SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 27, 1997
COMMISSION FILE NUMBER 1-9838
_______________
NS GROUP, INC.
(Exact name of registrant as specified in its charter)
_______________
Kentucky
(State or other jurisdiction of incorporation or
organization)
61-0985936
(I.R.S. Employer Identification Number)
Ninth and Lowell Streets, Newport, Kentucky 41072
(Address of principal executive offices)
Registrant's telephone number, including area code (606)
292-6809
_______________
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange Title of each class
on which registered Common Stock, no par value
New York Stock Exchange Preferred Stock Purchase Rights
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the registrant (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90
days. YES X NO ______
Indicate by check mark if disclosure of delinquent
filers pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of
registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K [X]
Based on the closing sales price of December 1, 1997,
as reported in The Wall Street Journal, the aggregate market
value of the voting stock held by non-affiliates of the
registrant was approximately $331.5 million.
The number of shares outstanding of the registrant's
Common Stock, no par value, was 24,080,148 at December 1,
1997.
Documents Incorporated by Reference
Parts I, II and III incorporate certain information by
reference from the Annual Report to Shareholders for the
fiscal year ended September 27, 1997 ("1997 Annual Report to
Shareholders"). Part III also incorporates certain
information by reference from the Company's Proxy Statement
dated December 22, 1997 for the Annual Meeting of
Shareholders on February 12, 1998.
Table of Contents
PART I Page
Item 1. Business 3
Item 2. Properties 11
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security
Holders 12
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 13
Item 6. Selected Consolidated Financial Data 13
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
Item 8. Financial Statements and Supplementary Data 13
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 13
PART III
Item 10. Directors and Executive Officers of the
Registrant 14
Item 11. Executive Compensation 14
Item 12. Security Ownership of Certain Beneficial
Owners and Management 14
Item 13. Certain Relationships and Related Transactions 14
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 14
PART I
ITEM 1. BUSINESS
General
The Company was incorporated in Kentucky in 1980 as
Newport Steel Corporation for the purpose of purchasing the
operating assets of the Newport Steel Works from Interlake,
Inc. The Company changed its name to NS Group, Inc. in
1987. As used herein, the terms "Company" and "NS Group"
refer to NS Group, Inc. and its subsidiaries, unless
otherwise required by the context.
NS Group conducts business in two industry segments,
the specialty steel segment and the adhesives segment.
Incorporated herein by reference from the 1997 Annual Report
to Shareholders is the segment data included in Management's
Discussion and Analysis of Financial Condition and Results
of Operations in "Results of Operations" and Note 12 to the
Consolidated Financial Statements, which contains additional
information pertaining to industry segment data.
Specialty Steel Segment
The Company is a 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 welded and
seamless tubular goods primarily used in oil and natural gas
drilling and production operations, referred to as oil
country tubular goods (OCTG); and line pipe, used in the
transmission of oil, natural gas and other fluids. Both
Newport and Koppel are certified by the American Petroleum
Institute (API) for production of these products. The
Company also produces special bar quality products,
primarily used in the manufacture of heavy industrial
equipment; and hot rolled coils, which are sold to service
centers and other manufacturers for further processing. The
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.
The following table sets forth certain operating
information with respect to Newport and Koppel for the
periods indicated.
(In thousands) 1997 1996 1995
Net sales
Newport
Welded tubular products $210,245 $157,385 $145,330
Hot rolled coils and
other products 10,336 16,230 16,673
Koppel
Seamless tubular products 152,146 133,446 90,926
SBQ products 67,502 62,405 82,954
$440,229 $369,466 $335,883
Operating income (loss) before corporate allocations
Newport $ 24,225 $ (4,855) $ (5,708)
Koppel 19,535 19,741 16,136
$ 43,760 $ 14,886 $ 10,428
Manufacturing Facilities and Processes - Specialty Steel
Segment
Newport Facilities
The Company manufactures welded OCTG and line pipe
products and hot rolled coils at its facilities located near
Newport, Kentucky. The production process for Newport's
welded tubular products includes three separate operations:
melting, rolling and pipe-making.
Steel scrap is melted into molten steel utilizing three
100-ton electric arc furnaces. Molten steel, reaching 3,000
degrees Fahrenheit, is tapped from the furnaces into ladles.
The ladles are then moved to an auxiliary stir station where
an argon lance stir process improves steel quality through
consistent metal deoxidation and desulfurization. Steel
refining continues at the ladle metallurgical station (LMS).
The LMS, which serves a dual role, allows for the precise
control of temperature and chemistry and enables continuous
production sequencing of the molten steel to the continuous
slab caster, thereby optimizing melt shop productivity.
Once strict metallurgical standards have been met, the
molten steel is "cast" into slabs that range in size from 7
to 10 inches in thickness, 28 to 55 inches in width and 15
to 34 feet in length. Slabs are cut to length and lifted
onto specially designed rail cars for transportation to the
adjacent reheat furnace. From time to time, Newport also
purchases slabs from third parties to supplement the
production of slabs by Newport's melt shop. In fiscal 1997,
Newport purchased approximately 117,000 tons of slabs for
use in the production of coil and pipe. Although Newport's
capacity utilization for its melt shop was 60% for fiscal
1997, one of Newport's three furnaces could not be operated
simultaneously with the other furnaces for most of the year
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 the future.
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 fiscal 1997, the Newport facilities' rated
capacities and capacity utilization were as follows:
Rated Capacity Capacity
(in tons) Utilization
Melt shop 700,000 60%
Hot strip rolling mill 750,000 65%
Welded pipe mills 580,000 75%
Koppel Facilities
The Company manufactures seamless OCTG, line pipe
products and SBQ products at its facilities located in
Koppel and Ambridge, Pennsylvania and Baytown, Texas. The
operations consist of a melting and casting facility and bar
mill located in Koppel and a seamless tubemaking facility
located approximately 20 miles away in Ambridge.
The melting and casting facilities at Koppel consist of
an 80-ton Ultra-High Powered (UHP) electric arc furnace, a
ladle refining station and a computer-controlled four-strand
continuous bloom/billet caster. Select grades of steel
scrap are melted utilizing the UHP furnace. Once the molten
steel reaches temperatures of approximately 3,000 degrees
Fahrenheit, it is tapped from the UHP furnace into a ladle
and transported to the ladle refining station. The ladle
refining station allows for the addition of alloys, thereby
providing precise chemical compositions, and it maintains
the molten steel at proper temperatures for the caster.
Once the chemistries are analyzed and conformed to
metallurgical standards, the ladle is carried by crane to
the continuous caster. The continuous caster is capable of
casting 9 inch square blooms or 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 an automated
rotary hearth furnace where round billets (tube rounds) are
reheated to temperatures over 2,200 degrees Fahrenheit.
Tube rounds exit the furnace to a piercer where a hollow
tube is formed. Hollow tubes are then rolled to a specific
size and wall thickness by passing through either the
mandrell mill or transval mill. Seamless tubular products
are produced in both carbon and alloy grades in sizes
ranging from 1 7/8 to 8 1/2 inches in outside diameter.
At Koppel's bar mill, blooms are reheated in a highly
automated rotary hearth furnace to temperatures over 2,200
degrees Fahrenheit. Blooms, upon exiting the furnace, pass
through a series of rolls, where they are reshaped into
round bars. SBQ products are available in both carbon and
alloy grades in sizes measuring 2 7/8 to 6 inches in
diameter.
For fiscal 1997, the Koppel facilities' rated
capacities and capacity utilization were as follows:
Rated Capacity Capacity
(in tons) Utilization
Melt shop 450,000 82%
Seamless tube mill 250,000 74%
Bar mill 200,000 78%
Finishing Facilities
The Company processes and finishes a portion of its
welded and seamless tubular products at facilities located
at the Port of Catoosa, near Tulsa, Oklahoma (Erlanger
Tubular Corporation, or Erlanger) and at Baytown, Texas,
located near Houston, Texas (Baytown). The finishing
processes include upsetting, which is a forging process that
thickens tube ends; heat treating, which is a furnace
operation designed to strengthen the steel; straightening;
non-destructive testing; coating for rust prevention; and
threading.
Products - Specialty Steel Segment
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.
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.
Demand for the Company's OCTG products is cyclical in
nature, being dependent on the number and depth of oil and
natural gas wells being drilled in the United States and
globally. The level of drilling activity is largely a
function of the current prices of oil and natural gas and
expectations of future prices. In addition, shipments by
domestic producers of OCTG products are influenced by the
levels of inventory held by producers, distributors and end
users as well as the level of foreign imports of OCTG
products. The average number of oil and natural gas
drilling rigs in operation in the United States was 906 in
fiscal 1997, up from 759 in fiscal 1996.
Line Pipe Products
The Company's line pipe products, which are produced by
both Newport and Koppel, are used primarily in gathering
lines for the transportation of oil and natural gas at the
drilling site and in transmission lines by both gas utility
and transmission companies. Line pipe products are coated
and shipped as a plain end product and welded together on
site. The majority of the Company's line pipe sales are
welded products.
The demand for line pipe is only partially dependent on
oil and gas drilling activities. Line pipe demand is also
dependent on factors such as the level of pipeline
construction activity, line pipe replacement requirements,
new residential construction and gas utility purchasing
programs.
Special Bar Quality Products
The Company manufactures a specialized market niche of
SBQ products at Koppel in sizes ranging from 2.875 to 6.0
inches 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 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. The demand
for these products is cyclical in nature and is sensitive to
general economic conditions.
Other Products
The Company's tubular products are inspected and tested
to ensure that they meet or exceed API specifications.
Products that do not meet specification are classified as
less then prime products and are sold at substantially
reduced prices.
Markets and Distribution - Specialty Steel Segment
The Company sells its specialty steel products to its
customers through an in-house sales force. The primary end
markets for the Company's seamless tubular products have
been the southwest United States and certain foreign
markets, including offshore applications. The Company has
historically marketed its welded tubular products in the
east, central and southwest regions of the United States, in
areas where shallow oil and gas drilling and exploration
activity utilize welded tubular products. Nearly all of the
Company's OCTG products are sold to domestic distributors,
some of whom subsequently sell the Company's products into
the international marketplace. The Company sells its SBQ
products to customers located generally within 400 miles of
the Koppel facilities.
All of the Company's steel-making and finishing
facilities are located on or near major rivers or waterways,
enabling the Company to transport its tubular products into
the southwest by barge. The Company ships substantially all
of its seamless and welded OCTG products destined for the
southwest region by barge.
Customers - Specialty Steel Segment
The Company has approximately 300 specialty steel
product customers. The Company's OCTG and line pipe
products are used by major and independent oil and natural
gas exploration and production companies in drilling and
production applications. Line pipe products are also used
by gas utility and transmission companies. The majority of
the Company's OCTG products are sold to domestic
distributors. Line pipe products are sold to both domestic
distributors and directly to end users. The Company sells
its SBQ products to service centers, cold finishers, forgers
and original equipment manufacturers. Hot rolled coils are
sold primarily to service centers and other manufacturers
for further processing. The Company has long-standing
relationships with many of its larger customers; however,
the Company believes that it is not dependent on any
customer and that it could, over time, replace lost sales
attributable to any one customer. In fiscal 1997, no one
customer accounted for more than 10% of total net sales,
other than Bourland & Leverich Supply Company, which
accounted for 10.3% of total net sales.
Competition - Specialty Steel Segment
The markets for the Company's specialty steel products
are highly competitive and cyclical. The Company's
principal competitors in its primary markets include
integrated producers, mini-mills and welded tubular product
processing companies, as well as foreign steel producers,
many of which have substantially greater assets and larger
sales organizations than the Company. The Company believes
that the principal competitive factors affecting its
business are price, quality and customer service.
In the welded OCTG and line pipe market, the Company
competes against certain manufacturers who purchase hot
rolled coils for further processing into welded OCTG and
line pipe products. The cost of finished tubular products
for these manufacturers is largely dependent on the market
price of hot rolled coils. Depending on market demand for
hot rolled coil, these tubular manufacturers may purchase
hot rolled coils at a lower or higher cost than the
Company's cost to manufacture hot rolled coils. Also,
additional new hot rolled manufacturing capacity is
anticipated which may also impact the market price for hot
rolled coils.
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 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 these appeals at this time.
Raw Materials and Supplies - Specialty Steel Segment
The Company's major raw material is steel scrap, which
is generated principally from industrial, automotive,
demolition, railroad and other steel scrap sources. Steel
scrap is purchased by the Company either through scrap
brokers or directly in the open market. The long-term
demand for steel scrap and its importance to the domestic
steel industry may be expected to increase as steel-makers
continue to expand steel scrap-based electric arc furnace
and thin slab casting capacities. For the foreseeable
future, however, the Company believes that supplies of steel
scrap will continue to be available in sufficient quantities
at competitive prices. In addition, a number of
technologies exist for the processing of iron ore into forms
which may be substituted for steel scrap in electric arc
furnace-based steel-making operations. Such forms include
direct-reduced iron, iron carbide and hot-briquette iron.
While such forms may not be cost competitive with steel
scrap at present, a sustained increase in the price of steel
scrap could result in increased implementation of these
alternative technologies.
The Company's steel manufacturing facilities consume
large amounts of electricity. The Company purchases its
electricity from utilities near its steel-making facilities
pursuant to separate contracts entered into by Koppel and
Newport. Koppel's contract 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 its wholly-owned subsidiary,
Imperial Adhesives, Inc. (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 - Adhesives Segment
Imperial's adhesives products are manufactured by
combining and mixing predetermined quantities of raw
materials. The raw materials are measured according to
specific formulas and mixed in numerous specially designed
industrial mixers. Raw materials are available from
multiple sources and consist primarily of
petrochemical-based materials. Pricing of raw materials
generally follows trends in the petrochemical markets. The
physical properties of finished formulas are measured and
monitored by a statistical process control system. Imperial
works closely with its customers to develop adhesive
applications designed to meet their specific product
requirements.
Products and Markets - Adhesives Segment
Imperial maintains approximately 1,000 active formulas
for the manufacture of water-borne, solvent-borne and
hot-melt adhesives products and approximately 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 1997, 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
are expected to be largely restricted by OSHA regulations
in December 1997. Methylene chloride-based products
represented approximately 22% of the Company's adhesives
segment sales in fiscal 1997.
Competition in the industrial adhesives industry
includes several major producers, as well as numerous small
and mid-sized companies comparable to Imperial. Imperial
competes on the basis of price, product performance and
customer service and believes that its diversity and ability
to develop applications to meet customers' specific needs
allows it to compete effectively with all adhesives
producers in its markets.
Environmental Matters
The Company is subject to federal, state and local
environmental laws and regulations, including, among others,
the Resource Conservation and Recovery Act (RCRA), the Clean
Air Act, the 1990 Amendments to the Clean Air Act, the Clean
Water Act and all regulations promulgated in connection
therewith, including, among others, those concerning the
discharge of contaminants as air emissions or waste water
effluents and the disposal of solid and/or hazardous wastes
such as electric arc furnace dust. As such, the Company is
from time to time involved in administrative and judicial
proceedings and administrative inquiries related to
environmental matters.
As with other steel mills in the industry, 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 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 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. 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 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, the Company 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 September 27, 1997, 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 27, 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 September 27, 1997, the Company had 1,948
employees, of whom 432 were salaried and 1,516
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.
ITEM 2. PROPERTIES
The Company's principal operating properties are listed
below. The Company believes its facilities are adequate and
suitable for its present level of operations.
Location and Properties
Specialty Steel Segment:
Newport, Kentucky - Newport owns approximately 250
acres of real estate upon which is located a melt shop, hot
strip mill, two welded pipe mills, a barge facility, machine
and fabricating shops and storage and repair facilities
aggregating approximately 675,000 square feet, as well as
administrative offices. The facilities are also located
adjacent to rail lines.
Tulsa, Oklahoma - Erlanger leases approximately 36
acres of real estate upon which is located a tubular
processing facility. The facility is located at the Tulsa
Port of Catoosa where barge facilities are in close
proximity. Located on this property are six buildings
aggregating approximately 119,000 square feet which house
the various finishing operations.
Koppel, Pennsylvania - Koppel owns approximately 227
acres of real estate upon which are located a melt shop, bar
mill, machine and fabricating shops, storage and repair
facilities and administrative offices aggregating
approximately 900,000 square feet. The facilities are
located adjacent to rail lines.
Ambridge, Pennsylvania - Koppel owns approximately 45
acres of real estate upon which are located a seamless tube
making facility and seamless tube finishing facilities
aggregating approximately 659,000 square feet. The
facilities are located adjacent to rail lines and river
barge facilities.
Baytown, Texas - Koppel owns approximately 55 acres of
real estate upon which are located a tubular processing
facility and barge facilities. Located on the property are
eight buildings aggregating approximately 65,000 square feet
which house the various finishing operations.
Adhesives Segment:
Cincinnati, Ohio; Lynchburg, Virginia; Nashville,
Tennessee - Imperial owns approximately seven acres of
property in Cincinnati, Ohio; 1.5 acres of property in
Lynchburg, Virginia and 3.1 acres in Nashville, Tennessee
for use in its adhesives and finishes operations. The
Cincinnati properties contain five buildings aggregating
approximately 150,000 square feet; the Lynchburg property
consists of one 10,000 square foot building and the
Nashville property contains one building aggregating
approximately 60,000 square feet.
Other:
Newport, Kentucky - The Company owns approximately 20
acres of partially developed land near Newport, Kentucky,
which is held as investment property and is listed for sale.
Information regarding encumbrances on the Company's
properties is included in Note 4 to the Consolidated
Financial Statements of the 1997 Annual Report to
Shareholders, and is incorporated herein by reference.
ITEM 3. LEGAL PROCEEDINGS
See Item 1, Business, "Environmental Matters" regarding
the Consent Order entered into by Koppel and the EPA in
March 1995 and the Notice of Violation received by Koppel
from the EPA in November 1996.
The Company is subject to various claims, lawsuits and
administrative proceedings arising in the ordinary course of
business with respect to workers compensation, health care
and product liability coverages (each of which is
self-insured to certain levels), as well as commercial and
other matters. Based upon its evaluation of available
information, management does not believe that any such
matters are likely, individually or in the aggregate, to
have a material adverse effect upon the Company's
consolidated financial position, results of operations or
cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
Incorporated herein by reference from the 1997 Annual
Report to Shareholders, "Corporate Information - Stock
Market Information" and "Corporate Information - Stock
Price" and Note 4 to the Consolidated Financial Statements.
As of December 1, 1997 there were approximately 184
record holders of Common Stock.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Incorporated herein by reference from the 1997 Annual
Report to Shareholders, "Consolidated Historical Summary".
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Incorporated herein by reference from the 1997 Annual
Report to Shareholders, "Management's Discussion and
Analysis of Financial Condition and Results of Operations".
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Incorporated herein by reference from the 1997 Annual
Report to Shareholders, "Consolidated Statements of
Operations"; "Consolidated Balance Sheets"; "Consolidated
Statements of Cash Flows"; Consolidated Statements of Common
Shareholders' Equity"; "Notes to Consolidated Financial
Statements"; "Report of Management" and "Report of
Independent Public Accountants".
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT
Incorporated herein by reference from the Company's
Proxy Statement dated December 22, 1997 for the Annual
Meeting of Shareholders on February 12, 1998, under the
caption "Election of Directors - Nominees for Election as
Directors"; "Share Ownership of Certain Beneficial Owners
and Management - footnote (4)"; "Information Regarding
Meetings and Committees of the Board of Directors -
Committees of the Board "; and "Section 16(a) Beneficial
Ownership Reporting Compliance".
ITEM 11. EXECUTIVE COMPENSATION
Incorporated herein by reference from the Company's
Proxy Statement dated December 22, 1997 for the Annual
Meeting of Shareholders on February 12, 1998, under the
caption "Information Regarding Meetings and Committees of
the Board of Directors - Director Compensation"; "Executive
Compensation"; and "Compensation Committee Interlocks and
Insider Participation".
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
Incorporated herein by reference from the Company's
Proxy Statement dated December 22, 1997 for the Annual
Meeting of Shareholders on February 12, 1998, "Share
Ownership of Certain Beneficial Owners and Management".
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS
Incorporated herein by reference from the Company's
Proxy Statement dated December 22, 1997 for the Annual
Meeting of Shareholders on February 12, 1998, under the
caption "Compensation Committee Interlocks and Insider
Participation" and "Certain Transactions".
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K
(a) 1. Consolidated Financial Statements - Audited
consolidated financial statements required by this item are
incorporated by reference and listed in Part II, Item 8.
(a) 2. Consolidated Financial Statement Schedule - The
financial statement schedule required to be filed as a part
of this report is included herein:
- - Report of Independent Public Accountants on Financial
Statement Schedule
- - Schedule II - Valuation and Qualifying Accounts
(a) 3. Exhibits - Reference is made to the Index to
Exhibits, which is included herein as part of this report.
(b) Reports on Form 8-K - None.
Report of Independent Public Accountants on Financial
Statement Schedule
To NS Group, Inc.:
We have audited in accordance with generally accepted
auditing standards the consolidated financial statements
included in NS Group, Inc. and subsidiaries annual report to
shareholders incorporated by reference in this Form 10-K,
and have issued our report thereon dated October 30, 1997.
Our audit was made for the purpose of forming an opinion on
the basic financial statements taken as a whole. The
schedule listed in Item 14(a) 2 is the responsibility of the
Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's
rules and is not part of the basic financial statements.
This schedule has been subjected to the auditing procedures
applied in the audit of the basic financial statements and,
in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation
to the basic financial statements taken as a whole.
Cincinnati, Ohio ARTHUR ANDERSEN LLP
October 30, 1997
SCHEDULE II
NS GROUP, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(Dollars in thousands)
Reserves Deducted from
Assets in Balance Sheets
Allowance
for Allowance
Doubtful for Cash
Accounts(1) Discounts(1)
BALANCE, September 24, 1994 $ 637 $ 306
Additions:
Charged to costs and expenses 586 3,553
Deductions:
Net charges of nature for which
reserves were created (202) (3,330)
BALANCE, September 30, 1995 $1,021 $ 529
Additions:
Charged to costs and expenses 744 3,487
Deductions:
Net charges of nature for which
reserves were created (1,008) (3,675)
BALANCE, September 28, 1996 $ 757 $ 341
Additions:
Charged to costs and expenses 1,050 7,414
Deductions:
Net charges of nature for which
reserves were created (1,095) (7,124)
BALANCE, September 27, 1997 $ 712 $ 631
(1) Deducted from accounts receivable
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of
the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NS GROUP, INC.
Date: December 12, 1997 By: /s/John R. Parker
John R. Parker, Vice
President,Treasurer and Chief
Financial Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints Clifford R.
Borland and John R. Parker, and each of them, his true and
lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities to sign any and
all amendments to this Annual Report on Form 10-K and any
other documents and instruments incidental thereto, and to
file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorneys-in-fact
and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite or
necessary to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person,
hereby ratifying and confirming all that said
attorneys-in-fact and agents and/or any of them, or their or
his substitute or substitutes, may lawfully do or cause to
be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange
Act of 1934, this report has been signed below by the
following persons on behalf of the Registrant and in the
capacities and on the dates indicated.
Date: December 12, 1997 /s/Clifford R. Borland
Clifford R. Borland,
Chief Executive Officer
and Director
Date: December 12, 1997 /s/Paul C. Borland,Jr.
Paul C. Borland, Jr., President and
Chief Operating Officer and
Director
Date: December 12, 1997 /s/John R. Parker
John R. Parker, Vice President,
Treasurer and Chief Financial
Officer
(Principal Financial Officer)
Date: December 12,1997 /s/Thomas J. Depenbrock
Thomas J. Depenbrock
Vice President and Corporate
Controller
(Principal Accounting Officer)
Date: December 12, 1997 /s/Ronald R. Noel
Ronald R. Noel
Vice President and Director
Date: December 12, 1997 /s/John B. Lally
John B. Lally, Director
Date: December 12, 1997 /s/Patrick J. B. Donnelly
Patrick J. B. Donnelly, Director
Date: December 12, 1997 /s/R. Glen Mayfield
R. Glen Mayfield, Director
INDEX TO EXHIBITS
Number Description
3.1 Amended and Restated Articles of Incorporation of
Registrant, filed as Exhibit 3.1 to Amendment No. 1 to
Registrants' Form S-1 dated January 17, 1995, File No.
33-56637, and incorporated herein by this reference
3.2 Amended and restated By-Laws of Registrant, dated
December 4, 1995, filed as Exhibit 3.2 to Company's Form
10-K for the fiscal year ended September 30, 1995, File No.
1-9838, and incorporated herein by this reference
Exhibits 4.1 through 4.19 were filed as exhibits under
their respective Exhibit numbers to Company's Form 10-Q for
the quarterly period ended July 1, 1995, File No. 1-9838,
and are incorporated herein by this reference
4.1 Indenture (including form of Senior Secured Note)
between the Company and The Huntington National Bank, as
trustee (the "Trustee")
4.2 Leasehold and Fee Mortgage, Assignment of Rents and
Leases and Security Agreement from Newport to the Trustee
(Kentucky)
4.3 Mortgage, Assignment of Rents and Leases and Security
Agreement from Koppel to the Trustee (Pennsylvania)
4.4 Deed of Trust, Assignment of Rents and Leases and
Security Agreement from Koppel to the Trustee (Texas)
4.5 Leasehold Mortgage, Assignment of Rents and Leases and
Security Agreement from Erlanger to the Trustee (Oklahoma)
4.6 Junior Leasehold and Fee Mortgage, Assignment of Rents
and Leases and Security Agreement from Newport to the
Company (Kentucky)
4.7 Junior Mortgage, Assignment of Rents and Leases and
Security Agreement from Koppel to the Company (Pennsylvania)
4.8 Junior Deed of Trust, Assignment of Rents and Leases
and Security Agreement from Koppel to the Company (Texas)
4.9 Junior Leasehold Mortgage, Assignment of Rents and
Leases and Security Agreement from Erlanger to the Company
(Oklahoma)
4.10 Subsidiary Security Agreement between Newport and the
Trustee
4.11 Subsidiary Security Agreement between Koppel and the
Trustee
4.12 Subsidiary Security Agreement between Erlanger and the
Trustee
4.13 ICN Security Agreement between Newport and the Company
INDEX TO EXHIBITS (Continued)
Number Description
4.14 ICN Security Agreement between Koppel and the Company
4.15 ICN Security Agreement between Erlanger and the Company
4.16 Pledge and Security Agreement between the Company and
the Trustee
4.17 Subsidiary Guarantee
4.18 Intercreditor Agreement between the Trustee and the
Bank of New York Commercial Corporation, as agent
under the Credit Facility
4.19 Agreement between the Trustee, Koppel and the
Commonwealth of Pennsylvania, Department of Commerce
4.20 Revolving Credit, Guaranty and Security Agreement among
Bank of New York Commercial Corporation, PNC Bank Ohio,
N.A., Newport, Koppel, Imperial, the Company, Erlanger,
Northern Kentucky Air, Inc. and Northern Kentucky
Management, Inc., filed as Exhibit 4.21 to Company's Form
10-Q for the quarterly period ended July 1, 1995, File No.
1-9838, and incorporated herein by this reference; Amendment
No. 1 dated October 23, 1995 and Amendment No. 2 dated
December 21, 1995 filed as Exhibit 4.21 to Company's Form
10-Q for the quarterly period ended December 30, 1995, File
No. 1-9838, and incorporated herein by this reference;
Amendment No. 3 dated February 14, 1996, filed as Exhibit
4.1 to Company's Post-Effective Amendment No. 1 on Form S-3
to Form S-1 Registration Statement, Registration No.
33-56637, and incorporated herein by this reference; and
Amendment No. 4 dated September 12, 1996, filed as Exhibit
4.21 to Company's Form 10-K for the fiscal year ended
September 28, 1996, File No. 1-9838, and incorporated herein
by this reference
4.21 Warrant Agreement between the Company and The
Huntington National Bank, as warrant agent, filed as Exhibit
4.22 to Company's Form 10-Q for the quarterly period ended
July 1,1995, File No. 1-9838, and incorporated herein by
this reference
10.1 Company's Amended Employee Incentive Stock Option Plan,
filed as Exhibit 10(a) to Company's Form 10-K for the fiscal
year ended September 30, 1989, File No. 1-9838, and
incorporated herein by this reference
10.2 Company's Executive Bonus Plan, filed as Schedule B to
Exhibit 10.4 to Company's Registration Statement on Form
S-18, File No. 2-90643, and incorporated herein by this
reference
10.3 Company's Non-Qualified Stock Option and Stock
Appreciation Rights Plan of 1988, filed as Exhibit 1 to
Company's Proxy Statement dated January 13, 1989, File No.
1-9838, and incorporated herein by this reference
10.4 Rights Agreement dated as of November 17, 1988 between
Company and Pittsburgh National Bank, filed as Exhibit 1 to
Company's Form 8-K dated November 17, 1988, File No.
1-9838, and incorporated herein by this reference, and
Appointment and Amendment Agreement dated July 29, 1994
between Registrant and Registrar and Transfer Company, filed
as Exhibit 10(d) to Company's Form 10-Q dated May 29,
1994, File No. 1-9838, and incorporated herein by this
reference
INDEX TO EXHIBITS (Continued)
Number Description
10.5 Company's 1993 Incentive Stock Option Plan, filed as
Exhibit 1 to Company's Proxy Statement dated December 22,
1992, File No. 1-9838, and incorporated herein by this
reference
10.6 Transfer Agreement, dated September 29, 1993, filed on
September 28, 1993 as Exhibit 10.2 to Amendment No. 2 to
the Registration Statement on Form S-1 of Kentucky Electric
Steel, Inc., File No. 33-67140, and incorporated herein by
this reference
10.7 Tax Agreement, dated October 6, 1993, by and among NS
Group, Inc., Kentucky Electric Steel, Inc. and NSub I, Inc.
(formerly Kentucky Electric Steel Corporation), filed as
Exhibit 10(h) to Company's Form 10-K for the fiscal year
ended September 25, 1993, File No. 1-9383, and incorporated
herein by this reference
10.8 Registration Rights Agreement dated October 6, 1993
among Kentucky Electric Steel, Inc., NS Group, Inc. and NSub
I, Inc. (formerly Kentucky Electric Steel Corporation),
filed as Exhibit 10(I) to Company's Form 10-K for fiscal
year ended September 25, 1993, File No. 1-9383, and
incorporated herein by this reference
10.9 Form of Warrant dated October 4, 1990, filed as Exhibit
4.2 to Company's Form 8-K dated October 18, 1990, File No.
1-9838, and incorporated herein by reference; and First
Amendment to Warrant dated September 26, 1992, filed as
Exhibit 4(c) to Company's Form 10-K for the fiscal year
ended September 26, 1992, File No. 1-9838, and incorporated
herein by this reference
10.10 Company's 1995 Stock Option and Stock Appreciation
Rights Plan, filed as Exhibit A to Company's Proxy Statement
dated December 27, 1995, File No. 1-9838, and incorporated
here in by this reference
13 1997 Annual Report to Shareholders (not deemed "filed"
except for portions which are expressly incorporated by
reference), filed herewith
21 Subsidiaries of Registrant
23 Consent of Independent Public Accountants
24 Power of Attorney (contained on Signature Page)
27 Financial Data Schedule
EXHIBIT 13
The following are the excerpted portions of the NS
Group, Inc. Annual Report to Shareholders for the fiscal
year ended September 27,1997 which are expressly
incorporated by reference into Form 10-K.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
The following analysis of financial condition and
results of operations of the Company should be read in
conjunction with the audited Consolidated Financial
Statements and related Notes of the Company.
The matters discussed or incorporated by reference in
this report 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: (i) the level
of domestic as well as worldwide oil and natural gas
drilling activity; (ii) general economic conditions; (iii)
product demand and industry capacity; (iv) industry pricing;
(v) the presence or absence of governmentally imposed trade
restrictions; (vi) manufacturing efficiencies; (vii)
volatility in raw material costs, particularly steel scrap;
(viii) costs of compliance with environmental regulations;
and (ix) product liability or other claims. 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.
General
The Company operates in two business segments:
specialty steel and industrial adhesives. Within the
specialty steel segment are the operations of Newport Steel
Corporation (Newport), a manufacturer of welded tubular
steel products and hot rolled coils, and Koppel Steel
Corporation (Koppel), a manufacturer of seamless tubular
steel products, special bar quality (SBQ) products and
semi-finished steel products. The Company's specialty steel
products consist of: (I) welded and seamless tubular goods
used primarily 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 used primarily in the
manufacture of heavy industrial equipment; and (iv) hot
rolled coils which are sold to service centers and other
manufacturers for further processing. Within the adhesives
segment are the operations of Imperial Adhesives, Inc.
(Imperial), a manufacturer of industrial adhesives products.
See Note 12 to the Consolidated Financial Statements
included herein for selected financial information by
business segment.
Results of Operations
The Company's net sales, gross profit and operating
results by industry segment for each of the three fiscal
years in the period ended September 27, 1997 are summarized
below. Fiscal 1997 and 1996 contain fifty-two weeks and
fiscal 1995 contains fifty-three 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.
(In thousands) 1997 1996 1995
Net sales:
Specialty steel segment
Newport $220,581 $173,615 $162,003
Koppel 219,648 195,851 173,880
440,229 369,466 335,883
Adhesives segment 40,941 39,916 35,469
$481,170 $409,382 $371,352
Gross profit:
Specialty steel segment
Newport $ 31,121 $ 3,966 $ 4,171
Koppel 26,574 26,251 22,266
57,695 30,217 26,437
Adhesives segment 10,630 9,580 7,645
$ 68,325 $ 39,797 $ 34,082
Operating income (loss):
Specialty steel segment
Newport $ 24,225 $ (4,855) $ (5,708)
Koppel 19,535 19,741 16,136
43,760 14,886 10,428
Adhesives segment 1,799 1,597 1,248
Corporate allocations (4,591) ( 4,430) (3,870)
$ 40,968 $ 12,053 $ 7,806
Shipment and sales data for the Company's specialty
steel segment for each of the three fiscal years in the
period ended September 27, 1997 were as follows:
1997 1996 1995
Tons shipped:
Newport
Welded tubular products 418,300 348,900 322,900
Hot rolled coils and
other products 26,200 43,300 47,600
Koppel
Seamless tubular products 172,100 157,400 116,600
SBQ products 152,400 133,700 169,000
769,000 683,300 656,100
Net sales ($000's):
Newport
Welded tubular products $210,245 $157,385 $145,330
Hot rolled coils and
other products 10,336 16,230 16,673
Koppel
Seamless tubular products 152,146 133,446 90,926
SBQ products 67,502 62,405 82,954
$440,229 $369,466 $335,883
Fiscal Year Ended September 27, 1997 compared with Fiscal
Year Ended September 28, 1996
Net sales in fiscal 1997 increased $71.8 million, or
17.5%, from fiscal 1996. Specialty steel segment net sales
increased $70.8 million, or 19.2%, and the adhesives
segment net sales increased $1.0 million, or 2.6%, from
fiscal 1996. 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.
Welded tubular net sales increased $52.9 million, or
33.6%, on a volume increase of 19.9%. The increase in total
welded tubular net sales was primarily due to an increase in
shipments and average selling price of welded OCTG products.
The increase in welded OCTG shipments and prices were the
result of increased drilling activity. Average selling
price for all welded tubular products was $503 per ton, an
11.5% increase from fiscal 1996.
Seamless tubular net sales increased $18.7 million, or
14.0%, on a volume increase of 9.3%. 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. Average selling price for all
seamless tubular products was $884 per ton, a 4.2% increase
from fiscal 1996, resulting primarily from changes in
product mix.
Demand for the Company's OCTG products is cyclical in
nature, being dependent on the number and depth of oil and
natural gas wells being drilled in the United States and
globally. The level of drilling activity is largely a
function of the current prices of oil and natural gas and
expectations of future prices. In addition, shipments by
domestic producers of OCTG products are influenced by the
levels of inventory held by producers, distributors and end
users, as well as the level of foreign imports of OCTG
products. The average number of oil and natural gas
drilling rigs in operation in the United States (rig count)
was 906 in fiscal 1997, up from 759 in fiscal 1996.
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 has had a
positive effect on its shipments and the pricing of certain
of its seamless tubular products; however, it cannot predict
the outcome or timing of the appeals or reviews at this
time.
SBQ product net sales increased $5.1 million, or 8.2%,
on a volume increase of 14.0%. Fiscal 1997 average selling
price for SBQ products declined 5.1% from fiscal 1996.
While shipments of SBQ products are above prior year levels,
market and competitive conditions resulted in lower pricing.
Other product shipments and sales for fiscal 1997 were
primarily attributable to sales of hot rolled coils. The
demand for the Company's SBQ and hot rolled coil products is
cyclical in nature and is sensitive to general economic
conditions.
Gross profit for fiscal 1997 increased $28.5 million
from fiscal 1996, for a gross profit margin of 14.2% in
fiscal 1997 compared to 9.7% in fiscal 1996. The specialty
steel segment gross profit increased $27.5 million, and this
segment had a gross profit margin of 13.1% in fiscal 1997
versus 8.2% in fiscal 1996. The increase in specialty steel
segment gross profit and margin was attributable to
Newport's welded tubular operations, where gross profit
margins rose from 2.3% in the prior year to 14.1% for the
current year. The increase was the result of increased
shipments of welded OCTG products, higher average selling
prices for all tubular products, improved operating
efficiencies and cost reduction initiatives. Koppel's gross
profit margin decreased to 12.1% from 13.4% in fiscal 1996,
primarily due to a decrease in SBQ selling prices.
The adhesives segment gross profit increased $1.1
million from fiscal 1996 due to slightly lower raw material
costs and the gross profit margin was 26.0% compared to
24.0% in fiscal 1996.
Fiscal 1997 selling and administrative expenses
decreased $0.4 million from 1996 and decreased as a
percentage of sales from 6.8% in fiscal 1996 to 5.7% in
fiscal 1997.
As a result of the above factors, operating income
increased $28.9 million, from $12.1 million in
fiscal 1996 to $41.0 million in fiscal 1997. The increase
in operating income was almost solely attributable to the
specialty steel segment and was primarily due to increased
shipments and average selling prices for welded OCTG
products and improved operations at Newport.
Interest income increased $0.4 million from fiscal 1996
as a result of increased average invested cash and
short-term investment balances during fiscal 1997. Interest
expense for fiscal 1997 was virtually unchanged from fiscal
1996 at $24.3 million.
Other income, net was $1.5 million and $0.6 million for
fiscal 1997 and fiscal 1996, respectively. Fiscal 1997
includes gains from the sale of certain development property
and settlement of insurance claims, while fiscal 1996 also
includes gains from insurance claims, offset by a loss on
the sale of a non-steel segment fixed asset.
The Company's combined federal and state effective tax
rate for fiscal 1997 was 28.6%. 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
fiscal 1997 net income before extraordinary item of $13.7
million, or $.86 per primary share ($.81 fully diluted),
compared to a net loss of $10.5 million, or a $.76 loss per
primary and fully diluted share, in fiscal 1996.
In connection with a fiscal 1997 fourth quarter
refinancing, the Company incurred prepayment costs and wrote
off unamortized debt discount and debt issuance costs which
resulted in an extraordinary charge of $9.3 million, net of
applicable income tax benefit of $2.3 million, or $.58 per
primary share and $.55 per fully diluted share. See
Liquidity and Capital Resources and Note 4 to the
Consolidated Financial Statements.
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. 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.
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 excessive inventory levels
in the SBQ marketplace. Other product shipments and sales
for fiscal 1996 were primarily attributable to sales 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 and this segment
had a gross profit margin of 8.2% in fiscal 1996 versus 7.9%
in fiscal 1995. The increase in specialty steel segment
gross profit and margin was attributable to Koppel's
seamless tubular operations, where gross profit margins rose
from 12.8% in 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 almost solely attributable to the specialty steel
segment and was due primarily to increased shipments and
average selling prices for Koppel's seamless tubular
products, partially offset by a decrease in SBQ product
shipments and average selling prices.
Interest income decreased $0.7 million from fiscal 1995
as a result of a decline in average invested cash and
short-term investment balances during the respective
comparable periods.
Interest expense increased $3.6 million over fiscal
1995 as a result of higher interest costs associated with
the Company's Senior Secured Notes issued in the fourth
quarter of fiscal 1995.
Other income, net decreased $2.4 million from fiscal
1995. Fiscal 1996 was impacted by a 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.
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.
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.
Liquidity and Capital Resources
In September 1997, the Company completed a public
offering (Offering) of the Company's common stock. The
Company sold 6,000,000 shares for net proceeds, after
expenses, of $169.8 million. In connection with the
Offering, an additional 2,164,705 shares of common stock
were issued upon the conversion of the Company's $28.3
million principal amount 11% Convertible Debentures and the
exercise of certain warrants. In October 1997, the
underwriters' overallotment was exercised in full, resulting
in the issuance of an additional 540,295 shares of common
stock with net proceeds to the Company of $15.4 million.
The Company used a portion of the proceeds to retire $9.6
million principal amount of long-term debt and called for
redemption $52.4 million principal amount of its outstanding
13.5% Senior Secured Notes (Notes). The redemption was made
in October and included a prepayment penalty of $7.1
million, plus accrued interest. Reference is made to Note 2
and Note 4 to the Consolidated Financial Statements for
further information concerning these transactions.
Working capital at September 27, 1997 was $226.9
million compared to $80.9 million at September 28, 1996.
The current ratio at September 27, 1997 was 2.64 to 1
compared to 2.16 to 1 at September 28, 1996. At September
27, 1997, the Company had cash and short-term investments
totaling $195.3 million, including $59.5 million of funds
held for debt called for redemption. At September 27, 1997,
the Company had no outstanding advances against its $45.0
million revolving credit facility (Credit Facility);
however, $11.2 million of the Credit Facility secured
various letters of credit issued primarily in connection
with the purchase of steel slabs at Newport.
Net cash flows provided by operating activities totaled
$11.0 million in fiscal 1997. The Company recorded net
income of $4.4 million in fiscal 1997 compared to a loss of
$10.5 million in fiscal 1996. Major sources of cash from
operating activities in fiscal 1997 included $23.8 million
in non-cash depreciation and amortization charges; a $7.1
million accrual for debt prepayment penalty; a $4.5 million
increase in long-term deferred taxes and a $9.6 million
increase in accounts payable and accrued liabilities due to
increased business activity. The major uses of cash in
operating activities included increases of $21.0 million and
$11.3 million in inventory and accounts receivable,
respectively, resulting from an increase in business
activity related primarily to improvements in the OCTG
marketplace. Additional uses of cash in operating
activities include a $7.6 million increase in other current
assets primarily related to increases in the Company's
current deferred tax asset and receivables recorded in
connection with certain insurance claims.
Net cash flows provided by operating activities totaled
$11.5 million in fiscal 1996. The Company recorded a net
loss of $10.5 million in fiscal 1996. Major uses of cash in
operating activities in fiscal 1996 included increases of
$6.0 million and $8.6 million in accounts receivable and
inventories, respectively, resulting from an increase in
business activity. Offsetting these uses were $20.9 million
in non-cash depreciation and amortization charges; a $2.5
million increase in long-term deferred taxes; a $1.8 million
decrease in refundable income taxes; a $0.8 million decrease
in other current assets resulting primarily from the
collection of previously filed insurance claims; a $9.0
million increase in accounts payable primarily resulting
from the purchase of steel slabs and a general increase in
business activity; and a $2.2 million increase in accrued
liabilities primarily related to accrued interest on the
Company's Notes. Included in the fiscal 1996 net loss was a
$1.2 million non-cash gain recorded in connection with the
settlement of certain warranty claims made by the Company
related to the acquisition of Koppel.
Net cash flows used in operating activities totaled
$5.7 million in fiscal 1995. The Company incurred a loss
before extraordinary charge in fiscal 1995 of $5.1 million.
Major uses included a $3.2 million increase in accounts
receivable and a $12.4 million increase in inventories
resulting from an increase in business activity and, for the
increase in inventories, unusually low levels at fiscal 1994
year end due to scheduled maintenance at Newport. Other
major uses include a decrease in long-term deferred taxes
and an increase in refundable income taxes, both resulting
from the fiscal 1995 net loss, including the extraordinary
charge for prepayment costs and a non-cash cost for the
write-off of unamortized debt issuance costs. Offsetting
these uses were $21.3 million in non-cash depreciation and
amortization charges and increases in accounts payable and
accrued liabilities of $5.6 million and $2.9 million,
respectively.
The Company invested $7.1 million, $6.5 million and
$12.2 million in capital expenditures during fiscal 1997,
1996 and 1995, respectively. Such capital expenditures were
primarily related to improvements to and acquisitions of
machinery and equipment in the specialty steel segment.
Capital spending for fiscal 1997, 1996 and 1995 related to
the Company's environmental control facilities was not
material. The Company currently estimates that fiscal 1998
capital spending will substantially exceed fiscal 1997
expenditures. A significant portion of fiscal 1998 capital
expenditures will be used to invest in equipment that will
reduce operating costs and increase tubular product
finishing capabilities. Sources for funding capital
expenditures include cash flows from operations, available
cash and short-term investments, as well as available
borrowing sources.
The Company also generated $4.1 million in cash in
fiscal 1997 from the sale of certain development property.
Net cash flows from financing activities include $182.9
million from the issuance of Company common stock, including
$169.8 million of net proceeds from the Offering. The
Company used $12.0 million to repay debt compared to debt
repayments of $1.9 million in fiscal 1996. In September
1997 the Company called for redemption $52.4 million
principal amount of its 13.5% Senior Secured Notes. The
redemption, which included a $7.1 million prepayment
penalty, plus accrued interest, was made in October 1997.
The Company's annual long-term debt maturities are $2.0
million in fiscal 1998, $0.7 million in fiscal 1999, $0.2
million in fiscal 2000, $0.2 million in fiscal 2001 and $0.1
million in fiscal 2002.
Reference is made to Note 4 to the Consolidated
Financial Statements for further information concerning the
Company's long-term debt and Credit Facility.
Earnings before interest, taxes, depreciation and
amortization (EBITDA) was $61.1 million for fiscal 1997,
$32.6 million for fiscal 1996 and $31.1 million for fiscal
1995. EBITDA is calculated as income before extraordinary
items 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 borrowing sources will be sufficient to meet its
anticipated operating cash requirements, including capital
expenditures, for at least the next twelve months.
Inflation
The Company believes that inflation has not had a
material effect on its results of operations to date.
Generally, the Company experiences inflationary increases in
its costs of raw materials, energy, supplies, salaries and
benefits and selling and administrative expenses. Except
with respect to significant increases in steel scrap prices,
the Company has generally been able to pass these
inflationary increases through to its customers.
Other Matters
See Note 8 to the Consolidated Financial Statements,
"Commitments and Contingencies".
Recently Issued Accounting Standards
See Note 1 to the Consolidated Financial Statements,
"Summary of Significant Accounting Policies - Recently
Issued Accounting Standards".
Consolidated Statements of Operations
For the years ended September 27, 1997, September 28, 1996
and September 30, 1995
(Dollars in thousands, except per share amounts)
1997 1996 1995
Net sales $481,170 $409,382 $371,352
Cost of products sold 412,845 369,585 337,270
Selling and
administrative expenses 27,357 27,744 26,276
Operating income 40,968 12,053 7,806
Interest income 1,010 637 1,341
Interest expense (24,261) (24,375) (20,796)
Other income, net 1,465 644 3,053
Income (loss) before
income taxes and
extraordinary items 19,182 (11,041) (8,596)
Provision (credit)
for income taxes 5,478 (584) (3,540)
Income (loss) before
extraordinary items 13,704 (10,457) (5,056)
Extraordinary items,
net of income taxes (9,256) (5,200)
Net income (loss) $ 4,448 $(10,457) $(10,256)
Per common share
(primary)
Income (loss) before
extraordinary items $.86 $(.76) $(.36)
Extraordinary items,
net of income taxes (.58) (.38)
Net income (loss) $.28 $(.76) $(.74)
Per common share
(fully diluted)
Income (loss) before
extraordinary items $.81 $(.76) $(.36)
Extraordinary items,
net of income taxes (.55) (.38)
Net income (loss) $.26 $(.76) $(.74)
Weighted average shares
outstanding (000's)
Primary 15,912 13,809 13,809
Fully diluted 16,858 13,809 13,809
See notes to consolidated financial statements
Consolidated Balance Sheets
September 27, 1997 and September 28, 1996
(Dollars in thousands)
ASSETS 1997 1996
Current assets
Cash $ 6,998 $ 3,442
Short-term investments 128,828 13,855
Funds held for debt
called for redemption 59,517
Accounts receivable,
less allowance for
doubtful accounts
of $712 and $757,
respectively 63,151 51,824
Inventories 73,474 53,317
Operating supplies 15,657 14,449
Deferred tax assets 10,884 5,459
Other current assets 6,412 8,129
Total current assets 364,921 150,475
Property, plant and equipment
-- at cost
Land and buildings 30,113 29,755
Machinery and equipment 245,362 239,218
Construction in progress 3,304 3,313
Less -- accumulated
depreciation (154,962) (138,512)
Net property, plant and
equipment 123,817 133,774
Other assets 11,578 15,785
Total assets $500,316 $300,034
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Notes payable $ 722 $ 879
Payments due on debt called
for redemption 59,517
Accounts payable 47,667 41,847
Accrued liabilities 28,126 24,376
Current portion of
long-term debt 1,958 2,468
Total current liabilities 137,990 69,570
Long-term debt 76,424 164,789
Deferred taxes 13,087 8,559
Common shareholders' equity
Common stock, no par value,
40,000,000 shares authorized,
23,310,297 and 13,809,413
shares issued and outstanding,
respectively 261,368 49,004
Common stock options and
warrants 1,612 2,774
Unrealized loss on available
for sale securities (1,238) (1,287)
Retained earnings 11,073 6,625
Common shareholders' equity 272,815 57,116
Total liabilities and
shareholders' equity $500,316 $300,034
See notes to consolidated financial statements
Consolidated Statements of Cash Flows
For the years ended September 27, 1997, September 28, 1996
and September 30, 1995
(Dollars in thousands)
1997 1996 1995
Cash flows from
operating activities:
Net income (loss) $ 4,448 $ (10,457) $(10,256)
Adjustments to reconcile
net income (loss) to net
cash flows from operating
activities:
Depreciation and
amortization 17,609 19,260 18,941
Amortization of debt
discount and finance costs 6,219 1,642 2,370
Increase (decrease) in
long-term deferred taxes 4,488 2,496 (2,970)
Non-cash gain on settlement
of claims (1,172)
(Gain) loss on disposal of
equipment 206 642 (470)
Increase in accounts
receivable (11,327) (5,966) (3,207)
Increase in inventories (20,992) (8,601) (12,426)
(Increase) decrease in
operating supplies and
other current assets (7,641) 2,543 (6,185)
Accrued prepayment fees
on debt called for
redemption 7,079
Increase in accounts payable 5,820 8,950 5,585
Increase in accrued
liabilities 3,750 2,209 2,886
Net cash flows from
operating activities 9,659 11,546 (5,732)
Cash flows from investing
activities:
Purchases of property,
plant and equipment (7,139) (6,510) (12,233)
Proceeds from sale of
equipment 382 1,729 494
(Increase) decrease in
other assets 4,053 (474) 1,892
Net cash flows from
investing activities (2,704) (5,255) (9,847)
Cash flows from financing
activities:
Increase (decrease) in
notes payable (157) 370 (28,363)
Proceeds from issuance of
long-term debt 340 1,277 122,587
Repayments on long-term debt (11,994) (1,892) (107,950)
Increase in debt issuance
costs - (6,331)
Proceeds from issuance of
warrants 2,411
Proceeds from issuance of
common stock 182,902
Net cash flows from
financing activities 171,091 (245) (17,646)
Net increase (decrease) in
cash and short term
investments 178,046 6,046 (33,225)
Cash and short term
investments at beginning
of year 17,297 11,251 44,476
Cash and short term
investments at end of year $195,343 $ 17,297 $ 11,251
Cash paid during the year for:
Interest $ 23,231 $ 22,179 $ 20,385
Income taxes, net of
refunds $ 1,463 $ (4,234) $ 209
See notes to consolidated financial statements
Consolidated Statements of Common Shareholders' Equity
For the years ended September 27, 1997, September 28, 1996
and September 30, 1995
(Dollars in thousands)
Unrealized
Gain (Loss)
Options on Available
Common Stock and for Sale Retained
Shares Amount Warrants Securities Earnings Total
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
loss 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
loss 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
Issuance
of common
stock 6,000,000 169,823 169,823
Conversion
of 11%
subor-
dinated
deben-
tures 1,664,705 28,300 28,300
Stock
option
plans 645,180 6,327 (12) 6,315
Exercise
of common
stock
warrants 1,190,999 7,914 (1,150) 6,764
Unrealized
gain on
investments 49 49
Net income 4,448 4,448
Balance,
September
27,
1997 23,310,297 $261,368 $1,612 $(1,238) $11,073 $272,815
See notes to consolidated financial statements
Notes to Consolidated Financial Statements
Note 1: Summary of Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the
accounts of NS Group, Inc. and its wholly-owned subsidiaries
(the Company): Newport Steel Corporation (Newport), Koppel
Steel Corporation (Koppel), Erlanger Tubular Corporation
(Erlanger), Imperial Adhesives, Inc. (Imperial) and Northern
Kentucky Management, Inc. All significant intercompany
accounts and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity
with generally accepted accounting principles requires that
management make certain estimates and assumptions that
affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could
differ from those estimates.
Cash
Cash includes currency on hand and demand deposits with
financial institutions.
Short-Term and Other Investments
Short-term investments, including funds held for debt
called for redemption, consist primarily of money market
mutual funds and U.S. treasury securities, for which market
value approximates cost. 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 27, 1997 and September 28, 1996,
inventories stated at the lower of LIFO (last-in, first-out)
cost or market represent approximately 53% and 36% 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:
(In thousands)
1997 1996
Raw materials $10,300 $ 5,948
Semi-finished and finished goods 66,005 50,471
76,305 56,419
LIFO reserve (2,831) (3,102)
Total inventories $73,474 $53,317
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. Expenditures for maintenance
and repairs are charged to expense as incurred.
Expenditures for equipment renewals which extend the life or
increase the productivity or capacity of an asset are
capitalized.
Income Taxes
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 February 1997, the Financial Accounting Standards
Board 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 in fiscal 1998.
For fiscal 1997, as calculated under Statement 128, basic
EPS and diluted EPS before extraordinary item are $.97 and
$.92, respectively. Basic EPS and diluted EPS for fiscal
1997 are $.31 and $.30, respectively. For fiscal 1996 and
1995 the reported EPS amounts would not have changed.
Fiscal Year-End
The Company's fiscal year ends on the last Saturday of
September. Fiscal 1997 and 1996 contain fifty-two weeks and
fiscal 1995 contains fifty-three weeks.
Earnings Per Share
Primary earnings per share is based on the
weighted-average number of shares outstanding during the
period, including the dilutive effect of applicable common
stock equivalents. It excludes the effect of the Company's
11% Subordinated Convertible Debentures, which were
converted in fiscal 1997. If such conversion had occurred
at the beginning of fiscal 1997, primary earnings per share
would have been $.91 based on income before extraordinary
items and $.38 based on net income. Fully diluted earnings
per share is calculated assuming maximum dilution from
dilutive common stock equivalents and convertible
securities.
Note 2: Common Stock Offering
In September 1997, the Company completed a public
offering (Offering) of the Company's common stock. The
Company issued and sold 6,000,000 shares, which resulted in
net proceeds to the Company of $169.8 million after the
underwriters' discount and other Offering expenses. In
connection with the Offering, an additional 2,164,705 shares
of common stock were issued upon the conversion of the
Company's 11% Convertible Debentures and the exercise of
certain warrants, a substantial portion of which were sold
in the Offering.
In October 1997, the underwriters' over-allotment
option was exercised in full, resulting in the issuance and
sale of an additional 540,295 shares of common stock by the
Company and net proceeds to the Company of $15.4 million.
Note 3: Accrued Liabilities
Accrued liabilities consist of the following:
(In thousands) 1997 1996
Accrued payroll and payroll taxes $11,352 $ 8,477
Accrued interest 3,742 4,696
Accrued environmental remediation 4,394 4,444
Other 8,638 6,759
$28,126 $24,376
Note 4: Long-term Debt and Credit Facility
Long-term debt of the Company consists of the
following:
(In thousands) 1997 1996
13.5% Senior Secured Notes due
July 15, 2003, interest due
semi-annually, secured by property,
plant and equipment (net of
unamortized discount of $4,237
and $7,754, respectively) $ 74,421 $123,342
13.5% Senior Secured Notes called
for redemption 52,438
11% Subordinated Convertible
Debentures, converted to
common stock in September 1997 28,300
Other 3,961 15,615
130,820 167,257
Less:
Current portion (1,958) (2,468)
13.5% Senior Secured Notes called
for redemption (52,438)
$ 76,424 $164,789
In September 1997, the Company called for redemption
$52.4 million principal amount of its outstanding 13.5%
Senior Secured Notes due 2003 (Notes). The redemption was
made in October 1997 from the proceeds of the Offering (see
Note 2) and included a prepayment penalty of $7.1 million,
plus accrued interest. The remaining Notes may be redeemed
at the option of the Company, at any time, in whole or in
part, beginning in 2000, initially at a price of 103.86%,
declining to 100% in 2002.
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.
In connection with the Offering, the holders of the
Company's 11% Subordinated Convertible Debentures exercised
their right to convert the full principal amount of such
Debentures. Also in connection with the Offering, the
Company prepaid $9.6 million principal amount of other
long-term debt.
The conversion of the 11% Subordinated Convertible
Debentures is a non-cash financing transaction and is not
included in the Consolidated Statements of Cash Flows.
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 the 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 27, 1997, approximately $11.2 million of the
Credit Facility was utilized to collateralize various
letters of credit and $33.8 million was available for
borrowing. The Credit Facility expires in fiscal 1998.
In connection with the retirement of long-term
indebtedness in the fourth quarter of fiscal 1997, the
Company incurred prepayment costs and wrote off unamortized
debt discount and debt issuance costs which resulted in an
extraordinary charge of $9.3 million, net of applicable
income tax benefit of $2.3 million, or $.58 and $.55 per
primary and fully diluted share, respectively. Similar
charges incurred in the retirement of long-term indebtedness
in fiscal 1995 resulted in an extraordinary charge of $5.2
million, net of applicable income tax benefit of $2.8
million, or $.38 per primary and fully diluted share.
Annual long-term debt maturities are $2.0 million in
fiscal 1998, $0.7 million in fiscal 1999, $0.2 million in
fiscal 2000, $0.2 million in fiscal 2001 and $0.1 million in
fiscal 2002.
As of September 27, 1997 and September 28, 1996, the
weighted-average interest rate on outstanding notes payable
was 6.0% and 6.1%, respectively.
Note 5: Fair Value of Financial Instruments
The following methods and assumptions were used to
estimate the fair value of financial instruments:
Cash and short-term investments - The carrying
amount approximates fair value because of the short maturity
of these instruments.
Other investments - Other investments, consisting of
marketable equity securities totaling $2.8 million, are
reported in other assets and 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 based upon current
market rates.
The carrying amount and fair value of the Company's
financial instruments are as follows:
1997 1996
Carrying Fair Carrying Fair
(In thousands) Amount Value Amount Value
Cash and short-term
investments $195,343 $195,343 $17,297 $17,297
Other investments 2,800 2,800 2,725 2,725
Notes payable 722 722 879 879
Long-term debt 130,820 153,856 167,257 176,860
Note 6: 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 expire in
November 1998.
Note 7: Stock Options and Warrants
The Company has various stock option plans under which
the Company may grant incentive and nonqualified stock
options and stock appreciation rights to purchase shares of
the Company's common stock. All incentive stock options
were granted at the fair market value on the date of grant.
Incentive stock options generally become exercisable one
year after the grant date and expire after ten years.
Nonqualified stock options become exercisable according to a
vesting schedule determined at the grant date and expire on
the date set forth in the option agreement. Nonqualified
stock options were granted at exercise prices approximating
the market price on the date of grant. For fiscal 1996, the
weighted-average fair value of options granted was $1.20.
A summary of transactions in the plans follows:
1997 1996 1995
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Outstanding,
beginning
of year 1,629,330 $7.22 1,667,055 $7.36 1,524,330 $7.80
Granted 60,000 2.63 212,400 4.38
Expired (87,395) 8.01 (97,725) 6.87 (69,675) 7.67
Exercised(645,180) 7.78 -
Outstanding,
end of
year 896,755 6.73 1,629,330 7.22 1,667,055 7.36
Exercisable,
end of
year 489,504 7.73 951,428 8.42 761,355 9.22
Available
for
grant 1,153,230 1,093,825 1,086,510
The Company accounts for these plans in accordance with
the intrinsic value method. Pro forma compensation cost,
net income (loss) and per share amounts computed as if the
Company had accounted for the 1996 option grant on the fair
value method, would not have been materially different from
reported amounts for 1997 or 1996.
A summary of information about stock options
outstanding at September 27, 1997 follows:
Options Outstanding Options Exercisable
Range of Average Average Average
Exercise Exercise Remaining Exercise
Prices Shares Price Life Shares Price
$2.63-$5.93 386,754 $4.18 6.76 186,563 $4.20
$6.125-$9.75 404,186 7.37 5.13 197,126 7.91
$13.25-
$14.125 105,815 13.63 .89 105,815 13.63
896,755 6.73 5.33 489,504 7.73
At September 27, 1997, the Company has common stock
warrants outstanding, exercisable for approximately 272,000
shares of the Company's common stock at a price of $8.00 per
share and 843,000 shares at a price of $4.00 per share. The
warrants expire October 4, 2000 and July 15, 2003,
respectively.
Note 8: 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.
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 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 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 September 27, 1997, claims
recorded in connection with disposal costs exhaust available
insurance coverage. Based on current knowledge, the Company
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 September 27, 1997, 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 27, 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 9: 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 $2.0 million, $1.0 million and $0.9 million in
fiscal years 1997, 1996 and 1995, respectively.
Note 10: Income Taxes
The provision (credit) for income taxes, including $2.3
million and $2.8 million allocated to extraordinary items in
fiscal 1997 and fiscal 1995, respectively, consists of the
following:
(In thousands) 1997 1996 1995
Current $ 2,780 $(2,112) $(3,044)
Deferred (897) 1,528 (3,296)
Tax benefit of employee stock
option exercises allocated
to equity 1,281
Provision (credit) for income
taxes $ 3,164 $ (584) $(6,340)
The income tax provision (credit) differs from the
amount computed by applying the statutory federal income tax
rate to income (loss), including extraordinary items, before
income taxes for the following reasons:
(In thousands) 1997 1996 1995
Income tax provision (credit)
at statutory tax rate of 35% $2,664 $(3,864) $(5,808)
Change in taxes resulting from:
State income taxes, net
of federal effect 95 (926) (150)
Change in valuation allowance 542 4,156
Other, net (137) 50 (382)
Provision (credit) for
income taxes $3,164 $ (584) $(6,340)
The following represents the components of deferred tax
liabilities and assets at September 27, 1997 and September
28, 1996:
(In thousands) 1997 1996
Deferred tax liabilities:
Property, plant and equipment $30,517 $29,993
Other items 671 141
31,188 30,134
Deferred tax assets:
Reserves and accruals 6,327 5,343
Net operating tax loss
carryforward 16,730 20,136
Alternative minimum tax and
other tax credit carryforwards 6,122 3,393
Deferred financing costs 1,641
Other items 2,863 2,318
33,683 31,190
Valuation allowance (4,698) (4,156)
Net deferred tax assets 28,985 27,034
Net deferred tax liability $ 2,203 $ 3,100
For federal income tax purposes, the Company has
alternative minimum tax credit carryforwards of
approximately $5.6 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 $47.8 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.
Note 11: Related Party Transactions
One of the Company's directors has a controlling
interest in a company which purchases secondary and limited
service tubular products from Newport. Sales to this
customer were approximately $15.6 million, $16.8 million and
$16.0 million for fiscal years 1997, 1996 and 1995,
respectively. Trade receivables from this customer were
$1.0 million and $1.4 million at the end of fiscal 1997 and
1996, respectively.
Note 12: Business Segment Information
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, special bar quality (SBQ) products and
semi-finished steel products. The Company's specialty steel
products consist of: (i) welded and seamless tubular goods
used primarily 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 used primarily 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. In fiscal 1997,
one customer accounted for 10.3% of net sales. The
following table sets forth selected financial information by
business segment for fiscal 1997, 1996 and 1995.
(In thousands)
Identi- Depreciation
Net Operating fiable and Amor- Capital
1997 Sales Income Assets tization Expenditures
Specialty
steel
segment $440,229 $43,760 $271,510 $16,954 $ 6,589
Adhesives
segment 40,941 1,799 13,505 655 550
Corporate
assets and
alloca-
tions (4,591) 215,301
Total
consoli-
dated $481,170 $40,968 $500,316 $17,609 $ 7,139
1996
Specialty
steel
segment $369,466 $14,886 $245,642 $18,595 $ 6,279
Adhesives
segment 39,916 1,597 15,338 665 231
Corporate
assets and
allo-
cations (4,430) 39,054
Total
consoli-
dated $409,382 $12,053 $300,034 $19,260 $ 6,510
1995
Specialty
steel
segment $335,883 $10,428 $250,711 $18,508 $11,748
Adhesives
segment 35,469 1,248 13,011 433 485
Corporate
assets and
allo-
cations (3,870) 34,775
Total
consoli-
dated $371,352 $ 7,806 $298,497 $18,941 $12,233
Note 13: Quarterly Financial Data (Unaudited)
Quarterly results of operations for fiscal 1997 and
1996 are as follows:
(In thousands, except per share amounts)
First Second Third Fourth
1997 Quarter Quarter Quarter Quarter
Net sales $105,167 $111,110 $132,853 $132,040
Gross profit 12,343 15,737 19,354 20,891
Income before
extraordinary
item 249 2,169 4,930 6,356
Net income (loss) 249 2,169 4,930 (2,900)
Net income per
common share
before extra-
ordinary item
Primary .02 .16 .34 .37
Fully diluted .02 .16 .32 .37
Net income (loss)
per common share
Primary .02 .16 .34 (.17)
Fully diluted .02 .16 .32 (.17)
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)
Note 14: 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 27, 1997 and September 28, 1996
and for each of the three years in the period ended
September 27, 1997. All significant intercompany accounts
and transactions between the Subsidiary Guarantors have been
eliminated.
(In thousands) September 27,1997 September 28,1996
Current assets $168,412 $131,839
Noncurrent assets 131,526 143,074
Current liabilities 70,871 61,980
Payable to parent $174,495 $162,593
Other noncurrent
liabilities 2,003 9,953
Total noncurrent
liabilities $176,498 $172,546
Fiscal Year Ended
(In thousands) 1997 1996 1995
Net sales $481,170 $409,382 $371,352
Gross profit 68,325 39,797 34,082
Net income (loss) 8,209 (5,816) (2,040)
Report of Management
The accompanying consolidated financial statements have
been prepared by the management of NS Group, Inc., in
conformity with generally accepted accounting principles
and, in the judgment of management, present fairly and
consistently the Company's consolidated financial position
and results of operations. These statements necessarily
include amounts that are based on management's best
estimates and judgments. The financial information
contained elsewhere in this report is consistent with that
contained in the consolidated financial statements.
In fulfilling its responsibilities for the integrity of
financial information, management maintains accounting
systems and related controls. These controls provide
reasonable assurance, at appropriate costs, that assets are
safeguarded against losses and that financial records are
reliable for use in preparing financial statements. These
systems are enhanced by written policies, an organizational
structure that provides division of responsibilities and
careful selection and training of qualified people.
In connection with their annual audit, independent
public accountants perform an examination in accordance with
generally accepted auditing standards, which includes a
review of the system of internal accounting control and an
expression of an opinion that the consolidated financial
statements are fairly presented.
The Board of Directors, through its Audit Committee
composed solely of non-employee directors, reviews the
Company's financial reporting and accounting practices. The
independent public accountants meet regularly with and have
access to this Committee, with or without management
present, to discuss the results of their audit work.
Clifford R. Borland
Chairman of the Board and
Chief Executive Officer
John R. Parker
Vice President, Treasurer and Chief Financial Officer
Report of Independent Public Accountants
To NS Group, Inc.
We have audited the accompanying consolidated balance
sheets of NS Group, Inc. (a Kentucky corporation) and
subsidiaries as of September 27, 1997 and September 28,
1996, and the related consolidated statements of operations,
common shareholders' equity and cash flows for each of the
three years in the period ended September 27, 1997. 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 27, 1997 and September 28, 1996, and the results
of their operations and their cash flows for each of the
three years in the period ended September 27, 1997 in
conformity with generally accepted accounting principles.
Cincinnati, Ohio, ARTHUR ANDERSEN LLP
October 30, 1997
Consolidated Historical Summary
(Dollars in thousands, except per share amounts)
1997 1996 1995 1994*
Summary of Operations
Net sales $481,170 $409,382 $371,352 $303,380
Operating income
(loss) 40,968 12,053 7,806 689
Operating income
margin 8.5% 2.9% 2.1% .2%
Net income (loss)
before extra-
ordinary items 13,704 (10,457) (5,056) 13,208
Net income (loss) 4,448 (10,457) (10,256) 13,208
Income (loss) per
share before extra-
ordinary items .86 (.76) (.36) .96
Net income (loss)
per share .28 (.76) (.74) .96
Dividends per common share
Weighted average shares
outstanding -
primary (000's) 15,912 13,809 13,809 13,789
Other Financial and Statistical Data
Working capital $226,931 $80,905 $ 72,854 $ 50,682
Total assets 500,316 300,034 298,497 315,327
Long-term debt 76,424 164,789 166,528 138,110
Common shareholders'
equity 272,815 57,116 68,110 76,464
Capital expenditures 7,139 6,510 12,233 10,394
Depreciation and
amortization 23,828 20,902 21,311 18,789
EBITDA 61,052 32,594 31,141 21,566
Current ratio 2.64 2.16 2.27 1.56
Debt-to-equity ratio .29 2.93 2.47 2.01
Book value per share 11.70 4.14 4.93 5.54
Steel product shipments
(tons)
Tubular products 590,000 506,000 440,000 370,000
Special bar quality
products and other 179,000 177,000 216,000 191,000
Employees 1,948 1,774 1,728 1,568
1993 1992 1991** 1990 1989 1988
$353,082 $281,242 $212,471 $249,871 $219,414 $239,175
11,672 1,401 (18,177) 19,370 18,469 36,668
3.3% .5% (8.6)% 7.8% 8.4% 15.3%
(5,896) (13,358) (20,603) 13,047 12,773 20,238
(6,991) (15,900) (20,603) 13,047 12,773 17,493
(.44) (.99) (1.53) .97 .95 1.73
(.52) (1.18) (1.53) .97 .95 1.49
.06 .12 .11 .05
13,553 13,483 13,449 13,419 13,387 11,690
1993 1992 1991** 1990 1989 1988
$ 43,174 $ 44,198 $ 48,411 $ 64,858 $ 55,714 $ 76,683
317,242 319,079 329,889 220,856 177,292 153,525
156,056 164,180 168,822 65,884 24,958 23,328
62,622 68,574 85,149 107,226 95,490 83,327
5,488 4,148 112,573 45,011 28,081 3,340
19,093 18,711 5,725 6,879 6,080 6,585
30,355 20,515 (1,360) 28,852 27,514 46,059
1.49 1.60 1.79 2.90 2.30 3.47
2.64 2.52 2.11 .65 .31 .29
4.57 5.08 6.33 7.98 7.13 6.23
385,000 292,000 215,000 285,000 209,000 262,000
363,000 299,000 212,000 239,000 262,000 255,000
1,995 1,770 1,705 1,479 1,457 1,336
* Includes the impact of the sale of Kentucky Electric Steel
Corporation
**Assets of Koppel Steel Corporation acquired
Stock Market Information
NS Group, Inc. is listed on the New York Stock Exchange,
trading symbol, NSS.
Stock Price
Fiscal 1997 High Low
1st Quarter $ 4 3/8 $ 3
2nd Quarter 5 5/8 4 1/8
3rd Quarter 11 7/8 4 3/4
4th Quarter 34 1/4 11 1/2
Fiscal 1996 High Low
1st Quarter $ 3 $ 1 7/8
2nd Quarter 3 1/8 2 1/8
3rd Quarter 3 1/8 2 1/2
4th Quarter 3 3/4 2 1/2
EXHIBIT 21
SUBSIDIARIES OF NS GROUP, INC.
(all are wholly-owned)
Name State of Incorporation
Erlanger Tubular Corporation Oklahoma
Imperial Adhesives, Inc. Ohio
Koppel Steel Corporation Pennsylvania
Newport Steel Corporation Kentucky
Northern Kentucky Management Kentucky
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the
incorporation
of our reports included or incorporated by reference in this Form
10-K, into
the Company's previously filed Registration Statements, File Nos.
33-24182,
33-24183, 33-51899, 33-28995, 33-37454, 33-39695, 33-56637 and
333-03657.
/s/Arthur Andersen LLP
Cincinnati, Ohio Arthur Andersen LLP
December 16, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted
from NS Group, Inc.'s consolidated financial statements as of and
for the fiscal year ended September 27, 1997, included in the
Company's Annual Report on Form 10-K and is qualified in its
entirety by reference to such consolidated financial statements.
</LEGEND>
<CIK> 0000745026
<NAME> NS GROUP, INC.
<MULTIPLIER> 1
<CURRENCY> US
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-27-1997
<PERIOD-START> SEP-30-1996
<PERIOD-END> SEP-27-1997
<EXCHANGE-RATE> 1
<CASH> 6,998
<SECURITIES> 188,345
<RECEIVABLES> 63,863
<ALLOWANCES> 712
<INVENTORY> 73,474
<CURRENT-ASSETS> 364,921
<PP&E> 278,779
<DEPRECIATION> 154,962
<TOTAL-ASSETS> 500,316
<CURRENT-LIABILITIES> 137,990
<BONDS> 76,424
0
0
<COMMON> 262,980
<OTHER-SE> 9,835
<TOTAL-LIABILITY-AND-EQUITY> 500,316
<SALES> 481,170
<TOTAL-REVENUES> 481,170
<CGS> 412,845
<TOTAL-COSTS> 412,845
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 24,261
<INCOME-PRETAX> 19,182
<INCOME-TAX> 5,478
<INCOME-CONTINUING> 13,704
<DISCONTINUED> 0
<EXTRAORDINARY> (9,256)
<CHANGES> 0
<NET-INCOME> 4,448
<EPS-PRIMARY> .28
<EPS-DILUTED> .26
</TABLE>
