in fiscal 1993 and
1992, radioactive substances were accidentally melted at
Newport, resulting in the contamination of a quantity of
electric arc furnace dust. The Company is investigating and
evaluating various issues concerning storage, treatment and
disposal of the radiation contaminated electric arc furnace
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. The Company expects to recover and has recorded a
$2.3 million receivable relating to insurance claims for the
recovery of disposal costs which will be filed with the
applicable insurance carrier at the time such disposal costs
are incurred. As of September 28, 1996, claims recorded in
connection with disposal costs exhaust available insurance
coverage. Based on current knowledge, management believes
the recorded gross reserves of $4.4 million for disposal
costs pertaining to these incidents are adequate.
Subject to the uncertainties concerning the Consent
Order, the NOV and the storage and disposal of the radiation
contaminated dust, the Company believes that it is currently
in compliance in all material respects with all applicable
environmental regulations. The Company cannot predict the
level of required capital expenditures or operating costs
that may result from future environmental regulations.
Capital expenditures for the next twelve months
relating to environmental control facilities are not
expected to be material; however, such expenditures could be
influenced by new or revised environmental regulations and
laws or new information or developments with respect to the
Company's operating facilities.
As of September 28, 1996, the Company had environmental
remediation reserves of $4.4 million, which pertain almost
exclusively to accrued disposal costs for radiation
contaminated dust. As of September 28, 1996, the possible
range of estimated losses related to the environmental
contingency matters discussed above in excess of those
accrued by the Company is $0 to $3.0 million; however, with
respect to the Consent Order, the Company cannot estimate
the possible range of losses should the Company ultimately
not be indemnified. Based upon its evaluation of available
information, management does not believe that any of the
environmental contingency matters discussed above are
likely, individually or in the aggregate, to have a
material adverse effect upon the Company's consolidated
financial position, results of operations or cash flows.
However, the Company cannot predict with certainty that new
information or developments with respect to the Consent
Order or its other environmental contingency matters,
individually or in the aggregate, will not have a material
adverse effect on the Company's consolidated financial
position, results of operations or cash flows.
Employees
As of September 28, 1996, the Company had 1,774
employees, of whom 450 were salaried and 1,324 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 1998 for Imperial.
ITEM 2. PROPERTIES
The Company's principal operating properties are listed
below. The Company believes its facilities are adequate and
suitable for its present level of operations.
Location and Properties
Specialty Steel Segment:
Koppel, Pennsylvania - Koppel owns approximately 227
acres of real estate upon which are located a melt shop, bar
mill, machine and fabricating shops, storage and repair
facilities and administrative offices aggregating
approximately 900,000 square feet. The facilities are
located adjacent to rail lines.
Ambridge, Pennsylvania - Koppel owns approximately 45
acres of real estate upon which are located a seamless tube
making facility and seamless tube finishing facilities
aggregating approximately 659,000 square feet. The
facilities are located adjacent to rail lines and river
barge facilities.
Baytown, Texas - Koppel owns approximately 55 acres of
real estate upon which are located a tubular processing
facility and barge facilities. Located on the property are
eight buildings aggregating approximately 65,000 square feet
which house the various finishing operations.
Newport, Kentucky - Newport owns approximately 250
acres of real estate upon which is located a melt shop, hot
strip mill, two welded pipe mills, a barge facility, machine
and fabricating shops and storage and repair facilities
aggregating approximately 675,000 square feet, as well as
administrative offices. The facilities are also located
adjacent to rail lines.
Tulsa, Oklahoma - Erlanger leases approximately 36
acres of real estate upon which is located a tubular
processing facility. The facility is located at the Tulsa
Port of Catoosa where barge facilities are in close
proximity. Located on this property are six buildings
aggregating approximately 119,000 square feet which house
the various finishing operations.
Adhesives Segment:
Cincinnati, Ohio; Lynchburg, Virginia; Nashville,
Tennessee - Imperial owns approximately seven acres of
property in Cincinnati, Ohio, and 1.5 acres of property in
Lynchburg, Virginia for use in its adhesives and finishes
operations. The Cincinnati properties contain five
buildings aggregating approximately 150,000 square feet and
the Lynchburg property consists of one 10,000 square foot
building. Imperial 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 36
acres of partially developed land near Newport, Kentucky,
which is held as investment property and is listed for sale.
The Company also owns approximately 85 acres of additional
real estate which is currently not used in operations.
Information regarding encumbrances on the Company's
properties is included in Note 5 to the Consolidated
Financial Statements.
Capacity Utilization
The Company's capacity utilization for fiscal 1996 was as
follows:
<TABLE>
<S> <C> <C>
Rated Capacity Capacity
Facility (in tons) Utilization
Koppel facilities
Melt shop ..... 400,000 83%
Seamless tube mill . 200,000 83%
Bar mill .......... 200,000 72%
Newport facilities
Melt shop .......... 700,000 52%
Hot strip rolling mill 750,000 60%
Welded pipe mills .... 580,000 60%
</TABLE>
ITEM 3. LEGAL PROCEEDINGS
See Item 1, Business, "Environmental Matters" regarding
the Consent Order entered into by Koppel and the EPA and the
Notice of Violation received by Koppel from the EPA.
The Company is subject to various claims, lawsuits and
administrative proceedings arising in the ordinary course of
business with respect to workers compensation, health care
and product liability coverages (each of which is
self-insured to certain levels), as well as commercial and
other matters. Based upon its evaluation of available
information, management does not believe that any such
matters are likely, individually or in the aggregate, to
have a material adverse effect upon the Company's
consolidated financial position, results of operations
or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
NS Group, Inc. is listed on the New York Stock Exchange,
trading symbol NSS. At the end of fiscal 1996, the number
of NS Group shareholders of record totaled 310. The following
table sets forth, for the fiscal periods indicated, the high and
low selling prices of the Company's common stock as reported
on the New York Stock Exchange.
<TABLE>
<S> <C> <C>
Fiscal 1996 High Low
1st Quarter $3 $1 7/8
2nd Quarter 3 1/8 2 1/8
3rd Quarter 3 1/8 2 1/2
4th Quarter 3 3/4 2 1/2
Fiscal 1995 High Low
1st Quarter $6 3/4 $4
2nd Quarter 5 1/4 3 3/4
3rd Quarter 4 5/8 2 3/8
4th Quarter 4 1/2 2 7/8
</TABLE>
Information regarding restrictions on common stock
dividends, warrants to purchase Company common stock, and
the Company's convertible debentures is included in Note 5 to
the Consolidated Financial Statements.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data (other than
the data under the caption "Tons shipped") for the five
years in the period ended September 28, 1996 are derived
from the audited consolidated financial statements of the
Company. The information set forth below should be read in
conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the
Consolidated Financial Statements and related Notes thereto
included in this report.
This data includes Kentucky Electric Steel Corporation
for fiscal 1992 and 1993 and the impact from its sale in
fiscal 1994. See Note 2 to the Consolidated Financial
Statements.
Fiscal Year Ended September
<TABLE>
<S> <C> <C> <C> <C> <C>
1996 1995 1994 1993 1992
STATEMENT OF
OPERATIONS DATA:
(In thousands, except per share and tons shipped data)
Net sales $409,382 $371,352 $303,380 $353,082 $281,242
Operating
income 12,053 7,806 689 11,672 1,401
Income (loss)
before extra-
ordinary items
and cumulative
effect of a
change in
accounting
principle (10,457) (5,056) 11,493 (5,896) (13,358)
Net income
(loss) (10,457) (10,256) 13,208 (6,991) (15,900)
Income (loss)
per share before
extraordinary
items and
cumulative effect
of a change in
accounting
principle (.76) (.36) .84 (.44) (.99)
Net income (loss)
per share (.76) (.74) .96 (.52) (1.18)
Cash dividends
declared per
share - - - - .06
BALANCE SHEET DATA:
Working
capital $ 72,869 $ 65,877 $ 45,202 $ 39,060 $ 40,676
Total
assets 300,034 298,497 315,327 317,242 319,079
Long-term
debt 164,789 166,528 138,110 156,056 164,180
Common
shareholders'
equity 57,116 68,110 76,464 62,622 68,574
OTHER FINANCIAL AND STATISTICAL DATA:
Sources and uses of cash flows:
Net cash flows
from operating
activities $ 12,605 $ ( 4,235)$ (4,329) $ 2,392 $ 8,515
Net cash flows
from investing
activities (13,756) 22,314 7,379 (4,254) (1,373)
Net cash flows
from financing
activities (245) (17,646) (4,442) (1,055) (3,526)
EBITDA (1) 32,594 31,141 21,566 30,355 20,515
Capital
expenditures 7,569 13,730 11,760 6,080 4,148
Depreciation and
amortization 20,902 21,311 18,789 19,093 18,711
Tons shipped:
Seamless tubular
products 157,400 116,600 92,300 76,900 45,400
Welded tubular
products 348,900 322,900 277,600 308,000 246,500
SBQ products 133,700 169,000 147,900 346,900 289,900
Hot rolled coil
and other
products 43,300 47,600 43,200 16,400 9,400
Total tons
shipped 683,300 656,100 561,000 748,200 591,200
</TABLE>
(1) EBITDA represents earnings before interest expense,
taxes, and depreciation and amortization, and is calculated
as net income (loss) before extraordinary items and the
cumulative effect of a change in accounting principle plus
interest expense, taxes, depreciation and amortization.
EBITDA provides additional information for determining the
Company's ability to meet debt service requirements. EBITDA
does not represent and should not be considered as an
alternative to net income, any other measure of performance
as determined by generally accepted accounting principles,
as an indicator of operating performance or as an
alternative to cash flows from operating, investing or
financing activities or as a measure of liquidity.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following analysis of financial condition and
results of operations of the Company should be read in
conjunction with the audited Consolidated Financial
Statements and related Notes of the Company, and other
financial information included in this report.
General
The Company operates in two business segments:
specialty steel and industrial adhesives. Within the
specialty steel segment are the operations of Koppel Steel
Corporation (Koppel), a manufacturer of seamless tubular
steel products, special bar quality (SBQ) products and
semi-finished steel products; and Newport Steel Corporation
(Newport), a manufacturer of welded tubular steel products
and hot rolled coils. 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) SBQ 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 13 to the Consolidated Financial Statements
included herein for selected financial information by
business segment for the fiscal years 1996, 1995, and 1994.
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 $45.6 million
in cash and 400,000 shares (approximately 8%) of the newly
formed public company. See Note 2 to the Consolidated
Financial Statements concerning the Company's sale of KES
and its pro forma effect on the Company's fiscal 1994
financial position and results of operations.
The matters discussed or incorporated by reference in
this Report on Form 10-K that are forward-looking statements
(as defined in the Private Securities Litigation Reform Act
of 1995) involve risks and uncertainties. Such risks and
uncertainties include, but are not limited to, the level of
domestic as well as worldwide oil and natural gas drilling
activity; general economic conditions; product demand and
industry capacity; industry pricing; the presence or absence
of governmentally imposed trade restrictions; manufacturing
efficiencies; volatility in raw material costs, particularly
steel scrap; costs of compliance with environmental
regulations; product liability or other claims; the
Company's ability to meet operating cash requirements,
including capital expenditures; and the Company's capital
structure, which may limit its operational and financial
flexibility. These risks and uncertainties may cause the
actual results or performance of the Company to differ
materially from any future results or performance expressed
or implied by such forward-looking statements.
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 28, 1996 are
summarized below. Fiscal 1995 contains fifty-three weeks and
fiscal years 1996 and 1994 contain fifty-two weeks. As such,
the increases and decreases in operating results for the
comparative periods, as discussed below, were partially
attributable to the additional week of operations in fiscal
1995.
<TABLE>
<S> <C> <C> <C>
(In thousands) 1996 1995 1994
Net sales
Specialty steel segment
Koppel $195,851 $173,880 $137,533
Newport 173,615 162,003 132,908
369,466 335,883 270,441
Adhesives
segment 39,916 35,469 32,939
$409,382 $371,352 $303,380
Cost of products sold
Specialty
steel
segment
Koppel $169,600 $151,614 $122,060
Newport 169,649 157,832 130,820
339,249 309,446 252,880
Adhesives
segment 30,336 27,824 25,281
$369,585 $337,270 $278,161
Operating income (loss)
Specialty steel segment
Koppel $ 19,741 $ 16,136 $ 9,042
Newport (4,855) (5,708) (6,133)
14,886 10,428 2,909
Adhesives
segment 1,597 1,248 1,150
Corporate
allocations (4,430) (3,870) (3,370)
$ 12,053 $ 7,806 $ 689
</TABLE>
Shipment and sales data for the Company's specialty
steel segment for each of the three fiscal years in the
period ended September 28, 1996 were as follows:
<TABLE>
<S> <C> <C> <C>
1996 1995 1994
Tons shipped
Koppel
Seamless
tubular
products 157,400 116,600 92,300
SBQ products 133,700 169,000 147,900
Newport
Welded
tubular
products 348,900 322,900 277,600
Hot rolled
coils and
other products 43,300 47,600 43,200
683,300 656,100 561,000
Net sales ($000's)
Koppel
Seamless tubular
products $133,446 $ 90,926 $ 72,675
SBQ products 62,405 82,954 64,858
Newport
Welded tubular
products 157,385 145,330 117,214
Hot rolled coils
and other products 16,230 16,673 15,694
$369,466 $335,883 $270,441
</TABLE>
Fiscal Year Ended September 28, 1996 compared with Fiscal
Year Ended September 30, 1995
Net sales in fiscal 1996 increased $38.0 million, or
10.2%, from fiscal 1995 to $409.4 million. Specialty steel
segment net sales increased $33.6 million, or 10.0%, and
the adhesives segment net sales increased $4.4 million, or
12.5%, from fiscal 1995. The overall increase in specialty
steel segment net sales was primarily attributable to
increased shipments of the Company's tubular products as
more fully discussed below.
Seamless tubular net sales increased $42.5 million, or
46.8%, on a volume increase of 35.0%. The increases in
seamless tubular net sales and shipments were primarily due
to increases in seamless OCTG product shipments and average
selling prices which were attributable in part to a decline
in the level of foreign imports, increased off-shore
drilling activity, as well as, with respect to pricing,
changes in OCTG product mix. Fiscal 1996 average selling
price for all seamless tubular products increased 8.7% from
fiscal 1995.
Welded tubular net sales increased $12.1 million, or
8.3%, on a volume increase of 8.1%. The increase in welded
tubular net sales was primarily attributable to an increase
in shipments of both welded line pipe products and welded
OCTG products. Average selling price for all welded tubular
products was essentially unchanged from fiscal 1995.
The demand for the Company's OCTG products is cyclical
in nature, being primarily dependent on the number and depth
of oil and natural gas wells being drilled in the United
States and globally. The average number of oil and natural
gas drilling rigs in operation in the United States (rig
count) was 759 in fiscal 1996, up from 738 in fiscal 1995.
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.
In July 1995, the United States imposed duties on
imports of various OCTG products from certain foreign
countries in response to antidumping and countervailing duty
cases filed by several U.S. steel companies (Trade Cases).
Several foreign OCTG producers, as well as certain U.S.
producers, have appealed the determinations to international
courts or panels. The Company cannot predict the outcome or
timing of these appeals at this time.
SBQ product net sales decreased $20.5 million, or
24.8%, on a volume decline of 20.9%. Fiscal 1996 average
selling price for SBQ products declined 4.9% from fiscal
1995. The decline in shipments and selling price of SBQ
products resulted from a softening in the markets served by
Koppel's SBQ products as well as excess inventory levels in
the SBQ marketplace. Shipments of SBQ products have
increased in each of the last three quarters of fiscal 1996;
however, average selling price declined 5.8% over the same
three quarters. Other product shipments and sales for
fiscal 1996 were primarily attributable to the sale of hot
rolled coils. The demand for the Company's SBQ and hot
rolled coil products is cyclical in nature and is sensitive
to general economic conditions.
Gross profit for fiscal 1996 increased $5.7 million
from fiscal 1995 for a gross profit margin of 9.7% in fiscal
1996 compared to 9.2% in fiscal 1995. The specialty steel
segment gross profit increased $3.8 million and this segment
had a gross profit margin of 8.2% in fiscal 1996 versus 7.9%
in fiscal 1995. The increase in specialty steel segment
gross profit and margin was attributable to Koppel's
seamless tubular operations, where gross profit margins rose
from 12.8% in the prior year period to 13.4% for the current
year.
The adhesives segment gross profit increased $1.9
million from fiscal 1995 primarily as a result of an
increase in sales volume. Gross profit margin for fiscal
1996 was 24.0% compared to 21.6% for fiscal 1995. The
increase was primarily a result of increased sales of higher
margin products.
Fiscal 1996 selling and administrative expenses
increased $1.5 million from 1995 but decreased as a
percentage of sales from 7.1% in fiscal 1995 to 6.8% in
fiscal 1996. The overall increase in selling and
administrative expenses was primarily attributable to
increased production and sales volume.
As a result of the above factors, operating income
increased $4.3 million, from $7.8 million in fiscal 1995 to
$12.1 million in fiscal 1996. The increase in operating
income was attributable almost solely to the specialty steel
segment and was primarily due to increased shipments and
average selling prices for Koppel's seamless tubular
products, partially offset by a decrease in SBQ product
shipments and average selling prices.
Interest income decreased $0.7 million from fiscal 1995
as a result of a decline in average invested cash and
short-term investment balances during the respective
comparable periods.
Interest expense increased $3.6 million over fiscal
1995 as a result of higher interest costs associated with
the Company's Senior Secured Notes issued in the fourth
quarter of fiscal 1995.
Other income, net decreased $2.4 million from fiscal
1995. The current fiscal year was impacted by a $0.7
million loss on the sale of a non-steel segment fixed asset
while fiscal 1995 includes income from property claims filed
with the Company's insurance company in connection with a
motor failure at Newport.
Tax benefits recorded by the Company in fiscal 1996 and
in prior years substantially offset previously recorded net
long-term deferred tax liabilities. As such, the Company is
currently establishing a full valuation allowance for all
deferred tax assets being generated by its operating losses
and, accordingly, is not currently recording the associated
tax benefits.
As a result of the above factors, the Company incurred
a net loss of $10.5 million, or a $.76 loss per share, in
fiscal 1996 compared to a net loss before extraordinary item
of $5.1 million, or a $.36 loss per share in fiscal 1995.
Fiscal Year Ended September 30, 1995 compared with Fiscal
Year Ended September 24, 1994
Net sales in fiscal 1995 increased $68.0 million, or
22.4%, from fiscal 1994. Specialty steel segment net sales
increased $65.4 million, or 24.2%, and the adhesive segment
net sales increased $2.5 million, or 7.7%, from fiscal 1994.
The overall increase in specialty steel segment net sales
was the result of both higher average selling prices and
increased shipment levels.
Seamless tubular net sales increased $18.3 million, or
25.1%, on a volume increase of 26.3%. The increase in
seamless tubular net sales was partially attributable to an
increase in shipments, which resulted in part from product
line expansion in fiscal 1995 as well as from the favorable
final rulings in the Trade Cases. Fiscal 1995 average
selling price for all seamless tubular products declined
less than 1% from fiscal 1994, due almost entirely to
changes in product mix, including the introduction of new
seamless OCTG products with lower average selling prices.
Fiscal 1995 average selling price for seamless OCTG products
decreased 1.9%, while seamless line pipe average selling
price increased 6.9% from fiscal 1994.
Welded tubular net sales increased $28.1 million, or
24.0%, on a volume increase of 16.3%. The increase in
welded tubular net sales was partially attributable to
improved average selling prices for both welded OCTG and
line pipe products as well as an increase in shipments.
Fiscal 1995 average selling price for all welded tubular
products increased 6.6% over fiscal 1994. The Company's
fiscal 1995 average selling price for its welded tubular
products was positively affected by stronger pricing for hot
rolled coils in the steel industry in general.
SBQ product net sales increased $18.1 million, or
27.9%, on a volume increase of 14.3%. Fiscal 1995 average
selling price for SBQ products increased 11.8%. SBQ product
volume and prices increased as a result of stronger market
demand in fiscal 1995 than in fiscal 1994. Selling prices
were also favorably impacted in fiscal 1995 as a result of
the implementation of surcharges to recover increases in
certain raw material costs. Other product shipments and
sales for fiscal 1995 were primarily attributable to
shipments of hot rolled coils.
The adhesives segment net sales increased $2.5 million,
or 7.7%, primarily as a result of improved pricing.
Gross profit for fiscal 1995 increased $8.9 million
from fiscal 1994 for a gross profit margin of 9.2% compared
to 8.3% in fiscal 1994. The specialty steel segment
accounted for nearly all of the increase in gross profit and
had a gross margin of 7.9% in fiscal 1995 versus 6.5% in
fiscal 1994. The increase in specialty steel segment gross
profit and margin was a result of improved operating
efficiencies for the full fiscal year comparative periods
resulting from increased production volume, as well as
increases in average selling prices, as discussed above.
The adhesives segment gross profit was unchanged from
fiscal 1994 and gross profit margin declined from 23.2% in
fiscal 1994 to 21.6% in fiscal 1995, primarily as a result
of higher raw material costs.
Selling and administrative expenses increased $1.7
million from fiscal 1994 but declined as a percentage of
sales from 8.1% in fiscal 1994 to 7.1% in fiscal 1995. The
overall increase in selling and administrative expenses was
primarily attributable to increased production and sales
volumes as well as costs incurred in connection with
litigation settled in fiscal 1995.
As a result of the above factors, operating income
increased $7.1 million, from $0.7 million in fiscal 1994 to
$7.8 million in fiscal 1995. The specialty steel segment
earned an operating profit of $10.4 million for fiscal 1995
compared to $2.9 million for fiscal 1994. The improvement
in operating results from the prior year was primarily due
to an overall increase in shipments as well as increased
selling prices and improved operating efficiencies resulting
from increased production volume. The adhesives segment
earned an operating profit of $1.2 million, unchanged from
fiscal 1994.
Interest expense increased $0.8 million over fiscal
1994 as a result of higher interest costs associated with
the Company's Senior Secured Notes issued in the fourth
quarter of fiscal 1995.
Other income, net increased $1.9 million over fiscal
1994, primarily due to the recording of property claims
filed with the Company's insurance carrier in connection
with a motor failure at Newport in the fiscal 1995 second
quarter.
As a result of the above factors, the fiscal 1995 loss
before extraordinary item was $5.1 million, or a $.36 loss
per share, compared to net income of $13.2 million in fiscal
1994, or $.96 per share. Fiscal 1994 net income includes a
one-time, after-tax gain on the sale of KES of $21.5
million, or $1.56 per share, and income of $1.7 million, or
$.12 per share, relating to the adoption of a new accounting
standard. Excluding these items, the Company incurred a
$10.0 million loss, or a $.72 loss per share, for fiscal
1994.
In connection with a fiscal 1995 fourth quarter
refinancing, the Company incurred prepayment costs and wrote
off unamortized debt issuance costs, which resulted in an
extraordinary charge of $5.2 million, net of applicable
income tax benefit of $2.8 million, or $.38 per share. See
Note 5 to the Consolidated Financial Statements.
Liquidity and Capital Resources
Working capital at September 28, 1996 was $72.9 million
compared to $65.9 million at September 30, 1995. The
current ratio at September 28, 1996 was 2.05 to 1 compared
to 2.15 to 1 at September 30, 1995. At September 28, 1996,
the Company had cash and short-term investments totaling
$17.3 million, $1.9 million of which was restricted in an
environmental trust account related to a permitted
hazardous waste disposal facility located on the Company's
property at Newport. At September 28, 1996, the Company had
no outstanding advances against its $45.0 million revolving
credit facility (Credit Facility); however, $15.6 million of
the Credit Facility secured various letters of credit issued
primarily in connection with the purchase of steel slabs at
Newport.
Net cash flows provided by operating activities totaled
$12.6 million in fiscal 1996, compared to a use of $4.2
million in fiscal 1995. The Company recorded a net loss of
$10.5 million in fiscal 1996 compared to a loss before
extraordinary item of $5.1 million in 1995. Major uses of
cash in operating activities in fiscal 1996 included
increases of $6.0 million and $8.6 million in accounts
receivable and inventories, respectively, resulting from an
increase in business activity. Offsetting these uses were
$20.9 million in non-cash depreciation and amortization
charges; a $2.5 million increase in long-term deferred
taxes; a $1.8 million decrease in refundable income taxes; a
$1.8 million decrease in other current assets resulting
primarily from the collection of previously filed insurance
claims; a $9.0 million increase in accounts payable
primarily resulting from the purchase of steel slabs and a
general increase in business activity; and a $2.2 million
increase in accrued liabilities primarily related to accrued
interest on the Company's senior secured notes. Included in
the fiscal 1996 net loss was a $1.2 million non-cash gain
recorded in connection with the settlement of certain
warranty claims made by the Company related to the
acquisition of Koppel.
Net cash flow used in operating activities totaled $4.2
million in fiscal 1995. The Company incurred a loss before
extraordinary charge in fiscal 1995 of $5.1 million compared
to a net loss before the effect of the gain on the sale of
KES and a change in accounting principle of $10.0 million in
fiscal 1994. Major uses of cash in operating activities for
fiscal 1995 included a $3.2 million increase in accounts
receivable and a $12.4 million increase in inventories
resulting from an increase in business activity and, for the
increase in inventories, unusually low levels at fiscal 1994
year end due to scheduled maintenance at Newport. Other
major uses include a decrease in long-term deferred taxes
and an increase in refundable income taxes, both resulting
from the fiscal 1995 net loss, including the extraordinary
charge for prepayment costs and a non-cash cost for the
write-off of unamortized debt issuance costs. Offsetting
these uses were $21.3 million in non-cash depreciation and
amortization charges and increases in accounts payable and
accrued liabilities of $5.6 million and $2.9 million,
respectively.
Net cash flow used in operating activities totaled $4.3
million in fiscal 1994. Major components include a $10.0
million net loss before the effect of the gain on the sale
of KES and the adoption of a new accounting standard, 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.
The Company invested $7.6 million, $13.7 million and
$11.8 million in capital expenditures during fiscal 1996,
1995, and 1994, respectively. Such capital expenditures
were primarily related to improvements to and acquisitions
of machinery and equipment in the specialty steel segment.
Capital spending for fiscal 1996, 1995 and 1994 related to
the Company's environmental control facilities was not
material. In fiscal 1996, the Company also received $1.7
million from the sale of a non-steel segment fixed asset.
The Company currently estimates that fiscal 1997 capital
spending will approximate $9.0 million, approximately $8.3
million of which is related to the specialty steel segment.
It is anticipated that capital spending will be funded
through cash flow from operations, available cash and
short-term investments, as well as available borrowing
sources.
Short-term investments increased $7.4 million in fiscal
1996, primarily as a result of improved cash flow from
operating activities as well as declines in capital spending
and long-term debt principal repayment requirements.
As a result of the sale of KES in the first quarter of
fiscal 1994, 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. The Company holds the common stock
acquired in the sale of KES as an available-for-sale
investment. As of September 28, 1996, such common stock was
recorded at $2.7 million compared to $3.6 million at
September 30, 1995, which resulted in a direct after-tax
charge to common shareholders' equity of $0.6 million in
fiscal 1996.
Net cash flows used by financing activities in fiscal
1996 were $0.2 million. In fiscal 1995, the Company
publicly issued $131.1 million principal amount of 13.5%
Senior Secured Notes (Notes) together with warrants
(Warrants) to purchase approximately 1.5 million shares of
the Company's common stock at $4.00 per share. The Notes,
together with the Warrants, were priced at 95.35%. Proceeds
from the transaction, together with available cash were used
to retire a substantial portion of the Company's
indebtedness, including borrowings under its lines of
credit. Net cash flow used by financing activities in
fiscal 1995 of $17.6 million includes the net effect of the
refinancing, including $6.3 million in debt issuance costs,
as well as $14.2 million in scheduled payments on long-term
debt obligations made prior to the refinancing. Net cash
flows used by financing activities were $4.4 million in
fiscal 1994. During fiscal 1994, 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.
The Company's annual long-term debt maturities are $2.5
million in fiscal 1997, $3.6 million in fiscal 1998, $2.3
million in fiscal 1999, $0.8 million in fiscal 2000 and $5.3
million in fiscal 2001.
Reference is made to Note 5 to the Consolidated
Financial Statements for further information concerning the
Company's long-term debt and Credit Facility. Pursuant to
the Company's debt agreements, it is currently prohibited
from paying dividends to its shareholders.
Earnings before interest, taxes, depreciation and
amortization (EBITDA) was $32.6 million for fiscal 1996,
$31.1 million for fiscal 1995 and $21.6 million for fiscal
1994 (excluding the gain on the sale of KES). EBITDA is
calculated as income before extraordinary items and the
cumulative effect of a change in accounting principle plus
interest expense, taxes, depreciation and amortization.
EBITDA provides additional information for determining the
Company's ability to meet debt service requirements. EBITDA
does not represent and should not be considered as an
alternative to net income, any other measure of performance
as determined by generally accepted accounting principles,
as an indicator of operating performance or as an
alternative to cash flows from operating, investing or
financing activities or as a measure of liquidity.
The Company believes that its current available cash
and 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,
the Company has generally been able to pass these
inflationary increases through to its customers.
Other Matters
See Item 1, Business, "Environmental Matters" and Item
3, Legal Proceedings.
Recently Issued Accounting Standards
See Note 1 to the Consolidated Financial Statements,
"Recently Issued Accounting Standards".
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements and Schedule
Consolidated Financial Statements Page
Report of Management 24
Report of Independent Public Accountants 25
Consolidated Statements of Operations 26
Consolidated Balance Sheets 27
Consolidated Statements of Cash Flows 28
Consolidated Statements of Common Shareholders'
Equity 29
Notes to Consolidated Financial Statements 30
Financial Statement Schedule
Schedule II 43
REPORT OF MANAGEMENT
The accompanying consolidated financial statements have
been prepared by the management of NS Group, Inc., in
conformity with generally accepted accounting principles
and, in the judgment of management, present fairly and
consistently the Company's consolidated financial position
and results of operations. These statements necessarily
include amounts that are based on management's best estimates and
judgments. The financial information contained elsewhere in this
report is consistent with that contained in the consolidated
financial statements.
In fulfilling its responsibilities for the integrity of
financial information, management maintains accounting
systems and related controls. These controls provide
reasonable assurance, at appropriate costs, that assets are
safeguarded against losses and that financial records are
reliable for use in preparing financial statements. These
systems are enhanced by written policies, an organizational
structure that provides division of responsibilities and
careful selection and training of qualified people.
In connection with their annual audit, independent
public accountants perform an examination in accordance with
generally accepted auditing standards, which includes a
review of the system of internal accounting control and an
expression of an opinion that the consolidated financial
statements are fairly presented.
The Board of Directors, through its Audit Committee
composed solely of non-employee directors, reviews the
Company's financial reporting and accounting practices. The
independent public accountants meet regularly with and have
access to this Committee, with or without management
present, to discuss the results of their audit work.
/s/Clifford R. Borland
Chairman of the Board and
Chief Executive Officer
/s/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 28, 1996 and September 30,
1995, and the related consolidated statements of operations,
common shareholders' equity and cash flows for each of the
three years in the period ended September 28, 1996. These
financial statements and schedule referred to below are the
responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements and schedule 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 28, 1996 and September 30, 1995, and the results
of their operations and their cash flows for each of the
three years in the period ended September 28, 1996 in
conformity with generally accepted accounting principles.
As explained in Note 11 to the Consolidated Financial
Statements, the Company changed its method of accounting for
income taxes effective September 26, 1993.
Our audit was made for the purpose of forming an
opinion on the basic financial statements taken as a whole.
The schedule listed in the Index to Consolidated Financial
Statements is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part
of the basic financial statements. This schedule has been
subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly
states in all material respects the financial data required
to be set forth therein in relation to the basic financial
statements taken as a whole.
Cincinnati, Ohio, /s/ARTHUR ANDERSEN LLP
November 1, 1996
NS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the years ended September 28, 1996, September 30, 1995
and September 24, 1994
(Dollars in thousands, except per share amounts)
<TABLE>
<S> <C> <C> <C>
1996 1995 1994
Net sales $409,382 $371,352 $303,380
Cost of products sold 369,585 337,270 278,161
Selling and
administrative expenses 27,744 26,276 24,530
Operating income 12,053 7,806 689
Interest income 637 1,341 1,733
Interest expense (24,375) (20,796) (20,030)
Other income, net 644 3,053 1,191
Gain on sale of subsidiary - - 35,292
Income (loss) before
income taxes, extra-
ordinary item and
cumulative effect of a
change in accounting
principle (11,041) (8,596) 18,875
Provision (credit) for
income taxes (584) (3,540) 7,382
Income (loss) before
extraordinary item and
cumulative effect of a
change in accounting
principle (10,457) (5,056) 11,493
Extraordinary item, net of
income taxes - (5,200) -
Cumulative effect of a
change in accounting
principle - - 1,715
Net income (loss) $(10,457) $(10,256) $ 13,208
Per common share
Income (loss)
before extraordinary
item and cumulative
effect of a change
in accounting
principle $(.76) $(.36) $.84
Extraordinary item - (.38) -
Cumulative effect of
a change in accounting
principle - - .12
Net income (loss) $(.76) $(.74) $.96
Weighted average shares
outstanding (000's) 13,809 13,809 13,789
</TABLE>
See notes to consolidated financial statements
NS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 28, 1996 and September 30, 1995
(Dollars in thousands)
<TABLE>
<S> <C> <C>
ASSETS 1996 1995
Current assets
Cash and cash equivalents $ 3,442 $ 4,838
Short-term investments 13,855 6,413
Accounts receivable, less
allowance for doubtful
accounts of $757 and
$1,021, respectively 51,824 45,858
Refundable income taxes 1,355 3,130
Inventories 53,317 44,716
Operating supplies and other
current assets 13,187 13,525
Deferred tax assets 5,459 4,842
Total current assets 142,439 123,322
Property, plant and equipment --
at cost
Land and buildings 29,755 30,110
Machinery and equipment 247,254 242,530
Construction in progress 3,313 3,622
Less -- accumulated
depreciation (138,512) (120,887)
Net property, plant
and equipment 141,810 155,375
Other assets 15,785 19,800
Total assets $300,034 $298,497
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Notes payable $ 879 $ 509
Accounts payable 41,847 32,897
Accrued liabilities 24,376 22,167
Current portion of long-term debt 2,468 1,872
Total current liabilities 69,570 57,445
Long-term debt 164,789 166,528
Deferred taxes 8,559 6,414
Common shareholders' equity
Common stock, no par value,
40,000,000 shares authorized,
13,809,413 shares issued and
outstanding for each period 49,004 49,004
Common stock options and warrants 2,774 2,737
Unrealized loss on available for
sale securities (1,287) (713)
Retained earnings 6,625 17,082
Common shareholders' equity 57,116 68,110
Total liabilities and
shareholders' equity $300,034 $298,497
</TABLE>
See notes to consolidated financial statements
NS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended September 28, 1996, September 30, 1995
and September 24, 1994
(Dollars in thousands)
<TABLE>
<S> <C> <C> <C>
1996 1995 1994
Cash flows from operating activities:
Net income (loss) $ (10,457) $(10,256) $ 13,208
Adjustments to reconcile
net income (loss) to
net cash flows from
operating activities:
Depreciation and
amortization 19,260 18,941 18,154
Amortization of debt
discount and finance
costs 1,642 2,370 635
Increase (decrease)
in long-term deferred
taxes 2,496 (2,970) (1,157)
Non-cash gain on
settlement of claims (1,172) - -
Gain on sale of
subsidiary - - (35,292)
(Gain) loss on disposal
of equipment 642 (470) (230)
Increase in accounts
receivable, net (5,966) (3,207) (7,921)
Increase in inventories (8,601) (12,426) (3,168)
(Increase) decrease in
refundable income taxes 1,775 (2,935) 2,618
(Increase) decrease in
other current assets 1,827 (1,753) 2,691
Increase in accounts
payable 8,950 5,585 5,782
Increase in accrued
liabilities 2,209 2,886 351
Net cash flows from
operating activities 12,605 (4,235) (4,329)
Cash flows from investing activities:
(Increase) decrease in
short-term investments (7,442) 33,658 (36,614)
Purchases of property,
plant and equipment (7,569) (13,730) (11,760)
Proceeds from sale of
equipment 1,729 494 631
(Increase) decrease in
other assets (474) 1,892 (2,122)
Proceeds from sale of
subsidiary - - 50,426
Cash dividend from sold
subsidiary - - 6,818
Net cash flows from
investing
activities (13,756) 22,314 7,379
Cash flows from financing activities:
Increase (decrease) in notes
payable 370 (28,363) 1,905
Proceeds from issuance of
long-term debt 1,277 122,587 431
Proceeds from issuance of
warrants - 2,411 -
Repayments on long-term
debt (1,892) (107,950) (7,246)
Increase in debt issuance
costs - (6,331) (236)
Proceeds from issuance of
common stock - - 704
Net cash flows
from financing
activities (245) (17,646) (4,442)
Net increase (decrease)
in cash and cash
equivalents (1,396) 433 (1,392)
Cash and cash equivalents at
beginning of year 4,838 4,405 5,797
Cash and cash equivalents at
end of year $ 3,442 $ 4,838 $ 4,405
Cash paid during the year for:
Interest $ 22,179 $ 20,385 $ 18,964
Income taxes,
net of refunds $ (4,234) $ 209 $ 2,297
</TABLE>
See notes to consolidated financial statements
NS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY
For the years ended September 28, 1996, September 30, 1995
and September 24, 1994
(Dollars in thousands)
<TABLE>
<S> <C> <C> <C>
Options
Common Stock and
Shares Amount Warrants
Balance, September
25, 1993 13,696,104 $48,284 $ 208
Stock option
plans 56,145 290 54
Issuance of common
stock 57,164 414
Unrealized losses
on investments
Net income
Balance, September
24, 1994 13,809,413 48,988 262
Stock option plans 64
Issuance of common
stock warrants 2,411
Unrealized losses
on investments
Other 16
Net loss
Balance, September
30, 1995 13,809,413 49,004 2,737
Stock option plans 37
Unrealized losses
on investments
Net loss
Balance, September
28, 1996 13,809,413 $49,004 $ 2,774
</TABLE>
See notes to consolidated financial statements
NS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY
For the years ended September 28, 1996, September 30, 1995
and September 24, 1994
(Dollars in thousands)
<TABLE>
<S> <S> <S> <S>
Unrealized
Gain (Loss)
Available
for Sale Retained
Securities Earnings Total
Balance, September
25, 1993 $ - $14,130 $62,622
Stock option plans 344
Issuance of common
stock 414
Unrealized losses
on investments (124) (124)
Net income 13,208 13,208
Balance, September
24, 1994 (124) 27,338 76,464
Stock option plans 64
Issuance of common stock
warrants 2,411
Unrealized losses on
investments (589) (589)
Other 16
Net loss (10,256) (10,256)
Balance, September
30, 1995 (713) 17,082 68,110
Stock option plans 37
Unrealized losses on
investments (574) (574)
Net loss (10,457) (10,457)
Balance, September
28, 1996 $(1,287) $ 6,625 $57,116
</TABLE>
NS GROUP, INC. AND SUBSIDIARIES
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): Koppel Steel Corporation (Koppel), Newport
Steel Corporation (Newport), Erlanger Tubular Corporation
(Erlanger), Imperial Adhesives, Inc. (Imperial) and Northern
Kentucky Management, Inc. See Note 2 regarding the sale of
Kentucky Electric Steel Corporation in fiscal 1994. All
significant intercompany accounts and transactions have been
eliminated.
Use of Estimates
The preparation of financial statements in conformity
with generally accepted accounting principles requires that
management make certain estimates and assumptions that
affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could
differ from those estimates.
Cash 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 money
market mutual funds and U.S. treasury securities, for which
market value approximates cost. At September 28, 1996,
approximately $1.9 million in short-term investments were
restricted in an environmental trust account related to a
permitted hazardous waste disposal facility located on the
Company's property at Newport. 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.
Inventories
At September 28, 1996 and September 30, 1995,
inventories stated at the lower of LIFO (last-in, first-out)
cost or market represent approximately 36% and 31% 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:
<TABLE>
<S> <C> <C>
(In thousands) 1996 1995
Raw materials $ 5,948 $ 6,591
Semi-finished and finished goods 50,471 40,570
56,419 47,161
LIFO reserve (3,102) (2,445)
Total inventories $53,317 $44,716
</TABLE>
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 28, 1996, are
assets with a net book value of approximately $4.7 million
which are not currently being used in the business. In
management's opinion, the carrying values of such assets are
realizable.
Income Taxes
At September 28, 1996 and September 30, 1995, deferred
income tax balances represent the estimated future tax
effects of temporary differences between the financial
reporting basis and the tax basis of certain assets and
liabilities.
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
In March 1995, the Financial Accounting Standards Board
(FASB) issued Statement No. 121 (Statement 121) on
accounting for the impairment of long-lived assets to be
held and used. Statement 121 also establishes accounting
standards for long-lived assets that are to be disposed.
Statement 121 is required to be applied prospectively for
assets to be held and used. The initial application of
Statement 121 to assets held for disposal is required to be
reported as the cumulative effect of a change in accounting
principle. The Company will adopt Statement 121 in the
first quarter of fiscal 1997 and currently expects the
impact of such adoption to be immaterial.
In October 1995, the FASB issued Statement No. 123
(Statement 123) establishing financial accounting and
reporting standards for stock-based employee compensation
plans. Statement 123 encourages the use of the fair value
based method to measure compensation cost for stock-based
employee compensation plans, however, it also continues to
allow the intrinsic value based method of accounting as
prescribed by APB Opinion No. 25, which is currently used by
the Company. Adoption is required in fiscal 1997 and the
Company intends to remain on the intrinsic value based
method of accounting. As such, beginning with the 1997
fiscal year-end, Statement 123 requires pro forma
disclosures of net income and earnings per share, as if the
fair value based method of accounting had been applied.
Fiscal Year-End
The Company's fiscal year ends on the last Saturday of
September. Fiscal 1996 and 1994 contain fifty-two weeks and
fiscal 1995 contains fifty-three weeks.
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 $45.6 million in cash and 400,000
shares of the newly formed public company. 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. The sale of KES resulted in a pre-tax gain of $35.3
million. After giving effect to the elimination of the
pre-tax gain of $35.3 million, the related tax effect of
$13.8 million and $0.1 million of net income of KES for the
eleven days of fiscal 1994 prior to sale, the Company's pro
forma net loss before cumulative effect of a change in
accounting principle for the fiscal year ended September 24,
1994 was $10.2 million, or a $.74 loss per share.
Note 3: Other Assets
Other assets at September 28, 1996 and September 30,
1995 includes approximately $8.0 million and $8.6 million,
respectively, in costs associated with land near Newport,
Kentucky, which is held as investment property and is listed
for sale and approximately $5.5 million and $6.5 million,
respectively, in deferred financing costs. Other assets at
September 30, 1995 also include investments totaling $3.6
million which are classified as other current assets at
September 28, 1996.
Note 4: Accrued Liabilities
Accrued liabilities consist of the following:
<TABLE>
<S> <C> <C>
(In thousands) 1996 1995
Accrued payroll and payroll taxes $ 8,477 $ 7,113
Accrued interest 4,696 4,084
Accrued environmental remediation 4,444 4,514
Accrued income taxes 218 32
Other 6,541 6,424
$24,376 $22,167
</TABLE>
Note 5: Long-term Debt and Credit Facility
Long-term debt of the Company consists of the
following:
<TABLE>
<S> <C> <C>
(In thousands) 1996 1995
13.5% Senior Secured Notes due
July 15, 2003, interest due
semi-annually, secured by
property, plant and equipment
(net of unamortized discount of
$7,754 and $8,398, respectively) $123,342 $122,698
11% Subordinated Convertible
Debentures, due in annual
installments from October,
2000 through 2005 28,300 29,000
Term loans due various states
and municipalities, interest
ranging from 2% to 11%, due
in varying monthly or quarterly
installments through 2016, secured
by junior mortgages on property,
plant and equipment 10,708 10,166
Other 4,907 6,536
167,257 168,400
Less - current portion (2,468) (1,872)
$164,789 $166,528
</TABLE>
In the fourth quarter of fiscal 1996, in connection
with the settlement of certain warranty claims related to
the Koppel acquisition, approximately $1.2 million of 11%
Subordinated Convertible Debentures and notes were canceled
by the Company, resulting in a non-cash gain.
In fiscal 1995, the Company publicly issued $131.1
million aggregate principal amount of 13.5% Senior Secured
Notes due 2003 (Notes) together with warrants (Warrants) to
purchase an aggregate of approximately 1,534,000 shares of
the Company's common stock at $4.00 per share. Proceeds
from the sale of the Notes and Warrants of approximately
$120.8 million, after underwriting discount and before
expenses, together with available cash on hand, were used to
retire a substantial portion of the Company's outstanding
indebtedness, including borrowings under its lines of
credit.
Through July 1998, the Company may redeem up to 40% of
the principal amount of the Notes with the net proceeds of a
public offering of common stock at a price of 113.5% of par,
provided that at least $75.0 million principal amount of the
Notes remain outstanding after redemption. The Notes may be
redeemed at the option of the Company, at any time, in whole
or in part, beginning in 2000, at declining premiums plus
accrued interest.
The Notes are unconditionally guaranteed in full,
jointly and severally, by each of the Company's subsidiaries
and are secured by the property, plant and equipment of the
Company's steel-making operations. The Indenture relating
to the Notes contains a number of restrictive covenants
including, among other things, limitations on the ability of
the Company to incur additional indebtedness; create liens;
make certain restricted payments, including dividends;
engage in certain transactions with affiliates; engage in
sale and leaseback transactions; dispose of assets; issue or
sell stock of its subsidiaries; enter into agreements that
restrict the ability of its subsidiaries to pay dividends
and make distributions; engage in mergers, consolidations
and transfers of substantially all of the Company's assets;
and make certain investments, loans and advances.
The Company has a $45.0 million revolving credit facility
(Credit Facility), borrowings on which are secured by
inventory and accounts receivable. Interest on borrowings
accrues at a rate per annum of (a) the sum of the alternate
base rate (which is the higher of prime rate or 0.5% over
the federal funds rate) plus 1% with respect to domestic
rate loans or (b) the sum of the Eurodollar rate (based on
LIBOR) plus 2.75% with respect to Eurodollar rate loans.
Borrowings are due on demand and are limited to defined
percentages of eligible inventory and accounts
receivable. The Credit Facility contains financial
covenants including maintenance of minimum net worth,
minimum interest coverage ratios, maximum ratios of
indebtedness to net worth, and minimum current ratio and
working capital requirements. The Credit Facility also
includes restrictions upon dividends, investments, capital
expenditures, indebtedness and the sale of certain assets.
At September 28, 1996, approximately $15.6 million of the
Credit Facility was utilized to collateralize various
letters of credit and $29.4 million was available for
borrowing. The Credit Facility expires in fiscal 1998.
Pursuant to the Company's debt agreements, it is
currently prohibited from paying dividends to its
shareholders.
In connection with the retirement of long-term
indebtedness in the fourth quarter of fiscal 1995, the
Company incurred prepayment costs and wrote off unamortized
debt issuance costs which resulted in an extraordinary
charge of $5.2 million, net of applicable income tax benefit
of $2.8 million, or $.38 per share.
The Company also has outstanding 11% Subordinated
Convertible Debentures, which are unsecured obligations of
the Company and are convertible into common shares of the
Company at a price of $17.00 per share, or approximately
1,665,000 shares. Interest is payable quarterly. The
debentures are redeemable by the Company at 110% of par.
Annual long-term debt maturities are $2.5 million in
fiscal 1997, $3.6 million in fiscal 1998, $2.3 million in
fiscal 1999, $0.8 in fiscal 2000 and $5.3 million in fiscal
2001.
As of September 28, 1996 and September 30, 1995, the
weighted average interest rate on outstanding notes payable
was 6.1% and 6.0%, respectively.
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 $2.7 million, are
reported in other current assets and are carried at market
value.
Notes payable - The carrying amount approximates
fair value because of the short maturity.
Long-term debt - The fair value of the Company's
Senior Secured Notes is based upon their trading price as of
fiscal year-end. All other long-term debt was estimated by
calculating the present value of the remaining interest and
principal payments on the debt to maturity. The present
value computation uses a discount rate 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 amount and fair value of the Company's
financial instruments are as follows.
<TABLE>
<S> <C> <C> <C> <C>
1996 1995
Carrying Fair Carrying Fair
(In thousands) Amount Value Amount Value
Cash, cash
equivalents
and short
- -term invest-
ments $ 17,297 $ 17,297 $ 11,251 $11,251
Other invest-
ments 2,725 2,725 3,650 3,650
Notes payable 879 879 509 509
Long-term debt 167,257 176,860 168,400 172,021
</TABLE>
Note 7: Preferred Stock
The Company's 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 Company's 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
28, 1996, options outstanding are priced in a range from
$3.25 to $14.125 per share.
A summary of transactions in the plans follows:
<TABLE>
<S> <C> <C> <C>
1996 1995 1994
Options outstanding,
beginning of year 989,030 1,048,705 1,185,525
Options granted - 10,000 289,050
Options expired (80,260) (69,675) (369,725)
Options exercised - - (56,145)
Options outstanding,
end of year 908,770 989,030 1,048,705
Options exercisable,
end of year 681,450 607,955 509,525
Available for grant 564,385 514,535 488,580
</TABLE>
The Company also has non-qualified stock option and stock
appreciation rights plans under which the Company may grant
to key employees options to purchase (or stock appreciation
awards corresponding to) shares of the Company's common
stock. Terms of the grants made under these plans are
determined by the Stock Option Committee of the Board of
Directors. Options granted in fiscal 1996, 1995 and 1994
under these plans were at exercise prices approximating the
market price on the date of the grant. At September 28,
1996, options outstanding under the Company's non-qualified
plans are priced in a range from $2.63 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 plans follows:
<TABLE>
<S> <C> <C> <C>
1996 1995 1994
Options outstanding,
beginning of year 678,025 475,625 366,760
Options granted 60,000 202,400 135,085
Options expired (17,465) - (26,220)
Options outstanding,
end of year 720,560 678,025 475,625
Options exercisable,
end of year 269,978 153,400 106,700
Available for grant 529,440 571,975 24,375
</TABLE>
The Company has common stock warrants outstanding,
issued in connection with the sale of the Company's Senior
Secured Notes. The warrants are exercisable for
approximately 1,534,000 shares of the Company's common stock
at a price of $4.00 per share and expire July 15, 2003. The
Company also has common stock warrants outstanding which
were issued in connection with the financing of the Koppel
acquisition. These warrants are exercisable for
approximately 772,000 shares of the Company's 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.
The Company is subject to various claims, lawsuits and
administrative proceedings arising in the ordinary course of
business with respect to workers compensation, health care
and product liability coverages (each of which is
self-insured to certain levels), as well as commercial and
other matters. The Company accrues for the cost of such
matters when the incurrence of such costs is probable and
can be reasonably estimated. Based upon its evaluation of
available information, management does not believe that any
such matters are likely, individually or in the aggregate,
to have a material adverse effect upon the Company's
consolidated financial position, results of operations or
cash flows.
Newport has incurred significant losses in recent
years. Certain assumptions and estimates have been made in
projecting future cash flows from Newport's operations and,
based upon its evaluation, the Company believes the carrying
value of Newport's facilities is realizable. However,
actual results could differ, which may have a material
effect on the Company's consolidated financial statements.
The Company is subject to federal, state and local
environmental laws and regulations, including, among others,
the Resource Conservation and Recovery Act (RCRA), the Clean
Air Act, the 1990 Amendments to the Clean Air Act, the Clean
Water Act and all regulations promulgated in connection
therewith, including, among others, those concerning the
discharge of contaminants as air emissions or waste water
effluents and the disposal of solid and/or hazardous wastes
such as electric arc furnace dust. As such, the Company is
from time to time involved in administrative and judicial
proceedings and administrative inquiries related to
environmental matters.
As with other steel mills in the industry, the
Company's steel mini-mills produce dust which contains lead,
cadmium and chromium, and is classified as a hazardous
waste. The Company currently collects the dust resulting
from its electric arc furnace operations through emission
control systems and contracts with a company for treatment
and disposal of the dust at an EPA-approved facility.
The Company has on its property at Newport a permitted
hazardous waste disposal facility. Newport's permit for
operating the hazardous waste disposal facility requires
that it investigate, test, and analyze for potential
releases of hazardous constituents from its closed loop
water recirculating system. Any contamination documented as
a result of the investigation would require certain cleanup
measures; however, the Company believes that the cost of any
such cleanup measures will not be material.
In March 1995, Koppel and the EPA signed a Consent
Order 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
Consent Order establishes a schedule for investigating,
monitoring, testing and analyzing the potential releases.
Contamination documented as a result of the investigation
requires cleanup measures and certain remediation has begun.
Pursuant to various indemnity provisions in agreements
entered into at the time of the Company's acquisition of the
Koppel facilities, certain parties have agreed to indemnify
the Company against various known and unknown environmental
matters. The Company believes that the indemnity provisions
provide for it to be fully indemnified against all matters
covered by the Consent Order, including all associated
costs, claims and liabilities.
In November 1996, Koppel received a Notice of Violation
(NOV) from the EPA alleging violations of the Clean Air Act
and the Pennsylvania State Implementation Plan. The
violations allegedly occurred during 1995 and 1996 and
pertain to air emissions from Koppel's electric arc furnace
operations. At this time, the Company is unable to
determine if the EPA will assess civil penalties as a result
of the alleged violations, or the extent of any such
potential penalties.
In two separate incidents occurring in fiscal 1993 and
1992, radioactive substances were accidentally melted at
Newport, resulting in the contamination of a quantity of
electric arc furnace dust. The Company is investigating and
evaluating various issues concerning storage, treatment and
disposal of the radiation contaminated electric arc furnace
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. The Company expects to recover and has recorded a
$2.3 million receivable relating to insurance claims for the
recovery of disposal costs which will be filed with the
applicable insurance carrier at the time such disposal costs
are incurred. As of September 28, 1996, claims recorded in
connection with disposal costs exhaust available insurance
coverage. Based on current knowledge, management believes
the recorded gross reserves of $4.4 million for disposal
costs pertaining to these incidents are adequate.
Subject to the uncertainties concerning the Consent
Order, the NOV and the storage and disposal of the radiation
contaminated dust, the Company believes that it is currently
in compliance in all material respects with all applicable
environmental regulations. The Company cannot predict the
level of required capital expenditures or operating costs
that may result from future environmental regulations.
Capital expenditures for the next twelve months
relating to environmental control facilities are not
expected to be material, however, such expenditures could be
influenced by new or revised environmental regulations and
laws or new information or developments with respect to the
Company's operating facilities.
As of September 28, 1996, the Company had environmental
remediation reserves of $4.4 million which pertain almost
exclusively to accrued disposal costs for radiation
contaminated dust. As of September 28, 1996, the estimated
range of possible losses related to the environmental
contingency matters discussed above in excess of those
accrued by the Company is $0 to $3.0 million; however, with
respect to the Consent Order, the Company cannot estimate
the possible range of losses should the Company ultimately
not be indemnified. Based upon its evaluation of available
information, management does not believe that any of the
environmental contingency matters discussed above are
likely, individually or in the aggregate, to have a material
adverse effect upon the Company's consolidated financial
position, results of operations or cash flows. However, the
Company cannot predict with certainty that new information
or developments with respect to the Consent Order or its
other environmental contingency matters, individually or in
the aggregate, will not have a material adverse effect on
the Company's consolidated financial position, results of
operations or cash flows.
Note 10: 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) 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 $1.0 million, $0.9 million and $0.5 million in
fiscal years 1996, 1995 and 1994, respectively.
Note 11: 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).
Under Statement 109, the Company's 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 provision (credit) for income taxes, including $2.8
million allocated to extraordinary items in fiscal 1995,
consists of the following:
<TABLE>
<S> <C> <C> <C>
(In thousands) 1996 1995 1994
Current $(2,112) $(3,044) $5,423
Deferred 1,528 (3,296) 1,959
Provision (credit) for
income taxes $ (584) $(6,340) $7,382
</TABLE>
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:
<TABLE>
<S> <C> <C> <C>
(In thousands) 1996 1995 1994
Income tax provision
(credit) at statutory tax
rate of 35% $(3,864) $(5,808) $6,606
Change in taxes resulting
from:
State income taxes,
net of federal effect (926) (150) 1,003
Dividend income exclusion (60) (61) (200)
Change in valuation
allowance 4,156 - -
Other, net 110 (321) (27)
Provision (credit) for
income taxes $ (584) $(6,340) $7,382
</TABLE>
The following represents the components of deferred tax
liabilities and assets at September 28, 1996 and September
30, 1995:
<TABLE>
<S> <C> <C>
(In thousands) 1996 1995
Deferred tax liabilities:
Property, plant and equipment $29,993 $27,646
Other items 141 2,196
30,134 29,842
Deferred tax assets:
Reserves and accruals 5,343 3,880
Net operating tax loss
carryforward 20,136 18,003
Alternative minimum tax and
other tax credit carryforwards 3,393 4,480
Other items 2,318 1,907
31,190 28,270
Valuation allowance (4,156) -
Net deferred tax assets 27,034 28,270
Net deferred tax liability $ 3,100 $ 1,572
</TABLE>
For federal income tax purposes, the Company has alternative
minimum tax credit carryforwards of approximately $2.9
million, which are not limited by expiration dates, and
other tax credit carryforwards of approximately $0.5
million, which expire beginning in 2000. The Company also
has net operating tax loss carryforwards of approximately
$57.5 million, which expire beginning in 2007. The Company
has recorded deferred tax assets related to these
carryforwards, net of a deferred tax asset valuation
allowance. In estimating the amount of the valuation
allowance required, the Company has considered future
taxable income related to the reversal of temporary
differences in the tax and financial reporting basis of
assets and liabilities, and has fully reserved for all
deferred tax assets not realizable through such reversals.
Note 12: Related Party Transactions
One of the Company's directors/shareholders has a
controlling interest in a company which purchases secondary
and limited service tubular products from Newport. Sales to
this customer were approximately $16.8 million, $16.0
million and $11.0 million for fiscal years 1996, 1995, and
1994, respectively. Trade receivables from this customer
were $1.4 million and $0.7 million at the end of fiscal 1996
and 1995, respectively.
Note 13: Business Segment Information
The Company operates in two business segments:
specialty steel and industrial adhesives. Within the
specialty steel segment are the operations of Koppel, a
manufacturer of seamless tubular steel products, special bar
quality (SBQ) products and semi-finished steel products; and
Newport, a manufacturer of welded tubular steel products and
hot rolled coils. 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) SBQ 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, a manufacturer of industrial
adhesives products and footwear finishes products.
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 1996, 1995 and 1994.
<TABLE>
<S> <C> <C> <C> <C> <C>
Depre-
ciation
Identi- and Capital
Net Operating fiable Amorti- Expen-
1996 Sales Income Assets zation ditures
(In thousands)
Specialty
steel
segment $369,466 $14,886 $245,642 $20,234 $ 7,338
Adhesives
segment 39,916 1,597 15,338 668 231
Corporate
assets and
allocations - (4,430) 39,054 - -
Total
consolidated $409,382 $12,053 $300,034 $20,902 $ 7,569
1995
Specialty
steel
segment $335,883 $10,428 $ 250,711 $20,862 $13,245
Adhesives
segment 35,469 1,248 13,011 449 485
Corporate
assets and
allocations - (3,870) 34,775 - -
Total
consoli-
dated $371,352 $ 7,806 $298,497 $21,311 $13,730
1994
Specialty
steel
segment $270,441 $ 2,909 $246,295 $18,373 $11,380
Adhesives
segment 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
</TABLE>
Note 14: Quarterly Financial Data (Unaudited)
Quarterly results of operations for 1996 and 1995 are
as follows:
<TABLE>
<S> <C> <C> <C> <C>
(In thousands, except per share amounts)
First Second Third Fourth
1996 Quarter Quarter Quarter Quarter
Net sales $89,295 $104,726 $103,766 $111,595
Gross profit 6,893 9,858 11,400 11,646
Net income (loss) (3,204) (1,508) (1,871) (3,874)
Net income (loss)
per common share (.23) (.11) (.14) (.28)
1995
Net sales $93,489 $ 97,055 $ 94,804 $ 86,004
Gross profit 11,490 10,145 10,592 1,855
Income (loss)
before extra-
ordinary item 75 447 529 (6,107)
Net income (loss) 75 447 529 (11,307)
Income (loss) per
common share
before extraordinary
item .01 .03 .04 (.44)
Net income (loss)
per common share .01 .03 .04 (.82)
</TABLE>
During the fiscal 1995 fourth quarter, the Company
experienced numerous unexpected operational problems,
principally at Newport. Newport's melt shop incurred an
unusual number of unplanned outages during the quarter
related to equipment breakdowns, lightning strikes and
power curtailments due to weather conditions. As a result,
steel production volume was significantly affected, limiting
availability of steel to Newport's hot strip mill and pipe
mills. The excessive downtime throughout all of Newport's
operations resulted in low operating efficiencies, increased
maintenance costs and lost sales opportunities during the
quarter. Also impacting the quarter at Newport was a
write-down of scrap inventory resulting from year-end
physical inventory counts. Shipments of Newport's tubular
products totaled 74,400 tons in the fourth quarter of fiscal
1995 compared to 78,700 tons in the third quarter of fiscal
1995 and 83,800 tons in the fourth quarter of fiscal 1994.
For the same periods, average selling prices for all of
Newport's welded tubular products were $440, $457 and
$429 per ton, respectively.
The fiscal 1995 fourth quarter was also impacted by a
decline in shipments of SBQ products from the Company's
Koppel facilities, due to softening in market demand. SBQ
shipments totaled 33,800 tons in the fourth quarter of
fiscal 1995 compared to 45,100 tons in the third quarter of
fiscal 1995 and 36,000 tons in the fourth quarter of fiscal
1994. For the same periods, average selling prices for SBQ
products were $503, $503, and $441 per ton, respectively.
In connection with a fiscal 1995 fourth quarter debt
refinancing, the Company incurred prepayment costs and wrote
off unamortized debt issuance costs, which resulted in an
extraordinary charge of $5.2 million, net of applicable
income tax benefit of $2.8 million, or $.38 per share.
Note 15: Summarized Financial Information
The Company's Senior Secured Notes are unconditionally
guaranteed in full, jointly and severally, by each of the
Company's subsidiaries (Subsidiary Guarantors), each of
which is wholly-owned. Separate financial statements of the
Subsidiary Guarantors are not presented because they are not
deemed material to investors. The following is summarized
financial information of the Subsidiary Guarantors as of
September 28, 1996 and September 30, 1995 and for each of
the three years in the period ended September 28, 1996. All
significant intercompany accounts and transactions between
the Subsidiary Guarantors have been eliminated.
<TABLE>
<S> <C> <C>
(In thousands) September 28, September 30,
1996 1995
Current assets $123,803 $ 111,371
Noncurrent assets 151,110 167,863
Current liabilities 61,980 50,933
Payable to parent $162,593 $ 169,079
Other noncurrent liabilities 9,953 9,779
Total noncurrent
liabilities $172,546 $ 178,858
Fiscal Year Ended
(In thousands) 1996 1995 1994
Net sales $409,382 $371,352 $303,380
Gross profit 39,797 34,082 25,219
Net income (loss) (5,816) (2,040) 14,689
</TABLE>
SCHEDULE II
NS GROUP, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(Dollars in thousands)
Reserves Deducted from
Assets in Balance Sheets
Allowance
for Allowance
Doubtful for Cash
Accounts(1) Discounts(1)
<TABLE>
<S> <C> <C>
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
Additions:
Charged to costs
and expenses 586 3,553
Deductions:
Net charges of nature
for which reserves
were created (202) (3,330)
BALANCE, September
30, 1995 $ 1,021 $ 529
Additions:
Charged to costs
and expenses 744 3,487
Deductions:
Net charges of nature
for which reserves were
created (1,008) (3,675)
BALANCE, September
28, 1996 $ 757 $ 341
</TABLE>
(1) Deducted from accounts receivable
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 23, 1996 for the Annual
Meeting of Shareholders on February 13, 1997, under the
caption "Election of Directors - Nominees for Election as
Directors"; "Share Ownership of Certain Beneficial Owners
and Management - footnote (5)"; "Information Regarding
Meetings and Committees of the Board of Directors -
Committees of the Board "; and "Section 16(a) Beneficial
Ownership Reporting Compliance".
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference from the Company's
Proxy Statement dated December 23, 1996 for the Annual
Meeting of Shareholders on February 13, 1997, under the
caption "Information Regarding Meetings and Committees of
the Board 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 23, 1996 for the Annual
Meeting of Shareholders on February 13, 1997, "Share
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 23, 1996 for the Annual
Meeting of Shareholders on February 13, 1997, under the
caption "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 - Audited
consolidated financial statements and supplementary data
required by this item are presented and listed in Part II,
Item 8.
(a) 2. Consolidated Financial Statement Schedule - The
financial statement schedule required to be filed as a part
of this report is presented in Part II, Item 8.
(a) 3. Exhibits - Reference is made to the Index to
Exhibits, which is included herein as part of this report
(b) Reports on Form 8-K - None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of
the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NS GROUP, INC.
Date: December 13, 1996 By: /s/John R. Parker
John R. Parker, Vice President,
Treasurer and Chief Financial
Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints Clifford R.
Borland and John R. Parker, and each of them, his true and
lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities to sign any and
all amendments to this Annual Report on Form 10-K and any
other documents and instruments incidental thereto, and to
file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact
and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite or
necessary to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person,
hereby ratifying and confirming all that said
attorneys-in-fact and agents and/or any of them, or their or
his substitute or substitutes, may lawfully do or cause to
be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange
Act of 1934, this report has been signed below by the
following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
Date: December 13, 1996 /s/Clifford R. Borland
Clifford R. Borland,
Chief Executive Officer and
Director
Date: December 13, 1996 /s/Paul C. Borland, Jr.
Paul C. Borland, Jr.
President and
Chief Operating
Officer and Director
Date: December 13, 1996 /s/John R. Parker
John R. Parker, Vice President,
Treasurer and Chief Financial
Officer
(Principal Financial Officer)
Date: December 13, 1996 /s/Thomas J. Depenbrock
Thomas J. Depenbrock
Vice President and Corporate
Controller
Date: December 13, 1996 /s/Ronald R. Noel
Ronald R. Noel
Vice President and Director
Date: December 13, 1996 /s/John B. Lally
John B. Lally, Director
Date: December 13, 1996 /s/Patrick J. B. Donnelly
Patrick J. B. Donnelly, Director
Date: December 13, 1996 /s/R. Glen Mayfield
R. Glen Mayfield, Director
INDEX TO EXHIBITS
Number Description
3.1 Amended and Restated Articles of Incorporation of
Registrant, filed as Exhibit 3.1 to Amendment No. 1 to
Registrants' Form S-1 dated January 17,1995, File No.
33-56637, and incorporated herein by this reference
3.2 Amended and restated By-Laws of Registrant, dated
December 4, 1995, filed as Exhibit 3.2 to Company's Form
10-K for the fiscal year ended September 30, 1995, File No.
1-9838, and incorporated herein by this reference
Exhibit 4.1 through 4.20 and 4.22 were filed as
exhibits under their respective Exhibit numbers to
Registrant's Form 10-Q for the quarterly period ended July
1, 1995, File No. 1-9838, and are incorporated herein by
this reference
4.1 Indenture (including form of Senior Secured Note)
between the Company and The Huntington National Bank, as
trustee (the "Trustee")
4.2 Leasehold and Fee Mortgage, Assignment of Rents and
Leases and Security Agreement from Newport to the Trustee
(Kentucky)
4.3 Mortgage, Assignment of Rents and Leases and
Security Agreement from Koppel to the Trustee (Pennsylvania)
4.4 Deed of Trust, Assignment of Rents and Leases and
Security Agreement from Koppel to the Trustee (Texas)
4.5 Leasehold Mortgage, Assignment of Rents and Leases
and Security Agreement from Erlanger to the Trustee
(Oklahoma)
4.6 Junior Leasehold and Fee Mortgage, Assignment of
Rents and Leases and Security Agreement from Newport to the
Company (Kentucky)
4.7 Junior Mortgage, Assignment of Rents and Leases and
Security Agreement from Koppel to the Company (Pennsylvania)
4.8 Junior Deed of Trust, Assignment of Rents and Leases
and Security Agreement from Koppel to the Company (Texas)
4.9 Junior Leasehold Mortgage, Assignment of Rents and
Leases and Security Agreement from Erlanger to the Company
(Oklahoma)
4.10 Subsidiary Security Agreement between Newport and
the Trustee 4.11 Subsidiary Security Agreement between
Koppel and the Trustee
4.12 Subsidiary Security Agreement between Erlanger and
the Trustee
4.13 ICN Security Agreement between Newport and the
Company
INDEX TO EXHIBITS (Continued)
Number Description
4.14 ICN Security Agreement between Koppel and the
Company
4.15 ICN Security Agreement between Erlanger and the
Company
4.16 Pledge and Security Agreement between the Company
and the Trustee
4.17 Subsidiary Guarantee
4.18 Intercreditor Agreement between the Trustee and
the Bank of New York Commercial Corporation, as agent under
the Credit Facility
4.19 Agreement between the Trustee, Koppel and the
Commonwealth of Pennsylvania, Department of Commerce
4.20 Subordination Agreement between the Trustee and
the City of Dayton, Kentucky
4.21 Revolving Credit, Guaranty and Security Agreement
among Bank of New York Commercial Corporation, PNC Bank
Ohio, N.A., Newport, Koppel, Imperial, the Company,
Erlanger, Northern Kentucky Air, Inc. and Northern
Kentucky Management, Inc.,filed as Exhibit 4.21 to
Company's Form 10-Q for the quarterly period ended July
1, 1995, File No. 1-9838, and incorporated herein by
this reference; Amendment No. 1 dated October 23, 1995 and
Amendment No. 2 dated December 21, 1995 filed as Exhibit
4.21 to Company's Form 10-Q for the quarterly period
ended December 30, 1995, File No. 1-9838, and incorporated
herein by this reference; Amendment No. 3 dated February 14,
1996, filed as Exhibit 4.1 to Company's Post-Effective
Amendment No. 1 on Form S-3 to Form S-1 Registration
Statement, Registration No. 33-56637,and incorporated herein
by this reference; and Amendment No. 4 dated September 12,
1996, filed herewith
4.22 Warrant Agreement between the Company and The
Huntington National Bank, as warrant agent
10.1 Company's Amended Employee Incentive Stock Option
Plan, filed as Exhibit 10(a) to Company's Form 10-K for the
fiscal year ended September 30, 1989, File No. 1-9838, and
incorporated herein by this reference
10.2 Company's Executive Bonus Plan, filed as Schedule B
to Exhibit 10.4 to Company's Registration Statement on Form
S-18, File No. 2-90643, and incorporated herein by this
reference
10.3 Company's Non-Qualified Stock Option and Stock
Appreciation Rights Plan of 1988, filed as Exhibit 1 to
Company's Proxy Statement dated January 13, 1989, File
No. 1-9838, and incorporated herein by this reference
10.4 Rights Agreement dated as of November 17, 1988
between Company and Pittsburgh National Bank, filed as
Exhibit 1 to Company'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 Company's
Form 10-Q dated May 29, 1994, File No. 1-9838, and
incorporated herein by this reference
INDEX TO EXHIBITS (Continued)
Number Description
10.5 Company's 1993 Incentive Stock Option Plan, filed
as Exhibit 1 to Company's Proxy Statement dated December 22,
1992, File No. 1-9838, and incorporated herein by this
reference
10.6 Transfer Agreement, dated September 29, 1993,
filed on September 28, 1993 as Exhibit 10.2 to
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
10.7 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 Company's Form 10-K for the fiscal
year ended September 25, 1993, File No. 1-9383, and
incorporated herein by this reference
10.8 Registration Rights Agreement dated October 6,
1993 among Kentucky Electric Steel, Inc., NS Group, Inc. and
NSub I, Inc. (formerly Kentucky Electric Steel Corporation),
filed as Exhibit 10(i) to Company's Form 10-K for fiscal
year ended September 25, 1993, File No. 1-9383, and
incorporated herein by this reference
10.9 Form of 11% Subordinated Convertible Debenture due
2005, filed as Exhibit 4.1 to Company's Form 8-K dated
October 18, 1990, File No. 1-9838, and incorporated
herein by this reference
10.10 Form of Warrant dated October 4, 1990, filed as
Exhibit 4.2 to Company's Form 8-K dated October 18, 1990,
File No. 1-9838, and incorporated herein by reference; and
First Amendment to Warrant dated September 26, 1992,
filed as Exhibit 4(c) to Company's Form 10-K for the fiscal
year ended September 26, 1992, File No. 1-9838, and
incorporated herein by this reference
10.11 Company's 1995 Stock Option and Stock Appreciation
Rights Plan, filed as Exhibit A to Company's Proxy Statement
dated December 27, 1995, File No. 1-9838, and incorporated
herein by this reference
21 Subsidiaries of Registrant, filed as Exhibit 21 to
Company's Form 10-K for the fiscal year ended September 30,
1995, File No. 1-9838, and incorporated herein by this
reference 23 Consent of Independent Public Accountants
24 Power of Attorney (contained on Signature Page)
27 Financial Data Schedule
Exhibit 4.21
AMENDMENT NO. 4
TO
REVOLVING CREDIT, GUARANTY AND SECURITY AGREEMENT
THIS AMENDMENT NO. 4 ("Amendment") is entered into as of
September 12, 1996, among NEWPORT STEEL CORPORATION, a
corporation organized under the laws of the State of
Kentucky ("Newport"), KOPPEL STEEL CORPORATION, a
corporation organized under the laws of the State of
Pennsylvania ("Koppel"), and IMPERIAL ADHESIVES, INC., a
corporation organized under the laws of the State of Ohio
("Imperial") (each of Newport, Koppel and Imperial a
"Borrower" and, jointly and severally, the "Borrowers"), NS
GROUP, INC., a corporation organized under the laws of the
State of Kentucky ("Holdings"), ERLANGER TUBULAR
CORPORATION, a corporation organized under the laws of the
state of Oklahoma ("Erlanger"), NORTHERN KENTUCKY AIR, INC.,
a corporation organized under the laws of Kentucky ("Air"),
NORTHERN KENTUCKY MANAGEMENT, INC., a corporation organized
under the laws of the State of Kentucky ("Management") (each
of Holdings, Erlanger, Air and Management, a "Guarantor"
and, jointly and severally, the "Guarantors"), the
undersigned financial institutions and any financial
institution that hereafter becomes a lender under the Loan
Agreement (as hereinafter defined) (collectively, the
"Lenders" and individually a "Lender"), THE BANK OF NEW YORK
COMMERCIAL CORPORATION ("BNYCC"), a corporation organized
under the laws of the State of New York, PNC BANK, OHIO,
NATIONAL ASSOCIATION ("PNC"), BNYCC and PNC as co-agents for
Lenders (BNYCC and PNC in such capacity, the "Co-Agents")
and BNYCC as administrative and collateral monitoring agent
for the Lenders (BNYCC, in such capacity, the "ACM Agent").
BACKGROUND
Borrowers, Guarantors and Lenders are parties to a
Revolving Credit, Guaranty and Security Agreement dated as
of July 28, 1995 (as the same has been amended by Amendment
No. 1 thereto, Amendment No. 2 thereto and Amendment No. 3
thereto, and as the same may further be amended,
supplemented or otherwise modified from time to time, the
"Loan Agreement") pursuant to which Lenders provide
Borrowers with certain financial accommodations.
Borrowers have requested that Lenders amend certain of
the financial covenants in the Loan Agreement and Lenders
are willing to do so on the terms and conditions hereafter
set forth.
NOW, THEREFORE, in consideration of any loan or advance
or grant of credit heretofore or hereafter made to or for
the account of Borrowers by Lenders, and for other good
and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto hereby
agree as follows:
1. Definitions. All capitalized terms not otherwise
defined herein shall have the meanings given to them in the
Loan Agreement.
2. Amendment to Loan Agreement. Subject to
satisfaction of the conditions precedent set forth in
Section 4 below, the Loan Agreement is hereby amended as
follows:
2.1. Section 6.5 of the Loan Agreement is hereby
amended in its entirety to provide as follows:
"Net Worth. Cause to be maintained at the end of
each fiscal quarter of Holdings, a Net Worth in an amount
not less than $57,000,000."
2.2 Section 6.7 of the Loan Agreement is hereby
amended in its entirety to provide as follows:
"6.7 Interest Coverage. Cause to be maintained on or
about the end of each fiscal quarter of Holdings an Interest
Coverage Ratio equal to or greater than (a) 1.25 to 1.0 on
the last day of (i) the fiscal quarter ended on or about
12/31/95 computed for the fiscal quarters ended on or about
12/31/95, 6/30/95, 3/31/95 and 12/31/94, (ii) the fiscal
quarter ended on or about 3/31/96 computed for the fiscal
quarters ended on or about 3/31/96, 12/31/95, 6/30/95 and
3/31/95, (iii) the fiscal quarter ended on or about 6/30/96
computed for the fiscal quarters ended 6/30/96, 3/31/96,
12/31/95 and 6/30/95, (iv) the fiscal quarter ended on or
about 9/30/96 computed for the fiscal quarters ended on or
about 9/30/96, 6/30/96, 3/31/96 and 12/31/95, and (v) each
fiscal quarter ended on or about 9/30/96, 12/31/96, 3/31/97
and 6/30/97 for the last four fiscal quarters then ended,
and (b) 1.5 to 1.0 on or about the last day of each fiscal
quarter thereafter for the last four fiscal quarters then
ended."
3. Amendment Fee. Borrowers shall pay to ACM Agent
for the ratable benefit of Lenders, a $10,000 amendment fee
("Amendment Fee") upon the execution of this Amendment.
4. Conditions of Effectiveness. This Amendment shall
become effective as of September 12, 1996, when and only
when ACM Agent shall have received (i) six (6) copies of
this Amendment executed by Borrowers and Guarantors, (ii)
the Amendment Fee and (iii) such other certificates,
instruments, documents, agreements and opinions of counsel
as may be required by ACM Agent or its counsel, each of
which shall be in form and substance satisfactory to ACM
Agent and its counsel.
5. Representations and Warranties. Borrowers and
Guarantors hereby represent and warrant as follows:
(a) This Amendment and the Loan Agreement,
amended hereby, constitute legal, valid and binding
obligations of Borrowers and Guarantors and are enforceable
against Borrowers and Guarantors in accordance with their
respective terms.
(b) Upon the effectiveness of this Amendment,
Borrowers and Guarantors hereby reaffirm all covenants,
representations and warranties made in the Loan Agreement to
the extent the same are not amended hereby and agree that
all such covenants, representations and warranties shall be
deemed to have been remade as of the effective date of this
Amendment.
(c) No Event of Default or Default has occurred
and is continuing or would exist after giving effect to this
Amendment.
(d) Neither any Borrower or any Guarantor has
any defense, counterclaim or offset with respect to the Loan
Agreement.
6. Effect on the Loan Agreement.
(a) Upon the effectiveness of Section 2 hereof,
each reference in the Loan Agreement to "this Agreement,"
"hereunder," "hereof," "herein" or words of like import
shall mean and be a reference to the Loan Agreement as
amended hereby.
(b) Except as specifically amended herein, the
Loan Agreement, and all other documents, instruments and
agreements executed and/or delivered in connection
therewith, shall remain in full force and effect, and are
hereby ratified and confirmed.
(c) The execution, delivery and effectiveness of
this Amendment shall not operate as a waiver of any right,
power or remedy of ACM Agent or Lenders, nor constitute a
waiver of any provision of the Loan Agreement, or any other
documents, instruments or agreements executed and/or
delivered under or in connection therewith.
7. Governing Law. This Amendment shall be binding
upon and inure to the benefit of the parties hereto and
their respective successors and assigns and shall be
governed by and construed in accordance with the laws of the
State of New York.
8. Headings. Section headings in this Amendment are
included herein for convenience of reference only and shall
not constitute a part of this Amendment for any other
purpose.
9. Counterparts. This Amendment may be executed by
the parties hereto in one or more counterparts, each of
which shall be deemed an original and all of which taken
together shall be deemed to constitute one and the same
agreement.
IN WITNESS WHEREOF, this Amendment has been duly
executed as of the day and year first written above.
NEWPORT STEEL CORPORATION
KOPPEL STEEL CORPORATION
IMPERIAL ADHESIVES, INC.
NS GROUP, INC.
ERLANGER TUBULAR CORPORATION
NORTHERN KENTUCKY AIR, INC.
NORTHERN KENTUCKY MANAGEMENT, INC.
By: /s/ John R. Parker
John R. Parker
Title: Treasurer of each of the
foregoing Corporations
THE BANK OF NEW YORK COMMERCIAL
CORPORATION, as Lender, as Co-Agent
and as ACM Agent
By: /s/ Daniel J. Murray
Daniel J. Murray
Title: Vice President
PNC BANK, OHIO, NATIONAL ASSOCIATION,
as Lender and as Co-Agent
By: /s/ Matthew D. Tevis
Matthew D. Tevis
Title: Vice President
Exhibit 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby
consent to the incorporation of our reports included or
incorporated by reference in this Form 10-K, into the
Company's previously filed Registration Statements,
File Nos. 33-24182, 33-24183, 33-51899, 33-28995, 33-37454,
33-39695, 33-56637 and 333-03657.
Cincinnati, Ohio /s/Arthur Andersen LLP
December 13, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted
from NS Group, Inc.'s consolidated financial statements as of and
for the fiscal year ended September 28, 1996, included in the
Company's Annual Report on Form 10-K and is qualified in its
entirety by reference to such consolidated financial statements.
</LEGEND>
<CIK> 0000745026
<NAME> NS GROUP, INC.
<CURRENCY> U.S.
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-28-1996
<PERIOD-END> SEP-28-1996
<EXCHANGE-RATE> 1
<CASH> 3,442
<SECURITIES> 13,855
<RECEIVABLES> 52,581
<ALLOWANCES> 757
<INVENTORY> 53,317
<CURRENT-ASSETS> 142,439
<PP&E> 280,322
<DEPRECIATION> 138,512
<TOTAL-ASSETS> 300,034
<CURRENT-LIABILITIES> 69,570
<BONDS> 164,789
0
0
<COMMON> 51,778
<OTHER-SE> 5,338
<TOTAL-LIABILITY-AND-EQUITY> 300,034
<SALES> 409,382
<TOTAL-REVENUES> 409,382
<CGS> 369,585
<TOTAL-COSTS> 369,585
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24,375
<INCOME-PRETAX> (11,041)
<INCOME-TAX> (584)
<INCOME-CONTINUING> (10,457)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (10,457)
<EPS-PRIMARY> (.76)
<EPS-DILUTED> (.76)
</TABLE>
