<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
- ------------------
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 28, 1997
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to _________
Commission file number 1-9838
NS GROUP, INC.
Exact name of registrant as specified in its charter
KENTUCKY 61-0985936
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
Ninth and Lowell Streets, Newport, Kentucky 41072
(Address of principal executive offices)
Registrant's telephone number, including area code (606) 292-6809
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common stock, no par value 14,480,792
(Class) (Outstanding at July 25,1997)
<PAGE> 2
NS GROUP, INC.
INDEX
PART I FINANCIAL INFORMATION PAGE
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Operations 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
PART II OTHER INFORMATION
Item 1 - Legal Proceedings 23
Item 6 - Exhibits and Reports on Form 8-K 23
<PAGE> 3
NS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF JUNE 28, 1997 AND SEPTEMBER 28, 1996
(Dollars in thousands) (Unaudited)
<TABLE>
<CAPTION>
June 28, September 28,
CURRENT ASSETS 1 9 9 7 1 9 9 6
<S> <C> <C>
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.
<PAGE> 4
NS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTH PERIODS ENDED
JUNE 28, 1997 AND JUNE 29, 1996
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 28, June 29, June 28, June 29,
1997 1996 1997 1996
<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.
<PAGE> 5
NS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTH PERIODS ENDED
JUNE 28, 1997 AND JUNE 29, 1996
(Dollars in thousands) (Unaudited)
<TABLE>
<CAPTION>
June 28, June 29,
CASH FLOWS FROM OPERATING ACTIVITIES 1 9 9 7 1 9 9 6
<S> <C> <C>
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.
<PAGE> 6
NS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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
<PAGE> 7
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 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>
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.
<PAGE> 8
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,
1 9 9 7 1 9 9 6
<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
<PAGE> 9
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, 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
emissions 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,
<PAGE> 10
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. 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
<PAGE> 11
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>
<PAGE> 12
NS GROUP, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
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 and special bar
quality (SBQ) 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 oil country tubular goods (OCTG) primarily used in
oil and natural gas drilling and production operations; (ii) line pipe used in
the transmission of oil, gas and other fluids; (iii) SBQ products primarily used
in the manufacture of heavy industrial equipment; and (iv) hot rolled coils
which are sold to service centers and other manufacturers for further
processing. Within the adhesives segment are the operations of Imperial, a
manufacturer of industrial adhesives products.
The matters discussed or incorporated by reference in this Report on
Form 10-Q that are forward-looking statements (as defined in the Private
Securities Litigation Reform Act of 1995) involve risks and uncertainties. Such
risks and uncertainties include, but are not limited to, the level of domestic
as well as worldwide oil and natural gas drilling activity; general economic
conditions; product demand and industry capacity; industry pricing; the presence
or absence of governmentally imposed trade restrictions; manufacturing
efficiencies; volatility in raw material costs, particularly steel scrap; costs
of compliance with environmental regulations; product liability or other claims;
the Company's ability to meet operating cash requirements, including capital
expenditures; and the Company's capital structure, which may limit its
operational and
<PAGE> 13
financial flexibility. These risks and uncertainties may cause the actual
results or performance of the Company to differ materially from any future
results or performance expressed or implied by such forward-looking statements.
Results of Operations
The Company's net sales, gross profit and operating income by business
segment for the three and nine month periods ended June 28, 1997 and June 29,
1996 are summarized below.
<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
Specialty steel segment
Newport $ 64,052 $ 42,167 $ 160,382 $ 125,507
Koppel 57,980 51,002 157,529 143,119
122,032 93,169 317,911 268,626
Adhesives segment 10,821 10,597 31,219 29,161
$ 132,853 $ 103,766 $ 349,130 $ 297,787
Gross profit
Specialty steel segment
Newport $ 8,225 $ 1,319 $ 21,655 $ 2,034
Koppel 8,228 7,398 17,931 19,180
16,453 8,717 39,586 21,214
Adhesives segment 2,901 2,683 7,848 6,937
$ 19,354 $ 11,400 $ 47,434 $ 28,151
Operating income
Specialty steel segment
Newport $ 6,503 $ (863) $ 16,805 $ (4,354)
Koppel 6,562 5,631 12,719 14,354
13,065 4,768 29,524 10,000
Adhesives segment 558 587 1,185 1,080
Corporate allocations (1,022) (1,236) (3,309) (3,463)
$ 12,601 $ 4,119 $ 27,400 $ 7,617
</TABLE>
<PAGE> 14
Sales data for the Company's specialty steel segment for the three and
nine month periods ended June 28, 1997 and June 29, 1996 were as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine months Ended
June 28, June 29, June 28, June 29,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Tons shipped
Newport
Welded tubular 121,800 87,500 305,800 254,400
Hot rolled coils and
other products 6,100 9,100 21,400 31,700
Koppel
Seamless tubular 47,200 40,900 121,200 116,100
SBQ 40,200 35,600 115,700 96,500
215,300 173,100 564,100 498,700
Net sales ($000's)
Newport
Welded tubular $ 61,725 $ 38,715 $151,915 $113,237
Hot rolled coils and
other products 2,327 3,452 8,467 12,270
Koppel
Seamless tubular 40,208 34,590 106,335 97,682
SBQ 17,772 16,412 51,194 45,437
$122,032 $ 93,169 $317,911 $268,626
</TABLE>
Net sales for the third quarter of fiscal 1997 increased $29.1 million,
or 28.0%, from the third quarter of fiscal 1996 to $132.9 million. For the nine
month comparable periods, net sales increased $51.3 million, or 17.2%, to $349.1
million. Specialty steel segment net sales increased $28.9 million, or 31.0%,
and $49.3 million, or 18.3%, for the three and nine month periods, respectively.
Adhesives segment net sales increased $0.2 million, or 2.1%, and $2.1 million,
or 7.1%, for the three and nine month periods, respectively. The overall
increase in specialty steel segment net sales was primarily attributable to
increased shipments and selling prices of the Company's tubular products as more
fully discussed below.
Total welded tubular net sales for the quarter increased $23.0 million,
or 59.4%, on a volume increase of 39.2%, from the comparable prior year period.
The increase in total welded tubular net sales for the quarter was also
attributable to a 14.7% increase in average selling prices for all welded
tubular products. 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 was $497 per ton, an
11.7% increase from the same period of fiscal 1996. Selling prices have
increased on the strength of the OCTG marketplace, which saw the average number
of oil and natural gas drilling rigs in the United States (rig count) increase
22% and 18% over the three and nine month periods of a year ago, respectively.
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.
<PAGE> 15
Total seamless tubular net sales and shipments for the fiscal 1997
third quarter increased $5.6 million, or 16.2%, on a volume increase of 15.4%.
Seamless tubular net sales increased $8.7 million, or 8.9%, on a volume increase
of 4.4% for the comparable nine month periods. The increase in total seamless
tubular net sales for the three and nine month periods 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 for the nine month period was
moderated by a decrease in sales and shipments of seamless line pipe. Fiscal
1997 third quarter average selling prices for all seamless tubular products
remained virtually unchanged from the third quarter of fiscal 1996.
The demand for the Company's OCTG products is cyclical in nature, being
primarily dependent on the number and depth of oil and natural gas wells being
drilled in the United States and globally. The level of drilling activity is
largely a function of the current prices of oil and natural gas and the
industry's future price expectations. Demand for OCTG products is also
influenced by the levels of inventory held by producers, distributors and end
users. In addition, the demand for OCTG products produced domestically is also
significantly impacted by the level of foreign imports of OCTG products. The
level of OCTG imports is affected by: (i) the value of the U.S. dollar versus
other key currencies; (ii) overall world demand for OCTG products; (iii) the
production cost competitiveness of domestic producers; (iv) trade practices of,
and government subsidies to, foreign producers; and (v) the presence or absence
of governmentally imposed trade restrictions in the United States.
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 Company
cannot predict the U.S. government's future actions regarding import duties or
other trade restrictions on imports of OCTG products.
SBQ product net sales increased $1.4 million, or 8.3%, on a volume
increase of 12.9%, and $5.8 million, or 12.7%, on a volume increase of 19.9% for
the comparable three and nine month periods. Average selling price for SBQ
products for the same periods decreased 4.3% and 6.2%, respectively. 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. The demand for the Company's SBQ and hot
rolled coil products is cyclical in nature and is sensitive to general economic
conditions.
<PAGE> 16
Gross profit for the third quarter of fiscal 1997 increased $8.0
million from the third quarter of fiscal 1996 for a gross profit margin of 14.6%
in fiscal 1997 compared to 11.0% in the third quarter of fiscal 1996. For the
nine months, 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 $7.7 million and $18.4 million for the three and
nine month periods and gross profit margin increased to 13.5% and 12.5%,
respectively, from 9.4% and 7.9% for the comparable prior year periods,
respectively. The increase in specialty steel segment gross profit and margin
for the three and nine month comparable periods was primarily attributable to
Newport's operations, where gross profit margins increased from 3.1% to 12.8%
and 1.6% to 13.5%, respectively, 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 three and
nine month periods decreased to 14.2% from 14.5% and 13.4% to 11.4%,
respectively, primarily due to a decrease in SBQ selling prices, and for the
nine month comparable periods, lower operating efficiencies in its tubular
operations resulting from a fiscal 1997 first quarter scheduled maintenance
outage.
The adhesives segment gross profit increased $0.2 million and $0.9
million for the third fiscal quarter and nine month periods, respectively, due
primarily to an increase in sales volume and slightly lower raw material costs.
Gross profit margin for the third quarter of fiscal 1997 was 26.8% compared to
25.3% for the comparable fiscal 1996 period.
Selling and administrative expenses for the third quarter and first
nine months of fiscal 1997 were $0.5 million below the comparable prior year
periods and decreased as a percent of sales to 5.1% and 5.7%, respectively, from
7.0% and 6.9% in the third quarter and first nine months of fiscal 1996.
As a result of the above factors, operating income increased $8.5
million, from $4.1 million in the third quarter of fiscal 1996 to $12.6 million
in the current quarter. For the nine month period operating income increased
$19.8 million from $7.6 million in fiscal 1996 to $27.4 million in the first
nine months of fiscal 1997. 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 $6.1 million and $18.3
million for the third quarter and first nine months of fiscal 1997,
respectively. Interest income was unchanged for the comparable three months and
increased $0.2 million for the nine month period as a result of higher average
invested cash and short-term investment balances.
<PAGE> 17
Other income (expense), net for the third quarter and first nine months
of fiscal 1997 was $0.1 million and $0.3 million, respectively. The comparable
nine month period in fiscal 1996 was affected by first quarter income from
insurance claims and a second quarter provision for a loss on the sale of
non-steel segment fixed assets.
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
$4.9 million, or $.34 per primary share ($.32 fully diluted), in the third
quarter of fiscal 1997 compared to a net loss of $1.9 million, or a $.14 loss
per primary and fully diluted share in the third quarter of fiscal 1996. For the
current nine month period, the Company reported net income of $7.3 million, or
$.53 per primary share ($.47 fully diluted), compared to a net loss of $6.6
million, or a $.48 loss per primary and fully diluted share, for the first nine
months of fiscal 1996.
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 revolving credit facility (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 $12.5 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
due to increases in accounts receivable and inventories of $10.9 million and a
$19.4 million increase in accounts receivable and inventories, respectively,
resulting from increased business activity related primarily to the OCTG
marketplace.
<PAGE> 18
For the first nine months of fiscal 1996, net cash flows provided by
operating activities were $12.5 million. Major uses of cash in operating
activities included a $5.0 million and a $12.0 million increase in accounts
receivable and inventories, respectively, resulting from an increase in business
activity and a $2.3 million decrease in long-term deferred taxes as a result of
operating losses. Offsetting these uses were $15.6 million in non-cash
depreciation and amortization charges; an increase in accounts payable primarily
resulting from the purchase of steel slabs and a general increase in business
activity; an increase in accrued interest expense related to the Company's
senior secured notes; and a decrease in other current assets resulting primarily
from the collection of previously filed insurance claims.
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.
Sources for funding capital expenditures include cash flow from operations,
available cash and short-term investments, as well as available borrowing
sources. The Company also generated $1.7 million in cash from the sale of
certain investment property.
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.
Earnings before interest, taxes, depreciation and amortization (EBITDA)
were $17.2 million and $41.6 million in the third quarter and first nine months
of fiscal 1997, respectively, compared to $9.2 million and $22.7 million in the
comparable periods of fiscal 1996. EBITDA is calculated as net income (loss)
plus interest expense, taxes, depreciation and amortization. EBITDA provides
additional information for determining the Company's ability to meet debt
service requirements. EBITDA does not represent and should not be considered as
an alternative to net income, any other measure of performance as determined by
generally accepted accounting principles, as an indicator of operating
performance, 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
<PAGE> 19
of operations to date. Generally, the Company experiences inflationary increases
in its costs of raw materials, energy, supplies, salaries and benefits and
selling and administrative expenses. Except with respect to significant
increases in steel scrap prices, the Company has generally been able to pass
these inflationary increases through to its customers.
Other Matters
Legal Matters
The Company is subject to various claims, lawsuits and administrative
proceedings arising in the ordinary course of business with respect to workers
compensation, health care and product liability coverages (each of which is
self-insured to certain levels), as well as commercial and other matters. Based
upon its evaluation of available information, management does not believe that
any such matters are likely, individually or in the aggregate, to have a
material adverse effect upon the Company's consolidated financial position,
results of operations or cash flows.
Environmental Matters
The Company is subject to federal, state and local environmental laws
and regulations, including, among others, the Resource Conservation and Recovery
Act (RCRA), the Clean Air Act, the 1990 Amendments to the Clean Air Act, the
Clean Water Act and all regulations promulgated in connection therewith,
including, among others, those concerning the discharge of contaminants as air
emissions or waste water effluents and the disposal of solid and/or hazardous
wastes such as electric arc furnace dust. As such, the Company is from time to
time involved in administrative and judicial proceedings and administrative
inquiries related to environmental matters.
As with other steel mills in the industry, Koppel and Newport produce
dust which contains lead, cadmium and chromium, and is classified as a hazardous
waste. The Company currently collects the dust resulting from its electric arc
furnace operations through emission control systems and contracts with a company
for treatment and disposal of the dust at an EPA-approved facility.
The Company has on its property at Newport a permitted hazardous waste
disposal facility. Newport's permit for operating the hazardous waste disposal
facility required that it investigate, test, and analyze for potential releases
of hazardous constituents from its closed loop water recirculation system. Based
on the findings of its investigation, which have been filed with the EPA, the
Company believes that the cost of any such 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
<PAGE> 20
Koppel's electric arc furnace operations. The conditions which contributed to
the alledged violations have been corrected and as of January 1, 1997, Koppel
has demonstrated compliance with the air emissions 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.
Such insurance claims will exhaust 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
<PAGE> 21
facilities are not expected to be material; however, such expenditures could be
influenced by new and 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.
Recently Issued Accounting Standards
In February 1997, the FASB issued SFAS No. 128 which establishes
standards for computing and presenting 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
the periods. 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 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>
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.
<PAGE> 22
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.
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
For a discussion regarding the Consent Order entered into by Koppel and
the EPA and the Notice of Violation received by Koppel from the EPA, see
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Other Matters - Environmental Matters.
ITEM 6. Exhibits and Reports on Form 8-K
a) Exhibits - Reference is made to the Index to
Exhibits, which is incorporated herein by
reference.
b) Reports on Form 8-K - None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NS GROUP, INC.
Date: August 5, 1997 By: /s/Clifford R. Borland
Clifford R. Borland
Chairman and Chief Executive Officer
Date: August 5, 1997 By: /s/John R. Parker
John R. Parker
Vice President and Treasurer
<PAGE> 23
INDEX TO EXHIBITS
Number Description
3.1 Amended and Restated Articles of Incorporation of Registrant, filed as
Exhibit 3.1 to Amendment No. 1 to Registrants' Form S-1 dated January
17, 1995, File No. 33-56637, and incorporated herein by this reference
3.2 Amended and restated By-Laws of Registrant, dated December 4, 1995,
filed as Exhibit 3.2 to Company's Form 10-K for the fiscal year ended
September 30, 1995, File No. 1-9838, and incorporated herein by this
reference
11 Statement regarding Computation of Per Share Earnings
27 Financial Data Schedule
<PAGE> 1
Exhibit 11
NS GROUP, INC. AND SUBSIDIARIES
Statement re Computation of Per Share Earnings (Loss)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
June 28, June 29, June 28, June 29,
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Primary Earnings (Loss)
Net Income (Loss)
Net income (loss) $ 4,930 ($ 1,871) $ 7,348 ($ 6,583)
After-tax interest expense related to
modified treasury stock calculation 68
$ 4,998 ($ 1,871) $ 7,348 ($ 6,583)
Shares
Weighted average shares outstanding
13,887 13,809 13,837 13,809
Common stock equivalents (1) 904
14,791 13,809 13,837 13,809
Per Share
Primary earnings (loss) per share
$ 0.34 ($ 0.14) $ .53 ($ 0.48)
Fully Diluted Earnings (Loss)
Net Income (Loss)
Net income (loss) $ 4,930 ($ 1,871) $ 7,348 ($ 6,583)
After-tax interest expense related
to 11% Subordinated Convertible
Debentures (2) 568
$ 5,498 ($ 1,871) $ 7,348 ($ 6,583)
Shares
Weighted average shares outstanding
13,887 13,809 13,837 13,809
Common stock equivalents (1)
1,850 1,900
Assuming conversion of 11%
Subordinated Convertible
Debentures (2) 1,665
</TABLE>
<PAGE> 2
<TABLE>
<S> <C> <C> <C> <C>
17,402 13,809 15,737 13,809
Per Share
Fully diluted earnings (loss) per share
$0.32 ($0.14)(3) $0.47 ($0.48)(3)
</TABLE>
- --------------------
(1) Calculated using the "Modified Treasury Stock Method" as if all options and
warrants were exercised and the proceeds were used to purchase common shares
(limited to 20% of the shares outstanding) at the average market price during
the period for primary earnings per share and at the period end market price for
fully diluted earnings per share. The excess proceeds, if any, over the cost to
repurchase 20% of the shares outstanding are assumed to repay debt and
accordingly, reduce after-tax interest expense. For all periods, on both a
primary and fully diluted basis, the impact of common stock equivalents is
disregarded if it is anti-dilutive.
(2) The 11% subordinated convertible debentures were determined not to be common
stock equivalents at issuance. They are, however, included in the fully diluted
earnings per share calculation using the "If Converted" method for all periods
for which they produce a dilutive effective. Under the "If Converted" method,
the debentures are assumed to have been converted at the beginning of the period
resulting in additional shares of common stock outstanding and a reduction in
after-tax interest expense.
(3) This calculation is submitted in accordance with Regulation S-K, Item 601
(11) although not required to be presented in the statement of operations under
the provisions of Accounting Principles Board Opinion No. 15. That Opinion
provides that any reduction of less than 3% need not be considered as dilution
and that a computation on a fully diluted basis which results in an improvement
of earnings (loss) per share not be taken into account.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM NS
GROUP, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AS OF
AND FOR THE THREE AND NINE MONTH PERIODS ENDED JUNE 28, 1997, INCLUDED IN THE
COMPANY'S QUARTERLY REPORT ON FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000745026
<NAME> NS GROUP, INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-27-1997
<PERIOD-START> SEP-26-1996
<PERIOD-END> JUN-28-1997
<EXCHANGE-RATE> 1
<CASH> 5,028
<SECURITIES> 16,155
<RECEIVABLES> 62,744
<ALLOWANCES> 930
<INVENTORY> 72,435
<CURRENT-ASSETS> 184,672
<PP&E> 275,659
<DEPRECIATION> 150,988
<TOTAL-ASSETS> 322,520
<CURRENT-LIABILITIES> 86,041
<BONDS> 162,689
<COMMON> 0
0
53,047
<OTHER-SE> 12,411
<TOTAL-LIABILITY-AND-EQUITY> 322,520
<SALES> 349,130
<TOTAL-REVENUES> 349,130
<CGS> 301,696
<TOTAL-COSTS> 301,696
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 18,298
<INCOME-PRETAX> 10,088
<INCOME-TAX> 2,740
<INCOME-CONTINUING> 7,348
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,348
<EPS-PRIMARY> .53
<EPS-DILUTED> .47
</TABLE>
