-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, agPTB91M8xM3sMlHA9vba/JwZH4+zG1t4Arele475dgtJilSumZUIXM+cpXYviQM tJ0L9w1FriN2Eu2cxef9tw== 0000745026-94-000011.txt : 19941219 0000745026-94-000011.hdr.sgml : 19941219 ACCESSION NUMBER: 0000745026-94-000011 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19940924 FILED AS OF DATE: 19941216 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: NS GROUP INC CENTRAL INDEX KEY: 0000745026 STANDARD INDUSTRIAL CLASSIFICATION: STEEL WORKS, BLAST FURNACES ROLLING MILLS (COKE OVENS) [3312] IRS NUMBER: 610985936 STATE OF INCORPORATION: KY FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-09838 FILM NUMBER: 94565048 BUSINESS ADDRESS: STREET 1: NINTH & LOWELL STS CITY: NEWPORT STATE: KY ZIP: 41072 BUSINESS PHONE: 6062926809 MAIL ADDRESS: STREET 1: PO BOX 1670 CITY: NEWPORT STATE: KY ZIP: 41072 FORMER COMPANY: FORMER CONFORMED NAME: NEWPORT STEEL CORP/KY DATE OF NAME CHANGE: 19870514 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 __________ FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE x SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended September 24, 1994 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 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 November 28, 1994, as reported in The Wall Street Journal, the aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $42.5 million. [Cover page 1 of 2 pages] The number of shares outstanding of the registrant's Common Stock, no par value, was 13,809,413 at November 28, 1994. 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 24, 1994 ("1994 Annual Report To Shareholders"). Part III also incorporates certain information by reference from the Company's Proxy Statement dated December 20, 1994 for the Annual Meeting of Shareholders on February 16, 1995. [Cover page 2 of 2 pages] 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. (Interlake). The Company changed its name to NS Group, Inc. in 1987 and transferred its tubular manufacturing operations to a subsidiary renamed Newport Steel Corporation. As used herein, the terms "Company" and "NS Group" refer to NS Group, Inc. and its subsidiaries, unless otherwise required by the context. In October 1990, the Company, through a newly-formed wholly-owned subsidiary, acquired certain assets now comprising Koppel Steel Corporation ("Koppel"), a steel mini-mill located in western Pennsylvania. Koppel manufactures seamless tubular products, special bar quality (SBQ) products and semi-finished steel products. Koppel operates melting and casting facilities and a bar mill in Koppel, Pennsylvania as well as a seamless tube-making facility approximately 20 miles from Koppel in Ambridge, Pennsylvania. Koppel's seamless tubular products are used in oil and natural gas drilling and production operations and in the transmission of oil, natural gas and other fluids. SBQ products are primarily used by forgers and original equipment manufacturers of heavy equipment and off-road vehicles. In October, 1993, the Company sold its wholly-owned subsidiary, Kentucky Electric Steel Corporation, to a newly formed public company in exchange for $45.6 million in cash and 400,000 shares (approximately 8%) of the new public company, then valued at $4.8 million. Kentucky Electric Steel Corporation was sold in order to enhance the Company's financial flexibility. Additional information pertaining to this transaction is incorporated herein by reference from Note 2 to the Consolidated Financial Statements included in the 1994 Annual Report to Shareholders, such relevant portion filed herewith under Exhibit 13, under the caption "Consolidated Financial Statements." NS Group conducts business in two industry segments. Specialty Steel -- includes three wholly-owned subsidiaries: Newport Steel Corporation (Newport), a mini-mill manufacturer of welded tubular steel products and hot rolled coils, located near Newport, Kentucky; Erlanger Tubular Corporation (Erlanger), a tubular steel finishing operation acquired in late fiscal 1986, located near Tulsa, Oklahoma; and Koppel Steel Corporation (Koppel), a mini-mill manufacturer of seamless tubular steel products, special bar quality products and semi-finished steel products, acquired in October, 1990, located in western Pennsylvania. Adhesives -- includes the wholly-owned subsidiary, Imperial Adhesives, Inc. (Imperial), a manufacturer of industrial adhesives products, located in Cincinnati, Ohio. Incorporated herein by reference is Note 14 to the Consolidated Financial Statements included in the 1994 Annual Report to Shareholders such relevant portion filed herewith under Exhibit 13, under the caption "Consolidated Financial Statements" for additional information pertaining to industry segment data. Specialty Steel Segment The Company's specialty steel products consist of: (i) seamless and welded tubular goods primarily used in oil and natural gas drilling and production operations (oil country tubular goods, or OCTG); (ii) line pipe used in the transmission of oil, natural gas and other fluids; (iii) SBQ products primarily used in the manufacture of heavy industrial equipment and off-road vehicles; and (iv) hot rolled coils which are sold to service centers and other manufacturers for further processing. The Company manufactures these specialty steel products at its two mini- mills, located in Koppel, Pennsylvania and near Newport, Kentucky. The term mini-mill connotes a smaller, relatively low-cost mill that typically uses scrap steel as its basic raw material and offers a relatively limited range of products. Products Seamless OCTG Products. The Company's seamless OCTG products 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. Welded OCTG Products. The Company's welded OCTG products 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. The demand for domestic OCTG products is primarily dependent on the number and depth of oil and natural gas wells being drilled in the United States. The level of drilling activity is largely a function of the current prices of oil and natural gas and the industry's future price expectations. Demand for OCTG products is also influenced by the levels of inventory held by producers, distributors and end users. In addition, the demand for OCTG products produced domestically is also significantly impacted by the level of foreign imports of OCTG products. The level of OCTG imports is affected by: (i) the value of the U.S. dollar versus other key currencies; (ii) overall world demand for OCTG products; (iii) the production cost competitiveness of domestic producers; (iv) trade practices of, and government subsidies to, foreign producers; and (v) the presence or absence of governmentally imposed trade restrictions in the United States. Line Pipe Products. The Company's line pipe products are primarily used in gathering lines for the transportation of oil and natural gas at the drilling site and in transmission lines by both gas utility and transmission companies. The Company's seamless and welded line pipe products are 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 SBQ products in a specialized market niche of products ranging in size from 2.875 to 6.0 inches. The Company produces its SBQ products from continuous cast blooms that enables substantial size reduction in the bloom during processing and provides heavier strength-to-weight ratios. These SBQ products are primarily used in critical weight-bearing applications such a suspension systems, gear blanks, drive axles for tractors and off-road vehicles, heavy machinery components and hydraulic and pneumatic cylinders. Hot Rolled Coils. The Company produces commercial quality grade hot rolled coils, from 28 to 50 inches in width, between 0.125 and 0.500 inches in gauge, and in 15 ton coil weights. In the past, the Company typically limited its production of hot rolled coils to the amount required to supply its welded pipe mills for conversion into welded tubular products. However, as a result of recent strong demand for hot rolled coils, the Company has begun to utilize its excess melting and rolling capacity to produce hot rolled coils for direct sale to third parties. These products are sold to service centers and to others for use in high-strength applications. Other Products. The Company's OCTG products are inspected and tested to ensure that they meet API specifications. Products that do not meet specification are classified as secondary or limited service products and are sold at substantially reduced prices. Finishing Facilities. The Company processes and finishes a portion of its own welded and seamless tubular products, and to a lesser extent, those of other tubular producers, at Erlanger and at its Koppel-owned facility in Baytown, Texas (Baytown). The finishing processes at Erlanger include upsetting, which is a forging process that thickens tube ends; heat treating, which is a furnace operation designed to strengthen the steel; straightening; coating for rust prevention; and threading. Currently, Baytown is capable of upsetting, coating and threading. After finishing, products are either immediately reshipped to customers or stored as inventory to enable the Company to respond quickly to customer needs. Markets and Distribution The Company sells its specialty steel products to its customers through an in-house sales force which is supplemented by a number of independent sales representatives. The primary end markets for the Company's seamless tubular products has been the southwest United States and certain foreign markets. 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 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. 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 welded OCTG products destined for the southwest region by barge, and with the addition of Baytown, the Company will be shipping substantially all of its seamless OCTG product destined for the southwest by barge as well. Customers The Company has approximately 300 specialty steel product customers. The Company's OCTG and line pipe products are used by major and independent oil and natural gas exploration and production companies in drilling and production applications in the United States, Canada, Mexico and overseas. Line pipe products are also used by gas utility and transmission companies. The majority of the Company's OCTG and line pipe products are sold to domestic distributors and directly to end users. The Company sells its SBQ products to service centers, cold finishers, forgers and original equipment manufacturers, and primarily sells its hot rolled coils 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. Competition The markets for the Company's specialty steel products are highly competitive and cyclical. The Company believes that the principal competitive factors affecting its business are price, quality and customer service. The Company competes with a number of domestic as well as foreign producers in the welded tubular market, which includes both OCTG and line pipe products. In the seamless OCTG market, the Company competes principally with one domestic producer as well as a number of foreign producers. With respect to its SBQ products, the Company competes with numerous other domestic steel manufacturers. Trade Cases. In response to the rising level of foreign imports of OCTG products, on June 30, 1994, the Company and six other U.S. steel companies filed antidumping petitions against imports of OCTG products from seven foreign nations. The cases ask the United States government to take action to offset injury to the domestic OCTG industry from unfairly traded imports. The antidumping petitions were filed against OCTG imports from Argentina, Austria, Italy, Japan, Korea, Mexico and Spain. The Company also joined in filing countervailing duty cases charging subsidization of OCTG imports from Austria and Italy. The cases are being handled by the International Trade Administration of the United States Department of Commerce, which is investigating the existence and extent of dumping and subsidization, and by the United States International Trade Commission which is assessing whether dumping and subsidization have caused material injury to the United States OCTG industry. In August 1994, the International Trade Commissioners voted unanimously that there was reasonable indication of material injury which warrants further investigation of the petitions. The existence and extent of unfair trade practices could be determined as early as late January 1995, and preliminary tariffs could be imposed at that time. Final determinations regarding unfair trade practices and any injury caused thereby are expected in the summer of 1995. While the Company cannot predict the outcome of the cases at this time, the Company believes that a favorable ruling could decrease foreign shipments of OCTG products and increase the volume and selling price of the Company's shipments. Raw Materials and Supplies The Company's major raw material is steel scrap, which is generated principally from industrial, automotive, demolition, railroad and other steel scrap sources. Steel scrap is purchased by the Company either through scrap brokers or directly in the open market. The long-term demand for steel scrap and its importance to the domestic steel industry may be expected to increase as steel-makers continue to expand steel scrap-based electric arc furnace and thin slab casting capacities. For the foreseeable future, however, the Company believes that supplies of steel scrap will continue to be available in sufficient quantities at competitive prices. In addition, a number of technologies exist for the processing of iron ore into forms which may be substituted for steel scrap in electric arc furnace-based steel-making operations. Such forms include direct-reduced iron, iron carbide and hot-briquette iron. While such forms may not be cost competitive with steel scrap at present, a sustained increase in the price of steel scrap could result in increased implementation of these alternative technologies. The Company's steel manufacturing facilities consume large amounts of electricity. The Company purchases its electricity from utilities near its steel-making facilities pursuant to contracts that expire in 1995 for Koppel and 2001 for Newport. 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 has no reason to believe that the utility contract expiring at Koppel in 1995 will not be renewed upon substantially similar terms. The Company also consumes smaller quantities of additives, alloys and flux which are purchased from a number of suppliers. Adhesives Segment Imperial is a manufacturer of industrial adhesives products. Imperial maintains over 900 active formulas for the manufacture of water- borne, solvent-borne, and hot-melt adhesives, which are used in product assembly applications, including footwear, foam bonding, marine and recreational vehicles, and consumer packaging. Raw materials are available from multiple sources and consist primarily of petrochemical- based materials. Pricing generally follows trends in the petrochemical markets. Imperial markets its adhesives products throughout the United States and Caribbean basin through an in-house sales force as well as numerous independent sales representatives. Products are distributed from four manufacturing sites, a warehouse in Puerto Rico, and a number of public warehouses across the United States. Competition in the industrial adhesives products market is highly- fragmented. The Company believes that it competes in this market on the basis of price, product performance and customer service. Imperial competes with numerous small or comparably-sized companies, as well as major adhesives producers. Environmental Matters The Company's specialty steel and adhesives operations are subject to various federal, state and local environmental laws and regulations, including, among others, the Clean Air Act, the 1990 Amendments to the Clean Air Act (the 1990 Amendments), the Clean Water Act and the Resource Conservation and Recovery Act (RCRA) 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. The Company is from time to time involved in administrative and judicial proceedings and administrative inquiries related to environmental matters. As with other similar mills in the industry, the Company's steel mini-mills produce dust which contains lead, cadmium and chromium, and is classified as a hazardous waste. The Company currently collects the dust resulting from its electric arc furnace operations through emission control systems and recycles it through a waste recycling firm using EPA- approved processes. The Company also has on its property at Newport a permitted hazardous waste disposal facility. In the event of a release of a hazardous substance generated by the Company, the Company could be responsible for the remediation of contamination associated with such release. During the fourth quarter of fiscal 1993, Newport shut down its melt shop operations for 19 days when it was discovered that a radioactive substance was accidentally melted, resulting in the contamination of the melt shop's electric arc furnace emission control facility, or "baghouse facility". A similar incident, having occurred in the third quarter of fiscal 1992, shut down Newport's melt shop facilities for 23 days. The source of the radiation in these incidents was contained in incoming shipments of steel scrap, and was not detected by monitors that check incoming steel scrap. In response, the Company has installed additional state-of-the-art radiation detection systems in various locations throughout the Newport plant. The Company incurred estimated losses as a result of the extended outages and costs to restore the melt shop and related facilities back to operation, including estimated costs to dispose of the radiation contaminated baghouse dust, of $7.2 million and $4.1 million in fiscal 1993 and 1992, respectively. The Company has recovered $3.5 million through insurance and expects to recover and has recorded as a receivable an additional $2.3 million in insurance claims for the fiscal 1993 incident. No recovery has been made nor recorded for the fiscal 1992 incident and the Company is assessing the possibility of legal remedies against certain parties. The losses and costs attributable to these incidents, net of insurance claims, resulted in an extraordinary charge of $1.1 million, net of applicable income tax benefit of $0.7 million, or an $.08 loss per share, in fiscal 1993 and an extraordinary charge of $2.5 million, net of applicable income tax benefit of $1.6 million, or a $.19 loss per share, in fiscal 1992. To date, the occurrence of the accidental melting of radioactive materials has not resulted in any notice of violations from federal or state environmental regulatory agencies. The Company is investigating and evaluating various issues concerning storage, treatment and disposal of the radiation contaminated baghouse dust; however, a final determination as to method of treatment and disposal, cost and further regulatory requirements cannot be made at this time. Depending on the ultimate timing and method of treatment and disposal, which will require appropriate federal and state regulatory approval, the actual cost of disposal could substantially exceed current estimates and the Company's insurance coverage. As of September 24, 1994, claims recorded in connection with disposal costs substantially exhaust available insurance coverage. Based on current knowledge, management believes the recorded reserves of $4.4 million for disposal costs pertaining to these incidents are adequate and the ultimate outcome will not have a material adverse effect on the Company's consolidated financial position. The ultimate effect of these matters on the Company's consolidated results of operations cannot be predicted because any such effect depends on the amount and timing of charges to operations resulting from new information as it becomes available. In September 1994, the Company received a proposed Consent Agreement from the Environmental Protection Agency (EPA) 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 RCRA Part B permit pertaining to a landfill that is adjacent to the Koppel facilities and owned by Babcock & Wilcox Company (B&W), the former owner of the Koppel facilities. The Assessment identified potential releases of hazardous constituents into the environment from numerous Solid Waste Management Units (SWMU's) and Areas of Concern (AOC's). The SWMU's and AOC's identified during the Assessment and the EPA's follow-up investigations are located at and adjacent to the Company's Koppel facilities. The proposed Consent Agreement establishes a schedule for investigating, monitoring, testing and analyzing the potential releases. Contamination documented as a result of the investigation may require cleanup measures. Pursuant to various agreements entered into among the Company, B&W and PMAC, Ltd. (PMAC) at the time of the Company's acquisition of the Koppel facilities, B&W and PMAC agreed to indemnify the Company against various known and unknown environmental matters. While reserving its rights against B&W, PMAC has accepted full financial responsibility for the matters covered by the proposed Consent Agreement other than with respect to a 1987 release of hazardous constituents (the 1987 Release) that the Company believes could represent the most significant component of any potential cleanup, and other than with respect to hazardous constituents generated by Koppel after its acquisition by the Company, if any. B&W, PMAC and Koppel are in dispute as to whether the indemnification provisions related to the 1987 Release expire in October 1995. Although B&W has not acknowledged responsibility for any cleanup measures that may be required as a result of any investigation (other than with respect to the 1987 Release, in the event certain actions are taken by the EPA prior to October 1995), B&W and PMAC have agreed to jointly retain an environmental consultant to assist in negotiating the Consent Agreement and to conduct the required investigation. Prior to the completion of the site analysis to be performed in connection with any Consent Agreement, the Company cannot predict the expected cleanup cost for the SWMU's and AOC's covered by the proposed Consent Agreement. The Company believes that it is entitled to full indemnity for all of the matters covered by the proposed Consent Agreement from B&W and/or PMAC. Pursuant to its contractual arrangements with PMAC, the Company has a right of offset against $15 million principal amount of Subordinated Convertible Debentures due October 2000 through 2005 issued to PMAC which are held in escrow to secure PMAC's indemnification obligations to the Company. Subject to the uncertainties concerning the proposed Consent Agreement and the storage and disposal of the radiation contaminated baghouse dust, the Company believes it is in compliance in all material respects with all applicable environmental regulations. Regulations resulting from the 1990 Amendments that will pertain to the Company's electric arc furnace operations are currently not expected to be promulgated until 1997 or later. The Company cannot predict the level of required capital expenditures resulting from future environmental regulations such as those forthcoming as a result of the 1990 Amendments, however, the Company believes that while the 1990 Amendments may require additional expenditures, such expenditures will not have a material impact on the Company's business or consolidated financial position for the foreseeable future. Capital expenditures for the Company's environmental control facilities are anticipated to total approximately $1.0 million through fiscal 1997, however such expenditures could be influenced by new and revised environmental laws and regulations. Employees As of September 24, 1994, the Company had 1,568 employees, of whom 384 were salaried and 1,184 were hourly. Substantially all of the Company's hourly employees are represented by the United Steelworkers of America under contracts expiring in 1997 for Erlanger; 1999 for Newport and Koppel; and 1995 for Imperial. ITEM 2. PROPERTIES The Company's principal operating properties are listed in the table below. The Company believes its facilities are adequate and suitable for its present level of operations. Location and Properties Specialty Steel Segment: Newport, Kentucky - The Company owns approximately 250 acres of real estate upon which are located a melt shop, hot strip mill, two welded pipe mills, machine and fabricating shops and storage and repair facilities aggregating approximately 636,000 square feet, as well as the Company's administrative offices. Koppel, Pennsylvania - The Company owns approximately 227 acres of real estate upon which are located a melt shop, bar mill, blooming mill, pickling facility, machine and fabricating shops, storage and repair facilities and administrative offices aggregating approximately 900,000 square feet. Ambridge, Pennsylvania - The Company 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. Tulsa, Oklahoma - The Company leases approximately 36 acres of real estate upon which are 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. Baytown, Texas - The Company owns approximately 40 acres of real estate upon which is located a tubular processing facility. The facility is located adjacent to accessible 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; Kalamazoo, Michigan; Lynchburg, Virginia; Nashville, Tennessee - The Company owns approximately seven acres of property in Cincinnati, Ohio, five acres of property in Kalamazoo, Michigan, and 1.5 acres of property in Lynchburg, Virginia for use in its adhesives operations. The Cincinnati properties contain five buildings aggregating approximately 150,000 square feet; the Kalamazoo property consists of one 24,000 square foot building; and the Lynchburg property consists of one 10,000 square foot building. The Company also leases approximately 3.1 acres in Nashville, Tennessee for use in its adhesives operations, including one building aggregating approximately 60,000 square feet. Other: Newport, Kentucky - The Company owns approximately 40 acres of partially developed land near Newport, Kentucky, acquired in fiscal 1989, for use as investment property. Information regarding encumbrances on the Company's properties is incorporated herein by reference from Note 5 to the Consolidated Financial Statements, included in the 1994 Annual Report to Shareholders, such relevant portion filed herewith under Exhibit 13, under the caption "Consolidated Financial Statements." Capacity Utilization The Company's capacity utilization for fiscal 1994 was as follows: Rated Capacity Facility (in tons) Tons Produced Percent Koppel facilities Melt shop ............... 400,000 278,300 69.6% Bar mill ................ 200,000 169,900 85.0% Seamless tube mill ...... 200,000 100,900 50.5% Newport facilities Melt shop ............... 700,000 367,300 52.5% Hot strip rolling mill .. 750,000 353,200 47.1% Welded pipe mills ....... 580,000 269,900 46.5% ITEM 3. LEGAL PROCEEDINGS In September 1994, the Company received a proposed Consent Agreement from the EPA. See "Environmental Matters." Newport is a co-defendant in a claim for breach of implied warranty in the United States District Court for the Southern District of Texas arising from the failure of two joints of welded pipe during testing of an off-shore pipeline. The plaintiff is seeking damages in excess of $5 million for costs associated with replacing the entire pipeline and lost production revenues. The Company believes that it has meritorious defenses to this claim, although no assurances can be given as to the outcome of this case. Insurance may be available for a portion, but not all, of any award for damages. In addition, the Company is subject to various other claims, lawsuits and administrative proceedings arising in the ordinary course of business with respect to commercial, product liability and other matters which seek remedies or damages. The Company believes it has meritorious defenses with respect to these claims and litigation and that the ultimate disposition of any of the proceedings to which the Company is currently a party will not have a material adverse effect on its consolidated financial position. There can be no assurance, however, as to the ultimate disposition of these matters. 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 NS Group, Inc. is listed on the New York Stock Exchange, trading symbol, NSS. Stock Price Fiscal 1994 High Low First Quarter $ 9 1/2 $ 5 7/8 Second Quarter 7 3/4 6 1/4 Third Quarter 7 1/8 4 7/8 Fourth Quarter 7 5 7/8 Fiscal 1993 High Low First Quarter $ 5 $ 3 1/2 Second Quarter 6 3/8 3 5/8 Third Quarter 8 7/8 5 Fourth Quarter 10 3/4 7 5/8 Additional information pertaining to dividends is incorporated herein by reference from Note 5 to the Consolidated Financial Statements included in the 1994 Annual Report to Shareholders, such relevant portion filed herewith under Exhibit 13, under the caption "Consolidated Financial Statements". As of November 28, 1994, there were approximately 310 record holders of Common Stock. ITEM 6. SELECTED FINANCIAL DATA Incorporated herein by reference from the 1994 Annual Report to Shareholders are Note 2 to the Consolidated Financial Statements and selected financial data, such relevant portions filed herewith under Exhibit 13, under the captions "Consolidated Financial Statements" and "Consolidated Historical Summary", respectively. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Incorporated herein by reference from the 1994 Annual Report to Shareholders, such relevant portion filed herewith under Exhibit 13, under the caption "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 1994 Annual Report to Shareholders, such relevant portion filed herewith under Exhibit 13, under the caption "Consolidated Financial Statements." 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 20, 1994 for the Annual Meeting of Shareholders on February 16, 1995, under the caption "I. Election of Directors" - "Nominees for Election as Directors"; "Committees of the Board"; and "Executive Compensation". ITEM 11. EXECUTIVE COMPENSATION Incorporated herein by reference from the Company's Proxy Statement dated December 20, 1994 for the Annual Meeting of Shareholders on February 16, 1995, under the caption "I. Election 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 20, 1994 for the Annual Meeting of Shareholders on February 16, 1995, "Securities 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 20, 1994 for the Annual Meeting of Shareholders on February 16, 1995, under the caption "I. Election of Directors" - "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 - The following Consolidated Financial Statements included in the 1994 Annual Report to Shareholders for the fiscal year ended September 24, 1994, are incorporated by reference in Item 8: - Consolidated Statements of Income - Consolidated Balance Sheets - Consolidated Statements of Cash Flows - Consolidated Statements of Common Shareholders' Equity - Notes to Consolidated Financial Statements - Report of Independent Public Accountants (a) 2. Consolidated Financial Statement Schedules - The following schedules are included herein: - Report of Independent Public Accountants on Financial Statement Schedules - Schedule I - Marketable Securities - Other Investments - Schedule V - Property, Plant and Equipment - Schedule VI - Accumulated Depreciation and Amortization of Property, Plant and Equipment - Schedule VIII - Valuation and Qualifying Accounts - Schedule IX - Short-Term Borrowings - Schedule X - Supplementary Income Statement Information (a) 3. Exhibits Reference is made to the Index to Exhibits, which is incorporated herein by reference. (b) Reports on Form 8-K There were no reports on Form 8-K filed during the quarter ended September 24, 1994. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULES 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 31, 1994. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedules listed in Item 14(a) 2 are the responsibility of the Company's management and are presented for purposes of complying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly state 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 31, 1994 SCHEDULE I NS GROUP, INC. AND SUBSIDIARIES ___________________ MARKETABLE SECURITIES - OTHER INVESTMENTS (Dollars in thousands) Amount at Which Shown Market in Balance Type of Investment Cost Value Sheet At September 25, 1993 Fixed Rate Obligations: Corporate notes......................... $ 527 $ 503 $ 503 Variable Rate Preferred Stocks............ 1,000 1,000 1,000 U.S. Treasury Securities.................. 1,954 1,954 1,954 Total short-term investments at September 25, 1993.................... $ 3,481 $ 3,457 $ 3,457 At September 24, 1994 Fixed Rate Obligations: Corporate notes......................... $ 527 $ 500 $ 500 Variable Rate Preferred Stocks: Utilities Duke Power Company .................. 1,500 1,500 1,500 Houston Industries, Inc. ............ 1,500 1,500 1,500 Kansas City Power & Light Company ... 1,500 1,500 1,500 Virginia Electric & Power Company ... 1,500 1,500 1,500 Other Utilities ..................... 6,000 6,000 6,000 Financial Northern Trust Corp. ................ 1,500 1,500 1,500 Konica Capital....................... 1,000 1,000 1,000 Transamerica Corporation............. 1,500 1,500 1,500 Other Financial...................... 6,000 6,000 6,000 Industrial.............................. 3,000 3,000 3,000 Other Variable Rate Investments: Provident Institutional Funds Tempcash Fund..................... 11,995 11,995 11,995 Other............................... 2,576 2,576 2,576 Total short-term investments at September 24, 1994................... $40,098 $40,071 $40,071 SCHEDULE V NS GROUP, INC. AND SUBSIDIARIES ______________________ PROPERTY, PLANT AND EQUIPMENT (Dollars in thousands)
Balance at Balance Beginning Additions at End Classification of Year at Cost Retirements Other(a) of Year For the Year Ended September 26, 1992: Land and land improvements.. $ 8,320 $ 50 $ (122) $ - $8,248 Buildings................... 17,788 1,251 (23) - 19,016 Machinery and equipment..... 226,498 4,900 (1,863) - 229,535 Construction in progress.... 6,046 (2,053)(b) - - 3,993 $258,652 $ 4,148 $(2,008) $ - $260,792 For the Year Ended September 25, 1993: Land and land improvements.. $ 8,248 $ 186 $ (12) $ - $ 8,422 Buildings................... 19,016 121 - - 19,137 Machinery and equipment..... 229,535 6,404 1,767) - 234,172 Construction in progress.... 3,993 (631)(b) - - 3,362 $260,792 $ 6,080 $(1,779) $ - $265,093 For the Year Ended September 24, 1994: Land and land improvements.. $ 8,422 $ 1,210 $ - $ (682) $ 8,950 Buildings................... 19,137 756 (283) (719) 18,891 Machinery and equipment..... 234,172 9,389 (3,993) (8,185) 231,383 Construction in progress.... 3,362 405 (b) - (270) 3,497 $265,093 $ 11,760 $(4,276) $(9,856) $262,721
_____________________________ (a) Reductions due to the sale of subsidiary. (b) Net change in construction in progress for the year. SCHEDULE VI NS GROUP, INC. AND SUBSIDIARIES ___________________ ACCUMULATED DEPRECIATION AND AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT (Dollars in thousands) [CAPTION] Additions Balance at Charged to Balance Beginning Costs and at End Classification of Year Expenses Retirements Other(a) of Year For the Year Ended September 26, 1992: Land and land improvements.. $ 602 $ 189 $ - $ - $ 791 Buildings................... 2,213 444 (1) - 2,656 Machinery and equipment..... 53,772 17,485 (380) - 70,877 $56,587 $18,118 $ (381) $ - $ 74,324 For the Year Ended September 25, 1993: Land and land improvements.. $ 791 $ 197 $ - $ - $ 988 Buildings................... 2,656 1,015 - - 3,671 Machinery and equipment..... 70,877 16,928 (837) - 86,968 $74,324 $18,140 $ (837) $ - $ 91,627 For the Year Ended September 24, 1994: Land and land improvements.. $ 988 $ 192 $ - $ (22) $ 1,158 Buildings................... 3,671 434 (217) (134) 3,754 Machinery and equipment..... 86,968 17,409 (3,659) (3,448) 97,270 $91,627 $18,035 $(3,876) $(3,604) $102,182
_____________________________ (a) Reductions due to the sale of subsidiary. SCHEDULE VIII 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 28, 1991....... $ 1,138 $ 97 Additions: Charged to costs and expenses.. 632 1,903 Deductions: Net charges of nature for which reserves were created......... ( 463) (1,792) BALANCE, September 26, 1992....... $ 1,307 $ 208 Additions: Charged to costs and expenses.. 572 2,338 Deductions: Net charges of nature for which reserves were created......... (1,060) (2,293) BALANCE, September 25, 1993....... $ 819 $ 253 Additions: Charged to costs and expenses.. 343 2,298 Deductions: Sale of subsidiary............. (305) - Net charges of nature for which reserves were created......... (220) (2,245) BALANCE, September 24, 1994....... $ 637 $ 306 _______________________ (1) Deducted from accounts receivable SCHEDULE IX NS GROUP, INC. AND SUBSIDIARIES ____________________ SHORT-TERM BORROWINGS (Dollars in thousands) [CAPTION] Maximum Amount Average Weighted Weighted Outstanding Amount Average Balance Average at Month-end Outstanding Interest Category of Aggregate at End Interest During During Rate During Short-Term Borrowings(1) of Year Rate the Year the Year(2) the Year(2) For the Year Ended September 26, 1992: Lines of credit.... $20,279 7.29% $31,744 $24,127 7.62% Other notes........ 402 5.58 608 297 5.58 $20,681 7.26 $32,352 $24,424 7.59 For the Year Ended September 25, 1993: Lines of credit.... $26,229 7.30% $29,729 $25,333 7.30% Other notes........ 738 5.58 1,137 533 5.58 $26,967 7.27 $30,866 $25,866 7.27 For the Year Ended September 24, 1994: Lines of credit.... $28,197 9.05% $33,353 $29,011 7.89% Other notes........ 675 5.29 855 490 5.58 $28,872 8.96 $34,208 $29,501 7.86
____________________________ (1) Short-term borrowings were under various bank line of credit agreements and short-term demand notes which are used to finance various insurance contracts. (2) Computed on a monthly weighted average basis. SCHEDULE X NS GROUP, INC. AND SUBSIDIARIES __________________ SUPPLEMENTARY INCOME STATEMENT INFORMATION (Dollars in thousands) Charged to Costs and Item Expenses For the Year Ended September 26, 1992: Maintenance and repairs.............................. $23,904 For the Year Ended September 25, 1993: Maintenance and repairs.............................. $21,703 For the Year Ended September 24, 1994: Maintenance and repairs.............................. $21,249 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 9, 1994 By: /s/Clifford R. Borland Clifford R. Borland, President 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 9, 1994 By: /s/Clifford R. Borland Clifford R. Borland, President, Chief Executive Officer and Director Date: December 9, 1994 /s/John R. Parker John R. Parker, Vice President and Treasurer, Principal Financial Officer Date: December 9, 1994 /s/Thomas J. Depenbrock Thomas J. Depenbrock Corporate Controller Date: December 9, 1994 /s/Ronald R. Noel Ronald R. Noel, Director Date: December 9, 1994 /s/John B. Lally John B. Lally, Director Date: December 9, 1994 /s/Patrick J. B. Donnelly Patrick J. B. Donnelly, Director Date: December 9, 1994 /s/R. Glen Mayfield R. Glen Mayfield, Director INDEX TO EXHIBITS Number Description 3(a) Amended and Restated Articles of Incorporation of Registrant, filed as Exhibit 3(a) to Registrant's Form 10-K for the fiscal year ended September 30, 1989, File No. 1-9838, and incorporated herein by this reference 3(b) Amended and Restated By-Laws of Registrant, dated November 14, 1991, filed as Exhibit 3(b) to Registrant's Form 10-K for the fiscal year ended September 28, 1991, File No. 1-9838, and incorporated herein by this reference 4(a) Note Agreement dated as of November 15, 1989 and amended as of October 3, 1990, between Newport Steel Corporation and the Purchasers named therein and related agreements, filed as Exhibit 4(a) to Registrant's Form 10-K for the fiscal year ended September 30, 1989, File No. 1-9838, and incorporated herein by this reference; Second and Third Amendment Agreements, dated May 11, 1992 and November 24, 1992, respectively, filed as Exhibit 4(a) to Registrant's Form 10-K for the fiscal year ended September 26, 1992, File No. 1-9838, and incorporated herein by this reference; Fourth Amendment Agreement dated February 8, 1993, filed as Exhibit 4(a) to Registrant's Form 10-Q for the quarterly period ended March 27, 1993, File No. 1-9838, and incorporated herein by this reference; and Fifth Amendment Agreement dated August 17, 1994, filed herewith 4(b) Form of 11% Subordinated Convertible Debenture due 2005, filed as Exhibit 4.1 to Registrant's Current Report on Form 8-K dated October 18, 1990, File No. 1-9838, and incorporated herein by this reference 4(c) Form of Warrant dated October 4, 1990, filed as Exhibit 4.2 to Registrant's Current Report on Form 8-K dated October 18, 1990, File No. 1-9838, and incorporated herein by this reference; and First Amendment to Warrant dated September 26, 1992, filed as Exhibit 4(c) to Registrant's Form 10-K for the fiscal year ended September 26, 1992, File No. 1-9838, and incorporated herein by this reference 4(d) Loan Agreement dated as of October 4, 1990 between Koppel Steel Corporation and General Electric Capital Corporation, filed as Exhibit 4.3 to Registrant's Current Report on Form 8-K dated October 18, 1990, File No. 1-9838, and incorporated herein by this reference; amendment dated September 27, 1991, filed as Exhibit 4(d) to Registrant's Form 10-K for the fiscal year ended September 28, 1991, File No. 1-9838, and incorporated herein by this reference; Second Amendment to Loan Agreement dated September 26, 1992, filed as Exhibit 4(d) to Registrant's Form 10-K for the fiscal year ended September 26, 1992, File No. 1-9838, and incorporated herein by this reference; and Third Amendment to Loan Agreement, dated September 24, 1993, filed herewith No other long-term debt instrument issued by the Registrant exceeds 10% of the consolidated total assets of the Registrant and its subsidiaries. The Registrant will furnish to the Commission upon request copies of such instruments and related agreements. 10(a) Registrant's Amended Employee Incentive Stock Option Plan, filed as Exhibit 10(a) to Registrant's Form 10-K for the fiscal year ended September 30, 1989, File No. 1-9838, and incorporated herein by this reference 10(b) Registrant's Executive Bonus Plan, filed as Schedule B to Exhibit 10.4 to Registrant's Registration Statement on Form S- 18, File No. 2-90643, and incorporated herein by this reference 10(c) Registrant's Non-Qualified Stock Option and Stock Appreciation Rights Plan of 1988, filed as Exhibit 1 to Registrant's Proxy Statement dated January 13, 1989, File No. 1-9838, and incorporated herein by this reference 10(d) Rights Agreement dated as of November 17, 1988 between Registrant and Pittsburgh National Bank, filed as Exhibit 1 to Registrant'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 Registrant's Form 10-Q dated May 29, 1994, File No. 1-9838, and incorporated herein by this reference. 10(e) Registrant's 1993 Incentive Stock Option Plan, filed as Exhibit 1 to Registrant's Proxy Statement dated December 22, 1992, File No. 1-9838, and incorporated herein by this reference 10(f) Transfer Agreement, dated September 29, 1993, filed on September 28, 1993 as Exhibit 10.2 to the 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(g) 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 the Registrant's Form 10-K for the fiscal year ended September 25, 1993, File No. 1-9838, and incorporated herein by this reference 10(h) Registration Rights Agreement dated October 6, 1993 among Kentucky Electric Steel, Inc., NS Group, Inc. and NSub I, Inc. filed as Exhibit 10(i) to the Registrant's Form 10-K for the fiscal year ended September 25, 1993, File No. 1-9838, and incorporated herein by this reference 13 Excerpted portion of the 1994 Annual Report to Shareholders 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) EX-4 2 Exhibit 4(a) NS GROUP, INC. NEWPORT STEEL CORPORATION Ninth and Lowell Streets Newport, Kentucky 41072 FIFTH AMENDMENT AGREEMENT August 17, 1994 To the Trustee and Noteholders Whose Names are set forth on the Signature Pages hereto: Ladies and Gentlemen: Reference is made to (i) those certain Note Agreements dated as of November 15, 1989 as amended by those certain Amendment Agreements dated as of October 3, 1990, May 11, 1992, November 24, 1992 and February 8, 1993 (the "Amendment Agreements" and, as so amended, the "Note Agreement") between Newport Steel Corporation (the "Company") and the respective purchasers of $45,000,000 in aggregate principal amount of the Company's 10.40% Senior Secured Notes due November 15, 1999 (the "Notes"), and (ii) that certain Guaranty Agreement dated as of November 15, 1989 as amended by the Amendment Agreements (the "Guaranty Agreement") pursuant to which NS Group, Inc. (the "Guarantor") has guaranteed, inter alia, payment of the Notes. The Company and the Guarantor have requested the Noteholders named on the signature pages hereto (the "Noteholders") and the Trustee to agree to a further amendment to the Note Agreement and to the Guaranty Agreement to waive certain rights thereunder; and the Noteholders and the Trustee have agreed to such amendment and waiver on the terms and conditions hereinafter set forth. In consideration of the foregoing and of the mutual covenants hereinafter set forth, the Company, the Guarantor, the Trustee and the Noteholders agree as follows: 1. Section 10.1 of the Note Agreement and Section 11.1 of the Guaranty Agreement are each modified by inserting in the correct alphabetical order the following new definition: "Cash Equivalents" shall mean (i) marketable direct obligations issued or unconditionally guaranteed by the United States of America or any agency thereof maturing within one year from the date of acquisition thereof, (ii) commercial paper maturing no more than one year from the date of creation thereof and currently having the highest rating obtainable from either Standard & Poor's Corporation or Moody's Investors Service, Inc., August 17, 1994 Page Two (iii) certificates of deposit, maturing no more than one year from the date of creation thereof, issued by commercial banks incorporated under the laws of the United States of America, each having combined capital, surplus and undivided profits not less than $200,000,000.00 and having a rating of "A": or better by a nationally recognized rating agency, (iv) money market preferred stocks which, at the date of acquisition and at all times thereafter, are accorded either of the two highest ratings obtainable from either Standard & Poors Corporation or Moody's Investor Service, Inc., and (v) time deposits maturing no more than thirty (30) days from the date of creation thereof with commercial banks or savings banks or savings and loan associations each having membership in the Federal Deposit Insurance Corporation and in amounts not exceeding the maximum amounts of insurance thereunder." 2. Section 10.1 of the Note Agreement is modified by inserting at the end of the definition of "Funded Debt" the following additional paragraph which shall be part of such definition: Notwithstanding the foregoing, any borrowings by the Company (or any guaranty by the Company of borrowings) pursuant to a revolving loan agreement, working capital agreement or line of credit that at any time or from time to time may constitute Funded Debt pursuant to the terms hereof shall, for purposes of calculating Funded Debt hereunder, be reduced by the aggregate amount of cash and Cash Equivalents held by the Company, the Guarantor and each Guarantor Subsidiary at the time of such calculation. 3. Section 11.1 of the Guaranty Agreement is modified by inserting at the end of the definition of "Funded Debt" the following additional paragraph which shall be part of such definition: Notwithstanding the foregoing, any borrowings by the Guarantor (or any Guaranty by the Guarantor of borrowings) pursuant to a revolving loan agreement, working capital agreement or line of credit that at any time or form time to time may constitute Funded Debt pursuant to the terms hereof shall nonetheless, for purposes of calculating Funded Debt hereunder, be reduced by the aggregate amount of cash and Cash Equivalents held by the Guarantor and its Subsidiaries at the time of such calculation. 4. The Company and the Guarantor have entered into a certain Amended and Restated Senior Secured Revolving Credit Agreement with PNC Bank, Ohio, National Association and The Fifth Third Bank with respect to the renewal of a certain revolving credit facility in favor of the Company and its affiliate, Erlanger Tubular Corporation (the "Renewed Revolving Credit"). In order to clarify August 17, 1994 Page Three the intent of the parties with respect to the Renewed Revolving Credit, the Noteholders and the Trustee acknowledge that they have no objection to the Renewed Revolving Credit and further acknowledge that compliance by the Company and the Guarantor with Section 7.8 of the Note Agreement and Section 6.6 of the Guaranty Agreement, respectively, was not required in connection therewith. Accordingly, to the extent applicable, the Noteholders and the Trustee hereby waive any Event of Default under section 7.8 of the Note Agreement or Section 6.6 of the Guaranty Agreement with respect to the Renewed Revolving Credit. 5. The modifications and waiver set forth herein shall become effective upon the occurrence of the following: (i) each Noteholder and the Trustee shall have signed and returned to the Company and the Guarantor a copy of this Fifth Amendment Agreement; (ii) all proceedings taken in connection with the execution of this Fifth Amendment Agreement and all documents and papers relating thereto shall be satisfactory to each Noteholder and its counsel; and each Noteholder and its counsel shall have received copies of such documents and papers as it or they may reasonably request in connection therewith, all in form and substance satisfactory to each Noteholder and its counsel. 6. Except as specifically modified hereby, the Note Agreement and the Guaranty Agreement shall remain in full force and effect in accordance with the terms thereof. 7. Each reference in the Note Agreement to "the Note Agreement," "the Agreement," "herein," "hereof," or other words of like import referred to the Note Agreement shall mean the Note Agreement as amended by this Agreement; and each reference in the Guaranty Agreement to "the Guaranty Agreement," "the Agreement", "this Agreement,", "herein," "hereof," or other words of like import referring to the Guaranty Agreement shall not mean the Guaranty Agreement as amended by this Agreement. NS Group, Inc. By John R. Parker Name: John R. Parker Title: Vice President & Treasurer August 17, 1994 Page Four Newport Steel Corporation By John R. Parker Name: John R. Parker Title: Vice President & Treasurer Agreed and Accepted Noteholders: MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY By _______________________________________ Name: Title: LIFE INSURANCE COMPANY OF NORTH AMERICA By: CIGNA Investments, Inc. By: Thomas P. Shea Name: Title: INSURANCE COMPANY OF NORTH AMERICA By: CIGNA Investments, Inc. By: Thomas P. Shea Name: Title: CONNECTICUT GENERAL LIFE INSURANCE COMPANY (on behalf of one or more separate accounts) By: CIGNA Investments, Inc. By: Thomas P. Shea Name: Title: August 17, 1994 Page Five CONNECTICUT GENERAL LIFE INSURANCE COMPANY By: CIGNA Investments, Inc. By: Thomas P. Shea Name: Title: CIGNA PROPERTY AND CASUALTY INSURANCE COMPANY By: CIGNA Investments, Inc. By: Thomas P. Shea Name: Title: THE OHIO NATIONAL LIFE INSURANCE COMPANY By: ____________________________________ Name: Title: COLONIAL PENN LIFE INSURANCE COMPANY By: ____________________________________ Name: Title: SOUTHERN FARM BUREAU ANNUITY INSURANCE COMPANY By: ____________________________________ Name: Title: WASHINGTON NATIONAL INSURANCE COMPANY By: ____________________________________ Name: Title: UNITED COMPANIES LIFE INSURANCE COMPANY By: ____________________________________ Name: Title: August 17, 1994 Page Six Trustee: HUNTINGTON NATIONAL BANK OF KENTON COUNTY, INC. By: ______________________________________ Name: Title: EX-4 3 Exhibit 4(d) THIRD AMENDMENT TO LOAN AGREEMENT THIS THIRD AMENDMENT ("Amendment"), made and entered into as of the 24th day of September, 1993 by and between KOPPEL STEEL CORPORATION, a Pennsylvania corporation ("Borrower"), and GENERAL ELECTRIC CAPITAL CORPORATION, a New York corporation ("GE Capital"), as "Agent" and sole "Lender" under the Loan Agreement referred to hereinafter (as such capitalized terms are defined therein); W I T N E S S E T H: WHEREAS, Borrower and GE Capital, as Agent and sole Lender, are parties to a certain Loan Agreement, dated as of October 4, 1990 (as heretofore amended, the "Loan Agreement"; capitalized terms used herein and not defined herein shall have the meanings ascribed to them in the Loan Agreement); and WHEREAS, pursuant to the Loan Agreement GE Capital makes available certain Capital Expenditure Loans to Borrower the proceeds of which are to be used by Borrower to finance Capital Expenditures under Borrower's Capital Expenditures Program; and WHEREAS, Borrower has advised GE Capital that it intends to obtain a Capital Expenditure Loan in the amount of $8,000,000 on or about the date hereof and has requested that GE Capital permit it to use the proceeds of such Loan to pay in full its obligations to PMAC under the Capital Improvements Note and, subject to the terms and conditions set forth herein and in the Loan Agreement, GE Capital is willing to do so; and WHEREAS, Borrower and GE Capital wish to enter into this Amendment in order to memorialize their mutual understanding in regard to such Capital Expenditure Loan and certain related modifications to the Loan Agreement; NOW, THEREFORE, in consideration of the premises, the terms and conditions contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows: 1. Refinancing Capital Expenditure Loan. Notwithstanding the restrictions set forth in Sections 2.04 and 2.07 of the Loan Agreement regarding the use of proceeds of Capital Expenditure Loans, GE Capital hereby consents to Borrower's use of the proceeds of an $8,000,000 Capital Expenditure Loan which Borrower anticipates obtaining on or about the date hereof (herein the "Refinancing Capital Expenditure Loan") to pay in full all of its obligations to PMAC under the Capital Improvements Note; provided, however, that GE Capital's consent is subject to each of the following conditions: (a) Except as expressly set forth hereinabove regarding the use of proceeds thereof, the Refinancing Capital Expenditure Loan will be subject to all terms and conditions of the Loan Agreement applicable to Capital Expenditure Loans. Without limitation of the foregoing (i) Borrower will comply with all provisions of Section 2.04 of the Loan Agreement in regard to its request for the Refinancing Capital Expenditure Loan; (ii) the Refinancing Capital Expenditure Loan will be repaid as provided in Section 2.04(c) of the Loan Agreement and will bear interest as provided in Section 2.09(d) or (f), as applicable, of the Loan Agreement, (iii) concurrently with its receipt of the Refinancing Capital Expenditure Loan Borrower will pay to GE Capital a Funding Fee in the amount of $80,000 as required by Section 2.12 of the Loan Agreement and (iv) each of the conditions precedent to the making of Capital Expenditure Loans set forth in Article 3 of the Loan Agreement shall have been satisfied prior to funding of the Refinancing Capital Expenditure Loan (except that Borrower shall not be required to certify that the proceeds of such Refinancing Capital Expenditure Loan will be used to fund Capital Expenditures). (b) Prior to the funding of the Refinancing Capital Expenditure Loan, each of the following additional conditions precedent shall have been satisfied: (i) By execution of this Amendment, Borrower shall have agreed with GE Capital that effective on the date of execution of this Amendment, the Loan Agreement shall be deemed to be amended in the manner set forth in Section 2 hereof. (ii) Borrower shall have caused to be delivered to GE Capital UCC termination statements, mortgage releases and other releases, in form and substance satisfactory to GE Capital, signed by PMAC, releasing all Liens of PMAC in the assets of Borrower securing the Capital Improvements Note. (iii) NS Group and Borrower shall have entered into an amendment to the Take or Pay Note or a replacement Take or Pay Note, in form and substance satisfactory to GE Capital, which shall provide that, in addition to any other prepayments required under the Take or Pay Note, in the event that NS Group's wholly-owned subsidiary, Kentucky Electric Steel Corporation ("Kentucky Electric"), shall issue pursuant to a public offering or private placement any shares of any equity security of Kentucky Electric (other than pursuant to the conversion or exercise of any existing security, option or right, any existing or future employee stock option plan of Kentucky Electric, a dividend payable in stock, or any other issuance of equity securities for a consideration other than cash or marketable securities), NS Group shall, within ten (10) days after receipt by Kentucky Electric of the net cash proceeds of such issuance, prepay the principal amount of the Take or Pay Note, and all accrued and unpaid interest thereon, in the amount of such net cash proceeds (net of all costs and expenses directly attributable to the offering, including, but not limited to, attorneys' fees, underwriting discounts or commissions, placement fees or other professional fees, and stock transfer taxes paid or payable in connection therewith) up to the then outstanding principal amount of the Take or Pay Note and all accrued and unpaid interest thereon. (iv) Borrower shall have paid all fees, costs and expenses incurred by GE Capital in connection with the preparation, execution and delivery of this Amendment and any other Loan Documents contemplated hereby (including the reasonable fees and expenses of its counsel retained in connection with this Amendment). (v) NS Group and Borrower shall have delivered to GE Capital certified resolutions of their respective boards of directors authorizing the execution, delivery and performance by each such entity of this Amendment and the other Loan Documents contemplated hereby to the extent that each is party thereto. (vi) Borrower shall have delivered to GE Capital all environmental, health and safety Permits necessary for Borrower to conduct its operations on the Q&T Property in compliance with all applicable Environmental Laws. (vii) NS Group and Borrower shall have executed and delivered to GE Capital such other documents, instruments and agreements as GE Capital shall reasonably request in connection with the transactions contemplated hereby. In the event that all conditions precedent set forth hereinabove and in the Loan Agreement with regard to the funding of the Refinancing Capital Expenditure Loan are not satisfied on or prior to September 30, 1993, and the Refinancing Capital Expenditure Loan is not made on or prior to such date, the consent set forth herein shall be void and of no further force or effect. The consent set forth herein is limited to the matter set forth herein and shall not be deemed to waive or modify any provision of the Loan Agreement (except as expressly set forth above in regard to the use of proceeds of the Refinancing Capital Expenditure Loan) or the other Loan Documents or to serve as a consent to any other matter prohibited by the terms and conditions thereof. 2. Amendments to Loan Agreement. Effective upon the execution of this Amendment by Borrower and GE Capital the Loan Agreement shall be deemed to be amended in the following respects: (a) Amendment to Section 6.03 of the Loan Agreement. Section 6.03 of the Loan Agreement shall be deemed to be amended by deleting clause (d) thereof in its entirety and substituting in lieu thereof the following revised clause (d): (d) not make, or permit its Subsidiaries to make, Capital Expenditures except in accordance with the Capital Expenditure Program and the Capital Expenditures budget approved by the Required Lenders pursuant to Section 5.01(f)(ii); provided that, (i) during its 1994 Fiscal Year Borrower shall make, or commit in writing (with suppliers, contractors and similar Persons) to make, Capital Expenditures of at least Five Million Dollars ($5,000,000) in accordance with the Capital Expenditure Program and the Capital Expenditures budget approved by the Required Lenders for such Fiscal Year and (ii) during the first ninety (90) days of its 1995 Fiscal Year Borrower shall make any Capital Expenditures committed to be made by Borrower in its 1994 Fiscal Year, as provided in the preceding clause (i), but not actually made in such Fiscal Year. (b) Amendment to Section 9.01 of the Loan Agreement. Section 9.01 of the Loan Agreement is hereby amended by adding at the end thereof a new clause (p) to read as follows: (p) NS Group shall fail to prepay the Take or Pay Note (and accrued and unpaid interest thereon) within ten (10) days after the receipt by Kentucky Electric Steel Corporation ("Kentucky Electric") of the proceeds of any public offering or private placement of any shares of any equity security of Kentucky Electric (other than pursuant to the conversion or exercise of any existing security, option or right, any existing or future employee stock option plan of Kentucky Electric, a dividend payable in stock, or any other issuance of equity securities for a consideration other than cash or marketable securities), in an amount equal to the cash proceeds of such offering or placement (net of all costs and expenses directly attributable to the offering or placement, including, but not limited to, attorneys' fees, underwriting discounts or commissions, placement fees or other professional fees and stock transfer taxes paid or payable in connection therewith) up to the then outstanding principal amount of the Take or Pay Note and all accrued and unpaid interest thereon. 3. Representations and Warranties. Borrower hereby represents and warrants in favor of GE Capital as follows: (a) The execution, delivery and performance by NS Group and Borrower of this Amendment and any other Loan Documents contemplated hereby and the amendment to the Take or Pay Note or the Replacement Take or Pay Note contemplated by Section 1 hereof (the "Take or Pay Note Amendment"), to the extent that each is party thereto, (i) are within NS Group's and Borrower's corporate power; (ii) have been duly authorized by all necessary or proper corporate action; (iii) are not in contravention of any provision of NS Group's or Borrower's respective certificates or articles of incorporation or by-laws; (iv) will not violate any law or regulation, or any order or decree of any court or governmental instrumentality; (v) will not conflict with or result in the breach or termination of, constitute a default under or accelerate any performance required by, any indenture, debenture, mortgage, deed of trust, lease, agreement, guaranty or other document or instrument to which NS Group or Borrower is a party or by which NS Group or Borrower or any of their respective properties is bound (including, without limitation, the documents described in Section 5.01(o) of the Loan Agreement and the Loan Agreement, dated as of January 21, 1992, between Borrower and the Commonwealth of Pennsylvania, acting by and through its Department of Commerce (the "Sunny Day Loan Agreement")); (vi) will not result in the creation or imposition of any Lien upon any of the property of NS Group or Borrower other than those in favor of GE Capital, all pursuant to the Loan Documents, and Permitted Encumbrances; and (vii) do not require the consent, authorization or approval of, or any declaration, notification, filing or registration with, any governmental body, agency, authority or any other Person, which have not been fully obtained, made or complied with. (b) This Amendment and each of the other Loan Documents contemplated hereby and the Take or Pay Note Amendment have been duly executed and delivered for the benefit of or on behalf of NS Group or Borrower, as the case may be, and this Amendment, each of such other Loan Documents and the Take or Pay Note Amendment constitute the legal, valid and binding obligations of NS Group and Borrower, to the extent each is party thereto, enforceable against NS Group and Borrower in accordance with their respective terms. (c) Borrower is not presently in default under any indenture, debenture, mortgage, deed of trust, lease, agreement or other instrument to which Borrower is party, including, without limitation, the Sunny Day Loan Agreement. (d) (i) The operations of Borrower and each of its Subsidiaries, with respect to the Q&T Property, comply in all material respects with all applicable Environmental Laws; (ii) Borrower and each of its Subsidiaries have obtained all environmental, health and safety Permits necessary for Borrower to operate its business at the Q&T Property, and all such Permits are valid, in good standing and not subject to any modification or revocation proceeding and Borrower and each of its Subsidiaries are in compliance in all material respects with all terms and conditions of such Permits; (iii) Borrower and each of its Subsidiaries and its past and present operations at the Q&T Property, are not subject to any outstanding written order or agreement with any governmental authority or private party respecting (A) any Environmental Laws, (B) any Remedial Actions, or (C) any Environmental Claims arising from the Release or potential Release of a Contaminant into the environment; (iv) none of the present or past operations of Borrower or any of its Subsidiaries with respect to Q&T Property is subject to any judicial or administrative proceeding alleging a violation of any Environmental Law; (v) none of the past or present operations of Borrower or any of its Subsidiaries with respect to the Q&T Property is the subject of any federal or state investigation evaluating whether any Remedial Action is needed to respond to a Release or potential Release of any Contaminant into the environment under any applicable law; (vi) except as described on Exhibit "A" attached hereto and incorporated herein by reference, neither Borrower nor any of its Subsidiaries has filed any notice under any Environmental Law indicating past or present treatment, storage, or disposal of a hazardous or solid waste or reporting a spill or Release of a Contaminant into the environment at, from or under the Q&T Property under any applicable law; (vii) neither Borrower nor any of its Subsidiaries, with respect to the Q&T Property, has contingent liabilities in connection with Releases or potential Releases of any Contaminant at or from the Q&T Property into the environment; (viii) none of Borrower's or any of its Subsidiary's operations at the Q&T Property will involve or have involved, the generation, transportation, treatment, recycling, reclamation, handling, use or disposal of hazardous waste, as defined under 40 C.F.R. Parts 260-270 or any state equivalent, except such hazardous waste generated in the normal course of business and transported, treated, recycled, reclaimed, handled, used or disposed of in compliance with all applicable Environmental Laws; (ix) none of Borrower, Borrower's Subsidiaries, or, to our knowledge, any other prior owner, any lessee, or any other person has disposed of any Contaminant by placing it in any disposal unit or in or on the ground or waters of the Q&T Property; (x) except as described on Exhibit "A", no underground storage tanks or surface impoundments are on, at or under the Q&T Property; and (xi) no Lien in favor of any governmental authority for (A) any liability under Environmental Laws, or (B) damages arising from or costs incurred by such governmental authority in response to a Release of a Contaminant into the environment, has been filed or attached to the Q&T property. 4. Additional Mortgage. At GE Capital's request at any time hereafter, Borrower shall deliver to GE Capital (a) such written representations and warranties regarding the compliance of the Q & T Property and Borrower's operations thereon with all applicable Environmental Laws as GE Capital shall request in addition to the representations and warranties set forth at Section 3(d) above and, if appropriate, a statement or schedule setting forth in detail the reasons that Borrower cannot make some or all of the requested representations and warranties without qualification, (b) Mortgages and Assignments of Rents and Leases, or amendments to the Mortgages and Assignments of Rents and Leases delivered by Borrower to GE Capital on the Closing Date, in either case, in form and substance satisfactory to GE Capital, granting to GE Capital first priority Liens on the Q & T Property, as further security for the Obligations, (c) title and extended coverage insurance, in amounts satisfactory to GE Capital, covering the Q & T Property and (d) an opinion of local Pennsylvania counsel, in form and substance satisfactory to GE Capital, as to the enforceability of the documents executed by Borrower pursuant to the preceding clause (b) and such related matters as GE Capital shall request. 5. Miscellaneous. (a) Restatement of Representations and Warranties. Subject to those matters (if any) set forth on Exhibit "B" attached hereto and incorporated herein by reference, Borrower hereby restates and renews each and every representation and warranty heretofore made by it under, or in connection with, the execution and delivery of the Loan Agreement and the other Loan Documents except the representations and warranties set forth at Sections 4.18, 4.19 and 4.27 of the Loan Agreement. (b) Effect of Amendment. All terms of the Loan Agreement, as amended hereby, and the other Loan Documents, shall be and remain in full force and effect from and after the date hereof and shall constitute the legal, valid, binding and enforceable obligations of Borrower to GE Capital. All references to the "Loan Agreement" in the other Loan Documents shall be deemed references to the Loan Agreement, as amended hereby. This Amendment shall constitute a "Loan Document" for all purposes of the Loan Agreement. (c) Ratification. Borrower hereby restates, ratifies and reaffirms each and every term and condition set forth in the Loan Agreement, as amended hereby, and the other Loan Documents effective as of the date hereof. (d) Estoppel. To induce GE Capital to enter into this Amendment and to continue to make financial accommodations to Borrower under the Loan Agreement, Borrower hereby acknowledges and agrees that, as of the date hereof, there exists no defense, right of offset, claim, counterclaim or objection in favor of Borrower as against GE Capital with respect to the Obligations. (e) GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK AND ALL APPLICABLE FEDERAL LAWS OF THE UNITED STATES OF AMERICA. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their respective officers thereunto duly authorized, as of the date first above written. KOPPEL STEEL CORPORATION By: /s/ Clifford R. Borland Name: Clifford R. Borland Title: Chairman GENERAL ELECTRIC CAPITAL CORPORATION, individually and as Agent By: /s/ John M. Greely Name: John M. Greely Title:Manager - Operations ACKNOWLEDGMENT OF NS GROUP The undersigned, NS Group, Inc., hereby (a) acknowledges its receipt of a copy of, and agreement with the terms of, the within and foregoing Third Amendment to Loan Agreement and ratifies and affirms each provision thereto applicable to it, (b) agrees that the NS Group Guaranty Documents, the NS Group Put Agreement and the NS Group Take or Pay Agreement (as such terms are defined in the Loan Agreement referenced in the within and foregoing Third Amendment to Loan Agreement) will continue in full force and effect without diminution or impairment notwithstanding the execution and delivery of the within and foregoing Third Amendment to Loan Agreement, and (c) certifies that, as of the date hereof, there exists no defense, right of offset, claim, counterclaim or objection to the payment and performance by the undersigned of the terms of the NS Group Guaranty Documents, the NS Group Take or Pay Agreement or the NS Group Put Agreement. IN WITNESS WHEREOF, the undersigned has set its hand and seal as of the 24th day of September, 1993. NS GROUP, INC. By: /s/ Clifford R. Borland Name: Clifford R. Borland Title: President and CEO EX-13 4 Exhibit 13 The following are the excerpted portions of the NS Group, Inc. Annual Report to Shareholders for the fiscal year ended September 24, 1994 which are expressly incorporated by reference into Form 10-K. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General The Company operates in two separate business segments: specialty steel and industrial adhesives. Within the specialty steel segment are the operations of Newport Steel Corporation (Newport), a manufacturer of welded tubular steel products and hot rolled coils; Koppel Steel Corporation (Koppel), a manufacturer of seamless tubular steel products, special bar quality (SBQ) products and semi-finished steel products; and Erlanger Tubular Corporation (Erlanger), a tubular steel product finishing operation. The Company's specialty steel products consist of: (i) seamless and welded tubular goods primarily used in oil and natural gas drilling and production operations, (oil country tubular goods, or OCTG); (ii) line pipe used in the transmission of oil, gas and other fluids; (iii) special bar quality products primarily used in the manufacture of heavy industrial equipment; and (iv) hot rolled coils which are sold to service centers and other manufacturers for further processing. Within the adhesives segment are the operations of Imperial Adhesives, Inc. (Imperial), a manufacturer of industrial adhesives products. See Note 14 to the Consolidated Financial Statements included herein for selected financial information by business segment for the fiscal years 1994, 1993 and 1992. In October 1993, the Company sold Kentucky Electric Steel Corporation (KES), a manufacturer of SBQ products, to a newly formed public company in exchange for $45,626,000 in cash and 400,000 shares (approximately 8%) of the newly formed public company, then valued at $4,800,000. Reference is made to Note 2 to the Consolidated Financial Statements included herein concerning the Company's sale of KES and its pro forma effect on the Company's financial position and results of operations. The following discussion includes the results of operations of KES for the comparative prior year periods. Results of Operations The Company's net sales, cost of products sold and operating results by industry segment for each of the three fiscal years in the period ended September 24, 1994 were as follows: (In thousands) 1994 1993 1992 Net sales Specialty steel, excluding KES $270,441 $234,460 $175,921 KES - 90,547 80,439 Total specialty steel segment 270,441 325,007 256,360 Adhesives segment 32,939 28,075 24,882 $303,380 $353,082 $281,242 Cost of products sold Specialty steel excluding KES $252,880 $217,215 $168,371 KES - 71,468 62,248 Total specialty steel segment 252,880 288,683 230,619 Adhesives segment 25,281 21,903 19,570 $278,161 $310,586 $250,189 Operating income (loss) Specialty steel, excluding KES $ 2,909 $ 4,094 $ (5,074) KES - 9,285 8,425 Total specialty steel segment 2,909 13,379 3,351 Adhesives segment 1,150 1,059 533 Corporate allocations and income (3,370) (2,766) (2,483) $ 689 $11,672 $ 1,401 Sales data for the Company's specialty steel segment for each of the three fiscal years in the period ended September 24, 1994 were as follows: 1994 1993 1992 Tons shipped Welded tubular 277,600 308,000 246,500 Seamless tubular 92,300 76,900 45,400 SBQ, excluding KES 147,900 102,500 72,000 Other 43,200 16,400 9,400 KES - 244,400 217,900 561,000 748,200 591,200 Net sales ($000's) Welded tubular $117,214 $125,132 $103,479 Seamless tubular 72,675 62,535 37,819 SBQ, excluding KES 64,858 40,561 28,756 Other 15,694 6,232 5,867 KES - 90,547 80,439 $270,441 $325,007 $256,360 Fiscal Year Ended September 24, 1994 Compared with Fiscal Year Ended September 25, 1993 Fiscal 1994 specialty steel net sales, excluding KES, increased $36.0 million, or 15.3% from fiscal 1993. Total specialty steel net sales declined $54.6 million, or 16.8% from fiscal 1993, primarily due to the sale of KES in October 1993. Welded tubular net sales declined $7.9 million, or 6.3% on a volume decline of 9.9%. Fiscal 1994 welded tubular net sales were negatively impacted by a decline in second quarter shipments that resulted primarily from customers' resistance to announced price increases. Second quarter welded tubular net sales declined $7.9 million on a volume decline of 29.8% from the second quarter of fiscal 1993. The Company adjusted its selling prices in response to the decline and volume increased in the third quarter. Fiscal 1994 average selling prices for all welded tubular products increased 3.9% from 1993. Seamless tubular net sales increased $10.1 million, or 16.2% on a volume increase of 20.0%. The increase in seamless tubular net sales resulted primarily from an increase in shipments of seamless OCTG due in part to Koppel's increased recognition in the marketplace. Fiscal 1994 average selling prices for all seamless tubular products declined 3.2% due in part to an increased level of foreign imports of seamless OCTG in fiscal 1994. Price and volume levels in the domestic tubular market are primarily dependent on the level of drilling activity in the United States and abroad, the level of foreign imports as well as general economic conditions. The average number of oil and natural gas drilling rigs in operation in the United States (rig count) increased 3.4%, from 757 for fiscal 1993 to 783 for fiscal 1994. The effects of this increase were offset by an increased level of imported tubular products resulting in downward pressure on tubular product prices for most of fiscal 1994. On June 30, 1994, the Company, and six other U.S. steel companies filed antidumping petitions against imports of OCTG products from seven foreign nations. The cases ask the U.S. government to take action to offset injury to the domestic OCTG industry from unfairly traded imports. The antidumping petitions were filed against OCTG imports from Argentina, Austria, Italy, Japan, Korea, Mexico and Spain. The Company also joined in filing countervailing duty cases charging subsidization of OCTG imports from Austria and Italy. The cases are being handled by the International Trade Administration of the U.S. Department of Commerce, which is investigating the existence and extent of dumping and subsidization, and by the U.S. International Trade Commission, which is assessing whether dumping and subsidization have caused material injury to the U.S. industry. In August 1994, the International Trade Commissioners voted unanimously that there was reasonable indication of material injury which warrants further investigation of the petitions. The existence and extent of unfair trade practices could be determined as early as late January 1995, and preliminary tariffs could be imposed at that time. Final determinations regarding unfair practices and any injury caused thereby are expected in the Summer of 1995. While the Company cannot predict the outcome of the cases at this time, the Company believes that a favorable ITC ruling could decrease foreign shipments of OCTG products and increase the volume and average selling prices of the Company's shipments. Price increases and improvements in tubular product shipments will continue to also be highly dependent on the level of drilling activity in the United States and abroad as well as the level of activity in the steel industry and the general state of the economy. SBQ product net sales, excluding KES, increased $24.3 million, or 59.9% on a volume increase of 44.3%. SBQ product average selling prices increased 10.9% from fiscal 1993. SBQ product volume and prices have increased as a result of stronger market demand over the prior year, combined with Koppel's increased recognition in the marketplace. The increase in net sales of "other" products is primarily attributable to an increase in shipments of hot rolled coils, which is a result of stronger market demand for this product over the prior year. Continued improvements in shipments and net sales of SBQ products and hot rolled coils will be largely dependent on the general state of the economy and the overall strength of the steel industry. Adhesives segment net sales increased $4.9 million, or 17.3%. The increase in adhesives segment net sales over the prior year was primarily the result of expansion of product lines acquired in fiscal 1993. Consolidated gross profit decreased $17.3 million from fiscal 1993 for a gross profit margin of 8.3% compared to 12.0% in fiscal 1993. The decline in gross profit and margin was primarily due to the sale of KES. Gross profit for the specialty steel segment, excluding KES, increased $316,000 from fiscal 1993 for a gross profit margin of 6.5% compared to 7.4% in fiscal 1993. The decline in gross profit margin was partially attributable to a 20.6% increase in the Company's average steel scrap costs over fiscal 1993. The Company has recovered a portion of the increase through higher selling prices for its SBQ products and hot rolled coils; however, it was generally unsuccessful in passing the increases in scrap costs through to tubular product customers. Newport and Erlanger's gross profit declined $5.3 million primarily as a result of increased steel scrap costs and the decline in welded tubular shipments as previously discussed as well as increased maintenance costs due to severe winter weather in the second fiscal quarter. Koppel's gross profit increased $5.4 million which was primarily attributable to improved operating efficiencies due to greater production and sales volume of SBQ and seamless tubular products, as previously discussed. These improvements were partially offset by increased steel scrap costs, lower seamless tubular average selling prices and the effects of severe winter weather conditions in the second fiscal quarter. The adhesives segment gross profit increased $1.5 million from fiscal 1993 for a gross profit margin of 23.2%, compared to 22.0% in fiscal 1993. The increase in gross profit and margin was primarily due to increased volume and improved selling prices. Selling and administrative expenses declined primarily as a result of the sale of KES and declined as a percentage of net sales from 8.7% in fiscal 1993 to 8.1% in fiscal 1994. As a result of the above factors, the specialty steel segment, excluding KES, earned an operating profit of $2.9 million in fiscal 1994 compared to $4.1 million in fiscal 1993. Of the $2.9 million specialty steel operating profit, Newport and Erlanger incurred a $6.1 million operating loss, compared to a $751,000 loss in fiscal 1993; and Koppel earned a $9.0 million operating profit, compared to a $4.8 million operating profit in fiscal 1993. The adhesives segment earned an operating profit of $1.2 million, virtually unchanged from fiscal 1993. Interest income increased $1.5 million primarily due to an increase in average cash and short-term investment balances that resulted primarily from the sale of KES. Interest expense decreased $1.1 million, primarily as a result of a decrease in long-term debt obligations, partially offset by an increase in the average borrowings and interest rates under the Company's lines of credit. Other income increased $1.3 million primarily due to income on the sale of equipment. The sale of KES in the first quarter of fiscal 1994 resulted in a pre-tax gain of $35.3 million and increased net income and earnings per common share by $21.5 million and $1.56, respectively. See Note 2 to the Consolidated Financial Statements included herein. In the first quarter of fiscal 1994, the Company recorded an increase to net income of $1.7 million, or $.12 per share, for the cumulative effect of the adoption of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (Statement 109). The adoption of Statement 109 had no impact on cash flow for fiscal 1994. A valuation allowance has not been recorded against deferred tax assets as it is estimated that such deferred tax assets will be realized through a reduction of taxes otherwise payable upon the reversal of existing taxable temporary differences. See Note 12 to the Consolidated Financial Statements included herein. During the first quarter of fiscal 1994, the Company also adopted the provisions of Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" (Statement 115). Statement 115 requires the Company to mark certain of its investments to market either through the income statement or directly to common shareholders' equity, depending on the nature of the investment. The impact on the Company's financial statements from the adoption of Statement 115 was not material. Fiscal Year Ended September 25, 1993 Compared with Fiscal Year Ended September 26, 1992 Net sales in fiscal 1993 increased $71.8 million, or 25.5% from fiscal 1992, to $353.1 million. The specialty steel segment net sales increased $68.6 million and the adhesives segment net sales increased $3.2 million. Welded tubular net sales increased $21.7 million, or 20.9% on a volume increase of 24.9%. The increase in welded tubular shipments resulted generally from an increase in market share as well as an increase in market activity, as evidenced by a modest increase in the number of oil and natural gas drilling rigs in operation in the United States. The rig count, which on average was 701 for fiscal 1992, increased approximately 8% to an average of 757 for fiscal 1993. Overall average selling prices of welded tubular products declined 3.3% from fiscal 1992; however, prices generally improved quarter to quarter during fiscal 1993. Seamless tubular net sales increased $24.7 million, or 65.4% on a volume increase of 69.4%. Seamless tubular product shipments increased for reasons similar to those for the increase in welded tubular shipments. Average selling prices for seamless tubular products declined approximately 2.4%. SBQ product net sales, excluding KES, increased $11.8 million, or 41.1% on a volume increase of 42.4%. SBQ product shipments improved as a result of stronger market demand over the prior year. Average selling prices, however, remained virtually unchanged. KES's net sales increased $10.1 million, or 12.6% on a 12.2% increase in volume. Average selling prices remained virtually unchanged from fiscal 1992. The increase in shipments resulted from continued improvement in the various markets served by KES. Imperial's net sales increased $3.2 million, or 12.8%, primarily the result of the acquisition of new product lines as well as price increases. Consolidated gross profit increased $11.4 million from fiscal 1992 to $42.5 million, or a 12.0% gross profit margin compared to 11.0% in fiscal 1992. Specialty steel gross profit, excluding KES, increased $9.7 million from fiscal 1992 for a gross profit margin of 7.4% compared to 4.3% in fiscal 1992. Newport and Erlanger's gross profit increased $2.1 million from fiscal 1992. The increase was primarily due to improved operating efficiencies resulting from increased production volumes, offset by increased steel scrap costs and lower overall selling prices. Gross profit at Koppel increased $7.6 million as a result of significant improvements in production efficiencies due to increased production volume for seamless tubular and SBQ products over fiscal 1992. Gross profit at Koppel was also negatively impacted by lower average selling prices and higher steel scrap costs compared to fiscal 1992. KES's gross profit increased $888,000, primarily as a result of increased volume as previously discussed, partially offset by increases in the cost of steel scrap. The adhesives segment gross profit increased $860,000 for a gross profit margin of 22.0% compared to 21.3% in fiscal 1992. The increase in gross profit and margin was primarily due to increased sales volume and operating efficiencies. Selling and administrative expenses increased $1.2 million, or 4.0% and declined as a percentage of sales from 10.5% in fiscal 1992 to 8.7% in fiscal 1993. The overall increase in selling and administrative expenses was primarily attributable to increased production and sales volumes. As a result of the above factors, the specialty steel segment earned an operating profit of $13.4 million in fiscal 1993 compared to $3.4 million in fiscal 1992. Of the $13.4 million specialty steel segment operating profit, Newport and Erlanger incurred a $751,000 loss, compared to a $2.0 million loss in fiscal 1992; Koppel earned a $4.8 million profit, compared to a $3.0 million loss in fiscal 1992 and KES earned a $9.3 million profit, compared to an $8.4 million profit in fiscal 1992. The adhesives segment earned an operating profit of $1.1 million in fiscal 1993 compared to $533,000 in fiscal 1992. Interest expense decreased $701,000 primarily as a result of a reduction in long-term debt obligations. During the fourth quarter of fiscal 1993, Newport shut down its melt shop operations for nineteen days when it was discovered that a radioactive substance was accidentally melted, resulting in the contamination of the melt shop's electric arc furnace emission control facility, or "baghouse" facility. A similar incident, having occurred in the third quarter of fiscal 1992, shut down Newport's melt shop facilities for twenty-three days. The source of the radiation in these incidents was contained in incoming shipments of scrap metal and was not detected by monitors that check incoming steel scrap. In response, the Company has installed additional state-of-the-art radiation detection systems in various locations throughout the Newport plant. The Company incurred estimated losses as a result of the extended outages and costs to restore the melt shop and related facilities back to operations, including estimated costs to dispose of the radiation contaminated baghouse dust, of $7.2 million and $4.1 million, in fiscal 1993 and 1992, respectively. The Company has recovered $3.5 million through insurance and expects to recover and has recorded as a receivable an additional $2.3 million in insurance claims for the fiscal 1993 incident. No recovery has been made nor recorded for the fiscal 1992 incident and the Company is assessing the possibility of legal remedies against certain parties. The losses and costs attributable to these incidents, net of insurance claims, resulted in an extraordinary charge of $1.1 million, net of applicable income tax benefit of $662,000, or an $.08 loss per share, in fiscal 1993 and an extraordinary charge of $2.5 million, net of applicable income tax benefit of $1.6 million, or a $.19 loss per share, in fiscal 1992. The occurrences of accidental melting of radioactive materials have not resulted in any notice of violations from federal or state environmental regulatory agencies. The Company is investigating and evaluating various issues concerning storage, treatment and disposal of the radiation contaminated baghouse dust; however, a final determination as to method of treatment and disposal, cost and further regulatory requirements cannot be made at this time. Depending on the ultimate timing and method of treatment and disposal, which will require appropriate federal and state regulatory approval, the actual cost of disposal could substantially exceed current estimates and the Company's insurance coverage. As of September 24, 1994, claims recorded in connection with disposal costs substantially exhausts available insurance coverage. Based on current knowledge, management believes the recorded reserves of $4.4 million for disposal costs pertaining to these incidents are adequate and the ultimate outcome will not have a material adverse effect on the Company's consolidated financial position. The ultimate effect of these matters on the Company's consolidated results of operations cannot be predicted because any such effect depends on the amount and timing of charges to operations resulting from new information as it becomes available. Liquidity and Capital Resources Working capital at September 24, 1994 was $45.2 million compared to $39.1 million at September 25, 1993. The current ratio at September 24, 1994 was 1.50 to 1 compared to 1.45 to 1 at September 25, 1993. At September 24, 1994, the Company had cash and short-term investments totaling $44.5 million compared to $9.3 million at September 25, 1993. At September 24, 1994, the Company had aggregate lines of credit available for borrowing of $34.9 million, including a $16.2 million line of credit restricted for use at Koppel, of which a total of $28.2 was outstanding. These lines expire in fiscal 1995 and 1996. At September 24, 1994, approximately $8.3 million in cash and short-term investments were restricted, primarily in connection with cash collateralized letters of credit. The Company is negotiating a new three year, $45.0 million working capital facility which would replace its existing credit line agreements. There can be no assurance that the new facility will be entered into, however; the Company believes that it will have sufficient credit facilities to meet its working capital needs for the next twelve months. Cash flow used in operating activities totaled $4.3 million. Major components include a net loss before the effect of the gain on the sale of KES and the adoption of Statement 109 of $10.0 million, a $7.9 million increase in accounts receivable, a $1.2 million decrease in long-term deferred taxes and a $3.2 million increase in inventories. Partially offsetting these uses of operating cash flow were non-cash depreciation and amortization charges of $18.8 million, a decrease in refundable income taxes and other current assets of $2.6 million and $2.7 million, respectively, and an increase in accounts payable of $5.8 million. The increases in accounts receivable, inventories and accounts payable were primarily attributable to the increase in business activity in the specialty steel segment. Other current assets decreased primarily due to the receipt of insurance claims recorded in fiscal 1993. Cash flows from operating activities were also reduced by $4.9 million for income taxes paid, which resulted from the sale of KES. As a result of the sale of KES, the Company received $45.6 million in cash and $4.8 million in common stock of the new entity. In addition, the Company received $6.8 million in cash from the new entity in satisfaction of a dividend declared by KES prior to the sale. A portion of the cash proceeds have been utilized to fund the current year's operating loss. Remaining cash proceeds are invested in short-term investments. The Company incurred $11.8 million in capital expenditures during fiscal 1994, an increase of $5.7 million over fiscal 1993. The Company currently estimates that capital spending in fiscal 1995 will increase over fiscal 1994 spending. Net cash flows used by financing activities was $4.4 million. During the fiscal year, the Company made payments on long-term debt obligations of $7.2 million and increased its borrowings under its lines of credit by $1.9 million. Scheduled long-term debt maturities are $15.5 million, $19.0 million and $18.6 million for fiscal 1995, 1996 and 1997, respectively. However, the Company is pursuing a refinancing of a significant portion of its long-term debt. See "Other Matters". Certain of the Company's loan agreements contain covenants restricting the payment of dividends to its shareholders. Under the most restrictive of these covenants, retained earnings available for dividends is computed under a formula which is based in part on the earnings and losses of the Company after fiscal 1988. Under this covenant, the Company is currently prohibited from paying dividends to its shareholders. 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 as discussed herein, the Company has generally been able to pass these inflationary increases through to its customers. Impact of Recently Issued Accounting Standards Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits" (Statement 112) was issued in November, 1992 and requires companies to accrue, during the period an employee renders service, the expense of providing certain postemployment benefits. Currently, the Company recognizes the expense of such benefits, to the extent provided, at the time payment is deemed probable. Adoption of Statement 112 is required in fiscal 1995. Management does not expect adoption of Statement 112 to have a material impact on the Company's financial condition or results of operations. Other Matters Newport is a co-defendant in a claim for breach of implied warranty arising from the failure of two joints of welded pipe during testing of an off-shore pipeline. The plaintiff is seeking damages in excess of $5 million for costs associated with replacing the entire pipeline and lost production revenues. The Company believes that it has meritorious defenses to this claim, although no assurances can be given as to the outcome of this case. Insurance may be available for a portion, but not all, of any award for damages. The Company is subject to various other claims, lawsuits and administrative proceedings arising in the ordinary course of business with respect to commercial, product liability and other matters, which seek remedies or damages. Based upon its evaluation of available information, management does not believe that any such matters are likely, individually or in the aggregate, to have a material adverse effect upon the Company's business or consolidated financial position. There can be no assurance, however, as to the ultimate disposition of these matters. The Company is subject to federal, state and local environmental laws and regulations, including, among others, the Resource Conservation and Recovery Act (RCRA), the Clean Air Act, the 1990 Amendments to the Clean Air Act (the 1990 Amendments), the Clean Water Act and all regulations promulgated in connection therewith, concerning the discharge of contaminants as air emissions or waste water effluents and the disposal of solid and/or hazardous wastes such as electric arc furnace dust. As such, the Company is from time to time involved in administrative and judicial proceedings and administrative inquiries related to environmental matters. As with other similar mills in the industry, the Company's steel mini-mills produce dust which contains lead, cadmium and chromium, and is classified as a hazardous waste. The Company currently collects the dust resulting from its electric arc furnace operations through emission control systems and recycles it through a waste recycling firm using EPA-approved processes. The Company also has on its property at Newport a permitted hazardous waste disposal facility. In September, 1994, the Company received a proposed Consent Agreement from the EPA 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 proposed Consent Agreement establishes a schedule for investigating, monitoring, testing and analyzing the potential releases. Any contamination documented as a result of the investigation may require remediation. Pursuant to various indemnity provisions in agreements entered into at the time of the Company's acquisition of the Koppel facilities in 1991, certain parties agreed to indemnify the Company against various known and unknown environmental matters. While such parties have not at this time acknowledged full responsibility for potential costs under the proposed Consent Agreement, the Company believes that the indemnity provisions provide for it to be fully indemnified against all matters covered by the proposed Consent Agreement, including all associated costs, claims and liabilities. Subject to the uncertainties concerning the proposed Consent Agreement and the storage and disposal of the radiation contaminated baghouse dust, the Company believes it is in compliance in all material respects with all applicable environmental regulations. Regulations resulting from the 1990 Amendments that will pertain to the Company's electric arc furnace operations are currently not expected to be promulgated until 1997 or later. The Company cannot predict the level of required capital expenditures resulting from future environmental regulations such as those forthcoming as a result of the 1990 Amendments. However, the Company believes that while the 1990 Amendments may require additional expenditures, such expenditures will not have a material impact on the Company's business or consolidated financial position for the foreseeable future. Capital expenditures during fiscal 1995 for the Company's environmental control facilities are not expected to be material; however, such expenditures could be influenced by new and revised environmental laws and regulations. The Company is currently pursuing a refinancing of a significant portion of its long-term debt through a proposed sale of $125 million senior secured notes due 2003 (the Offering). Completion of the Offering would substantially reduce principal amortization requirements until the maturity of the senior secured notes. Completion of the Offering is subject to the Securities and Exchange Commission allowing the registration of the senior secured notes to become effective, the entering into a firm commitment with the underwriters and the existence of market conditions acceptable to the Company. CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED STATEMENTS OF INCOME For the years ended September 24, 1994, September 25, 1993 and September 26, 1992 (Dollars in thousands, except per share amounts) 1994 1993 1992 Net sales $303,380 $353,082 $281,242 Cost of products sold 278,161 310,586 250,189 Selling and administrative expenses 24,530 30,824 29,652 Operating income 689 11,672 1,401 Interest income 1,733 277 722 Interest expense (20,030) (21,096) (21,797) Other income (expense) 1,191 (131) 258 Gain on sale of subsidiary 35,292 - - Income (loss) before income taxes, extraordinary items and cumulative effect of a change in accounting principle 18,875 (9,278) (19,416) Provision (credit) for income taxes 7,382 (3,382) (6,058) Income (loss) before extraordi- nary items and cumulative effect of a change in accounting principle 11,493 (5,896) (13,358) Extraordinary items, net of income taxes - (1,095) (2,542) Cumulative effect of a change in accounting principle 1,715 - - Net income (loss) $ 13,208 $ (6,991) $ (15,900) Per common share Income (loss) before extraordi- nary items and cumulative effect of a change in accounting principle $.84 $(.44) $ (.99) Extraordinary items - (.08) (.19) Cumulative effect of a change in accounting principle .12 - - Net income (loss) $.96 $(.52) $(1.18) Weighted average shares outstanding 13,789,265 13,552,838 13,483,247 See notes to consolidated financial statements CONSOLIDATED BALANCE SHEETS September 24, 1994 and September 25, 1993 (Dollars in thousands) ASSETS 1994 1993 Current assets Cash and cash equivalents $ 4,405 $ 5,797 Short-term investments 40,071 3,457 Accounts receivable, less allowance for doubtful accounts of $637 and $819, respectively 42,651 48,602 Refundable income taxes 195 2,813 Inventories 32,290 41,691 Operating supplies and other current assets 11,721 18,358 Deferred tax assets 4,877 6,004 Total current assets 136,210 126,722 Property, plant and equipment -- at cost Land and buildings 27,841 27,559 Machinery and equipment 231,383 234,172 Construction in progress 3,497 3,362 Less -- accumulated depreciation (102,182) (91,627) Net property, plant and equipment 160,539 173,466 Other assets 18,578 17,054 Total assets $315,327 $317,242 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Notes payable $ 28,872 $ 26,967 Accounts payable 27,312 28,300 Accrued liabilities 19,281 23,263 Current portion of long-term debt 15,543 9,132 Total current liabilities 91,008 87,662 Long-term debt 138,110 156,056 Deferred taxes 9,745 10,902 Common shareholders' equity Common stock, no par value, 40,000,000 shares authorized, 13,809,413 and 13,696,104 shares issued and outstanding, respectively 48,988 48,284 Common stock options and warrants 262 208 Unrealized gain (loss) on available for sale securities (124) - Retained earnings 27,338 14,130 Common shareholders' equity 76,464 62,622 Total liabilities and shareholders' equity $315,327 $317,242 See notes to consolidated financial statements CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended September 24, 1994, September 25, 1993 and September 26, 1992 (Dollars in thousands) 1994 1993 1992 Cash flows from operating activities: Net income (loss) $13,208 $ (6,991) $(15,900) Adjustments to reconcile net income (loss) to net cash flows from operating activities: Depreciation and amortization 18,789 19,093 18,711 Decrease in long-term deferred taxes (1,157) (1,998) (1,675) Gain on sale of subsidiary (35,292) - - (Gain) loss on disposal of equipment (230) 323 381 Increase in accounts receivable, net (7,921) (11,461) (11,498) (Increase) decrease in inventories (3,168) 906 1,430 Decrease in refundable income taxes 2,618 2,012 7,067 (Increase) decrease in other current assets 2,691 (7,203) (33) Increase in accounts payable 5,782 958 6,442 Increase in accrued liabilities 351 6,753 3,590 Net cash flows from operating activities (4,329) 2,392 8,515 Cash flows from investing activities: Proceeds from sale of subsidiary 50,426 - - Cash dividend from sold subsidiary 6,818 - - Purchases of property, plant and equipment (11,760) (6,080) (4,148) Proceeds from sale of equipment 631 619 1,246 (Increase) decrease in other assets (2,122) 999 (774) (Increase) decrease in short- term investments (36,614) 208 2,303 Net cash flows from investing activities 7,379 (4,254) (1,373) Cash flows from financing activities: Increase in notes payable 1,905 6,286 3,989 Proceeds from issuance of long-term debt 431 2,012 6,379 Repayments on long-term debt (7,246) (9,896) (12,960) Increase in debt issuance costs (236) (388) (259) Proceeds from issuance of common stock 704 931 133 Dividends paid on common stock - - (808) Net cash flows from financing activities (4,442) (1,055) (3,526) Net increase (decrease) in cash and cash equivalents (1,392) (2,917) 3,616 Cash and cash equivalents at beginning of year 5,797 8,714 5,098 Cash and cash equivalents at end of year $ 4,405 $ 5,797 $ 8,714 Cash paid during the year for: Interest $18,964 $18,434 $18,448 Income taxes $ 4,868 $ 291 $ 177 See notes to consolidated financial statements CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY For the years ended September 24, 1994, September 25, 1993 and September 26, 1992 (Dollars in thousands) Unrealized Gain Options (Loss) on Common Stock and Available for Retained Shares Amount Warrants Sale Securities Earnings Total Balance, September 28,1991 13,454,982 $47,220 $100 $37,829 $85,149 Stock option plans 49,575 133 133 Net loss (15,900)(15,900) Common stock dividends ($.06 per share) (808) (808) Balance, September 26,1992 13,504,557 $47,353 $100 $21,121 $68,574 Stock option plans 48,750 181 108 289 Common stock issuance 142,797 750 750 Net loss (6,991) (6,991) Balance, September 25, 1993 13,696,104 $48,284 $208 $ - $14,130 $62,622 Stock option plans 56,145 290 54 344 Common stock issuance 57,164 414 414 Unrealized losses on investments (124) (124) Net income 13,208 13,208 Balance, September 24, 1994 13,809,413 $48,988 $262 $(124) $27,338 $76,464 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), Northern Kentucky Management, Inc., Northern Kentucky Air, Inc. and NSub I, Inc., formerly known as Kentucky Electric Steel Corporation. See Note 2. All significant intercompany accounts and transactions have been eliminated. Cash and Cash Equivalents Cash includes currency on hand and demand deposits with financial institutions. Cash equivalents consist of investments with original maturities of three months or less. Amounts are stated at cost, which approximates market value. Short-Term and Other Investments Short-term investments consist primarily of auction rate preferred stocks and money market mutual funds, for which market value approximates cost. At September 24, 1994, approximately $8,309,000 in short-term investments were restricted, primarily in connection with cash collateralized letters of credit. During the first quarter of fiscal 1994, the Company adopted Statement of Financial Accounting Standards No. 115, Accounting for Certain Investments in Debt and Equity Securities (Statement 115). Under Statement 115, 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. The impact on the Company's consolidated financial statements from the adoption of Statement 115 was not material. Inventories At September 24, 1994 and September 25, 1993, inventories stated at the lower of LIFO (last-in, first-out) cost or market represent approximately 27% and 23% 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 components: (In thousands) 1994 1993 Raw materials $ 6,699 $ 5,736 Semi-finished and finished goods 27,695 37,830 34,394 43,566 LIFO reserve (2,104) (1,875) Total inventories $ 32,290 $41,691 Property, Plant and Equipment and Depreciation For financial reporting purposes, plant and equipment are depreciated on a straight-line method over the estimated useful lives of the assets. Depreciation claimed for income tax purposes is computed by use of accelerated methods. Expenditures for maintenance and repairs are charged to expense as incurred. Expenditures for equipment renewals which extend the life of an asset are capitalized. Included in property, plant and equipment at September 24, 1994, are assets with a net book value of approximately $5,910,000 which are not currently being used in the business. In managements opinion, the values assigned to such assets are realizable. Income Taxes At September 24, 1994, deferred income tax balances represent the tax effect of temporary differences between the financial reporting basis and the tax basis of certain assets and liabilities. In fiscal 1993 and 1992, the provision for deferred income taxes represents the tax effect of income and expense items reported in one period for financial statement purposes and in another period for tax reporting purposes. See Note 12. 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 Statement of Financial Accounting Standards No.112, Employers Accounting for Postemployment Benefits (Statement 112) was issued in November, 1992 and requires companies to accrue, during the period an employee renders service, the expense of providing certain postemployment benefits. Currently, the Company recognizes the expense of such benefits, to the extent provided, at the time payment is deemed probable. Adoption of Statement 112 is required in fiscal 1995. Management does not expect adoption of Statement 112 to have a material impact on the Companys consolidated financial condition or results of operations. Fiscal Year-End The Companys fiscal year ends on the last Saturday of September. Earnings Per Share Earnings per share are calculated using the weighted average number of shares outstanding during the period. The effect of common stock equivalents arising from stock options and warrants on the computation of earnings per share is not significant. Note 2: Sale of Subsidiary On October 6, 1993, the Company sold all of the assets and liabilities of its wholly-owned subsidiary, Kentucky Electric Steel Corporation (KES), to a newly formed public company in exchange for $45,626,000 in cash and 400,000 shares (approximately 8%) of the new entity, valued at $4,800,000. In addition, the Company received $6,818,000 in cash from the new entity in satisfaction of a dividend declared by KES prior to the sale. Subsequent to the sale, the Company changed the name of KES to NSub I, Inc., which currently holds a portion of the proceeds from the sale. The accompanying consolidated financial statements include the financial position, results of operations and changes in cash flows of KES for the periods prior to the sale. The sale of KES resulted in a pre-tax gain of $35,292,000. After giving effect to the elimination of the pre-tax gain of $35,292,000, the related tax effect of $13,764,000 and $123,000 of net income of KES for the eleven days of fiscal 1994 prior to sale, the Companys pro forma net loss before cumulative effect of a change in accounting principle for the fiscal year ended September 24, 1994 is $10,158,000, or a $.74 loss per share. Note 3: Other Assets Other assets at September 24, 1994 and September 25, 1993 includes approximately $10,528,000 and $13,274,000, respectively, in costs associated with land near Newport, Kentucky, for use as development property. Other assets also include marketable equity securities totaling $4,600,000. Note 4: Accrued Liabilities Accrued liabilities consist of the following: (In thousands) 1994 1993 Accrued payroll and payroll taxes $ 5,032 $ 6,339 Accrued interest 4,072 4,131 Accrued environmental remediation 4,563 5,766 Accrued income taxes 711 - Other 4,903 7,027 $ 19,281 $23,263 Note 5: Long-term Debt and Lines of Credit Long-term debt of the Company consists of the following: (In thousands) 1994 1993 Term loans due a non-bank financial institution, interest ranging from 11.54% to 12.54%, due in varying quarterly installments through 2001, secured by property, plant and equipment $ 59,125 $ 61,125 Senior Secured Notes due various insurance companies, interest at 10.65%, due in equal quarterly installments through 1999, secured by property, plant and equipment 32,729 37,200 11% Subordinated Convertible Debentures, due in annual installments from October, 2000 through 2005 29,000 29,000 Capital Expenditure Loans due a non-bank financial institution, interest ranging from 7.99% to 11.54%, due in equal quarterly installments beginning December, 1994 through 2001, secured by property, plant and equipment 14,626 14,626 Term loans due various states and municipalities, interest ranging from 3% to 11%, due in varying monthly or quarterly installments through 2010, secured by junior mortgages on property, plant and equipment 11,613 16,470 Other 6,560 6,767 153,653 165,188 Less - Current portion (15,543) (9,132) $138,110 $156,056 Certain of the loan agreements contain a number of restrictive covenants including, among other things, maintenance of minimum net worth, minimum fixed charge coverage ratios, maximum ratios of indebtedness to total capitalization, minimum current ratio and working capital requirements and restrictions on transferring assets between affiliated companies. Certain term loans also require mandatory prepayments in the event Koppel's cash flow exceeds certain defined levels. In addition, certain of the loan agreements allow for redemption prior to maturity, at the option of the Company, at amounts in excess of par. Certain of the loan agreements contain covenants restricting the payment of dividends to its shareholders. Under the most restrictive of these covenants, retained earnings available for dividends is computed under a formula which is based in part on the earnings and losses of the Company after fiscal 1988. Under this covenant, the Company is currently prohibited from paying dividends to its shareholders. The Subordinated Convertible Debentures are unsecured obligations of the Company and are convertible into common shares of the Company at a price of $17 per share, or approximately 1,706,000 shares. Interest is payable quarterly. The Debentures are redeemable by the Company at 110% of par. Annual long-term debt maturities are $15,543,000 in fiscal 1995, $18,952,000 in fiscal 1996, $18,644,000 in fiscal 1997, $21,792,000 in fiscal 1998 and $21,747,000 in fiscal 1999. The Company is currently pursuing a refinancing of a significant portion of its long-term debt through a proposed sale of $125 million senior secured notes due 2003 ( the Offering). Completion of the Offering would substantially reduce principal amortization requirements until the maturity of the senior secured notes. Completion of the Offering is subject to the Securities and Exchange Commission allowing the registration of the senior secured notes to become effective, the entering into a firm commitment with the underwriters and the existence of market conditions satisfactory to the Company. The Company has consolidated line of credit agreements with various lenders totaling $34,915,000, including a $16,165,000 line of credit agreement restricted for use at Koppel. The lines are secured by inventory and accounts receivable, with interest rates ranging from 1/2% to 1 1/2% over prime. Borrowings are due on demand and are limited under the agreements to defined percentages of eligible inventory and receivable balances, as well as by certain restrictive covenants. At September 24, 1994, $34,915,000 of the Companys consolidated lines of credit were available for borrowing, of which $28,197,000 was outstanding. These credit lines expire in fiscal 1995 and 1996. Note 6: Fair Value of Financial Instruments The following methods and assumptions were used to estimate the fair value of financial instruments: Cash, cash equivalents and short-term investments - The carrying amount approximates fair value because of the short maturity of those instruments. Other investments - Other investments, consisting of marketable equity securities totaling $4,600,000, are reported in other assets and are carried at market value. Notes payable - The carrying amount approximates fair value because of the short maturity and because such instruments contain interest rates that vary with the prime rate. Long-term debt - The fair value of the Companys long-term debt was estimated by calculating the present value of the remaining interest and principal payments on the debt to maturity. The present value computation uses a discount rate equal to Treasury rates with similar terms at the end of the reporting period plus or minus the spread between the Treasury rates and the rate negotiated on the debt at the inception of the loan. The carrying amounts and fair values of the Companys long-term debt at September 24, 1994 were $153,653,000 and $154,649,000, respectively. Note 7: Preferred Stock The Companys 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 Companys common stock. The Company may redeem the Rights for one cent per Right at any time before a 30% position has been acquired. The Rights will expire in November 1998. Note 8: Stock Options and Warrants The Company has Employee Incentive Stock Option Plans which provide for the issuance of shares of common stock of the Company upon exercise of options granted to certain employees. Under the terms of these plans, options have been granted at fair market value at the grant date and are exercisable on a pro rata basis over a period of nine years beginning one year after the date of grant. At September 24, 1994, options outstanding are priced in a range from $3.25 to $14.125 per share. Of the options expired in fiscal 1994, 295,030 options expired in connection with the sale of KES. A summary of transactions in the plans for fiscal 1994 and 1993 follows: 1994 1993 Options outstanding, beginning of year 1,185,525 960,020 Options granted 289,050 332,550 Options expired (369,725) (58,295) Options exercised (56,145) (48,750) Options outstanding, end of year 1,048,705 1,185,525 Options exercisable, end of year 509,525 644,500 Available for grant 488,580 674,250 Under the NS Group, Inc. Non-Qualified Stock Option and Stock Appreciation Rights Plan of 1988 the Company may grant to key employees options to purchase (or stock appreciation awards corresponding to) an aggregate of 500,000 shares of the Companys common stock. Options are to be issued at no less than 50% of market value on the date of grant, are exercisable in yearly increments as determined by the Stock Option Committee and expire ten years from the date of grant. At September 24, 1994, options outstanding are priced in a range from $3.75 to $13.43 per share. Grant prices have ranged from 64% to 110% of the market price at the date of grant. A summary of transactions in the plan for fiscal 1994 and 1993 follows: 1994 1993 Options outstanding beginning of year 366,760 262,000 Options granted 135,085 125,760 Options expired (26,220) (21,000) Options exercised - - Options outstanding, end of year 475,625 366,760 Options exercisable, end of year 106,700 61,200 Available for grant 24,375 133,240 The Company has common stock warrants outstanding, issued in connection with the financing of the Koppel acquisition. The warrants are exercisable for approximately 772,000 shares of the Companys common stock, at a price of $8.00 per share and expire October 4, 2000. Note 9: Commitments and Contingencies The Company has various commitments for the purchase of materials, supplies and energy arising in the ordinary course of business. Newport is a co-defendant in a claim for breach of implied warranty arising from the failure of two joints of welded pipe during testing of an off-shore pipeline. The plaintiff is seeking damages in excess of $5 million for costs associated with replacing the entire pipeline and lost production revenues. The Company believes that it has meritorious defenses to this claim. Insurance may be available for a portion, but not all, of any award for damages. The Company is subject to various other claims, lawsuits and administrative proceedings arising in the ordinary course of business with respect to commercial, product liability and other matters, which seek remedies or damages. Based upon its evaluation of available information, management does not believe that any such matters are likely, individually or in the aggregate, to have a material adverse effect upon the Companys business or consolidated financial position. The Company is subject to federal, state and local environmental laws and regulations, including, among others, the Resource Conservation and Recovery Act (RCRA), the Clean Air Act, the 1990 Amendments to the Clean Air Act (the 1990 Amendments), the Clean Water Act and all regulations promulgated in connection therewith, concerning the discharge of contaminants as air emissions or waste water effluents and the disposal of solid and/or hazardous wastes such as electric arc furnace dust. As such, the Company is from time to time involved in administrative and judicial proceedings and administrative inquiries related to environmental matters. As with other similar mills in the industry, the Company's steel mini-mills produce dust which contains lead, cadmium and chromium, and is classified as a hazardous waste. The Company currently collects the dust resulting from its electric arc furnace operations through emission control systems and recycles it through a waste recycling firm using EPA-approved processes. The Company also has on its property at Newport a permitted hazardous waste disposal facility. Reference is made to Note 10 for information regarding the disposal of radiation contaminated dust at Newport. In September 1994, the Company received a proposed Consent Agreement from the EPA 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 proposed Consent Agreement establishes a schedule for investigating, monitoring, testing and analyzing the potential releases. Any contamination documented as a result of the investigation may require remediation. Pursuant to various agreements entered into at the time of the Company's acquisition of the Koppel facilities in 1991, certain parties agreed to indemnify the Company against various known and unknown environmental matters. The Company believes that such agreements provide for it to be fully indemnified against all matters covered by the proposed Consent Agreement, including all associated costs, claims and liabilities. Subject to the uncertainties concerning the proposed Consent Agreement and the storage and disposal of the radiation contaminated dust, as discussed in Note 10, the Company believes that it is currently in compliance with all known material and applicable environmental regulations. Regulations under the 1990 Amendments to the Clean Air Act that will pertain to the Companys operations are currently not expected to be promulgated until 1997 or later. The Company cannot predict the level of required capital expenditures or operating costs resulting from future environmental regulations such as those forthcoming as a result of the 1990 Amendments. However, the Company believes that while the 1990 Amendments may require additional expenditures, such expenditures will not have a material impact on the Companys business or consolidated financial position for the foreseeable future. Capital expenditures for the succeeding fiscal year relating to environmental control facilities are not expected to be material, however, such expenditures could be influenced by new and revised environmental regulations and laws. Note 10: Extraordinary Items During the fourth quarter of fiscal 1993, Newport shut down its melt shop operations for nineteen days when it was discovered that a radioactive substance was accidentally melted, resulting in the contamination of the melt shop's electric arc furnace emission control facility, or "baghouse facility". A similar incident, having occurred in the third quarter of fiscal 1992, shut down Newport's melt shop facilities for twenty-three days. The source of the radiation in these incidents was contained in incoming shipments of scrap steel and was not detected by monitors that check incoming steel scrap. In response, the Company has installed additional state-of-the-art radiation detection systems in various locations throughout the Newport plant. The Company incurred estimated losses as a result of the extended outages and costs to restore the melt shop and related facilities back to operation, including estimated costs to dispose of the radiation contaminated baghouse dust, of $7,156,000 and $4,100,000, in fiscal 1993 and 1992, respectively. The Company has recovered $3,460,000 through insurance and expects to recover and has recorded as a receivable an additional $2,302,000 in insurance claims for the fiscal 1993 incident. No recovery has been made nor recorded for the fiscal 1992 incident and the Company is assessing the possibility of legal remedies against certain parties. The losses and costs attributable to these incidents, net of insurance claims, resulted in an extraordinary charge of $1,095,000, net of applicable income tax benefit of $662,000, or an $.08 loss per share, in fiscal 1993 and an extraordinary charge of $2,542,000, net of applicable income tax benefit of $1,558,000, or a $.19 loss per share, in fiscal 1992. The occurrences of accidental melting of radioactive materials have not resulted in any notice of violations from federal or state environmental regulatory agencies. The Company is investigating and evaluating various issues concerning storage, treatment and disposal of the radiation contaminated baghouse dust; however, a final determination as to method of treatment and disposal, cost and further regulatory requirements cannot be made at this time. Depending on the ultimate timing and method of treatment and disposal, which will require appropriate federal and state regulatory approval, the actual cost of disposal could substantially exceed current estimates and the Companys insurance coverage. As of September 24, 1994, claims recorded in connection with disposal costs substantially exhaust available insurance coverage. Based on current knowledge, management believes the recorded reserves of $4,354,000 for disposal costs pertaining to these incidents are adequate and the ultimate outcome will not have a material adverse effect on the Companys consolidated financial position. The ultimate effect of these matters on the Company's consolidated results of operations cannot be predicted because any such effect depends on the amount and timing of charges to operations resulting from new information as it becomes available. Note 11: 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 at Newport) 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 $497,000, $1,244,000 and $1,119,000 in fiscal years 1994, 1993 and 1992, respectively. Note 12: Income Taxes Effective September 26, 1993, the Company adopted the provisions of Statement of Financial Accounting Standards No.109, "Accounting for Income Taxes ("Statement 109"). Prior to adoption of Statement 109, deferred tax expense was based on items of income and expense that were reported in different years in the financial statements and tax returns and were measured at the tax rate in effect in the year the difference originated. Under Statement 109, deferred tax liabilities and assets are based upon differences in the basis of assets and liabilities for financial statements and tax returns and are determined based on the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The cumulative effect of the change in accounting increased net income by $1,715,000, or $.12 per share. The provision (credit) for income taxes, including $662,000 and $1,558,000 allocated to extraordinary items in fiscal 1993 and 1992, respectively, consists of the following: (In thousands) 1994 1993 1992 Current: Federal $5,100 $(2,000) $(4,000) State 323 (851) (287) 5,423 (2,851) (4,287) Deferred: Federal 739 (1,526) (3,470) State 1,220 333 141 1,959 (1,193) (3,329) Provision (credit) for income taxes $7,382 $(4,044) $(7,616) 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) 1994 1993 1992 Income tax provision (credit) at statutory tax rate of 35% in fiscal 1994 and 34% in fiscal 1993 and 1992 $6,606 $(3,752) $(7,995) Change in taxes resulting from: State income taxes, net of federal effect 1,003 (342) (96) Dividend income exclusion (200) (6) (14) Other, net (27) 56 489 Total provision (credit) for income taxes $7,382 $(4,044) $(7,616) The following represents the components of deferred tax liabilities and assets at September 24, 1994. A valuation allowance has not been recorded against deferred tax assets as it is estimated that such deferred tax assets will be realized through a reduction of taxes otherwise payable upon the reversal of existing taxable temporary differences. (In thousands) 1994 Deferred tax liabilities: Property, plant and equipment $27,774 Other items 2,222 29,996 Deferred tax assets: Reserves and accruals 3,904 Net operating tax loss carryforward 11,690 Alternative minimum tax and other tax credit carryforwards 7,629 Other items 1,905 25,128 Net deferred tax liability $ 4,868 For federal income tax purposes, the Company has alternative minimum tax credit carryforwards of approximately $7,237,000, which are not limited by expiration dates, and other tax credit carryforwards of approximately $392,000, which expire beginning in 2000. The Company also has net operating tax loss carryforwards of approximately $33,399,000, which expire beginning in 2007. The components of the credit for deferred income taxes for fiscal 1993 and 1992 are as follows: (In thousands) 1993 1992 Excess of tax over book depreciation $ 4,097 $ 7,778 Koppel start-up costs deferred for income tax purposes 177 533 Reserves and accruals not currently deductible (299) (1,439) Alternative minimum tax and other tax credit carryforwards 1,684 (780) Net operating tax loss carryforward (7,034) (8,134) Other, net 182 (1,287) Total $(1,193) $(3,329) Note 13: Related Party Transactions One of the Companys directors/shareholders has a controlling interest in a company which purchases certain reject and limited service tubular products from Newport. Sales to this customer were approximately $10,984,000, $10,914,000 and $10,356,000 for fiscal years 1994, 1993, and 1992, respectively. Trade receivables from this customer were $958,000 and $582,000 at the end of fiscal 1994 and 1993, respectively. Note 14: Business Segment Information The Company operates primarily in two separate business segments: Specialty Steel Products - Includes welded tubular steel products and hot rolled coils manufactured at a mini-mill located near Newport, Kentucky; seamless tubular steel products, special bar quality products and semi-finished steel products manufactured at a mini-mill located in western Pennsylvania and a pipe finishing operation located near Tulsa, Oklahoma. Adhesive Products - Includes industrial adhesives manufactured principally at plants in Cincinnati, Ohio and Nashville, Tennessee. The operations of both segments are conducted principally in the United States. The Company grants trade credit to customers, the most significant of which are distributors serving the oil and natural gas exploration and production industries which purchase tubular steel products from the Specialty Steel Products segment. The following table sets forth selected financial information by business segment for fiscal 1994, 1993 and 1992. (In thousands) Depre- Oper- ciation ating Identi- and Capital Net Income fiable Amorti- Expen- 1994 Sales (Loss) Assets zation ditures Specialty steel products $270,441 $ 2,909 $246,295 $18,373 $11,380 Adhesives products 32,939 1,150 12,486 416 380 Corporate assets and allocations - (3,370) 56,546 - - Total consoli- dated $303,380 $ 689 $315,327 $18,789 $11,760 1993 Specialty steel products $325,007 $13,379 $271,968 $18,691 $ 5,798 Adhesives products 28,075 1,059 12,228 402 282 Corporate assets and allocations - (2,766) 33,046 - - Total consoli- dated $353,082 $11,672 $317,242 $19,093 $ 6,080 1992 Specialty steel products $256,360 $ 3,351 $271,477 $18,296 $ 3,948 Adhesives products 24,882 533 10,845 415 200 Corporate assets and allocations - (2,483) 36,757 - - Total consoli- dated $281,242 $ 1,401 $319,079 $18,711 $ 4,148 Note 15: Quarterly Financial Data (Unaudited) Quarterly results of operations for 1994 and 1993 are as follows: (In thousands, except per share amounts) First Second Third Fourth 1994 Quarter Quarter Quarter Quarter Net sales $71,959 $66,012 $80,807 $84,602 Gross profit 7,791 1,831 7,203 8,394 Income (loss) before cumulative effect of a change in accounting principle 20,026 (5,583) (1,990) (960) Net income (loss) 21,741 (5,583) (1,990) (960) Income (loss) per common share before cumulative effect of a change in accounting principle 1.46 (.40) (.14) (.07) Net income (loss) per common share 1.58 (.40) (.14) (.07) 1993 Net sales $77,779 $86,735 $95,363 $93,205 Gross profit 7,366 10,282 12,686 12,162 Income (loss) before extraordinary item (3,355) (2,115) 11 (437) Net income (loss) (3,355) (2,115) 11 (1,532) Income (loss) per common share before extraordinary item (.25) (.16) - (.03) Net income (loss) per common share (.25) (.16) - (.11) The sale of KES increased fiscal 1994 first quarter net income by $21,528,000. In addition, in the fiscal 1994 first quarter, the Company recorded the cumulative effect of the adoption of FAS No. 109, "Accounting for Income Taxes", which increased net income by $1,715,000. REPORT OF MANAGEMENT The accompanying 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 Companys consolidated financial position and results of operations. These statements necessarily include amounts that are based on managements best estimates and judgments. The financial information contained elsewhere in this annual 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 Companys 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 President 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 24, 1994 and September 25, 1993, and the related consolidated statements of income, common shareholders equity and cash flows for each of the three years in the period ended September 24, 1994. These financial statements are the responsibility of the Companys 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 24, 1994 and September 25, 1993, and the results of their operations and their cash flows for each of the three years in the period ended September 24, 1994 in conformity with generally accepted accounting principles. As explained in Note 12 to the consolidated financial statements, the Company changed its method of accounting for income taxes effective September 26, 1993. Cincinnati, Ohio October 31, 1994 ARTHUR ANDERSEN LLP CONSOLIDATED HISTORICAL SUMMARY (Dollars in thousands except per share amounts) 1994 1993 1992 1991 1990 Summary of Operations Net sales $303,380 $353,082 $281,242 $212,471 $249,871 Operating income (loss) 689 11,672 1,401 (18,177) 19,370 Operating income margin .2% 3.3% .5% (8.6)% 7.8% Net income (loss) before extraor- dinary items 13,208 (5,896) (13,358) (20,603) 13,047 Net income (loss) 13,208 (6,991) (15,900) (20,603) 13,047 Income (loss) per share before extra- ordinary items .96 (.44) (.99) (1.53) .97 Net income (loss) per share .96 (.52) (1.18) (1.53) .97 Dividends per common share - - .06 .12 .11 Weighted average shares out- standing (000's) 13,789 13,553 13,483 13,449 13,419 Shareholders of record 313 332 327 315 233 Other Financial and Statistical Data Working capital $ 45,202 $ 39,060 $ 40,676 $ 48,411 $ 64,858 Capital expendi- tures 11,760 6,080 4,148 112,573 45,011 Depreci- ation and amorti- zation 18,789 19,093 18,711 15,725 6,879 Total assets 315,327 317,242 319,079 329,889 220,856 Long- term debt 153,653 165,188 173,072 179,653 70,165 Common share- holders' equity 76,464 62,622 68,574 85,149 107,226 Book value per share 5.54 4.57 5.08 6.33 7.98 Current ratio 1.50 1.45 1.55 1.79 2.90 Debt-to - -equity ratio 2.01 2.64 2.52 2.11 .65 Steel mill shipments (tons) Tubular products 370,000 385,000 292,000 215,000 285,000 Special bar quality products and other 191,000 363,000 299,000 212,000 239,000 Employees 1,568 1,995 1,770 1,705 1,479 1989 1988** 1987 1986 1985 1984 $219,414 $239,175 $157,201 $ 66,320 $ 70,221 $ 73,426 18,469 36,668 14,252 (2,879) 3,649 11,140 8.4% 15.3% 9.1% (4.3)% 5.2% 15.2% 12,773 20,238 3,673 (5,939) (302) 6,651 12,773 17,493 6,665 (5,939) (2,317) 7,269 .95 1.73 .38 (.61) (.03) .69 .95 1.49 .69 (.61) (.24) .75 .05 - - - - - 13,387 11,690 9,621 9,688 9,687 9,686 179 115 - - - - $ 55,714 $ 76,683 $ 26,993 $ 12,978 $ 24,173 $ 16,020 28,081 3,340 2,838 13,297 7,222 12,642 6,080 6,585 6,614 6,103 5,395 2,756 177,292 153,525 105,094 86,184 87,020 77,874 29,192 24,489 49,163 57,392 45,737 37,000 95,490 83,327 19,628 13,126 19,068 21,389 7.13 6.23 2.06 1.35 1.97 2.21 2.30 3.47 1.97 1.82 2.96 1.99 .31 .29 2.50 4.37 2.40 1.73 209,000 262,000 235,000 133,000 165,000 178,000 262,000 255,000 138,000 - - - 1,457 1,336 1,192 719 536 514 1983 1982 1981* $ 44,592 $ 61,982 $ 41,644 3,797 14,441 13,429 8.5% 23.3% 32.2% 1,247 6,334 5,844 1,247 6,334 5,844 .13 .65 .63 .13 .65 .63 - - - 9,685 9,685 9,685 - - - $ 7,065 $ 15,199 $ 14,664 10,751 7,302 252 2,493 2,286 779 54,569 50,379 55,247 27,467 29,667 30,017 14,117 12,870 6,536 1.46 1.33 .67 1.60 3.04 1.82 1.95 2.31 4.59 111,000 123,000 74,000 - - - 448 523 561 *Represents a 5 1/2 month period, the Company's start-up year. **The Company's stock began trading following an initial public offering on March 4, 1988. EX-21 5 Exhibit 21 SUBSIDIARIES OF NS GROUP, INC. (all are wholly-owned) State of Name Incorporation Erlanger Tubular Corporation Oklahoma Imperial Adhesives, Inc. Ohio Koppel Steel Corporation Pennsylvania NSub I, Inc. Kentucky Newport Steel Corporation Kentucky Northern Kentucky Management, Inc. Kentucky Northern Kentucky Air, Inc. Kentucky EX-23 6 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, 33-24184, 33-28995, 33-37454 and 33-39695. Cincinnati, Ohio ARTHUR ANDERSEN LLP December 15, 1994 -----END PRIVACY-ENHANCED MESSAGE-----