SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________
FORM 10-Q
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 28, 1998
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to
_________
Commission file number 1-9838
NS GROUP, INC.
Exact name of registrant as specified in its charter
KENTUCKY 61-0985936
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
Ninth and Lowell Streets, Newport, Kentucky 41072
(Address of principal executive offices)
Registrant's telephone number, including area code (606)
292-6809
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES X
NO _____
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of the latest
practicable date.
Common stock, no par value 23,830,413
(Class) (Outstanding at April 29, 1998)
NS GROUP, INC.
INDEX
PART I FINANCIAL INFORMATION PAGE
Item 1 Financial Statements
Condensed Consolidated Statements of
Operations 3
Condensed Consolidated Balance Sheets 4
Condensed Consolidated Statements of
Cash Flows 5
Notes to Condensed Consolidated Financial
Statements 6
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of
Operations 12
PART II OTHER INFORMATION
Item 1 Legal Proceedings 21
Item 4 Submission of Matters to a Vote of Security
Holders 21
Item 6 Exhibits and Reports on Form 8-K 21
NS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTH PERIODS ENDED
MARCH 28, 1998 AND MARCH 29, 1997
(In thousands, except per share amounts)
(Unaudited)
Three Months Ended Six Months Ended
March 28, March 29, March 28, March 29,
1998 1997 1998 1997
<TABLE>
<S> <C> <C> <C> <C>
NET SALES $123,566 $111,110 $247,299 $216,277
COST AND EXPENSES
Cost of products
sold 107,387 95,373 213,529 188,197
Selling and
administrative
expenses 7,083 6,883 13,924 13,281
Operating income 9,096 8,854 19,846 14,799
OTHER INCOME (EXPENSE)
Investment income 2,072 151 4,413 458
Interest expense (3,022) (6,105) (6,581) (12,168)
Other, net 419 122 433 205
Income before income
taxes 8,565 3,022 18,111 3,294
PROVISION FOR
INCOME TAXES 2,829 853 5,838 876
Net income $ 5,736 $ 2,169 $12,273 $2,418
NET INCOME PER COMMON SHARE
Basic $.24 $.16 $.51 $.18
Diluted $.23 $.15 $.49 $.17
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic 24,069 13,814 24,026 13,812
Diluted 25,097 14,158 25,245 13,992
</TABLE>
The accompanying notes to condensed consolidated financial
statements are an integral part of these statements.
NS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF MARCH 28, 1998 AND SEPTEMBER 27, 1997
(Dollars in thousands) (Unaudited)
<TABLE>
<S> <C> <C>
March 28, September 27,
CURRENT ASSETS 1 9 9 8 1 9 9 7
Cash $ 3,471 $ 6,998
Short-term investments 71,731 128,828
Funds held for debt called for
redemption - 59,517
Accounts receivable, less
allowance for doubtful accounts
of $646 and $712, respectively 70,749 63,151
Inventories 81,011 73,474
Other current assets 29,363 32,953
Total current assets 256,325 364,921
PROPERTY, PLANT AND EQUIPMENT 292,481 278,779
Less - accumulated depreciation (163,490) (154,962)
128,991 123,817
LONG-TERM INVESTMENTS 59,614 -
OTHER ASSETS 8,071 11,578
Total assets $453,001 $500,316
CURRENT LIABILITIES
Notes payable $ 423 $ 722
Payments due on debt called
for redemption - 59,517
Accounts payable 35,808 47,667
Accrued liabilities 27,241 28,126
Current portion of long-term debt 1,733 1,958
Total current liabilities 65,205 137,990
LONG-TERM DEBT 76,106 76,424
DEFERRED TAXES 12,835 13,087
COMMON SHAREHOLDERS' EQUITY
Common stock, no par value 278,355 261,368
Common stock options and warrants 1,233 1,612
Treasury stock (2,744) -
Unrealized loss on available for
sale securities (1,335) (1,238)
Retained earnings 23,346 11,073
Total common shareholders'
equity 298,855 272,815
Total liabilities and
shareholders' equity $453,001 $500,316
</TABLE>
The accompanying notes to condensed consolidated financial
statements are an integral part of these statements.
NS GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTH PERIODS ENDED
MARCH 28, 1998 AND MARCH 29, 1997
(Dollars in thousands) (Unaudited)
<TABLE>
<S> <C> <C>
March 28, March 29,
1 9 9 8 1 9 9 7
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $12,273 $ 2,418
Adjustments to reconcile net income
to net cash flows from operating
activities:
Depreciation and amortization 8,845 8,893
Amortization of debt discount
and finance costs 632 838
Decrease in long-term deferred
taxes (200) (245)
(Increase) decrease in accounts
receivable, net (7,598) 1,255
Increase in inventories (7,537) (11,192)
Decrease in other current assets 3,601 844
Increase (decrease) in accounts
payable (11,859) 824
Increase (decrease) in accrued
liabilities (7,964) 1,444
Net cash flows from operating
activities (9,807) 5,079
CASH FLOWS FROM INVESTING ACTIVITIES
Increase in property, plant and
equipment, net (13,952) (2,011)
Net purchases of long-term
investments (56,936) -
Decrease in other assets 224 1,670
Net cash flows from investing
activities (70,664) (341)
CASH FLOWS FROM FINANCING ACTIVITIES
Decrease in notes payable (299) (879)
Repayments on long-term debt (53,244) (1,391)
Proceeds from issuance of common
stock 16,592 36
Purchases of treasury stock (2,719) -
Net cash flows from financing
activities (39,670) (2,234)
Net increase (decrease) in cash
and short-term investments (120,141) 2,504
CASH AND SHORT-TERM INVESTMENTS AT
BEGINNING OF YEAR 195,343 17,297
CASH AND SHORT-TERM INVESTMENTS AT
END OF PERIOD $ 75,202 $19,801
Cash paid during the period for:
Interest $ 7,376 $11,267
Income taxes, net of refunds $ 4,156 $ (489)
</TABLE>
The accompanying notes to condensed consolidated financial
statements are an integral part of these statements.
NS GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1: Summary of Significant Accounting Policies
Basis of Presentation
The condensed consolidated financial statements include
the accounts of NS Group, Inc. and its wholly-owned
subsidiaries (the Company): Newport Steel Corporation
(Newport), Koppel Steel Corporation (Koppel), Erlanger
Tubular Corporation (Erlanger), Imperial Adhesives, Inc.
(Imperial) and Northern Kentucky Management, Inc. All
significant intercompany balances and transactions have been
eliminated.
The accompanying information reflects, in the opinion
of management, all adjustments (which consist only of normal
recurring adjustments) necessary to present fairly the
results for the interim periods. The preparation of
financial statements in conformity with generally accepted
accounting principles requires that management make certain
estimates and assumptions that affect the amounts reported
in the consolidated financial statements and accompanying
notes. Actual results could differ from those estimates.
Reference should be made to NS Group, Inc.'s Form 10-K for
the fiscal year ended September 27, 1997 for additional
footnote disclosure, including a summary of significant
accounting policies.
In March 1998, the American Institute of Certified
Public Accountants issued Statement of Position (SOP 98-1)
which addresses the recognition, measurement and disclosure
issues for costs of computer software developed for internal
use. SOP 98-1 requires companies to capitalize certain
costs related to software developed or obtained for internal
use. The Company must adopt SOP 98-1 by fiscal 2000,
however, early adoption is permitted. The Company has not
yet determined when it will adopt SOP 98-1. The adoption of
SOP 98-1, which is accounted for prospectively, is not
expected to have a material impact on the Company's
financial position or results of operations.
Short-term and Long-term Investments
At March 28, 1998, short-term investments consist
primarily of money market mutual funds, U.S. government
securities and commercial paper, for which market value
approximates cost. Long-term investments consist primarily
of corporate and government bonds which are classified as
"available for sale" and are recorded at current market
value.
Earnings Per Share
Basic earnings per share is computed by dividing net
income by the weighted-average number of common shares
outstanding for the period. Diluted earnings per share
reflects the potential dilution from instruments that could
result in additional common shares being issued which, for
the Company, includes stock options and warrants.
Fiscal Year-End
The Company's fiscal year ends on the last Saturday of
September.
Note 2: Inventories
At March 28, 1998 and September 27, 1997, inventories
stated at the lower of LIFO (last-in, first-out) cost or
market represent approximately 46% and 53% of total
inventories before the LIFO reserve, respectively.
Inventories consist of the following components ($000's):
<TABLE>
<S> <C> <C>
March 28, September 27,
1 9 9 8 1 9 9 7
Raw materials $ 8,582 $10,300
Semi-finished and
finished goods 75,260 66,005
83,842 76,305
LIFO reserve (2,831) (2,831)
$81,011 $73,474
</TABLE>
Note 3: Long-term Debt
In October 1997 the Company redeemed $52.4 million
principal amount of its outstanding 13.5% Senior Secured
Notes due 2003 (Notes). The redemption was made from the
proceeds of the Company's September 1997 public offering and
included a prepayment penalty of $7.1 million, which was
recorded in the fourth quarter of fiscal 1997, plus accrued
interest.
Note 4: Common Stock and Stock Option Transactions
During the first quarter of fiscal 1998, the Company
issued 540,295 shares of its common stock through the
exercise of the underwriters' over-allotment option related
to the Company's September 1997 public offering. The
Company also issued 304,135 shares of its common stock in
the first six months of fiscal 1998 in connection with the
exercise of stock options and warrants.
During the second quarter of fiscal 1998, the Company
purchased 197,600 shares of its common stock in open market
transactions. The repurchased shares are recorded as
treasury shares.
Also during the second quarter of fiscal 1998, under
its various stock option plans, the Company granted stock
options for the right to purchase 791,950 shares of the
Company's common stock. The options were granted at fair
market value on the date of grant, which was $14 3/8 per
share.
Note 5: Commitments and Contingencies
The Company has various commitments for the purchase of
materials, supplies and energy arising in the ordinary
course of business.
Legal Matters
The Company is subject to various claims, lawsuits and
administrative proceedings arising in the ordinary course of
business with respect to workers compensation, health care
and product liability coverages (each of which is
self-insured to certain levels), as well as commercial and
other matters. The Company accrues for the cost of such
matters when the incurrence of such costs is probable and
can be reasonably estimated. Based upon its evaluation of
available information, management does not believe that any
such matters are likely, individually or in the aggregate,
to have a material adverse effect upon the Company's
consolidated financial position, results of operations or
cash flows.
Environmental Matters
The Company is subject to federal, state and local
environmental laws and regulations, including, among others,
the Resource Conservation and Recovery Act (RCRA), the Clean
Air Act, the 1990 Amendments to the Clean Air Act, the Clean
Water Act and all regulations promulgated in connection
therewith, including, 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
were corrected and Koppel has demonstrated compliance with
air emission regulations. At this time, the Company is
unable to determine the extent of any civil penalties which
the EPA may assess.
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. In
accordance with the Consent Order, investigation,
monitoring, testing and analysis of the potential releases
has been completed and a final report has been forwarded to
the EPA; however, additional 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 has not been made at this time. Depending on
the ultimate timing and method of treatment and disposal,
which will require appropriate federal and state regulatory
approval, the actual cost of disposal could substantially
exceed current estimates and the Company's insurance
coverage. The Company expects to recover and has recorded a
$2.3 million receivable relating to insurance claims for the
recovery of disposal costs which will be filed with the
applicable insurance carrier at the time such disposal costs
are incurred. Such insurance claims will exhaust available
insurance coverage pertaining to these incidents. Based on
current knowledge, management believes the recorded gross
reserves of $4.3 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 expected to
be approximately $1.0 million; 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 March 28, 1998, the Company had environmental
remediation reserves of $4.3 million which pertain almost
exclusively to accrued disposal costs for radiation
contaminated dust. As of March 28, 1998, 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 6: Summarized Financial Information
The Company's Senior Secured Notes are unconditionally
guaranteed in full, jointly and severally, by each of the
Company's subsidiaries (Subsidiary Guarantors), each of
which is wholly-owned. Separate financial statements of the
Subsidiary Guarantors are not presented because they are not
deemed material to investors. The following is summarized
financial information of the Subsidiary Guarantors. All
significant intercompany accounts and transactions between
the Subsidiary Guarantors have been eliminated.
<TABLE>
<S> <C> <C>
March 28, September 27,
1998 1997
(Dollars in thousands)
Current assets $180,218 $168,412
Noncurrent assets $136,107 $131,526
Current liabilities $ 58,608 $ 70,871
Payable to parent $195,120 $174,495
Other noncurrent
liabilities 1,413 2,003
Total noncurrent
liabilities $196,533 $176,498
</TABLE>
Three Months Ended Six Months Ended
March 28, March 29, March 28, March 29,
1998 1997 1998 1997
(Dollars in thousands)
<TABLE>
<S> <C> <C> <C> <C>
Net sales $123,566 $111,110 $247,299 $216,277
Gross profit $ 16,179 $ 15,737 $ 33,770 $ 28,080
Net income $ 5,308 $ 3,261 $11,444 $ 5,084
</TABLE>
NS GROUP, INC. AND SUBSIDIARIES
MANAGEMENT's DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
The matters discussed or incorporated by reference in
this Report on Form 10-Q that are forward-looking statements
(as defined in the Private Securities Litigation Reform Act
of 1995) involve risks and uncertainties. Such risks and
uncertainties include, but are not limited to: (i) the
level of domestic as well as worldwide oil and natural gas
drilling activity; (ii) general economic conditions; (iii)
product demand, inventory levels and industry capacity;
(iv) industry pricing; (v) the level of imports and 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.
The following analysis of financial condition and
results of operations of the Company should be read in
conjunction with the unaudited Consolidated Financial
Statements and related Notes of the Company.
The Company operates in two business segments:
specialty steel and industrial adhesives. Within the
specialty steel segment are the operations of Newport, a
manufacturer of welded tubular steel products and hot rolled
coils, and Koppel, a manufacturer of seamless tubular steel
products and special bar quality (SBQ) products. The
Company's specialty steel products consist of: (i) welded
and seamless oil country tubular goods (OCTG) used primarily
in oil and natural gas drilling and production operations;
(ii) line pipe used in the transmission of oil, gas and
other fluids; (iii) SBQ products 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.
Results of Operations
The Company's net sales, gross profit and operating
income by business segment for the three and six month
periods ended March 28, 1998 and March 29, 1997 are
summarized below.
Three Months Ended Six Months Ended
March 28, March 29, March 28, March 29,
1998 1997 1998 1997
<TABLE>
<S> <C> <C> <C> <C>
(Dollars in thousands)
Net sales
Specialty steel segment
Newport $ 50,469 $ 48,244 $105,250 $ 96,330
Koppel 63,633 52,655 123,061 99,549
114,102 100,899 228,311 195,879
Adhesives segment 9,464 10,211 18,988 20,398
$123,566 $111,110 $247,299 $216,277
Gross profit
Specialty steel segment
Newport $ 5,315 $ 7,050 $ 13,368 $ 13,430
Koppel 8,472 6,181 15,586 9,703
13,787 13,231 28,954 23,133
Adhesives
segment 2,392 2,506 4,816 4,947
$ 16,179 $ 15,737 $ 33,770 $ 28,080
Operating income
Specialty steel segment
Newport $ 3,162 $ 5,281 $ 9,424 $ 10,302
Koppel 6,825 4,517 12,290 6,157
9,987 9,798 21,714 16,459
Adhesives segment 377 383 684 627
Corporate
allocations (1,268) (1,327) (2,552) (2,287)
$ 9,096 $ 8,854 $19,846 $14,799
</TABLE>
Sales data for the Company's specialty steel segment
for the three and six month periods ended March 28, 1998 and
March 29, 1997 were as follows:
Three Months Ended Six Months Ended
March 28, March 29, March 28, March 29,
1998 1997 1998 1997
<TABLE>
<S> <C> <C> <C> <C>
Tons shipped
Newport
Welded tubular 90,500 90,200 188,100 184,000
Hot rolled
coils and other
products 8,300 7,600 15,300 15,300
Koppel
Seamless
tubular 46,900 40,400 93,400 74,000
SBQ 45,700 39,500 82,500 75,500
191,400 177,700 379,300 348,800
Net sales ($000's)
Newport
Welded
tubular $ 46,926 $ 45,300 $ 98,732 $ 90,190
Hot rolled
coils and
other products 3,543 2,944 6,518 6,140
Koppel
Seamless
tubular 42,718 35,210 85,573 66,127
SBQ 20,915 17,445 37,488 33,422
$114,102 $100,899 $228,311 $195,879
</TABLE>
Net sales for the second quarter of fiscal 1998
increased $12.5 million, or 11.2%, from the second quarter
of fiscal 1997 to $123.6 million. For the six month
comparable periods, net sales increased $31.0 million, or
14.3 %, to $247.3 million. Specialty steel segment net
sales increased $13.2 million, or 13.1%, and $32.4 million,
or 16.6%, for the three and six month periods, respectively.
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. Adhesives segment net sales
decreased $0.7 million, or 7.3%, and $1.4 million, or 6.9%,
for the three and six month periods, respectively. The
decline in adhesives segment net sales was attributable to a
decline in sales of methylene chloride-based products, which
were largely restricted by OSHA regulations beginning in the
fiscal 1998 first quarter, as well as Imperial's emphasis on
eliminating certain non-strategic, low margin product lines.
Welded tubular product net sales for the current
quarter increased $1.6 million, or 3.6%, from the second
quarter of fiscal 1997 on virtually unchanged volume.
Average selling price for all welded tubular products for
the second quarter of fiscal 1998 increased 3.4% from the
prior fiscal year second quarter. Welded tubular product
net sales for the first six months of fiscal 1998 increased
$8.5 million, or 9.5%, on a volume increase of 2.2%, from
the comparable prior year period. The average selling price
for all welded tubular products for the first half of fiscal
1998 was $525 per ton, a 7.1% increase from the same period
in fiscal 1997. The increase in shipments and average
selling prices for both the second quarter and first half of
1998 were primarily attributable to welded OCTG products,
which was driven by an increase in drilling activity over
the comparable prior year periods. Shipments of welded
tubular products for the second quarter and first six months
of fiscal 1997 were negatively affected by weather related
flooding.
Total seamless tubular product net sales for the fiscal
1998 second quarter increased $7.5 million, or 21.3%, on a
volume increase of 16.1% from the second quarter of fiscal
1997. For the comparable six month periods, net sales of
seamless tubular products increased $19.4 million, or 29.4%,
on a volume increase of 26.2%. Average selling prices of
all seamless tubular products was $917 per ton in the first
six months of fiscal 1998, a 2.7% increase over the
comparable fiscal 1997 period. Like welded tubular product,
the improvement in seamless tubular product shipments was
positively impacted by improved drilling activity, resulting
in increased shipments of seamless OCTG products.
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. The average number of oil
and natural gas drilling rigs in operation in the United
States (rig count) increased 12.9% and 15.4% for the three
and six month periods of fiscal 1998, respectively, over the
comparable prior fiscal year periods. 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.
Demand for the Company's OCTG products began to soften
in the latter part of the fiscal 1998 second quarter. The
softness can be attributed to higher industry inventory
levels as well as a decline in rig count, which is
attributable in part to normal seasonal patterns and in part
to recent declines in oil prices. Rig count as of May 1,
1998 was 876, down from an average of 966 in the second
quarter of fiscal 1998. As a result, the Company is
experiencing a reduction in operating levels as it enters
the fiscal third quarter.
The U.S. government is currently imposing duties on the
imports of various OCTG products from certain foreign
countries in response to antidumping and countervailing duty
cases filed by several U.S. steel companies. The duties are
subject to annual review by the U.S. Department of Commerce
through 2000. 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 U.S. government's future
actions regarding import duties or other trade restrictions
on imports of OCTG products.
SBQ product net sales increased $3.5 million, or 19.9%,
on a volume increase of 15.7%, and $4.1 million, or 12.2%,
on a volume increase of 9.3% for the comparable three and
six month periods, respectively. Average selling price for
SBQ products for the same periods increased 3.6% and 2.5%,
respectively. The demand for the Company's SBQ products is
cyclical in nature and is sensitive to general economic
conditions.
Gross profit for the second quarter of fiscal 1998
increased $0.4 million from the second quarter of fiscal
1997. Gross profit margin was 13.1% in the second quarter
of fiscal 1998 compared to 14.2% in the second quarter of
fiscal 1997. For the six months, gross profit increased
$5.7 million. Gross profit margin was 13.7% compared to
13.0% in the comparable prior year period. Newport's gross
profit margin for the three and six month comparable periods
decreased to 10.5% and 12.7% from 14.6% and 13.9%,
respectively, due primarily to decreased operating
efficiencies, particularly in the latter portion of the 1998
second fiscal quarter. Koppel's gross profit margin for the
three and six month comparable periods increased to 13.3%
and 12.7% from 11.7% and 9.7%, respectively, due to
increased shipments and selling prices of seamless OCTG
products and SBQ products. Koppel also experienced lower
operating efficiencies in its tubular operations in the
first quarter of fiscal 1997 due to a major maintenance
outage.
The adhesives segment gross profit decreased $0.1
million for both the second fiscal quarter and six month
periods due primarily to the decline in methylene
chloride-based product sales as previously discussed. Gross
profit margin for the second quarter of fiscal 1998 was
25.3% compared to 24.5% for the comparable fiscal 1997
period.
Selling and administrative expenses for the second
quarter and first six months of fiscal 1998 increased
slightly from the comparable prior year periods and
decreased as a percent of sales to 5.7% and 5.6%,
respectively, from 6.2% and 6.1% in the second quarter and
first six months of fiscal 1997.
As a result of the above factors, operating income
increased $0.2 million, from $8.9 million in the second
quarter of fiscal 1997 to $9.1 million in the current fiscal
quarter. For the six month period, operating income
increased $5.0 million, from $14.8 million in fiscal 1997 to
$19.8 million in the first six months of fiscal 1998. The
increase in operating income was almost solely attributable
to the specialty steel segment and was primarily due to
increased shipments and selling prices of seamless OCTG
products.
Fiscal 1998 second quarter and six month investment
income increased $1.9 million and $4.0 million from the
comparable prior year periods while interest expense for the
same comparable periods decreased $3.1 million and $5.6
million, respectively. The increase in investment income
and decrease in interest expense is the result of increased
average cash and investment balances and a decrease in
long-term debt obligations, respectively, which resulted
from the Company's September 1997 public offering (including
the exercise of the underwriters' overallotment option in
October 1997) (Offering) and related retirement of long-term
debt.
The Company's combined federal and state effective tax
rate for the fiscal 1998 six month period was 32.2%. This
rate is lower than the combined federal and state statutory
rates primarily due to the utilization of net operating loss
carryforwards for which certain deferred tax valuation
allowances had been previously recorded. The Company is
currently paying federal taxes at the alternative minimum
tax rate of 20%.
As a result of the above factors, the Company reported
net income of $5.7 million, or $.24 per share ($.23
diluted), in the second quarter of fiscal 1998 compared to
$2.2 million, or $.16 per share ($.15 diluted), in the
second quarter of fiscal 1997. For the current six month
period, the Company reported net income of $12.3 million, or
$.51 per share, ($.49 diluted), compared to $2.4 million, or
$.18 per share ($.17 diluted), for the fist six months of
fiscal 1997. Weighted average shares outstanding increased
for the comparable periods primarily as a result of the
Offering.
Liquidity and Capital Resources
Working capital at March 28, 1998 was $191.1 million
compared to $226.9 million at September 27, 1997. The
current ratio was 3.9 to 1 at March 28, 1998 compared to 2.6
to 1 at September 27, 1997. At March 28, 1998, the Company
had cash and investments totaling $134.8 million. At March
28, 1998, the Company had no outstanding advances against
its $45.0 million revolving credit facility (Credit
Facility); however $6.0 million of the Credit Facility
secured various letters of credit issued primarily in
connection with the Company's self-insured workers
compensation liabilities.
Net cash flows used in operating activities totaled
$9.8 million in the first six months of fiscal 1998,
compared to cash provided by operations of $5.1 million in
the comparable prior year period. The Company recorded net
income of $12.2 million in the first six months of fiscal
1998 compared to $2.4 million in the first six months of
fiscal 1997. Major uses of cash from operating activities
included an $11.9 million decrease in accounts payable
related primarily to payments for steel slabs which Newport
purchased in fiscal 1997; a $9.3 million decrease in accrued
liabilities related to the fiscal first quarter debt
prepayment penalty in connection with the redemption of the
Company's 13.5% Senior Secured Notes (Notes) in October
1997; an increase in accounts receivable and inventory of
$7.6 million and $7.5 million, respectively, primarily due
to increased sales and business activity at Koppel. Major
sources of cash from operating activities in the first half
of fiscal 1998 included $9.5 million in non-cash
depreciation and amortization, a $3.6 million decrease in
other current assets which resulted primarily from the
receipt of certain insurance claims filed by the Company and
a $1.4 million increase in income taxes payable.
For the first six months of fiscal 1997, net cash flows
provided by operating activities were $5.1 million. Major
sources of cash from operating activities included $9.7
million in non-cash depreciation and amortization charges; a
$1.3 million decrease in accounts receivable and increase in
accounts payable and accrued liabilities totaling $2.3
million. The major use of cash in operating activities for
the period was an $11.2 million increase in inventories
resulting from increased business activity related primarily
to the OCTG marketplace.
The Company invested $14.0 million in capital
expenditures during the first six months of fiscal 1998,
primarily related to improvements to and acquisition of
machinery and equipment in the specialty steel segment. The
Company currently estimates that fiscal 1998 capital
spending will approximate $36.0 million, primarily in the
specialty steel segment. Of the total, approximately $10.0
million is estimated to be incurred in connection with the
purchase and installation of a new AC electric arc furnace
at Newport. Total spending for the furnace over fiscal 1998
and 1999 is estimated at $25.0 million and start-up is
scheduled for Spring 1999. A significant portion of the
remaining fiscal 1998 capital expenditures will be used to
invest in equipment which should reduce operating costs and
increase tubular product finishing capabilities. The
Company's sources for funding capital expenditures include
cash flow from operations, available cash and investments,
as well as available borrowing sources.
The Company also used cash and short-term investments
to make net investments of $56.9 million in long-term
investments, primarily government and corporate bonds.
Repayments on long-term debt of $53.2 million during
the first six months of fiscal 1998 includes the redemption
of $52.4 million principal amount of the Company's Notes.
Reference is made to Note 3: Long-term Debt, to the Notes to
Condensed Consolidated Financial Statements. During the
first six months of fiscal 1998, the Company received $16.6
million in proceeds from the issuance of common stock,
approximately $15.4 million of which represents the exercise
of the underwriters' over-allotment option in connection
with the Offering. The remainder represents the exercise of
stock options and warrants. The Company also purchased
197,600 shares of its common stock in open market
transactions for $2.7 million during the first six months of
fiscal 1998. The shares were purchased pursuant to the
Board of Directors authorization to purchase up to one
million shares of the Company's common stock through
December 1998.
Earnings before interest, taxes, depreciation and
amortization (EBITDA) were $16.0 million and $33.5 million
in the second quarter and first six months of fiscal 1998,
respectively, compared to $13.6 million and $24.4 million in
the comparable periods of fiscal 1997. EBITDA is calculated
as net income plus interest expense, taxes, depreciation and
amortization. EBITDA provides additional information for
determining the Company's ability to meet debt service
requirements. EBITDA does not represent and should not be
considered as an alternative to net income, any other
measure of performance as determined by generally accepted
accounting principles, as an indicator of operating
performance or as an alternative to cash flows from
operating, investing or financing activities or as a measure
of liquidity.
The Company believes that its current available cash
and investments, its cash flow from operations and its
borrowing sources will be sufficient to meet anticipated
operating cash requirements, including capital expenditures,
for at least the next twelve months.
Inflation
The Company believes that inflation has not had a
material effect on its results of operations to date.
Generally, the Company experiences inflationary increases in
its costs of raw materials, energy, supplies, salaries and
benefits and selling and administrative expenses. Except
with respect to significant increases in steel scrap prices,
the Company has generally been able to pass these
inflationary increases through to its customers.
Other Matters
See "Note 5: Commitments and Contingencies" to the
Notes to Condensed Consolidated Financial Statements.
In March 1998, the American Institute of Certified
Public Accountants issued Statement of Position (SOP 98-1)
which addresses the recognition, measurement and disclosure
issues for costs of computer software developed for internal
use. SOP 98-1 requires companies to capitalize certain
costs related to software developed or obtained for internal
use. The Company must adopt SOP 98-1 by fiscal 2000,
however, early adoption is permitted. The Company has not
yet determined when it will adopt SOP 98-1. The adoption of
SOP 98-1, which is accounted for prospectively, is not
expected to have a material impact on the Company's
financial position or results of operations.
Year 2000 Compliance Programs
The Company is currently conducting a review of all
systems serving the financial and operational activities of
its business units and is in various stages of developing
and implementing plans to identify and resolve year 2000
issues. The potential effect of year 2000 issues as it
pertains to customers and suppliers is also being
considered. The Company believes that, with modification of
existing computer systems, updates by vendors and conversion
to new software in the ordinary course of business, the year
2000 issue will not have a material impact on the Company's
operations. The costs of modifications and conversions are
not anticipated to be material. There can be no assurance,
however, that as a result of the failure of major customers
or suppliers to properly address their year 2000 issues, or
as a result of a delay or oversight in the Company's
efforts, that the year 2000 issue will not have a material
impact on the business and operations of the Company.
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings
For a discussion 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,
see "Note 5: Commitments and Contingencies - Environmental
Matters" to the Notes to Condensed Consolidated Financial
Statements.
ITEM 4. Submission of Matters to a Vote of Security
Holders
The Annual meeting of shareholders was held on February
12, 1998. In connection with the meeting, proxies were
solicited pursuant to the Securities Exchange Act. The
following are the voting results on proposals considered and
voted upon at the meeting, all of which were described in
the proxy statement.
1. All nominees for director were elected. The vote
was as follows:
For Against
Clifford R. Borland 22,603,906 107,477
Paul C. Borland, Jr. 22,601,756 109,627
Ronald R. Noel 22,604,256 107,127
John B. Lally 22,604,471 106,912
Patrick J. B. Donnelly 22,641,901 69,482
R. Glen Mayfield 22,640,661 70,722
2. The proposal to ratify the Board of Directors'
appointment of Arthur Andersen LLP as the Company's
independent public accountants for its fiscal year ending
September 26, 1998 was approved (For, 22,629,925; Against,
20,590; Abstain, 60,868)
ITEM 6. Exhibits and Reports on Form 8-K
a) Exhibits - Reference is made to the Index to
Exhibits, which is incorporated herein by
reference.
b) Reports on Form 8-K - None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned thereunto duly
authorized.
NS GROUP, INC.
Date: May 5, 1998 By: /s/Clifford R. Borland
Clifford R. Borland
Chairman and Chief Executive
Officer
Date: May 5, 1998 By: /s/John R. Parker
John R. Parker
Vice President and Treasurer
INDEX TO EXHIBITS
Number Description
3.1 Amended and Restated Articles of Incorporation of
Registrant, filed as Exhibit 3.1 to Amendment No. 1 to
Registrants' Form S-1 dated January 17, 1995, File No.
33-56637, and incorporated herein by this reference
3.2 Amended and restated By-Laws of Registrant, dated
December 4, 1995, filed as Exhibit 3.2 to Company's Form
10-K for the fiscal year ended September 30, 1995, File No.
1-9838, and incorporated herein by this reference
27 Financial Data Schedule
27.1 Restated Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Exhibit 27 contains summary financial information extracted
from NS Group, Inc. and Subsidiaries Condensed Consolidated
Financial Statements as of and for the three and six month
periods ended March 28, 1998, included in the Company's quarterly
report on Form 10-Q and is qualified in its entirety by reference
to such condensed consolidated financial statements.
</LEGEND>
<CIK> 0000745026
<NAME> NS GROUP, INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S.
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-26-1998
<PERIOD-START> SEP-28-1997
<PERIOD-END> MAR-28-1998
<EXCHANGE-RATE> 1
<CASH> 3,471
<SECURITIES> 71,731
<RECEIVABLES> 71,395
<ALLOWANCES> 646
<INVENTORY> 81,011
<CURRENT-ASSETS> 256,325
<PP&E> 292,481
<DEPRECIATION> 163,490
<TOTAL-ASSETS> 453,001
<CURRENT-LIABILITIES> 65,205
<BONDS> 76,106
0
0
<COMMON> 279,588
<OTHER-SE> 22,011
<TOTAL-LIABILITY-AND-EQUITY> 453,001
<SALES> 247,299
<TOTAL-REVENUES> 247,299
<CGS> 213,529
<TOTAL-COSTS> 213,529
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6,581
<INCOME-PRETAX> 18,111
<INCOME-TAX> 5,838
<INCOME-CONTINUING> 12,273
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,273
<EPS-PRIMARY> .51
<EPS-DILUTED> .49
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This exhibit 27.1 contains restated information for all
applicable periods in accordance with Regulation S-K, Item
601(c)(2)(iii) to reflect the Company's adoption of
Statement of Financial Accounting Standards No. 128.
</LEGEND>
<RESTATED>
<CIK> 0000745026
<NAME> NS GROUP, INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S.
<S> <C> <C> <C>
<PERIOD-TYPE> 6-MOS 9-MOS YEAR
<FISCAL-YEAR-END> SEP-27-1997 SEP-27-1997 SEP-27-1997
<PERIOD-START> SEP-29-1996 SEP-29-1996 SEP-29-1996
<PERIOD-END> MAR-29-1997 JUN-28-1997 SEP-27-1997
<EXCHANGE-RATE> 1 1 1
<CASH> 1,744 5,028 6,998
<SECURITIES> 18,057 16,155 188,345
<RECEIVABLES> 51,423 62,744 63,863
<ALLOWANCES> 854 930 712
<INVENTORY> 64,221 72,435 73,474
<CURRENT-ASSETS> 160,552 184,672 364,921
<PP&E> 274,641 275,659 278,779
<DEPRECIATION> 146,762 150,988 154,962
<TOTAL-ASSETS> 301,920 322,520 500,316
<CURRENT-LIABILITIES> 70,974 86,041 137,990
<BONDS> 163,722 162,689 76,424
0 0 0
0 0 0
<COMMON> 51,829 53,047 262,980
<OTHER-SE> 7,318 12,411 9,835
<TOTAL-LIABILITY-AND-EQUITY>
301,920 322,520 500,316
<SALES> 216,277 349,130 481,170
<TOTAL-REVENUES> 216,277 349,130 481,170
<CGS> 188,197 301,696 412,845
<TOTAL-COSTS> 188,197 301,696 412,845
<OTHER-EXPENSES> 0 0 0
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 12,168 18,298 24,261
<INCOME-PRETAX> 3,294 10,088 19,182
<INCOME-TAX> 876 2,740 5,478
<INCOME-CONTINUING> 2,418 7,348 13,704
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 (9,256)
<CHANGES> 0 0 0
<NET-INCOME> 2,418 7,348 4,448
<EPS-PRIMARY> .18 .53 .31
<EPS-DILUTED> .17 .52 .30
</TABLE>
