SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 30, 1996
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to _________
Commission file number 1-9838
NS GROUP, INC.
Exact name of registrant as specified in its charter
KENTUCKY 61-0985936 (State or
other jurisdiction of (I.R.S. Employer incorporation
or organization) Identification Number)
Ninth and Lowell Streets, Newport, Kentucky 41072
(Address of principal executive offices)
Registrants telephone number, including area code (606)
292-6809
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES X NO _____
Indicate the number of shares outstanding of each of the
issuers classes of common stock, as of the latest
practicable date.
Common stock, no par value 13,809,413
(Class) (Outstanding at May 6, 1996)
NS GROUP, INC.
INDEX
PART I FINANCIAL INFORMATION PAGE
Item 1 Financial Statements
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Operations 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6
Item 2 Managements Discussion and Analysis of Financial
Condition and Results of Operations 11
PART II OTHER INFORMATION
Item 4 Submission of Matter to a Vote of
Security-Holders 21
Item 6 Exhibits and Reports on Form 8-K 21
NS GROUP, INC. AND SUBSIDIARIES CONDENSED
CONSOLIDATED BALANCE SHEETS AS OF MARCH 30, 1996
AND SEPTEMBER 30, 1995
(Dollars in thousands) (Unaudited)
<TABLE>
March 30, September 30,
<S> <C> <C>
1 9 9 6 1 9 9 5
CURRENT ASSETS
Cash and cash equivalents $ 6,099 $ 4,838
Short-term investments 14,179 6,413
Accounts receivable, less
allowance for doubtful
accounts of $863 and $1,021,
respectively 49,233 45,858
Inventories 46,131 44,716
Other current assets 20,718 21,497
Total current assets 136,360 123,322
PROPERTY, PLANT AND EQUIPMENT 278,292 276,262
Less - accumulated depreciation (129,673) (120,887)
148,619 155,375
OTHER ASSETS 16,273 19,800
Total assets $301,252 $298,497
CURRENT LIABILITIES
Notes payable $ - $ 509
Accounts payable 44,462 32,897
Other current liabilities 22,633 22,167
Current portion of long-term debt 2,271 1,872
Total current liabilities 69,366 57,445
LONG-TERM DEBT 165,705 166,528
DEFERRED TAXES 3,158 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 2,765 2,737
Unrealized loss on available
for sale securities (1,116) (713)
Retained earnings 12,370 17,082
Total common shareholders equity 63,023 68,110
Total liabilities and shareholders
equity $301,252 $298,497
</TABLE>
The accompanying notes to condensed consolidated financial
statements are an integral part of these statements.
NS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTH AND SIX MONTH PERIODS ENDED MARCH
30, 1996 AND APRIL 1, 1995
(In thousands, except per share amounts) (Unaudited)
Three Months Ended Six Months Ended
March 30, April 1, March 30, April 1,
1996 1995 1996 1995
<TABLE>
<S> <C> <C> <C> <C>
NET SALES $104,726 $ 97,055 $194,021 $190,544
COST AND EXPENSES
Cost of products
sold 94,868 86,910 177,270 168,909
Selling and
administrative
expenses 6,967 6,688 13,253 13,620
Operating income 2,891 3,457 3,498 8,015
OTHER INCOME (EXPENSE)
Interest expense (6,082) (4,938) (12,137) (10,294)
Interest income 146 388 271 920
Other, net (447) 1,819 251 2,208
Income (loss)
before income
taxes (3,492) 726 (8,117) 849
PROVISION (CREDIT)
FOR INCOME TAXES (1,984) 279 (3,405) 327
Net income (loss)$ (1,508) $ 447 $ (4,712) $ 522
NET INCOME (LOSS)
PER COMMON SHARE $(.11) $.03 $(.34) $.04
WEIGHTED AVERAGE
SHARES
OUTSTANDING 13,809 13,809 13,809 13,809
</TABLE>
The accompanying notes to condensed consolidated financial
statements are an integral part of these statements.
NS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTH PERIODS ENDED MARCH 30, 1996
AND APRIL 1, 1995
(Dollars in thousands) (Unaudited)
March 30, April 1,
1 9 9 6 1 9 9 5
<TABLE>
<S> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES
Net income (loss) $ (4,712) $ 522
Adjustments to reconcile net
income (loss)to net cash
flows from operating
activities:
Depreciation and amortization 9,522 9,416
Amortization of debt discount
and finance costs 816 279
Increase (decrease) in
long-term deferred taxes (3,009) 261
Increase in accounts
receivable, net (3,375) (6,399)
Increase in inventories (1,415) (13,334)
(Increase) decrease in
other current assets 5,539 (2,854)
Increase in accounts payable 11,565 6,142
Increase (decrease) in
accrued liabilities 466 94
Net cash flows from operating
activities 15,397 (5,873)
CASH FLOWS FROM INVESTING
ACTIVITIES
Increase in property, plant
and equipment, net (4,776) (7,317)
Increase in other assets (344) (324)
(Increase) decrease in
short-term investments (7,766) 19,989
Net cash flows from investing
activities (12,886) 12,348
CASH FLOWS FROM FINANCING
ACTIVITIES
Increase (decrease) in notes
payable (509) 1,041
Repayments on long-term debt (741) (9,753)
Increase in deferred financing
costs - (818)
Net cash flows from
financing activities (1,250) (9,530)
Net increase (decrease) in
cash and cash equivalents 1,261 (3,055)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 4,838 4,405
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 6,099 $ 1,350
Cash paid during the period for:
Interest $10,560 $12,059
Income taxes, net of refunds $(2,571) $12,724
</TABLE>
The accompanying notes to condensed consolidated financial
statements are an integral part of these statements.
NS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Unaudited)
Note 1: Principles of Consolidation
The condensed consolidated financial statements include the
accounts of NS Group, Inc. and its wholly-owned subsidiaries
(the Company): Newport Steel Corporation (Newport), Koppel
Steel Corporation (Koppel), Erlanger Tubular Corporation
(Erlanger), Imperial Adhesives, Inc. (Imperial), Northern
Kentucky Management, Inc. and Northern Kentucky Air, Inc.
All significant intercompany balances and transactions have
been eliminated.
The accompanying information reflects, in the opinion of
management, all adjustments (which consist only of normal
recurring adjustments) necessary to present fairly the
results for the interim periods. The preparation of
financial statements in conformity with generally accepted
accounting principles requires that management make certain
estimates and assumptions that affect the amounts reported
in the consolidated financial statements and accompanying
notes. Actual results could differ from those estimates.
Reference should be made to NS Group, Inc.s Form 10-K for
the fiscal year ended September 30, 1995 for additional
footnote disclosure, including a summary of significant
accounting policies.
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 is required to adopt Statement 121
no later than fiscal 1997. The Company has not yet
determined when it will adopt Statement 121 or the impact,
if any, that the adoption will have on its financial
position or results of operations.
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 valued
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. If the intrinsic value based method continues
to be used, 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. The fair value
based method requires compensation cost be measured at the
grant date based upon the value of the award and recognized
over the service period, which is normally the vesting
period. The Company is required to adopt Statement 123 no
later than fiscal 1997. The Company has not yet determined
when it will adopt Statement 123 or the valuation method it
will use.
The Company's fiscal year ends on the last Saturday of
September. The first quarter and six month periods of
fiscal 1996 and 1995 are 13 and 14 week and 26 and 27 week
periods, respectively.
Note 2: Inventories
At March 30, 1996 and September 30, 1995, inventories stated
at the lower of LIFO (last-in, first-out) cost or market
represent approximately 30% and 31% of total inventories
before the LIFO reserve, respectively. Inventories consist
of the following components ($000s):
<TABLE>
<S> <C> <C>
March 30, September 30,
1 9 9 6 1 9 9 5
Raw materials $ 5,675 $ 6,591
Semi-finished and
finished goods 43,061 40,570
48,736 47,161
LIFO reserve (2,605) (2,445)
$46,131 $44,716
</TABLE>
Note 3: Income Taxes
The Company's combined federal and state effective tax rates
for the three and six month periods ended March 30, 1996
were 56.8% and 41.9%, respectively, and include a credit of
approximately $1.6 million related to the favorable
settlement of certain state income tax issues.
Tax benefits recorded through the second quarter of fiscal
1996 and in prior years substantially offset previously
recorded net long-term deferred tax liabilities. As such,
the Company is currently unable to benefit any future
operating losses.
Note 4: 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 commercial, product liability and
other matters, which seek remedies or damages. Based upon
its evaluation of available information, management does not
believe that any such matters are likely, individually or in
the aggregate, to have a material adverse effect upon the
Company's consolidated financial position, results of
operations or cash flows.
The Company is subject to federal, state and local
environmental laws and regulations, including, among others,
the Resource Conservation and Recovery Act (RCRA), the Clean
Air Act, the 1990 Amendments to the Clean Air Act (the 1990
Amendments), 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 similar mills in the industry, the Company's
steel mini-mills produce dust which contains lead, cadmium
and chromium, which 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. While such parties have not at this time
acknowledged full responsibility for potential costs under
the Consent Order, 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 two separate incidents occurring in fiscal 1993 and 1992,
radioactive substances were accidentally melted at Newport,
resulting in the contamination of the melt shops electric
arc furnace emission control facility, or baghouse facility.
The Company is investigating and evaluating various issues
concerning storage, treatment and disposal of the radiation
contaminated baghouse dust; however, a final determination
as to method of treatment and disposal, cost and further
regulatory requirements cannot be made at this time.
Depending on the ultimate timing and method of treatment and
disposal, which will require appropriate federal and state
regulatory approval, the actual cost of disposal could
substantially exceed current estimates and the Company's
insurance coverage. As of March 30, 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
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.
Regulations under the 1990 Amendments to the Clean Air Act
that will pertain to the Company's operations are currently
not expected to be promulgated until 1997 or later. The
Company cannot predict the level of required capital
expenditures or operating costs resulting from future
environmental regulations such as those forthcoming as a
result of the 1990 Amendments. However, the Company
believes that while the 1990 Amendments may require
additional expenditures, such expenditures will not have a
material impact on the Company's business or consolidated
financial position for the foreseeable future.
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 and revised environmental regulations and laws.
As of March 30, 1996, the Company had environmental
remediation reserves of $4.5 million of which $4.4 million
pertain to accrued disposal costs for radiation contaminated
baghouse dust. As of March 30, 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.
Note 5: 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
March 30, 1996 and September 30, 1995 and for the three and
six month periods ended March 30, 1996 and April 1, 1995.
All significant intercompany accounts and transactions
between the Subsidiary Guarantors have been eliminated.
<TABLE>
<S> <C> <C>
March 30, September 30,
1996 1995
(In thousands)
Current assets $116,480 $111,371
Noncurrent assets $158,004 $167,863
Current liabilities $ 62,266 $ 50,933
Payable to parent $158,916 $169,079
Other noncurrent liabilities 9,416 9,779
Total noncurrent liabilities $168,332 $178,858
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
Three Months Ended Six Months Ended
March 30, April 1, March 30, April 1,
1996 1995 1996 1995
(In thousands)
Net sales $104,726 $ 97,055 $194,021 $190,544
Gross profit $ 9,858 $ 10,145 $ 16,751 $ 21,635
Net income (loss) $ (847) $ 1,185 $ (3,233) $ 2,117
</TABLE>
NS GROUP, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
The Company operates in two separate business segments:
specialty steel and industrial adhesives. Within the
specialty steel segment are the operations of Newport, a
manufacturer of welded tubular steel products and hot rolled
coils; Koppel, a manufacturer of seamless tubular steel
products, special bar quality (SBQ) products and
semi-finished steel products; and Erlanger, a tubular steel
product finishing operation. The Company's specialty steel
products consist of: (i) seamless and welded oil country
tubular goods (OCTG) primarily used in oil and natural gas
drilling and production operations; (ii) line pipe used in
the transmission of oil, gas and other fluids; (iii) SBQ
products 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.
The matters discussed or incorporated by reference in this
Report on Form 10-Q that are forward-looking statements (as
defined in the Private Securities Litigation Reform Act of
1995) involve risks and uncertainties. Such risks and
uncertainties include, but are not limited to, 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; and the
level of indebtedness which may limit the Company's
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 the three and six month
periods ended March 30, 1996 and April 1, 1995 are
summarized below. The first quarters of fiscal 1996 and
1995 are 13 and 14 week periods, respectively. As such, the
increases and decreases in operating results for the six
month comparative periods, as discussed below, were
partially attributable to the additional week of operations
in the first quarter of fiscal 1995.
<TABLE>
<S> <C> <C> <C> <C>
Three Months Ended Six Months Ended
March 30, April 1, March 30, April 1,
1996 1995 1996 1995
(In thousands)
Net sales
Specialty
steel segment $ 95,075 $ 88,227 $175,457 $172,943
Adhesives segment 9,651 8,828 18,564 17,601
$104,726 $ 97,055 $194,021 $190,544
Cost of products
sold
Specialty steel
segment $ 87,542 $ 79,932 $162,960 $155,142
Adhesives segment 7,326 6,978 14,310 13,767
$ 94,868 $ 86,910 $177,270 $168,909
Operating income
Specialty steel
segment $ 3,806 $ 4,148 $ 5,232 $ 9,444
Adhesives segment 361 251 493 524
Corporate
allocations
and income (1,276) (942) (2,227) (1,953)
$ 2,891 $ 3,457 $ 3,498 $ 8,015
</TABLE>
Sales data for the Company's specialty steel segment for the
three and six month periods ended March 30, 1996 and April
1, 1995 were as follows:
<TABLE>
Three Months Ended Six Months Ended
March 30, April 1, March 30, April 1,
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Tons shipped
Welded tubular 92,100 80,900 166,900 169,800
Seamless tubular 41,100 29,700 75,200 57,600
SBQ 32,000 47,300 60,900 90,100
Other 11,600 15,000 22,600 25,000
176,800 172,900 325,600 342,500
Net sales ($000s)
Welded tubular $40,346 $36,905 $ 74,522 $ 76,584
Seamless tubular 35,029 22,466 63,092 44,252
SBQ 15,045 23,808 29,025 43,266
Other 4,655 5,048 8,818 8,841
$95,075 $88,227 $175,457 $172,943
</TABLE>
Net sales for the second quarter of fiscal 1996 increased
$7.7 million, or 7.9%, from the second quarter of fiscal
1995 to $104.7 million. For the six month comparable
periods, net sales increased $3.5 million, or 1.8%, to
$194.0 million. Specialty steel segment net sales increased
$6.8 million, or 7.8% and $2.5 million, or 1.5%, for the
three and six month periods, respectively. Adhesives
segment net sales increased $0.8 million, or 9.3%, and $1.0
million, or 5.5%, for the three and six month periods,
respectively. 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.
Welded tubular net sales increased $3.4 million, or 9.3%, on
a volume increase of 13.8%, for the comparable three month
periods. The increase in welded tubular net sales for the
second quarter was primarily attributable to an increase in
shipments of welded OCTG products over the second quarter of
fiscal 1995. Partially offsetting the impact of the
increase in welded OCTG shipments was a 3.6% decline in the
average selling price of welded OCTG products and a 10.5%
and 6.4% decline in welded line pipe shipments and average
selling prices, respectively. For the comparable six month
periods, total welded tubular net sales decreased $2.1
million, or 2.7%, on a volume decline of 1.7%.
Seamless tubular net sales increased $12.6 million, or
55.9%, on a volume increase of 38.4%, and $18.8 million, or
42.6%, on a volume increase of 30.6%, for the comparable
three and six month periods, respectively. The increase in
seamless tubular net sales and shipments was 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 as well as, with respect to
pricing, changes in OCTG product mix. Fiscal 1996 second
quarter average selling prices for all seamless tubular
products increased 12.5% over the second quarter of 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. The average number of oil and natural gas drilling
rigs in operation in the United States (rig count) was 708
in the second quarter of fiscal 1996, virtually unchanged
from the comparable period of fiscal 1995. Rig count
declined 3.9% from 766 in the first six months of fiscal
1995, to 736 in the first six months of fiscal 1996. 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 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 cannot predict the outcome or timing of
these appeals at this time.
SBQ product net sales decreased $8.8 million, or 36.8%, on a
volume decline of 32.3%, and $14.2 million, or 32.9%, on a
volume decline of 32.4% , for the comparable three and six
month periods, respectively. Fiscal 1996 second quarter
average selling price for SBQ product declined 6.6% from the
second quarter of 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
excessive inventory levels in the SBQ marketplace. Other
product shipments in the second quarter of fiscal 1996 were
primarily attributable to the sale of hot rolled coils.
Other product shipments declined from the prior year as a
result of a one-time sale of approximately 5,500 tons of
steel slab in the second quarter of fiscal 1995.
The demand for the Company's SBQ and hot rolled coil
products is cyclical in nature and is sensitive to general
economic conditions. The demand for and the pricing of the
Company's SBQ and hot rolled coil products is also affected
by economic trends in areas such as commercial and
residential construction, automobile production and
industrial investment in new plants and facilities.
Gross profit for the second quarter of fiscal 1996 decreased
$0.3 million from the second quarter of fiscal 1995 for a
gross profit margin of 9.4% in fiscal 1996 compared to 10.5%
in the second quarter of fiscal 1995. For the six month
comparable periods, gross profit decreased $4.9 million for
a gross profit margin of 8.6% compared to 11.4% for the
first six months of fiscal 1995. The specialty steel
segment accounted for $0.8 million and $5.3 million of the
decrease in gross profit for the second quarter and six
month periods, respectively. Gross profit margin for the
second quarter of fiscal 1996 declined primarily as a result
of lower average selling prices for the Company's welded
tubular products and SBQ products, as discussed above. The
decrease in specialty steel segment gross profit and margin
for the six month comparable periods was attributable to a
decline in shipments and average selling prices of the
Company's welded tubular products and SBQ products as well
as lower operating efficiencies resulting from lower
production volume. Gross margin for the fiscal 1995 second
quarter was negatively impacted by production and shipment
interruptions caused by the failure and subsequent
replacement of a 5,000 horsepower motor in Newport's hot
strip mill.
The adhesives segment gross profit increased $0.5 million
and $0.4 million for the second quarter and six month
periods, respectively. Gross profit margin for the second
quarter of fiscal 1996 was 24.1% compared to 21.0% for the
comparable fiscal 1995 period and increased primarily as a
result of changes in product mix.
Fiscal 1996 second quarter selling and administrative
expenses increased $0.3 million from the second quarter of
fiscal 1995 and declined as a percentage of net sales from
6.9% in the second quarter of fiscal 1995 to 6.7% for the
second quarter of fiscal 1996. For the six month period,
selling and administrative expenses declined $0.4 million
from the prior year, due in part to costs incurred in the
first quarter of fiscal 1995 in connection with litigation.
As a result of the above factors, operating income decreased
$0.6 million, from $3.5 million in the second quarter of
fiscal 1995 to $2.9 million in the current quarter. For the
six month period, operating income decreased $4.5 million,
from $8.0 million in fiscal 1995 to $3.5 million in the
first six months of fiscal 1996. The decline in operating
income was virtually all attributable to the specialty steel
segment and was primarily due to a decline in welded tubular
product average selling prices and SBQ product shipments and
average selling prices for the quarterly comparative periods
and to a decline in welded OCTG and SBQ product shipments
and average selling prices together with a decline in
operating efficiencies for the comparative six month
periods.
Interest expense increased $1.1 million and $1.8 million for
the three and six month periods, respectively, as a result
of higher interest costs associated with the Company's
Senior Secured Notes issued in the fourth quarter of fiscal
1995.
Interest income decreased $0.2 million and $0.6 million for
the three and six month periods, respectively, as a result
of a decline in invested cash and short-term investment
balances during the respective comparable periods.
Other income (expense), net for the current quarter was
impacted by a $0.7 million provision for loss on non-steel
segment related fixed assets held for sale. The prior year
second quarter includes income from property claims filed
with the Company's insurance company in connection with the
motor failure at Newport in the fiscal 1995 second quarter.
The Company's combined federal and state effective tax rates
for the three and six month periods were 56.8% and 41.9%,
respectively, and include a credit of approximately $1.6
million related to the favorable settlement of certain state
income tax issues. Tax benefits recorded through the second
quarter of fiscal 1996 and in prior years substantially
offset previously recorded net long-term deferred tax
liabilities. As such, the Company is currently unable to
benefit any future operating losses.
As a result of the above factors, the Company incurred a net
loss of $1.5 million, or an $.11 loss per share, in the
second quarter of fiscal 1996 compared to net income of $0.4
million, or $.03 per share in the second quarter of fiscal
1995. For the current six month period, the Company
incurred a net loss of $4.7 million, or a $.34 loss per
share compared to net income of $0.5 million, or $.04 per
share for the first six months of fiscal 1995.
Liquidity and Capital Resources
Working capital at March 30, 1996 was $67.0 million compared
to $65.9 million at September 30, 1995. The current ratio
at March 30, 1996 was 1.97 to 1 compared to 2.15 to 1 at
September 30, 1995. At March 30, 1995, the Company had cash
and short-term investments totaling $20.3 million, $3.1
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
March 30, 1996, approximately $13.6 million of the Company's
$45.0 million revolving credit facility was utilized to
collateralize various letters of credit and $31.4 million
was available for borrowing. The letters of credit were
issued primarily in connection with the purchase of steel
slabs at Newport to supplement Newport's operations.
Net cash flows provided by operating activities totaled
$15.4 million in the first six months of fiscal 1996,
compared to a use of $5.9 million in the comparable prior
year period. The Company recorded a net loss of $4.7
million in the first six months of fiscal 1996 compared to
net income of $0.5 million in the first six months of fiscal
1995. Major uses of cash in operating activities in the
first six months of fiscal 1996 included a $3.0 million
decrease in long-term deferred taxes as a result of
operating losses in the first six months and a $3.4 million
and $1.4 million increase in accounts receivable and
inventories, respectively, resulting from an increase in
business activity. Offsetting these uses were $10.3 million
in non-cash depreciation and amortization charges; a
decrease in other current assets resulting primarily from
the collection of previously filed insurance claims; and an
increase in accounts payable primarily resulting from the
purchase of steel slabs and a general increase in business
activity.
For the first six months of fiscal 1995, net cash flows used
in operating activities of $5.9 million were primarily
impacted by a $6.4 million increase in accounts receivable
and a $13.3 million increase in inventories resulting from
an increase in business activity and, for the increase in
inventories, unusually low levels at the beginning of fiscal
1995 due to scheduled maintenance outages at Newport. Other
assets increased $2.9 million primarily due to the recording
of various insurance claims. Offsetting these uses were
$9.7 million in non-cash depreciation and amortization
charges and a $6.1 million increase in accounts payable,
resulting primarily to an increase in inventories and
business activities in general.
The Company invested $4.8 million in capital expenditures
during the first six months of fiscal 1996, primarily
related to improvements to and acquisition of machinery and
equipment in the specialty steel segment. The Company
currently estimates that fiscal 1996 capital spending will
approximate $10.0 million and it is anticipated that capital
spending will be funded through cash flow from operations
and available borrowing sources as well as available cash
and short-term investments. Short-term investments
increased $7.8 million in the first six months of fiscal
1996 primarily as a result of investment of excess cash.
During the first six months of fiscal 1995, short-term
investments deceased $20.0 million, due in large part to an
increase in net working capital, particularly the inventory
component.
Net cash flows from financing activities in the first six
months of fiscal 1996 included repayments on long-term debt
of $0.7 million, compared to long-term debt repayments of
$9.8 million in the first six months of fiscal 1995. The
decline is the result of the Company's fiscal 1995 fourth
quarter debt refinancing.
Earnings before interest, taxes, depreciation and
amortization (EBITDA) was $7.4 million and $13.5 million in
the second quarter and first six months of fiscal 1996,
respectively, compared to $10.2 million and $20.6 million in
the second quarter and first six months of fiscal 1995,
respectively. EBITDA is calculated as net income (loss)
plus interest expense, taxes, depreciation and amortization.
The Company believes that its current available cash and
short-term investments, its cash flow from operations and
its borrowing sources will be sufficient to meet
anticipated operating cash requirements, including capital
expenditures, for at least the next twelve months.
Inflation
The Company believes that inflation has not had a material
effect on its results of operations to date. Generally, the
Company experiences inflationary increases in its costs of
raw materials, energy, supplies, salaries and benefits and
selling and administrative expenses. 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
Legal Matters
The Company is subject to various claims, lawsuits and
administrative proceedings arising in the ordinary course of
business with respect to commercial, product liability and
other matters, which seek remedies or damages. Based upon
its evaluation of available information, management does not
believe that any such matters are likely, individually or in
the aggregate, to have a material adverse effect upon the
Company's consolidated financial position, results of
operations or cash flows.
Environmental Matters
The Company is subject to federal, state and local
environmental laws and regulations, including, among others,
the Resource Conservation and Recovery Act (RCRA), the Clean
Air Act, the 1990 Amendments to the Clean Air Act (the 1990
Amendments), 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 similar mills in the industry, the Company's
steel mini-mills produce dust which contains lead, cadmium
and chromium, and is classified as a hazardous waste. The
Company currently collects the dust resulting from its
electric arc furnace operations through emission control
systems and 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 a hazardous waste disposal facility on its
property 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. While such parties have not at this time
acknowledged full responsibility for potential costs under
the Consent Order, 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 two separate incidents occurring in fiscal 1993 and 1992,
radioactive substances were accidentally melted at Newport,
resulting in the contamination of the melt shops electric
arc furnace emission control facility, or baghouse facility.
The Company is investigating and evaluating various issues
concerning storage, treatment and disposal of the radiation
contaminated baghouse dust; however, a final determination
as to method of treatment and disposal, cost and further
regulatory requirements cannot be made at this time.
Depending on the ultimate timing and method of treatment and
disposal, which will require appropriate federal and state
regulatory approval, the actual cost of disposal could
substantially exceed current estimates and the Company's
insurance coverage. As of March 30, 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
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.
Regulations under the 1990 Amendments to the Clean Air Act
that will pertain to the Company's operations are currently
not expected to be promulgated until 1997 or later. The
Company cannot predict the level of required capital
expenditures or operating costs resulting from future
environmental regulations such as those forthcoming as a
result of the 1990 Amendments. However, the Company
believes that while the 1990 Amendments may require
additional expenditures, such expenditures will not have a
material impact on the Company's business or consolidated
financial position for the foreseeable future.
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 and revised environmental regulations and laws.
As of March 30, 1996, the Company had environmental
remediation reserves of $4.5 million, of which $4.4 million
pertain to accrued disposal costs for radiation contaminated
baghouse dust. As of March 30, 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.
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 is required to adopt Statement 121
no later than fiscal 1997. The Company has not yet
determined when it will adopt Statement 121 or the impact,
if any, that the adoption will have on its financial
position or results of operations.
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. If the intrinsic value based method continues
to be used, 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. The fair value
based method requires compensation cost be measured at the
grant date based upon the value of the award and recognized
over the service period, which is normally the vesting
period. The Company is required to adopt Statement 123 no
later than fiscal 1997. The Company has not yet determined
when it will adopt Statement 123 or the valuation method it
will use.
PART II OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of
Security-Holders
The annual meeting of shareholders was held on February
15, 1996. In connection with the meeting, proxies were
solicited pursuant to the Securities Exchange Act. The
following are the voting results on proposals considered and
voted upon at the meeting, all of which were described in
the proxy statement.
1. All nominees for director were elected. The vote was as
follows: For Withheld
Clifford R. Borland 12,266,029 144,802
Ronald R. Noel 12,266,029 144,802
John B. Lally 12,266,029 144,802
Patrick J.B. Donnelly 12,266,029 144,802
R. Glen Mayfield 12,265,529 145,302
In addition, the Board of Directors appointed Paul C.
Borland, Jr. as a director of the Company subsequent to the
meeting.
2. The proposal to adopt the NS Group, Inc. 1995 Stock
Option and Stock Appreciation Rights Plan was approved:
(For, 8,506,038; Against, 1,817,932; Abstain, 50,471;
Non-Vote, 2,036,390)
3. The proposal to ratify the Board of Directors
appointment of Arthur Andersen LLP as the Company's
independent public accountants for its fiscal year ending
September 28, 1996 was approved (For, 12,350,065, Against
15,390, Abstain 45,376).
ITEM 6. Exhibits and Reports on Form 8-K
a) Exhibits - Reference is made to the Index to Exhibits,
which is incorporated herein by reference.
b) Reports on Form 8-K - None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly
authorized.
NS GROUP, INC.
Date: May 10, 1996
By: /s/Clifford R. Borland
Clifford R. Borland
Chairman and Chief Executive Officer
Date: May 10, 1996
By: /s/John R. Parker
John R. Parker
Vice President and Treasurer
INDEX TO EXHIBITS
Number Description
3.1 Amended and Restated Articles of Incorporation of
Registrant, filed as Exhibit 3.1 to Amendment No. 1 to
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
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5 Exhibit 27
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM NS GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS AS OF AND FOR THE THREE AND SIX MONTH
PERIODS ENDED MARCH 30, 1996, INCLUDED IN THE COMPANY'S QUARTERLY
REPORT ON FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000745026
<NAME> NS GROUP, INC.
<MULTIPLIER> 1,000
<CURRENCY> US
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-28-1996
<PERIOD-START> OCT-01-1995
<PERIOD-END> MAR-30-1996
<EXCHANGE-RATE> 1
<CASH> 6,099
<SECURITIES> 14,179
<RECEIVABLES> 49,233
<ALLOWANCES> 863
<INVENTORY> 46,131
<CURRENT-ASSETS> 136,360
<PP&E> 278,292
<DEPRECIATION> 129,673
<TOTAL-ASSETS> 301,252
<CURRENT-LIABILITIES> 69,366
<BONDS> 165,705
<COMMON> 51,769
0
0
<OTHER-SE> 11,254
<TOTAL-LIABILITY-AND-EQUITY> 301,252
<SALES> 194,021
<TOTAL-REVENUES> 194,021
<CGS> 177,270
<TOTAL-COSTS> 177,270
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12,137
<INCOME-PRETAX> (8,117)
<INCOME-TAX> (3,405)
<INCOME-CONTINUING> (4,712)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,712)
<EPS-PRIMARY> (.34)
<EPS-DILUTED> (.34)
</TABLE>
