-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, FZqJfF/vPHd0PIkY6/0MeXHGZ/ld6yWNWOX7B8i1kKddTXpzVTXytfjom2o7395F RWuRjsHl0sBwcng36lZT1A== 0000745026-96-000015.txt : 19961220 0000745026-96-000015.hdr.sgml : 19961220 ACCESSION NUMBER: 0000745026-96-000015 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19960928 FILED AS OF DATE: 19961219 SROS: NYSE 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: 96682944 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 SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED SEPTEMBER 28, 1996 COMMISSION FILE NUMBER 1-9838 NS GROUP, INC. (Exact name of registrant as specified in its charter) Kentucky (State or other jurisdiction of incorporation or organization) 61-0985936 (I.R.S. Employer Identification Number) Ninth and Lowell Streets, Newport, Kentucky 41072 (Address of principal executive offices) Registrant's telephone number, including area code (606) 292-6809 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered Common Stock, no par value New York Stock Exchange Preferred Stock Purchase Rights New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [X] Based on the closing sales price of December 2, 1996, as reported in The Wall Street Journal, the aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $31.9 million. The number of shares outstanding of the registrant's Common Stock, no par value, was 13,809,413 at December 2, 1996. Documents Incorporated by Reference Part III incorporates certain information by reference from the Company's Proxy Statement dated December 23, 1996 for the Annual Meeting of Shareholders on February 13, 1997. Table of Contents PART I Page Item 1. Business 3 Item 2. Properties 11 Item 3. Legal Proceedings 12 Item 4. Submission of Matters to a Vote of Security Holders 12 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 13 Item 6. Selected Consolidated Financial Data 14 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation 15 Item 8. Financial Statements and Supplementary Data 23 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 44 PART III Item 10. Directors and Executive Officers of the Registrant 44 Item 11. Executive Compensation 44 Item 12. Security Ownership of Certain Beneficial Owners and Management 44 Item 13. Certain Relationships and Related Transactions 44 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 45 PART I ITEM 1. BUSINESS General The Company was incorporated in Kentucky in 1980 as Newport Steel Corporation for the purpose of purchasing the operating assets of the Newport Steel Works from Interlake, Inc. The Company changed its name to NS Group, Inc. in 1987 and transferred its welded tubular manufacturing operations to a subsidiary renamed Newport Steel Corporation (Newport). 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. 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 of the new public company. See Note 2 to the Consolidated Financial Statements for additional information pertaining to this transaction. NS Group conducts business in two industry segments, the speciality steel segment and the adhesives segment. See the segment data included in Management's Discussion and Analysis of Financial Condition and Results of Operations in "Results of Operations" and Note 13 to the Consolidated Financial Statements, for additional information pertaining to industry segment data. Specialty Steel Segment The Company produces a diverse group of specialty steel products at its two mini-mills, Koppel and Newport. These products include seamless and welded tubular goods, primarily used in oil and natural gas drilling and production operations, referred to as oil country tubular goods (OCTG); and line pipe, used in the transmission of oil, natural gas and other fluids. Both Koppel and Newport are certified by the American Petroleum Institute (API) for production of these products. The Company also produces special bar quality products, primarily used in the manufacture of heavy industrial equipment; and hot rolled coils, which are sold to service centers and other manufacturers for further processing. The following table sets forth certain operating information with respect to Koppel and Newport for the periods indicated. (In thousands) 1996 1995 1994 Net sales Koppel Seamless tubular products $133,446 $ 90,926 $ 72,675 SBQ products 62,405 82,954 64,858 Newport Welded tubular products 157,385 145,330 117,214 Hot rolled coils and other products 16,230 16,673 15,694 $369,466 $335,883 $270,441 Operating income (loss) before corporate allocations Koppel $ 19,741 $ 16,136 $ 9,042 Newport (4,855) (5,708) (6,133) $ 14,886 $ 10,428 $ 2,909
Manufacturing Facilities and Processes - Specialty Steel Segment Koppel Facilities The Company manufactures seamless OCTG, line pipe products and SBQ products at its facilities located in Koppel and Ambridge, Pennsylvania and Baytown, Texas. The operations consist of a melting and casting facility and bar mill located in Koppel and a seamless tubemaking facility located approximately 20 miles away in Ambridge. The melting and casting facilities at Koppel consist of an 80-ton Ultra-High Powered (UHP) electric arc furnace, a ladle refining station and a computer-controlled four-strand continuous bloom/billet caster. Select grades of steel scrap are melted utilizing the UHP furnace. Once the molten steel reaches temperatures of approximately 3,000 degrees Fahrenheit, it is tapped from the UHP furnace into a ladle and transported to the ladle refining station. The ladle refining station allows for the addition of alloys, thereby providing precise chemical compositions, and it maintains the molten steel at proper temperatures for the caster. Once the chemistries are analyzed and conformed to metallurgical standards, the ladle is carried by crane to the continuous caster. The continuous caster is capable of casting 9 inch square blooms or 51/2 inch round billets. Blooms and billets are further processed at the tubemaking facilities into seamless tubular products or at the bar facilities into SBQ products, or they can be sold as "as cast" (semi-finished) product. Koppel's tubemaking facility includes a highly automated rotary hearth furnace where round billets (tube rounds) are reheated to temperatures over 2,200 degrees Fahrenheit. Tube rounds exit the furnace to a piercer where a hollow tube is formed. Hollow tubes are then rolled to a specific size and wall thickness by passing through either the mandrell mill or transval mill. Seamless tubular products are produced in both carbon and alloy grades in sizes ranging from 1 7/8 to 8 1/2 inches in outside diameter. At Koppel's bar mill, blooms are reheated in a highly automated rotary hearth furnace to temperatures over 2,200 degrees Fahrenheit. Blooms, upon exiting the furnace, pass through a series of rolls, where they are reshaped into round bars. SBQ products are available in both carbon and alloy grades in sizes measuring 2 7/8 to 6 inches in diameter. Newport Facilities The Company manufactures welded OCTG and line pipe products and hot rolled coils at its facilities located near Newport, Kentucky. The production process for Newport's welded tubular products includes three separate operations: melting, rolling and pipe-making. Steel scrap is melted into molten steel utilizing three 100-ton electric arc furnaces. Molten steel, reaching 3,000 degrees Fahrenheit, is tapped from the furnaces into ladles. The ladles are then moved to an auxiliary stir station where an argon lance stir process improves steel quality through consistent metal deoxidation and desulfurization. Steel refining continues at the ladle metallurgical station (LMS). The LMS, which serves a dual role, allows for the precise control of temperature and chemistry and enables continuous production sequencing of the molten steel to the continuous slab caster, thereby optimizing melt shop productivity. Once strict metallurgical standards have been met, the molten steel is "cast" into slabs that range in size from 7 to 10 inches in thickness, 28 to 55 inches in width and 15 to 34 feet in length. Slabs are cut to length and lifted onto specially designed rail cars for transportation to the adjacent reheat furnace. From time to time, when economically advantageous, Newport also purchases slabs from third parties. In fiscal 1996, Newport purchased approximately 109,000 tons of slabs for use in the production of coil and pipe. At Newport's hot strip rolling mill, slabs are processed through the walking beam slab reheat furnace where they are evenly heated to temperatures over 2,400 degrees Fahrenheit. Slabs exit directly from the reheat furnace onto the hot strip rolling mill where they are reduced to desired thickness and rolled into coils in sizes up to a maximum of 50 inches in width. Coils are then either slit and formed into welded tubular products at one of the two pipe-making facilities or are sold as hot rolled coils. Newport's welded tubular products range in size from 4 1/2 to 13 3/8 inches in outside diameter and are available in both carbon and alloy grades. Finishing Facilities The Company processes and finishes a portion of its welded and seamless tubular products at facilities located at the Port of Catoosa, near Tulsa, Oklahoma (Erlanger Tubular Corporation, or "Erlanger") and at Baytown, Texas, located near Houston, Texas (Baytown). The finishing processes include upsetting, which is a forging process that thickens tube ends; heat treating, which is a furnace operation designed to strengthen the steel; straightening; non-destructive testing; coating for rust prevention; and threading. Products - Specialty Steel Segment Seamless OCTG Products The Company's seamless OCTG products, which are produced by Koppel, are used as drill pipe, casing and production tubing. Drill pipe is used and may be reused to drill several wells. Casing forms the structural wall of oil and natural gas wells to provide support and prevent caving during drilling operations and is generally not removed after it has been installed in a well. Production tubing is placed within the casing and is used to convey oil and natural gas to the surface. The Company's seamless OCTG products are sold as a finished threaded and coupled product in both carbon and alloy grades. Compared to similar welded products, seamless production tubing and casing are better suited for use in hostile drilling environments such as off-shore drilling or deeper wells because of their greater strength and durability. The production of seamless tubular products with these properties requires a more costly and specialized manufacturing process than does the production of welded tubular products. The majority of the Company's seamless OCTG product sales are production tubing in sizes ranging from 1.9 inches to 5 inches in outside diameter. Welded OCTG Products The Company's welded OCTG products, which are produced by Newport, are used primarily as casing in oil and natural gas wells during drilling operations. Welded OCTG products are generally used when higher strength is not required, typically in wells less than 10,000 feet in depth. The Company sells its welded OCTG products as both a plain end and as a finished tubular product in both carbon and alloy grades. The demand for the Company's OCTG products is cyclical in nature, being dependent on the number and depth of oil and natural gas wells being drilled in the United States and globally. The level of drilling activity is largely a function of the current prices of oil and natural gas and expectations of future prices. 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, which are produced by both Koppel and Newport, are primarily used in gathering lines for the transportation of oil and natural gas at the drilling site and in transmission lines by both gas utility and transmission companies. Line pipe products are coated and shipped as a plain end product and welded together on site. The majority of the Company's line pipe sales are welded products. The demand for line pipe is only partially dependent on oil and gas drilling activities. Line pipe demand is also dependent on factors such as the level of pipeline construction activity, line pipe replacement requirements, new residential construction and gas utility purchasing programs. Special Bar Quality Products The Company manufactures a specialized market niche of SBQ products at Koppel in sizes ranging from 2.875 to 6.0 inches. The Company produces its SBQ products from continuous cast blooms that enables substantial size reduction in the bloom during processing and provides greater strength-to-weight ratios. These SBQ products are primarily used in critical weight-bearing applications such as suspension systems, gear blanks, drive axles for tractors and off-road vehicles, heavy machinery components and hydraulic and pneumatic cylinders. The demand for the Company's SBQ and hot rolled coil products is also cyclical in nature and is sensitive to general economic conditions. Hot Rolled Coils The Company produces commercial quality grade hot rolled coils at Newport, from 28 to 50 inches in width, between 0.125 and 0.500 inches in gauge, and in 15 ton coil weights. These products are sold to service centers and to others for use in high-strength applications. Other Products The Company's OCTG products are inspected and tested to ensure that they meet API specifications. Products that do not meet specification are classified as secondary or limited service products and are sold at substantially reduced prices. Markets and Distribution - Specialty Steel Segment The Company sells its specialty steel products to its customers through an in-house sales force. The primary end markets for the Company's seamless tubular products have been the southwest United States and certain foreign markets, including offshore applications. The Company has historically marketed its welded tubular products in the east, central and southwest regions of the United States, in areas where shallow oil and gas drilling and exploration activity utilize welded tubular products. Nearly all of the Company's OCTG products are sold to domestic distributors, some of whom subsequently sell the Company's products into the international marketplace. The Company sells its SBQ products to customers located generally within 400 miles of the Koppel facilities. All of the Company's steel-making and finishing facilities are located on or near major rivers or waterways, enabling the Company to transport its tubular products into the southwest by barge. The Company ships substantially all of its seamless and welded OCTG products destined for the southwest region by barge. Customers - Specialty Steel Segment The Company has approximately 300 specialty steel product customers. The Company's OCTG and line pipe products are used by major and independent oil and natural gas exploration and production companies in drilling and production applications. Line pipe products are also used by gas utility and transmission companies. The majority of the Company's OCTG products are sold to domestic distributors. Line pipe products are sold to both domestic distributors and directly to end users. The Company sells its SBQ products to service centers, cold finishers, forgers and original equipment manufacturers. Hot rolled coils are sold primarily to service centers and other manufacturers for further processing. The Company has long-standing relationships with many of its larger customers; however, the Company believes that it is not dependent on any customer and that it could, over time, replace lost sales attributable to any one customer. In fiscal 1996, the Company's top five customers accounted for approximately 28% of total net sales, and no one customer accounted for more than 9% of total net sales. Competition - Specialty Steel Segment The markets for the Company's specialty steel products are highly competitive and cyclical. The Company's principal competitors in its primary markets include integrated producers, mini-mills and welded tubular product processing companies, as well as foreign steel producers, many of which have substantially greater assets and larger sales organizations than the Company. The Company believes that the principal competitive factors affecting its business are price, quality and customer service. In the seamless OCTG market, Koppel's principal competitors include the USS/Kobe Steel Company in Lorain, Ohio, and a number of foreign producers. With respect to its SBQ products, Koppel competes with a number of steel manufacturers, including USX Corporation, CSC Industries, Inc., Republic Engineered Steels, Inc., Inland Steel Industries, Inc., MacSteel Division of Quanex Corporation, North Star Steel Company, Inc. and The Timken Company. Newport's principal domestic competitors in the welded tubular market are Lone Star Steel Company, LTV Corporation, IPSCO Steel, Inc. and Maverick Tube Corporation. In the welded OCTG and line pipe market, the Company competes against certain manufacturers who purchase hot rolled coils for further processing into welded OCTG and line pipe products. The cost of finished tubular products for these manufacturers is largely dependent on the market price of hot rolled coils. Depending on market demand for hot rolled coil, these tubular manufacturers may purchase hot rolled coils at a lower or higher cost than the Company's cost to manufacture hot rolled coils. Also, additional new hot rolled manufacturing capacity is anticipated over the next twelve months which may also impact the market price for hot rolled coils. In July 1995, the United States imposed duties on the imports of various OCTG products from certain foreign countries in response to antidumping and countervailing duty cases filed by several U.S. steel companies. Several foreign OCTG producers, as well as certain U.S. producers, have appealed the determinations to international courts or panels. The Company believes the imposition of the duties have had a positive effect on its shipments and pricing of certain of its seamless tubular products; however, it cannot predict the outcome or timing of these appeals at this time. Raw Materials and Supplies - Specialty Steel Segment The Company's major raw material is steel scrap, which is generated principally from industrial, automotive, demolition, railroad and other steel scrap sources. Steel scrap is purchased by the Company either through scrap brokers or directly in the open market. The long-term demand for steel scrap and its importance to the domestic steel industry may be expected to increase as steel-makers continue to expand steel scrap-based electric arc furnace and thin slab casting capacities. For the foreseeable future, however, the Company believes that supplies of steel scrap will continue to be available in sufficient quantities at competitive prices. In addition, a number of technologies exist for the processing of iron ore into forms which may be substituted for steel scrap in electric arc furnace-based steel-making operations. Such forms include direct-reduced iron, iron carbide and hot-briquette iron. While such forms may not be cost competitive with steel scrap at present, a sustained increase in the price of steel scrap could result in increased implementation of these alternative technologies. The Company's steel manufacturing facilities consume large amounts of electricity. The Company purchases its electricity from utilities near its steel-making facilities pursuant to separate contracts entered into by Koppel and Newport. Koppel's contract, which expired in 1996, has been extended while a new supply contract is being negotiated. Newport's contract expires in 2001. The contracts contain provisions that provide for lower priced demand charges during off-peak hours and known maximums in higher cost firm demand power. Also, the Company receives discounted demand rates in return for the utilities' right to periodically curtail service during periods of peak demand. These curtailments are generally limited to a few hours and historically have had a negligible impact on the Company's operations. The Company also consumes smaller quantities of additives, alloys and flux which are purchased from a number of suppliers. Adhesives Segment The Company, through its wholly-owned subsidiary, Imperial Adhesives, Inc. (Imperial), is a custom manufacturer of water-borne, solvent borne and hot melt adhesives products and footwear finishes products. These products are manufactured at plants located in Cincinnati, Ohio; Nashville, Tennessee and Lynchburg, Virginia. Manufacturing Process - Adhesives Segment Imperial's adhesives products are manufactured by combining and mixing predetermined quantities of raw materials. The raw materials are measured according to specific formulas and mixed in numerous specially designed industrial mixers. Raw materials are available from multiple sources and consist primarily of petrochemical-based materials. Pricing of raw materials generally follows trends in the petrochemical markets. The physical properties of finished formulas are measured and monitored by a statistical process control system. Imperial works closely with its customers to develop adhesive applications designed to meet their specific product requirements. Products and Markets - Adhesives Segment Imperial maintains approximately 1,000 active formulas for the manufacture of water-borne, solvent-borne and hot-melt adhesives products and approximately 1,000 active formulas for the manufacture of footwear finishes. Its multiple product lines are used primarily in product assembly applications within such industries as footwear, foam bonding, marine and recreational vehicles, consumer packaging, construction, furniture, and transportation. In fiscal 1996, approximately 21% of Imperial's sales were to the footwear industry. The Company's industrial adhesives products are marketed throughout the United States and Caribbean basin through an in-house sales force as well as a number of independent sales representatives. Products are distributed from Imperial's manufacturing sites and a number of public warehouses across the United States and in Puerto Rico. Competition in the industrial adhesives industry includes several major producers, as well as numerous small and mid-sized companies comparable to Imperial. Imperial competes on the basis of price, product performance and customer service and believes that its diversity and ability to develop applications to meet customers' specific needs allows it to compete effectively with all adhesives producers in its markets. Environmental Matters The Company is subject to federal, state and local environmental laws and regulations, including, among others, the Resource Conservation and Recovery Act (RCRA), the Clean Air Act, the 1990 Amendments to the Clean Air Act, the Clean Water Act and all regulations promulgated in connection therewith, including, among others, those concerning the discharge of contaminants as air emissions or waste water effluents and the disposal of solid and/or hazardous wastes such as electric arc furnace dust. As such, the Company is from time to time involved in administrative and judicial proceedings and administrative inquiries related to environmental matters. As with other steel mills in the industry, Koppel and Newport produce dust which contains lead, cadmium and chromium, and is classified as a hazardous waste. The Company currently collects the dust resulting from its electric arc furnace operations through emission control systems and contracts with a company for treatment and disposal of the dust at an EPA-approved facility. The Company has on its property at Newport a permitted hazardous waste disposal facility. Newport's permit for operating the hazardous waste disposal facility requires that it investigate, test, and analyze for potential releases of hazardous constituents from its closed loop water recirculation system. Any contamination documented as a result of the investigation would require certain cleanup measures; however, the Company believes that the cost of any such cleanup measures will not be material. In March 1995, Koppel and the EPA signed a Consent Order relating to an April 1990 RCRA facility assessment (the Assessment) completed by the EPA and the Pennsylvania Department of Environmental Resources. The Assessment was performed in connection with a permit application pertaining to a landfill that is adjacent to the Koppel facilities. The Assessment identified potential releases of hazardous constituents at or adjacent to the Koppel facilities prior to the Company's acquisition of the Koppel facilities. The Consent Order establishes a schedule for investigating, monitoring, testing and analyzing the potential releases. Contamination documented as a result of the investigation requires cleanup measures and certain remediation has begun. Pursuant to various indemnity provisions in agreements entered into at the time of the Company's acquisition of the Koppel facilities, certain parties have agreed to indemnify the Company against various known and unknown environmental matters. The Company believes that the indemnity provisions provide for it to be fully indemnified against all matters covered by the Consent Order, including all associated costs, claims and liabilities. In November 1996, Koppel received a Notice of Violation (NOV) from the EPA alleging violations of the Clean Air Act and the Pennsylvania State Implementation Plan. The violations allegedly occurred during 1995 and 1996 and pertain to air emissions from Koppel's electric arc furnace operations. At this time, the Company is unable to determine if the EPA will assess civil penalties as a result of the alleged violations, or the extent of any such potential penalties. In two separate incidents occurring in fiscal 1993 and 1992, radioactive substances were accidentally melted at Newport, resulting in the contamination of a quantity of electric arc furnace dust. The Company is investigating and evaluating various issues concerning storage, treatment and disposal of the radiation contaminated electric arc furnace dust; however a final determination as to method of treatment and disposal, cost and further regulatory requirements cannot be made at this time. Depending on the ultimate timing and method of treatment and disposal, which will require appropriate federal and state regulatory approval, the actual cost of disposal could substantially exceed current estimates and the Company's insurance coverage. The Company expects to recover and has recorded a $2.3 million receivable relating to insurance claims for the recovery of disposal costs which will be filed with the applicable insurance carrier at the time such disposal costs are incurred. As of September 28, 1996, claims recorded in connection with disposal costs exhaust available insurance coverage. Based on current knowledge, management believes the recorded gross reserves of $4.4 million for disposal costs pertaining to these incidents are adequate. Subject to the uncertainties concerning the Consent Order, the NOV and the storage and disposal of the radiation contaminated dust, the Company believes that it is currently in compliance in all material respects with all applicable environmental regulations. The Company cannot predict the level of required capital expenditures or operating costs that may result from future environmental regulations. Capital expenditures for the next twelve months relating to environmental control facilities are not expected to be material; however, such expenditures could be influenced by new or revised environmental regulations and laws or new information or developments with respect to the Company's operating facilities. As of September 28, 1996, the Company had environmental remediation reserves of $4.4 million, which pertain almost exclusively to accrued disposal costs for radiation contaminated dust. As of September 28, 1996, the possible range of estimated losses related to the environmental contingency matters discussed above in excess of those accrued by the Company is $0 to $3.0 million; however, with respect to the Consent Order, the Company cannot estimate the possible range of losses should the Company ultimately not be indemnified. Based upon its evaluation of available information, management does not believe that any of the environmental contingency matters discussed above are likely, individually or in the aggregate, to have a material adverse effect upon the Company's consolidated financial position, results of operations or cash flows. However, the Company cannot predict with certainty that new information or developments with respect to the Consent Order or its other environmental contingency matters, individually or in the aggregate, will not have a material adverse effect on the Company's consolidated financial position, results of operations or cash flows. Employees As of September 28, 1996, the Company had 1,774 employees, of whom 450 were salaried and 1,324 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 1998 for Imperial. ITEM 2. PROPERTIES The Company's principal operating properties are listed below. The Company believes its facilities are adequate and suitable for its present level of operations. Location and Properties Specialty Steel Segment: Koppel, Pennsylvania - Koppel owns approximately 227 acres of real estate upon which are located a melt shop, bar mill, machine and fabricating shops, storage and repair facilities and administrative offices aggregating approximately 900,000 square feet. The facilities are located adjacent to rail lines. Ambridge, Pennsylvania - Koppel owns approximately 45 acres of real estate upon which are located a seamless tube making facility and seamless tube finishing facilities aggregating approximately 659,000 square feet. The facilities are located adjacent to rail lines and river barge facilities. Baytown, Texas - Koppel owns approximately 55 acres of real estate upon which are located a tubular processing facility and barge facilities. Located on the property are eight buildings aggregating approximately 65,000 square feet which house the various finishing operations. Newport, Kentucky - Newport owns approximately 250 acres of real estate upon which is located a melt shop, hot strip mill, two welded pipe mills, a barge facility, machine and fabricating shops and storage and repair facilities aggregating approximately 675,000 square feet, as well as administrative offices. The facilities are also located adjacent to rail lines. Tulsa, Oklahoma - Erlanger leases approximately 36 acres of real estate upon which is located a tubular processing facility. The facility is located at the Tulsa Port of Catoosa where barge facilities are in close proximity. Located on this property are six buildings aggregating approximately 119,000 square feet which house the various finishing operations. Adhesives Segment: Cincinnati, Ohio; Lynchburg, Virginia; Nashville, Tennessee - Imperial owns approximately seven acres of property in Cincinnati, Ohio, and 1.5 acres of property in Lynchburg, Virginia for use in its adhesives and finishes operations. The Cincinnati properties contain five buildings aggregating approximately 150,000 square feet and the Lynchburg property consists of one 10,000 square foot building. Imperial 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 36 acres of partially developed land near Newport, Kentucky, which is held as investment property and is listed for sale. The Company also owns approximately 85 acres of additional real estate which is currently not used in operations. Information regarding encumbrances on the Company's properties is included in Note 5 to the Consolidated Financial Statements. Capacity Utilization The Company's capacity utilization for fiscal 1996 was as follows: Rated Capacity Capacity Facility (in tons) Utilization Koppel facilities Melt shop ..... 400,000 83% Seamless tube mill . 200,000 83% Bar mill .......... 200,000 72% Newport facilities Melt shop .......... 700,000 52% Hot strip rolling mill 750,000 60% Welded pipe mills .... 580,000 60%
ITEM 3. LEGAL PROCEEDINGS See Item 1, Business, "Environmental Matters" regarding the Consent Order entered into by Koppel and the EPA and the Notice of Violation received by Koppel from the EPA. The Company is subject to various claims, lawsuits and administrative proceedings arising in the ordinary course of business with respect to workers compensation, health care and product liability coverages (each of which is self-insured to certain levels), as well as commercial and other matters. Based upon its evaluation of available information, management does not believe that any such matters are likely, individually or in the aggregate, to have a material adverse effect upon the Company's consolidated financial position, results of operations or cash flows. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS NS Group, Inc. is listed on the New York Stock Exchange, trading symbol NSS. At the end of fiscal 1996, the number of NS Group shareholders of record totaled 310. The following table sets forth, for the fiscal periods indicated, the high and low selling prices of the Company's common stock as reported on the New York Stock Exchange. Fiscal 1996 High Low 1st Quarter $3 $1 7/8 2nd Quarter 3 1/8 2 1/8 3rd Quarter 3 1/8 2 1/2 4th Quarter 3 3/4 2 1/2 Fiscal 1995 High Low 1st Quarter $6 3/4 $4 2nd Quarter 5 1/4 3 3/4 3rd Quarter 4 5/8 2 3/8 4th Quarter 4 1/2 2 7/8
Information regarding restrictions on common stock dividends, warrants to purchase Company common stock, and the Company's convertible debentures is included in Note 5 to the Consolidated Financial Statements. ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA The selected consolidated financial data (other than the data under the caption "Tons shipped") for the five years in the period ended September 28, 1996 are derived from the audited consolidated financial statements of the Company. The information set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements and related Notes thereto included in this report. This data includes Kentucky Electric Steel Corporation for fiscal 1992 and 1993 and the impact from its sale in fiscal 1994. See Note 2 to the Consolidated Financial Statements. Fiscal Year Ended September 1996 1995 1994 1993 1992 STATEMENT OF OPERATIONS DATA: (In thousands, except per share and tons shipped data) Net sales $409,382 $371,352 $303,380 $353,082 $281,242 Operating income 12,053 7,806 689 11,672 1,401 Income (loss) before extra- ordinary items and cumulative effect of a change in accounting principle (10,457) (5,056) 11,493 (5,896) (13,358) Net income (loss) (10,457) (10,256) 13,208 (6,991) (15,900) Income (loss) per share before extraordinary items and cumulative effect of a change in accounting principle (.76) (.36) .84 (.44) (.99) Net income (loss) per share (.76) (.74) .96 (.52) (1.18) Cash dividends declared per share - - - - .06 BALANCE SHEET DATA: Working capital $ 72,869 $ 65,877 $ 45,202 $ 39,060 $ 40,676 Total assets 300,034 298,497 315,327 317,242 319,079 Long-term debt 164,789 166,528 138,110 156,056 164,180 Common shareholders' equity 57,116 68,110 76,464 62,622 68,574 OTHER FINANCIAL AND STATISTICAL DATA: Sources and uses of cash flows: Net cash flows from operating activities $ 12,605 $ ( 4,235)$ (4,329) $ 2,392 $ 8,515 Net cash flows from investing activities (13,756) 22,314 7,379 (4,254) (1,373) Net cash flows from financing activities (245) (17,646) (4,442) (1,055) (3,526) EBITDA (1) 32,594 31,141 21,566 30,355 20,515 Capital expenditures 7,569 13,730 11,760 6,080 4,148 Depreciation and amortization 20,902 21,311 18,789 19,093 18,711 Tons shipped: Seamless tubular products 157,400 116,600 92,300 76,900 45,400 Welded tubular products 348,900 322,900 277,600 308,000 246,500 SBQ products 133,700 169,000 147,900 346,900 289,900 Hot rolled coil and other products 43,300 47,600 43,200 16,400 9,400 Total tons shipped 683,300 656,100 561,000 748,200 591,200
(1) EBITDA represents earnings before interest expense, taxes, and depreciation and amortization, and is calculated as net income (loss) before extraordinary items and the cumulative effect of a change in accounting principle plus interest expense, taxes, depreciation and amortization. EBITDA provides additional information for determining the Company's ability to meet debt service requirements. EBITDA does not represent and should not be considered as an alternative to net income, any other measure of performance as determined by generally accepted accounting principles, as an indicator of operating performance or as an alternative to cash flows from operating, investing or financing activities or as a measure of liquidity. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following analysis of financial condition and results of operations of the Company should be read in conjunction with the audited Consolidated Financial Statements and related Notes of the Company, and other financial information included in this report. General The Company operates in two business segments: specialty steel and industrial adhesives. Within the specialty steel segment are the operations of Koppel Steel Corporation (Koppel), a manufacturer of seamless tubular steel products, special bar quality (SBQ) products and semi-finished steel products; and Newport Steel Corporation (Newport), a manufacturer of welded tubular steel products and hot rolled coils. The Company's specialty steel products consist of: (i) seamless and welded tubular goods primarily used in oil and natural gas drilling and production operations (oil country tubular goods, or OCTG); (ii) line pipe used in the transmission of oil, gas and other fluids; (iii) SBQ products primarily used in the manufacture of heavy industrial equipment; and (iv) hot rolled coils which are sold to service centers and other manufacturers for further processing. Within the adhesives segment are the operations of Imperial Adhesives, Inc. (Imperial), a manufacturer of industrial adhesives products. See Note 13 to the Consolidated Financial Statements included herein for selected financial information by business segment for the fiscal years 1996, 1995, and 1994. 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 $45.6 million in cash and 400,000 shares (approximately 8%) of the newly formed public company. See Note 2 to the Consolidated Financial Statements concerning the Company's sale of KES and its pro forma effect on the Company's fiscal 1994 financial position and results of operations. The matters discussed or incorporated by reference in this Report on Form 10-K that are forward-looking statements (as defined in the Private Securities Litigation Reform Act of 1995) involve risks and uncertainties. Such risks and uncertainties include, but are not limited to, the level of domestic as well as worldwide oil and natural gas drilling activity; general economic conditions; product demand and industry capacity; industry pricing; the presence or absence of governmentally imposed trade restrictions; manufacturing efficiencies; volatility in raw material costs, particularly steel scrap; costs of compliance with environmental regulations; product liability or other claims; the Company's ability to meet operating cash requirements, including capital expenditures; and the Company's capital structure, which may limit its operational and financial flexibility. These risks and uncertainties may cause the actual results or performance of the Company to differ materially from any future results or performance expressed or implied by such forward-looking statements. Results of Operations The Company's net sales, cost of products sold and operating results by industry segment for each of the three fiscal years in the period ended September 28, 1996 are summarized below. Fiscal 1995 contains fifty-three weeks and fiscal years 1996 and 1994 contain fifty-two weeks. As such, the increases and decreases in operating results for the comparative periods, as discussed below, were partially attributable to the additional week of operations in fiscal 1995. (In thousands) 1996 1995 1994 Net sales Specialty steel segment Koppel $195,851 $173,880 $137,533 Newport 173,615 162,003 132,908 369,466 335,883 270,441 Adhesives segment 39,916 35,469 32,939 $409,382 $371,352 $303,380 Cost of products sold Specialty steel segment Koppel $169,600 $151,614 $122,060 Newport 169,649 157,832 130,820 339,249 309,446 252,880 Adhesives segment 30,336 27,824 25,281 $369,585 $337,270 $278,161 Operating income (loss) Specialty steel segment Koppel $ 19,741 $ 16,136 $ 9,042 Newport (4,855) (5,708) (6,133) 14,886 10,428 2,909 Adhesives segment 1,597 1,248 1,150 Corporate allocations (4,430) (3,870) (3,370) $ 12,053 $ 7,806 $ 689
Shipment and sales data for the Company's specialty steel segment for each of the three fiscal years in the period ended September 28, 1996 were as follows: 1996 1995 1994 Tons shipped Koppel Seamless tubular products 157,400 116,600 92,300 SBQ products 133,700 169,000 147,900 Newport Welded tubular products 348,900 322,900 277,600 Hot rolled coils and other products 43,300 47,600 43,200 683,300 656,100 561,000 Net sales ($000's) Koppel Seamless tubular products $133,446 $ 90,926 $ 72,675 SBQ products 62,405 82,954 64,858 Newport Welded tubular products 157,385 145,330 117,214 Hot rolled coils and other products 16,230 16,673 15,694 $369,466 $335,883 $270,441
Fiscal Year Ended September 28, 1996 compared with Fiscal Year Ended September 30, 1995 Net sales in fiscal 1996 increased $38.0 million, or 10.2%, from fiscal 1995 to $409.4 million. Specialty steel segment net sales increased $33.6 million, or 10.0%, and the adhesives segment net sales increased $4.4 million, or 12.5%, from fiscal 1995. The overall increase in specialty steel segment net sales was primarily attributable to increased shipments of the Company's tubular products as more fully discussed below. Seamless tubular net sales increased $42.5 million, or 46.8%, on a volume increase of 35.0%. The increases in seamless tubular net sales and shipments were primarily due to increases in seamless OCTG product shipments and average selling prices which were attributable in part to a decline in the level of foreign imports, increased off-shore drilling activity, as well as, with respect to pricing, changes in OCTG product mix. Fiscal 1996 average selling price for all seamless tubular products increased 8.7% from fiscal 1995. Welded tubular net sales increased $12.1 million, or 8.3%, on a volume increase of 8.1%. The increase in welded tubular net sales was primarily attributable to an increase in shipments of both welded line pipe products and welded OCTG products. Average selling price for all welded tubular products was essentially unchanged from fiscal 1995. The demand for the Company's OCTG products is cyclical in nature, being primarily dependent on the number and depth of oil and natural gas wells being drilled in the United States and globally. The average number of oil and natural gas drilling rigs in operation in the United States (rig count) was 759 in fiscal 1996, up from 738 in fiscal 1995. 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. In July 1995, the United States imposed duties on imports of various OCTG products from certain foreign countries in response to antidumping and countervailing duty cases filed by several U.S. steel companies (Trade Cases). Several foreign OCTG producers, as well as certain U.S. producers, have appealed the determinations to international courts or panels. The Company cannot predict the outcome or timing of these appeals at this time. SBQ product net sales decreased $20.5 million, or 24.8%, on a volume decline of 20.9%. Fiscal 1996 average selling price for SBQ products declined 4.9% from fiscal 1995. The decline in shipments and selling price of SBQ products resulted from a softening in the markets served by Koppel's SBQ products as well as excess inventory levels in the SBQ marketplace. Shipments of SBQ products have increased in each of the last three quarters of fiscal 1996; however, average selling price declined 5.8% over the same three quarters. Other product shipments and sales for fiscal 1996 were primarily attributable to the sale of hot rolled coils. The demand for the Company's SBQ and hot rolled coil products is cyclical in nature and is sensitive to general economic conditions. Gross profit for fiscal 1996 increased $5.7 million from fiscal 1995 for a gross profit margin of 9.7% in fiscal 1996 compared to 9.2% in fiscal 1995. The specialty steel segment gross profit increased $3.8 million and this segment had a gross profit margin of 8.2% in fiscal 1996 versus 7.9% in fiscal 1995. The increase in specialty steel segment gross profit and margin was attributable to Koppel's seamless tubular operations, where gross profit margins rose from 12.8% in the prior year period to 13.4% for the current year. The adhesives segment gross profit increased $1.9 million from fiscal 1995 primarily as a result of an increase in sales volume. Gross profit margin for fiscal 1996 was 24.0% compared to 21.6% for fiscal 1995. The increase was primarily a result of increased sales of higher margin products. Fiscal 1996 selling and administrative expenses increased $1.5 million from 1995 but decreased as a percentage of sales from 7.1% in fiscal 1995 to 6.8% in fiscal 1996. The overall increase in selling and administrative expenses was primarily attributable to increased production and sales volume. As a result of the above factors, operating income increased $4.3 million, from $7.8 million in fiscal 1995 to $12.1 million in fiscal 1996. The increase in operating income was attributable almost solely to the specialty steel segment and was primarily due to increased shipments and average selling prices for Koppel's seamless tubular products, partially offset by a decrease in SBQ product shipments and average selling prices. Interest income decreased $0.7 million from fiscal 1995 as a result of a decline in average invested cash and short-term investment balances during the respective comparable periods. Interest expense increased $3.6 million over fiscal 1995 as a result of higher interest costs associated with the Company's Senior Secured Notes issued in the fourth quarter of fiscal 1995. Other income, net decreased $2.4 million from fiscal 1995. The current fiscal year was impacted by a $0.7 million loss on the sale of a non-steel segment fixed asset while fiscal 1995 includes income from property claims filed with the Company's insurance company in connection with a motor failure at Newport. Tax benefits recorded by the Company in fiscal 1996 and in prior years substantially offset previously recorded net long-term deferred tax liabilities. As such, the Company is currently establishing a full valuation allowance for all deferred tax assets being generated by its operating losses and, accordingly, is not currently recording the associated tax benefits. As a result of the above factors, the Company incurred a net loss of $10.5 million, or a $.76 loss per share, in fiscal 1996 compared to a net loss before extraordinary item of $5.1 million, or a $.36 loss per share in fiscal 1995. Fiscal Year Ended September 30, 1995 compared with Fiscal Year Ended September 24, 1994 Net sales in fiscal 1995 increased $68.0 million, or 22.4%, from fiscal 1994. Specialty steel segment net sales increased $65.4 million, or 24.2%, and the adhesive segment net sales increased $2.5 million, or 7.7%, from fiscal 1994. The overall increase in specialty steel segment net sales was the result of both higher average selling prices and increased shipment levels. Seamless tubular net sales increased $18.3 million, or 25.1%, on a volume increase of 26.3%. The increase in seamless tubular net sales was partially attributable to an increase in shipments, which resulted in part from product line expansion in fiscal 1995 as well as from the favorable final rulings in the Trade Cases. Fiscal 1995 average selling price for all seamless tubular products declined less than 1% from fiscal 1994, due almost entirely to changes in product mix, including the introduction of new seamless OCTG products with lower average selling prices. Fiscal 1995 average selling price for seamless OCTG products decreased 1.9%, while seamless line pipe average selling price increased 6.9% from fiscal 1994. Welded tubular net sales increased $28.1 million, or 24.0%, on a volume increase of 16.3%. The increase in welded tubular net sales was partially attributable to improved average selling prices for both welded OCTG and line pipe products as well as an increase in shipments. Fiscal 1995 average selling price for all welded tubular products increased 6.6% over fiscal 1994. The Company's fiscal 1995 average selling price for its welded tubular products was positively affected by stronger pricing for hot rolled coils in the steel industry in general. SBQ product net sales increased $18.1 million, or 27.9%, on a volume increase of 14.3%. Fiscal 1995 average selling price for SBQ products increased 11.8%. SBQ product volume and prices increased as a result of stronger market demand in fiscal 1995 than in fiscal 1994. Selling prices were also favorably impacted in fiscal 1995 as a result of the implementation of surcharges to recover increases in certain raw material costs. Other product shipments and sales for fiscal 1995 were primarily attributable to shipments of hot rolled coils. The adhesives segment net sales increased $2.5 million, or 7.7%, primarily as a result of improved pricing. Gross profit for fiscal 1995 increased $8.9 million from fiscal 1994 for a gross profit margin of 9.2% compared to 8.3% in fiscal 1994. The specialty steel segment accounted for nearly all of the increase in gross profit and had a gross margin of 7.9% in fiscal 1995 versus 6.5% in fiscal 1994. The increase in specialty steel segment gross profit and margin was a result of improved operating efficiencies for the full fiscal year comparative periods resulting from increased production volume, as well as increases in average selling prices, as discussed above. The adhesives segment gross profit was unchanged from fiscal 1994 and gross profit margin declined from 23.2% in fiscal 1994 to 21.6% in fiscal 1995, primarily as a result of higher raw material costs. Selling and administrative expenses increased $1.7 million from fiscal 1994 but declined as a percentage of sales from 8.1% in fiscal 1994 to 7.1% in fiscal 1995. The overall increase in selling and administrative expenses was primarily attributable to increased production and sales volumes as well as costs incurred in connection with litigation settled in fiscal 1995. As a result of the above factors, operating income increased $7.1 million, from $0.7 million in fiscal 1994 to $7.8 million in fiscal 1995. The specialty steel segment earned an operating profit of $10.4 million for fiscal 1995 compared to $2.9 million for fiscal 1994. The improvement in operating results from the prior year was primarily due to an overall increase in shipments as well as increased selling prices and improved operating efficiencies resulting from increased production volume. The adhesives segment earned an operating profit of $1.2 million, unchanged from fiscal 1994. Interest expense increased $0.8 million over fiscal 1994 as a result of higher interest costs associated with the Company's Senior Secured Notes issued in the fourth quarter of fiscal 1995. Other income, net increased $1.9 million over fiscal 1994, primarily due to the recording of property claims filed with the Company's insurance carrier in connection with a motor failure at Newport in the fiscal 1995 second quarter. As a result of the above factors, the fiscal 1995 loss before extraordinary item was $5.1 million, or a $.36 loss per share, compared to net income of $13.2 million in fiscal 1994, or $.96 per share. Fiscal 1994 net income includes a one-time, after-tax gain on the sale of KES of $21.5 million, or $1.56 per share, and income of $1.7 million, or $.12 per share, relating to the adoption of a new accounting standard. Excluding these items, the Company incurred a $10.0 million loss, or a $.72 loss per share, for fiscal 1994. In connection with a fiscal 1995 fourth quarter refinancing, the Company incurred prepayment costs and wrote off unamortized debt issuance costs, which resulted in an extraordinary charge of $5.2 million, net of applicable income tax benefit of $2.8 million, or $.38 per share. See Note 5 to the Consolidated Financial Statements. Liquidity and Capital Resources Working capital at September 28, 1996 was $72.9 million compared to $65.9 million at September 30, 1995. The current ratio at September 28, 1996 was 2.05 to 1 compared to 2.15 to 1 at September 30, 1995. At September 28, 1996, the Company had cash and short-term investments totaling $17.3 million, $1.9 million of which was restricted in an environmental trust account related to a permitted hazardous waste disposal facility located on the Company's property at Newport. At September 28, 1996, the Company had no outstanding advances against its $45.0 million revolving credit facility (Credit Facility); however, $15.6 million of the Credit Facility secured various letters of credit issued primarily in connection with the purchase of steel slabs at Newport. Net cash flows provided by operating activities totaled $12.6 million in fiscal 1996, compared to a use of $4.2 million in fiscal 1995. The Company recorded a net loss of $10.5 million in fiscal 1996 compared to a loss before extraordinary item of $5.1 million in 1995. Major uses of cash in operating activities in fiscal 1996 included increases of $6.0 million and $8.6 million in accounts receivable and inventories, respectively, resulting from an increase in business activity. Offsetting these uses were $20.9 million in non-cash depreciation and amortization charges; a $2.5 million increase in long-term deferred taxes; a $1.8 million decrease in refundable income taxes; a $1.8 million decrease in other current assets resulting primarily from the collection of previously filed insurance claims; a $9.0 million increase in accounts payable primarily resulting from the purchase of steel slabs and a general increase in business activity; and a $2.2 million increase in accrued liabilities primarily related to accrued interest on the Company's senior secured notes. Included in the fiscal 1996 net loss was a $1.2 million non-cash gain recorded in connection with the settlement of certain warranty claims made by the Company related to the acquisition of Koppel. Net cash flow used in operating activities totaled $4.2 million in fiscal 1995. The Company incurred a loss before extraordinary charge in fiscal 1995 of $5.1 million compared to a net loss before the effect of the gain on the sale of KES and a change in accounting principle of $10.0 million in fiscal 1994. Major uses of cash in operating activities for fiscal 1995 included a $3.2 million increase in accounts receivable and a $12.4 million increase in inventories resulting from an increase in business activity and, for the increase in inventories, unusually low levels at fiscal 1994 year end due to scheduled maintenance at Newport. Other major uses include a decrease in long-term deferred taxes and an increase in refundable income taxes, both resulting from the fiscal 1995 net loss, including the extraordinary charge for prepayment costs and a non-cash cost for the write-off of unamortized debt issuance costs. Offsetting these uses were $21.3 million in non-cash depreciation and amortization charges and increases in accounts payable and accrued liabilities of $5.6 million and $2.9 million, respectively. Net cash flow used in operating activities totaled $4.3 million in fiscal 1994. Major components include a $10.0 million net loss before the effect of the gain on the sale of KES and the adoption of a new accounting standard, 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. The Company invested $7.6 million, $13.7 million and $11.8 million in capital expenditures during fiscal 1996, 1995, and 1994, respectively. Such capital expenditures were primarily related to improvements to and acquisitions of machinery and equipment in the specialty steel segment. Capital spending for fiscal 1996, 1995 and 1994 related to the Company's environmental control facilities was not material. In fiscal 1996, the Company also received $1.7 million from the sale of a non-steel segment fixed asset. The Company currently estimates that fiscal 1997 capital spending will approximate $9.0 million, approximately $8.3 million of which is related to the specialty steel segment. It is anticipated that capital spending will be funded through cash flow from operations, available cash and short-term investments, as well as available borrowing sources. Short-term investments increased $7.4 million in fiscal 1996, primarily as a result of improved cash flow from operating activities as well as declines in capital spending and long-term debt principal repayment requirements. As a result of the sale of KES in the first quarter of fiscal 1994, 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. The Company holds the common stock acquired in the sale of KES as an available-for-sale investment. As of September 28, 1996, such common stock was recorded at $2.7 million compared to $3.6 million at September 30, 1995, which resulted in a direct after-tax charge to common shareholders' equity of $0.6 million in fiscal 1996. Net cash flows used by financing activities in fiscal 1996 were $0.2 million. In fiscal 1995, the Company publicly issued $131.1 million principal amount of 13.5% Senior Secured Notes (Notes) together with warrants (Warrants) to purchase approximately 1.5 million shares of the Company's common stock at $4.00 per share. The Notes, together with the Warrants, were priced at 95.35%. Proceeds from the transaction, together with available cash were used to retire a substantial portion of the Company's indebtedness, including borrowings under its lines of credit. Net cash flow used by financing activities in fiscal 1995 of $17.6 million includes the net effect of the refinancing, including $6.3 million in debt issuance costs, as well as $14.2 million in scheduled payments on long-term debt obligations made prior to the refinancing. Net cash flows used by financing activities were $4.4 million in fiscal 1994. During fiscal 1994, 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. The Company's annual long-term debt maturities are $2.5 million in fiscal 1997, $3.6 million in fiscal 1998, $2.3 million in fiscal 1999, $0.8 million in fiscal 2000 and $5.3 million in fiscal 2001. Reference is made to Note 5 to the Consolidated Financial Statements for further information concerning the Company's long-term debt and Credit Facility. Pursuant to the Company's debt agreements, it is currently prohibited from paying dividends to its shareholders. Earnings before interest, taxes, depreciation and amortization (EBITDA) was $32.6 million for fiscal 1996, $31.1 million for fiscal 1995 and $21.6 million for fiscal 1994 (excluding the gain on the sale of KES). EBITDA is calculated as income before extraordinary items and the cumulative effect of a change in accounting principle plus interest expense, taxes, depreciation and amortization. EBITDA provides additional information for determining the Company's ability to meet debt service requirements. EBITDA does not represent and should not be considered as an alternative to net income, any other measure of performance as determined by generally accepted accounting principles, as an indicator of operating performance or as an alternative to cash flows from operating, investing or financing activities or as a measure of liquidity. The Company believes that its current available cash and short-term investments, its cash flow from operations and borrowing sources will be sufficient to meet its anticipated operating cash requirements, including capital expenditures, for at least the next twelve months. Inflation The Company believes that inflation has not had a material effect on its results of operations to date. Generally, the Company experiences inflationary increases in its costs of raw materials, energy, supplies, salaries and benefits and selling and administrative expenses. Except with respect to significant increases in steel scrap prices, the Company has generally been able to pass these inflationary increases through to its customers. Other Matters See Item 1, Business, "Environmental Matters" and Item 3, Legal Proceedings. Recently Issued Accounting Standards See Note 1 to the Consolidated Financial Statements, "Recently Issued Accounting Standards". ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Index to Consolidated Financial Statements and Schedule Consolidated Financial Statements Page Report of Management 24 Report of Independent Public Accountants 25 Consolidated Statements of Operations 26 Consolidated Balance Sheets 27 Consolidated Statements of Cash Flows 28 Consolidated Statements of Common Shareholders' Equity 29 Notes to Consolidated Financial Statements 30 Financial Statement Schedule Schedule II 43 REPORT OF MANAGEMENT The accompanying consolidated financial statements have been prepared by the management of NS Group, Inc., in conformity with generally accepted accounting principles and, in the judgment of management, present fairly and consistently the Company's consolidated financial position and results of operations. These statements necessarily include amounts that are based on management's best estimates and judgments. The financial information contained elsewhere in this report is consistent with that contained in the consolidated financial statements. In fulfilling its responsibilities for the integrity of financial information, management maintains accounting systems and related controls. These controls provide reasonable assurance, at appropriate costs, that assets are safeguarded against losses and that financial records are reliable for use in preparing financial statements. These systems are enhanced by written policies, an organizational structure that provides division of responsibilities and careful selection and training of qualified people. In connection with their annual audit, independent public accountants perform an examination in accordance with generally accepted auditing standards, which includes a review of the system of internal accounting control and an expression of an opinion that the consolidated financial statements are fairly presented. The Board of Directors, through its Audit Committee composed solely of non-employee directors, reviews the Company's financial reporting and accounting practices. The independent public accountants meet regularly with and have access to this Committee, with or without management present, to discuss the results of their audit work. /s/Clifford R. Borland Chairman of the Board and Chief Executive Officer /s/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 28, 1996 and September 30, 1995, and the related consolidated statements of operations, common shareholders' equity and cash flows for each of the three years in the period ended September 28, 1996. These financial statements and schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of NS Group, Inc. and subsidiaries as of September 28, 1996 and September 30, 1995, and the results of their operations and their cash flows for each of the three years in the period ended September 28, 1996 in conformity with generally accepted accounting principles. As explained in Note 11 to the Consolidated Financial Statements, the Company changed its method of accounting for income taxes effective September 26, 1993. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the Index to Consolidated Financial Statements is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. Cincinnati, Ohio, /s/ARTHUR ANDERSEN LLP November 1, 1996 NS GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS For the years ended September 28, 1996, September 30, 1995 and September 24, 1994 (Dollars in thousands, except per share amounts) 1996 1995 1994 Net sales $409,382 $371,352 $303,380 Cost of products sold 369,585 337,270 278,161 Selling and administrative expenses 27,744 26,276 24,530 Operating income 12,053 7,806 689 Interest income 637 1,341 1,733 Interest expense (24,375) (20,796) (20,030) Other income, net 644 3,053 1,191 Gain on sale of subsidiary - - 35,292 Income (loss) before income taxes, extra- ordinary item and cumulative effect of a change in accounting principle (11,041) (8,596) 18,875 Provision (credit) for income taxes (584) (3,540) 7,382 Income (loss) before extraordinary item and cumulative effect of a change in accounting principle (10,457) (5,056) 11,493 Extraordinary item, net of income taxes - (5,200) - Cumulative effect of a change in accounting principle - - 1,715 Net income (loss) $(10,457) $(10,256) $ 13,208 Per common share Income (loss) before extraordinary item and cumulative effect of a change in accounting principle $(.76) $(.36) $.84 Extraordinary item - (.38) - Cumulative effect of a change in accounting principle - - .12 Net income (loss) $(.76) $(.74) $.96 Weighted average shares outstanding (000's) 13,809 13,809 13,789
See notes to consolidated financial statements NS GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS September 28, 1996 and September 30, 1995 (Dollars in thousands) ASSETS 1996 1995 Current assets Cash and cash equivalents $ 3,442 $ 4,838 Short-term investments 13,855 6,413 Accounts receivable, less allowance for doubtful accounts of $757 and $1,021, respectively 51,824 45,858 Refundable income taxes 1,355 3,130 Inventories 53,317 44,716 Operating supplies and other current assets 13,187 13,525 Deferred tax assets 5,459 4,842 Total current assets 142,439 123,322 Property, plant and equipment -- at cost Land and buildings 29,755 30,110 Machinery and equipment 247,254 242,530 Construction in progress 3,313 3,622 Less -- accumulated depreciation (138,512) (120,887) Net property, plant and equipment 141,810 155,375 Other assets 15,785 19,800 Total assets $300,034 $298,497 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Notes payable $ 879 $ 509 Accounts payable 41,847 32,897 Accrued liabilities 24,376 22,167 Current portion of long-term debt 2,468 1,872 Total current liabilities 69,570 57,445 Long-term debt 164,789 166,528 Deferred taxes 8,559 6,414 Common shareholders' equity Common stock, no par value, 40,000,000 shares authorized, 13,809,413 shares issued and outstanding for each period 49,004 49,004 Common stock options and warrants 2,774 2,737 Unrealized loss on available for sale securities (1,287) (713) Retained earnings 6,625 17,082 Common shareholders' equity 57,116 68,110 Total liabilities and shareholders' equity $300,034 $298,497
See notes to consolidated financial statements NS GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended September 28, 1996, September 30, 1995 and September 24, 1994 (Dollars in thousands) 1996 1995 1994 Cash flows from operating activities: Net income (loss) $ (10,457) $(10,256) $ 13,208 Adjustments to reconcile net income (loss) to net cash flows from operating activities: Depreciation and amortization 19,260 18,941 18,154 Amortization of debt discount and finance costs 1,642 2,370 635 Increase (decrease) in long-term deferred taxes 2,496 (2,970) (1,157) Non-cash gain on settlement of claims (1,172) - - Gain on sale of subsidiary - - (35,292) (Gain) loss on disposal of equipment 642 (470) (230) Increase in accounts receivable, net (5,966) (3,207) (7,921) Increase in inventories (8,601) (12,426) (3,168) (Increase) decrease in refundable income taxes 1,775 (2,935) 2,618 (Increase) decrease in other current assets 1,827 (1,753) 2,691 Increase in accounts payable 8,950 5,585 5,782 Increase in accrued liabilities 2,209 2,886 351 Net cash flows from operating activities 12,605 (4,235) (4,329) Cash flows from investing activities: (Increase) decrease in short-term investments (7,442) 33,658 (36,614) Purchases of property, plant and equipment (7,569) (13,730) (11,760) Proceeds from sale of equipment 1,729 494 631 (Increase) decrease in other assets (474) 1,892 (2,122) Proceeds from sale of subsidiary - - 50,426 Cash dividend from sold subsidiary - - 6,818 Net cash flows from investing activities (13,756) 22,314 7,379 Cash flows from financing activities: Increase (decrease) in notes payable 370 (28,363) 1,905 Proceeds from issuance of long-term debt 1,277 122,587 431 Proceeds from issuance of warrants - 2,411 - Repayments on long-term debt (1,892) (107,950) (7,246) Increase in debt issuance costs - (6,331) (236) Proceeds from issuance of common stock - - 704 Net cash flows from financing activities (245) (17,646) (4,442) Net increase (decrease) in cash and cash equivalents (1,396) 433 (1,392) Cash and cash equivalents at beginning of year 4,838 4,405 5,797 Cash and cash equivalents at end of year $ 3,442 $ 4,838 $ 4,405 Cash paid during the year for: Interest $ 22,179 $ 20,385 $ 18,964 Income taxes, net of refunds $ (4,234) $ 209 $ 2,297
See notes to consolidated financial statements NS GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY For the years ended September 28, 1996, September 30, 1995 and September 24, 1994 (Dollars in thousands) Options Common Stock and Shares Amount Warrants Balance, September 25, 1993 13,696,104 $48,284 $ 208 Stock option plans 56,145 290 54 Issuance of common stock 57,164 414 Unrealized losses on investments Net income Balance, September 24, 1994 13,809,413 48,988 262 Stock option plans 64 Issuance of common stock warrants 2,411 Unrealized losses on investments Other 16 Net loss Balance, September 30, 1995 13,809,413 49,004 2,737 Stock option plans 37 Unrealized losses on investments Net loss Balance, September 28, 1996 13,809,413 $49,004 $ 2,774
See notes to consolidated financial statements NS GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY For the years ended September 28, 1996, September 30, 1995 and September 24, 1994 (Dollars in thousands) Unrealized Gain (Loss) Available for Sale Retained Securities Earnings Total Balance, September 25, 1993 $ - $14,130 $62,622 Stock option plans 344 Issuance of common stock 414 Unrealized losses on investments (124) (124) Net income 13,208 13,208 Balance, September 24, 1994 (124) 27,338 76,464 Stock option plans 64 Issuance of common stock warrants 2,411 Unrealized losses on investments (589) (589) Other 16 Net loss (10,256) (10,256) Balance, September 30, 1995 (713) 17,082 68,110 Stock option plans 37 Unrealized losses on investments (574) (574) Net loss (10,457) (10,457) Balance, September 28, 1996 $(1,287) $ 6,625 $57,116
NS GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1: Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts of NS Group, Inc. and its wholly-owned subsidiaries (the Company): Koppel Steel Corporation (Koppel), Newport Steel Corporation (Newport), Erlanger Tubular Corporation (Erlanger), Imperial Adhesives, Inc. (Imperial) and Northern Kentucky Management, Inc. See Note 2 regarding the sale of Kentucky Electric Steel Corporation in fiscal 1994. All significant intercompany accounts and transactions have been eliminated. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires that management make certain estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Cash and Cash Equivalents Cash includes currency on hand and demand deposits with financial institutions. Cash equivalents consist of investments with original maturities of three months or less. Amounts are stated at cost, which approximates market value. Short-Term and Other Investments Short-term investments consist primarily of money market mutual funds and U.S. treasury securities, for which market value approximates cost. At September 28, 1996, approximately $1.9 million in short-term investments were restricted in an environmental trust account related to a permitted hazardous waste disposal facility located on the Company's property at Newport. Certain of the Company's investments are classified as "available for sale" and are recorded at current market value with an offsetting adjustment to common shareholders' equity. Inventories At September 28, 1996 and September 30, 1995, inventories stated at the lower of LIFO (last-in, first-out) cost or market represent approximately 36% and 31% of total inventories before the LIFO reserve, respectively. All other inventories are stated at the lower of average cost or market, or the lower of FIFO cost or market. Inventory costs include labor, material and manufacturing overhead. Inventories consist of the following: (In thousands) 1996 1995 Raw materials $ 5,948 $ 6,591 Semi-finished and finished goods 50,471 40,570 56,419 47,161 LIFO reserve (3,102) (2,445) Total inventories $53,317 $44,716
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 28, 1996, are assets with a net book value of approximately $4.7 million which are not currently being used in the business. In management's opinion, the carrying values of such assets are realizable. Income Taxes At September 28, 1996 and September 30, 1995, deferred income tax balances represent the estimated future tax effects of temporary differences between the financial reporting basis and the tax basis of certain assets and liabilities. Environmental Remediation and Compliance Environmental remediation costs are accrued, except to the extent capitalizable, when incurrence of such costs is probable and the costs can be reasonably estimated. Environmental compliance costs include maintenance and operating costs associated with pollution control facilities, costs of ongoing monitoring programs, permit costs and other similar costs. Such costs are expensed as incurred. Recently Issued Accounting Standards In March 1995, the Financial Accounting Standards Board (FASB) issued Statement No. 121 (Statement 121) on accounting for the impairment of long-lived assets to be held and used. Statement 121 also establishes accounting standards for long-lived assets that are to be disposed. Statement 121 is required to be applied prospectively for assets to be held and used. The initial application of Statement 121 to assets held for disposal is required to be reported as the cumulative effect of a change in accounting principle. The Company will adopt Statement 121 in the first quarter of fiscal 1997 and currently expects the impact of such adoption to be immaterial. In October 1995, the FASB issued Statement No. 123 (Statement 123) establishing financial accounting and reporting standards for stock-based employee compensation plans. Statement 123 encourages the use of the fair value based method to measure compensation cost for stock-based employee compensation plans, however, it also continues to allow the intrinsic value based method of accounting as prescribed by APB Opinion No. 25, which is currently used by the Company. Adoption is required in fiscal 1997 and the Company intends to remain on the intrinsic value based method of accounting. As such, beginning with the 1997 fiscal year-end, Statement 123 requires pro forma disclosures of net income and earnings per share, as if the fair value based method of accounting had been applied. Fiscal Year-End The Company's fiscal year ends on the last Saturday of September. Fiscal 1996 and 1994 contain fifty-two weeks and fiscal 1995 contains fifty-three weeks. Earnings Per Share Earnings per share are calculated using the weighted average number of shares outstanding during the period. The effect of common stock equivalents arising from stock options and warrants on the computation of earnings per share is not significant. Note 2: Sale of Subsidiary On October 6, 1993, the Company sold all of the assets and liabilities of its wholly-owned subsidiary, Kentucky Electric Steel Corporation (KES), to a newly formed public company in exchange for $45.6 million in cash and 400,000 shares of the newly formed public company. In addition, the Company received $6.8 million in cash from the new entity in satisfaction of a dividend declared by KES prior to the sale. The sale of KES resulted in a pre-tax gain of $35.3 million. After giving effect to the elimination of the pre-tax gain of $35.3 million, the related tax effect of $13.8 million and $0.1 million of net income of KES for the eleven days of fiscal 1994 prior to sale, the Company's pro forma net loss before cumulative effect of a change in accounting principle for the fiscal year ended September 24, 1994 was $10.2 million, or a $.74 loss per share. Note 3: Other Assets Other assets at September 28, 1996 and September 30, 1995 includes approximately $8.0 million and $8.6 million, respectively, in costs associated with land near Newport, Kentucky, which is held as investment property and is listed for sale and approximately $5.5 million and $6.5 million, respectively, in deferred financing costs. Other assets at September 30, 1995 also include investments totaling $3.6 million which are classified as other current assets at September 28, 1996. Note 4: Accrued Liabilities Accrued liabilities consist of the following: (In thousands) 1996 1995 Accrued payroll and payroll taxes $ 8,477 $ 7,113 Accrued interest 4,696 4,084 Accrued environmental remediation 4,444 4,514 Accrued income taxes 218 32 Other 6,541 6,424 $24,376 $22,167
Note 5: Long-term Debt and Credit Facility Long-term debt of the Company consists of the following: (In thousands) 1996 1995 13.5% Senior Secured Notes due July 15, 2003, interest due semi-annually, secured by property, plant and equipment (net of unamortized discount of $7,754 and $8,398, respectively) $123,342 $122,698 11% Subordinated Convertible Debentures, due in annual installments from October, 2000 through 2005 28,300 29,000 Term loans due various states and municipalities, interest ranging from 2% to 11%, due in varying monthly or quarterly installments through 2016, secured by junior mortgages on property, plant and equipment 10,708 10,166 Other 4,907 6,536 167,257 168,400 Less - current portion (2,468) (1,872) $164,789 $166,528
In the fourth quarter of fiscal 1996, in connection with the settlement of certain warranty claims related to the Koppel acquisition, approximately $1.2 million of 11% Subordinated Convertible Debentures and notes were canceled by the Company, resulting in a non-cash gain. In fiscal 1995, the Company publicly issued $131.1 million aggregate principal amount of 13.5% Senior Secured Notes due 2003 (Notes) together with warrants (Warrants) to purchase an aggregate of approximately 1,534,000 shares of the Company's common stock at $4.00 per share. Proceeds from the sale of the Notes and Warrants of approximately $120.8 million, after underwriting discount and before expenses, together with available cash on hand, were used to retire a substantial portion of the Company's outstanding indebtedness, including borrowings under its lines of credit. Through July 1998, the Company may redeem up to 40% of the principal amount of the Notes with the net proceeds of a public offering of common stock at a price of 113.5% of par, provided that at least $75.0 million principal amount of the Notes remain outstanding after redemption. The Notes may be redeemed at the option of the Company, at any time, in whole or in part, beginning in 2000, at declining premiums plus accrued interest. The Notes are unconditionally guaranteed in full, jointly and severally, by each of the Company's subsidiaries and are secured by the property, plant and equipment of the Company's steel-making operations. The Indenture relating to the Notes contains a number of restrictive covenants including, among other things, limitations on the ability of the Company to incur additional indebtedness; create liens; make certain restricted payments, including dividends; engage in certain transactions with affiliates; engage in sale and leaseback transactions; dispose of assets; issue or sell stock of its subsidiaries; enter into agreements that restrict the ability of its subsidiaries to pay dividends and make distributions; engage in mergers, consolidations and transfers of substantially all of the Company's assets; and make certain investments, loans and advances. The Company has a $45.0 million revolving credit facility (Credit Facility), borrowings on which are secured by inventory and accounts receivable. Interest on borrowings accrues at a rate per annum of (a) the sum of the alternate base rate (which is the higher of prime rate or 0.5% over the federal funds rate) plus 1% with respect to domestic rate loans or (b) the sum of the Eurodollar rate (based on LIBOR) plus 2.75% with respect to Eurodollar rate loans. Borrowings are due on demand and are limited to defined percentages of eligible inventory and accounts receivable. The Credit Facility contains financial covenants including maintenance of minimum net worth, minimum interest coverage ratios, maximum ratios of indebtedness to net worth, and minimum current ratio and working capital requirements. The Credit Facility also includes restrictions upon dividends, investments, capital expenditures, indebtedness and the sale of certain assets. At September 28, 1996, approximately $15.6 million of the Credit Facility was utilized to collateralize various letters of credit and $29.4 million was available for borrowing. The Credit Facility expires in fiscal 1998. Pursuant to the Company's debt agreements, it is currently prohibited from paying dividends to its shareholders. In connection with the retirement of long-term indebtedness in the fourth quarter of fiscal 1995, the Company incurred prepayment costs and wrote off unamortized debt issuance costs which resulted in an extraordinary charge of $5.2 million, net of applicable income tax benefit of $2.8 million, or $.38 per share. The Company also has outstanding 11% Subordinated Convertible Debentures, which are unsecured obligations of the Company and are convertible into common shares of the Company at a price of $17.00 per share, or approximately 1,665,000 shares. Interest is payable quarterly. The debentures are redeemable by the Company at 110% of par. Annual long-term debt maturities are $2.5 million in fiscal 1997, $3.6 million in fiscal 1998, $2.3 million in fiscal 1999, $0.8 in fiscal 2000 and $5.3 million in fiscal 2001. As of September 28, 1996 and September 30, 1995, the weighted average interest rate on outstanding notes payable was 6.1% and 6.0%, respectively. Note 6: Fair Value of Financial Instruments The following methods and assumptions were used to estimate the fair value of financial instruments: Cash, cash equivalents and short-term investments - The carrying amount approximates fair value because of the short maturity of those instruments. Other investments - Other investments, consisting of marketable equity securities totaling $2.7 million, are reported in other current assets and are carried at market value. Notes payable - The carrying amount approximates fair value because of the short maturity. Long-term debt - The fair value of the Company's Senior Secured Notes is based upon their trading price as of fiscal year-end. All other long-term debt was estimated by calculating the present value of the remaining interest and principal payments on the debt to maturity. The present value computation uses a discount rate equal to Treasury rates with similar terms at the end of the reporting period plus or minus the spread between the Treasury rates and the rate negotiated on the debt at the inception of the loan. The carrying amount and fair value of the Company's financial instruments are as follows. 1996 1995 Carrying Fair Carrying Fair (In thousands) Amount Value Amount Value Cash, cash equivalents and short - -term invest- ments $ 17,297 $ 17,297 $ 11,251 $11,251 Other invest- ments 2,725 2,725 3,650 3,650 Notes payable 879 879 509 509 Long-term debt 167,257 176,860 168,400 172,021
Note 7: Preferred Stock The Company's authorized stock includes 2,000,000 shares of Class A Preferred Stock, issuable in one or more series. The rights, preferences, privileges and restrictions of any series of Class A Preferred Stock, the number of shares constituting any such series and the designation thereof, are subject to determination by the Board of Directors. Four hundred thousand shares of the Class A Preferred Stock has been designated as Series A Junior Participating Preferred Stock, par value $10 per share, in connection with the Shareholders Protection Rights Plan (Plan) adopted in fiscal 1989. Pursuant to the Plan, one Preferred Stock Purchase Right (Right) is attached to each outstanding share of common stock of the Company. The Plan includes provisions which are intended to protect shareholders against certain unfair and abusive takeover attempts by anyone acquiring or tendering for 30% or more of the Company's common stock. The Company may redeem the Rights for one cent per Right at any time before a 30% position has been acquired. The Rights will expire in November 1998. Note 8: Stock Options and Warrants The Company has employee incentive stock option plans which provide for the issuance of shares of common stock of the Company upon exercise of options granted to certain employees. Under the terms of these plans, options have been granted at fair market value at the grant date and are exercisable on a pro rata basis over a period of nine years beginning one year after the date of grant. At September 28, 1996, options outstanding are priced in a range from $3.25 to $14.125 per share. A summary of transactions in the plans follows: 1996 1995 1994 Options outstanding, beginning of year 989,030 1,048,705 1,185,525 Options granted - 10,000 289,050 Options expired (80,260) (69,675) (369,725) Options exercised - - (56,145) Options outstanding, end of year 908,770 989,030 1,048,705 Options exercisable, end of year 681,450 607,955 509,525 Available for grant 564,385 514,535 488,580
The Company also has non-qualified stock option and stock appreciation rights plans under which the Company may grant to key employees options to purchase (or stock appreciation awards corresponding to) shares of the Company's common stock. Terms of the grants made under these plans are determined by the Stock Option Committee of the Board of Directors. Options granted in fiscal 1996, 1995 and 1994 under these plans were at exercise prices approximating the market price on the date of the grant. At September 28, 1996, options outstanding under the Company's non-qualified plans are priced in a range from $2.63 to $13.43 per share. Grant prices have ranged from 64% to 110% of the market price at the date of grant. A summary of transactions in the plans follows: 1996 1995 1994 Options outstanding, beginning of year 678,025 475,625 366,760 Options granted 60,000 202,400 135,085 Options expired (17,465) - (26,220) Options outstanding, end of year 720,560 678,025 475,625 Options exercisable, end of year 269,978 153,400 106,700 Available for grant 529,440 571,975 24,375
The Company has common stock warrants outstanding, issued in connection with the sale of the Company's Senior Secured Notes. The warrants are exercisable for approximately 1,534,000 shares of the Company's common stock at a price of $4.00 per share and expire July 15, 2003. The Company also has common stock warrants outstanding which were issued in connection with the financing of the Koppel acquisition. These warrants are exercisable for approximately 772,000 shares of the Company's common stock, at a price of $8.00 per share and expire October 4, 2000. Note 9: Commitments and Contingencies The Company has various commitments for the purchase of materials, supplies and energy arising in the ordinary course of business. The Company is subject to various claims, lawsuits and administrative proceedings arising in the ordinary course of business with respect to workers compensation, health care and product liability coverages (each of which is self-insured to certain levels), as well as commercial and other matters. The Company accrues for the cost of such matters when the incurrence of such costs is probable and can be reasonably estimated. Based upon its evaluation of available information, management does not believe that any such matters are likely, individually or in the aggregate, to have a material adverse effect upon the Company's consolidated financial position, results of operations or cash flows. Newport has incurred significant losses in recent years. Certain assumptions and estimates have been made in projecting future cash flows from Newport's operations and, based upon its evaluation, the Company believes the carrying value of Newport's facilities is realizable. However, actual results could differ, which may have a material effect on the Company's consolidated financial statements. The Company is subject to federal, state and local environmental laws and regulations, including, among others, the Resource Conservation and Recovery Act (RCRA), the Clean Air Act, the 1990 Amendments to the Clean Air Act, the Clean Water Act and all regulations promulgated in connection therewith, including, among others, those concerning the discharge of contaminants as air emissions or waste water effluents and the disposal of solid and/or hazardous wastes such as electric arc furnace dust. As such, the Company is from time to time involved in administrative and judicial proceedings and administrative inquiries related to environmental matters. As with other steel mills in the industry, the Company's steel mini-mills produce dust which contains lead, cadmium and chromium, and is classified as a hazardous waste. The Company currently collects the dust resulting from its electric arc furnace operations through emission control systems and contracts with a company for treatment and disposal of the dust at an EPA-approved facility. The Company has on its property at Newport a permitted hazardous waste disposal facility. Newport's permit for operating the hazardous waste disposal facility requires that it investigate, test, and analyze for potential releases of hazardous constituents from its closed loop water recirculating system. Any contamination documented as a result of the investigation would require certain cleanup measures; however, the Company believes that the cost of any such cleanup measures will not be material. In March 1995, Koppel and the EPA signed a Consent Order relating to an April 1990 RCRA facility assessment (the Assessment) completed by the EPA and the Pennsylvania Department of Environmental Resources. The Assessment was performed in connection with a permit application pertaining to a landfill that is adjacent to the Koppel facilities. The Assessment identified potential releases of hazardous constituents at or adjacent to the Koppel facilities prior to the Company's acquisition of the Koppel facilities. The Consent Order establishes a schedule for investigating, monitoring, testing and analyzing the potential releases. Contamination documented as a result of the investigation requires cleanup measures and certain remediation has begun. Pursuant to various indemnity provisions in agreements entered into at the time of the Company's acquisition of the Koppel facilities, certain parties have agreed to indemnify the Company against various known and unknown environmental matters. The Company believes that the indemnity provisions provide for it to be fully indemnified against all matters covered by the Consent Order, including all associated costs, claims and liabilities. In November 1996, Koppel received a Notice of Violation (NOV) from the EPA alleging violations of the Clean Air Act and the Pennsylvania State Implementation Plan. The violations allegedly occurred during 1995 and 1996 and pertain to air emissions from Koppel's electric arc furnace operations. At this time, the Company is unable to determine if the EPA will assess civil penalties as a result of the alleged violations, or the extent of any such potential penalties. In two separate incidents occurring in fiscal 1993 and 1992, radioactive substances were accidentally melted at Newport, resulting in the contamination of a quantity of electric arc furnace dust. The Company is investigating and evaluating various issues concerning storage, treatment and disposal of the radiation contaminated electric arc furnace dust; however a final determination as to method of treatment and disposal, cost and further regulatory requirements cannot be made at this time. Depending on the ultimate timing and method of treatment and disposal, which will require appropriate federal and state regulatory approval, the actual cost of disposal could substantially exceed current estimates and the Company's insurance coverage. The Company expects to recover and has recorded a $2.3 million receivable relating to insurance claims for the recovery of disposal costs which will be filed with the applicable insurance carrier at the time such disposal costs are incurred. As of September 28, 1996, claims recorded in connection with disposal costs exhaust available insurance coverage. Based on current knowledge, management believes the recorded gross reserves of $4.4 million for disposal costs pertaining to these incidents are adequate. Subject to the uncertainties concerning the Consent Order, the NOV and the storage and disposal of the radiation contaminated dust, the Company believes that it is currently in compliance in all material respects with all applicable environmental regulations. The Company cannot predict the level of required capital expenditures or operating costs that may result from future environmental regulations. Capital expenditures for the next twelve months relating to environmental control facilities are not expected to be material, however, such expenditures could be influenced by new or revised environmental regulations and laws or new information or developments with respect to the Company's operating facilities. As of September 28, 1996, the Company had environmental remediation reserves of $4.4 million which pertain almost exclusively to accrued disposal costs for radiation contaminated dust. As of September 28, 1996, the estimated range of possible losses related to the environmental contingency matters discussed above in excess of those accrued by the Company is $0 to $3.0 million; however, with respect to the Consent Order, the Company cannot estimate the possible range of losses should the Company ultimately not be indemnified. Based upon its evaluation of available information, management does not believe that any of the environmental contingency matters discussed above are likely, individually or in the aggregate, to have a material adverse effect upon the Company's consolidated financial position, results of operations or cash flows. However, the Company cannot predict with certainty that new information or developments with respect to the Consent Order or its other environmental contingency matters, individually or in the aggregate, will not have a material adverse effect on the Company's consolidated financial position, results of operations or cash flows. Note 10: Profit Sharing Plans The Company has established various profit sharing plans at the operating companies which are based on the earnings of the respective companies. Generally, the plans require mandatory contributions at a specified percentage of pretax profits (with a guaranteed minimum based on hours worked) for the bargaining unit employees, and allow for a discretionary contribution set by the Board of Directors for salaried employees. Expense for contributions was approximately $1.0 million, $0.9 million and $0.5 million in fiscal years 1996, 1995 and 1994, respectively. Note 11: Income Taxes Effective September 26, 1993, the Company adopted the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (Statement 109). Under Statement 109, the Company's deferred tax liabilities and assets are based upon differences in the basis of assets and liabilities for financial statements and tax returns and are determined based on the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The provision (credit) for income taxes, including $2.8 million allocated to extraordinary items in fiscal 1995, consists of the following: (In thousands) 1996 1995 1994 Current $(2,112) $(3,044) $5,423 Deferred 1,528 (3,296) 1,959 Provision (credit) for income taxes $ (584) $(6,340) $7,382
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) 1996 1995 1994 Income tax provision (credit) at statutory tax rate of 35% $(3,864) $(5,808) $6,606 Change in taxes resulting from: State income taxes, net of federal effect (926) (150) 1,003 Dividend income exclusion (60) (61) (200) Change in valuation allowance 4,156 - - Other, net 110 (321) (27) Provision (credit) for income taxes $ (584) $(6,340) $7,382
The following represents the components of deferred tax liabilities and assets at September 28, 1996 and September 30, 1995: (In thousands) 1996 1995 Deferred tax liabilities: Property, plant and equipment $29,993 $27,646 Other items 141 2,196 30,134 29,842 Deferred tax assets: Reserves and accruals 5,343 3,880 Net operating tax loss carryforward 20,136 18,003 Alternative minimum tax and other tax credit carryforwards 3,393 4,480 Other items 2,318 1,907 31,190 28,270 Valuation allowance (4,156) - Net deferred tax assets 27,034 28,270 Net deferred tax liability $ 3,100 $ 1,572
For federal income tax purposes, the Company has alternative minimum tax credit carryforwards of approximately $2.9 million, which are not limited by expiration dates, and other tax credit carryforwards of approximately $0.5 million, which expire beginning in 2000. The Company also has net operating tax loss carryforwards of approximately $57.5 million, which expire beginning in 2007. The Company has recorded deferred tax assets related to these carryforwards, net of a deferred tax asset valuation allowance. In estimating the amount of the valuation allowance required, the Company has considered future taxable income related to the reversal of temporary differences in the tax and financial reporting basis of assets and liabilities, and has fully reserved for all deferred tax assets not realizable through such reversals. Note 12: Related Party Transactions One of the Company's directors/shareholders has a controlling interest in a company which purchases secondary and limited service tubular products from Newport. Sales to this customer were approximately $16.8 million, $16.0 million and $11.0 million for fiscal years 1996, 1995, and 1994, respectively. Trade receivables from this customer were $1.4 million and $0.7 million at the end of fiscal 1996 and 1995, respectively. Note 13: Business Segment Information The Company operates in two business segments: specialty steel and industrial adhesives. Within the specialty steel segment are the operations of Koppel, a manufacturer of seamless tubular steel products, special bar quality (SBQ) products and semi-finished steel products; and Newport, a manufacturer of welded tubular steel products and hot rolled coils. The Company's specialty steel products consist of: (i) seamless and welded tubular goods primarily used in oil and natural gas drilling and production operations, (oil country tubular goods, or OCTG); (ii) line pipe used in the transmission of oil, gas and other fluids; (iii) SBQ products primarily used in the manufacture of heavy industrial equipment and (iv) hot rolled coils which are sold to service centers and other manufacturers for further processing. Within the adhesives segment are the operations of Imperial, a manufacturer of industrial adhesives products and footwear finishes products. The operations of both segments are conducted principally in the United States. The Company grants trade credit to customers, the most significant of which are distributors serving the oil and natural gas exploration and production industries which purchase tubular steel products from the specialty steel products segment. The following table sets forth selected financial information by business segment for fiscal 1996, 1995 and 1994. Depre- ciation Identi- and Capital Net Operating fiable Amorti- Expen- 1996 Sales Income Assets zation ditures (In thousands) Specialty steel segment $369,466 $14,886 $245,642 $20,234 $ 7,338 Adhesives segment 39,916 1,597 15,338 668 231 Corporate assets and allocations - (4,430) 39,054 - - Total consolidated $409,382 $12,053 $300,034 $20,902 $ 7,569 1995 Specialty steel segment $335,883 $10,428 $ 250,711 $20,862 $13,245 Adhesives segment 35,469 1,248 13,011 449 485 Corporate assets and allocations - (3,870) 34,775 - - Total consoli- dated $371,352 $ 7,806 $298,497 $21,311 $13,730 1994 Specialty steel segment $270,441 $ 2,909 $246,295 $18,373 $11,380 Adhesives segment 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
Note 14: Quarterly Financial Data (Unaudited) Quarterly results of operations for 1996 and 1995 are as follows: (In thousands, except per share amounts) First Second Third Fourth 1996 Quarter Quarter Quarter Quarter Net sales $89,295 $104,726 $103,766 $111,595 Gross profit 6,893 9,858 11,400 11,646 Net income (loss) (3,204) (1,508) (1,871) (3,874) Net income (loss) per common share (.23) (.11) (.14) (.28) 1995 Net sales $93,489 $ 97,055 $ 94,804 $ 86,004 Gross profit 11,490 10,145 10,592 1,855 Income (loss) before extra- ordinary item 75 447 529 (6,107) Net income (loss) 75 447 529 (11,307) Income (loss) per common share before extraordinary item .01 .03 .04 (.44) Net income (loss) per common share .01 .03 .04 (.82)
During the fiscal 1995 fourth quarter, the Company experienced numerous unexpected operational problems, principally at Newport. Newport's melt shop incurred an unusual number of unplanned outages during the quarter related to equipment breakdowns, lightning strikes and power curtailments due to weather conditions. As a result, steel production volume was significantly affected, limiting availability of steel to Newport's hot strip mill and pipe mills. The excessive downtime throughout all of Newport's operations resulted in low operating efficiencies, increased maintenance costs and lost sales opportunities during the quarter. Also impacting the quarter at Newport was a write-down of scrap inventory resulting from year-end physical inventory counts. Shipments of Newport's tubular products totaled 74,400 tons in the fourth quarter of fiscal 1995 compared to 78,700 tons in the third quarter of fiscal 1995 and 83,800 tons in the fourth quarter of fiscal 1994. For the same periods, average selling prices for all of Newport's welded tubular products were $440, $457 and $429 per ton, respectively. The fiscal 1995 fourth quarter was also impacted by a decline in shipments of SBQ products from the Company's Koppel facilities, due to softening in market demand. SBQ shipments totaled 33,800 tons in the fourth quarter of fiscal 1995 compared to 45,100 tons in the third quarter of fiscal 1995 and 36,000 tons in the fourth quarter of fiscal 1994. For the same periods, average selling prices for SBQ products were $503, $503, and $441 per ton, respectively. In connection with a fiscal 1995 fourth quarter debt refinancing, the Company incurred prepayment costs and wrote off unamortized debt issuance costs, which resulted in an extraordinary charge of $5.2 million, net of applicable income tax benefit of $2.8 million, or $.38 per share. Note 15: Summarized Financial Information The Company's Senior Secured Notes are unconditionally guaranteed in full, jointly and severally, by each of the Company's subsidiaries (Subsidiary Guarantors), each of which is wholly-owned. Separate financial statements of the Subsidiary Guarantors are not presented because they are not deemed material to investors. The following is summarized financial information of the Subsidiary Guarantors as of September 28, 1996 and September 30, 1995 and for each of the three years in the period ended September 28, 1996. All significant intercompany accounts and transactions between the Subsidiary Guarantors have been eliminated. (In thousands) September 28, September 30, 1996 1995 Current assets $123,803 $ 111,371 Noncurrent assets 151,110 167,863 Current liabilities 61,980 50,933 Payable to parent $162,593 $ 169,079 Other noncurrent liabilities 9,953 9,779 Total noncurrent liabilities $172,546 $ 178,858 Fiscal Year Ended (In thousands) 1996 1995 1994 Net sales $409,382 $371,352 $303,380 Gross profit 39,797 34,082 25,219 Net income (loss) (5,816) (2,040) 14,689
SCHEDULE II NS GROUP, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS (Dollars in thousands) Reserves Deducted from Assets in Balance Sheets Allowance for Allowance Doubtful for Cash Accounts(1) Discounts(1) BALANCE, September 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 Additions: Charged to costs and expenses 586 3,553 Deductions: Net charges of nature for which reserves were created (202) (3,330) BALANCE, September 30, 1995 $ 1,021 $ 529 Additions: Charged to costs and expenses 744 3,487 Deductions: Net charges of nature for which reserves were created (1,008) (3,675) BALANCE, September 28, 1996 $ 757 $ 341
(1) Deducted from accounts receivable 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 23, 1996 for the Annual Meeting of Shareholders on February 13, 1997, under the caption "Election of Directors - Nominees for Election as Directors"; "Share Ownership of Certain Beneficial Owners and Management - footnote (5)"; "Information Regarding Meetings and Committees of the Board of Directors - Committees of the Board "; and "Section 16(a) Beneficial Ownership Reporting Compliance". ITEM 11. EXECUTIVE COMPENSATION Incorporated herein by reference from the Company's Proxy Statement dated December 23, 1996 for the Annual Meeting of Shareholders on February 13, 1997, under the caption "Information Regarding Meetings and Committees of the Board of Directors - Director Compensation"; "Executive Compensation"; and "Compensation Committee Interlocks and Insider Participation". ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Incorporated herein by reference from the Company's Proxy Statement dated December 23, 1996 for the Annual Meeting of Shareholders on February 13, 1997, "Share Ownership of Certain Beneficial Owners and Management". ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Incorporated herein by reference from the Company's Proxy Statement dated December 23, 1996 for the Annual Meeting of Shareholders on February 13, 1997, under the caption "Compensation Committee Interlocks and Insider Participation" and "Certain Transactions". PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. Consolidated Financial Statements - Audited consolidated financial statements and supplementary data required by this item are presented and listed in Part II, Item 8. (a) 2. Consolidated Financial Statement Schedule - The financial statement schedule required to be filed as a part of this report is presented in Part II, Item 8. (a) 3. Exhibits - Reference is made to the Index to Exhibits, which is included herein as part of this report (b) Reports on Form 8-K - None 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 13, 1996 By: /s/John R. Parker John R. Parker, Vice President, Treasurer and Chief Financial Officer KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Clifford R. Borland and John R. Parker, and each of them, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities to sign any and all amendments to this Annual Report on Form 10-K and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents and/or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Date: December 13, 1996 /s/Clifford R. Borland Clifford R. Borland, Chief Executive Officer and Director Date: December 13, 1996 /s/Paul C. Borland, Jr. Paul C. Borland, Jr. President and Chief Operating Officer and Director Date: December 13, 1996 /s/John R. Parker John R. Parker, Vice President, Treasurer and Chief Financial Officer (Principal Financial Officer) Date: December 13, 1996 /s/Thomas J. Depenbrock Thomas J. Depenbrock Vice President and Corporate Controller Date: December 13, 1996 /s/Ronald R. Noel Ronald R. Noel Vice President and Director Date: December 13, 1996 /s/John B. Lally John B. Lally, Director Date: December 13, 1996 /s/Patrick J. B. Donnelly Patrick J. B. Donnelly, Director Date: December 13, 1996 /s/R. Glen Mayfield R. Glen Mayfield, Director INDEX TO EXHIBITS Number Description 3.1 Amended and Restated Articles of Incorporation of Registrant, filed as Exhibit 3.1 to Amendment No. 1 to Registrants' Form S-1 dated January 17,1995, File No. 33-56637, and incorporated herein by this reference 3.2 Amended and restated By-Laws of Registrant, dated December 4, 1995, filed as Exhibit 3.2 to Company's Form 10-K for the fiscal year ended September 30, 1995, File No. 1-9838, and incorporated herein by this reference Exhibit 4.1 through 4.20 and 4.22 were filed as exhibits under their respective Exhibit numbers to Registrant's Form 10-Q for the quarterly period ended July 1, 1995, File No. 1-9838, and are incorporated herein by this reference 4.1 Indenture (including form of Senior Secured Note) between the Company and The Huntington National Bank, as trustee (the "Trustee") 4.2 Leasehold and Fee Mortgage, Assignment of Rents and Leases and Security Agreement from Newport to the Trustee (Kentucky) 4.3 Mortgage, Assignment of Rents and Leases and Security Agreement from Koppel to the Trustee (Pennsylvania) 4.4 Deed of Trust, Assignment of Rents and Leases and Security Agreement from Koppel to the Trustee (Texas) 4.5 Leasehold Mortgage, Assignment of Rents and Leases and Security Agreement from Erlanger to the Trustee (Oklahoma) 4.6 Junior Leasehold and Fee Mortgage, Assignment of Rents and Leases and Security Agreement from Newport to the Company (Kentucky) 4.7 Junior Mortgage, Assignment of Rents and Leases and Security Agreement from Koppel to the Company (Pennsylvania) 4.8 Junior Deed of Trust, Assignment of Rents and Leases and Security Agreement from Koppel to the Company (Texas) 4.9 Junior Leasehold Mortgage, Assignment of Rents and Leases and Security Agreement from Erlanger to the Company (Oklahoma) 4.10 Subsidiary Security Agreement between Newport and the Trustee 4.11 Subsidiary Security Agreement between Koppel and the Trustee 4.12 Subsidiary Security Agreement between Erlanger and the Trustee 4.13 ICN Security Agreement between Newport and the Company INDEX TO EXHIBITS (Continued) Number Description 4.14 ICN Security Agreement between Koppel and the Company 4.15 ICN Security Agreement between Erlanger and the Company 4.16 Pledge and Security Agreement between the Company and the Trustee 4.17 Subsidiary Guarantee 4.18 Intercreditor Agreement between the Trustee and the Bank of New York Commercial Corporation, as agent under the Credit Facility 4.19 Agreement between the Trustee, Koppel and the Commonwealth of Pennsylvania, Department of Commerce 4.20 Subordination Agreement between the Trustee and the City of Dayton, Kentucky 4.21 Revolving Credit, Guaranty and Security Agreement among Bank of New York Commercial Corporation, PNC Bank Ohio, N.A., Newport, Koppel, Imperial, the Company, Erlanger, Northern Kentucky Air, Inc. and Northern Kentucky Management, Inc.,filed as Exhibit 4.21 to Company's Form 10-Q for the quarterly period ended July 1, 1995, File No. 1-9838, and incorporated herein by this reference; Amendment No. 1 dated October 23, 1995 and Amendment No. 2 dated December 21, 1995 filed as Exhibit 4.21 to Company's Form 10-Q for the quarterly period ended December 30, 1995, File No. 1-9838, and incorporated herein by this reference; Amendment No. 3 dated February 14, 1996, filed as Exhibit 4.1 to Company's Post-Effective Amendment No. 1 on Form S-3 to Form S-1 Registration Statement, Registration No. 33-56637,and incorporated herein by this reference; and Amendment No. 4 dated September 12, 1996, filed herewith 4.22 Warrant Agreement between the Company and The Huntington National Bank, as warrant agent 10.1 Company's Amended Employee Incentive Stock Option Plan, filed as Exhibit 10(a) to Company's Form 10-K for the fiscal year ended September 30, 1989, File No. 1-9838, and incorporated herein by this reference 10.2 Company's Executive Bonus Plan, filed as Schedule B to Exhibit 10.4 to Company's Registration Statement on Form S-18, File No. 2-90643, and incorporated herein by this reference 10.3 Company's Non-Qualified Stock Option and Stock Appreciation Rights Plan of 1988, filed as Exhibit 1 to Company's Proxy Statement dated January 13, 1989, File No. 1-9838, and incorporated herein by this reference 10.4 Rights Agreement dated as of November 17, 1988 between Company and Pittsburgh National Bank, filed as Exhibit 1 to Company's Form 8-K dated November 17, 1988, File No. 1-9838, and incorporated herein by this reference, and Appointment and Amendment Agreement dated July 29, 1994 between Registrant and Registrar and Transfer Company, filed as Exhibit 10(d) to Company's Form 10-Q dated May 29, 1994, File No. 1-9838, and incorporated herein by this reference INDEX TO EXHIBITS (Continued) Number Description 10.5 Company's 1993 Incentive Stock Option Plan, filed as Exhibit 1 to Company's Proxy Statement dated December 22, 1992, File No. 1-9838, and incorporated herein by this reference 10.6 Transfer Agreement, dated September 29, 1993, filed on September 28, 1993 as Exhibit 10.2 to Amendment No. 2 to the Registration Statement on Form S-1 of Kentucky Electric Steel, Inc., File No. 33-67140, and incorporated herein by this reference 10.7 Tax Agreement, dated October 6, 1993, by and among NS Group, Inc., Kentucky Electric Steel, Inc. and NSub I, Inc. (formerly Kentucky Electric Steel Corporation), filed as Exhibit 10(h) to Company's Form 10-K for the fiscal year ended September 25, 1993, File No. 1-9383, and incorporated herein by this reference 10.8 Registration Rights Agreement dated October 6, 1993 among Kentucky Electric Steel, Inc., NS Group, Inc. and NSub I, Inc. (formerly Kentucky Electric Steel Corporation), filed as Exhibit 10(i) to Company's Form 10-K for fiscal year ended September 25, 1993, File No. 1-9383, and incorporated herein by this reference 10.9 Form of 11% Subordinated Convertible Debenture due 2005, filed as Exhibit 4.1 to Company's Form 8-K dated October 18, 1990, File No. 1-9838, and incorporated herein by this reference 10.10 Form of Warrant dated October 4, 1990, filed as Exhibit 4.2 to Company's Form 8-K dated October 18, 1990, File No. 1-9838, and incorporated herein by reference; and First Amendment to Warrant dated September 26, 1992, filed as Exhibit 4(c) to Company's Form 10-K for the fiscal year ended September 26, 1992, File No. 1-9838, and incorporated herein by this reference 10.11 Company's 1995 Stock Option and Stock Appreciation Rights Plan, filed as Exhibit A to Company's Proxy Statement dated December 27, 1995, File No. 1-9838, and incorporated herein by this reference 21 Subsidiaries of Registrant, filed as Exhibit 21 to Company's Form 10-K for the fiscal year ended September 30, 1995, File No. 1-9838, and incorporated herein by this reference 23 Consent of Independent Public Accountants 24 Power of Attorney (contained on Signature Page) 27 Financial Data Schedule EX-4 2 Exhibit 4.21 AMENDMENT NO. 4 TO REVOLVING CREDIT, GUARANTY AND SECURITY AGREEMENT THIS AMENDMENT NO. 4 ("Amendment") is entered into as of September 12, 1996, among NEWPORT STEEL CORPORATION, a corporation organized under the laws of the State of Kentucky ("Newport"), KOPPEL STEEL CORPORATION, a corporation organized under the laws of the State of Pennsylvania ("Koppel"), and IMPERIAL ADHESIVES, INC., a corporation organized under the laws of the State of Ohio ("Imperial") (each of Newport, Koppel and Imperial a "Borrower" and, jointly and severally, the "Borrowers"), NS GROUP, INC., a corporation organized under the laws of the State of Kentucky ("Holdings"), ERLANGER TUBULAR CORPORATION, a corporation organized under the laws of the state of Oklahoma ("Erlanger"), NORTHERN KENTUCKY AIR, INC., a corporation organized under the laws of Kentucky ("Air"), NORTHERN KENTUCKY MANAGEMENT, INC., a corporation organized under the laws of the State of Kentucky ("Management") (each of Holdings, Erlanger, Air and Management, a "Guarantor" and, jointly and severally, the "Guarantors"), the undersigned financial institutions and any financial institution that hereafter becomes a lender under the Loan Agreement (as hereinafter defined) (collectively, the "Lenders" and individually a "Lender"), THE BANK OF NEW YORK COMMERCIAL CORPORATION ("BNYCC"), a corporation organized under the laws of the State of New York, PNC BANK, OHIO, NATIONAL ASSOCIATION ("PNC"), BNYCC and PNC as co-agents for Lenders (BNYCC and PNC in such capacity, the "Co-Agents") and BNYCC as administrative and collateral monitoring agent for the Lenders (BNYCC, in such capacity, the "ACM Agent"). BACKGROUND Borrowers, Guarantors and Lenders are parties to a Revolving Credit, Guaranty and Security Agreement dated as of July 28, 1995 (as the same has been amended by Amendment No. 1 thereto, Amendment No. 2 thereto and Amendment No. 3 thereto, and as the same may further be amended, supplemented or otherwise modified from time to time, the "Loan Agreement") pursuant to which Lenders provide Borrowers with certain financial accommodations. Borrowers have requested that Lenders amend certain of the financial covenants in the Loan Agreement and Lenders are willing to do so on the terms and conditions hereafter set forth. NOW, THEREFORE, in consideration of any loan or advance or grant of credit heretofore or hereafter made to or for the account of Borrowers by Lenders, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. Definitions. All capitalized terms not otherwise defined herein shall have the meanings given to them in the Loan Agreement. 2. Amendment to Loan Agreement. Subject to satisfaction of the conditions precedent set forth in Section 4 below, the Loan Agreement is hereby amended as follows: 2.1. Section 6.5 of the Loan Agreement is hereby amended in its entirety to provide as follows: "Net Worth. Cause to be maintained at the end of each fiscal quarter of Holdings, a Net Worth in an amount not less than $57,000,000." 2.2 Section 6.7 of the Loan Agreement is hereby amended in its entirety to provide as follows: "6.7 Interest Coverage. Cause to be maintained on or about the end of each fiscal quarter of Holdings an Interest Coverage Ratio equal to or greater than (a) 1.25 to 1.0 on the last day of (i) the fiscal quarter ended on or about 12/31/95 computed for the fiscal quarters ended on or about 12/31/95, 6/30/95, 3/31/95 and 12/31/94, (ii) the fiscal quarter ended on or about 3/31/96 computed for the fiscal quarters ended on or about 3/31/96, 12/31/95, 6/30/95 and 3/31/95, (iii) the fiscal quarter ended on or about 6/30/96 computed for the fiscal quarters ended 6/30/96, 3/31/96, 12/31/95 and 6/30/95, (iv) the fiscal quarter ended on or about 9/30/96 computed for the fiscal quarters ended on or about 9/30/96, 6/30/96, 3/31/96 and 12/31/95, and (v) each fiscal quarter ended on or about 9/30/96, 12/31/96, 3/31/97 and 6/30/97 for the last four fiscal quarters then ended, and (b) 1.5 to 1.0 on or about the last day of each fiscal quarter thereafter for the last four fiscal quarters then ended." 3. Amendment Fee. Borrowers shall pay to ACM Agent for the ratable benefit of Lenders, a $10,000 amendment fee ("Amendment Fee") upon the execution of this Amendment. 4. Conditions of Effectiveness. This Amendment shall become effective as of September 12, 1996, when and only when ACM Agent shall have received (i) six (6) copies of this Amendment executed by Borrowers and Guarantors, (ii) the Amendment Fee and (iii) such other certificates, instruments, documents, agreements and opinions of counsel as may be required by ACM Agent or its counsel, each of which shall be in form and substance satisfactory to ACM Agent and its counsel. 5. Representations and Warranties. Borrowers and Guarantors hereby represent and warrant as follows: (a) This Amendment and the Loan Agreement, amended hereby, constitute legal, valid and binding obligations of Borrowers and Guarantors and are enforceable against Borrowers and Guarantors in accordance with their respective terms. (b) Upon the effectiveness of this Amendment, Borrowers and Guarantors hereby reaffirm all covenants, representations and warranties made in the Loan Agreement to the extent the same are not amended hereby and agree that all such covenants, representations and warranties shall be deemed to have been remade as of the effective date of this Amendment. (c) No Event of Default or Default has occurred and is continuing or would exist after giving effect to this Amendment. (d) Neither any Borrower or any Guarantor has any defense, counterclaim or offset with respect to the Loan Agreement. 6. Effect on the Loan Agreement. (a) Upon the effectiveness of Section 2 hereof, each reference in the Loan Agreement to "this Agreement," "hereunder," "hereof," "herein" or words of like import shall mean and be a reference to the Loan Agreement as amended hereby. (b) Except as specifically amended herein, the Loan Agreement, and all other documents, instruments and agreements executed and/or delivered in connection therewith, shall remain in full force and effect, and are hereby ratified and confirmed. (c) The execution, delivery and effectiveness of this Amendment shall not operate as a waiver of any right, power or remedy of ACM Agent or Lenders, nor constitute a waiver of any provision of the Loan Agreement, or any other documents, instruments or agreements executed and/or delivered under or in connection therewith. 7. Governing Law. This Amendment shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns and shall be governed by and construed in accordance with the laws of the State of New York. 8. Headings. Section headings in this Amendment are included herein for convenience of reference only and shall not constitute a part of this Amendment for any other purpose. 9. Counterparts. This Amendment may be executed by the parties hereto in one or more counterparts, each of which shall be deemed an original and all of which taken together shall be deemed to constitute one and the same agreement. IN WITNESS WHEREOF, this Amendment has been duly executed as of the day and year first written above. NEWPORT STEEL CORPORATION KOPPEL STEEL CORPORATION IMPERIAL ADHESIVES, INC. NS GROUP, INC. ERLANGER TUBULAR CORPORATION NORTHERN KENTUCKY AIR, INC. NORTHERN KENTUCKY MANAGEMENT, INC. By: /s/ John R. Parker John R. Parker Title: Treasurer of each of the foregoing Corporations THE BANK OF NEW YORK COMMERCIAL CORPORATION, as Lender, as Co-Agent and as ACM Agent By: /s/ Daniel J. Murray Daniel J. Murray Title: Vice President PNC BANK, OHIO, NATIONAL ASSOCIATION, as Lender and as Co-Agent By: /s/ Matthew D. Tevis Matthew D. Tevis Title: Vice President EX-23 3 Exhibit 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included or incorporated by reference in this Form 10-K, into the Company's previously filed Registration Statements, File Nos. 33-24182, 33-24183, 33-51899, 33-28995, 33-37454, 33-39695, 33-56637 and 333-03657. Cincinnati, Ohio /s/Arthur Andersen LLP December 13, 1996 EX-27 4
5 This schedule contains summary financial information extracted from NS Group, Inc.'s consolidated financial statements as of and for the fiscal year ended September 28, 1996, included in the Company's Annual Report on Form 10-K and is qualified in its entirety by reference to such consolidated financial statements. 0000745026 NS GROUP, INC. U.S. YEAR SEP-28-1996 SEP-28-1996 1 3,442 13,855 52,581 757 53,317 142,439 280,322 138,512 300,034 69,570 164,789 0 0 51,778 5,338 300,034 409,382 409,382 369,585 369,585 0 0 24,375 (11,041) (584) (10,457) 0 0 0 (10,457) (.76) (.76)
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