<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 17, 1997
REGISTRATION NO. 333-32965
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 2
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
NS GROUP, INC.
(Exact name of registrant as specified in its charter)
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<S> <C>
KENTUCKY 61-0985936
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
NINTH & LOWELL STREETS,
NEWPORT KENTUCKY 41072
(606) 292-6809
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
JOHN R. PARKER
NINTH & LOWELL STREETS,
NEWPORT KENTUCKY 41072
(606) 292-6809
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies of all correspondence to:
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<S> <C>
WILLIAM F. SEABAUGH, ESQ. ARTHUR D. ROBINSON, ESQ.
BRYAN CAVE LLP SIMPSON THACHER & BARTLETT
ONE METROPOLITAN SQUARE 425 LEXINGTON AVENUE
211 NORTH BROADWAY, SUITE 3600 NEW YORK, NEW YORK 10017-3954
ST. LOUIS, MISSOURI 63102-2750 (212) 455-2000
(314) 259-2000
</TABLE>
Approximate date of commencement of proposed sale to public: As soon as
practicable after this Registration Statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED SEPTEMBER 17, 1997
PROSPECTUS
7,500,000 SHARES
NS GROUP INC.
COMMON STOCK
------------------
Of the 7,500,000 shares of common stock, no par value (the "Common Stock"),
offered hereby (the "Offering"), 6,000,000 shares are being sold by the Company
and 1,500,000 shares are being sold by certain shareholders. See "Principal and
Selling Shareholders." The Company will not receive any of the proceeds from the
sale of the shares by the Selling Shareholders. The Common Stock is traded on
the New York Stock Exchange under the symbol "NSS." The last reported sale price
of the Common Stock on the New York Stock Exchange on September 12, 1997 was
$33.3125 per share.
------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 6 OF THIS PROSPECTUS FOR A DISCUSSION
OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE
COMMON STOCK.
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
================================================================================================
PROCEEDS TO
PRICE TO PROCEEDS TO SELLING
PUBLIC UNDERWRITING COMPANY (2) SHAREHOLDERS
DISCOUNTS AND
COMMISSIONS (1)
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share $ $ $ $
- ------------------------------------------------------------------------------------------------
Total (3) $ $ $ $
================================================================================================
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(1) For information regarding indemnification of the Underwriters, see
"Underwriting."
(2) Before deducting expenses estimated at $750,000, payable by the Company.
(3) Certain Selling Shareholders and the Company have granted to the
Underwriters a 30-day option to purchase up to 1,125,000 additional
shares of Common Stock solely to cover over-allotments, if any. See
"Underwriting." If such option is exercised in full, the total Price to
Public, Underwriting Discounts and Commissions, Proceeds to Company and
Proceeds to Selling Shareholders will be $ , $ , $
and $ , respectively.
------------------
The shares of Common Stock are being offered by the several Underwriters
named herein, subject to prior sale, when, as and if accepted by them and
subject to certain conditions. It is expected that certificates for the shares
of Common Stock offered hereby will be available for delivery on or about
, 1997, at the office of Smith Barney Inc., 333 West 34th Street, New
York, New York 10001.
------------------
SMITH BARNEY INC.
MCDONALD & COMPANY
SECURITIES, INC.
RAYMOND JAMES & ASSOCIATES, INC.
, 1997
<PAGE> 3
The Company's seamless and welded
tubular products include production
tubing, casing and line pipe in both
carbon and alloy grades of steel.
The Company's tubular products are used primarily in oil and natural gas
drilling and production operations and in the transmission of oil, natural gas
and other fluids.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVER-ALLOTMENT, ENTERING STABILIZING BIDS, EFFECTING SYNDICATE
COVERING TRANSACTIONS, AND IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements
included and incorporated by reference in this Prospectus. Unless otherwise
indicated or the context otherwise requires, all information in this Prospectus
assumes that the over-allotment option granted to the Underwriters by certain
Selling Shareholders and the Company is not exercised.
Unless the context otherwise requires, all references to the "Company"
refer to NS Group, Inc. and its subsidiaries. All references to a fiscal year
are to the fiscal year of the Company which ends on the last Saturday of
September (for example, references to "fiscal 1996" mean the fiscal year ended
September 28, 1996). All references to market share and industry data in this
Prospectus are based on independent industry and government publications and,
unless otherwise indicated, references to years denote calendar rather than
fiscal years.
THE COMPANY
The Company is a leading producer of specialty steel products serving the
energy industry. These products are produced at its two mini-mills, Newport
Steel Corporation ("Newport") and Koppel Steel Corporation ("Koppel"), and
include seamless and welded tubular goods which are primarily used in oil and
natural gas drilling and production operations (oil country tubular goods or
"OCTG") and line pipe which is used in the transmission of oil, natural gas and
other fluids. In addition, the Company manufactures special bar quality ("SBQ")
products which are primarily used in the manufacture of heavy industrial
products. Sales of specialty steel products represented 90.2% of the Company's
fiscal 1996 sales. The Company also manufactures various industrial adhesive
products, which represented 9.8% of fiscal 1996 sales. See "Business."
The demand for domestic OCTG products is primarily dependent on the number
of rigs actively drilling for oil and natural gas in the U.S. The monthly
average domestic active rig count was 893 for the first six months of 1997, up
22% from the average rig count for the first six months of 1996. The number of
tons of OCTG products shipped by domestic producers (excluding exports) has
increased over the last ten years from 588,000 tons in 1986 to 1,785,000 tons in
1996. Over the same time frame, drilling activity for natural gas has increased
due in part to an increase in the average daily consumption of natural gas from
44 billion cubic feet ("bcf") per day to 60 bcf per day. See "Industry
Overview." These recent improvements in the energy sector of the economy have
resulted in increased demand for the Company's energy-related tubular products,
particularly OCTG products. In the first nine months of fiscal 1997,
approximately 66% of the Company's shipments were to the energy industry versus
approximately 60% for all of fiscal 1996. The Company's net sales, operating
income and fully diluted net income (loss) per share for the nine months ended
June 28, 1997 were $349.1 million, $27.4 million and $.47 per share,
respectively, compared to $297.8 million, $7.6 million and $(.48) per share,
respectively, for the comparable prior year period.
The Company's strategy is to increase its net sales and profitability by
strengthening its position in selected energy-related markets as a high quality
producer of specialty steel products. In addition to emphasizing a high level of
ongoing customer service and support, key elements of the Company's strategy
include capitalizing on the improved OCTG markets, lowering manufacturing costs
per ton, expanding tubular product finishing capabilities and increasing
financial flexibility. See "Business -- Business Strategy."
The address of the Company's principal place of business is Ninth & Lowell
Streets, Newport, Kentucky 41072, and its telephone number is (606) 292-6809.
3
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RISK FACTORS
See "Risk Factors" for a discussion of certain factors that should be
considered by prospective purchasers of the Common Stock.
THE OFFERING
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Common Stock offered by:
The Company............................... 6,000,000 shares
The Selling Shareholders.................. 1,500,000 shares
-----------------
7,500,000 shares
=================
Common Stock to be outstanding after the
Offering.................................. 22,970,968 shares(1)
Use of proceeds............................. The net proceeds to the Company from the
Offering will be used to repay debt and for
general corporate purposes, primarily
consisting of capital expenditures. See "Use
of Proceeds."
NYSE Symbol................................. NSS
</TABLE>
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(1) Based on shares outstanding as of August 15, 1997 and assumes conversion of
the Convertible Debentures (as defined) into 1,664,705 shares of Common
Stock, the exercise of certain GECC Warrants (as defined) into 500,000
shares of Common Stock and the issuance of shares of Common Stock in the
Offering, but does not include 272,481 shares which are reserved for
issuance upon exercise of the outstanding GECC Warrants not being exercised
in connection with this Offering, 1,013,380 shares which are reserved for
issuance upon exercise of the outstanding Registered Warrants (as defined)
and 1,151,192 shares which are reserved for issuance upon exercise of
outstanding stock options. See "Shares Eligible for Future Sale."
4
<PAGE> 6
SUMMARY CONSOLIDATED FINANCIAL DATA
The summary consolidated financial data should be read in conjunction with
"Selected Consolidated Financial Data," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Consolidated Financial
Statements and related Notes thereto included elsewhere herein.
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NINE MONTHS ENDED
--------------------------- FISCAL YEAR ENDED SEPTEMBER
JUNE 28, JUNE 29, ----------------------------------
1997 1996 1996 1995 1994
-------- -------------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND PER TON DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales.......................................... $349,130 $297,787 $409,382 $371,352 $303,380
Cost of products sold.............................. 301,696 269,636 369,585 337,270 278,161
Selling and administrative expenses................ 20,034 20,534 27,744 26,276 24,530
Operating income................................... 27,400 7,617 12,053 7,806 689
Net interest expense............................... 17,604 17,769 23,738 19,455 18,297
Gain on sale of subsidiary......................... -- -- -- -- 35,292(1)
Provision (credit) for income taxes................ 2,740 (3,269) (584) (3,540) 7,382
Extraordinary item................................. -- -- -- (5,200) --
Cumulative effect of a change in accounting
principle........................................ -- -- -- -- 1,715
Net income (loss).................................. 7,348 (6,583) (10,457) (10,256) 13,208
Income (loss) per share before extraordinary item
and change in accounting principle............... $ 0.53 $ (0.48) $ (0.76) $ (0.36) $ 0.84
Net income (loss) per share
Primary.......................................... $ 0.53 $ (0.48) $ (0.76) $ (0.74) $ 0.96
Fully diluted.................................... 0.47 (0.48) (0.76) (0.74) 0.96
OTHER FINANCIAL AND STATISTICAL DATA:
EBITDA(2).......................................... $ 41,595 $ 22,727 $ 32,594 $ 31,141 $ 21,566(3)
Capital expenditures............................... 3,187 5,787 6,510 12,233 10,394
Tons shipped:
Welded tubular products.......................... 305,800 254,400 348,900 322,900 277,600
Seamless tubular products........................ 121,200 116,100 157,400 116,600 92,300
SBQ products..................................... 115,700 96,500 133,700 169,000 147,900
Hot rolled coils and other products.............. 21,400 31,700 43,300 47,600 43,200
-------- -------- -------- -------- --------
Total tons shipped............................... 564,100 498,700 683,300 656,100 561,000
======== ======== ======== ======== ========
Average selling price per ton:
Welded tubular products.......................... $ 497 $ 445 $ 451 $ 450 $ 422
Seamless tubular products........................ 878 841 848 780 787
SBQ products..................................... 442 471 467 491 439
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JUNE 28, 1997
---------------------------
ACTUAL AS ADJUSTED(4)
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<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.................................... $ 98,631 $223,459
Total assets....................................... 322,520 443,911
Total debt......................................... 167,014 79,249
Common shareholders' equity........................ 65,458 276,969(5)
</TABLE>
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(1) Represents the gain on the sale of Kentucky Electric Steel Corporation
("KES"). See Note 2 to the Consolidated Financial Statements.
(2) EBITDA represents earnings before interest expense, taxes, depreciation and
amortization, and is calculated as net income before extraordinary items and
the cumulative effect of a change in accounting principle plus interest
expense, taxes, depreciation and amortization. EBITDA does not represent and
should not be considered as an alternative to net income or 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. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" for a discussion of liquidity and
operating results.
(3) Excludes the gain on the sale of KES.
(4) Presented on an as adjusted basis assuming a public offering price of
$33.3125 per share, the conversion of all of the $28.3 million aggregate
principal amount of Convertible Debentures into 1,664,705 shares of Common
Stock and the exercise of a portion of the GECC Warrants into 500,000 shares
of Common Stock and giving effect to the Offering and the application of the
estimated net proceeds therefrom as described in "Use of Proceeds."
(5) Includes the after-tax effect of an extraordinary charge of $9.4 million for
prepayment premiums on certain debt to be repaid with a portion of the net
proceeds of the Offering and the related write-off of unamortized debt
issuance costs. Such charge will be incurred in the fiscal quarter in which
the Offering closes and the concurrent redemption notice is given.
5
<PAGE> 7
RISK FACTORS
In addition to the other information set forth in this Prospectus,
prospective investors should carefully consider the following risk factors in
evaluating the Company and its business before purchasing shares of Common
Stock. The matters discussed or incorporated by reference in this Prospectus
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
Company's ability to meet operating cash requirements, including capital
expenditures. 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.
DEPENDENCE ON OIL COUNTRY TUBULAR GOODS MARKET
OCTG products represent the Company's principal product lines and largest
source of net sales, representing 58.1% and 45.7% of the Company's net sales for
the nine months ended June 28, 1997 and for fiscal 1996, respectively. The
domestic market for OCTG is primarily dependent upon domestic oil and natural
gas drilling activity, which is largely dependent on the number of rigs actively
drilling for oil and natural gas in the U.S. 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. Over the last decade, the average annual
rig count has varied significantly from a high of 1,009 in 1990 to a low of 721
in 1992. The average monthly rig count was 893 for the first six months of 1997.
Any increases in rig count may benefit only welded or only seamless product
sales depending on the type of wells being drilled. The Company's OCTG sales and
margins are also significantly influenced by OCTG imports, inventory levels of
welded and seamless products, competitive conditions, steel scrap prices and
other factors beyond the Company's control. The Company's OCTG sales and margins
may be subject to significant variations from year to year. No assurance can be
given as to the level of future demand for the Company's products.
Industry-wide inventory levels of OCTG can vary significantly from period
to period and have a direct effect on the demand for new production of such
products. As a result, the Company's OCTG sales and results of operations may
vary significantly from period to period. Inventory levels have been rising in
recent periods. There can be no assurance that OCTG inventories will not become
excessive or that substantial draw downs of such inventories will not occur,
which could have a material adverse effect on price levels and the quantity of
OCTG products sold by the Company. See "Industry Overview."
CYCLICAL INDUSTRY AND SENSITIVITY TO ECONOMIC CONDITIONS
The demand for the Company's OCTG products is cyclical in nature, being
dependent on oil and natural gas drilling activity, industry-wide inventory
levels and general economic conditions, as noted above. The demand for the
Company's SBQ and hot rolled coil products is also 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, off-road vehicles and
heavy machinery components and industrial investment in new plants and
facilities. Future economic downturns may adversely affect the Company. See
"Business -- Products."
CAPITAL INTENSIVE INDUSTRY
The Company operates in an industry which requires substantial capital
investment, and additional capital expenditures are required by the Company to
continue to upgrade its facilities. The Company believes that foreign and
domestic producers will continue to invest heavily to achieve increased
production efficiencies and improve product quality. During the past few years,
the Company has deferred certain discretionary capital expenditures due to
financial constraints. There can be no assurance that the Company will have
sufficient internally generated cash or available acceptable external financing
to make the necessary capital expenditures for an extended period of time.
6
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COMPETITION
The Company competes with foreign and domestic producers, including both
integrated and mini-mill producers, many of which have substantially greater
assets and larger sales organizations than the Company. The domestic mini-mill
steel industry, particularly with respect to OCTG products, is characterized by
vigorous competition with respect to price, quality and service, as well as
competition to achieve technological advancements that would allow a mini-mill
to lower its production costs.
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. Since these tubular manufacturers acquire
their principal raw material from other producers, they avoid the substantial
investment required to build and operate a melt shop and hot strip mill. 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 cost than the Company's cost to manufacture hot rolled coils. Additional
announced hot rolled manufacturing capacity is anticipated and may cause a
reduction in the market prices for hot rolled coils. Moreover, by steel industry
standards, the barriers to entry into the welded tubular market with respect to
capital investment are low.
The domestic steel industry historically has faced significant competition
from foreign steel producers. Many foreign steel producers are owned, controlled
or subsidized by their governments and their decisions with respect to
production and sales may be influenced more by political and economic policy
considerations than by prevailing market conditions. The U.S. government is
currently imposing 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 (the "Trade Cases"). Several foreign OCTG
producers, as well as certain U.S. producers, have appealed the determinations
to U.S. and international courts or panels. The duties are subject to annual and
five-year reviews by the U.S. Department of Commerce. Over the last decade, OCTG
market penetration by imports in the United States reached a high of 45% in
1988. For the first six months of 1997, import levels had dropped to 15% of
total shipments, which the Company believes is due to increased worldwide OCTG
demand and the impact of the duties on imports imposed by the U.S. in response
to the Trade Cases. The Company cannot predict the U.S. government's future
actions regarding import duties or other trade restrictions on imports of OCTG
products or the impact of such actions on its sales of OCTG products. See
"Industry Overview" and "Business -- Competition."
VOLATILITY IN RAW MATERIAL COSTS
The market for steel scrap, the principal raw material used in the
Company's operations, is highly competitive and subject to price volatility
influenced by supply and demand factors, freight costs, speculation by scrap
brokers and other market conditions largely beyond the Company's control.
Although the domestic mini-mill industry attempts to maintain its profit margin
by attempting to increase the price of its finished products in response to
increases in scrap costs, increases in the prices of finished products often do
not fully compensate for such scrap price increases and generally lag several
months behind increases in steel scrap prices, thereby restricting the ability
of mini-mill producers to recover higher raw material costs. During periods of
declining steel prices, declines in scrap prices may not be as significant as
declines in product prices and, likewise, a decline in scrap prices may cause a
decline in selling prices for the Company's products. Operation of new
mini-mills in the same geographic region as the Company will increase the demand
for steel scrap and may result in an increase in steel scrap costs to the
Company.
VARIABILITY OF FINANCIAL RESULTS
Excluding the gain on the sale of Kentucky Electric Steel, Inc. ("KES") in
fiscal 1994, the Company recorded a net loss in each of its last five fiscal
years. See "Selected Consolidated Financial Data" and "Management's Discussion
and Analysis of Results of Operations and Financial Condition." From fiscal 1992
through fiscal 1996, the Company's results of operation were adversely affected
by a number of factors, including, without limitation, a decline in domestic
drilling activity; the decline in the demand for and the selling prices of the
Company's products, particularly its tubular products; the start-up of Koppel in
the face of declining markets; and increases in the cost of steel scrap, the
Company's principal raw material. There is no assurance that similar events and
circumstances or other events or circumstances, such as an economic
7
<PAGE> 9
downturn adversely affecting the steel industry generally or the Company in
particular, will not occur in the future, and any of these events or
circumstances could have a material adverse effect on the Company.
OWNERSHIP CONTROL OF MANAGEMENT
Three of the Company's six directors are executive officers of the Company.
Executive officers and directors of the Company, as a group, after giving effect
to the Offering, will beneficially own 22.3% of the Common Stock. As a result,
they will continue to have sufficient voting power to influence the election of
the Company's Board of Directors and the policies of the Company. See "Principal
and Selling Shareholders."
COST OF COMPLIANCE WITH ENVIRONMENTAL REGULATIONS
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.
Among the more significant environmental matters involving the Company are:
(1) a Notice of Violation issued by the EPA to Koppel in November 1996; (2) a
Consent Order signed by Koppel and the EPA in March 1995 relating to an April
1990 RCRA facility assessment; (3) potential remediation pertaining to Newport's
closed loop water recirculation system; and (4) storage, treatment and disposal
of contaminated electric arc furnace dust resulting from two separate accidental
meltings of radioactive substances at Newport occurring in fiscal 1992 and
fiscal 1993. For a more complete description of each of these matters and the
current status thereof, as well as a description of certain other environmental
matters involving the Company, see "Business -- Environmental Matters."
Based upon its evaluation of available information, management does not
believe that any of the environmental contingency matters affecting the Company
are likely, individually or in the aggregate, to have a material adverse effect
upon the Company's consolidated financial position, results of operations or
cash flows. However, the Company cannot predict with certainty that new
information or developments with respect to its environmental contingency
matters, individually or in the aggregate, will not have a material adverse
effect on the Company's consolidated financial position or results of operations
or cash flows, nor can the Company predict the level of required capital
expenditures or operating costs that may result from future environmental
regulations.
RESTRICTIVE COVENANTS
Although the net proceeds of the Offering will be used in part to repay
certain indebtedness, the Company will continue to be subject to certain
restrictive covenants under its debt instruments. The Company's $45.0 million
revolving credit facility (the "Credit Facility") prescribes minimum levels of
net worth and working capital and requires the maintenance of a prescribed
interest coverage ratio, current ratio and ratio of total liabilities to net
worth. The Credit Facility and the indenture under which the Company's 13 1/2%
Senior Secured Notes due 2003 (the "Senior Secured Notes") were issued contain
certain restrictive covenants that, among other things, could limit the ability
of the Company to incur additional indebtedness, pay dividends or distributions,
make investments, create liens, engage in transactions with affiliates, engage
in sale and leaseback transactions, dispose of assets, issue or sell stock of
its subsidiaries and engage in mergers, consolidations and transfers of
substantially all of the Company's assets. The effect of these restrictions may
place the Company at a competitive disadvantage in relation to its competitors.
PRODUCT LIABILITY
Certain losses may result or be alleged to result from defects in the
Company's specialty steel products and adhesives products, thereby subjecting
the Company to claims for consequential damages. Drilling for oil and natural
gas, in particular, involves a variety of risks. The Company warrants certain of
its OCTG, line pipe and SBQ products to be free of certain defects. There can be
no assurance that product liability in excess of
8
<PAGE> 10
insurance coverage will not be incurred or that the Company will be able to
maintain insurance with adequate coverage levels.
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of substantial amounts of Common Stock in the public market
could adversely affect prevailing market prices. Giving effect to the Offering,
including the sale of 500,000 shares which will be issued upon the exercise of
certain of the warrants issued in connection with the financing of the Koppel
acquisition (exercisable at a price of $8 per share) (the "GECC Warrants") and
the conversion of the Company's 11% Subordinated Convertible Debentures
(convertible at a price of $17 per share) (the "Convertible Debentures") into
1,664,705 shares, the Company would have had 22,970,968 shares of issued and
outstanding Common Stock at August 15, 1997. Also giving effect to the Offering,
the Company would have had 1,151,192 shares of Common Stock reserved for
issuance upon the exercise of outstanding stock options, 272,481 shares of
Common Stock reserved for issuance upon exercise of the GECC Warrants not being
exercised in connection with the Offering and 1,013,380 shares of Common Stock
reserved for issuance upon the exercise of warrants issued in connection with
the Senior Secured Notes (exercisable at a price of $4 per share) (the
"Registered Warrants"). The holders of the 664,705 shares to be issued upon
conversion of the Convertible Debentures which are not being sold in this
Offering (absent exercise of the over-allotment option relating to 434,705 of
such shares) and the holders of the GECC Warrants have certain registration
rights and a registration statement is effective with respect to the shares
underlying the Registered Warrants. The Company has agreed not to issue any
securities or file a registration statement under the Securities Act of 1933, as
amended (the "Securities Act") subject to certain exceptions, for a period of
120 days following the date of the Prospectus relating to the Offering without
the prior written consent of Smith Barney Inc. Certain Selling Shareholders and
the Company have granted the Underwriters an over-allotment option to purchase
up to 1,125,000 shares of Common Stock, 540,295 of which would be sold by the
Company. All directors and officers of the Company, as a group, after giving
effect to the Offering, would beneficially own approximately 22.3% of the Common
Stock, and their shares may be "restricted securities" as that term is defined
by Rule 144 promulgated under the Securities Act and may not be sold other than
pursuant to an effective registration statement under the Securities Act or
pursuant to an exemption from such registration requirement. See "Shares
Eligible for Future Sale."
CERTAIN ANTI-TAKEOVER PROVISIONS
The Company's authorized stock includes 2,000,000 shares of Class A
Preferred Stock, par value $10 per share (the "Preferred Stock"), issuable in
one or more series. The rights, preferences, privileges and restrictions of any
series of Preferred Stock, the number of shares constituting any such series and
the designation thereof, are subject to determination by the Board of Directors.
The rights of the holders of the Common Stock will be subject to, and may be
adversely affected by, the rights of the holders of any Preferred Stock that may
be issued in the future.
400,000 shares of Preferred Stock has been designated as Series A Junior
Participating Preferred Stock, par value $10 per share ("Series A Junior
Participating Preferred Stock"), in connection with the Preferred Stock Purchase
Rights Plan adopted by the Company in fiscal 1989 (the "Rights Plan").
The existence of the authorized and unissued Preferred Stock and the Rights
Plan have certain anti-takeover effects. See "Description of Capital Stock."
POSSIBLE VOLATILITY OF STOCK PRICE
There has been and may be volatility in the market price of the Common
Stock. Quarterly operating results of the Company, deviations in results of
operations from estimates of securities analysts, changes in general conditions
in the economy or the energy or steel industries or other developments affecting
the Company or its competitors could cause the market price of the Common Stock
to fluctuate substantially. The equity markets have, on occasion, experienced
significant price and volume fluctuations that have affected the market prices
for many companies' securities and that have been unrelated to the operating
performance of such companies. Any such fluctuations that occur following
completion of the Offering may adversely affect the market price of the Common
Stock.
9
<PAGE> 11
USE OF PROCEEDS
The net proceeds to the Company from the Offering are estimated to be
approximately $188.6 million after deducting underwriting discounts and
commissions and estimated offering expenses, assuming a public offering price of
$33.3125 per share, the last reported sale price on September 12, 1997. The
Company expects to use approximately $59.5 million of the net proceeds of the
Offering to redeem $52.4 million of the outstanding principal amount of the
Company's 13.5% Senior Secured Notes due 2003 at 113.50% of the principal amount
thereof pursuant to the optional redemption provision of the Indenture under
which the Senior Secured Notes were issued. The Company will use a portion of
the net proceeds to retire other corporate debt, including $6.4 million to repay
an 11% urban development area grant loan from the City of Dayton, Kentucky due
in quarterly installments through December 2011 and $3.5 million to prepay 11%
subordinated notes due in equal quarterly installment through October 1999. The
remaining net proceeds will be used for general corporate purposes, primarily
consisting of capital expenditures. The Company will not receive any proceeds
from the sale of the Common Stock by the Selling Shareholders. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
PRICE RANGE OF COMMON STOCK AND DIVIDENDS
The Common Stock is traded on the New York Stock Exchange (the "NYSE")
under the symbol NSS. The following table sets forth the high and low sales
prices of the Common Stock on the NYSE Composite Tape for the periods shown.
<TABLE>
<CAPTION>
MARKET PRICE
------------
HIGH LOW
---- ---
<S> <C> <C>
FISCAL 1995
First Quarter......................................................... $ 6 3/4 $ 4
Second Quarter........................................................ 5 1/4 3 3/4
Third Quarter......................................................... 4 5/8 2 3/8
Fourth Quarter........................................................ 4 1/2 2 7/8
FISCAL 1996
First Quarter......................................................... $ 3 $ 1 7/8
Second Quarter........................................................ 3 1/8 2 1/8
Third Quarter......................................................... 3 1/8 2 1/2
Fourth Quarter........................................................ 3 3/4 2 1/2
FISCAL 1997
First Quarter......................................................... $ 4 3/8 $ 3
Second Quarter........................................................ 5 5/8 4 1/8
Third Quarter......................................................... 11 7/8 4 3/4
Fourth Quarter (through September 12, 1997)........................... 34 1/2 11 1/2
</TABLE>
On September 12, 1997, the last reported sale price of the Common Stock on
the NYSE was $33.3125 per share. As of June 28, 1997 the number of shareholders
of record of the Common Stock was 316.
The Company has not paid a dividend on its Common Stock since the second
quarter of fiscal 1992. The payment of dividends in the future is subject to the
discretion of the Board of Directors and will depend upon general business
conditions, legal and contractual restrictions on the payment of dividends and
other factors the Board of Directors of the Company may deem to be relevant. As
a holding company, the Company depends on dividends and other permitted payments
from its subsidiaries to pay cash dividends to its shareholders. The payment of
cash dividends is subject to restrictions contained in the Company's debt
instruments.
10
<PAGE> 12
CAPITALIZATION
The following table sets forth the cash, cash equivalents and short-term
investments, short-term debt and capitalization of the Company as of June 28,
1997, and as adjusted assuming the conversion of all of the $28.3 million
aggregate principal amount of the Convertible Debentures into 1,664,705 shares
of Common Stock and the exercise of a portion of the GECC Warrants into 500,000
shares of Common Stock and giving effect to the Offering and the application of
the estimated net proceeds therefrom as described in "Use of Proceeds." This
information should be read in conjunction with "Selected Consolidated Financial
Data," "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and the Consolidated Financial Statements and related Notes
thereto included elsewhere herein.
<TABLE>
<CAPTION>
AS OF JUNE 28, 1997
-----------------------
ACTUAL AS ADJUSTED
-------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash, cash equivalents and short-term investments..................... $ 21,183 $ 144,372
========= ========
Short-term debt:
Current portion of long-term debt................................... $ 3,239 $ 1,600
Revolving credit facility........................................... 0 0
Other notes payable................................................. 1,086 1,086
--------- --------
Total short-term debt............................................ $ 4,325 $ 2,686
========= ========
Long-term debt, less current portion:
Senior Secured Notes................................................ $131,096 $ 78,658
Unamortized discount on Senior Secured Notes..................... (7,245) (4,347)
--------- --------
Senior Secured Notes -- net of discount.......................... 123,851 74,311
Convertible Debentures.............................................. 28,300 0
Other long-term debt................................................ 10,538 2,252
--------- --------
Total long-term debt............................................. 162,689 76,563
--------- --------
Common shareholders' equity:
Common Stock, no par value -- 40,000,000 shares authorized and
14,078,454 (23,243,159 as adjusted) shares issued and outstanding
(1).............................................................. 50,425 271,422
Common Stock options and warrants................................... 2,622 2,557
Unrealized gain (loss) on available for sale securities............. (1,562) (1,562)
Retained earnings................................................... 13,973 4,552(2)
--------- --------
Total common shareholders' equity................................ 65,458 276,969
--------- --------
Total capitalization.................................................. $228,147 $ 353,531
========= ========
</TABLE>
- ---------------
(1) "Actual" does not include 772,481 shares which are reserved for issuance
upon exercise of outstanding GECC Warrants, 1,422,671 shares which are
reserved for issuance upon exercise of outstanding Registered Warrants,
1,469,710 shares which are reserved for outstanding stock options and
1,664,705 shares which are reserved for conversion of the Convertible
Debentures. "As Adjusted" assumes conversion of all of the Convertible
Debentures into 1,664,705 shares of Common Stock, the exercise of a portion
of the GECC Warrants into 500,000 shares of Common Stock and the issuance of
the shares of Common Stock in the Offering. "As Adjusted" does not include
272,481 shares which are reserved for issuance upon exercise of the GECC
Warrants not exercised in connection with the Offering, 1,422,671 shares
which are reserved for issuance upon exercise of outstanding Registered
Warrants and 1,469,710 shares which are reserved for issuance upon exercise
of outstanding stock options. See "Description of Capital Stock."
(2) Includes the after-tax effect of an extraordinary charge of $9.4 million for
prepayment costs to redeem a portion of the Senior Secured Notes and the
related write-off of unamortized debt issuance costs. The reduction will be
reflected in the fiscal quarter in which the Offering closes and the
concurrent redemption notice is given.
11
<PAGE> 13
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected consolidated financial data for the
Company. The selected consolidated financial data (other than the data under the
captions "Tons shipped" and "Average selling price per ton") for the five years
in the period ended September 28, 1996 are derived from, and should be read in
conjunction with, the audited consolidated financial statements of the Company.
The selected consolidated financial data shown below is unaudited for the fiscal
1997 and 1996 nine month periods. In the opinion of management, all adjustments
considered necessary for a fair presentation have been included in the unaudited
consolidated financial statements of the Company. Interim results for the nine
months ended June 28, 1997 are not necessarily indicative of results that can be
expected for the fiscal year ending September 27, 1997. 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 elsewhere herein.
The following data includes KES for fiscal 1992 and 1993 and the impact of
its sale in fiscal 1994. See Note 2 to the Consolidated Financial Statements.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
------------------- FISCAL YEAR ENDED SEPTEMBER
JUNE 28, JUNE 29, --------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
-------- -------- -------- -------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND PER TON DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................. $349,130 $297,787 $409,382 $371,352 $ 303,380 $ 353,082 $ 281,242
Cost of products sold..................... 301,696 269,636 369,585 337,270 278,161 310,586 250,189
Selling and administrative expenses....... 20,034 20,534 27,744 26,276 24,530 30,824 29,652
-------- -------- -------- -------- -------- -------- --------
Operating income.......................... 27,400 7,617 12,053 7,806 689 11,672 1,401
Net interest expense...................... 17,604 17,769 23,738 19,455 18,297 20,819 21,075
Other income (expense), net............... 292 300 644 3,053 1,191 (131) 258
Gain on sale of subsidiary(1)............. -- -- -- -- 35,292 -- --
Provision (credit) for income taxes....... 2,740 (3,269) (584) (3,540) 7,382 (3,382) (6,058)
Extraordinary items....................... -- -- -- (5,200) -- (1,095) (2,542)
Cumulative effect of a change in
accounting principle.................... -- -- -- -- 1,715 -- --
-------- -------- -------- -------- -------- -------- --------
Net income (loss)......................... $ 7,348 $ (6,583) $(10,457) $(10,256) $ 13,208 $ (6,991) $ (15,900)
======== ======== ======== ======== ======== ======== ========
Income (loss) per share before
extraordinary items and change in
accounting principle.................... $ 0.53 $ (0.48) $ (0.76) $ (0.36) $ 0.84 $ (0.44) $ (0.99)
Net income (loss) per share
Primary................................. $ 0.53 $ (0.48) $ (0.76) $ (0.74) $ 0.96 $ (0.52) $ (1.18)
Fully diluted........................... 0.47 (0.48) (0.76) (0.74) 0.96 (0.52) (1.18)
Cash dividends declared per share......... -- -- -- -- -- -- $ 0.06
</TABLE>
12
<PAGE> 14
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-------------------- FISCAL YEAR ENDED SEPTEMBER
JUNE 28, JUNE 29, ---------------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
-------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND PER TON DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER FINANCIAL AND STATISTICAL DATA:
EBITDA(2)............................. $ 41,595 $ 22,727 $ 32,594 $ 31,141 $ 21,566(3) $ 30,355 $ 20,515
Capital expenditures.................. 3,187 5,787 6,510 12,233 10,394 5,488 4,148
Tons shipped:
Welded tubular products............. 305,800 254,400 348,900 322,900 277,600 308,000 246,500
Seamless tubular products........... 121,200 116,100 157,400 116,600 92,300 76,900 45,400
SBQ products........................ 115,700 96,500 133,700 169,000 147,900 346,900 289,900
Hot rolled coils and other
products.......................... 21,400 31,700 43,300 47,600 43,200 16,400 9,400
-------- -------- -------- -------- -------- -------- --------
Total tons shipped.................. 564,100 498,700 683,300 656,100 561,000 748,200 591,200
======== ======== ======== ======== ======== ======== ========
Average selling price per ton:
Welded tubular products............. $ 497 $ 445 $ 451 $ 450 $ 422 $ 406 $ 420
Seamless tubular products........... 878 841 848 780 787 813 833
SBQ products........................ 442 471 467 491 439 396 399
BALANCE SHEET DATA (AT PERIOD END):
Working capital....................... $ 98,631 $ 77,632 $ 80,905 $ 72,854 $ 50,682 $ 43,174 $ 44,198
Total assets.......................... 322,520 308,077 300,034 298,497 315,327 317,242 319,079
Total debt............................ 167,014 169,951 168,136 168,909 182,525 192,155 193,753
Common shareholders' equity........... 65,458 61,321 57,116 68,110 76,464 62,622 68,574
</TABLE>
- ---------------
(1) Represents the gain on the sale of KES. See Note 2 to the Consolidated
Financial Statements.
(2) EBITDA represents earnings before interest expense, taxes, depreciation and
amortization, and is calculated as net income before extraordinary items and
the cumulative effect of a change in accounting principle plus interest
expense, taxes, depreciation and amortization. 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. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" for a discussion of liquidity and operating
results.
(3) Excludes the gain on the sale of KES.
13
<PAGE> 15
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following condensed analysis of financial condition and results of
operations of the Company should be read in conjunction with the Company's
annual and quarterly reports filed with the Commission, which are incorporated
by reference herein, as well as the Consolidated Financial Statements and
related Notes thereto, and the other financial information and "Risk Factors"
included in this Prospectus.
GENERAL
The Company operates in two 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,
and Koppel, a manufacturer of seamless tubular steel products and SBQ products.
The Company's specialty steel products consist of: (i) seamless and welded OCTG
products 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 Adhesives, Inc. ("Imperial"), a manufacturer of
industrial adhesives products.
In October 1993, the Company sold KES, a manufacturer of SBQ products, to a
newly formed public company in exchange for $45.6 million in cash and 400,000
shares of the newly formed public company.
RECENT RESULTS
Recent increases in demand for the Company's energy related products have
resulted in steady improvements in shipments, sales, and operating profit for
the Company's specialty steel products, particularly its welded tubular steel
products. In the first nine months of fiscal 1997, approximately 66% of the
Company's shipments were to the energy industry versus 60% for all of fiscal
1996. The following table sets forth certain information with respect to the
Company and its Newport and Koppel operations for the first three quarters of
fiscal 1997.
<TABLE>
<CAPTION>
FISCAL 1997
--------------------------------------------------
THIRD QUARTER SECOND QUARTER FIRST QUARTER
------------- -------------- -------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
TONS SHIPPED:
Newport
Welded tubular products................................ 121,800 90,200 93,800
Hot rolled coils and other products.................... 6,100 7,600 7,700
Koppel
Seamless tubular products.............................. 47,200 40,400 33,600
SBQ products........................................... 40,200 39,500 36,000
-------- -------- --------
215,300 177,700 171,100
======== ======== ========
NET SALES:
Newport
Welded tubular products................................ $ 61,725 $ 45,300 $ 44,890
Hot rolled coils and other products.................... 2,327 2,944 3,196
Koppel
Seamless tubular products.............................. 40,208 35,210 30,917
SBQ products........................................... 17,772 17,445 15,977
-------- -------- --------
$ 122,032 $100,899 $ 94,980
======== ======== ========
OPERATING INCOME BEFORE CORPORATE ALLOCATIONS:
Newport.................................................. $ 6,503 $ 5,281 $ 5,021
Koppel................................................... 6,562 4,517 1,640
-------- -------- --------
$ 13,065 $ 9,798 $ 6,661
======== ======== ========
NET INCOME PER COMMON SHARE:
Primary.................................................. $ .34 $ .16 $ .02
Fully diluted............................................ .32 .16 .02
</TABLE>
14
<PAGE> 16
RESULTS OF OPERATIONS
The Company's net sales, gross profit and operating income by business
segment for the nine month periods ended June 28, 1997 and June 29, 1996 and 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 1996 and
fiscal 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>
<CAPTION>
NINE MONTHS ENDED
--------------------- FISCAL YEAR ENDED
JUNE 28, JUNE 29, ----------------------------------
1997 1996 1996 1995 1994
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
NET SALES:
Specialty steel segment
Newport..................................... $160,382 $125,507 $173,615 $162,003 $132,908
Koppel...................................... 157,529 143,119 195,851 173,880 137,533
-------- -------- -------- -------- --------
317,911 268,626 369,466 335,883 270,441
Adhesives segment............................. 31,219 29,161 39,916 35,469 32,939
-------- -------- -------- -------- --------
$349,130 $297,787 $409,382 $371,352 $303,380
======== ======== ======== ======== ========
GROSS PROFIT:
Specialty steel segment
Newport..................................... $ 21,655 $ 2,034 $ 3,966 $ 4,171 $ 2,088
Koppel...................................... 17,931 19,180 26,251 22,266 15,473
-------- -------- -------- -------- --------
39,586 21,214 30,217 26,437 17,561
Adhesives segment............................. 7,848 6,937 9,580 7,645 7,658
-------- -------- -------- -------- --------
$ 47,434 $ 28,151 $ 39,797 $ 34,082 $ 25,219
======== ======== ======== ======== ========
OPERATING INCOME (LOSS):
Specialty steel segment
Newport..................................... $ 16,805 $ (4,354) $ (4,855) $ (5,708) $ (6,133)
Koppel...................................... 12,719 14,354 19,741 16,136 9,042
-------- -------- -------- -------- --------
29,524 10,000 14,886 10,428 2,909
Adhesives segment............................. 1,185 1,080 1,597 1,248 1,150
Corporate allocations......................... (3,309) (3,463) (4,430) (3,870) (3,370)
-------- -------- -------- -------- --------
$ 27,400 $ 7,617 $ 12,053 $ 7,806 $ 689
======== ======== ======== ======== ========
</TABLE>
Shipment and sales data for the Company's specialty steel segment for the
nine months ended June 28, 1997 and June 29, 1996 and for each of the three
fiscal years in the period ended September 28, 1996 were as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
--------------------- FISCAL YEAR ENDED
JUNE 28, JUNE 29, ----------------------------------
1997 1996 1996 1995 1994
-------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
TONS SHIPPED:
Newport
Welded tubular.............................. 305,800 254,400 348,900 322,900 277,600
Hot rolled coils and other products......... 21,400 31,700 43,300 47,600 43,200
Koppel
Seamless tubular............................ 121,200 116,100 157,400 116,600 92,300
SBQ......................................... 115,700 96,500 133,700 169,000 147,900
-------- -------- -------- -------- --------
564,100 498,700 683,300 656,100 561,000
======== ======== ======== ======== ========
NET SALES:
Newport
Welded tubular.............................. $151,915 $113,237 $157,385 $145,330 $117,214
Hot rolled coils and other products......... 8,467 12,270 16,230 16,673 15,694
Koppel
Seamless tubular............................ 106,335 97,682 133,446 90,926 72,675
SBQ......................................... 51,194 45,437 62,405 82,954 64,858
-------- -------- -------- -------- --------
$317,911 $268,626 $369,466 $335,883 $270,441
======== ======== ======== ======== ========
</TABLE>
15
<PAGE> 17
NINE MONTHS FISCAL 1997 COMPARED WITH NINE MONTHS FISCAL 1996
Net sales for the nine months ended June 28, 1997 increased $51.3 million,
or 17.2%, from the comparable prior year period, to $349.1 million. Specialty
steel segment net sales increased $49.3 million, or 18.3% and adhesives segment
net sales increased $2.1 million, or 7.1%, for the first nine months of fiscal
1997. The overall increase in specialty steel segment net sales was primarily
attributable to increased shipments and average selling prices of the Company's
tubular products as more fully discussed below.
Total welded tubular net sales for the first nine months of fiscal 1997
increased $38.7 million, or 34.2%, on a volume increase of 20.2%, from the
comparable prior year period. The average selling price for all welded tubular
products for the first nine months of fiscal 1997 increased 11.7% compared to
the same period of fiscal 1996. Selling prices have increased on the strength of
the OCTG marketplace, which saw the average rig count increase from 744 to 877,
or 18%, over the comparable prior year period. Shipments of welded tubular
products for the first nine months of fiscal 1997 were negatively affected by
the loss of approximately two weeks of production at one of Newport's welded
pipe mills due to weather related flooding.
Seamless tubular net sales increased $8.7 million, or 8.9%, on a volume
increase of 4.4%, for the first nine months of fiscal 1997. The increase in
total seamless tubular net sales was primarily due to increased shipments of
seamless OCTG products, attributable to increased domestic and international
drilling activity, including off-shore drilling. The increase in total seamless
tubular net sales was moderated by a decrease in sales and shipments of seamless
line pipe. Average selling prices for all seamless tubular products for the
first nine months of fiscal 1997 increased 4.4% over the comparable period in
fiscal 1996, partially due to a change in product mix resulting from an emphasis
on OCTG products.
SBQ product net sales increased $5.8 million, or 12.7%, on a volume
increase of 19.9% from the comparable nine month period. Average selling price
for SBQ products for the same period decreased 6.2%. While shipments of SBQ
products are above comparable prior year levels, market and competitive
conditions resulted in lower pricing. Other product shipments are primarily the
sale of hot rolled coils.
For the nine months ended June 28, 1997, gross profit increased $19.3
million for a gross profit margin of 13.6% compared to 9.5% in the comparable
prior year period. The specialty steel segment gross profit increased $18.4
million for the nine months ended June 28, 1997 and gross profit margin
increased to 12.5% from 7.9% for the comparable prior year period. The increase
in specialty steel segment gross profit and margin was primarily attributable to
Newport's operations, where gross profit margins increased to 13.5% from 1.6% as
a result of higher average selling prices, improved operating efficiencies, cost
reduction initiatives, and increased shipments of welded OCTG product. Koppel's
gross profit margin for the nine months ended June 28, 1997 decreased to 11.4%
from 13.4% primarily due to a decrease in SBQ selling prices and lower operating
efficiencies in its tubular operations resulting from a fiscal 1997 first
quarter scheduled maintenance outage.
The adhesives segment gross profit increased $0.9 million for the first
nine months of fiscal 1997 due primarily to an increase in sales volume and
slightly lower raw material costs. Gross profit margin was 25.1% compared to
23.8% for the comparable period of fiscal 1996.
Selling and administrative expenses for the first nine months of fiscal
1997 were $0.5 million below the comparable prior year period and decreased as a
percent of sales to 5.7% from 6.9% in the first nine months of fiscal 1996.
As a result of the above factors, operating income for the nine months
ended June 28, 1997 increased $19.8 million to $27.4 million in the first nine
months of fiscal 1997 from $7.6 million in the comparable prior year period. The
increase in operating income was almost solely attributable to the specialty
steel segment and was primarily due to improved operations at Newport combined
with increased shipments and average selling prices for welded OCTG products.
Interest expense was virtually unchanged at $18.3 million for the first
nine months of fiscal 1997 and interest income increased $0.2 million as a
result of higher average invested cash and short-term investment balances.
16
<PAGE> 18
The Company's combined federal and state effective tax rate for the fiscal
1997 nine month period was 27%. This rate is lower than the combined federal and
state statutory rates primarily due to the utilization of net operating loss
carryforwards for which certain deferred tax valuation allowances had been
previously recorded. The Company is currently paying federal taxes at the
alternative minimum tax rate of 20%.
As a result of the above factors, the Company reported net income of $7.3
million, or $.53 per primary share ($.47 fully diluted), for the first nine
months of fiscal 1997 compared to a net loss of $6.6 million, or a $.48 loss per
primary and fully diluted share, for the comparable period of fiscal 1996.
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.
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.
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.
The average number of oil and natural gas drilling rigs in operation in the
United States was 759 in fiscal 1996, up from 738 in fiscal 1995.
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 generally increased throughout fiscal 1996; however, average
selling price declined. Other product shipments and sales for fiscal 1996 were
primarily attributable to the sale of hot rolled coils.
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 resulting in 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
fiscal 1995 to 13.4% in fiscal 1996.
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.
17
<PAGE> 19
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. Fiscal year 1996
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 established a valuation allowance for deferred tax assets
generated by its operating losses in fiscal 1996.
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
18
<PAGE> 20
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 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 June 28, 1997 was $98.6 million compared to $80.9
million at September 28, 1996. The current ratio was 2.15 to 1 at June 28, 1997
compared to 2.16 to 1 at September 28, 1996. At June 28, 1997, the Company had
cash and short-term investments totaling $21.2 million, $2.0 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 June 28, 1997, the Company had no outstanding advances against its $45.0
million Credit Facility; however, $16.2 million of various letters of credit
have been issued under the Credit Facility primarily in connection with the
purchase of steel slabs at Newport.
Net cash flows provided by operating activities totaled $5.7 million in the
first nine months of fiscal 1997, compared to $11.6 million in the comparable
prior year period. The Company recorded net income of $7.3 million in the first
nine months of fiscal 1997 compared to a net loss of $6.6 million in the first
nine months of fiscal 1996. Major sources of cash from operating activities in
the first nine months of fiscal 1997 included $14.5 million in non-cash
depreciation and amortization charges; a $7.9 million increase in accounts
payable primarily related to the purchase of steel coils at Newport and
increased business activity; and a $7.5 million increase in accrued liabilities
primarily resulting from accrued interest expense on the Company's senior
secured notes, which had a scheduled $8.9 million interest payment in July 1997.
The major uses of cash in operating activities for the period were increases in
accounts receivable and inventories of $10.9 million and $19.4 million,
respectively, resulting from increased business activity related primarily to
the OCTG marketplace.
The Company invested $3.2 million in capital expenditures during the first
nine months of fiscal 1997, primarily related to improvements to and acquisition
of machinery and equipment in the specialty steel segment. The Company currently
estimates that fiscal 1997 capital spending will approximate $6.0 million,
primarily in the specialty steel segment, and capital spending for fiscal 1998
is expected to substantially exceed fiscal 1997 estimated spending. As discussed
in "Use of Proceeds," a portion of the net proceeds of the Offering will be used
to fund capital expenditures. Additional sources for funding future capital
expenditures
19
<PAGE> 21
include cash flow from operations, available cash and short-term investments, as
well as available borrowing sources.
Net cash flows from financing activities in the first nine months of fiscal
1997 included repayments of long-term debt of $1.8 million, compared to similar
payments of $1.5 million in the first nine months of fiscal 1996. The fiscal
1997 periods also include proceeds of $1.2 million from the issuance of Common
Stock resulting from the exercise of Company stock options and warrants. The
Company's annual long-term debt maturities are $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. As discussed in "Use of Proceeds," a portion of the net proceeds of the
Offering will be used to prepay certain of the Company's long-term debt, which
will significantly reduce the Company's debt service requirements. On a pro
forma basis, after giving effect to the Offering and application of the proceeds
therefrom and the conversion of the Convertible Debentures, the Company's
interest expense for the nine months ended June 28, 1997 and for fiscal 1996
would have declined by $8.9 million and $12.2 million, respectively.
Certain of the Company's loan agreements contain covenants restricting the
payment of dividends to its shareholders. Under the most restrictive of these
covenants, retained earnings available for dividends are computed under a
formula which is based in part on the earnings and losses of the Company after
fiscal 1995. Reference is made to Note 5 to the Consolidated Financial
Statements for further information concerning the Company's long-term debt and
Credit Facility.
EBITDA was $41.6 million in the first nine months of fiscal 1997, compared
to $22.7 million in the comparable period of fiscal 1996, and $32.6 million for
fiscal 1996. EBITDA is calculated as net income (loss) plus interest expense,
taxes, depreciation and amortization. EBITDA does not represent and should not
be considered as an alternative to net income, any other measure of performance
as determined by generally accepted accounting principles, as an indicator of
operating performance, as an alternative to cash flows from operating, investing
or financing activities or as a measure of liquidity.
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.
RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement No. 128 ("Statement 128") which establishes standards for computing
and presenting earnings per share ("EPS"). Statement 128 replaces primary EPS
and fully diluted EPS with a dual presentation of basic EPS and diluted EPS,
respectively. Basic EPS is computed by dividing income available to common
shareholders by the weighted-average number of common shares outstanding for a
period. Diluted EPS reflects the potential dilution which would result from any
instrument which could result in additional common shares being issued.
The Company must adopt Statement 128 for fiscal 1998. For the fiscal 1997
nine month period, EPS as reported and as calculated under Statement 128 are as
follows:
<TABLE>
<CAPTION>
AS REPORTED STATEMENT 128
----------- -------------
<S> <C> <C>
Primary/Basic EPS............................... $ .53 $ .53
Fully Diluted/Diluted EPS....................... $ .47 $ .52
</TABLE>
20
<PAGE> 22
For the comparable nine month and full year periods in fiscal 1996, the reported
EPS amounts would not change.
In June 1997, the FASB issued Statement No. 130 ("Statement 130") which
establishes standards for reporting comprehensive income in financial
statements. Comprehensive income is the total of net income and all other
nonowner changes in equity, which for the Company currently consists solely of
unrealized holding gains/losses on available for sale securities. The Company
must adopt Statement 130 for fiscal 1999, at which time the Company will provide
additional financial statement disclosures of comprehensive income for the
periods then presented.
21
<PAGE> 23
INDUSTRY OVERVIEW
Unless otherwise noted, all industry statistics in "-- Oil Country Tubular
Goods" are from Department of Energy publications, in "-- Line Pipe" are from
Preston Pipe & Tube Report and in "-- SBQ Products" are from the American Iron
and Steel Institute.
OIL COUNTRY TUBULAR GOODS
Demand for 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. In addition to demand due to drilling activity, shipments
by domestic producers of OCTG products are influenced by the levels of inventory
held by producers, distributors and end users and the level of foreign imports
of OCTG products. See "Risk Factors -- Dependence on Oil Country Tubular Goods,"
"-- Cyclical Industry and Sensitivity to Economic Conditions" and
"-- Competition."
The level of drilling activity is largely a function of current prices for
oil and natural gas and the industry's future price expectations. These prices
are, in turn, determined by various supply and demand factors, such as
consumption levels, current inventory levels, import levels, production capacity
in existing wells, production economics and future expectations.
Since 1994, there has been more drilling for natural gas reflecting
increased consumption of natural gas. U.S. average daily consumption of natural
gas has increased from 44 bcf/day in 1986 to 60 bcf/day in 1996. These increases
are due to regulatory demands for a cleaner environment, natural gas
conversions, new residential construction in which more new homes use natural
gas, new uses for natural gas (such as space cooling and gas heat pumps) and
advances in gas-fired generation technology. U.S. average daily consumption of
natural gas is forecast to increase to 83 bcf/day in the year 2015. There can be
no assurance that such forecasted increases will occur. In prior years, the
increases in gas consumption were largely satisfied through gas imports, gas
inventory drawdowns and gas production from previously shut-in wells. The
Company believes that the current increase in gas consumption is being mostly
satisfied through new drilling activity.
The following chart sets forth the domestic average active rig count since
1988, the most commonly cited indicator of the level of drilling activity. The
average rig count was 893 for the first six months of 1997, up 22% from the
average rig count for the first six months of 1996.
LOGO
The consumption of OCTG products is a function not only of the number of
rigs but also the depth of wells and exploratory success rates. The average well
depth in the U.S. has increased from 4,482 feet in 1986
22
<PAGE> 24
to 5,944 feet in 1996. In addition, due in large part to increased utilization
of 3-D seismic and related technologies, the percentage of exploratory wells as
producing wells completed has increased. Prior to 1994, exploratory success
rates were generally in the 25% to 30% range. In each of 1995 and 1996, the
success rate exceeded 40%. A completed well requires not only an initial drill
string, but also completion casing and production tubing, all of which comprise
OCTG products. Domestic OCTG consumption in any period equals domestic OCTG
shipments (excluding exports) plus decreases in inventory levels (or minus
increases in inventory levels) plus OCTG imports in such period.
In addition to rig count, well depth and exploratory success rates,
shipments by domestic producers of OCTG products are influenced by the levels of
OCTG inventory held by producers, distributors and end users. OCTG product
inventory levels have historically been cyclical with inventories generally
building during periods of high drilling activity and declining in periods of
lower drilling activity. The following chart sets forth the average monthly
total of OCTG product inventories since 1986.
LOGO
Domestic shipments of OCTG products are 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 and government subsidies of foreign
producers; and (v) the presence or absence of governmental imposed trade
restrictions in the United States. As shown in the chart below, over the last
decade, OCTG market penetration by imports in the United States reached a high
of 45% in 1988; for the first six months of 1997, import levels had dropped to
15% of total shipments, which the Company believes is due to increased worldwide
OCTG demand and the impact of the duties on imports imposed by the U.S. in
response to the Trade Cases. The Company cannot predict the U.S. government's
future actions regarding import duties or other trade restrictions on imports of
OCTG products or the impact of such measures on the Company's net sales. See
"Risk Factors -- Competition."
23
<PAGE> 25
LOGO
Due to the recent trends in inventory and import levels, the Company
believes the increased demand for OCTG products in the U.S. is largely being met
by current domestic OCTG production. The following chart sets forth U.S.
domestic shipments (excluding exports) of OCTG since 1986.
LOGO
Although the demand for the Company's OCTG products has improved steadily
in recent quarters, the factors contributing to such improvement, primarily
being drilling activity, oil and gas prices, inventory levels and import levels,
are inherently variable and subject to significant volatility and no assurance
can be given as to the level of future demand for the Company's products.
LINE PIPE
The demand for line pipe is only partially dependent on oil and gas
drilling activities. In addition to drilling activities, line pipe demand is
dependent on factors such as line pipe construction activity, line pipe
24
<PAGE> 26
replacement requirements, utility purchasing programs and new residential
construction. Line pipe demand has grown since 1989 along with the increase in
natural gas usage and the attendant need for gas transportation lines. Overall,
total shipments by domestic line pipe producers (excluding exports) reached 1.1
million tons in 1996 and shipments of line pipe product 16 inches in diameter
and smaller, the product sizes that the Company produces, totaled 0.8 million
tons in that year.
SBQ PRODUCTS
The bar market represents the second largest segment of the steel market.
Total 1996 shipments by domestic producers of bar products (which include the
Company's SBQ products) were approximately 16.8 million tons. Bar products are
generally categorized into merchant bar quality products and SBQ products. SBQ
products are used for a wide variety of industrial applications including
automotive, metal working fabrication, construction, farm equipment, heavy
machinery and trucks and off-road vehicles. The Company competes in relatively
small segments of the SBQ market. Unlike the majority of SBQ products which are
primarily used by passenger car manufacturers, heavy SBQ products such as those
produced by the Company are primarily used in the manufacture of heavy
industrial products.
25
<PAGE> 27
BUSINESS
GENERAL
The Company is a leading producer of specialty steel products serving the
energy industry. These products are produced at its two mini-mills, Newport and
Koppel, and include seamless and welded tubular goods which are primarily OCTG
products used in oil and natural gas drilling and production operations, and
line pipe which is used in the transmission of oil, natural gas and other
fluids. The term mini-mill connotes a smaller, relatively low-cost mill that
typically uses steel scrap as its basic raw material and offers a relatively
limited range of products. In addition, the Company manufactures SBQ products
which are primarily used in the manufacture of heavy industrial equipment. Sales
of specialty steel products represented 90.2% of the Company's fiscal 1996
sales. The Company also manufactures various industrial adhesive products
through its wholly-owned subsidiary, Imperial, which represented 9.8% of fiscal
1996 sales.
The Company was incorporated in Kentucky in 1980 as Newport Steel
Corporation for the purpose of purchasing the operating assets of the Newport
Steel Works from Interlake, Inc. ("Interlake"). The Company changed its name to
NS Group, Inc. in 1987 and transferred its welded tubular manufacturing
operations to a subsidiary renamed Newport Steel Corporation. In October 1990,
the Company, through a newly-formed wholly-owned subsidiary, acquired certain
assets now comprising Koppel, a steel mini-mill located in western Pennsylvania.
Koppel manufactures seamless tubular products and SBQ products.
BUSINESS STRATEGY
The Company's strategy is to increase its net sales and profitability by
strengthening its position in selected energy-related markets as a high quality
producer of specialty steel products. In addition to emphasizing a high level of
ongoing customer service and support, key elements of the Company's strategy
include:
Capitalizing on Improved OCTG Market Conditions
Recent improvements in the energy sector of the economy have resulted in
increased demand for the Company's energy-related tubular products, particularly
OCTG products. The Company shipped 309,000 tons of OCTG products through the
first nine months of fiscal 1997 compared to OCTG shipments of 202,500 tons for
the comparable fiscal 1996 nine month period and 284,000 tons for the entire
1996 fiscal year. Average selling prices for the Company's welded and seamless
OCTG products increased $46 per ton and $12 per ton, respectively, for the
comparable nine month periods. The Company has capitalized and intends to
continue to capitalize on recent trends in the OCTG market by emphasizing its
sales and marketing efforts toward higher margin OCTG products. See "Industry
Overview."
Lowering Manufacturing Costs Per Ton
The Company historically has reinvested in its operating facilities and
emphasized productivity improvements in an effort to reduce its manufacturing
costs per ton (defined as all manufacturing costs excluding the cost of steel
scrap and depreciation). For example, the Company has introduced a number of
operational and capital investment initiatives at Newport which have contributed
to the reduction in manufacturing costs per ton for its tubular products.
Manufacturing costs per ton have declined from $232 per ton in fiscal 1995 to
$204 per ton for the first nine months of fiscal 1997 for tubular products
produced on Newport's 8" mill and from $204 per ton in fiscal 1995 to $178 per
ton for the first nine months of fiscal 1997 for tubular products produced on
its 16" mill. The Company's increased levels of production and shipments, as
well as change in product mix, have had a significant influence on Newport's
manufacturing costs per ton and other productivity measures.
The Company intends to continue to make capital investments and additional
manufacturing improvements at Newport and Koppel that will further lower
manufacturing costs per ton and enhance its market position.
26
<PAGE> 28
Expanding Tubular Product Finishing Capabilities
The Company intends to increase its tubular product finishing capabilities
which will enhance its competitive position by enabling it to produce a larger
percentage of value-added products in-house. For example, the Company intends to
make capital investments in additional threading and upsetting capabilities. The
Company believes that such additional finishing capabilities will significantly
lower production costs and improve product quality and the level of service for
its customers.
Increasing Financial Flexibility
The Offering will significantly reduce the Company's debt service
requirements and enable the Company to more readily respond to market changes
and capital investment opportunities. The Company intends to maintain a strong
balance sheet in order to provide financial flexibility.
SPECIALTY STEEL SEGMENT
MANUFACTURING FACILITIES AND PROCESSES
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 can 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, Newport also purchases slabs from
third parties to supplement the production of slabs by Newport's melt shop. In
fiscal 1996, Newport purchased approximately 109,000 tons of slabs for use in
the production of coil and pipe. Although Newport's capacity utilization for its
melt shop was 55.6% for the twelve months ended June 28, 1997, one of Newport's
three furnaces could not be operated simultaneously with the other furnaces for
most of such period due to constraints on Newport's baghouse facilities. The
Company completed a project to upgrade its baghouse facilities late in the third
quarter of fiscal 1997 to permit the simultaneous operation of Newport's three
furnaces. The Company believes the upgrade of its baghouse facilities will
significantly reduce its need to purchase slabs from third parties in future
periods.
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.
For the twelve months ended June 28, 1997, the Newport facilities' rated
capacities and capacity utilization were as follows:
<TABLE>
<CAPTION>
NEWPORT FACILITIES RATED CAPACITY (IN TONS) CAPACITY UTILIZATION
------------------------------------ ------------------------ --------------------
<S> <C> <C>
Melt shop........................... 700,000 55.6%
Hot strip rolling mill.............. 750,000 62.6%
Welded pipe mills................... 580,000 70.3%
</TABLE>
27
<PAGE> 29
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, a seamless tubemaking facility located approximately 20 miles
away in Ambridge, and a tubular finishing facility located in Baytown, Texas.
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 5 1/2 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 1.9 to 8.5 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.
For the twelve month period ended June 28, 1997, the Koppel facilities'
rated capacities and capacity utilization were as follows:
<TABLE>
<CAPTION>
KOPPEL FACILITIES RATED CAPACITY (IN TONS) CAPACITY UTILIZATION
------------------------------------ ------------------------ --------------------
<S> <C> <C>
Melt shop........................... 450,000 79.7%
Seamless tube mill.................. 250,000 69.4%
Bar mill............................ 200,000 79.2%
</TABLE>
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. The finishing processes include upsetting, which is
a forging process that thickens tube ends to prepare for the threading process;
heat treating, which is a furnace operation designed to strengthen the steel;
straightening; non-destructive testing; coating for rust prevention; and
threading.
PRODUCTS
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.
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<PAGE> 30
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.
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.
SBQ Products
The Company manufactures in a specialized market niche of SBQ products at
Koppel in sizes ranging from 2.875 to 6.0 inches in diameter. 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 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 American Petroleum Institute 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
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
utilizes 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.
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<PAGE> 31
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
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. For the first nine months of fiscal 1997 and for fiscal 1996, the
Company's top five specialty steel customers accounted for approximately 34% and
28% of total net sales, respectively. For the same periods, no one customer
accounted for more than 10% of total net sales, other than Bourland & Leverich
Supply Company which accounted for 10.2% of total net sales in the first nine
months of fiscal 1997.
COMPETITION
The markets for the Company's specialty steel products are highly
competitive and cyclical. The Company's principal competitors in its primary
markets include domestic 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 small diameter
seamless OCTG market in which Koppel competes, its 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 announced hot
rolled manufacturing capacity is anticipated and may 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 U.S. and international courts or panels. The duties are
subject to annual and five-year reviews by the U.S. Department of Commerce. 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 the appeals or reviews at this time.
Over the last decade, OCTG market penetration by imports in the United States
reached a high of 45% in 1988. For the first six months of 1997, import levels
had dropped to 15% of total shipments, which the Company believes is due to
increased worldwide OCTG demand and the impact of the duties on imports imposed
by the U.S. in response to the Trade Cases. See "Risk Factors -- Competition."
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<PAGE> 32
RAW MATERIALS AND SUPPLIES
The Company's major raw material is steel scrap, which is generated
principally from industrial, automotive, demolition, railroad and other steel
scrap sources. Steel scrap is purchased by the Company either through scrap
brokers or directly in the open market. The long-term demand for steel scrap and
its importance to the domestic steel industry may be expected to increase as
steel-makers continue to expand steel scrap-based electric arc furnace and thin
slab casting capacities. For the foreseeable future, however, the Company
believes that supplies of steel scrap will continue to be available in
sufficient quantities at competitive prices. In addition, a number of
technologies exist for the processing of iron ore into forms which may be
substituted for steel scrap in electric arc furnace-based steel-making
operations. Such forms include direct-reduced iron, iron carbide and
hot-briquette iron. While such forms may not be cost competitive with steel
scrap at present, a sustained increase in the price of steel scrap could result
in increased implementation of these alternative technologies.
The Company's steel manufacturing facilities consume large amounts of
electricity. The Company purchases its electricity from utilities near its
steel-making facilities pursuant to separate contracts entered into by Koppel
and Newport. Koppel's electricity contract expired in 1996. The parties have
been operating under monthly extensions of the prior contract, 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 Imperial, is a custom manufacturer of water-borne,
solvent borne and hot melt adhesives and footwear finishes. These products are
manufactured at plants located in Cincinnati, Ohio; Nashville, Tennessee and
Lynchburg, Virginia.
MANUFACTURING PROCESS
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
Imperial maintains approximately 1,000 active formulas for the manufacture
of water-borne, solvent-borne and hot-melt adhesives products and approximately
600 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. The adhesives industry is currently seeking alternatives to
its methylene chloride-based products, which will be largely restricted by OSHA
regulations commencing in October 1997. Methylene
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<PAGE> 33
chloride-based products represented approximately 23.8% of the Company's
adhesives segment sales in fiscal 1996.
Competition in the industrial adhesives industry includes several major
producers, as well as numerous small and mid-sized companies comparable to
Imperial. The Company 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.
LEGAL MATTERS
The Company is subject to various claims, lawsuits and administrative
proceedings arising in the ordinary course of business. The Company carries
insurance 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 pending claims, lawsuits or
administrative proceedings 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, 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 required that it investigate, test, and analyze for potential releases
of hazardous constituents from its closed loop water recirculation system. Based
upon the findings of its investigation, which have been filed with the EPA, the
Company believes that the cost of any remediation of such potential releases, if
required, will not be material.
In November 1996, Koppel received a Notice of Violation 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. The
conditions which contributed to the alleged violations have been corrected, and
as of January 1, 1997, Koppel has demonstrated compliance with the air emission
regulations. 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 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
established a schedule for investigating, monitoring, testing and analyzing the
potential releases. Initial remediation has been completed and a report
submitted to the EPA. Additional monitoring and remediation may be required.
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. Although certain of the indemnifying parties have stated that their
indemnification obligations do not extend to all of the matters covered by the
Consent Order, to date the Company has been fully indemnified against all
matters pertaining to the Consent Order and the Company
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<PAGE> 34
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 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. Such insurance
claims will exhaust available insurance coverage pertaining to these incidents.
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. 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 June 28, 1997, the Company had environmental remediation reserves of
$4.5 million, which pertain almost exclusively to accrued disposal costs for
radiation contaminated dust. As of June 28, 1997, 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.
EMPLOYEES
As of June 18, 1997, the Company had 1,848 full-time employees, of whom 428
were salaried and 1,420 were hourly. Substantially all of the Company's hourly
employees are represented by the United Steelworkers of America under contracts
expiring in 1998 for Imperial, 1999 for Newport and Koppel, and 2000 for
Erlanger. Since its inception, the Company has successfully negotiated 15 labor
contracts, and has experienced only one two-day work stoppage which was in 1994.
The Company has assumed no legacy costs, such as retirement and health
benefits, with respect to former employees of the facilities it has acquired.
Retirement benefits (including post-retirement health care) represent the most
significant difference between the Company's labor costs and the industry
average, as the Company's employees participate in profit sharing plans as
opposed to the typically more costly defined benefit plans prevalent throughout
the industry. The Company's profit sharing plans generally require mandatory
contributions at a specified percentage of pre-tax profits (with certain
guaranteed minimums). The contribution expense for the Company's profit sharing
plans was approximately $1.0 million in fiscal 1996.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
- ------------------------- --- ------------------------------------------------
<S> <C> <C>
Clifford R. Borland 60 Director, Chairman and Chief Executive Officer
Paul C. Borland, Jr. 63 Director, President and Chief Operating Officer
Patrick J.B. Donnelly 60 Director
John B. Lally 61 Director
R. Glen Mayfield 55 Director
Director and Vice President; President of
Ronald R. Noel 56 Newport
Vice President, Treasurer and Chief Financial
John R. Parker 53 Officer
</TABLE>
The directors of the Company are elected at each annual meeting of the
shareholders and hold office until their successors have been elected and
qualified. The officers are appointed by the Board of Directors and serve at its
discretion. The Company's Restated Articles of Incorporation (the "Articles")
provide that at such time as there are nine or more directors, the Board of
Directors may by resolution divide the Board into three classes with the terms
in office of each class ending in successive years.
BUSINESS BACKGROUND OF DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
CLIFFORD R. BORLAND is a founder of the Company and was the Company's President
and Chief Executive Officer until December 4, 1995, when he was elected Chairman
of the Company. He has been a director since 1981. He held various positions at
United States Steel Corporation from 1960 through 1967. He joined Interlake's
Riverdale Works as Chief Metallurgist in 1967, became Director of Metallurgy for
Interlake's Iron and Steel Division in 1978 and served as Plant Manager of the
Newport Steel Works from 1977 to 1980. Mr. Borland is also a director of
Kentucky Electric Steel, Inc.
PAUL C. BORLAND, JR. joined the Company as Vice President and General Manager of
KES in 1989. Mr. Borland assumed the position of President of Koppel in 1990 and
assumed the position of President and Chief Operating Officer of the Company on
December 4, 1995. Mr. Borland joined the Company with over 33 years of steel
industry experience where he held various management positions with Latrobe
Steel Corporation and the Universal Cyclops Specialty Steel Division of Cyclops
Corporation. He also held the position of Vice President and General Manager of
Ohio Steel Tube, a division of Copperweld Corporation, where he also held the
position of Vice President. Paul C. Borland, Jr. is the brother of Clifford R.
Borland.
PATRICK J.B. DONNELLY has been a director of the Company since November 1981.
Since 1972, he has been a partner in the law firm of Niles, Barton and Wilmer
which is based in Baltimore, Maryland.
JOHN B. LALLY has been a director of the Company since November 1981. Mr. Lally
is Chairman of the Board and Chief Executive Officer of L B Industries, Inc., a
privately-owned pipe distributor. He has served as an executive officer of L B
Industries, Inc. and its predecessors for over 29 years. Mr. Lally is also
Chairman of the Board of LB Steel Plate Company, a privately-owned steel plate
processor and distributor.
R. GLEN MAYFIELD has been a director of the Company since November 1981. Mr.
Mayfield is the President of Mayfield & Robinson, Inc., an independent
management and financial consulting firm, which he founded in 1978. For ten
years prior to founding Mayfield & Robinson, Inc., Mr. Mayfield worked for the
First National Bank of Cincinnati.
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<PAGE> 36
RONALD R. NOEL has been a director of the Company since November 1981. He is a
founder of the Company and has been Vice President since its inception. He held
the position of Secretary of the Company from November 1989 until February 1995
and the position of President of Newport since March 1994. Mr. Noel joined
Interlake's Newport Steel Works in 1966 and served in various positions,
including Chief Industrial Engineer from 1976 to 1980.
JOHN R. PARKER joined the Company as Treasurer in 1981 and has held the
positions of Vice President, Treasurer and Chief Financial Officer or similar
positions with the Company for more than five years. Prior to joining the
Company, he was a manager with Arthur Andersen LLP.
BUSINESS BACKGROUND OF OTHER MANAGEMENT MEMBERS
THOMAS J. DEPENBROCK has been Corporate Controller of the Company since 1987 and
Vice President since February 1995. Mr. Depenbrock was with the accounting firm
of Arthur Andersen LLP from 1978 until 1987.
THOMAS L. GOLATZKI has been Vice President of the Company since 1987. Prior to
1987, Mr. Golatzki was the Director of Engineering and Administrative Services
of the Company.
ROBERT D. JOHNSON joined Imperial in 1970 and has served as its President since
1980.
JACK W. MEHALKO has been Vice President of the Company since March 1994 and
Secretary since February 1995. Mr. Mehalko was President of Newport from 1989
until March 1994 and Vice President and General Manager of KES from 1986 to
1989.
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PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information as of August 15, 1997
with respect to the beneficial ownership of shares of Common Stock owned by (a)
each person known by the Company to own beneficially more than 5% of the Common
Stock, (b) each director or executive officer of the Company, (c) all directors
and executive officers of the Company as a group and (d) each Selling
Shareholder.
For purposes of the Offering, "Selling Shareholders" is defined to include
PMAC, Ltd. ("PMAC") and certain of its affiliates and General Electric Capital
Corporation ("GECC"). For purposes of the over-allotment option, "Selling
Shareholders" is defined to include PMAC and certain of its affiliates and
Messrs. Lally, Mayfield and Donnelly. Except as set forth in footnote 3, the
following table does not give effect to the exercise of the over-allotment
option. Of the 1,125,000 shares subject to the over-allotment option, 540,295 of
such shares would be issued by the Company and the balance by the Selling
Shareholders.
<TABLE>
<CAPTION>
SHARES OWNED SHARES OWNED
PRIOR TO THE OFFERING AFTER THE OFFERING
----------------------- --------------------
NAME NUMBER PERCENT BEING OFFERED NUMBER PERCENT
- --------------------------------------- --------- ------- ------------- --------- -------
<S> <C> <C> <C> <C> <C>
DIRECTORS AND EXECUTIVE OFFICERS
Clifford R. Borland(1)(2)(3) 2,977,254 20.0% -- 2,977,254 12.9%
Ronald R. Noel(1)(2)(3) 1,175,810 7.9 -- 1,175,810 5.1
John B. Lally(3)(4) 655,729 4.4 -- 655,729 2.8
R. Glen Mayfield(3) 114,730 * -- 114,730 *
Patrick J.B. Donnelly(3)(5) 99,375 * -- 99,375 *
John R. Parker(2)(6) 84,928 * -- 84,928 *
Paul C. Borland, Jr.(2) 62,618 * -- 62,618 *
All Directors and Executive Officers as
a group (7 persons)(2)(3) 5,170,444 34.4 -- 5,170,444 22.3
OTHER 5% SHAREHOLDERS:
Dimensional Fund Advisors Inc. (1)(7) 889,100 6.0 -- 889,100 3.9
General Electric Capital
Corporation(1)(8) 772,481 5.0 500,000 272,481 1.2
PMAC, Ltd. and affiliates(1)(3)(9) 1,664,705 10.1 1,000,000 664,705 2.9
</TABLE>
- ---------------
* Less than one percent.
(1) The address of Messrs. C. R. Borland and Noel is NS Group, Inc., Ninth and
Lowell Streets, Newport, Kentucky 41072. The address of Dimensional Fund
Advisors Inc. is 1299 Ocean Avenue, 11th Floor, Santa Monica, California
90401. The address of GECC is 260 Long Ridge Road, Stamford, Connecticut
06927. The address of PMAC and R. Alpert is 15311 Vantage Parkway West,
Suite 315, Houston, Texas 77032. The address of R. E. Belfer and R. A.
Belfer (each of whom are affiliates of PMAC) is 767 Fifth Avenue, New York,
New York 10017.
(2) Includes, where applicable, shares of Common Stock (a) which may be acquired
within 60 days of August 15, 1997 by Mr. C. R. Borland (89,754), Mr. Noel
(46,258), Mr. Parker (47,258), Mr. P. C. Borland, Jr. (60,518) and all
directors and executive officers as a group (243,788) pursuant to the
Company's non-qualified stock option and stock appreciation rights plans and
(b) owned by Mr. Noel (1,102) and all Directors and executive officers as a
group (1,102) and held by the trustee of the Company's Salaried Employees'
Flexible Compensation Plan, which shares are voted as directed by the
participants to whose account they are allocated.
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<PAGE> 38
(3) The 1,125,000 shares subject to the Underwriters' over-allotment option
include 100,000 shares owned by Mr. Lally, 30,000 shares owned by Mr.
Mayfield and 20,000 shares owned by Mr. Donnelly, together with 434,705 of
the remaining shares to be owned by PMAC and affiliates upon conversion of
the Convertible Debentures. Assuming full exercise of the over-allotment
option, the number of shares owned and the percentage of the aggregate
shares outstanding for each of such Selling Shareholders and the directors
and executive officers as a group would be: Mr. Lally -- 555,729 shares,
2.4%; Mr. Mayfield -- 84,730 shares, 0.36%; Mr. Donnelly -- 79,375 shares,
0.34%; PMAC and affiliates -- 230,000 shares, 0.98%; and all directors and
executive officers as a group -- 4,560,444 shares, 21.1%.
(4) Includes 50,855 shares owned by Mr. Lally's wife. Mr. Lally disclaims any
beneficial interest in these shares.
(5) Includes 32,850 shares owned by Mr. Donnelly's wife and 33,000 shares held
by Mr. Donnelly's wife as custodian for their children. Mr. Donnelly
disclaims any beneficial interest in these shares.
(6) Includes 18,800 shares owned by Mr. Parker's wife. Mr. Parker disclaims any
beneficial interest in these shares.
(7) The information in this footnote and the corresponding information in the
above share ownership table was derived from such shareholder's most recent
Schedule 13D filing with the Securities and Exchange Commission (the
"Commission"), as updated from information provided by the shareholder.
(8) Represents number of shares purchasable upon exercise of the GECC Warrants,
which have an exercise price of $8.00 per share.
(9) PMAC is a Texas limited partnership for which PM Acquisition Corporation
("PM Corp.") is the general partner. PMAC, PM Corp. and certain other
affiliated persons have filed a Schedule 13D ("PMAC Schedule 13D") with the
Commission indicating on the cover pages thereof the following beneficial
ownership of Common Stock and related percentages, as updated from
information provided by PMAC: R. Alpert, 915,588 (5.8%) and R. E. Belfer and
R. A. Belfer, as co-trustees of certain trusts, 749,117 (5.0%).
All of the shares listed in the PMAC Schedule 13D represent shares issuable
upon conversion of $28.3 million of the Convertible Debentures, issued to
PMAC in connection with the Company's purchase of the assets comprising
Koppel Steel Corporation in 1990. In connection with the Offering, it is
anticipated that each of the holders of the Convertible Debentures will
convert all of their respective Convertible Debentures into shares of Common
Stock.
The information in this footnote and the corresponding information in the
above share ownership table was derived from the PMAC Schedule 13D,
information provided by PMAC and from the terms of the Convertible
Debentures.
37
<PAGE> 39
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 40,000,000 shares of
Common Stock and 2,000,000 shares of Preferred Stock. 400,000 shares of the
Preferred Stock have been designated as Series A Junior Participating Preferred
Stock in connection with the Company's Rights Plan discussed below. The
following statements are brief summaries of certain provisions relating to the
capital stock of the Company. Such summaries do not purport to be complete and
are subject to, and qualified in their entirety by reference to, the Articles
and the By-Laws of the Company and the Preferred Stock Purchase Rights Agreement
referred to herein, including the definition therein of certain terms, a copy of
each of which is filed with the Commission. See "Available Information."
COMMON STOCK
Subject to the prior rights of any outstanding shares of the Company's
Preferred Stock or Series A Junior Participating Preferred Stock, the holders of
the Common Stock are entitled to receive dividends as and when declared by the
Board of Directors out of funds legally available for dividends, and, in the
event of liquidation, dissolution or winding up of the Company, to share ratably
in all assets remaining after payment of liabilities. The holders of the Common
Stock are entitled to vote cumulatively in the election of directors and are
entitled to one vote for each share of Common Stock held of record on all other
matters subject to a vote of the shareholders. The holders of Common Stock have
no pre-emptive rights or conversion rights and are not subject to further calls
or assessments by the Company. There are no redemption or sinking fund
provisions applicable to the Common Stock. The Common Stock currently
outstanding is fully paid and non-assessable.
PREFERRED STOCK
The Company is authorized to issue the Preferred Stock in one or more
series. No shares of Preferred Stock are presently outstanding, and no shares of
Preferred Stock have been designated as a series except for the Series A Junior
Participating Preferred Stock. The Board of Directors is authorized, without any
further action by the shareholders, to determine the dividend rights, dividend
rate, conversion rights, voting rights, rights and terms of redemption,
liquidation preferences, sinking fund terms and other rights, preferences,
privileges and restrictions of any additional series of Preferred Stock, the
number of shares constituting any such series, and the designation thereof. The
Board of Directors may, without shareholder approval, issue Preferred Stock with
voting and conversion rights which could adversely affect the voting power of
the holders of Common Stock.
CERTAIN EFFECTS OF AUTHORIZED BUT UNISSUED STOCK
The authorized but unissued shares are available for future issuance
without shareholder approval. These additional shares may be utilized for a
variety of proper corporate purposes, including future public offerings to raise
additional capital, to facilitate corporate acquisitions and for employee
benefit plans.
One of the effects of the existence of unissued and unreserved Preferred
and Common Stock may be to enable the Board of Directors to issue shares to
persons friendly to current management which could render more difficult or
discourage an attempt to obtain control of the Company by means of a merger,
tender offer, proxy contest or otherwise, and thereby protect the continuity of
the Company's management. Issuance of Preferred Stock might, under certain
circumstances, deter the acquisition of the Company or its securities by a
person concerned about the terms or effect of such stock.
CLASSIFIED BOARD OF DIRECTORS
The Articles provide at such time as there are nine or more directors, the
Board of Directors may by resolution divide the Board into three classes with
the terms of office of each class ending in successive years.
38
<PAGE> 40
LIMITATIONS ON DIRECTORS' LIABILITY
The Articles provide that no director shall be personally liable to the
Company or its shareholders for monetary damages for breach of his duties as a
director; provided, however, that a director's liability shall not be eliminated
or limited for (i) for transactions in which the director's personal financial
interest is in conflict with the financial interest of the Company or its
shareholders; (ii) acts or omissions not in good faith or which involve
intentional misconduct or are known to the director to be a violation of law;
(iii) acts which violate Section 271B.8-330 of the Kentucky Business Corporation
Act (regarding unlawful distributions); or (iv) any transaction from which the
director derived an improper personal benefit.
PREFERRED STOCK PURCHASE RIGHTS PLAN
In November 1988, the Board of Directors declared a dividend distribution
of one right (a "Right") for each outstanding share of Common Stock of the
Company. The dividend distribution was payable on November 30, 1988 to the
shareholders of record at the close of business on that date. In addition, the
Board of Directors authorized and directed the issuance of one Right (subject to
adjustment) with respect to each share of Common Stock that becomes outstanding
prior to the earlier of the Distribution Date, as defined below, and the
redemption, exchange or expiration of the Rights.
The Rights Plan provides that until the Distribution Date (or earlier
redemption, exchange or expiration of the Rights) the Rights will be evidenced
only by certificates for, and will be transferred automatically with, the Common
Stock. Each Right entitles the holder to purchase from the Company under certain
circumstances one one-hundredth of a share of the Series A Junior Participating
Preferred Stock at an exercise price of $40 per one one-hundredth of a share,
subject to anti-dilution adjustments. Each one one-hundredth of a share of the
Series A Junior Participating Preferred Stock is designed to approximate the
value of one share of Common Stock. The Rights will become exercisable, and will
trade separately from the Common Stock, on the earlier of (i) 10 days after
public announcement, or the Company has notice, that a person or a group (other
than subsidiaries, employee benefit plans or certain existing shareholders) (an
"acquiring person or group") has become the beneficial owner of 30% or more of
the outstanding Common Stock, or (ii) 10 days after the commencement of a tender
or exchange offer for 30% or more of the outstanding Common Stock, in either
such case without the prior written consent of the Board of Directors
("Distribution Date"). After the Distribution Date, separate certificates for
Rights will be mailed to holders of Common Stock of record on the Distribution
Date.
If an acquiring person or group acquires 30% or more of the Common Stock,
holders of Rights (other than the acquiring person or group) may purchase from
the Company, at the Right's then exercise price, Common Stock having a value at
that time of twice such exercise price. Further, at any time after an acquiring
person or group acquires 30% or more (but less than 50%) of the outstanding
Common Stock, the Board may, at its option, exchange the Rights (other than
Rights held by the acquiring person or group), in whole or in part, at an
exchange ratio of one share of Common Stock (or one one-hundredth of a share of
the Preferred Stock) per Right, subject to anti-dilution adjustments.
In addition, in the event that the Company is acquired in a merger, sale of
assets or similar transaction after the Rights become exercisable, holders of
Rights may purchase, at the then exercise price, common stock of the acquiring
entity having a value equal to twice such exercise price.
Prior to the acquisition by an acquiring person or group of beneficial
ownership of 30% or more of the Common Stock, the Rights are redeemable for one
cent per Right at the option of the Board of Directors.
The Board of Directors is authorized to reduce the 30% thresholds referred
to above to not less than 15% or the amount owned by an acquiring person or
group.
If not earlier redeemed or exchanged, the Rights will expire on November
17, 1998.
The Rights have certain anti-takeover effects. The Rights could cause
substantial dilution to a person or group that attempts to acquire the Company
without conditioning the offer on redemption of the Rights or on substantially
all of the Rights also being acquired. The Rights should not, however, interfere
with any merger
39
<PAGE> 41
or other business combination approved by the Board of Directors since the
Rights may be redeemed by the Company as described above.
SHARES ELIGIBLE FOR FUTURE SALE
Future sales of substantial amounts of Common Stock in the public market
could adversely affect prevailing market prices. Giving effect to the Offering,
including the sale of the 500,000 shares which will be issued upon the exercise
of certain of the GECC Warrants and the conversion of the Convertible Debentures
into 1,664,705 shares, the Company would have had 22,970,968 shares of issued
and outstanding Common Stock at August 15, 1997. Also giving effect to the
Offering, the Company would have had 1,151,192 shares of Common Stock reserved
for issuance upon the exercise of outstanding stock options, 272,481 shares of
Common Stock reserved for issuance upon exercise of the GECC Warrants not being
exercised in connection with the Offering and 1,013,380 shares of Common Stock
reserved for issuance upon the exercise of warrants issued in connection with
the Registered Warrants. The holders of the GECC Warrants and the 664,705 shares
to be issued upon conversion of the Convertible Debentures which are not being
sold in this Offering (absent exercise of the over-allotment option relating to
434,705 of such shares) have certain registration rights and a registration
statement is effective with respect to the shares underlying the Registered
Warrants. The Company has agreed not to issue any securities or file a
registration statement under the Securities Act, subject to certain exceptions,
for a period of 120 days following the date of the Prospectus relating to the
Offering without the prior written consent of Smith Barney Inc. Certain Selling
Shareholders and the Company have granted the Underwriters an over-allotment
option to purchase up to 1,125,000 shares of Common Stock, 540,295 of which
would be sold by the Company. All directors and officers of the Company, as a
group, after giving effect to the Offering, would beneficially own approximately
22.3% of the Common Stock. Their shares may be "restricted securities" as that
term is defined by Rule 144 promulgated under the Securities Act and may not be
sold other than pursuant to an effective registration statement under the
Securities Act or pursuant to an exemption from such registration requirement.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including any person who may be deemed to be an
"affiliate" of the Company, is entitled to sell within any three month period
"restricted" shares beneficially owned by him or her in an amount that does not
exceed the greater of (i) 1% of the then outstanding shares of Common Stock or
(ii) the average weekly trading volume in shares of Common Stock during the four
calendar weeks preceding such sale, provided that at least one year has elapsed
since such shares were acquired from the Company or an affiliate of the Company.
Sales are also subject to certain requirements as to the manner of sale, notice
and the availability of current public information regarding the Company.
However, a person who has not been an affiliate of the Company at any time
within three months prior to the sale is entitled to sell his or her shares
without regard to the volume limitations or other requirements of Rule 144,
provided that at least two years have elapsed since such shares were acquired
from the Company or an affiliate of the Company.
UNDERWRITING
Upon the terms and subject to the conditions stated in the Underwriting
Agreement dated the date hereof, each Underwriter named below has severally
agreed to purchase, and the Company and the Selling Shareholders have agreed to
sell to such Underwriter, the number of shares of Common Stock set forth
opposite the name of such Underwriter.
<TABLE>
<CAPTION>
NAME NUMBER OF SHARES
---------------------------------------------------------- ----------------
<S> <C>
Smith Barney Inc..........................................
McDonald & Company Securities, Inc........................
Raymond James & Associates, Inc...........................
---------
Total........................................... 7,500,000
=========
</TABLE>
40
<PAGE> 42
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares are subject to
approval of certain legal matters by counsel and to certain other conditions.
The Underwriters are obligated to take and pay for all shares of Common Stock
offered hereby (other than those covered by the over-allotment option described
below) if any such shares are taken.
The Underwriters, for whom Smith Barney Inc., McDonald & Company
Securities, Inc. and Raymond James & Associates, Inc. are acting as the
Representatives, propose to offer part of the shares directly to the public at
the public offering price set forth on the cover page of this Prospectus and
part of the shares to certain dealers at a price which represents a concession
not in excess of $ per share under the public offering price. The
Underwriters may allow, and such dealers may reallow, a concession not in excess
of $ per share to certain other dealers. After the initial offering of
the shares to the public, the public offering price and such concessions may be
changed by the Representatives.
The Company, its executive officers and directors and the Selling
Shareholders have agreed, subject to certain exceptions, that for a period of
120 days from the date of this Prospectus, it/they will not, without the prior
written consent of Smith Barney Inc., offer, sell, contract to sell, or
otherwise dispose of, any shares of Common Stock or any securities convertible
into, or exercisable or exchangeable for, Common Stock.
Certain Selling Shareholders and the Company have granted to the
Underwriters an option, exercisable for 30 days from the date of this
Prospectus, to purchase up to 1,125,000 additional shares of Common Stock at the
price to public set forth on the cover page of this Prospectus minus the
underwriting discounts and commissions. The Underwriters may exercise such
option solely for the purpose of covering over-allotments, if any, in connection
with the offering of the shares offered hereby. To the extent such option is
exercised, each Underwriter will be obligated, subject to certain conditions, to
purchase approximately the same percentage of such additional shares as the
number of shares set forth opposite each Underwriter's name in the preceding
table bears to the total number of shares listed in such table.
The Company, the Selling Shareholders and the Underwriters have agreed to
indemnify each other against certain liabilities, including liabilities under
the Securities Act.
In connection with the Offering and in compliance with applicable law, the
Underwriters may over-allot (i.e., sell more Common Stock than the total amount
shown on the list of Underwriters and participations which appear above) and may
effect transactions which stabilize, maintain or otherwise affect the market
price of the Common Stock at levels above those which might otherwise prevail in
the open market. Such transactions may include placing bids for the Common Stock
or effecting purchases of the Common Stock for the purpose of pegging, fixing or
maintaining the price of the Common Stock or for the purpose of reducing a
syndicate short position created in connection with the offering. A syndicate
short position may be covered by exercise of the option described above in lieu
of or in addition to open market purchases. In addition, the contractual
arrangements among the Underwriters include a provision whereby, if the
Representatives purchase Common Stock in the open market for the account of the
underwriting syndicate and the securities purchased can be traced to a
particular Underwriter or member of the selling group, the underwriting
syndicate may require the Underwriter or selling group member in question to
purchase the Common Stock in question at the cost price to the syndicate or may
recover from (or decline to pay to) the Underwriter or selling group member in
question the selling concession applicable to the securities in question. The
Underwriters are not required to engage in any of these activities and any such
activities, if commenced, may be discontinued at any time.
Each underwriter has represented and agreed that (i) it has not offered or
sold and prior to the date six months after the latest closing date will not
offer or sell any shares of Common Stock to persons in the United Kingdom except
to those persons whose ordinary activities involve them in acquiring, holding,
managing or disposing of investments (as principal or agent) for the purposes of
their businesses or otherwise in circumstances which have not resulted or will
not result in an offer to the public in the United Kingdom within the meaning of
the Public Offers of Securities Regulations 1995; (ii) it has complied and will
comply with all applicable provisions of the Financial Services Act 1986 (the
"1986 Act") with respect to anything done by it in relation to the Common Stock
in, from or otherwise involving the United Kingdom; and (iii) it has only issued
or passed on, and will only issue and pass on to any person in the United
Kingdom, any investment advertisement (within the meaning of the 1986 Act)
relating to the Common Stock if that person falls within
41
<PAGE> 43
Article 11(3) of the Financial Services Act of 1986 (Investment Advertisements)
(Exemptions) Order 1996 or is a person to whom such document may otherwise
lawfully be issued or passed on.
Smith Barney Inc. has from time to time performed, and continues to
perform, various investment banking services for the Company and has received
and may receive customary fees in respect of such activities. In addition, in
that more than 10% of the proceeds from the sale of the shares of Common Stock
may be received by members of the National Association of Securities Dealers,
Inc. (the "NASD") participating in the Offering, the Offering is being made
pursuant to the provisions of Section 2710(c)(8) of the Conduct Rules of the
NASD.
INDEPENDENT AUDITORS
The audited financial statements and schedule of the Company included and
incorporated by reference in this Prospectus and elsewhere in the Registration
Statement have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their report with respect thereto and are included
and incorporated by reference in reliance upon the authority of said firm as
experts in accounting and auditing in giving said reports. Reference is made to
said report, which includes an explanatory paragraph with respect to the change
in the method of accounting for income taxes effective September 26, 1993, as
discussed in Note 11 to the Consolidated Financial Statements.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Bryan Cave LLP, St. Louis, Missouri. Certain legal
matters will be passed upon for the Underwriters by Simpson Thacher & Bartlett
(a partnership which includes professional corporations), New York, New York.
Certain other legal matters will be passed upon for the Company by Kepley,
Gilligan & Eyrich, Cincinnati, Ohio. Bryan Cave LLP and Simpson Thacher &
Bartlett will rely, as to matters of Kentucky law, upon the opinion of Kepley,
Gilligan & Eyrich.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy and information statements and other information
with the Commission. Such reports, proxy and information statements and other
information can be inspected and copied at the public reference facilities
maintained by the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the following regional offices of the Commission:
New York Regional Office, 7 World Trade Center, New York, New York 10048 and
Chicago Regional Office, 1400 Citicorp Center, 500 West Madison Street, Chicago,
Illinois 60661. Copies of such material can be obtained from the Public
Reference Section of the Commission, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. Such material may also be accessed
electronically by means of the Commission's home page on the Internet
(http://www.sec.gov). In addition, the aforementioned material can also be
inspected at the offices of the New York Stock Exchange Inc., 20 Broad Street,
New York, New York 10005.
The Company has filed with the Commission a Registration Statement on Form
S-3 (together with all amendments and exhibits thereto, the "Registration
Statement") under the Securities Act. This Prospectus does not contain all of
the information set forth in the Registration Statement, certain parts of which
are of which are omitted in accordance with the rules and regulations of the
Commission. For further information, reference is made to the Registration
Statement, copies of which are available from the Public Reference Section of
the Commission at prescribed rates as described above. Statements contained
herein concerning the provisions of documents filed with, or incorporated by
reference in, the Registration Statement as exhibits are necessarily summaries
of such provisions and documents and each such statement is qualified in its
entirety by reference to the copy of the applicable document filed with the
Commission.
42
<PAGE> 44
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, filed with the Commission by the Company (File No.
1-9838), are incorporated in this Prospectus by reference: (i) the Company's
Annual Report on Form 10-K for the fiscal year ended September 28, 1996; (ii)
the Company's Quarterly Reports on Form 10-Q for the three months ended December
28, 1996, March 29, 1997 and June 28, 1997; and (iii) the description of the
capital stock of the Company which is contained in the Company's Registration
Statement on Form 8-A dated November 17, 1988, and which incorporates by
reference the description contained in the Company's prospectus dated March 4,
1988 (File No. 33-17952); and (iv) the description of the Preferred Stock
Purchase Rights which is contained in the Company's Registration Statement on
Form 8-K dated November 17, 1988.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14
and 15(d) of the Exchange Act after the date of this Prospectus and prior to the
termination of the Offering shall be deemed to be incorporated by reference in
this Prospectus and to be a part hereof from the date of the filing of such
documents. Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any such
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.
This Prospectus includes certain statistical data relating to certain of
the industries in which the Company functions. Such data is based on information
from certain independent industry and government publications and the Company
assumes no responsibility for the accuracy thereof.
The Company undertakes to provide without charge to each person, including
any beneficial owner, to whom a copy of this Prospectus has been delivered, on
written or oral request, a copy of any and all of the documents incorporated in
this Prospectus by reference, other than exhibits to such documents not
specifically incorporated by reference therein. Requests for such copies should
be directed to NS Group, Inc., at its principal executive offices located at
Ninth and Lowell Streets, Newport, Kentucky 41072, Attention: Manager of
Investor Relations (telephone: (606) 292-6809).
43
<PAGE> 45
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
NS GROUP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
<C> <S> <C>
I. CONSOLIDATED FINANCIAL STATEMENTS FOR THE FISCAL YEARS ENDED 1996, 1995, AND 1994
Report of Independent Public Accountants........................................... F-2
Consolidated Statements of Operations for the years ended September 28, 1996,
September 30, 1995 and September 24, 1994.......................................... F-3
Consolidated Balance Sheets as of September 28,
1996 and September 30, 1995........................................................ F-4
Consolidated Statements of Cash Flows for the years ended September 28, 1996,
September 30, 1995 and September 24, 1994.......................................... F-5
Consolidated Statements of Common Shareholders' Equity for the years ended
September 28, 1996, September 30, 1995 and September 24, 1994...................... F-6
Notes to Consolidated Financial Statements......................................... F-7
II. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE FISCAL QUARTERS ENDED JUNE 28,
1997 AND JUNE 29, 1996 (UNAUDITED)
Condensed Consolidated Balance Sheets.............................................. F-19
Condensed Consolidated Statements of Operations.................................... F-20
Condensed Consolidated Statements of Cash Flows.................................... F-21
Notes to Condensed Consolidated Financial Statements............................... F-22
</TABLE>
F-1
<PAGE> 46
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 are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of NS Group, Inc. and
subsidiaries as of September 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.
ARTHUR ANDERSEN LLP
Cincinnati, Ohio,
November 1, 1996
F-2
<PAGE> 47
NS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 28, 1996, SEPTEMBER 30, 1995 AND SEPTEMBER 24,
1994
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
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, extraordinary 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
F-3
<PAGE> 48
NS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 28, 1996 AND SEPTEMBER 30, 1995
<TABLE>
<CAPTION>
1996 1995
--------- ---------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
ASSETS
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................................................... 14,449 14,031
Deferred tax assets.................................................. 5,459 4,842
Other current assets................................................. 6,774 6,471
--------- ---------
Total current assets.............................................. 150,475 130,299
--------- ---------
Property, plant and equipment -- at cost
Land and buildings................................................... 29,755 30,110
Machinery and equipment.............................................. 239,218 235,553
Construction in progress............................................. 3,313 3,622
Less -- accumulated depreciation..................................... (138,512) (120,887)
--------- ---------
Net property, plant and equipment................................. 133,774 148,398
--------- ---------
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
F-4
<PAGE> 49
NS GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 28, 1996, SEPTEMBER 30, 1995 AND SEPTEMBER 24,
1994
<TABLE>
<CAPTION>
1996 1995 1994
--------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
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 operating supplies and other
current assets....................................... 768 (3,250) 1,325
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............. 11,546 (5,732) (5,695)
--------- --------- ---------
Cash flows from investing activities:
(Increase) decrease in short-term investments............. (7,442) 33,658 (36,614)
Purchases of property, plant and equipment................ (6,510) (12,233) (10,394)
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............. (12,697) 23,811 8,745
--------- --------- ---------
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
F-5
<PAGE> 50
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
<TABLE>
<CAPTION>
UNREALIZED
GAIN (LOSS)
COMMON STOCK OPTIONS ON AVAILABLE
-------------------- AND FOR SALE RETAINED
SHARES AMOUNT WARRANTS SECURITIES EARNINGS TOTAL
---------- ------- -------- ------------ -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance, September 25, 1993....... 13,696,104 $48,284 $ 208 $ -- $ 14,130 $ 62,622
Stock option plans.............. 56,145 290 54 344
Issuance of common stock........ 57,164 414 414
Unrealized losses on
investments.................. (124) (124)
Net income...................... 13,208 13,208
----------- -------- -------- ------- ------ -------
Balance, September 24, 1994....... 13,809,413 48,988 262 (124) 27,338 76,464
Stock option plans.............. 64 64
Issuance of common stock
warrants..................... 2,411 2,411
Unrealized losses on
investments.................. (589) (589)
Other........................... 16 16
Net loss........................ (10,256) (10,256)
----------- -------- -------- ------- ------ -------
Balance, September 30, 1995....... 13,809,413 49,004 2,737 (713) 17,082 68,110
Stock option plans.............. 37 37
Unrealized losses on
investments.................. (574) (574)
Net loss........................ (10,457) (10,457)
----------- -------- -------- ------- ------ -------
Balance, September 28, 1996....... 13,809,413 $49,004 $2,774 $ (1,287) $ 6,625 $ 57,116
=========== ======== ======== ======= ====== =======
</TABLE>
See notes to consolidated financial statements
F-6
<PAGE> 51
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. Certain amounts have been reclassified in the
accompanying consolidated financial statements to conform to fiscal 1997
presentation.
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>
<CAPTION>
1996 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
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
F-7
<PAGE> 52
NS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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
F-8
<PAGE> 53
NS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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>
<CAPTION>
1996 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
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>
<CAPTION>
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
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>
F-9
<PAGE> 54
NS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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.
F-10
<PAGE> 55
NS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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>
<CAPTION>
1996 1995
--------------------- ---------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash, cash equivalents and short-term
investments......................... $ 17,297 $ 17,297 $ 11,251 $ 11,251
Other investments..................... 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.
F-11
<PAGE> 56
NS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
A summary of transactions in the plans follows:
<TABLE>
<CAPTION>
1996 1995 1994
------- --------- ---------
<S> <C> <C> <C>
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>
<CAPTION>
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
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.
F-12
<PAGE> 57
NS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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
F-13
<PAGE> 58
NS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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>
<CAPTION>
1996 1995 1994
------- ------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
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>
F-14
<PAGE> 59
NS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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>
<CAPTION>
1996 1995 1994
------- ------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
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>
<CAPTION>
1996 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
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.
F-15
<PAGE> 60
NS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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>
<CAPTION>
DEPRECIATION
NET OPERATING IDENTIFIABLE AND CAPITAL
SALES INCOME ASSETS AMORTIZATION EXPENDITURES
-------- --------- ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
1996
Specialty steel segment............... $369,466 $14,886 $245,642 $ 20,234 $ 6,279
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 $ 6,510
======== ======= ======== ======= =======
1995
Specialty steel segment............... $335,883 $10,428 $250,711 $ 20,862 $ 11,748
Adhesives segment..................... 35,469 1,248 13,011 449 485
Corporate assets and allocations...... -- (3,870) 34,775 -- --
-------- ------- -------- ------- -------
Total consolidated.................... $371,352 $ 7,806 $298,497 $ 21,311 $ 12,233
======== ======= ======== ======= =======
1994
Specialty steel segment............... $270,441 $ 2,909 $246,295 $ 18,373 $ 10,014
Adhesives segment..................... 32,939 1,150 12,486 416 380
Corporate assets and allocations...... -- (3,370) 56,546 -- --
-------- ------- -------- ------- -------
Total consolidated.................... $303,380 $ 689 $315,327 $ 18,789 $ 10,394
======== ======= ======== ======= =======
</TABLE>
F-16
<PAGE> 61
NS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE 14: QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly results of operations for 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
1996
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 extraordinary 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,
F-17
<PAGE> 62
NS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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>
<CAPTION>
SEPTEMBER 28, SEPTEMBER 30,
1996 1995
------------- -------------
(IN THOUSANDS)
<S> <C> <C>
Current assets............................................ $ 131,839 $ 118,348
Noncurrent assets......................................... 143,074 160,886
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
======== ========
</TABLE>
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
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>
F-18
<PAGE> 63
NS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF JUNE 28, 1997 AND SEPTEMBER 28, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 28, SEPTEMBER 28,
1997 1996
--------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents........................................ $ 5,028 $ 3,442
Short-term investments........................................... 16,155 13,855
Accounts receivable, less allowance for doubtful accounts of $930
and $757, respectively........................................ 62,744 51,824
Inventories...................................................... 72,435 53,317
Other current assets............................................. 28,310 28,037
---------- ----------
Total current assets.......................................... 184,672 150,475
---------- ----------
PROPERTY, PLANT AND EQUIPMENT...................................... 275,659 272,286
Less -- accumulated depreciation................................. (150,988) (138,512)
---------- ----------
124,671 133,774
---------- ----------
OTHER ASSETS....................................................... 13,177 15,785
---------- ----------
Total assets.................................................. $ 322,520 $ 300,034
========== ==========
CURRENT LIABILITIES
Notes payable.................................................... $ 1,086 $ 879
Accounts payable................................................. 49,792 41,847
Other current liabilities........................................ 31,924 24,376
Current portion of long-term debt................................ 3,239 2,468
---------- ----------
Total current liabilities..................................... 86,041 69,570
---------- ----------
LONG-TERM DEBT..................................................... 162,689 164,789
---------- ----------
DEFERRED TAXES..................................................... 8,332 8,559
---------- ----------
COMMON SHAREHOLDERS' EQUITY
Common stock, no par value....................................... 50,425 49,004
Common stock options and warrants................................ 2,622 2,774
Unrealized loss on available for sale securities................. (1,562) (1,287)
Retained earnings................................................ 13,973 6,625
---------- ----------
Total common shareholders' equity............................. 65,458 57,116
---------- ----------
Total liabilities and shareholders' equity.................... $ 322,520 $ 300,034
========== ==========
</TABLE>
The accompanying notes to condensed consolidated financial statements are an
integral part of these statements.
F-19
<PAGE> 64
NS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE AND NINE MONTH PERIODS ENDED JUNE 28, 1997 AND JUNE 29, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 28, JUNE 29, JUNE 28, JUNE 29,
1997 1996 1997 1996
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
NET SALES....................................... $132,853 $103,766 $349,130 $297,787
COST AND EXPENSES
Cost of products sold......................... 113,499 92,366 301,696 269,636
Selling and administrative expenses........... 6,753 7,281 20,034 20,534
-------- -------- -------- --------
Operating income.............................. 12,601 4,119 27,400 7,617
OTHER INCOME (EXPENSE)
Interest expense.............................. (6,130) (6,107) (18,298) (18,244)
Interest income............................... 236 204 694 475
Other, net.................................... 87 49 292 300
-------- -------- -------- --------
Income (loss) before income taxes............. 6,794 (1,735) 10,088 (9,852)
PROVISION (CREDIT) FOR INCOME TAXES............. 1,864 136 2,740 (3,269)
-------- -------- -------- --------
Net income (loss)............................. $ 4,930 $ (1,871) $ 7,348 $ (6,583)
======== ======== ======== ========
NET INCOME (LOSS) PER COMMON SHARE:
Primary.................................... $ .34 $ (.14) $ .53 $ (.48)
Fully diluted.............................. .32 (.14) .47 (.48)
WEIGHTED AVERAGE SHARES OUTSTANDING:
Primary.................................... 14,791 13,809 13,837 13,809
Fully diluted.............................. 17,402 13,809 15,737 13,809
</TABLE>
The accompanying notes to condensed consolidated financial statements are an
integral part of these statements.
F-20
<PAGE> 65
NS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTH PERIODS ENDED JUNE 28, 1997 AND JUNE 29, 1996
(UNAUDITED)
<TABLE>
<CAPTION>
JUNE 28, JUNE 29,
1997 1996
-------- --------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss).................................................... $ 7,348 $ (6,583)
Adjustments to reconcile net income (loss) to net cash flows from
operating activities:
Depreciation and amortization..................................... 13,209 14,335
Amortization of debt discount and finance costs................... 1,258 1,223
Decrease in long-term deferred taxes.............................. (77) (2,259)
Loss on disposal of equipment..................................... 5 635
Increase in accounts receivable, net.............................. (10,920) (4,993)
Increase in inventories........................................... (19,406) (11,996)
(Increase) decrease in other current assets....................... (1,260) 3,520
Increase in accounts payable...................................... 7,945 11,966
Increase in accrued liabilities................................... 7,548 5,772
-------- --------
Net cash flows from operating activities..................... 5,650 11,620
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Increase in property, plant and equipment, net....................... (3,187) (5,787)
Proceeds from sale of equipment...................................... 139 1,729
(Increase) decrease in other assets.................................. 1,669 (414)
-------- --------
Net cash flows from investing activities..................... (1,379) (4,472)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Decrease in notes payable............................................ 207 751
Repayments on long-term debt......................................... (1,838) (1,460)
Proceeds from the issuance of long-term debt......................... -- 1,277
Proceeds from issuance of common stock............................... 1,246 --
-------- --------
Net cash flows from financing activities..................... (385) 568
-------- --------
Net increase in cash and short-term investments.............. 3,886 7,716
CASH AND SHORT-TERM INVESTMENTS AT BEGINNING OF YEAR................... 17,297 11,251
-------- --------
CASH AND SHORT-TERM INVESTMENTS AT END OF PERIOD....................... $ 21,183 $ 18,967
======== ========
Cash paid during the period for:
Interest............................................................. $ 12,502 $ 11,979
Income taxes, net of refunds......................................... $ 477 $ (4,238)
</TABLE>
The accompanying notes to condensed consolidated financial statements are an
integral part of these statements.
F-21
<PAGE> 66
NS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
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) and Northern
Kentucky Management, Inc. All significant intercompany balances and transactions
have been eliminated. Certain amounts for the prior period have been
reclassified in the accompanying condensed consolidated financial statements to
conform to fiscal 1997 presentation.
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 28, 1996 for additional
footnote disclosure, including a summary of significant accounting policies.
EARNINGS PER SHARE
Primary earnings per share is computed by applying the modified treasury
stock method to the Company's outstanding stock options and warrants. Fully
diluted earnings per share is calculated assuming maximum dilution from all
potentially dilutive instruments which can include stock options, warrants and
the Company's 11% Convertible Debentures.
RECENTLY ISSUED ACCOUNTING STANDARDS
In the first quarter of fiscal 1997, the Company adopted the provisions of
Statement of Financial Accounting Standards (SFAS) No. 121 (Statement 121).
Statement 121 establishes accounting standards for impairment of long-lived
assets to be held and used and for long-lived assets that are to be disposed.
The impact on the Company's financial statements from the adoption of Statement
121 was not material.
In the first quarter of fiscal 1997, the Company also adopted SFAS No. 123
(Statement 123). Statement 123 establishes accounting and reporting standards
for stock-based employee compensation plans. As permitted under Statement 123,
the Company has elected to remain on the intrinsic value based method of
accounting for stock-based employee compensation plans. 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.
In February 1997, the Financial Accounting Standards Board (FASB) issued
SFAS No. 128 (Statement 128) which establishes standards for computing and
presenting earnings per share (EPS). Statement 128 replaces primary EPS and
fully diluted EPS with a dual presentation of basic EPS and diluted EPS,
respectively. Basic EPS is computed by dividing net earnings available to common
shareholders by the weighted-average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution which would result from any
instrument which could result in additional common shares being issued.
The Company must adopt Statement 128 for fiscal 1998. For the fiscal 1997
third quarter and nine month period ended June 28,1997 EPS as reported and as
calculated under Statement 128 are as follows:
<TABLE>
<CAPTION>
AS REPORTED PROFORMA STATEMENT 128
--------------------------- ---------------------------
THREE MONTHS NINE MONTHS THREE MONTHS NINE MONTHS
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Primary/Basic EPS................ $.34 $ .53 $.36 $ .53
Fully Diluted/Diluted EPS........ $.32 $ .47 $.33 $ .52
</TABLE>
F-22
<PAGE> 67
NS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
For the comparable three and nine month periods in fiscal 1996, the reported EPS
would not change.
In June 1997, the FASB issued SFAS No. 130 (Statement 130) which
establishes standards for reporting comprehensive income in financial
statements. Comprehensive income is the total of net income and all other
nonowner changes in equity, which, for the Company currently consists solely of
unrealized holding gains/losses on available for sale securities. The Company
must adopt Statement 130 for fiscal 1999 at which time the Company will provide
additional financial statement disclosures of comprehensive income for the
periods presented.
FISCAL YEAR-END
The Company's fiscal year ends on the last Saturday of September.
NOTE 2: INVENTORIES
At June 28, 1997 and September 28, 1996, inventories stated at the lower of
LIFO (last-in, first-out) cost or market represent approximately 50% and 36% of
total inventories before the LIFO reserve, respectively. Inventories consist of
the following components ($000's):
<TABLE>
<CAPTION>
JUNE 28, SEPTEMBER 28,
1997 1996
-------- -------------
<S> <C> <C>
Raw materials................................................ $ 10,505 $ 5,948
Semi-finished and finished goods............................. 65,052 50,471
------- -------
75,557 56,419
LIFO reserve................................................. (3,122) (3,102)
------- -------
$ 72,435 $53,317
======= =======
</TABLE>
NOTE 3: STOCK OPTIONS AND WARRANTS
During the third quarter and first nine months of fiscal 1997, the Company
issued 257,891 and 269,041 shares of its common stock, respectively, in
connection with the exercise of stock options and warrants.
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.
Legal Matters
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.
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,
F-23
<PAGE> 68
NS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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 required that it investigate, test, and analyze for potential releases
of hazardous constituents from its closed loop water recirculating system. Based
on the findings of its investigation, which have been filed with the EPA, the
Company believes that the cost of any remediation, if required, will not be
material.
In November 1996, Koppel received a Notice of Violation 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. The
conditions which contributed to the alleged violations, have been corrected and
as of January 1, 1997, Koppel has demonstrated compliance with the air emission
regulations. 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 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
established a schedule for investigating, monitoring, testing and analyzing the
potential releases. Initial remediation has been completed and reported to the
EPA; however, additional monitoring and remediation may be required. 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.
To date, the Company has been fully indemnified against all matters pertaining
to the Consent Order and the Company believes that the indemnity provisions
provide for it to be fully indemnified against all future 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 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 June 28, 1997, 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
F-24
<PAGE> 69
NS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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 June 28, 1997, the Company had environmental remediation reserves of
$4.5 million which pertain almost exclusively to accrued disposal costs for
radiation contaminated dust. As of June 28, 1997, 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 range of possible
losses should the Company not be indemnified on future matters. 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. All significant intercompany accounts and transactions between the
Subsidiary Guarantors have been eliminated.
<TABLE>
<CAPTION>
JUNE 28, SEPTEMBER 28,
1997 1996
-------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Current assets.............................................. $164,957 $ 131,839
Noncurrent assets........................................... 132,043 143,074
Current liabilities......................................... 72,087 61,980
Payable to parent........................................... $169,649 $ 162,593
Other noncurrent liabilities................................ 8,409 9,953
-------- --------
Total noncurrent liabilities.............................. $178,058 $ 172,546
======== ========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------- -------------------
JUNE 28, JUNE 29, JUNE 28, JUNE 29,
1997 1996 1997 1996
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Net sales................................... $132,853 $103,766 $349,130 $297,787
Gross profit................................ $ 19,354 $ 11,400 $ 47,434 $ 28,151
Net income (loss)........................... $ 5,612 $ (725) $ 10,169 $ (3,958)
</TABLE>
F-25
<PAGE> 70
The Company's value-added processing and finishing capabilities include
upsetting, threading, heat treating, straightening, non-destructive testing and
coating.
Heat treating is a furnance operation designed to strengthen steel.
Upsetting is a forging process that thickens tube ends giving it a stronger
profile prior to being threaded and coupled.
Threaded tubular products are connected with a coupling to create a "string" and
are used in oil and gas drilling and production operations.
<PAGE> 71
======================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED HEREIN, AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, THE SELLING SHAREHOLDERS OR BY ANY OF THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES
OTHER THAN THOSE TO WHICH IT RELATES OR AN OFFER TO SELL, OR A SOLICITATION OF
AN OFFER TO BUY, THOSE TO WHICH IT RELATES IN ANY STATE TO ANY PERSON TO WHOM IT
IS NOT LAWFUL TO MAKE SUCH OFFER IN SUCH STATE. THE DELIVERY OF THIS PROSPECTUS
AT ANY TIME DOES NOT IMPLY THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO ITS DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 6
Use of Proceeds....................... 10
Price Range of Common Stock and
Dividends........................... 10
Capitalization........................ 11
Selected Consolidated Financial
Data................................ 12
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 14
Industry Overview..................... 22
Business.............................. 26
Management............................ 34
Principal and Selling Shareholders.... 36
Description of Capital Stock.......... 38
Shares Eligible for Future Sale....... 40
Underwriting.......................... 40
Independent Auditors.................. 42
Legal Matters......................... 42
Available Information................. 42
Incorporation of Certain Documents by
Reference........................... 43
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>
======================================================
======================================================
7,500,000 SHARES
NS GROUP INC.
COMMON STOCK
------------
PROSPECTUS
, 1997
---------------
SMITH BARNEY INC.
MCDONALD & COMPANY
SECURITIES, INC.
RAYMOND JAMES
& ASSOCIATES, INC.
======================================================
<PAGE> 72
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses (other than underwriting
discounts and commissions), which other than the SEC registration fee are
estimates, payable by the Company in connection with the sale and distribution
of the shares registered hereby:
<TABLE>
<S> <C>
SEC Registration Fee.................................................... $ 66,249
NASD Filing Fees........................................................ 20,723
Blue Sky Filing and Counsel Fees and Expenses........................... 7,500
Printing Expenses....................................................... 200,000
Accountants' Fees and Expenses.......................................... 100,000
Legal Fees and Expenses................................................. 275,000
Transfer Agent's Fees and Expenses...................................... 1,000
Miscellaneous Expenses.................................................. 79,528
--------
Total................................................................. $ 750,000
========
</TABLE>
- ---------------
* To be provided by amendment
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Sections 271B.8-500 to 271B.8-580 of the Kentucky Business Corporation Act;
provides that, subject to restrictions contained in the statute, a corporation
may indemnify any person made or threatened to be made a party to any
threatened, pending or completed action, suit or proceeding by reason of the
fact that he is or was a director, officer, employee or agent of the
corporation, or is or was serving at the request of the corporation as a
director, officer, partner, trustee, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise or employee benefit plan.
A person, who has been successful on the merits or otherwise in any suit or
matter covered by the indemnification statute, shall be indemnified against
expenses (including attorneys' fees) reasonably incurred by him in connection
therewith. Indemnification is authorized upon a determination that the person to
be indemnified has met the applicable standard of conduct required. Such
determination shall be made by the board of directors by a majority vote of a
quorum consisting of directors who were not parties to such action, suit or
proceeding; or if such a quorum cannot be obtained, by a majority vote of a
committee of the board, duly designated to so act by a majority of the full
board, consisting solely of two or more directors who are not parties to the
action; or by special legal counsel selected by the board or a committee
thereof; or by the shareholders who are not parties to such action, suit or
proceeding. Expenses incurred in defense may be paid in advance upon receipt by
the corporation of a written affirmation by the director of his good faith
belief that he has met the applicable standard of conduct required, a written
undertaking by or on behalf of the director to repay such advance if it is
ultimately determined that he did not meet the standard of conduct, and a
determination that the facts then known to those making the determination would
not preclude indemnification under the statute. The indemnification provided by
statute shall not be deemed exclusive of any other rights to which those seeking
indemnification may be entitled under any by-law, agreement, vote of
shareholders or disinterested directors, or otherwise, which shall inure to the
benefit of the heirs, executors and administrators of such a person. Insurance
may be purchased on behalf of any person entitled to indemnification by the
corporation against any liability incurred in an official capacity regardless of
whether the person could be indemnified under the statute. References to the
corporation include all constituent corporations absorbed in a consolidation or
merger as well as the resulting or surviving corporation and anyone seeking
indemnification by virtue of acting in some capacity with a constituent
corporation would stand in the same position as if he had served the resulting
or surviving corporation in the same capacity.
II-1
<PAGE> 73
The By-Laws of the Company provide for indemnification of directors and
officers of the Company to the maximum extent permitted by the Kentucky Business
Corporation Act.
ITEM 16. EXHIBITS.
See Exhibit Index.
ITEM 17. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes that, for purposes of
determining liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(c) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act of 1933 shall be deemed to be part
of this registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-2
<PAGE> 74
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Amendment No. 2 to
the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in Newport, Kentucky, on September 15, 1997.
NS GROUP, INC.
By: /s/ JOHN R. PARKER
------------------------------------
John R. Parker, Vice President
Treasurer and Chief Financial
Officer
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints
Clifford R. Borland and John R. Parker, and each of them (with full power to
each of them to act alone), the true and lawful attorney in fact and agent for
the undersigned, to act on behalf of and in the name of the undersigned in
connection with this Registration Statement, including the authority to sign any
amendments (including post-effective amendments) to this Registration Statement,
and to file the same, with exhibits and any and all other documents filed with
respect thereto, with the Securities and Exchange Commission (or any other
governmental or regulatory authority), and each such person ratifies and
confirms all that said attorneys in fact and agents may lawfully do or cause to
be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to the Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
- ----------------------------------- ----------------------------------- -------------------
<C> <S> <C>
* Chief Executive Officer and September 15, 1997
- ----------------------------------- Director
Clifford R. Borland
* President, Chief Operating Officer September 15, 1997
- ----------------------------------- and Director
Paul C. Borland, Jr.
/s/ JOHN R. PARKER Vice President, Treasurer and Chief September 15, 1997
- ----------------------------------- Financial Officer (Principal
John R. Parker Financial Officer)
* Vice President and Corporate September 15, 1997
- ----------------------------------- Controller
Thomas J. Depenbrock
* Vice President and Director September 15, 1997
- -----------------------------------
Ronald R. Noel
* Director September 15, 1997
- -----------------------------------
John B. Lally
* Director September 15, 1997
- -----------------------------------
Patrick J. B. Donnelly
* Director September 15, 1997
- -----------------------------------
R. Glen Mayfield
*By: /s/ JOHN R. PARKER
- -----------------------------------
John R. Parker
Attorney-in-fact
</TABLE>
II-3
<PAGE> 75
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement
4.1 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
4.2 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
5.1 Opinion of Bryan Cave LLP
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Bryan Cave LLP (included in Exhibit 5.1)
24.1 Power of Attorney (included in Signature Page)
</TABLE>
- ---------------
II-4
<PAGE> 76
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report and to all references to our Firm included in or made part of this
registration statement.
ARTHUR ANDERSEN LLP
Cincinnati, Ohio
September 16, 1997
II-5
<PAGE> 1
Page 1
Exhibit 1
7,500,000 Shares
NS GROUP, INC.
Common Stock
UNDERWRITING AGREEMENT
September , 1997
SMITH BARNEY INC.
MCDONALD & COMPANY SECURITIES, INC.
RAYMOND JAMES & ASSOCIATES, INC.
As Representatives of the Several Underwriters
c/o SMITH BARNEY INC.
388 Greenwich Street
New York, New York 10013
Dear Sirs:
NS Group, Inc., a Kentucky corporation (the "Company"), proposes to
issue and sell an aggregate of 6,000,000 shares of its common stock, no par
value per share, to the several Underwriters named in Schedule II hereto (the
"Underwriters"), and the persons named in Part A of Schedule I hereto (the
"Selling Stockholders") propose to sell to the several Underwriters an aggregate
of 1,500,000 shares of common stock of the Company. The Company and the Selling
Stockholders are hereinafter sometimes referred to as the "Sellers". The
Company's common stock, no par value, is hereinafter referred to as the "Common
Stock" and the 6,000,000 shares of Common Stock to be issued and sold to the
Underwriters by the Company and the 1,500,000 shares of Common Stock to be sold
to the Underwriters by the Selling Stockholders are hereinafter referred to as
the "Firm Shares". The Company and the Selling Stockholders listed in Part B of
Schedule I hereto also propose to sell to the Underwriters, upon the terms and
conditions set forth in Section 2 hereof, up to an additional 1,125,000 shares
(the "Additional Shares") of Common Stock. The Firm Shares and the Additional
Shares are hereinafter collectively referred to as the "Shares".
The Company and the Selling Stockholders wish to confirm their
respective agreements with you (the "Representatives") and
<PAGE> 2
Page 2
the other several Underwriters on whose behalf you are acting, in connection
with the several purchases of the Shares by the Underwriters as follows:
Registration Statement and Prospectus. The Company has prepared and
filed with the Securities and Exchange Commission (the "Commission") in
accordance with the provisions of the Securities Act of 1933, as amended, and
the rules and regulations of the Commission thereunder (collectively, the
"Act"), a registration statement on Form S-3 under the Act (the "registration
statement"), including a prospectus subject to completion relating to the
Shares. The term "Registration Statement" as used in this Agreement means the
registration statement (including all financial schedules and exhibits), as
amended at the time it becomes effective, or, if the registration statement
became effective prior to the execution of this Agreement, as supplemented or
amended prior to the execution of this Agreement. If it is contemplated, at the
time this Agreement is executed, that a post-effective amendment to the
registration statement will be filed and must be declared effective before the
offering of the Shares may commence, the term "Registration Statement" as used
in this Agreement means the registration statement as amended by said
post-effective amendment. If an abbreviated registration statement is prepared
and filed with the Commission in accordance with Rule 462(b) under the Act (an
"Abbreviated Registration Statement"), the term "Registration Statement" as used
in this Agreement includes the Abbreviated Registration Statement. The term
"Prospectus" as used in this Agreement means the prospectus in the form included
in the Registration Statement, or, if the prospectus included in the
Registration Statement omits information in reliance on Rule 430A under the Act
and such information is included in a prospectus filed with the Commission
pursuant to Rule 424(b) under the Act, the term "Prospectus" as used in this
Agreement means the prospectus in the form included in the Registration
Statement as supplemented by the addition of the Rule 430A information contained
in the prospectus filed with the Commission pursuant to Rule 424(b). The term
"Prepricing Prospectus" as used in this Agreement means the prospectus subject
to completion in the form included in the registration statement at the time of
the initial filing of the registration statement with the Commission, as the
same may have been amended from time to time prior to the date of the
Prospectus. Any reference in this Agreement to the registration statement, the
Registration Statement, any Prepricing Prospectus or the Prospectus shall be
deemed to refer to and include the documents incorporated by reference therein
pursuant to Item 12 of Form S-3 under the Act, as of the date of the
registration statement, the Registration Statement, such Prepricing Prospectus
or the Prospectus, as the case may be, and any reference to any amendment or
supplement to the registration statement, the Registration Statement, any
Prepricing Prospectus or the Prospectus shall be deemed to refer to and include
any documents filed after such date under the
<PAGE> 3
Page 3
Securities Exchange Act of 1934, as amended (the "Exchange Act"), which, upon
filing, are incorporated by reference therein, as required by paragraph (b) of
Item 12 of Form S-3. As used herein, the term "Incorporated Documents" means the
documents which at the time are incorporated by reference in the registration
statement, the Registration Statement, any Prepricing Prospectus, the
Prospectus, or any amendment or supplement thereto.
Agreements to Sell and Purchase. Subject to such adjustments
as you may determine in order to avoid fractional shares, the Company hereby
agrees, subject to all the terms and conditions set forth herein, to issue and
sell to each Underwriter and, upon the basis of the representations, warranties
and agreements of the Company and the Selling Stockholders herein contained and
subject to all the terms and conditions set forth herein, each Underwriter
agrees, severally and not jointly, to purchase from the Company, at a purchase
price of ______ per Share (the "purchase price per share"), the number of Firm
Shares which bears the same proportion to the aggregate number of Firm Shares to
be issued and sold by the Company as the number of Firm Shares set forth
opposite the name of such Underwriter in Schedule II hereto (or such number of
Firm Shares increased as set forth in Section 12 hereof) bears to the aggregate
number of Firm Shares to be sold by the Company and the Selling Stockholders.
Subject to such adjustments as you may determine in order to avoid
fractional shares, each Selling Stockholder agrees, subject to all the terms and
conditions set forth herein, to sell to each Underwriter and, upon the basis of
the representations, warranties and agreements of the Company and the Selling
Stockholders herein contained and subject to all the terms and conditions set
forth herein, each Underwriter, severally and not jointly, agrees to purchase
from each Selling Stockholder, at the purchase price per share, that number of
Firm Shares which bears the same proportion to the number of Firm Shares set
forth opposite the name of such Selling Stockholder in Schedule I hereto as the
number of Firm Shares set forth opposite the name of such Underwriter in
Schedule II hereto (or such number of Firm Shares increased as set forth in
Section 12 hereof) bears to the aggregate number of Firm Shares to be sold by
the Company and the Selling Stockholders.
The Company and the Selling Stockholders listed in Part B of Schedule I
hereto also agree, subject to all the terms and conditions set forth herein, to
sell to the Underwriters, and, upon the basis of the representations, warranties
and agreements of the Company and the Selling Stockholders herein contained and
subject to all the terms and conditions set forth herein, the Underwriters shall
have the right to purchase from the Company and the Selling Stockholders listed
in Part B of Schedule I hereto, at the purchase price per share, pursuant to an
option
<PAGE> 4
Page 4
(the "over-allotment option") which may be exercised at any time and from time
to time prior to 9:00 P.M., New York City time, on the 30th day after the date
of the Prospectus (or, if such 30th day shall be a Saturday or Sunday or a
holiday, on the next business day thereafter when the New York Stock Exchange is
open for trading), up to an aggregate of 230,295 Additional Shares from the
Company and up to an aggregate of 1,044,705 Shares from the Selling Stockholders
listed in Part B of Schedule I hereto (the maximum number of Additional Shares
which each of them agrees to sell upon the exercise by the Underwriters of the
over-allotment option is set forth opposite their respective names in Part B of
Schedule I). Additional Shares may be purchased only for the purpose of covering
over-allotments made in connection with the offering of the Firm Shares. The
number of Additional Shares which the Underwriters elect to purchase upon any
exercise of the over-allotment option shall be provided by the Company and by
each Selling Stockholder who has agreed to sell Additional Shares in the order
indicated in Part B of Schedule I. Upon any exercise of the over-allotment
option, each Underwriter, severally and not jointly, agrees to purchase from the
Company and each Selling Stockholder who has agreed to sell Additional Shares
the number of Additional Shares (subject to such adjustments as you may
determine in order to avoid fractional shares) subject to such exercise in the
order indicated in Part B of Schedule I.
Certificates in transferable form for the Shares (including any
Additional Shares) which each of the Selling Stockholders agrees to sell
pursuant to this Agreement have been placed in custody with (the
"Custodian") for delivery under this Agreement pursuant to a Custody Agreement
and Power of Attorney (the "Custody Agreement") executed by each of the Selling
Stockholders appointing and as agents and
attorneys-in-fact (the "Attorneys-in-Fact"). Each Selling Stockholder agrees
that (i) the Shares represented by the certificates held in custody pursuant to
the Custody Agreement are subject to the interests of the Underwriters, the
Company and each other Selling Stockholder, (ii) the arrangements made by the
Selling Stockholders for such custody are, except as specifically provided in
the Custody Agreement, irrevocable, and (iii) the obligations of the Selling
Stockholders hereunder and under the Custody Agreement shall not be terminated
by any act of such Selling Stockholder or by operation of law, whether by the
death or incapacity of any Selling Stockholder or the occurrence of any other
event. If any Selling Stockholder shall die or be incapacitated or if any other
event shall occur before the delivery of the Shares hereunder, certificates for
the Shares of such Selling Stockholder shall be delivered to the Underwriters by
the Attorneys-in-Fact in accordance with the terms and conditions of this
Agreement and the Custody Agreement as if such death or incapacity or other
event had not occurred, regardless of whether or not the Attorneys-in-Fact or
any Underwriter shall have received notice of such death, incapacity or other
event.
<PAGE> 5
Page 5
Pursuant to the terms and conditions of the Custody Agreement, each
Attorney-in-Fact is authorized, on behalf of each of the Selling Stockholders,
to execute this Agreement and any other documents necessary or desirable in
connection with the sale of the Shares to be sold hereunder by such Selling
Stockholder, to make delivery of the certificates for such Shares, to receive
the price per share, to give receipts for such proceeds, to pay therefrom any
expenses to be borne by such Selling Stockholder in connection with the sale and
public offering of such Shares, to distribute the balance thereof to such
Selling Stockholder, and to take such other action as may be necessary or
desirable in connection with the transactions contemplated by this Agreement.
Each Attorney-in-Fact has agreed to perform his duties under the Custody
Agreement.
Terms of Public Offering. The Sellers have been advised by you
that the Underwriters propose to make a public offering of their respective
portions of the Shares as soon after the Registration Statement and this
Agreement have become effective as in your judgment is advisable and initially
to offer the Shares upon the terms set forth in the Prospectus.
Delivery of the Shares and Payment Therefor. Delivery to the
Underwriters of and payment for the Firm Shares shall be made at the office of
Simpson Thacher & Bartlett, 425 Lexington Avenue, New York, NY 10017, at 10:00
A.M., New York City time, on September ___, 1997 (the "Closing Date"). The place
of closing for the Firm Shares and the Closing Date may be varied by agreement
among you, the Company and the Attorneys-in-Fact.
Delivery to the Underwriters of and payment for any Additional Shares
to be purchased by the Underwriters shall be made at the aforementioned office
of Simpson Thacher & Bartlett at such time on such date or dates (each such
date, an "Option Closing Date"), which may be the same as the Closing Date but
shall in no event be earlier than the Closing Date nor earlier than two nor
later than ten business days after the giving of the notice hereinafter referred
to, as shall be specified in a written notice from you on behalf of the
Underwriters to the Company and the Attorneys-in-Fact of the Underwriters'
determination to purchase a number, specified in such notice, of Additional
Shares. The place of closing for any Additional Shares and any Option Closing
Date for such Shares may be varied by agreement among you, the Company and the
Attorneys-in-Fact.
Certificates for the Firm Shares and for any Additional Shares to be
purchased hereunder shall be registered in such names and in such denominations
as you shall request prior to 9:30 A.M., New York City time, on the second
business day preceding the Closing Date or any Option Closing Date, as the case
may be. Such certificates shall be made available to you in New York City for
inspection and packaging not later than 9:30 A.M., New York City time, on the
business day next preceding the
<PAGE> 6
Page 6
Closing Date or the Option Closing Date, as the case may be. The certificates
evidencing the Firm Shares and any Additional Shares to be purchased hereunder
shall be delivered to you on the Closing Date or the Option Closing Date, as the
case may be, against payment of the purchase price therefor by wire transfer of
immediately available funds to the accounts specified in writing by the Company
and the Attorney-in-Fact.
Agreements of the Company. The Company agrees with the several
Underwriters as follows:
If, at the time this Agreement is executed and
delivered, it is necessary for the Registration Statement or a
post-effective amendment thereto to be declared effective before the
offering of the Shares may commence, the Company will endeavor to cause
the Registration Statement or such post-effective amendment to become
effective as soon as possible and will advise you promptly and, if
requested by you, will confirm such advice in writing, when the
Registration Statement or such post-effective amendment has become
effective.
The Company will advise you promptly and, if
requested by you, will confirm such advice in writing: (i) of any
request by the Commission for amendment of or a supplement to the
Registration Statement, any Prepricing Prospectus or the Prospectus or
for additional information; (ii) of the issuance by the Commission of
any stop order suspending the effectiveness of the Registration
Statement or of the suspension of qualification of the Shares for
offering or sale in any jurisdiction or the initiation of any
proceeding for such purpose; and (iii) within the period of time
referred to in paragraph (f) below, of any change in the Company's
condition (financial or other), business, prospects, properties, net
worth or results of operations, or of the happening of any event, which
makes any statement of a material fact made in the Registration
Statement or the Prospectus (as then amended or supplemented) untrue or
which requires the making of any additions to or changes in the
Registration Statement or the Prospectus (as then amended or
supplemented) in order to state a material fact required by the Act or
the regulations thereunder to be stated therein or necessary in order
to make the statements therein not misleading, or of the necessity to
amend or supplement the Prospectus (as then amended or supplemented) to
comply with the Act or any other law. If at any time the Commission
shall issue any stop order suspending the effectiveness of the
Registration Statement, the Company will make every reasonable effort
to obtain the withdrawal of such order at the earliest possible time.
The Company will furnish to you, without charge (i)
four signed copies of the registration statement as
<PAGE> 7
Page 7
originally filed with the Commission and of each amendment thereto,
including financial statements and all exhibits to the registration
statement, (ii) such number of conformed copies of the registration
statement as originally filed and of each amendment thereto, but
without exhibits, as you may request, (iii) such number of copies of
the Incorporated Documents, without exhibits, as you may request, and
(iv) four copies of the exhibits to the Incorporated Documents.
The Company will not file any amendment to the
Registration Statement or make any amendment or supplement to the
Prospectus or, prior to the end of the period of time referred to in
the first sentence in subsection (f) below, file any document which,
upon filing becomes an Incorporated Document, of which you shall not
previously have been advised or to which, after you shall have received
a copy of the document proposed to be filed, you shall reasonably
object.
Prior to the execution and delivery of this
Agreement, the Company has delivered to you, without charge, in such
quantities as you have requested, copies of each form of the Prepricing
Prospectus. The Company consents to the use, in accordance with the
provisions of the Act and with the securities or Blue Sky laws of the
jurisdictions in which the Shares are offered by the several
Underwriters and by dealers, prior to the date of the Prospectus, of
each Prepricing Prospectus so furnished by the Company.
As soon after the execution and delivery of this
Agreement as possible and thereafter from time to time for such period
as in the opinion of counsel for the Underwriters a prospectus is
required by the Act to be delivered in connection with sales by any
Underwriter or dealer, the Company will expeditiously deliver to each
Underwriter and each dealer, without charge, as many copies of the
Prospectus (and of any amendment or supplement thereto) as you may
request. The Company consents to the use of the Prospectus (and of any
amendment or supplement thereto) in accordance with the provisions of
the Act and with the securities or Blue Sky laws of the jurisdictions
in which the Shares are offered by the several Underwriters and by all
dealers to whom Shares may be sold, both in connection with the
offering and sale of the Shares and for such period of time thereafter
as the Prospectus is required by the Act to be delivered in connection
with sales by any Underwriter or dealer. If during such period of time
any event shall occur that in the judgment of the Company or in the
opinion of counsel for the Underwriters is required to be set forth in
the Prospectus (as then amended or supplemented) or should be set forth
therein in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading, or
<PAGE> 8
Page 8
if it is necessary to supplement or amend the Prospectus (or to file
under the Exchange Act any document which, upon filing, becomes an
Incorporated Document) in order to comply with the Act or any other
law, the Company will forthwith prepare and, subject to the provisions
of paragraph (d) above, file with the Commission an appropriate
supplement or amendment thereto (or to such document), and will
expeditiously furnish to the Underwriters and dealers a reasonable
number of copies thereof. In the event that the Company and you, as
Representatives of the several Underwriters, agree that the Prospectus
should be amended or supplemented, the Company, if requested by you,
will promptly issue a press release announcing or disclosing the
matters to be covered by the proposed amendment or supplement.
The Company will cooperate with you and with counsel
for the Underwriters in connection with the registration or
qualification of the Shares for offering and sale by the several
Underwriters and by dealers under the securities or Blue Sky laws of
such jurisdictions as you may designate and will file such consents to
service of process or other documents necessary or appropriate in order
to effect such registration or qualification; provided that in no event
shall the Company be obligated to qualify to do business in any
jurisdiction where it is not now so qualified or to take any action
which would subject it to service of process in suits, other than those
arising out of the offering or sale of the Shares, in any jurisdiction
where it is not now so subject.
The Company will make generally available to its
security holders a consolidated earnings statement, which need not be
audited, covering a twelve-month period commencing after the effective
date of the Registration Statement and ending not later than 15 months
thereafter, as soon as practicable after the end of such period, which
consolidated earnings statement shall satisfy the provisions of Section
11(a) of the Act.
During the period of three years hereafter, the
Company will furnish to you (i) as soon as available, a copy of each
report of the Company mailed to stockholders or filed with the
Commission, and (ii) from time to time such other information
concerning the Company as you may request.
If this Agreement shall terminate or shall be
terminated after execution pursuant to any provisions hereof
(otherwise than pursuant to the second paragraph of Section 12 hereof
or by notice given by you terminating this Agreement pursuant to
Section 12 or Section 13 hereof) or if this Agreement shall be
terminated by the Underwriters because of any failure or refusal on the
part of the Company or the Selling Stockholders to comply with the
terms or
<PAGE> 9
Page 9
fulfill any of the conditions of this Agreement, the Company agrees to
reimburse the Representatives for all out-of-pocket expenses (including
fees and expenses of counsel for the Underwriters) incurred by you in
connection herewith.
The Company will apply the net proceeds from the sale
of the Shares to be sold by it hereunder substantially in accordance
with the description set forth in the Prospectus.
If Rule 430A of the Act is employed, the Company will
timely file the Prospectus pursuant to Rule 424(b) under the Act and
will advise you of the time and manner of such filing.
Except as provided in this Agreement, the Company
will not sell, contract to sell or otherwise dispose of any Common
Stock or any securities convertible into or exercisable or exchangeable
for Common Stock, or grant any options or warrants to purchase Common
Stock, for a period of 120 days after the date of the Prospectus,
without the prior written consent of Smith Barney Inc.
The Company has furnished or will furnish to you "lock-up"
letters, in form and substance satisfactory to you, signed by each of
its current officers and directors and by each holder of its equity
securities designated by you.
Except as stated in this Agreement and in the
Prepricing Prospectus and Prospectus, the Company has not taken, nor
will it take, directly or indirectly, any action designed to or that
might reasonably be expected to cause or result in stabilization or
manipulation of the price of the Common Stock to facilitate the sale or
resale of the Shares.
The Company will use its best efforts to have the
shares of Common Stock which it agrees to sell under this Agreement
listed, subject to notice of issuance, on the New York Stock Exchange
on or before the Closing Date.
Agreements of the Selling Stockholders. Each of the Selling
Stockholders agrees with the several Underwriters as follows:
Such Selling Stockholder will cooperate to the extent
necessary to cause the registration statement or any post-effective
amendment thereto to become effective at the earliest possible time.
Such Selling Stockholder will pay all Federal and
other taxes, if any, on the transfer or sale of the Shares being sold
by the Selling Stockholder to the Underwriters.
<PAGE> 10
Page 10
Such Selling Stockholder will do or perform all
things required to be done or performed by such Selling Stockholder
prior to the Closing Date or any Option Closing Date, as the case may
be, to satisfy all conditions precedent to the delivery of the Shares
pursuant to this Agreement.
Such Selling Stockholder has executed or will execute
a "lock-up" letter substantially similar to the letter referred to in
Section 5(n) above and will not sell, contract to sell or otherwise
dispose of any Common Stock, except for the sale of Shares to the
Underwriters pursuant to this Agreement, prior to the expiration of 120
days after the date of the Prospectus, without the prior written
consent of Smith Barney Inc.
Except as stated in this Agreement and in the
Prepricing Prospectus and the Prospectus, such Selling Stockholder will
not take, directly or indirectly, any action designed to or that might
reasonably be expected to cause or result in stabilization or
manipulation of the price of the Common Stock to facilitate the sale or
resale of the Shares.
Such Selling Stockholder will advise you promptly,
and if requested by you, will confirm such advice in writing, within
the period of time referred to in Section 5(f) hereof, of any change in
information relating to such Selling Stockholder or the Company or any
new information relating to the Company or relating to any matter
stated in the Prospectus or any amendment or supplement thereto which
comes to the attention of such Selling Stockholder that suggests that
any statement made in the Registration Statement or the Prospectus (as
then amended or supplemented, if amended or supplemented) is or may be
untrue in any material respect or that the Registration Statement or
Prospectus (as then amended or supplemented, if amended or
supplemented) omits or may omit to state a material fact or a fact
necessary to be stated therein in order to make the statements therein
not misleading in any material respect, or of the necessity to amend or
supplement the Prospectus (as then amended or supplemented, if amended
or supplemented) in order to comply with the Act or any other law.
Representations and Warranties of the Company. The Company
represents and warrants to each Underwriter that:
Each Prepricing Prospectus included as part of the
registration statement as originally filed or as part of any amendment
or supplement thereto, or filed pursuant to Rule 424 under the Act,
complied when so filed in all material
<PAGE> 11
Page 11
respects with the provisions of the Act. The Commission has not issued
any order preventing or suspending the use of any Prepricing
Prospectus.
The Company and the transactions contemplated by this
Agreement meet the requirements for using Form S-3 under the Act. The
registration statement in the form in which it became or becomes
effective and also in such form as it may be when any post-effective
amendment thereto shall become effective and the prospectus and any
supplement or amendment thereto when filed with the Commission under
Rule 424(b) under the Act, complied or will comply in all material
respects with the provisions of the Act and will not at any such times
contain an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading, except that this representation and
warranty does not apply to statements in or omissions from the
registration statement or the prospectus made in reliance upon and in
conformity with information relating to any Underwriter or Selling
Stockholder furnished to the Company in writing by or on behalf of any
Underwriter through you expressly for use therein.
The Incorporated Documents heretofore filed, when they were
filed (or, if any amendment with respect to any such document was
filed, when such amendment was filed), conformed in all material
respects with the requirements of the Exchange Act and the rules and
regulations thereunder, any further Incorporated Documents so filed
will, when they are filed, conform in all material respects with the
requirements of the Exchange Act and the rules and regulations
thereunder; no such document when it was filed (or, if an amendment
with respect to any such document was filed, when such amendment was
filed), contained an untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary in
order to make the statements therein not misleading; and no such
further document, when it is filed, will contain an untrue statement of
a material fact or will omit to state a material fact required to be
stated therein or necessary in order to make the statements therein not
misleading.
The Company and each of its subsidiaries have been duly
incorporated and are validly existing as corporations in good standing
under the laws of their respective jurisdictions of incorporation, are
duly qualified to do business and are in good standing as foreign
corporations in each jurisdiction in which their respective ownership
or lease of property or the conduct of their respective businesses
requires such qualification, and have all power and authority necessary
to own or hold their respective properties and to conduct the
businesses in which they are
<PAGE> 12
Page 12
engaged, except where the failure to so qualify or have such power or
authority would not have, individually or in the aggregate, a material
adverse effect on the condition (financial or otherwise), results of
operations, business or prospects of the Company and its subsidiaries
taken as a whole.
The Company has full right, power and authority to execute
and deliver this Agreement and to perform its obligations hereunder;
and all corporate action required to be taken for the due and proper
authorization, execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been duly and
validly taken.
The execution and delivery of, and the performance by the
Company of its obligations under, this Agreement have been duly and
validly authorized by the Company, and this Agreement has been duly
executed and delivered by the Company and constitutes a valid and
binding agreement of the Company enforceable against the Company in
accordance with its terms except, as enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium and other similar
laws relating to or affecting creditors' rights generally and by
general equitable principles (regardless of whether such enforceability
is considered in a proceeding in equity or at law) and except as rights
to indemnity and contribution hereunder may be limited by federal or
state securities laws; and the Shares conform to the descriptions
thereof contained in the Prospectus.
Except as disclosed in the Registration Statement and
the Prospectus (or any amendment or supplement thereto), subsequent to
the respective dates as of which such information is given in the
Registration Statement and the Prospectus (or any amendment or
supplement thereto), neither the Company nor any of the Subsidiaries
has incurred any liability or obligation, direct or contingent, or
entered into any transaction, not in the ordinary course of business,
that is material to the Company and its subsidiaries taken as a whole,
and there has not been any change in the capital stock, or material
increase in the short-term debt or long-term debt, of the Company or
any of its subsidiaries, or any material adverse change, or any
development involving or which may reasonably be expected to involve, a
prospective material adverse change, in the condition (financial or
other), results of operations, business or prospects of the Company and
its subsidiaries taken as a whole.
The Company has not distributed and, prior to the
later to occur of (i) the Closing Date (or the Option Closing Date, if
any) and (ii) completion of the
<PAGE> 13
Page 13
distribution of the Shares, will not distribute any offering material
in connection with the offering and sale of the Shares other than the
Registration Statement, the Prepricing Prospectus, the Prospectus or
other materials, if any, permitted by the Act.
The Shares to be issued and sold by the Company hereunder,
when issued and delivered to the Underwriters against payment therefor
in accordance with the terms hereof, will be duly authorized, validly
issued, fully paid and non-assessable, will not be subject to any
preemptive or similar rights and will be free and clear of all liens,
encumbrances, equities and claims or restrictions on transferability
(other than those, if any, imposed by the Act and the securities or
Blue Sky laws of certain jurisdictions) or voting.
The issued and outstanding shares of capital stock of the
Company have been duly authorized and validly issued and are fully paid
and nonassessable; the capital stock conforms to all statements
relating thereto in the Prospectus; the Company has authorized, issued
and outstanding capital stock as set forth under "Description of
Capital Stock" in the Prospectus (except for subsequent issuances
pursuant to reservations, agreements, employee benefits plans or the
exercise of convertible securities and warrants referred to in the
Prospectus); and the stockholders have no preemptive rights or similar
rights with respect to the Common Stock.
Except as set forth in the Prospectus, there are no
outstanding (i) securities or obligations of the Company convertible
into or exchangeable for any capital stock of the Company, (ii)
warrants, rights or options to subscribe for or purchase from the
Company any such capital stock or any such convertible or exchangeable
securities or obligations, or (iii) obligations of the Company to issue
any such convertible or exchangeable securities or obligations, or any
such warrants, rights or obligations.
Except as set forth in the Prospectus, the Company and each
of its subsidiaries have good and marketable title in fee simple to, or
have valid rights to lease or otherwise use, all items of real or
personal property which are material to the business of the Company and
its subsidiaries taken as a whole, free and clear of all liens,
encumbrances, claims and defects that may materially interfere with the
condition (financial or otherwise), results of operations, business or
prospects of the Company and its subsidiaries taken as a whole.
All of the outstanding shares of capital stock of each
subsidiary of the Company have been duly and validly authorized and
issued and are fully paid and non-assessable
<PAGE> 14
Page 14
and are owned directly or indirectly by the Company through one or more
wholly-owned subsidiaries, free and clear of any claim, lien,
encumbrance, security interest, restriction upon voting or transfer or
any other claim of any third party and are in the possession of the
Company.
The execution, delivery and performance of this Agreement by
the Company, the issuance and sale of the Shares to be sold by the
Company hereunder and the consummation of the transactions contemplated
hereby will not conflict with or result in a breach or violation of any
of the terms or provisions of, or constitute a default under, any
indenture, mortgage, deed of trust, loan agreement or other agreement
or instrument to which the Company or any of its subsidiaries is a
party or by which the Company or any of its subsidiaries is bound or to
which any of the property or assets of the Company or any of its
subsidiaries is subject except where any of the same would not
reasonably be expected to have a material adverse effect on the
operations of the Company or the subsidiaries to which such conflict,
breach, violation or default relates, nor will such actions result in
any violation of the provisions of the charter or by-laws of the
Company or any of its subsidiaries or any statute or any order, rule or
regulation of any court or governmental agency or body having
jurisdiction over the Company or any of its subsidiaries or any of
their properties or assets except where any of the same would not
reasonably be expected to have a material adverse effect on the
operations of the Company or the subsidiaries to which such violation
relates; and except for the registration of the Shares under the Act,
such consents, approvals, authorizations, registrations or
qualifications as may be required under the Exchange Act and applicable
state securities laws in connection with the purchase and distribution
of the Shares by the Underwriters, no consent, approval, authorization
or order of, or filing or registration with, any such court or
governmental agency or body is required for the execution, delivery and
performance of this Agreement by the Company, the issuance and sale of
the Shares to be sold by the Company hereunder and the consummation of
the transactions contemplated hereby.
The financial statements (including the related notes and
supporting schedules) filed as part of the Registration Statement or
included or incorporated by reference in the Prospectus present fairly
the financial condition and results of operations of the entities
purported to be shown thereby, at the dates and for the periods
indicated, and have been prepared in conformity with generally accepted
accounting principles applied on a consistent basis throughout the
periods involved; and the other financial and statistical information
and data included or incorporated by
<PAGE> 15
Page 15
reference in the Registration Statement and the Prospectus (and any
amendment or supplement thereto) are accurately presented and prepared
on a basis consistent with such financial statements and the books and
records of the Company and its subsidiaries.
There are no contracts or other documents which are required
to be described in the Prospectus or filed as exhibits to the
Registration Statement or any Incorporated Document by the Securities
Act which have not been so described or filed.
Except as disclosed in the Registration Statement and the
Prospectus, there are no legal or governmental proceedings pending to
which the Company or any of its subsidiaries is a party or of which any
property or assets of the Company or any of its subsidiaries is the
subject which, individually or in the aggregate, if determined
adversely to the Company or any of its subsidiaries, are reasonably
likely to have a material adverse effect on the condition (financial or
otherwise), results of operations, business or prospects of the Company
and its subsidiaries taken as a whole; and to the best of the Company's
knowledge, no such proceedings are threatened or contemplated by
governmental authorities or threatened by others.
Neither the Company nor any of its subsidiaries (i) is in
violation of its charter or by-laws, (ii) is in default in any material
respect, and no event has occurred which, with notice or lapse of time
or both, would constitute such a default, in the due performance or
observance of any term, covenant or condition contained in any material
indenture, mortgage, deed of trust, loan agreement or other agreement
or instrument to which it is a party or by which it is bound or to
which any of its property or assets is subject or (iii) is in violation
in any respect of any law, ordinance, governmental rule, regulation or
court decree to which it or its property or assets may be subject,
except any violation or default that would not have a material adverse
effect on the condition (financial or otherwise), results of
operations, business or prospects of the Company and its subsidiaries
taken as a whole.
The Company and each of its subsidiaries possess all
material licenses, certificates, authorizations and permits issued by,
and have made all declarations and filings with, the appropriate state,
federal or foreign regulatory agencies or bodies which are necessary
for the ownership of their respective properties or the conduct of
their respective businesses as described in the Prospectus, except
where the failure to possess or make the same would not
<PAGE> 16
Page 16
have, individually or in the aggregate, a material adverse effect on
the condition (financial or otherwise), results of operations, business
or prospects of the Company and its subsidiaries taken as a whole, and
the Company has not received notification of any revocation or
modification of any such license, authorization or permit and has no
reason to believe that any such license, certificate, authorization or
permit will not be renewed.
The Company and each of its subsidiaries own or possess
adequate rights to use all material patents, patent applications,
trademarks, service marks, trade names, trademark registrations,
service mark registrations, copyrights, licenses and know how
(including trade secrets and other unpatented and/or unpatentable
proprietary or confidential information, systems or procedures)
necessary for the conduct of their respective businesses and are not
aware that the conduct of their respective businesses will conflict
with, and have not received any notice of any claim of conflict with,
any such rights of others.
No labor disturbance by the employees of the Company or any
of its subsidiaries exists or, to the best of the Company's knowledge,
is imminent which might be expected to have a material adverse effect
on the condition (financial or otherwise), results of operations,
business or prospects of the Company and its subsidiaries taken as a
whole.
No "prohibited transaction" (as defined in Section 406 of
the Employee Retirement Income Security Act of 1974, as amended,
including the regulations and published interpretations thereunder
("ERISA"), or Section 4975 of the Internal Revenue Code of 1986, as
amended from time to time (the "Code")) or "accumulated funding
deficiency" (as defined in Section 302 of ERISA) or any of the events
set forth in Section 4043(b) of ERISA (other than events with respect
to which the 30-day notice requirement under Section 4043 of ERISA has
been waived) has occurred with respect to any employee benefit plan
which could have a material adverse effect on the condition (financial
or otherwise), results of operations, business or prospects of the
Company and its subsidiaries taken as a whole; each employee benefit
plan is in compliance in all material respects with applicable law,
including ERISA and the Code; the Company has not incurred and does not
expect to incur liability under Title IV of ERISA with respect to the
termination of, or withdrawal from, any "pension plan"; and each
"pension plan" (as defined in ERISA) for which the Company would have
any liability that is intended to be qualified under Section 401(a) of
the Code is so qualified in all material respects and nothing has
occurred, whether by action or by failure to act, which could cause the
loss of such qualification.
<PAGE> 17
Page 17
Except as disclosed in the Registration Statement and the
Prospectus, there has been no storage, generation, transportation,
handling, treatment, disposal, discharge, emission, or other release of
any kind of toxic or other wastes or other hazardous substances by, due
to, or caused by the Company or any of its subsidiaries (or, to the
best of the Company's knowledge, any other entity for whose acts or
omissions the Company or any of its subsidiaries is or may be liable)
upon any of the property now or previously owned or leased by the
Company or any of its subsidiaries, or upon any other property, in
violation of any statute or any ordinance, rule, regulation, order,
judgment, decree or permit or which would, under any statute or any
ordinance, rule (including rule of common law), regulation, order,
judgment, decree or permit, give rise to any liability, except for any
violation or liability which would not have, individually or in the
aggregate with all such violations and liabilities, a material adverse
effect on the condition (financial or otherwise), results of
operations, business or prospects of the Company and its subsidiaries
taken as a whole; except as disclosed in the Registration Statement and
the Prospectus, there has been no disposal, discharge, emission or
other release of any kind onto such property or into the environment
surrounding such property of any toxic or other wastes or other
hazardous substances with respect to which the Company or any of its
subsidiaries have knowledge, except for any such disposal, discharge,
emission, or other release of any kind which would not have,
individually or in the aggregate with all such discharges and other
releases, a material adverse effect on the condition (financial or
otherwise), results of operations, business or prospects of the Company
and its subsidiaries taken as a whole.
Except for General Electric Capital Corporation ("GECC") or
PMAC, Ltd. and its affiliates (collectively, "PMAC"), there are no
persons with registration or other similar rights either to have any
securities registered pursuant to the Registration Statement or to have
any securities otherwise registered by the Company under the Act in
connection with or as a result of the execution, delivery and
performance of this Agreement, and any such registration or other
similar rights of GECC or PMAC in connection with or as a result of the
execution, delivery and performance of this Agreement will have been
satisfied, discharged or waived in their entireties upon consummation
of the sale of the Shares as contemplated herein.
Neither the Company nor any of its subsidiaries is an
"investment company" within the meaning of the Investment
Company Act of 1940, as amended (the "Investment Company Act"), and the
rules and regulations of the Commission thereunder.
<PAGE> 18
Page 18
The Company has complied with all provisions of Florida
Statutes, 517.075, relating to issuers doing business with Cuba.
Representations and Warranties of the Selling
Stockholders. Each Selling Stockholder represents and warrants
to each Underwriter that:
Such Selling Stockholder now has, and on the Closing
Date and any Option Closing Date will have, valid and marketable title
to the Shares to be sold by such Selling Stockholder, free and clear of
any lien, claim, security interest or other encumbrance, including,
without limitation, any restriction on transfer.
Such Selling Stockholder now has, and on the Closing
Date and any Option Closing Date will have, full legal right, power and
authorization, and any approval required by law, to sell, assign
transfer and deliver such Shares in the manner provided in this
Agreement, and upon delivery of and payment for such Shares hereunder,
the several Underwriters will acquire valid and marketable title to
such Shares, free and clear of any lien, claim, security interest, or
other encumbrance.
This Agreement and the Custody Agreement have been
duly authorized, executed and delivered by or on behalf of such Selling
Stockholder and are the valid and binding agreements of such Selling
Stockholder enforceable against such Selling Stockholder in accordance
with their terms, except as enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium and other similar
laws relating to or affecting creditors' rights generally and by
general equitable principles (regardless of whether such enforceability
is considered in a proceeding in equity or at law).
Neither the execution and delivery of this Agreement
or the Custody Agreement by or on behalf of such Selling Stockholder
nor the consummation of the transactions herein or therein contemplated
by or on behalf of such Selling Stockholder requires any consent,
approval, authorization or order of, or filing or registration with,
any court, regulatory body, administrative agency or other governmental
body, agency or official (except such as may be required under the Act
and the Exchange Act or such as may be required under state securities
or Blue Sky laws governing the purchase and distribution of the Shares)
or conflicts or will conflict with or constitutes or will constitute a
breach of, or default under, or violates or will violate, any
agreement, indenture or other instrument to which such Selling
Stockholder is a party or by which
<PAGE> 19
Page 19
such Selling Stockholder is or may be bound or to which any of such
Selling Stockholder's property or assets is subject, or any statute,
law, rule, regulation, ruling, judgment, injunction, order or decree
applicable to such Selling Stockholder or to any property or assets of
such Selling Stockholder.
The Registration Statement and the Prospectus,
insofar as they relate to such Selling Stockholder, do not and will not
contain an untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading.
Such Selling Stockholder does not have any
knowledge or any reason to believe that the Registration Statement or
the Prospectus (or any amendment or supplement thereto) contains any
untrue statement of a material fact or omits to state any material fact
required to be stated therein or necessary to make the statements
therein concerning such Selling Stockholder not misleading.
The representations and warranties of such Selling
Stockholder in the Custody Agreement are, and on the Closing Date and
any Option Closing Date will be, true and correct.
Except as stated in this Agreement and in the Prepricing
Prospectus and Prospectus, such Selling Stockholder has not taken, nor
will it take directly or indirectly, any action designed to or that
might reasonably be expected to cause or result in stabilization or
manipulation of the price of the Common Stock to facilitate the sale or
resale of the Shares, except for the lock-up arrangements described in
the Prospectus.
Indemnification and Contribution. A. The Company, agrees to
indemnify and hold harmless each of you and each other Underwriter and each
person, if any, who controls any Underwriter within the meaning of Section 15 of
the Act or Section 20 of the Exchange Act from and against any and all losses,
claims, damages, liabilities and expenses (including reasonable costs of
investigation) arising out of or based upon any untrue statement or alleged
untrue statement of a material fact contained in any Prepricing Prospectus or in
the Registration Statement or the Prospectus or in any amendment or supplement
thereto, or arising out of or based upon any omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, except insofar as such losses, claims,
damages, liabilities or expenses arise out of or are based upon any untrue
statement or omission or alleged untrue statement or omission which has been
made therein or omitted therefrom in reliance upon and in conformity
<PAGE> 20
Page 20
with the information exclusively relating to such Underwriter furnished in
writing to the Company by or on behalf of any Underwriter through you expressly
for use in connection therewith; provided, however, that the indemnification
contained in this paragraph (a) with respect to any Prepricing Prospectus shall
not inure to the benefit of any Underwriter (or to the benefit of any person
controlling such Underwriter) on account of any such loss, claim, damage,
liability or expense arising from the sale of the Shares by such Underwriter to
any person if a copy of the Prospectus shall not have been delivered or sent to
such person within the time required by the Act and the regulations thereunder,
and the untrue statement or alleged untrue statement or omission or alleged
omission of a material fact contained in such Prepricing Prospectus was
corrected in the Prospectus, provided that the Company has delivered the
Prospectus to the several Underwriters in requisite quantity on a timely basis
to permit such delivery or sending. The foregoing indemnity agreement
shall be in addition to any liability which the Company may otherwise have.
If any action, suit or proceeding shall be brought against any
Underwriter or any person controlling any Underwriter in respect of which
indemnity may be sought against the Company or any Selling Stockholder (pursuant
to clause (c) below), such Underwriter or such controlling person shall promptly
notify the parties against whom indemnification is being sought (the
"indemnifying parties") and such indemnifying parties shall assume the defense
thereof, including the employment of counsel and payment of all reasonable fees
and expenses. Such Underwriter or any such controlling person shall have the
right to employ separate counsel in any such action, suit or proceeding and to
participate in the defense thereof, but the fees and expenses of such counsel
shall be at the expense of such Underwriter or such controlling person unless
(i) the indemnifying parties have agreed in writing to pay such fees and
expenses, (ii) the indemnifying parties have failed to assume the defense and
employ counsel, or (iii) the named parties to any such action, suit or
proceeding (including any impleaded parties) include both such Underwriter or
such controlling person and the indemnifying parties and such Underwriter or
such controlling person shall have been advised by its counsel that
representation of such indemnified party and any indemnifying party by the same
counsel would be inappropriate under applicable standards of professional
conduct (whether or not such representation by the same counsel has been
proposed) due to actual or potential differing interests between them (in which
case the indemnifying party shall not have the right to assume the defense of
such action, suit or proceeding on behalf of such Underwriter or such
<PAGE> 21
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controlling person). It is understood, however, that the indemnifying parties
shall, in connection with any one such action, suit or proceeding or separate
but substantially similar or related actions, suits or proceedings in the same
jurisdiction arising out of the same general allegations or circumstances, be
liable for the reasonable fees and expenses of only one separate firm of
attorneys (in addition to any local counsel) at any time for all such
Underwriters and controlling persons not having actual or potential differing
interests with you or among themselves, which firm for such Underwriters and
controlling persons shall be designated in writing by Smith Barney Inc., and
that all such fees and expenses shall be reimbursed as they are incurred. The
indemnifying parties shall not be liable for any settlement of any such action,
suit or proceeding effected without their written consent, but if settled with
such written consent, or if there be a final judgment for the plaintiff in any
such action, suit or proceeding, the indemnifying parties agree to indemnify and
hold harmless any Underwriter, to the extent provided in the preceding
paragraph, and any such controlling person from and against any loss, claim,
damage, liability or expense by reason of such settlement or judgment.
Each Selling Stockholder agrees, severally and not jointly,
to indemnify and hold harmless each of you and each other Underwriter and each
person, if any, who controls any Underwriter within the meaning of Section 15 of
the Act or Section 20 of the Exchange Act, the Company, its directors, its
officers who sign the Registration Statement, and any person who controls the
Company within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act to the same extent as the foregoing indemnity from the Company to
each Underwriter, but only with respect to the information furnished in writing
by or on behalf of such Selling Stockholder expressly for use in the
Registration Statement, the Prospectus or any Prepricing Prospectus, or any
amendment or supplement thereto. If any action, suit or proceeding shall be
brought against any Underwriter, any such controlling person of any Underwriter,
the Company, any of its directors, any such officer, or any such controlling
person of the Company, based on the Registration Statement, the Prospectus or
any Prepricing Prospectus or any amendment or supplement thereto, and in respect
of which indemnity may be sought against any Selling Stockholder pursuant to
this paragraph (c), such Selling Stockholder shall have the rights and duties
given to the Company by paragraph (b) above (except that if the Company shall
have assumed the defense thereof such Selling Stockholder shall not be required
to do so, but may employ separate counsel therein and participate in the defense
thereof, but the fees and expenses of such counsel shall be at such Selling
Stockholder's expense), and each Underwriter, each such controlling person of
any Underwriter, the Company, its directors, any such officer, and any such
controlling person of the Company shall have the rights and duties given to the
<PAGE> 22
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Underwriters by paragraph (b) above. The foregoing indemnity agreement shall be
in addition to any liability which any Selling Stockholder may otherwise have.
Each Underwriter agrees, severally and not jointly, to
indemnify and hold harmless the Company, its directors, its officers who sign
the Registration Statement, each Selling Stockholder, and any person who
controls the Company within the meaning of Section 15 of the Act or Section 20
of the Exchange Act, to the same extent as the foregoing indemnity from the
Company and the Selling Stockholders to each Underwriter, but only with respect
to information exclusively relating to such Underwriter furnished in writing by
or on behalf of such Underwriter through you expressly for use in the
Registration Statement, the Prospectus or any Prepricing Prospectus, or any
amendment or supplement thereto. If any action, suit or proceeding shall be
brought against the Company, any of its directors, any such officer, any Selling
Stockholder, or any such controlling person based on the Registration Statement,
the Prospectus or any Prepricing Prospectus, or any amendment or supplement
thereto, and in respect of which indemnity may be sought against any Underwriter
pursuant to this paragraph (d), such Underwriter shall have the rights and
duties given to the Company by paragraph (b) above (except that if the Company
shall have assumed the defense thereof such Underwriter shall not be required to
do so, but may employ separate counsel therein and participate in the defense
thereof, but the fees and expenses of such counsel shall be at such
Underwriter's expense), and the Company, its directors, any such officer, the
Selling Stockholders, and any such controlling person shall have the rights and
duties given to the Underwriters by paragraph (b) above. The foregoing indemnity
agreement shall be in addition to any liability which any Underwriter may
otherwise have.
If the indemnification provided for in this Section 9 is
unavailable to an indemnified party under paragraphs (a), (c) or (d) hereof in
respect of any losses, claims, damages, liabilities or expenses referred to
therein, then an indemnifying party, in lieu of indemnifying such indemnified
party, shall contribute to the amount paid or payable by such indemnified party
as a result of such losses, claims, damages, liabilities or expenses (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company and the Selling Stockholders on the one hand and the Underwriters on the
other hand from the offering of the Shares, or (ii) if the allocation provided
by clause (i) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of the Company and the Selling Stockholders on
the one hand and the Underwriters on the other in connection with the statements
or omissions that resulted in such losses, claims, damages, liabilities or
expenses, as well as any other relevant equitable considerations. The relative
benefits received by the
<PAGE> 23
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Company and the Selling Stockholders on the one hand and the Underwriters on the
other shall be deemed to be in the same proportion as the total net proceeds
from the offering (before deducting expenses) received by the Company and the
Selling Stockholders bear to the total underwriting discounts and commissions
received by the Underwriters, in each case as set forth in the table on the
cover page of the Prospectus; provided that, in the event that the Underwriters
shall have purchased any Additional Shares hereunder, any determination of the
relative benefits received by the Company, the Selling Stockholders or the
Underwriters from the offering of the Shares shall include the net proceeds
(before deducting expenses) received by the Company and the Selling
Stockholders, and the underwriting discounts and commissions received by the
Underwriters, from the sale of such Additional Shares, in each case computed on
the basis of the respective amounts set forth in the notes to the table on the
cover page of the Prospectus. The relative fault of the Company and the Selling
Stockholders on the one hand and the Underwriters on the other hand shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Company or the Selling
Stockholders on the one hand or by the Underwriters on the other hand and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission.
The Company, the Selling Stockholders and the Underwriters
agree that it would not be just and equitable if contribution pursuant to this
Section 9 were determined by a pro rata allocation (even if the Underwriters
were treated as one entity for such purpose) or by any other method of
allocation that does not take account of the equitable considerations referred
to in paragraph (e) above. The amount paid or payable by an indemnified party as
a result of the losses, claims, damages, liabilities and expenses referred to in
paragraph (e) above shall be deemed to include, subject to the limitations set
forth above, any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating any claim or defending any such action,
suit or proceeding. Notwithstanding the provisions of this Section 9, no
Underwriter shall be required to contribute any amount in excess of the amount
by which the total price of the Shares underwritten by it and distributed to the
public exceeds the amount of any damages which such Underwriter has otherwise
been required to pay by reason of such untrue or alleged untrue statement or
omission or alleged omission. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations to contribute pursuant to this
Section 9 are several in proportion to the respective numbers of Firm Shares set
forth opposite their names in Schedule II hereto (or
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Page 24
such numbers of Firm Shares increased as set forth in Section 12 hereof) and not
joint.
No indemnifying party shall, without the prior written consent of the
indemnified party, effect any settlement of any pending or threatened action,
suit or proceeding in respect of which any indemnified party is or could have
been a party and indemnity could have been sought hereunder by such indemnified
party, unless such settlement includes an unconditional release of such
indemnified party from all liability on claims that are the subject matter of
such action, suit or proceeding.
Any losses, claims, damages, liabilities or expenses for which
an indemnified party is entitled to indemnification or contribution under this
Section 9 shall be paid by the indemnifying party to the indemnified party as
such losses, claims, damages, liabilities or expenses are incurred. The
indemnity and contribution agreements contained in this Section 9 and the
representations and warranties of the Company and the Selling Stockholders set
forth in this Agreement shall remain operative and in full force and effect,
regardless of (i) any investigation made by or on behalf of any Underwriter or
any person controlling any Underwriter, the Company, its directors or officers
or the Selling Stockholders or any person controlling the Company, (ii)
acceptance of any Shares and payment therefor hereunder, and (iii) any
termination of this Agreement. A successor to any Underwriter or any person
controlling any Underwriter, or to the Company, its directors or officers, or
any person controlling the Company, shall be entitled to the benefits of the
indemnity, contribution and reimbursement agreements contained in this Section
9.
Conditions of Underwriters' Obligations. The several
obligations of the Underwriters to purchase the Firm Shares
hereunder are subject to the following conditions:
If, at the time this Agreement is executed and
delivered, it is necessary for the registration statement or a
post-effective amendment thereto to be declared effective before the
offering of the Shares may commence, the registration statement or such
post-effective amendment shall have become effective not later than
5:30 P.M., New York City time, on the date hereof, or at such later
date and time as shall be consented to in writing by you, and all
filings, if any, required by Rules 424 and 430A under the Act shall
have been timely made; no stop order suspending the effectiveness of
the registration statement shall have been issued and no proceeding for
that purpose shall have been instituted or, to the knowledge of the
Company or any Underwriter, threatened by the Commission, and any
request of the Commission for additional information (to be included in
the registration statement or the prospectus or otherwise) shall have
been complied with to your
<PAGE> 25
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satisfaction.
Subsequent to the effective date of this Agreement,
there shall not have occurred (i) any change, or any development
involving a prospective change, in or affecting the condition
(financial or other), business, properties, net worth, or results of
operations of the Company or any of its subsidiaries not contemplated
by the Prospectus, which in your opinion, as Representatives of the
several Underwriters, would materially adversely affect the market for
the Shares, or (ii) any event or development relating to or involving
the Company or any officer or director of the Company or any Selling
Stockholder which makes any statement made in the Prospectus untrue or
which, in the opinion of the Company and its counsel or the
Underwriters and their counsel, requires the making of any addition to
or change in the Prospectus in order to state a material fact required
by the Act or any other law to be stated therein or necessary in order
to make the statements therein not misleading, if amending or
supplementing the Prospectus to reflect such event or development
would, in your opinion, as Representatives of the several Underwriters,
materially adversely affect the market for the Shares.
All corporate proceedings and other legal matters incident
to the authorization, form and validity of this Agreement, the Shares,
the Registration Statement and the Prospectus, and all other legal
matters relating to this Agreement and the transactions contemplated
hereby, shall be reasonably satisfactory in all material respects to
counsel for the Underwriters, and the Company shall have furnished to
such counsel all documents and information that they may reasonably
request to enable them to pass upon such matters.
Bryan Cave LLP shall have furnished to the Underwriters
their written opinion, as special counsel to the Company, addressed to
the Underwriters and dated the Closing Date or the Option Closing Date,
as the case may be, in form and substance reasonably satisfactory to
you, as Representatives of the several Underwriters, to the effect
that:
The Registration Statement was declared
effective under the Act as of the date and time specified in
such opinion; the Prospectus was filed with the Commission
pursuant to the subparagraph of Rule 424(b) of the rules and
regulations of the Commission promulgated thereunder (the
"Rules and Regulations") specified in such opinion on the date
specified therein; and no stop order suspending the
effectiveness of the Registration Statement has been issued
and, to the best of such counsel's knowledge, no
<PAGE> 26
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proceeding for that purpose is pending or threatened by the
Commission;
The Registration Statement and the
Prospectus and any further amendments or supplements to the
Registration Statement or the Prospectus made by the Company
prior to the Closing Date (other than the financial statements
and related schedules and the other financial and statistical
information contained therein, as to which such counsel need
express no opinion) comply as to form in all material respects
with the requirements of the Act and the Rules and
Regulations; and each of the Incorporated Documents (other
than the financial statements and related schedules and the
other financial and statistical information contained therein,
as to which such counsel need express no opinion) complies as
to form in all material respects with the Exchange Act and the
rules and regulations of the Commission thereunder;
The authorized and outstanding capital stock
of the Company is as set forth under the caption
"Capitalization" in the Prospectus; and the authorized capital
stock of the Company conforms in all material respects as to
legal matters to the description thereof contained in the
Prospectus under the caption "Description of Capital Stock";
The execution, delivery and performance of
this Agreement by the Company, the issuance and sale of the
Shares to be issued and sold by the Company hereunder and the
consummation of the transactions contemplated hereby will not
conflict with or result in a breach or violation of any of the
terms or provisions of, or constitute a default under (A) the
Revolving Credit, Guaranty and Security Agreement among The
Bank of New York Commercial Corporation, PNC Bank Ohio, N.A.,
the Company and the subsidiaries of the Company listed
therein, including Amendments 1,2,3,4 and 5 thereto, (B) the
11% Subordinated Convertible Debentures due October 1, 2005
(the "PMAC Debentures"), (C) the Indenture between the Company
and The Huntington National Bank, as Trustee (the "Indenture")
relating to the Company's 13 1/2% Senior Secured Notes due
2003 (the "Senior Secured Notes"), (E) the Senior Secured
Notes, (F), the Warrant Agreement between The Huntington
National Bank and the Company relating to the warrants issued
by the Company in connection with the issuance of the Senior
Secured Notes, (G) the Sunny Day Fund Loan to Koppel Steel
Corporation Project in the amount of $4,000,000 for Koppel
Steel Corporation Project, located in Koppel and Ambridge,
Beaver County, Pennsylvania and (H) the Warrant Agreement
dated as of
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October 4, 1990 in favor of GECC (the "GECC Warrant
Agreement"), nor will such actions result in any violation of
the provisions of the charter or by-laws of the Company or any
of its subsidiaries or any New York or federal statute or any
New York or federal order, rule or regulation known to such
counsel of any New York or federal court or governmental
agency or body having jurisdiction over the Company or any of
its subsidiaries or any of their properties or assets, except
when any of the same would not result in a material adverse
effect on the Company and any of its subsidiaries, taken as a
whole; and except for the registration of the Shares under the
Act and such consents, approvals, authorizations,
registrations or qualifications as may be required under the
Exchange Act and applicable state securities laws in
connection with the purchase and distribution of the Shares by
the Underwriters, no consent, approval, authorization or order
of, or filing or registration with, any such court or
governmental agency or body is required for the execution,
delivery and performance of this Agreement by the Company, the
issuance and sale of the Shares and the consummation of the
transactions contemplated hereby; and
To the best of such counsel's knowledge,
there are no contracts, agreements or understandings between
the Company and any person granting such person the right to
require the Company to include securities owned or to be owned
by such person in the securities registered pursuant to the
Registration Statement, except pursuant to the GECC Warrant
Agreement or the PMAC Debentures.
Such counsel confirms that (x) to the best of such counsel's
knowledge, no action, suit or proceeding that is pending or overtly threatened
in writing against the Company or any of its subsidiaries before any court,
governmental agency, authority or body, or any arbitrator, of a character
required to be disclosed in the Registration Statement or Prospectus is not so
disclosed; (y) to the best of such counsel's knowledge, there is no contract or
other document of a character required to be described in the Registration
Statement or Prospectus, or to be filed as an exhibit to the Registration
Statement, in either case under the Act, which is not so described or filed as
required or incorporated therein by reference as permitted by the Act; and (z)
although such counsel has not undertaken, except as otherwise indicated in their
opinion, to determine independently, and does not assume any responsibility for,
the accuracy or completeness of the statements in the Registration Statement,
such counsel has participated in the preparation of the Registration Statement
and the Prospectus, including review and discussion of the contents thereof
(including review and discussion of the contents of all
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Incorporated Documents), and nothing has come to the attention of such counsel
that has caused them to believe that the Registration Statement (including the
Incorporated Documents) at the time the Registration Statement became effective,
or the Prospectus, as of its date and as of the Closing Date or the Option
Closing Date, as the case may be, contained an untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading or that any amendment or
supplement to the Prospectus, as of its respective date, and as of the Closing
Date or the Option Closing Date, as the case may be, contained any untrue
statement of a material fact or omitted to state a material fact necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading (it being understood that such counsel need
express no opinion with respect to the financial statements and the notes
thereto and the schedules and other financial and statistical data included in
the Registration Statement or the Prospectus or any Incorporated Document).
Kepley, Gilligan & Eyrich shall have furnished to the
Underwriters their written opinion, as counsel to the Company,
addressed to the Underwriters and dated the Closing Date or Option
Closing Date, as the case may be, in form and substance reasonably
satisfactory to the Underwriters, to the effect that:
The Company, Newport Steel Corporation
("Newport") and Northern Kentucky Management, Inc.
("Management") have been duly incorporated and are validly
existing as corporations in good standing under the laws of
the Commonwealth of Kentucky. Imperial Adhesives, Inc.
("Imperial") is duly qualified to do business and is in good
standing as a foreign corporation in the States of North
Carolina, Virginia, Tennessee, Massachusetts and Texas. Koppel
Steel Corporation ("Koppel") is duly qualified to do business
and is in good standing as a foreign corporation in the State
of Oklahoma. Newport, Koppel and Imperial are each duly
qualified to do business and are in good standing as foreign
corporations in the State of Texas. Each of the Company,
Newport, Management, Koppel, Erlanger Tubular Corporation
("Erlanger") and Imperial has all power and authority
necessary to own or hold its respective properties and to
conduct the businesses in which they are engaged;
The Company has the authorized
capitalization set forth in the Prospectus, and all of the
issued shares of capital stock of the Company, including the
Shares being offered by the Selling Stockholders, have been
duly and validly authorized and issued, are fully paid and
non-assessable and conform
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to the description thereof contained in the Prospectus; the
issuance and sale of the Shares is not subject to preemptive
rights arising by operation of law; the stockholders of the
Company have no preemptive rights provided by statute or the
articles of incorporation of the Company with respect to the
Shares; the issuance of the Shares has been duly and validly
authorized, and the Shares, when issued, paid for and
delivered in accordance with the terms hereof, will be validly
issued, fully paid and nonassessable, free and clear of all
liens, encumbrances, equities and claims or restrictions on
transferability or voting, and to our knowledge no holder of
any securities of the Company has preemptive rights applicable
to the Shares; the form of certificates for the Shares
conforms to the requirements of the Kentucky Business
Corporation Act and all of the issued shares of capital stock
of each subsidiary of the Company have been duly and validly
authorized and issued and are fully paid and non-assessable
and (except for directors' qualifying shares) are owned
directly or indirectly by the Company, free and clear of all
liens, encumbrances, equities or claims;
The Company has the corporate power and
authority to execute and deliver this Agreement and to perform
its obligations hereunder; and all corporate action required
to be taken by the Company for the due and proper
authorization, execution and delivery of this Agreement and
the consummation of the transactions contemplated hereby have
been duly and validly taken;
This Agreement has been duly authorized,
executed and delivered by the Company and constitutes a valid
and binding agreement of the Company in accordance with its
terms, subject to the effects of bankruptcy, insolvency,
fraudulent conveyance, reorganization, moratorium and similar
laws relating to or affecting creditors' rights generally,
general equitable principles (whether considered in a
proceeding in equity or at law) and an implied covenant of
good faith and fair dealing;
Koppel has been duly incorporated and is
validly existing as a corporation in good standing under the
laws of the Commonwealth of Pennsylvania. Imperial is not
required to qualify as a foreign corporation in the
Commonwealth of Pennsylvania. Koppel has all power and
authority necessary to own or hold its respective properties
and to conduct the business in which it is engaged;
Neither the Company, Newport, Management
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or Koppel is in violation of its respective certificate or
articles of incorporation or bylaws, or to the best knowledge
of such counsel after reasonable inquiry, is in default in the
performance of any material obligation, agreement or condition
contained in any bond, debenture, note or other evidence of
indebtedness, except as may be disclosed in the Prospectus;
To the best of such counsel's knowledge
after reasonable inquiry and except as set forth in the
Prospectus, there are no legal or governmental proceedings
pending to which the Company or any of its subsidiaries is a
party or of which any property or assets of the Company or any
of its subsidiaries is the subject which, if determined
adversely to the Company or any of its subsidiaries, are
reasonably likely to have a material adverse effect on the
condition (financial or otherwise), results of operations,
business or prospects of the Company and its subsidiaries
taken as a whole; and, to the best of such counsel's
knowledge, no such proceedings are threatened or contemplated
by governmental authorities or threatened by others;
To the best knowledge of such counsel after
reasonable inquiry, there are no material agreements,
contracts, indentures, leases or other instruments to which
the Company or any of its subsidiaries is a party or to which
the Company or any of its subsidiaries is subject that are not
described in the Registration Statement or the Prospectus (or
any amendment or supplement thereto) or filed as an exhibit to
the Registration Statement or any Incorporated Documents;
To the best knowledge of such counsel after
reasonable inquiry, neither the Company nor any of the
Subsidiaries is in violation of any law, ordinance,
administrative or governmental rule or regulation applicable
to the Company or any of the Subsidiaries or of any decree of
any court or governmental agency or body having jurisdiction
over the Company or any of the Subsidiaries;
The execution, delivery and performance of
this Agreement by the Company, the issuance and sale of the
Shares to be issued and sold by the Company hereunder and the
consummation of the transactions contemplated hereby will not
conflict with or result in a breach or violation of any of the
terms or provisions of, or constitute a default under any
indenture, mortgage, deed of trust, loan agreement, or other
<PAGE> 31
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agreement or instrument known or which reasonably should be
known to such counsel to which the Company or any of its
subsidiaries is a party or to which the Company or any of its
subsidiaries is subject, nor will such actions result in any
violation of the provisions of the articles or by-laws of the
Company or any of its subsidiaries or any Kentucky or any
Kentucky order, rule or regulation known to such counsel of
any Kentucky court or governmental agency or body having
jurisdiction over the Company or any of its subsidiaries or
any of their properties or assets, except when any of the same
would not result in a material adverse effect on the Company
and any of its subsidiaries, taken as a whole; and
Except as described in the Prospectus, there
are no outstanding options, warrants or other rights calling
for the issuance of, and such counsel does not know of any
commitment, plan or arrangement to issue any shares of capital
stock of the Company or any security convertible into or
exchangeable or exercisable for capital stock of the Company.
Harsha Murthy, Esq., counsel to GECC, [
], counsel to PMAC, and [ ], counsel to the other
Selling Stockholders listed in Part A of Schedule I hereto, each shall
have furnished to the Underwriters their written opinion, addressed to
the Underwriters and dated the Closing Date or the Option Closing Date,
as the case may be, in form and substance reasonably satisfactory to
the Underwriters, to the effect that:
This Agreement and the Custody Agreement
have each been duly executed and delivered by or on behalf of
such Selling Stockholder and are valid and binding agreements
of such Selling Stockholder enforceable against such Selling
Stockholder in accordance with their terms, subject to the
effects of bankruptcy, insolvency, fraudulent conveyance,
reorganization, moratorium and similar laws relating to or
affecting creditors' rights generally, general equitable
principles (whether considered in a proceeding in equity or at
law) and an implied covenant of good faith and fair dealing;
To the knowledge of such counsel, such
Selling Stockholder has full legal right, power and
authorization, and any approval required by law, to sell,
assign, transfer and deliver good and marketable title to the
Shares which such Selling Stockholder has agreed to sell
pursuant to this Agreement;
<PAGE> 32
Page 32
The execution and delivery of this Agreement
and the Custody Agreement by such Selling Stockholder and the
consummation of the transactions contemplated hereby and
thereby will not conflict with, violate, result in a breach of
or constitute a default under the terms or provisions of any
agreement, indenture, mortgage or other instrument known to
such counsel to which such Selling Stockholder is a party or
by which it or any of its assets or property is bound, or any
court order or decree or any law, rule, or regulation
applicable to such Selling Stockholder or to any of the
property or assets of such Selling Stockholder; and
Upon delivery of the Shares by such Selling
Stockholder pursuant to this Agreement and payment therefor as
contemplated herein the Underwriters will acquire good and
marketable title to such Shares, free and clear of any lien,
claim, security interest or other encumbrance, restriction on
transfer or other defect in title.
The Representatives shall have received from Simpson
Thacher & Bartlett, counsel for the Underwriters, such opinion or
opinions, dated the Closing Date, with respect to such matters as the
Underwriters may reasonably require, and the Company shall have
furnished to such counsel such documents as they reasonably request for
enabling them to pass upon such matters.
(i) No stop order suspending the effectiveness of the
Registration Statement shall have been issued and no proceedings for
that purpose shall have been taken or, to the knowledge of the Company,
shall be contemplated by the Commission at or prior to the Closing
Date; (ii) there shall not have been any change in the capital stock of
the Company nor any material increase in the short-term or long-term
debt of the Company (other than in the ordinary course of business)
from that set forth or contemplated in the Registration Statement or
the Prospectus (or any amendment or Supplement thereto); (iii) there
shall not have been, since the respective dates as of which information
is given in the Registration Statement and the Prospectus (or any
amendment or supplement thereto), except as may otherwise be stated in
the Registration Statement and Prospectus (or any amendment or
supplement thereto), any material adverse change in the condition
(financial or other), business, prospects, properties, net worth or
results of operations of the Company and its subsidiaries taken as a
whole; (iv) the Company and its subsidiaries shall not have any
liabilities or obligations, direct or contingent (whether or not in the
ordinary course of business), that are material to the Company and its
subsidiaries, taken as a whole, other than
<PAGE> 33
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those reflected in the Registration Statement or the Prospectus (or any
amendment or supplement thereto); and (v) all the representations and
warranties of the Company contained in this Agreement shall be true and
correct on and as of the date hereof and on and as of the Closing Date
as if made on and as of the Closing Date, and you shall have received a
certificate, dated the Closing Date and signed by the chief executive
officer and the chief financial officer of the Company (or such other
officers as are acceptable to you), to the effect set forth in this
Section 10(h) and in Section 10(j) hereof.
You shall have received letters addressed to you, as
Representatives of the several Underwriters, and dated the date hereof
and the Closing Date from Arthur Andersen LLP, independent certified
public accountants, substantially in the forms heretofore approved by
you.
The Company shall not have failed at or prior to the
Closing Date to have performed or complied with any of its agreements
herein contained and required to be performed or complied with by it
hereunder at or prior to the Closing Date.
All the representations and warranties of the Selling
Stockholders contained in this Agreement shall be true and correct on
and as of the date hereof and on and as of the Closing Date as if made
on and as of the Closing Date, and you shall have received a
certificate, dated the Closing Date and signed by or on behalf of the
Selling Stockholders to the effect set forth in this Section 10(k) and
in Section 10(l) hereof.
The Selling Stockholders shall not have failed at or
prior to the Closing Date to have performed or complied with any of
their agreements herein contained and required to be performed or
complied with by them hereunder at or prior to the Closing Date.
Prior to the Closing Date the Shares of Common Stock
which the Company agrees to sell pursuant to this Agreement shall have
been listed, subject to notice of issuance, on the New York Stock
Exchange.
The Sellers shall have furnished or caused to be
furnished to you such further certificates and documents as you shall
have reasonably requested.
All such opinions, certificates, letters and other documents will be in
compliance with the provisions hereof only if they are satisfactory in form and
substance to you and your counsel.
Any certificate or document signed by any officer of the
<PAGE> 34
Page 34
Company or any Attorney-in-Fact or any Selling Stockholder and delivered to you,
as Representatives of the Underwriters, or to counsel for the Underwriters,
shall be deemed a representation and warranty by the Company, the Selling
Stockholders or the particular Selling Stockholder, as the case may be, to each
Underwriter as to the statements made therein.
The several obligations of the Underwriters to purchase Additional
Shares hereunder are subject to the satisfaction on and as of any Option Closing
Date of the conditions set forth in this Section 10, except that, if any Option
Closing Date is other than the Closing Date, the certificates, opinions and
letters referred to in paragraphs (d) through (k) shall be dated the Option
Closing Date in question and the opinions called for by paragraphs (d) through
(g) of this Section 10 shall be revised to reflect the sale of Additional
Shares.
Expenses. The Company agrees to pay the following costs and
expenses and all other costs and expenses incident to the performance of the
obligations hereunder: (i) the preparation, printing or reproduction, and
filing with the Commission of the registration statement (including financial
statements and exhibits thereto), each Prepricing Prospectus, the Prospectus,
and each amendment or supplement to any of them; (ii) the printing (or
reproduction) and delivery (including postage, air freight charges and charges
for counting and packaging) of such copies of the registration statement, each
Prepricing Prospectus, the Prospectus, the Incorporated Documents, and all
amendments or supplements to any of them, as may be reasonably requested for use
in connection with the offering and sale of the Shares; (iii) the preparation,
printing, authentication, issuance and delivery of certificates for the Shares,
including any stamp taxes in connection with the original issuance and sale of
the Shares; (iv) the printing (or reproduction) and delivery of this Agreement,
the Blue Sky Memorandum and all other agreements or documents printed (or
reproduced) and delivered in connection with the offering of the Shares; (v) the
listing of the Shares on the New York Stock Exchange; (vi) the registration or
qualification of the Shares for offer and sale under the securities or Blue Sky
laws of the several states as provided in Section 5(g) hereof (including the
reasonable fees, expenses and disbursements of counsel for the Underwriters
relating to the preparation, printing or reproduction, and delivery of the Blue
Sky Memorandum and such registration and qualification); (vii) the filing fees
and the fees and expenses of counsel for the Underwriters in connection with any
filings required to be made with the National Association of Securities Dealers,
Inc.; (viii) the transportation and other expenses incurred by or on behalf of
Company representatives in connection with presentations to prospective
purchasers of the Shares; and (ix) the fees and expenses of the Company's
accountants and the fees and expenses of counsel (including local and special
counsel) for the Company; provided, that the Selling Stockholders shall be
obligated to pay, on a pro rata
<PAGE> 35
Page 35
basis, for all incremental registration and qualification fees and expenses
(including Underwriters' discounts and commissions), and any incremental costs
and disbursements (including legal fees and commissions) that result from the
inclusion of the Shares being offered by each of them (including any additional
shares which the Underwriters shall have elected to purchase). In addition, each
Selling Stockholder shall pay the fees and expenses of its own legal counsel.
Effective Date of Agreement. This Agreement shall become
effective: (i) upon the execution and delivery hereof by the parties hereto; or
(ii) if, at the time this Agreement is executed and delivered, it is necessary
for the registration statement or a post-effective amendment thereto to be
declared effective before the offering of the Shares may commence, when
notification of the effectiveness of the registration statement or such
post-effective amendment has been released by the Commission. Until such time as
this Agreement shall have become effective, it may be terminated by the Company,
by notifying you, or by you, as Representatives of the several Underwriters, by
notifying the Company and the Selling Stockholders.
If any one or more of the Underwriters shall fail or refuse to purchase
Shares which it or they are obligated to purchase hereunder on the Closing Date,
and the aggregate number of Shares which such defaulting Underwriter or
Underwriters are obligated but fail or refuse to purchase is not more than
one-tenth of the aggregate number of Shares which the Underwriters are obligated
to purchase on the Closing Date, each non-defaulting Underwriter shall be
obligated, severally, in the proportion which the number of Firm Shares set
forth opposite its name in Schedule II hereto bears to the aggregate number of
Firm Shares set forth opposite the names of all non-defaulting Underwriters or
in such other proportion as you may specify in accordance with Section 20 of the
Master Agreement Among Underwriters of Smith Barney Inc., to purchase the Shares
which such defaulting Underwriter or Underwriters are obligated, but fail or
refuse, to purchase. If any one or more of the Underwriters shall fail or refuse
to purchase Shares which it or they are obligated to purchase on the Closing
Date and the aggregate number of Shares with respect to which such default
occurs is more than one-tenth of the aggregate number of Shares which the
Underwriters are obligated to purchase on the Closing Date and arrangements
satisfactory to you and the Company for the purchase of such Shares by one or
more non-defaulting Underwriters or other party or parties approved by you and
the Company are not made within 36 hours after such default, this Agreement will
terminate without liability on the part of any non-defaulting Underwriter or the
Company. In any such case which does not result in termination of this
Agreement, either you or the Company shall have the right to postpone the
Closing Date, but in no event for longer than seven calendar days, in order that
the required changes, if any, in the Registration Statement and the Prospectus
or any other documents
<PAGE> 36
Page 36
or arrangements may be effected. Any action taken under this paragraph shall not
relieve any defaulting Underwriter from liability in respect of any such default
of any such Underwriter under this Agreement. The term "Underwriter" as used in
this Agreement includes, for all purposes of this Agreement, any party not
listed in Schedule I hereto who, with your approval and the approval of the
Company, purchases Shares which a defaulting Underwriter is obligated, but fails
or refuses, to purchase.
Any notice under this Section 12 may be given by telegram, telecopy or
telephone but shall be subsequently confirmed by letter.
Termination of Agreement. This Agreement shall be subject to
termination in your absolute discretion, without liability on the part of any
Underwriter to the Company or any Selling Stockholder, by notice to the Company,
if prior to the Closing Date or any Option Closing Date (if different from the
Closing Date and then only as to the Additional Shares), as the case may be, (i)
trading in securities generally on the New York Stock Exchange, the American
Stock Exchange or the Nasdaq National Market shall have been suspended or
materially limited, (ii) a general moratorium on commercial banking activities
in New York or Kentucky shall have been declared by either federal or state
authorities, or (iii) there shall have occurred any outbreak or escalation of
hostilities or other international or domestic calamity, crisis or change in
political, financial or economic conditions, the effect of which on the
financial markets of the United States is such as to make it, in your judgment,
impracticable or inadvisable to commence or continue the offering of the Shares
at the offering price to the public set forth on the cover page of the
Prospectus or to enforce contracts for the resale of the Shares by the
Underwriters. Notice of such termination may be given to the Company by
telegram, telecopy or telephone and shall be subsequently confirmed by letter.
Information Furnished by the Underwriters. The statements set
forth in the last paragraph on the cover page, the stabilization legend on the
inside cover page, and the statements in the first, third and seventh paragraphs
under the caption "Underwriting" in any Prepricing Prospectus and in the
Prospectus, constitute the only information furnished by or on behalf of the
Underwriters through you as such information is referred to in Sections 7(b) and
9 hereof. The first paragraph under the caption "Underwriting" will contain the
names and participations of the underwriters; the third paragraph will contain
the selling concession and the reallowance.
Miscellaneous. Except as otherwise provided in Sections 5, 12
and 13 hereof, notice given pursuant to any provision of this Agreement shall be
in writing and shall be delivered (i) if to the Company, at the office of the
Company at P.O. Box 1670, Ninth & Lowell Streets, Newport, Kentucky 41072,
<PAGE> 37
Page 37
Attention: Treasurer; or (ii) if to the Selling Stockholders, at
___________________, Attention: _______________, or (iii) if to you, as
Representatives of the several Underwriters, care of Smith Barney Inc., 388
Greenwich Street, New York, New York 10013, Attention: Manager, Investment
Banking Division.
This Agreement has been and is made solely for the benefit of the
several Underwriters, the Company, its directors and officers, and the other
controlling persons referred to in Section 9 hereof and their respective
successors and assigns, to the extent provided herein, and no other person shall
acquire or have any right under or by virtue of this Agreement. Neither the term
"successor" nor the term "successors and assigns" as used in this Agreement
shall include a purchaser from any Underwriter of any of the Shares in his
status as such purchaser.
Applicable Law; Counterparts. This Agreement shall be governed
by and construed in accordance with the laws of the State of New York applicable
to contracts made and to be performed within the State of New York.
This Agreement may be signed in various counterparts which together
constitute one and the same instrument. If signed in counterparts, this
Agreement shall not become effective unless at least one counterpart hereof
shall have been executed and delivered on behalf of each party hereto.
<PAGE> 38
Page 38
Please confirm that the foregoing correctly sets forth the agreement
among the Company, the Selling Stockholders and the several Underwriters.
Very truly yours,
NS GROUP, INC.
By _____________________________
Name:
Title:
Each of the Selling Stockholders
named in Schedule I hereto
By _____________________________
Attorney-in-Fact
By _____________________________
Attorney-in-Fact
Confirmed as of the date first above mentioned on behalf of themselves and the
other several Underwriters named in Schedule II
hereto.
SMITH BARNEY INC.
MCDONALD & COMPANY SECURITIES, INC.
RAYMOND JAMES & ASSOCIATES, INC.
As Representatives of the Several Underwriters
By SMITH BARNEY INC.
By _____________________________
Name:
Title:
<PAGE> 39
Page 39
SCHEDULE I
NS GROUP, INC.
Part A - Firm Shares
<TABLE>
<CAPTION>
Number of
Selling Stockholders Firm Shares
-------------------- -----------
<S> <C>
Robert Alpert 550,000
R.A. Belfer and R.A. Belfer, Trustees 450,000
General Electric Capital Corporation 500,000
---------
Total.......... 1,500,000
=========
</TABLE>
Part B - Additional Shares1
<TABLE>
<CAPTION>
Selling Stockholders Number of
-------------------- Additional Shares
-----------------
<S> <C>
Robert Alpert 365,584
R. A. Belfer and R.A. Belfer, Trustees 69,116
John B. Lally 100,000
R. Glen Mayfield 30,000
Patrick J.B. Donnelly 20,000
-------
Total........ 584,700
=======
</TABLE>
[Footnote]
<PAGE> 40
Page 40
SCHEDULE II
NS GROUP, INC.
<TABLE>
<CAPTION>
Number of
Underwriter Firm Shares
- ----------- -----------
<S> <C>
Smith Barney Inc.
McDonald & Company Securities, Inc.
Raymond James & Associates, Inc
---------
Total..... 7,500,000
=========
</TABLE>
<PAGE> 1
EXHIBIT 5.1
BRYAN CAVE LLP
ONE METROPOLITAN SQUARE
211 NORTH BROADWAY, SUITE 3600
ST. LOUIS, MISSOURI 63102
(314) 259-2000
FACSIMILE (314) 259-2100
September 16, 1997
Board of Directors
NS Group, Inc.
Ninth & Lowell Street
Newport, Kentucky 41072
Ladies and Gentlemen:
We are acting as special counsel for NS Group, Inc., a
Kentucky corporation (the "Company"), in connection with various legal matters
relating to the filing of a Registration Statement on Form S-3, File No.
333-32965 (the "Registration Statement"), under the Securities Act of 1933, as
amended (the "Act"), covering the offering of an aggregate of 8,500,000 shares
(the "Shares") of the Company's common stock, no par value per share, proposed
to be issued pursuant to an Underwriting Agreement (the "Underwriting
Agreement") between the Company, the Selling Stockholders named therein and the
Representatives of the Underwriters named therein.
In connection with this opinion, we have examined and relied
as to matters of fact upon such corporate records, certificates and other
documents as we have considered necessary or appropriate for the purposes of
this opinion. In such examinations, we have assumed the genuineness of all
signatures and the authenticity of all documents submitted to us as originals,
and the conformity of the originals of all documents submitted to us as copies.
Based on such examination, we are of the opinion that when the
Registration Statement relating to the Shares has become effective under the Act
and the sale of the Shares has been consummated pursuant to the Underwriting
Agreement, the Shares will be duly authorized, legally issued, fully paid and
non-assessable.
We hereby consent to the filing of this opinion as Exhibit 5.1
to the Registration Statement and to the use of our name under the caption
"Legal Matters" in the Prospectus filed as part thereof. We also hereby consent
to you filing copies of this opinion as an exhibit to the Registration Statement
with agencies of such states as you deem necessary in the course of complying
with the laws of such states regarding the offering and sale of the Shares. In
giving
<PAGE> 2
Board of Directors
NS Group, Inc.
September 16, 1997
Page 2
this consent, we do not hereby admit that we are in the category of persons
whose consent is required under Section 7 of the Act or the rules and
regulations of the Securities and Exchange Commission relating thereto.
Very truly yours,
/s/ Bryan Cave LLP
BRYAN CAVE LLP
