-----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, NBh8TeXHDDE5VCapWQkwvHiwXrmz0ZvkEEjs0Xs/tBlvJ2cxJQn/7YhgWy+EacEw 6ORcvP1EdWkvakoMvhO6Dw== 0000745026-97-000032.txt : 19971222 0000745026-97-000032.hdr.sgml : 19971222 ACCESSION NUMBER: 0000745026-97-000032 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19970927 FILED AS OF DATE: 19971219 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: SEC FILE NUMBER: 001-09838 FILM NUMBER: 97741136 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 27, 1997 COMMISSION FILE NUMBER 1-9838 _______________ NS GROUP, INC. (Exact name of registrant as specified in its charter) _______________ Kentucky (State or other jurisdiction of incorporation or organization) 61-0985936 (I.R.S. Employer Identification Number) Ninth and Lowell Streets, Newport, Kentucky 41072 (Address of principal executive offices) Registrant's telephone number, including area code (606) 292-6809 _______________ Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of each class on which registered Common Stock, no par value New York Stock Exchange Preferred Stock Purchase Rights New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ______ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [X] Based on the closing sales price of December 1, 1997, as reported in The Wall Street Journal, the aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $331.5 million. The number of shares outstanding of the registrant's Common Stock, no par value, was 24,080,148 at December 1, 1997. Documents Incorporated by Reference Parts I, II and III incorporate certain information by reference from the Annual Report to Shareholders for the fiscal year ended September 27, 1997 ("1997 Annual Report to Shareholders"). Part III also incorporates certain information by reference from the Company's Proxy Statement dated December 22, 1997 for the Annual Meeting of Shareholders on February 12, 1998. Table of Contents PART I Page Item 1. Business 3 Item 2. Properties 11 Item 3. Legal Proceedings 12 Item 4. Submission of Matters to a Vote of Security Holders 12 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 13 Item 6. Selected Consolidated Financial Data 13 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 13 Item 8. Financial Statements and Supplementary Data 13 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 13 PART III Item 10. Directors and Executive Officers of the Registrant 14 Item 11. Executive Compensation 14 Item 12. Security Ownership of Certain Beneficial Owners and Management 14 Item 13. Certain Relationships and Related Transactions 14 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 14 PART I ITEM 1. BUSINESS General The Company was incorporated in Kentucky in 1980 as Newport Steel Corporation for the purpose of purchasing the operating assets of the Newport Steel Works from Interlake, Inc. The Company changed its name to NS Group, Inc. in 1987. As used herein, the terms "Company" and "NS Group" refer to NS Group, Inc. and its subsidiaries, unless otherwise required by the context. NS Group conducts business in two industry segments, the specialty steel segment and the adhesives segment. Incorporated herein by reference from the 1997 Annual Report to Shareholders is the segment data included in Management's Discussion and Analysis of Financial Condition and Results of Operations in "Results of Operations" and Note 12 to the Consolidated Financial Statements, which contains additional information pertaining to industry segment data. Specialty Steel Segment The Company is a producer of specialty steel products serving the energy industry. These products are produced at its two mini-mills, Newport Steel Corporation (Newport) and Koppel Steel Corporation (Koppel), and include welded and seamless tubular goods primarily used in oil and natural gas drilling and production operations, referred to as oil country tubular goods (OCTG); and line pipe, used in the transmission of oil, natural gas and other fluids. Both Newport and Koppel are certified by the American Petroleum Institute (API) for production of these products. The Company also produces special bar quality products, primarily used in the manufacture of heavy industrial equipment; and hot rolled coils, which are sold to service centers and other manufacturers for further processing. The term mini-mill connotes a smaller, relatively low-cost mill that typically uses steel scrap as its basic raw material and offers a relatively limited range of products. The following table sets forth certain operating information with respect to Newport and Koppel for the periods indicated. (In thousands) 1997 1996 1995 Net sales Newport Welded tubular products $210,245 $157,385 $145,330 Hot rolled coils and other products 10,336 16,230 16,673 Koppel Seamless tubular products 152,146 133,446 90,926 SBQ products 67,502 62,405 82,954 $440,229 $369,466 $335,883 Operating income (loss) before corporate allocations Newport $ 24,225 $ (4,855) $ (5,708) Koppel 19,535 19,741 16,136 $ 43,760 $ 14,886 $ 10,428 Manufacturing Facilities and Processes - Specialty Steel Segment Newport Facilities The Company manufactures welded OCTG and line pipe products and hot rolled coils at its facilities located near Newport, Kentucky. The production process for Newport's welded tubular products includes three separate operations: melting, rolling and pipe-making. Steel scrap is melted into molten steel utilizing three 100-ton electric arc furnaces. Molten steel, reaching 3,000 degrees Fahrenheit, is tapped from the furnaces into ladles. The ladles are then moved to an auxiliary stir station where an argon lance stir process improves steel quality through consistent metal deoxidation and desulfurization. Steel refining continues at the ladle metallurgical station (LMS). The LMS, which serves a dual role, allows for the precise control of temperature and chemistry and enables continuous production sequencing of the molten steel to the continuous slab caster, thereby optimizing melt shop productivity. Once strict metallurgical standards have been met, the molten steel is "cast" into slabs that range in size from 7 to 10 inches in thickness, 28 to 55 inches in width and 15 to 34 feet in length. Slabs are cut to length and lifted onto specially designed rail cars for transportation to the adjacent reheat furnace. From time to time, Newport also purchases slabs from third parties to supplement the production of slabs by Newport's melt shop. In fiscal 1997, Newport purchased approximately 117,000 tons of slabs for use in the production of coil and pipe. Although Newport's capacity utilization for its melt shop was 60% for fiscal 1997, one of Newport's three furnaces could not be operated simultaneously with the other furnaces for most of the year due to constraints on Newport's baghouse facilities. The Company completed a project to upgrade its baghouse facilities late in the third quarter of fiscal 1997 to permit the simultaneous operation of Newport's three furnaces. The Company believes the upgrade of its baghouse facilities will significantly reduce its need to purchase slabs from third parties in the future. At Newport's hot strip rolling mill, slabs are processed through the walking beam slab reheat furnace where they are evenly heated to temperatures over 2,400 degrees Fahrenheit. Slabs exit directly from the reheat furnace onto the hot strip rolling mill where they are reduced to desired thickness and rolled into coils in sizes up to a maximum of 50 inches in width. Coils are then either slit and formed into welded tubular products at one of the two pipe-making facilities or are sold as hot rolled coils. Newport's welded tubular products range in size from 4 1/2 to 13 3/8 inches in outside diameter and are available in both carbon and alloy grades. For fiscal 1997, the Newport facilities' rated capacities and capacity utilization were as follows: Rated Capacity Capacity (in tons) Utilization Melt shop 700,000 60% Hot strip rolling mill 750,000 65% Welded pipe mills 580,000 75% Koppel Facilities The Company manufactures seamless OCTG, line pipe products and SBQ products at its facilities located in Koppel and Ambridge, Pennsylvania and Baytown, Texas. The operations consist of a melting and casting facility and bar mill located in Koppel and a seamless tubemaking facility located approximately 20 miles away in Ambridge. The melting and casting facilities at Koppel consist of an 80-ton Ultra-High Powered (UHP) electric arc furnace, a ladle refining station and a computer-controlled four-strand continuous bloom/billet caster. Select grades of steel scrap are melted utilizing the UHP furnace. Once the molten steel reaches temperatures of approximately 3,000 degrees Fahrenheit, it is tapped from the UHP furnace into a ladle and transported to the ladle refining station. The ladle refining station allows for the addition of alloys, thereby providing precise chemical compositions, and it maintains the molten steel at proper temperatures for the caster. Once the chemistries are analyzed and conformed to metallurgical standards, the ladle is carried by crane to the continuous caster. The continuous caster is capable of casting 9 inch square blooms or 5 1/2 inch round billets. Blooms and billets are further processed at the tubemaking facilities into seamless tubular products or at the bar facilities into SBQ products, or they can be sold as "as cast" (semi-finished) product. Koppel's tubemaking facility includes an automated rotary hearth furnace where round billets (tube rounds) are reheated to temperatures over 2,200 degrees Fahrenheit. Tube rounds exit the furnace to a piercer where a hollow tube is formed. Hollow tubes are then rolled to a specific size and wall thickness by passing through either the mandrell mill or transval mill. Seamless tubular products are produced in both carbon and alloy grades in sizes ranging from 1 7/8 to 8 1/2 inches in outside diameter. At Koppel's bar mill, blooms are reheated in a highly automated rotary hearth furnace to temperatures over 2,200 degrees Fahrenheit. Blooms, upon exiting the furnace, pass through a series of rolls, where they are reshaped into round bars. SBQ products are available in both carbon and alloy grades in sizes measuring 2 7/8 to 6 inches in diameter. For fiscal 1997, the Koppel facilities' rated capacities and capacity utilization were as follows: Rated Capacity Capacity (in tons) Utilization Melt shop 450,000 82% Seamless tube mill 250,000 74% Bar mill 200,000 78% Finishing Facilities The Company processes and finishes a portion of its welded and seamless tubular products at facilities located at the Port of Catoosa, near Tulsa, Oklahoma (Erlanger Tubular Corporation, or Erlanger) and at Baytown, Texas, located near Houston, Texas (Baytown). The finishing processes include upsetting, which is a forging process that thickens tube ends; heat treating, which is a furnace operation designed to strengthen the steel; straightening; non-destructive testing; coating for rust prevention; and threading. Products - Specialty Steel Segment Welded OCTG Products The Company's welded OCTG products, which are produced by Newport, are used primarily as casing in oil and natural gas wells during drilling operations. Welded OCTG products are generally used when higher strength is not required, typically in wells less than 10,000 feet in depth. The Company sells its welded OCTG products as both a plain end and as a finished tubular product in both carbon and alloy grades. Seamless OCTG Products The Company's seamless OCTG products, which are produced by Koppel, are used as drill pipe, casing and production tubing. Drill pipe is used and may be reused to drill several wells. Casing forms the structural wall of oil and natural gas wells to provide support and prevent caving during drilling operations and is generally not removed after it has been installed in a well. Production tubing is placed within the casing and is used to convey oil and natural gas to the surface. The Company's seamless OCTG products are sold as a finished threaded and coupled product in both carbon and alloy grades. Compared to similar welded products, seamless production tubing and casing are better suited for use in hostile drilling environments such as off-shore drilling or deeper wells because of their greater strength and durability. The production of seamless tubular products with these properties requires a more costly and specialized manufacturing process than does the production of welded tubular products. The majority of the Company's seamless OCTG product sales are production tubing in sizes ranging from 1.9 inches to 5 inches in outside diameter. Demand for the Company's OCTG products is cyclical in nature, being dependent on the number and depth of oil and natural gas wells being drilled in the United States and globally. The level of drilling activity is largely a function of the current prices of oil and natural gas and expectations of future prices. In addition, shipments by domestic producers of OCTG products are influenced by the levels of inventory held by producers, distributors and end users as well as the level of foreign imports of OCTG products. The average number of oil and natural gas drilling rigs in operation in the United States was 906 in fiscal 1997, up from 759 in fiscal 1996. Line Pipe Products The Company's line pipe products, which are produced by both Newport and Koppel, are used primarily in gathering lines for the transportation of oil and natural gas at the drilling site and in transmission lines by both gas utility and transmission companies. Line pipe products are coated and shipped as a plain end product and welded together on site. The majority of the Company's line pipe sales are welded products. The demand for line pipe is only partially dependent on oil and gas drilling activities. Line pipe demand is also dependent on factors such as the level of pipeline construction activity, line pipe replacement requirements, new residential construction and gas utility purchasing programs. Special Bar Quality Products The Company manufactures a specialized market niche of SBQ products at Koppel in sizes ranging from 2.875 to 6.0 inches in diameter. The Company produces its SBQ products from continuous cast blooms that enables substantial size reduction in the bloom during processing and provides greater strength-to-weight ratios. These SBQ products are primarily used in critical weight-bearing applications such as suspension systems, gear blanks, drive axles for tractors and off-road vehicles, heavy machinery components and hydraulic and pneumatic cylinders. The demand for the Company's SBQ products is cyclical in nature and is sensitive to general economic conditions. Hot Rolled Coils The Company produces commercial quality grade hot rolled coils at Newport, from 28 to 50 inches in width, between 0.125 and 0.500 inches in gauge, and in 15 ton coil weights. These products are sold to service centers and to others for use in high-strength applications. The demand for these products is cyclical in nature and is sensitive to general economic conditions. Other Products The Company's tubular products are inspected and tested to ensure that they meet or exceed API specifications. Products that do not meet specification are classified as less then prime products and are sold at substantially reduced prices. Markets and Distribution - Specialty Steel Segment The Company sells its specialty steel products to its customers through an in-house sales force. The primary end markets for the Company's seamless tubular products have been the southwest United States and certain foreign markets, including offshore applications. The Company has historically marketed its welded tubular products in the east, central and southwest regions of the United States, in areas where shallow oil and gas drilling and exploration activity utilize welded tubular products. Nearly all of the Company's OCTG products are sold to domestic distributors, some of whom subsequently sell the Company's products into the international marketplace. The Company sells its SBQ products to customers located generally within 400 miles of the Koppel facilities. All of the Company's steel-making and finishing facilities are located on or near major rivers or waterways, enabling the Company to transport its tubular products into the southwest by barge. The Company ships substantially all of its seamless and welded OCTG products destined for the southwest region by barge. Customers - Specialty Steel Segment The Company has approximately 300 specialty steel product customers. The Company's OCTG and line pipe products are used by major and independent oil and natural gas exploration and production companies in drilling and production applications. Line pipe products are also used by gas utility and transmission companies. The majority of the Company's OCTG products are sold to domestic distributors. Line pipe products are sold to both domestic distributors and directly to end users. The Company sells its SBQ products to service centers, cold finishers, forgers and original equipment manufacturers. Hot rolled coils are sold primarily to service centers and other manufacturers for further processing. The Company has long-standing relationships with many of its larger customers; however, the Company believes that it is not dependent on any customer and that it could, over time, replace lost sales attributable to any one customer. In fiscal 1997, no one customer accounted for more than 10% of total net sales, other than Bourland & Leverich Supply Company, which accounted for 10.3% of total net sales. Competition - Specialty Steel Segment The markets for the Company's specialty steel products are highly competitive and cyclical. The Company's principal competitors in its primary markets include integrated producers, mini-mills and welded tubular product processing companies, as well as foreign steel producers, many of which have substantially greater assets and larger sales organizations than the Company. The Company believes that the principal competitive factors affecting its business are price, quality and customer service. In the welded OCTG and line pipe market, the Company competes against certain manufacturers who purchase hot rolled coils for further processing into welded OCTG and line pipe products. The cost of finished tubular products for these manufacturers is largely dependent on the market price of hot rolled coils. Depending on market demand for hot rolled coil, these tubular manufacturers may purchase hot rolled coils at a lower or higher cost than the Company's cost to manufacture hot rolled coils. Also, additional new hot rolled manufacturing capacity is anticipated which may also impact the market price for hot rolled coils. In the small diameter seamless OCTG market in which Koppel competes, its principal competitors include the USS/Kobe Steel Company in Lorain, Ohio, and a number of foreign producers. With respect to its SBQ products, Koppel competes with a number of steel manufacturers, including USX Corporation, CSC Industries, Inc., Republic Engineered Steels, Inc., Inland Steel Industries, Inc., MacSteel Division of Quanex Corporation, North Star Steel Company, Inc. and The Timken Company. Newport's principal domestic competitors in the welded tubular market are Lone Star Steel Company, LTV Corporation, IPSCO Steel, Inc. and Maverick Tube Corporation. In July 1995, the United States imposed duties on the imports of various OCTG products from certain foreign countries in response to antidumping and countervailing duty cases filed by several U.S. steel companies. Several foreign OCTG producers, as well as certain U.S. producers, have appealed the determinations to U.S. and international courts or panels. The duties are subject to annual and five-year reviews by the U.S. Department of Commerce. The Company believes the imposition of the duties have had a positive effect on its shipments and pricing of certain of its seamless tubular products; however, it cannot predict the outcome or timing of these appeals at this time. Raw Materials and Supplies - Specialty Steel Segment The Company's major raw material is steel scrap, which is generated principally from industrial, automotive, demolition, railroad and other steel scrap sources. Steel scrap is purchased by the Company either through scrap brokers or directly in the open market. The long-term demand for steel scrap and its importance to the domestic steel industry may be expected to increase as steel-makers continue to expand steel scrap-based electric arc furnace and thin slab casting capacities. For the foreseeable future, however, the Company believes that supplies of steel scrap will continue to be available in sufficient quantities at competitive prices. In addition, a number of technologies exist for the processing of iron ore into forms which may be substituted for steel scrap in electric arc furnace-based steel-making operations. Such forms include direct-reduced iron, iron carbide and hot-briquette iron. While such forms may not be cost competitive with steel scrap at present, a sustained increase in the price of steel scrap could result in increased implementation of these alternative technologies. The Company's steel manufacturing facilities consume large amounts of electricity. The Company purchases its electricity from utilities near its steel-making facilities pursuant to separate contracts entered into by Koppel and Newport. Koppel's contract expired in 1996. The parties have been operating under monthly extensions of the prior contract, while a new supply contract is being negotiated. Newport's contract expires in 2001. The contracts contain provisions that provide for lower priced demand charges during off-peak hours and known maximums in higher cost firm demand power. Also, the Company receives discounted demand rates in return for the utilities' right to periodically curtail service during periods of peak demand. These curtailments are generally limited to a few hours and historically have had a negligible impact on the Company's operations. The Company also consumes smaller quantities of additives, alloys and flux which are purchased from a number of suppliers. Adhesives Segment The Company, through its wholly-owned subsidiary, Imperial Adhesives, Inc. (Imperial), is a custom manufacturer of water-borne, solvent borne and hot melt adhesives and footwear finishes. These products are manufactured at plants located in Cincinnati, Ohio; Nashville, Tennessee and Lynchburg, Virginia. Manufacturing Process - Adhesives Segment Imperial's adhesives products are manufactured by combining and mixing predetermined quantities of raw materials. The raw materials are measured according to specific formulas and mixed in numerous specially designed industrial mixers. Raw materials are available from multiple sources and consist primarily of petrochemical-based materials. Pricing of raw materials generally follows trends in the petrochemical markets. The physical properties of finished formulas are measured and monitored by a statistical process control system. Imperial works closely with its customers to develop adhesive applications designed to meet their specific product requirements. Products and Markets - Adhesives Segment Imperial maintains approximately 1,000 active formulas for the manufacture of water-borne, solvent-borne and hot-melt adhesives products and approximately 600 active formulas for the manufacture of footwear finishes. Its multiple product lines are used primarily in product assembly applications within such industries as footwear, foam bonding, marine and recreational vehicles, consumer packaging, construction, furniture, and transportation. In fiscal 1997, approximately 21% of Imperial's sales were to the footwear industry. The Company's industrial adhesives products are marketed throughout the United States and Caribbean basin through an in-house sales force as well as a number of independent sales representatives. Products are distributed from Imperial's manufacturing sites and a number of public warehouses across the United States and in Puerto Rico. The adhesives industry is currently seeking alternatives to its methylene chloride-based products, which are expected to be largely restricted by OSHA regulations in December 1997. Methylene chloride-based products represented approximately 22% of the Company's adhesives segment sales in fiscal 1997. Competition in the industrial adhesives industry includes several major producers, as well as numerous small and mid-sized companies comparable to Imperial. Imperial competes on the basis of price, product performance and customer service and believes that its diversity and ability to develop applications to meet customers' specific needs allows it to compete effectively with all adhesives producers in its markets. Environmental Matters The Company is subject to federal, state and local environmental laws and regulations, including, among others, the Resource Conservation and Recovery Act (RCRA), the Clean Air Act, the 1990 Amendments to the Clean Air Act, the Clean Water Act and all regulations promulgated in connection therewith, including, among others, those concerning the discharge of contaminants as air emissions or waste water effluents and the disposal of solid and/or hazardous wastes such as electric arc furnace dust. As such, the Company is from time to time involved in administrative and judicial proceedings and administrative inquiries related to environmental matters. As with other steel mills in the industry, the Company's steel mini-mills produce dust which contains lead, cadmium and chromium, and is classified as a hazardous waste. The Company currently collects the dust resulting from its electric arc furnace operations through emission control systems and contracts with a company for treatment and disposal of the dust at an EPA-approved facility. The Company has on its property at Newport a permitted hazardous waste disposal facility. Newport's permit for operating the hazardous waste disposal facility required that it investigate, test, and analyze for potential releases of hazardous constituents from its closed loop water recirculation system. Based upon the findings of its investigation, which have been filed with the EPA, the Company believes that the cost of any remediation of such potential releases, if required, will not be material. In November 1996, Koppel received a Notice of Violation from the EPA alleging violations of the Clean Air Act and the Pennsylvania State Implementation Plan. The violations allegedly occurred during 1995 and 1996 and pertain to air emissions from Koppel's electric arc furnace operations. The conditions which contributed to the alleged violations have been corrected, and as of January 1, 1997, Koppel has demonstrated compliance with air emission regulations. At this time, the Company is unable to determine if the EPA will assess civil penalties as a result of the alleged violations, or the extent of any such potential penalties. In March 1995, Koppel and the EPA signed a Consent Order relating to an April 1990 RCRA facility assessment (the Assessment) completed by the EPA and the Pennsylvania Department of Environmental Resources. The Assessment was performed in connection with a permit application pertaining to a landfill that is adjacent to the Koppel facilities. The Assessment identified potential releases of hazardous constituents at or adjacent to the Koppel facilities prior to the Company's acquisition of the Koppel facilities. The Consent Order established a schedule for investigating, monitoring, testing and analyzing the potential releases. Initial remediation has been completed and a report submitted to the EPA. Additional monitoring and remediation may be required. Pursuant to various indemnity provisions in agreements entered into at the time of the Company's acquisition of the Koppel facilities, certain parties have agreed to indemnify the Company against various known and unknown environmental matters. To date the Company has been fully indemnified against all matters pertaining to the Consent Order and the Company believes that the indemnity provisions provide for it to be fully indemnified against all matters covered by the Consent Order, including all associated costs, claims and liabilities. In two separate incidents occurring in fiscal 1993 and 1992, radioactive substances were accidentally melted at Newport, resulting in the contamination of a quantity of electric arc furnace dust. The Company is investigating and evaluating various issues concerning storage, treatment and disposal of the radiation contaminated electric arc furnace dust; however a final determination as to method of treatment and disposal, cost and further regulatory requirements cannot be made at this time. Depending on the ultimate timing and method of treatment and disposal, which will require appropriate federal and state regulatory approval, the actual cost of disposal could substantially exceed current estimates and the Company's insurance coverage. The Company expects to recover and has recorded a $2.3 million receivable relating to insurance claims for the recovery of disposal costs which will be filed with the applicable insurance carrier at the time such disposal costs are incurred. Such insurance claims will exhaust available insurance coverage pertaining to these incidents. Based on current knowledge, the Company believes the recorded gross reserves of $4.4 million for disposal costs pertaining to these incidents are adequate. Subject to the uncertainties concerning the Consent Order and the storage and disposal of the radiation contaminated dust, the Company believes that it is currently in compliance in all material respects with all applicable environmental regulations. The Company cannot predict the level of required capital expenditures or operating costs that may result from future environmental regulations. Capital expenditures for the next twelve months relating to environmental control facilities are not expected to be material; however, such expenditures could be influenced by new or revised environmental regulations and laws or new information or developments with respect to the Company's operating facilities. As of September 27, 1997, the Company had environmental remediation reserves of $4.4 million, which pertain almost exclusively to accrued disposal costs for radiation contaminated dust. As of September 27, 1997, the estimated range of possible losses related to the environmental contingency matters discussed above in excess of those accrued by the Company is $0 to $3.0 million; however, with respect to the Consent Order, the Company cannot estimate the possible range of losses should the Company ultimately not be indemnified. Based upon its evaluation of available information, management does not believe that any of the environmental contingency matters discussed above are likely, individually or in the aggregate, to have a material adverse effect upon the Company's consolidated financial position, results of operations or cash flows. However, the Company cannot predict with certainty that new information or developments with respect to the Consent Order or its other environmental contingency matters, individually or in the aggregate, will not have a material adverse effect on the Company's consolidated financial position, results of operations or cash flows. Employees As of September 27, 1997, the Company had 1,948 employees, of whom 432 were salaried and 1,516 were hourly. Substantially all of the Company's hourly employees are represented by the United Steelworkers of America under contracts expiring in 1998 for Imperial; 1999 for Newport and Koppel; and 2000 for Erlanger. ITEM 2. PROPERTIES The Company's principal operating properties are listed below. The Company believes its facilities are adequate and suitable for its present level of operations. Location and Properties Specialty Steel Segment: Newport, Kentucky - Newport owns approximately 250 acres of real estate upon which is located a melt shop, hot strip mill, two welded pipe mills, a barge facility, machine and fabricating shops and storage and repair facilities aggregating approximately 675,000 square feet, as well as administrative offices. The facilities are also located adjacent to rail lines. Tulsa, Oklahoma - Erlanger leases approximately 36 acres of real estate upon which is located a tubular processing facility. The facility is located at the Tulsa Port of Catoosa where barge facilities are in close proximity. Located on this property are six buildings aggregating approximately 119,000 square feet which house the various finishing operations. Koppel, Pennsylvania - Koppel owns approximately 227 acres of real estate upon which are located a melt shop, bar mill, machine and fabricating shops, storage and repair facilities and administrative offices aggregating approximately 900,000 square feet. The facilities are located adjacent to rail lines. Ambridge, Pennsylvania - Koppel owns approximately 45 acres of real estate upon which are located a seamless tube making facility and seamless tube finishing facilities aggregating approximately 659,000 square feet. The facilities are located adjacent to rail lines and river barge facilities. Baytown, Texas - Koppel owns approximately 55 acres of real estate upon which are located a tubular processing facility and barge facilities. Located on the property are eight buildings aggregating approximately 65,000 square feet which house the various finishing operations. Adhesives Segment: Cincinnati, Ohio; Lynchburg, Virginia; Nashville, Tennessee - Imperial owns approximately seven acres of property in Cincinnati, Ohio; 1.5 acres of property in Lynchburg, Virginia and 3.1 acres in Nashville, Tennessee for use in its adhesives and finishes operations. The Cincinnati properties contain five buildings aggregating approximately 150,000 square feet; the Lynchburg property consists of one 10,000 square foot building and the Nashville property contains one building aggregating approximately 60,000 square feet. Other: Newport, Kentucky - The Company owns approximately 20 acres of partially developed land near Newport, Kentucky, which is held as investment property and is listed for sale. Information regarding encumbrances on the Company's properties is included in Note 4 to the Consolidated Financial Statements of the 1997 Annual Report to Shareholders, and is incorporated herein by reference. ITEM 3. LEGAL PROCEEDINGS See Item 1, Business, "Environmental Matters" regarding the Consent Order entered into by Koppel and the EPA in March 1995 and the Notice of Violation received by Koppel from the EPA in November 1996. The Company is subject to various claims, lawsuits and administrative proceedings arising in the ordinary course of business with respect to workers compensation, health care and product liability coverages (each of which is self-insured to certain levels), as well as commercial and other matters. Based upon its evaluation of available information, management does not believe that any such matters are likely, individually or in the aggregate, to have a material adverse effect upon the Company's consolidated financial position, results of operations or cash flows. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Incorporated herein by reference from the 1997 Annual Report to Shareholders, "Corporate Information - Stock Market Information" and "Corporate Information - Stock Price" and Note 4 to the Consolidated Financial Statements. As of December 1, 1997 there were approximately 184 record holders of Common Stock. ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA Incorporated herein by reference from the 1997 Annual Report to Shareholders, "Consolidated Historical Summary". ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Incorporated herein by reference from the 1997 Annual Report to Shareholders, "Management's Discussion and Analysis of Financial Condition and Results of Operations". ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Incorporated herein by reference from the 1997 Annual Report to Shareholders, "Consolidated Statements of Operations"; "Consolidated Balance Sheets"; "Consolidated Statements of Cash Flows"; Consolidated Statements of Common Shareholders' Equity"; "Notes to Consolidated Financial Statements"; "Report of Management" and "Report of Independent Public Accountants". ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Incorporated herein by reference from the Company's Proxy Statement dated December 22, 1997 for the Annual Meeting of Shareholders on February 12, 1998, under the caption "Election of Directors - Nominees for Election as Directors"; "Share Ownership of Certain Beneficial Owners and Management - footnote (4)"; "Information Regarding Meetings and Committees of the Board of Directors - Committees of the Board "; and "Section 16(a) Beneficial Ownership Reporting Compliance". ITEM 11. EXECUTIVE COMPENSATION Incorporated herein by reference from the Company's Proxy Statement dated December 22, 1997 for the Annual Meeting of Shareholders on February 12, 1998, under the caption "Information Regarding Meetings and Committees of the Board of Directors - Director Compensation"; "Executive Compensation"; and "Compensation Committee Interlocks and Insider Participation". ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Incorporated herein by reference from the Company's Proxy Statement dated December 22, 1997 for the Annual Meeting of Shareholders on February 12, 1998, "Share Ownership of Certain Beneficial Owners and Management". ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Incorporated herein by reference from the Company's Proxy Statement dated December 22, 1997 for the Annual Meeting of Shareholders on February 12, 1998, under the caption "Compensation Committee Interlocks and Insider Participation" and "Certain Transactions". PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. Consolidated Financial Statements - Audited consolidated financial statements required by this item are incorporated by reference and listed in Part II, Item 8. (a) 2. Consolidated Financial Statement Schedule - The financial statement schedule required to be filed as a part of this report is included herein: - - Report of Independent Public Accountants on Financial Statement Schedule - - Schedule II - Valuation and Qualifying Accounts (a) 3. Exhibits - Reference is made to the Index to Exhibits, which is included herein as part of this report. (b) Reports on Form 8-K - None. Report of Independent Public Accountants on Financial Statement Schedule To NS Group, Inc.: We have audited in accordance with generally accepted auditing standards the consolidated financial statements included in NS Group, Inc. and subsidiaries annual report to shareholders incorporated by reference in this Form 10-K, and have issued our report thereon dated October 30, 1997. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in Item 14(a) 2 is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audit of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. Cincinnati, Ohio ARTHUR ANDERSEN LLP October 30, 1997 SCHEDULE II NS GROUP, INC. AND SUBSIDIARIES VALUATION AND QUALIFYING ACCOUNTS (Dollars in thousands) Reserves Deducted from Assets in Balance Sheets Allowance for Allowance Doubtful for Cash Accounts(1) Discounts(1) BALANCE, September 24, 1994 $ 637 $ 306 Additions: Charged to costs and expenses 586 3,553 Deductions: Net charges of nature for which reserves were created (202) (3,330) BALANCE, September 30, 1995 $1,021 $ 529 Additions: Charged to costs and expenses 744 3,487 Deductions: Net charges of nature for which reserves were created (1,008) (3,675) BALANCE, September 28, 1996 $ 757 $ 341 Additions: Charged to costs and expenses 1,050 7,414 Deductions: Net charges of nature for which reserves were created (1,095) (7,124) BALANCE, September 27, 1997 $ 712 $ 631 (1) Deducted from accounts receivable SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. NS GROUP, INC. Date: December 12, 1997 By: /s/John R. Parker John R. Parker, Vice President,Treasurer and Chief Financial Officer KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Clifford R. Borland and John R. Parker, and each of them, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities to sign any and all amendments to this Annual Report on Form 10-K and any other documents and instruments incidental thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents and/or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Date: December 12, 1997 /s/Clifford R. Borland Clifford R. Borland, Chief Executive Officer and Director Date: December 12, 1997 /s/Paul C. Borland,Jr. Paul C. Borland, Jr., President and Chief Operating Officer and Director Date: December 12, 1997 /s/John R. Parker John R. Parker, Vice President, Treasurer and Chief Financial Officer (Principal Financial Officer) Date: December 12,1997 /s/Thomas J. Depenbrock Thomas J. Depenbrock Vice President and Corporate Controller (Principal Accounting Officer) Date: December 12, 1997 /s/Ronald R. Noel Ronald R. Noel Vice President and Director Date: December 12, 1997 /s/John B. Lally John B. Lally, Director Date: December 12, 1997 /s/Patrick J. B. Donnelly Patrick J. B. Donnelly, Director Date: December 12, 1997 /s/R. Glen Mayfield R. Glen Mayfield, Director INDEX TO EXHIBITS Number Description 3.1 Amended and Restated Articles of Incorporation of Registrant, filed as Exhibit 3.1 to Amendment No. 1 to Registrants' Form S-1 dated January 17, 1995, File No. 33-56637, and incorporated herein by this reference 3.2 Amended and restated By-Laws of Registrant, dated December 4, 1995, filed as Exhibit 3.2 to Company's Form 10-K for the fiscal year ended September 30, 1995, File No. 1-9838, and incorporated herein by this reference Exhibits 4.1 through 4.19 were filed as exhibits under their respective Exhibit numbers to Company's Form 10-Q for the quarterly period ended July 1, 1995, File No. 1-9838, and are incorporated herein by this reference 4.1 Indenture (including form of Senior Secured Note) between the Company and The Huntington National Bank, as trustee (the "Trustee") 4.2 Leasehold and Fee Mortgage, Assignment of Rents and Leases and Security Agreement from Newport to the Trustee (Kentucky) 4.3 Mortgage, Assignment of Rents and Leases and Security Agreement from Koppel to the Trustee (Pennsylvania) 4.4 Deed of Trust, Assignment of Rents and Leases and Security Agreement from Koppel to the Trustee (Texas) 4.5 Leasehold Mortgage, Assignment of Rents and Leases and Security Agreement from Erlanger to the Trustee (Oklahoma) 4.6 Junior Leasehold and Fee Mortgage, Assignment of Rents and Leases and Security Agreement from Newport to the Company (Kentucky) 4.7 Junior Mortgage, Assignment of Rents and Leases and Security Agreement from Koppel to the Company (Pennsylvania) 4.8 Junior Deed of Trust, Assignment of Rents and Leases and Security Agreement from Koppel to the Company (Texas) 4.9 Junior Leasehold Mortgage, Assignment of Rents and Leases and Security Agreement from Erlanger to the Company (Oklahoma) 4.10 Subsidiary Security Agreement between Newport and the Trustee 4.11 Subsidiary Security Agreement between Koppel and the Trustee 4.12 Subsidiary Security Agreement between Erlanger and the Trustee 4.13 ICN Security Agreement between Newport and the Company INDEX TO EXHIBITS (Continued) Number Description 4.14 ICN Security Agreement between Koppel and the Company 4.15 ICN Security Agreement between Erlanger and the Company 4.16 Pledge and Security Agreement between the Company and the Trustee 4.17 Subsidiary Guarantee 4.18 Intercreditor Agreement between the Trustee and the Bank of New York Commercial Corporation, as agent under the Credit Facility 4.19 Agreement between the Trustee, Koppel and the Commonwealth of Pennsylvania, Department of Commerce 4.20 Revolving Credit, Guaranty and Security Agreement among Bank of New York Commercial Corporation, PNC Bank Ohio, N.A., Newport, Koppel, Imperial, the Company, Erlanger, Northern Kentucky Air, Inc. and Northern Kentucky Management, Inc., filed as Exhibit 4.21 to Company's Form 10-Q for the quarterly period ended July 1, 1995, File No. 1-9838, and incorporated herein by this reference; Amendment No. 1 dated October 23, 1995 and Amendment No. 2 dated December 21, 1995 filed as Exhibit 4.21 to Company's Form 10-Q for the quarterly period ended December 30, 1995, File No. 1-9838, and incorporated herein by this reference; Amendment No. 3 dated February 14, 1996, filed as Exhibit 4.1 to Company's Post-Effective Amendment No. 1 on Form S-3 to Form S-1 Registration Statement, Registration No. 33-56637, and incorporated herein by this reference; and Amendment No. 4 dated September 12, 1996, filed as Exhibit 4.21 to Company's Form 10-K for the fiscal year ended September 28, 1996, File No. 1-9838, and incorporated herein by this reference 4.21 Warrant Agreement between the Company and The Huntington National Bank, as warrant agent, filed as Exhibit 4.22 to Company's Form 10-Q for the quarterly period ended July 1,1995, File No. 1-9838, and incorporated herein by this reference 10.1 Company's Amended Employee Incentive Stock Option Plan, filed as Exhibit 10(a) to Company's Form 10-K for the fiscal year ended September 30, 1989, File No. 1-9838, and incorporated herein by this reference 10.2 Company's Executive Bonus Plan, filed as Schedule B to Exhibit 10.4 to Company's Registration Statement on Form S-18, File No. 2-90643, and incorporated herein by this reference 10.3 Company's Non-Qualified Stock Option and Stock Appreciation Rights Plan of 1988, filed as Exhibit 1 to Company's Proxy Statement dated January 13, 1989, File No. 1-9838, and incorporated herein by this reference 10.4 Rights Agreement dated as of November 17, 1988 between Company and Pittsburgh National Bank, filed as Exhibit 1 to Company's Form 8-K dated November 17, 1988, File No. 1-9838, and incorporated herein by this reference, and Appointment and Amendment Agreement dated July 29, 1994 between Registrant and Registrar and Transfer Company, filed as Exhibit 10(d) to Company's Form 10-Q dated May 29, 1994, File No. 1-9838, and incorporated herein by this reference INDEX TO EXHIBITS (Continued) Number Description 10.5 Company's 1993 Incentive Stock Option Plan, filed as Exhibit 1 to Company's Proxy Statement dated December 22, 1992, File No. 1-9838, and incorporated herein by this reference 10.6 Transfer Agreement, dated September 29, 1993, filed on September 28, 1993 as Exhibit 10.2 to Amendment No. 2 to the Registration Statement on Form S-1 of Kentucky Electric Steel, Inc., File No. 33-67140, and incorporated herein by this reference 10.7 Tax Agreement, dated October 6, 1993, by and among NS Group, Inc., Kentucky Electric Steel, Inc. and NSub I, Inc. (formerly Kentucky Electric Steel Corporation), filed as Exhibit 10(h) to Company's Form 10-K for the fiscal year ended September 25, 1993, File No. 1-9383, and incorporated herein by this reference 10.8 Registration Rights Agreement dated October 6, 1993 among Kentucky Electric Steel, Inc., NS Group, Inc. and NSub I, Inc. (formerly Kentucky Electric Steel Corporation), filed as Exhibit 10(I) to Company's Form 10-K for fiscal year ended September 25, 1993, File No. 1-9383, and incorporated herein by this reference 10.9 Form of Warrant dated October 4, 1990, filed as Exhibit 4.2 to Company's Form 8-K dated October 18, 1990, File No. 1-9838, and incorporated herein by reference; and First Amendment to Warrant dated September 26, 1992, filed as Exhibit 4(c) to Company's Form 10-K for the fiscal year ended September 26, 1992, File No. 1-9838, and incorporated herein by this reference 10.10 Company's 1995 Stock Option and Stock Appreciation Rights Plan, filed as Exhibit A to Company's Proxy Statement dated December 27, 1995, File No. 1-9838, and incorporated here in by this reference 13 1997 Annual Report to Shareholders (not deemed "filed" except for portions which are expressly incorporated by reference), filed herewith 21 Subsidiaries of Registrant 23 Consent of Independent Public Accountants 24 Power of Attorney (contained on Signature Page) 27 Financial Data Schedule EX-13 2 EXHIBIT 13 The following are the excerpted portions of the NS Group, Inc. Annual Report to Shareholders for the fiscal year ended September 27,1997 which are expressly incorporated by reference into Form 10-K. Management's Discussion and Analysis of Financial Condition and Results of Operations The following analysis of financial condition and results of operations of the Company should be read in conjunction with the audited Consolidated Financial Statements and related Notes of the Company. The matters discussed or incorporated by reference in this report that are forward-looking statements (as defined in the Private Securities Litigation Reform Act of 1995) involve risks and uncertainties. Such risks and uncertainties include, but are not limited to: (i) the level of domestic as well as worldwide oil and natural gas drilling activity; (ii) general economic conditions; (iii) product demand and industry capacity; (iv) industry pricing; (v) the presence or absence of governmentally imposed trade restrictions; (vi) manufacturing efficiencies; (vii) volatility in raw material costs, particularly steel scrap; (viii) costs of compliance with environmental regulations; and (ix) product liability or other claims. These risks and uncertainties may cause the actual results or performance of the Company to differ materially from any future results or performance expressed or implied by such forward-looking statements. General The Company operates in two business segments: specialty steel and industrial adhesives. Within the specialty steel segment are the operations of Newport Steel Corporation (Newport), a manufacturer of welded tubular steel products and hot rolled coils, and Koppel Steel Corporation (Koppel), a manufacturer of seamless tubular steel products, special bar quality (SBQ) products and semi-finished steel products. The Company's specialty steel products consist of: (I) welded and seamless tubular goods used primarily in oil and natural gas drilling and production operations (oil country tubular goods, or OCTG); (ii) line pipe used in the transmission of oil, gas and other fluids; (iii) SBQ products used primarily in the manufacture of heavy industrial equipment; and (iv) hot rolled coils which are sold to service centers and other manufacturers for further processing. Within the adhesives segment are the operations of Imperial Adhesives, Inc. (Imperial), a manufacturer of industrial adhesives products. See Note 12 to the Consolidated Financial Statements included herein for selected financial information by business segment. Results of Operations The Company's net sales, gross profit and operating results by industry segment for each of the three fiscal years in the period ended September 27, 1997 are summarized below. Fiscal 1997 and 1996 contain fifty-two weeks and fiscal 1995 contains fifty-three weeks. As such, the increases and decreases in operating results for the comparative periods, as discussed below, were partially attributable to the additional week of operations in fiscal 1995. (In thousands) 1997 1996 1995 Net sales: Specialty steel segment Newport $220,581 $173,615 $162,003 Koppel 219,648 195,851 173,880 440,229 369,466 335,883 Adhesives segment 40,941 39,916 35,469 $481,170 $409,382 $371,352 Gross profit: Specialty steel segment Newport $ 31,121 $ 3,966 $ 4,171 Koppel 26,574 26,251 22,266 57,695 30,217 26,437 Adhesives segment 10,630 9,580 7,645 $ 68,325 $ 39,797 $ 34,082 Operating income (loss): Specialty steel segment Newport $ 24,225 $ (4,855) $ (5,708) Koppel 19,535 19,741 16,136 43,760 14,886 10,428 Adhesives segment 1,799 1,597 1,248 Corporate allocations (4,591) ( 4,430) (3,870) $ 40,968 $ 12,053 $ 7,806 Shipment and sales data for the Company's specialty steel segment for each of the three fiscal years in the period ended September 27, 1997 were as follows: 1997 1996 1995 Tons shipped: Newport Welded tubular products 418,300 348,900 322,900 Hot rolled coils and other products 26,200 43,300 47,600 Koppel Seamless tubular products 172,100 157,400 116,600 SBQ products 152,400 133,700 169,000 769,000 683,300 656,100 Net sales ($000's): Newport Welded tubular products $210,245 $157,385 $145,330 Hot rolled coils and other products 10,336 16,230 16,673 Koppel Seamless tubular products 152,146 133,446 90,926 SBQ products 67,502 62,405 82,954 $440,229 $369,466 $335,883 Fiscal Year Ended September 27, 1997 compared with Fiscal Year Ended September 28, 1996 Net sales in fiscal 1997 increased $71.8 million, or 17.5%, from fiscal 1996. Specialty steel segment net sales increased $70.8 million, or 19.2%, and the adhesives segment net sales increased $1.0 million, or 2.6%, from fiscal 1996. The overall increase in specialty steel segment net sales was primarily attributable to increased shipments and average selling prices of the Company's tubular products as more fully discussed below. Welded tubular net sales increased $52.9 million, or 33.6%, on a volume increase of 19.9%. The increase in total welded tubular net sales was primarily due to an increase in shipments and average selling price of welded OCTG products. The increase in welded OCTG shipments and prices were the result of increased drilling activity. Average selling price for all welded tubular products was $503 per ton, an 11.5% increase from fiscal 1996. Seamless tubular net sales increased $18.7 million, or 14.0%, on a volume increase of 9.3%. The increase in total seamless tubular net sales was primarily due to increased shipments of seamless OCTG products, attributable to increased domestic and international drilling activity, including off-shore drilling. Average selling price for all seamless tubular products was $884 per ton, a 4.2% increase from fiscal 1996, resulting primarily from changes in product mix. Demand for the Company's OCTG products is cyclical in nature, being dependent on the number and depth of oil and natural gas wells being drilled in the United States and globally. The level of drilling activity is largely a function of the current prices of oil and natural gas and expectations of future prices. In addition, shipments by domestic producers of OCTG products are influenced by the levels of inventory held by producers, distributors and end users, as well as the level of foreign imports of OCTG products. The average number of oil and natural gas drilling rigs in operation in the United States (rig count) was 906 in fiscal 1997, up from 759 in fiscal 1996. In July 1995, the United States imposed duties on the imports of various OCTG products from certain foreign countries in response to antidumping and countervailing duty cases filed by several U.S. steel companies. Several foreign OCTG producers, as well as certain U.S. producers, have appealed the determinations to U.S. and international courts or panels. The duties are subject to annual and five-year reviews by the U.S. Department of Commerce. The Company believes the imposition of the duties has had a positive effect on its shipments and the pricing of certain of its seamless tubular products; however, it cannot predict the outcome or timing of the appeals or reviews at this time. SBQ product net sales increased $5.1 million, or 8.2%, on a volume increase of 14.0%. Fiscal 1997 average selling price for SBQ products declined 5.1% from fiscal 1996. While shipments of SBQ products are above prior year levels, market and competitive conditions resulted in lower pricing. Other product shipments and sales for fiscal 1997 were primarily attributable to sales of hot rolled coils. The demand for the Company's SBQ and hot rolled coil products is cyclical in nature and is sensitive to general economic conditions. Gross profit for fiscal 1997 increased $28.5 million from fiscal 1996, for a gross profit margin of 14.2% in fiscal 1997 compared to 9.7% in fiscal 1996. The specialty steel segment gross profit increased $27.5 million, and this segment had a gross profit margin of 13.1% in fiscal 1997 versus 8.2% in fiscal 1996. The increase in specialty steel segment gross profit and margin was attributable to Newport's welded tubular operations, where gross profit margins rose from 2.3% in the prior year to 14.1% for the current year. The increase was the result of increased shipments of welded OCTG products, higher average selling prices for all tubular products, improved operating efficiencies and cost reduction initiatives. Koppel's gross profit margin decreased to 12.1% from 13.4% in fiscal 1996, primarily due to a decrease in SBQ selling prices. The adhesives segment gross profit increased $1.1 million from fiscal 1996 due to slightly lower raw material costs and the gross profit margin was 26.0% compared to 24.0% in fiscal 1996. Fiscal 1997 selling and administrative expenses decreased $0.4 million from 1996 and decreased as a percentage of sales from 6.8% in fiscal 1996 to 5.7% in fiscal 1997. As a result of the above factors, operating income increased $28.9 million, from $12.1 million in fiscal 1996 to $41.0 million in fiscal 1997. The increase in operating income was almost solely attributable to the specialty steel segment and was primarily due to increased shipments and average selling prices for welded OCTG products and improved operations at Newport. Interest income increased $0.4 million from fiscal 1996 as a result of increased average invested cash and short-term investment balances during fiscal 1997. Interest expense for fiscal 1997 was virtually unchanged from fiscal 1996 at $24.3 million. Other income, net was $1.5 million and $0.6 million for fiscal 1997 and fiscal 1996, respectively. Fiscal 1997 includes gains from the sale of certain development property and settlement of insurance claims, while fiscal 1996 also includes gains from insurance claims, offset by a loss on the sale of a non-steel segment fixed asset. The Company's combined federal and state effective tax rate for fiscal 1997 was 28.6%. This rate is lower than the combined federal and state statutory rates primarily due to the utilization of net operating loss carryforwards for which certain deferred tax valuation allowances had been previously recorded. The Company is currently paying federal taxes at the alternative minimum tax rate of 20%. As a result of the above factors, the Company reported fiscal 1997 net income before extraordinary item of $13.7 million, or $.86 per primary share ($.81 fully diluted), compared to a net loss of $10.5 million, or a $.76 loss per primary and fully diluted share, in fiscal 1996. In connection with a fiscal 1997 fourth quarter refinancing, the Company incurred prepayment costs and wrote off unamortized debt discount and debt issuance costs which resulted in an extraordinary charge of $9.3 million, net of applicable income tax benefit of $2.3 million, or $.58 per primary share and $.55 per fully diluted share. See Liquidity and Capital Resources and Note 4 to the Consolidated Financial Statements. Fiscal Year Ended September 28, 1996 compared with Fiscal Year Ended September 30, 1995 Net sales in fiscal 1996 increased $38.0 million, or 10.2%, from fiscal 1995. Specialty steel segment net sales increased $33.6 million, or 10.0%, and the adhesives segment net sales increased $4.4 million, or 12.5%, from fiscal 1995. The overall increase in specialty steel segment net sales was primarily attributable to increased shipments of the Company's tubular products. Welded tubular net sales increased $12.1 million, or 8.3%, on a volume increase of 8.1%. The increase in welded tubular net sales was primarily attributable to an increase in shipments of both welded line pipe products and welded OCTG products. Average selling price for all welded tubular products was essentially unchanged from fiscal 1995. Seamless tubular net sales increased $42.5 million, or 46.8%, on a volume increase of 35.0%. The increases in seamless tubular net sales and shipments were primarily due to increases in seamless OCTG product shipments and average selling prices which were attributable in part to a decline in the level of foreign imports, increased off-shore drilling activity, as well as, with respect to pricing, changes in OCTG product mix. Fiscal 1996 average selling price for all seamless tubular products increased 8.7% from fiscal 1995. The average number of oil and natural gas drilling rigs in operation in the United States was 759 in fiscal 1996, up from 738 in fiscal 1995. SBQ product net sales decreased $20.5 million, or 24.8%, on a volume decline of 20.9%. Fiscal 1996 average selling price for SBQ products declined 4.9% from fiscal 1995. The decline in shipments and selling price of SBQ products resulted from a softening in the markets served by Koppel's SBQ products as well as excessive inventory levels in the SBQ marketplace. Other product shipments and sales for fiscal 1996 were primarily attributable to sales of hot rolled coils. Gross profit for fiscal 1996 increased $5.7 million from fiscal 1995 for a gross profit margin of 9.7% in fiscal 1996 compared to 9.2% in fiscal 1995. The specialty steel segment gross profit increased $3.8 million and this segment had a gross profit margin of 8.2% in fiscal 1996 versus 7.9% in fiscal 1995. The increase in specialty steel segment gross profit and margin was attributable to Koppel's seamless tubular operations, where gross profit margins rose from 12.8% in fiscal 1995 to 13.4% in fiscal 1996. The adhesives segment gross profit increased $1.9 million from fiscal 1995 primarily as a result of an increase in sales volume. Gross profit margin for fiscal 1996 was 24.0% compared to 21.6% for fiscal 1995. The increase was primarily a result of increased sales of higher margin products. Fiscal 1996 selling and administrative expenses increased $1.5 million from 1995 but decreased as a percentage of sales from 7.1% in fiscal 1995 to 6.8% in fiscal 1996. The overall increase in selling and administrative expenses was primarily attributable to increased production and sales volume. As a result of the above factors, operating income increased $4.3 million, from $7.8 million in fiscal 1995 to $12.1 million in fiscal 1996. The increase in operating income was almost solely attributable to the specialty steel segment and was due primarily to increased shipments and average selling prices for Koppel's seamless tubular products, partially offset by a decrease in SBQ product shipments and average selling prices. Interest income decreased $0.7 million from fiscal 1995 as a result of a decline in average invested cash and short-term investment balances during the respective comparable periods. Interest expense increased $3.6 million over fiscal 1995 as a result of higher interest costs associated with the Company's Senior Secured Notes issued in the fourth quarter of fiscal 1995. Other income, net decreased $2.4 million from fiscal 1995. Fiscal 1996 was impacted by a loss on the sale of a non-steel segment fixed asset, while fiscal 1995 includes income from property claims filed with the Company's insurance company in connection with a motor failure at Newport. As a result of the above factors, the Company incurred a net loss of $10.5 million, or a $.76 loss per share, in fiscal 1996 compared to a net loss before extraordinary item of $5.1 million, or a $.36 loss per share in fiscal 1995. In connection with a fiscal 1995 fourth quarter refinancing, the Company incurred prepayment costs and wrote off unamortized debt issuance costs, which resulted in an extraordinary charge of $5.2 million, net of applicable income tax benefit of $2.8 million, or $.38 per share. Liquidity and Capital Resources In September 1997, the Company completed a public offering (Offering) of the Company's common stock. The Company sold 6,000,000 shares for net proceeds, after expenses, of $169.8 million. In connection with the Offering, an additional 2,164,705 shares of common stock were issued upon the conversion of the Company's $28.3 million principal amount 11% Convertible Debentures and the exercise of certain warrants. In October 1997, the underwriters' overallotment was exercised in full, resulting in the issuance of an additional 540,295 shares of common stock with net proceeds to the Company of $15.4 million. The Company used a portion of the proceeds to retire $9.6 million principal amount of long-term debt and called for redemption $52.4 million principal amount of its outstanding 13.5% Senior Secured Notes (Notes). The redemption was made in October and included a prepayment penalty of $7.1 million, plus accrued interest. Reference is made to Note 2 and Note 4 to the Consolidated Financial Statements for further information concerning these transactions. Working capital at September 27, 1997 was $226.9 million compared to $80.9 million at September 28, 1996. The current ratio at September 27, 1997 was 2.64 to 1 compared to 2.16 to 1 at September 28, 1996. At September 27, 1997, the Company had cash and short-term investments totaling $195.3 million, including $59.5 million of funds held for debt called for redemption. At September 27, 1997, the Company had no outstanding advances against its $45.0 million revolving credit facility (Credit Facility); however, $11.2 million of the Credit Facility secured various letters of credit issued primarily in connection with the purchase of steel slabs at Newport. Net cash flows provided by operating activities totaled $11.0 million in fiscal 1997. The Company recorded net income of $4.4 million in fiscal 1997 compared to a loss of $10.5 million in fiscal 1996. Major sources of cash from operating activities in fiscal 1997 included $23.8 million in non-cash depreciation and amortization charges; a $7.1 million accrual for debt prepayment penalty; a $4.5 million increase in long-term deferred taxes and a $9.6 million increase in accounts payable and accrued liabilities due to increased business activity. The major uses of cash in operating activities included increases of $21.0 million and $11.3 million in inventory and accounts receivable, respectively, resulting from an increase in business activity related primarily to improvements in the OCTG marketplace. Additional uses of cash in operating activities include a $7.6 million increase in other current assets primarily related to increases in the Company's current deferred tax asset and receivables recorded in connection with certain insurance claims. Net cash flows provided by operating activities totaled $11.5 million in fiscal 1996. The Company recorded a net loss of $10.5 million in fiscal 1996. Major uses of cash in operating activities in fiscal 1996 included increases of $6.0 million and $8.6 million in accounts receivable and inventories, respectively, resulting from an increase in business activity. Offsetting these uses were $20.9 million in non-cash depreciation and amortization charges; a $2.5 million increase in long-term deferred taxes; a $1.8 million decrease in refundable income taxes; a $0.8 million decrease in other current assets resulting primarily from the collection of previously filed insurance claims; a $9.0 million increase in accounts payable primarily resulting from the purchase of steel slabs and a general increase in business activity; and a $2.2 million increase in accrued liabilities primarily related to accrued interest on the Company's Notes. Included in the fiscal 1996 net loss was a $1.2 million non-cash gain recorded in connection with the settlement of certain warranty claims made by the Company related to the acquisition of Koppel. Net cash flows used in operating activities totaled $5.7 million in fiscal 1995. The Company incurred a loss before extraordinary charge in fiscal 1995 of $5.1 million. Major uses included a $3.2 million increase in accounts receivable and a $12.4 million increase in inventories resulting from an increase in business activity and, for the increase in inventories, unusually low levels at fiscal 1994 year end due to scheduled maintenance at Newport. Other major uses include a decrease in long-term deferred taxes and an increase in refundable income taxes, both resulting from the fiscal 1995 net loss, including the extraordinary charge for prepayment costs and a non-cash cost for the write-off of unamortized debt issuance costs. Offsetting these uses were $21.3 million in non-cash depreciation and amortization charges and increases in accounts payable and accrued liabilities of $5.6 million and $2.9 million, respectively. The Company invested $7.1 million, $6.5 million and $12.2 million in capital expenditures during fiscal 1997, 1996 and 1995, respectively. Such capital expenditures were primarily related to improvements to and acquisitions of machinery and equipment in the specialty steel segment. Capital spending for fiscal 1997, 1996 and 1995 related to the Company's environmental control facilities was not material. The Company currently estimates that fiscal 1998 capital spending will substantially exceed fiscal 1997 expenditures. A significant portion of fiscal 1998 capital expenditures will be used to invest in equipment that will reduce operating costs and increase tubular product finishing capabilities. Sources for funding capital expenditures include cash flows from operations, available cash and short-term investments, as well as available borrowing sources. The Company also generated $4.1 million in cash in fiscal 1997 from the sale of certain development property. Net cash flows from financing activities include $182.9 million from the issuance of Company common stock, including $169.8 million of net proceeds from the Offering. The Company used $12.0 million to repay debt compared to debt repayments of $1.9 million in fiscal 1996. In September 1997 the Company called for redemption $52.4 million principal amount of its 13.5% Senior Secured Notes. The redemption, which included a $7.1 million prepayment penalty, plus accrued interest, was made in October 1997. The Company's annual long-term debt maturities are $2.0 million in fiscal 1998, $0.7 million in fiscal 1999, $0.2 million in fiscal 2000, $0.2 million in fiscal 2001 and $0.1 million in fiscal 2002. Reference is made to Note 4 to the Consolidated Financial Statements for further information concerning the Company's long-term debt and Credit Facility. Earnings before interest, taxes, depreciation and amortization (EBITDA) was $61.1 million for fiscal 1997, $32.6 million for fiscal 1996 and $31.1 million for fiscal 1995. EBITDA is calculated as income before extraordinary items plus interest expense, taxes, depreciation and amortization. EBITDA provides additional information for determining the Company's ability to meet debt service requirements. EBITDA does not represent and should not be considered as an alternative to net income, any other measure of performance as determined by generally accepted accounting principles, as an indicator of operating performance, as an alternative to cash flows from operating, investing or financing activities or as a measure of liquidity. The Company believes that its current available cash and short-term investments, its cash flow from operations and borrowing sources will be sufficient to meet its anticipated operating cash requirements, including capital expenditures, for at least the next twelve months. Inflation The Company believes that inflation has not had a material effect on its results of operations to date. Generally, the Company experiences inflationary increases in its costs of raw materials, energy, supplies, salaries and benefits and selling and administrative expenses. Except with respect to significant increases in steel scrap prices, the Company has generally been able to pass these inflationary increases through to its customers. Other Matters See Note 8 to the Consolidated Financial Statements, "Commitments and Contingencies". Recently Issued Accounting Standards See Note 1 to the Consolidated Financial Statements, "Summary of Significant Accounting Policies - Recently Issued Accounting Standards". Consolidated Statements of Operations For the years ended September 27, 1997, September 28, 1996 and September 30, 1995 (Dollars in thousands, except per share amounts) 1997 1996 1995 Net sales $481,170 $409,382 $371,352 Cost of products sold 412,845 369,585 337,270 Selling and administrative expenses 27,357 27,744 26,276 Operating income 40,968 12,053 7,806 Interest income 1,010 637 1,341 Interest expense (24,261) (24,375) (20,796) Other income, net 1,465 644 3,053 Income (loss) before income taxes and extraordinary items 19,182 (11,041) (8,596) Provision (credit) for income taxes 5,478 (584) (3,540) Income (loss) before extraordinary items 13,704 (10,457) (5,056) Extraordinary items, net of income taxes (9,256) (5,200) Net income (loss) $ 4,448 $(10,457) $(10,256) Per common share (primary) Income (loss) before extraordinary items $.86 $(.76) $(.36) Extraordinary items, net of income taxes (.58) (.38) Net income (loss) $.28 $(.76) $(.74) Per common share (fully diluted) Income (loss) before extraordinary items $.81 $(.76) $(.36) Extraordinary items, net of income taxes (.55) (.38) Net income (loss) $.26 $(.76) $(.74) Weighted average shares outstanding (000's) Primary 15,912 13,809 13,809 Fully diluted 16,858 13,809 13,809 See notes to consolidated financial statements Consolidated Balance Sheets September 27, 1997 and September 28, 1996 (Dollars in thousands) ASSETS 1997 1996 Current assets Cash $ 6,998 $ 3,442 Short-term investments 128,828 13,855 Funds held for debt called for redemption 59,517 Accounts receivable, less allowance for doubtful accounts of $712 and $757, respectively 63,151 51,824 Inventories 73,474 53,317 Operating supplies 15,657 14,449 Deferred tax assets 10,884 5,459 Other current assets 6,412 8,129 Total current assets 364,921 150,475 Property, plant and equipment -- at cost Land and buildings 30,113 29,755 Machinery and equipment 245,362 239,218 Construction in progress 3,304 3,313 Less -- accumulated depreciation (154,962) (138,512) Net property, plant and equipment 123,817 133,774 Other assets 11,578 15,785 Total assets $500,316 $300,034 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Notes payable $ 722 $ 879 Payments due on debt called for redemption 59,517 Accounts payable 47,667 41,847 Accrued liabilities 28,126 24,376 Current portion of long-term debt 1,958 2,468 Total current liabilities 137,990 69,570 Long-term debt 76,424 164,789 Deferred taxes 13,087 8,559 Common shareholders' equity Common stock, no par value, 40,000,000 shares authorized, 23,310,297 and 13,809,413 shares issued and outstanding, respectively 261,368 49,004 Common stock options and warrants 1,612 2,774 Unrealized loss on available for sale securities (1,238) (1,287) Retained earnings 11,073 6,625 Common shareholders' equity 272,815 57,116 Total liabilities and shareholders' equity $500,316 $300,034 See notes to consolidated financial statements Consolidated Statements of Cash Flows For the years ended September 27, 1997, September 28, 1996 and September 30, 1995 (Dollars in thousands) 1997 1996 1995 Cash flows from operating activities: Net income (loss) $ 4,448 $ (10,457) $(10,256) Adjustments to reconcile net income (loss) to net cash flows from operating activities: Depreciation and amortization 17,609 19,260 18,941 Amortization of debt discount and finance costs 6,219 1,642 2,370 Increase (decrease) in long-term deferred taxes 4,488 2,496 (2,970) Non-cash gain on settlement of claims (1,172) (Gain) loss on disposal of equipment 206 642 (470) Increase in accounts receivable (11,327) (5,966) (3,207) Increase in inventories (20,992) (8,601) (12,426) (Increase) decrease in operating supplies and other current assets (7,641) 2,543 (6,185) Accrued prepayment fees on debt called for redemption 7,079 Increase in accounts payable 5,820 8,950 5,585 Increase in accrued liabilities 3,750 2,209 2,886 Net cash flows from operating activities 9,659 11,546 (5,732) Cash flows from investing activities: Purchases of property, plant and equipment (7,139) (6,510) (12,233) Proceeds from sale of equipment 382 1,729 494 (Increase) decrease in other assets 4,053 (474) 1,892 Net cash flows from investing activities (2,704) (5,255) (9,847) Cash flows from financing activities: Increase (decrease) in notes payable (157) 370 (28,363) Proceeds from issuance of long-term debt 340 1,277 122,587 Repayments on long-term debt (11,994) (1,892) (107,950) Increase in debt issuance costs - (6,331) Proceeds from issuance of warrants 2,411 Proceeds from issuance of common stock 182,902 Net cash flows from financing activities 171,091 (245) (17,646) Net increase (decrease) in cash and short term investments 178,046 6,046 (33,225) Cash and short term investments at beginning of year 17,297 11,251 44,476 Cash and short term investments at end of year $195,343 $ 17,297 $ 11,251 Cash paid during the year for: Interest $ 23,231 $ 22,179 $ 20,385 Income taxes, net of refunds $ 1,463 $ (4,234) $ 209 See notes to consolidated financial statements Consolidated Statements of Common Shareholders' Equity For the years ended September 27, 1997, September 28, 1996 and September 30, 1995 (Dollars in thousands) Unrealized Gain (Loss) Options on Available Common Stock and for Sale Retained Shares Amount Warrants Securities Earnings Total Balance, September 24, 1994 13,809,413 $48,988 $262 $(124) $27,338 $76,464 Stock option plans 64 64 Issuance of common stock warrants 2,411 2,411 Unrealized loss on investments (589) (589) Other 16 16 Net loss (10,256)(10,256) Balance, September 30, 1995 13,809,413 49,004 2,737 (713) 17,082 68,110 Stock option plans 37 37 Unrealized loss on investments (574) (574) Net loss (10,457)(10,457) Balance, September 28, 1996 13,809,413 49,004 2,774 (1,287) 6,625 57,116 Issuance of common stock 6,000,000 169,823 169,823 Conversion of 11% subor- dinated deben- tures 1,664,705 28,300 28,300 Stock option plans 645,180 6,327 (12) 6,315 Exercise of common stock warrants 1,190,999 7,914 (1,150) 6,764 Unrealized gain on investments 49 49 Net income 4,448 4,448 Balance, September 27, 1997 23,310,297 $261,368 $1,612 $(1,238) $11,073 $272,815 See notes to consolidated financial statements Notes to Consolidated Financial Statements Note 1: Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts of NS Group, Inc. and its wholly-owned subsidiaries (the Company): Newport Steel Corporation (Newport), Koppel Steel Corporation (Koppel), Erlanger Tubular Corporation (Erlanger), Imperial Adhesives, Inc. (Imperial) and Northern Kentucky Management, Inc. All significant intercompany accounts and transactions have been eliminated. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires that management make certain estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Cash Cash includes currency on hand and demand deposits with financial institutions. Short-Term and Other Investments Short-term investments, including funds held for debt called for redemption, consist primarily of money market mutual funds and U.S. treasury securities, for which market value approximates cost. Certain of the Company's investments are classified as "available for sale" and are recorded at current market value with an offsetting adjustment to common shareholders' equity. Inventories At September 27, 1997 and September 28, 1996, inventories stated at the lower of LIFO (last-in, first-out) cost or market represent approximately 53% and 36% of total inventories before the LIFO reserve, respectively. All other inventories are stated at the lower of average cost or market, or the lower of FIFO cost or market. Inventory costs include labor, material and manufacturing overhead. Inventories consist of the following: (In thousands) 1997 1996 Raw materials $10,300 $ 5,948 Semi-finished and finished goods 66,005 50,471 76,305 56,419 LIFO reserve (2,831) (3,102) Total inventories $73,474 $53,317 Property, Plant and Equipment and Depreciation For financial reporting purposes, plant and equipment are depreciated on a straight-line method over the estimated useful lives of the assets. Expenditures for maintenance and repairs are charged to expense as incurred. Expenditures for equipment renewals which extend the life or increase the productivity or capacity of an asset are capitalized. Income Taxes Deferred income tax balances represent the estimated future tax effects of temporary differences between the financial reporting basis and the tax basis of certain assets and liabilities. Environmental Remediation and Compliance Environmental remediation costs are accrued, except to the extent capitalizable, when incurrence of such costs is probable and the costs can be reasonably estimated. Environmental compliance costs include maintenance and operating costs associated with pollution control facilities, costs of ongoing monitoring programs, permit costs and other similar costs. Such costs are expensed as incurred. Recently Issued Accounting Standards In February 1997, the Financial Accounting Standards Board issued SFAS No. 128 (Statement 128) which establishes standards for computing and presenting earnings per share (EPS). Statement 128 replaces primary EPS and fully diluted EPS with a dual presentation of basic EPS and diluted EPS, respectively. Basic EPS is computed by dividing net earnings available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution which would result from any instrument which could result in additional common shares being issued. The Company must adopt Statement 128 in fiscal 1998. For fiscal 1997, as calculated under Statement 128, basic EPS and diluted EPS before extraordinary item are $.97 and $.92, respectively. Basic EPS and diluted EPS for fiscal 1997 are $.31 and $.30, respectively. For fiscal 1996 and 1995 the reported EPS amounts would not have changed. Fiscal Year-End The Company's fiscal year ends on the last Saturday of September. Fiscal 1997 and 1996 contain fifty-two weeks and fiscal 1995 contains fifty-three weeks. Earnings Per Share Primary earnings per share is based on the weighted-average number of shares outstanding during the period, including the dilutive effect of applicable common stock equivalents. It excludes the effect of the Company's 11% Subordinated Convertible Debentures, which were converted in fiscal 1997. If such conversion had occurred at the beginning of fiscal 1997, primary earnings per share would have been $.91 based on income before extraordinary items and $.38 based on net income. Fully diluted earnings per share is calculated assuming maximum dilution from dilutive common stock equivalents and convertible securities. Note 2: Common Stock Offering In September 1997, the Company completed a public offering (Offering) of the Company's common stock. The Company issued and sold 6,000,000 shares, which resulted in net proceeds to the Company of $169.8 million after the underwriters' discount and other Offering expenses. In connection with the Offering, an additional 2,164,705 shares of common stock were issued upon the conversion of the Company's 11% Convertible Debentures and the exercise of certain warrants, a substantial portion of which were sold in the Offering. In October 1997, the underwriters' over-allotment option was exercised in full, resulting in the issuance and sale of an additional 540,295 shares of common stock by the Company and net proceeds to the Company of $15.4 million. Note 3: Accrued Liabilities Accrued liabilities consist of the following: (In thousands) 1997 1996 Accrued payroll and payroll taxes $11,352 $ 8,477 Accrued interest 3,742 4,696 Accrued environmental remediation 4,394 4,444 Other 8,638 6,759 $28,126 $24,376 Note 4: Long-term Debt and Credit Facility Long-term debt of the Company consists of the following: (In thousands) 1997 1996 13.5% Senior Secured Notes due July 15, 2003, interest due semi-annually, secured by property, plant and equipment (net of unamortized discount of $4,237 and $7,754, respectively) $ 74,421 $123,342 13.5% Senior Secured Notes called for redemption 52,438 11% Subordinated Convertible Debentures, converted to common stock in September 1997 28,300 Other 3,961 15,615 130,820 167,257 Less: Current portion (1,958) (2,468) 13.5% Senior Secured Notes called for redemption (52,438) $ 76,424 $164,789 In September 1997, the Company called for redemption $52.4 million principal amount of its outstanding 13.5% Senior Secured Notes due 2003 (Notes). The redemption was made in October 1997 from the proceeds of the Offering (see Note 2) and included a prepayment penalty of $7.1 million, plus accrued interest. The remaining Notes may be redeemed at the option of the Company, at any time, in whole or in part, beginning in 2000, initially at a price of 103.86%, declining to 100% in 2002. The Notes are unconditionally guaranteed in full, jointly and severally, by each of the Company's subsidiaries and are secured by the property, plant and equipment of the Company's steel-making operations. The Indenture relating to the Notes contains a number of restrictive covenants including, among other things, limitations on the ability of the Company to incur additional indebtedness; create liens; make certain restricted payments, including dividends; engage in certain transactions with affiliates; engage in sale and leaseback transactions; dispose of assets; issue or sell stock of its subsidiaries; enter into agreements that restrict the ability of its subsidiaries to pay dividends and make distributions; engage in mergers, consolidations and transfers of substantially all of the Company's assets; and make certain investments, loans and advances. In connection with the Offering, the holders of the Company's 11% Subordinated Convertible Debentures exercised their right to convert the full principal amount of such Debentures. Also in connection with the Offering, the Company prepaid $9.6 million principal amount of other long-term debt. The conversion of the 11% Subordinated Convertible Debentures is a non-cash financing transaction and is not included in the Consolidated Statements of Cash Flows. The Company has a $45.0 million revolving credit facility (Credit Facility), borrowings on which are secured by inventory and accounts receivable. Interest on borrowings accrues at a rate per annum of (a) the sum of the alternate base rate (which is the higher of the prime rate or 0.5% over the federal funds rate) plus 1% with respect to domestic rate loans or (b) the sum of the Eurodollar rate (based on LIBOR) plus 2.75% with respect to Eurodollar rate loans. Borrowings are due on demand and are limited to defined percentages of eligible inventory and accounts receivable. The Credit Facility contains financial covenants, including maintenance of minimum net worth, minimum interest coverage ratios, maximum ratios of indebtedness to net worth, and minimum current ratio and working capital requirements. The Credit Facility also includes restrictions upon dividends, investments, capital expenditures, indebtedness and the sale of certain assets. At September 27, 1997, approximately $11.2 million of the Credit Facility was utilized to collateralize various letters of credit and $33.8 million was available for borrowing. The Credit Facility expires in fiscal 1998. In connection with the retirement of long-term indebtedness in the fourth quarter of fiscal 1997, the Company incurred prepayment costs and wrote off unamortized debt discount and debt issuance costs which resulted in an extraordinary charge of $9.3 million, net of applicable income tax benefit of $2.3 million, or $.58 and $.55 per primary and fully diluted share, respectively. Similar charges incurred in the retirement of long-term indebtedness in fiscal 1995 resulted in an extraordinary charge of $5.2 million, net of applicable income tax benefit of $2.8 million, or $.38 per primary and fully diluted share. Annual long-term debt maturities are $2.0 million in fiscal 1998, $0.7 million in fiscal 1999, $0.2 million in fiscal 2000, $0.2 million in fiscal 2001 and $0.1 million in fiscal 2002. As of September 27, 1997 and September 28, 1996, the weighted-average interest rate on outstanding notes payable was 6.0% and 6.1%, respectively. Note 5: Fair Value of Financial Instruments The following methods and assumptions were used to estimate the fair value of financial instruments: Cash and short-term investments - The carrying amount approximates fair value because of the short maturity of these instruments. Other investments - Other investments, consisting of marketable equity securities totaling $2.8 million, are reported in other assets and carried at market value. Notes payable - The carrying amount approximates fair value because of the short maturity. Long-term debt - The fair value of the Company's Senior Secured Notes is based upon their trading price as of fiscal year-end. All other long-term debt was estimated by calculating the present value of the remaining interest and principal payments on the debt to maturity. The present value computation uses a discount rate based upon current market rates. The carrying amount and fair value of the Company's financial instruments are as follows: 1997 1996 Carrying Fair Carrying Fair (In thousands) Amount Value Amount Value Cash and short-term investments $195,343 $195,343 $17,297 $17,297 Other investments 2,800 2,800 2,725 2,725 Notes payable 722 722 879 879 Long-term debt 130,820 153,856 167,257 176,860 Note 6: Preferred Stock The Company's authorized stock includes 2,000,000 shares of Class A Preferred Stock, issuable in one or more series. The rights, preferences, privileges and restrictions of any series of Class A Preferred Stock, the number of shares constituting any such series and the designation thereof, are subject to determination by the Board of Directors. Four hundred thousand shares of the Class A Preferred Stock has been designated as Series A Junior Participating Preferred Stock, par value $10 per share, in connection with the Shareholders' Protection Rights Plan (Plan) adopted in fiscal 1989. Pursuant to the Plan, one Preferred Stock Purchase Right (Right) is attached to each outstanding share of common stock of the Company. The Plan includes provisions which are intended to protect shareholders against certain unfair and abusive takeover attempts by anyone acquiring or tendering for 30% or more of the Company's common stock. The Company may redeem the Rights for one cent per Right at any time before a 30% position has been acquired. The Rights expire in November 1998. Note 7: Stock Options and Warrants The Company has various stock option plans under which the Company may grant incentive and nonqualified stock options and stock appreciation rights to purchase shares of the Company's common stock. All incentive stock options were granted at the fair market value on the date of grant. Incentive stock options generally become exercisable one year after the grant date and expire after ten years. Nonqualified stock options become exercisable according to a vesting schedule determined at the grant date and expire on the date set forth in the option agreement. Nonqualified stock options were granted at exercise prices approximating the market price on the date of grant. For fiscal 1996, the weighted-average fair value of options granted was $1.20. A summary of transactions in the plans follows: 1997 1996 1995 Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price Outstanding, beginning of year 1,629,330 $7.22 1,667,055 $7.36 1,524,330 $7.80 Granted 60,000 2.63 212,400 4.38 Expired (87,395) 8.01 (97,725) 6.87 (69,675) 7.67 Exercised(645,180) 7.78 - Outstanding, end of year 896,755 6.73 1,629,330 7.22 1,667,055 7.36 Exercisable, end of year 489,504 7.73 951,428 8.42 761,355 9.22 Available for grant 1,153,230 1,093,825 1,086,510 The Company accounts for these plans in accordance with the intrinsic value method. Pro forma compensation cost, net income (loss) and per share amounts computed as if the Company had accounted for the 1996 option grant on the fair value method, would not have been materially different from reported amounts for 1997 or 1996. A summary of information about stock options outstanding at September 27, 1997 follows: Options Outstanding Options Exercisable Range of Average Average Average Exercise Exercise Remaining Exercise Prices Shares Price Life Shares Price $2.63-$5.93 386,754 $4.18 6.76 186,563 $4.20 $6.125-$9.75 404,186 7.37 5.13 197,126 7.91 $13.25- $14.125 105,815 13.63 .89 105,815 13.63 896,755 6.73 5.33 489,504 7.73 At September 27, 1997, the Company has common stock warrants outstanding, exercisable for approximately 272,000 shares of the Company's common stock at a price of $8.00 per share and 843,000 shares at a price of $4.00 per share. The warrants expire October 4, 2000 and July 15, 2003, respectively. Note 8: Commitments and Contingencies The Company has various commitments for the purchase of materials, supplies and energy arising in the ordinary course of business. The Company is subject to various claims, lawsuits and administrative proceedings arising in the ordinary course of business with respect to workers' compensation, health care and product liability coverages (each of which is self-insured to certain levels), as well as commercial and other matters. The Company accrues for the cost of such matters when the incurrence of such costs is probable and can be reasonably estimated. Based upon its evaluation of available information, management does not believe that any such matters are likely, individually or in the aggregate, to have a material adverse effect upon the Company's consolidated financial position, results of operations or cash flows. The Company is subject to federal, state and local environmental laws and regulations, including, among others, the Resource Conservation and Recovery Act (RCRA), the Clean Air Act, the 1990 Amendments to the Clean Air Act, the Clean Water Act and all regulations promulgated in connection therewith, including, among others, those concerning the discharge of contaminants as air emissions or waste water effluents and the disposal of solid and/or hazardous wastes such as electric arc furnace dust. As such, the Company is from time to time involved in administrative and judicial proceedings and administrative inquiries related to environmental matters. As with other steel mills in the industry, the Company's steel mini-mills produce dust which contains lead, cadmium and chromium, and is classified as a hazardous waste. The Company currently collects the dust resulting from its electric arc furnace operations through emission control systems and contracts with a company for treatment and disposal of the dust at an EPA-approved facility. The Company has on its property at Newport a permitted hazardous waste disposal facility. Newport's permit for operating the hazardous waste disposal facility required that it investigate, test, and analyze for potential releases of hazardous constituents from its closed loop water recirculating system. Based on the findings of its investigation, which have been filed with the EPA, the Company believes that the cost of any remediation, if required, will not be material. In November 1996, Koppel received a Notice of Violation from the EPA alleging violations of the Clean Air Act and the Pennsylvania State Implementation Plan. The violations allegedly occurred during 1995 and 1996 and pertain to air emissions from Koppel's electric arc furnace operations. The conditions which contributed to the alleged violations have been corrected and as of January 1, 1997, Koppel has demonstrated compliance with air emission regulations. At this time, the Company is unable to determine if the EPA will assess civil penalties as a result of the alleged violations, or the extent of any such potential penalties. In March 1995, Koppel and the EPA signed a Consent Order relating to an April 1990 RCRA facility assessment (the Assessment) completed by the EPA and the Pennsylvania Department of Environmental Resources. The Assessment was performed in connection with a permit application pertaining to a landfill that is adjacent to the Koppel facilities. The Assessment identified potential releases of hazardous constituents at or adjacent to the Koppel facilities prior to the Company's acquisition of the Koppel facilities. The Consent Order established a schedule for investigating, monitoring, testing and analyzing the potential releases. Initial remediation has been completed and reported to the EPA; however, additional monitoring and remediation may be required. Pursuant to various indemnity provisions in agreements entered into at the time of the Company's acquisition of the Koppel facilities, certain parties have agreed to indemnify the Company against various known and unknown environmental matters. To date the Company has been fully indemnified against all matters pertaining to the Consent Order and the Company believes that the indemnity provisions provide for it to be fully indemnified against all future matters covered by the Consent Order, including all associated costs, claims and liabilities. In two separate incidents occurring in fiscal 1993 and 1992, radioactive substances were accidentally melted at Newport, resulting in the contamination of a quantity of electric arc furnace dust. The Company is investigating and evaluating various issues concerning storage, treatment and disposal of the radiation contaminated electric arc furnace dust; however, a final determination as to method of treatment and disposal, cost and further regulatory requirements cannot be made at this time. Depending on the ultimate timing and method of treatment and disposal, which will require appropriate federal and state regulatory approval, the actual cost of disposal could substantially exceed current estimates and the Company's insurance coverage. The Company expects to recover and has recorded a $2.3 million receivable relating to insurance claims for the recovery of disposal costs which will be filed with the applicable insurance carrier at the time such disposal costs are incurred. As of September 27, 1997, claims recorded in connection with disposal costs exhaust available insurance coverage. Based on current knowledge, the Company believes the recorded gross reserves of $4.4 million for disposal costs pertaining to these incidents are adequate. Subject to the uncertainties concerning the Consent Order and the storage and disposal of the radiation contaminated dust, the Company believes that it is currently in compliance in all material respects with all applicable environmental regulations. The Company cannot predict the level of required capital expenditures or operating costs that may result from future environmental regulations. Capital expenditures for the next twelve months relating to environmental control facilities are not expected to be material, however, such expenditures could be influenced by new or revised environmental regulations and laws or new information or developments with respect to the Company's operating facilities. As of September 27, 1997, the Company had environmental remediation reserves of $4.4 million, which pertain almost exclusively to accrued disposal costs for radiation contaminated dust. As of September 27, 1997, the estimated range of possible losses related to the environmental contingency matters discussed above in excess of those accrued by the Company is $0 to $3.0 million; however, with respect to the Consent Order, the Company cannot estimate the range of possible losses should the Company not be indemnified on future matters. Based upon its evaluation of available information, management does not believe that any of the environmental contingency matters discussed above are likely, individually or in the aggregate, to have a material adverse effect upon the Company's consolidated financial position, results of operations or cash flows. However, the Company cannot predict with certainty that new information or developments with respect to the Consent Order or its other environmental contingency matters, individually or in the aggregate, will not have a material adverse effect on the Company's consolidated financial position, results of operations or cash flows. Note 9: Profit Sharing Plans The Company has established various profit sharing plans at the operating companies which are based on the earnings of the respective companies. Generally, the plans require mandatory contributions at a specified percentage of pretax profits (with a guaranteed minimum based on hours worked) for the bargaining unit employees, and allow for a discretionary contribution set by the Board of Directors for salaried employees. Expense for contributions was approximately $2.0 million, $1.0 million and $0.9 million in fiscal years 1997, 1996 and 1995, respectively. Note 10: Income Taxes The provision (credit) for income taxes, including $2.3 million and $2.8 million allocated to extraordinary items in fiscal 1997 and fiscal 1995, respectively, consists of the following: (In thousands) 1997 1996 1995 Current $ 2,780 $(2,112) $(3,044) Deferred (897) 1,528 (3,296) Tax benefit of employee stock option exercises allocated to equity 1,281 Provision (credit) for income taxes $ 3,164 $ (584) $(6,340) The income tax provision (credit) differs from the amount computed by applying the statutory federal income tax rate to income (loss), including extraordinary items, before income taxes for the following reasons: (In thousands) 1997 1996 1995 Income tax provision (credit) at statutory tax rate of 35% $2,664 $(3,864) $(5,808) Change in taxes resulting from: State income taxes, net of federal effect 95 (926) (150) Change in valuation allowance 542 4,156 Other, net (137) 50 (382) Provision (credit) for income taxes $3,164 $ (584) $(6,340) The following represents the components of deferred tax liabilities and assets at September 27, 1997 and September 28, 1996: (In thousands) 1997 1996 Deferred tax liabilities: Property, plant and equipment $30,517 $29,993 Other items 671 141 31,188 30,134 Deferred tax assets: Reserves and accruals 6,327 5,343 Net operating tax loss carryforward 16,730 20,136 Alternative minimum tax and other tax credit carryforwards 6,122 3,393 Deferred financing costs 1,641 Other items 2,863 2,318 33,683 31,190 Valuation allowance (4,698) (4,156) Net deferred tax assets 28,985 27,034 Net deferred tax liability $ 2,203 $ 3,100 For federal income tax purposes, the Company has alternative minimum tax credit carryforwards of approximately $5.6 million, which are not limited by expiration dates, and other tax credit carryforwards of approximately $0.5 million, which expire beginning in 2000. The Company also has net operating tax loss carryforwards of approximately $47.8 million, which expire beginning in 2007. The Company has recorded deferred tax assets related to these carryforwards, net of a deferred tax asset valuation allowance. In estimating the amount of the valuation allowance required, the Company has considered future taxable income related to the reversal of temporary differences in the tax and financial reporting basis of assets and liabilities. Note 11: Related Party Transactions One of the Company's directors has a controlling interest in a company which purchases secondary and limited service tubular products from Newport. Sales to this customer were approximately $15.6 million, $16.8 million and $16.0 million for fiscal years 1997, 1996 and 1995, respectively. Trade receivables from this customer were $1.0 million and $1.4 million at the end of fiscal 1997 and 1996, respectively. Note 12: Business Segment Information The Company operates in two business segments: specialty steel and industrial adhesives. Within the specialty steel segment are the operations of Newport, a manufacturer of welded tubular steel products and hot rolled coils and Koppel, a manufacturer of seamless tubular steel products, special bar quality (SBQ) products and semi-finished steel products. The Company's specialty steel products consist of: (i) welded and seamless tubular goods used primarily in oil and natural gas drilling and production operations, (oil country tubular goods, or OCTG); (ii) line pipe used in the transmission of oil, gas and other fluids; (iii) SBQ products used primarily in the manufacture of heavy industrial equipment and (iv) hot rolled coils which are sold to service centers and other manufacturers for further processing. Within the adhesives segment are the operations of Imperial, a manufacturer of industrial adhesives products and footwear finishes products. The operations of both segments are conducted principally in the United States. The Company grants trade credit to customers, the most significant of which are distributors serving the oil and natural gas exploration and production industries which purchase tubular steel products from the specialty steel products segment. In fiscal 1997, one customer accounted for 10.3% of net sales. The following table sets forth selected financial information by business segment for fiscal 1997, 1996 and 1995. (In thousands) Identi- Depreciation Net Operating fiable and Amor- Capital 1997 Sales Income Assets tization Expenditures Specialty steel segment $440,229 $43,760 $271,510 $16,954 $ 6,589 Adhesives segment 40,941 1,799 13,505 655 550 Corporate assets and alloca- tions (4,591) 215,301 Total consoli- dated $481,170 $40,968 $500,316 $17,609 $ 7,139 1996 Specialty steel segment $369,466 $14,886 $245,642 $18,595 $ 6,279 Adhesives segment 39,916 1,597 15,338 665 231 Corporate assets and allo- cations (4,430) 39,054 Total consoli- dated $409,382 $12,053 $300,034 $19,260 $ 6,510 1995 Specialty steel segment $335,883 $10,428 $250,711 $18,508 $11,748 Adhesives segment 35,469 1,248 13,011 433 485 Corporate assets and allo- cations (3,870) 34,775 Total consoli- dated $371,352 $ 7,806 $298,497 $18,941 $12,233 Note 13: Quarterly Financial Data (Unaudited) Quarterly results of operations for fiscal 1997 and 1996 are as follows: (In thousands, except per share amounts) First Second Third Fourth 1997 Quarter Quarter Quarter Quarter Net sales $105,167 $111,110 $132,853 $132,040 Gross profit 12,343 15,737 19,354 20,891 Income before extraordinary item 249 2,169 4,930 6,356 Net income (loss) 249 2,169 4,930 (2,900) Net income per common share before extra- ordinary item Primary .02 .16 .34 .37 Fully diluted .02 .16 .32 .37 Net income (loss) per common share Primary .02 .16 .34 (.17) Fully diluted .02 .16 .32 (.17) 1996 Net sales $89,295 $104,726 $103,766 $111,595 Gross profit 6,893 9,858 11,400 11,646 Net income (loss) (3,204) (1,508) (1,871) (3,874) Net income (loss) per common share (.23) (.11) (.14) (.28) Note 14: Summarized Financial Information The Company's Senior Secured Notes are unconditionally guaranteed in full, jointly and severally, by each of the Company's subsidiaries (Subsidiary Guarantors), each of which is wholly-owned. Separate financial statements of the Subsidiary Guarantors are not presented because they are not deemed material to investors. The following is summarized financial information of the Subsidiary Guarantors as of September 27, 1997 and September 28, 1996 and for each of the three years in the period ended September 27, 1997. All significant intercompany accounts and transactions between the Subsidiary Guarantors have been eliminated. (In thousands) September 27,1997 September 28,1996 Current assets $168,412 $131,839 Noncurrent assets 131,526 143,074 Current liabilities 70,871 61,980 Payable to parent $174,495 $162,593 Other noncurrent liabilities 2,003 9,953 Total noncurrent liabilities $176,498 $172,546 Fiscal Year Ended (In thousands) 1997 1996 1995 Net sales $481,170 $409,382 $371,352 Gross profit 68,325 39,797 34,082 Net income (loss) 8,209 (5,816) (2,040) Report of Management The accompanying consolidated financial statements have been prepared by the management of NS Group, Inc., in conformity with generally accepted accounting principles and, in the judgment of management, present fairly and consistently the Company's consolidated financial position and results of operations. These statements necessarily include amounts that are based on management's best estimates and judgments. The financial information contained elsewhere in this report is consistent with that contained in the consolidated financial statements. In fulfilling its responsibilities for the integrity of financial information, management maintains accounting systems and related controls. These controls provide reasonable assurance, at appropriate costs, that assets are safeguarded against losses and that financial records are reliable for use in preparing financial statements. These systems are enhanced by written policies, an organizational structure that provides division of responsibilities and careful selection and training of qualified people. In connection with their annual audit, independent public accountants perform an examination in accordance with generally accepted auditing standards, which includes a review of the system of internal accounting control and an expression of an opinion that the consolidated financial statements are fairly presented. The Board of Directors, through its Audit Committee composed solely of non-employee directors, reviews the Company's financial reporting and accounting practices. The independent public accountants meet regularly with and have access to this Committee, with or without management present, to discuss the results of their audit work. Clifford R. Borland Chairman of the Board and Chief Executive Officer John R. Parker Vice President, Treasurer and Chief Financial Officer Report of Independent Public Accountants To NS Group, Inc. We have audited the accompanying consolidated balance sheets of NS Group, Inc. (a Kentucky corporation) and subsidiaries as of September 27, 1997 and September 28, 1996, and the related consolidated statements of operations, common shareholders' equity and cash flows for each of the three years in the period ended September 27, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of NS Group, Inc. and subsidiaries as of September 27, 1997 and September 28, 1996, and the results of their operations and their cash flows for each of the three years in the period ended September 27, 1997 in conformity with generally accepted accounting principles. Cincinnati, Ohio, ARTHUR ANDERSEN LLP October 30, 1997 Consolidated Historical Summary (Dollars in thousands, except per share amounts) 1997 1996 1995 1994* Summary of Operations Net sales $481,170 $409,382 $371,352 $303,380 Operating income (loss) 40,968 12,053 7,806 689 Operating income margin 8.5% 2.9% 2.1% .2% Net income (loss) before extra- ordinary items 13,704 (10,457) (5,056) 13,208 Net income (loss) 4,448 (10,457) (10,256) 13,208 Income (loss) per share before extra- ordinary items .86 (.76) (.36) .96 Net income (loss) per share .28 (.76) (.74) .96 Dividends per common share Weighted average shares outstanding - primary (000's) 15,912 13,809 13,809 13,789 Other Financial and Statistical Data Working capital $226,931 $80,905 $ 72,854 $ 50,682 Total assets 500,316 300,034 298,497 315,327 Long-term debt 76,424 164,789 166,528 138,110 Common shareholders' equity 272,815 57,116 68,110 76,464 Capital expenditures 7,139 6,510 12,233 10,394 Depreciation and amortization 23,828 20,902 21,311 18,789 EBITDA 61,052 32,594 31,141 21,566 Current ratio 2.64 2.16 2.27 1.56 Debt-to-equity ratio .29 2.93 2.47 2.01 Book value per share 11.70 4.14 4.93 5.54 Steel product shipments (tons) Tubular products 590,000 506,000 440,000 370,000 Special bar quality products and other 179,000 177,000 216,000 191,000 Employees 1,948 1,774 1,728 1,568 1993 1992 1991** 1990 1989 1988 $353,082 $281,242 $212,471 $249,871 $219,414 $239,175 11,672 1,401 (18,177) 19,370 18,469 36,668 3.3% .5% (8.6)% 7.8% 8.4% 15.3% (5,896) (13,358) (20,603) 13,047 12,773 20,238 (6,991) (15,900) (20,603) 13,047 12,773 17,493 (.44) (.99) (1.53) .97 .95 1.73 (.52) (1.18) (1.53) .97 .95 1.49 .06 .12 .11 .05 13,553 13,483 13,449 13,419 13,387 11,690 1993 1992 1991** 1990 1989 1988 $ 43,174 $ 44,198 $ 48,411 $ 64,858 $ 55,714 $ 76,683 317,242 319,079 329,889 220,856 177,292 153,525 156,056 164,180 168,822 65,884 24,958 23,328 62,622 68,574 85,149 107,226 95,490 83,327 5,488 4,148 112,573 45,011 28,081 3,340 19,093 18,711 5,725 6,879 6,080 6,585 30,355 20,515 (1,360) 28,852 27,514 46,059 1.49 1.60 1.79 2.90 2.30 3.47 2.64 2.52 2.11 .65 .31 .29 4.57 5.08 6.33 7.98 7.13 6.23 385,000 292,000 215,000 285,000 209,000 262,000 363,000 299,000 212,000 239,000 262,000 255,000 1,995 1,770 1,705 1,479 1,457 1,336 * Includes the impact of the sale of Kentucky Electric Steel Corporation **Assets of Koppel Steel Corporation acquired Stock Market Information NS Group, Inc. is listed on the New York Stock Exchange, trading symbol, NSS. Stock Price Fiscal 1997 High Low 1st Quarter $ 4 3/8 $ 3 2nd Quarter 5 5/8 4 1/8 3rd Quarter 11 7/8 4 3/4 4th Quarter 34 1/4 11 1/2 Fiscal 1996 High Low 1st Quarter $ 3 $ 1 7/8 2nd Quarter 3 1/8 2 1/8 3rd Quarter 3 1/8 2 1/2 4th Quarter 3 3/4 2 1/2 EX-21 3 EXHIBIT 21 SUBSIDIARIES OF NS GROUP, INC. (all are wholly-owned) Name State of Incorporation Erlanger Tubular Corporation Oklahoma Imperial Adhesives, Inc. Ohio Koppel Steel Corporation Pennsylvania Newport Steel Corporation Kentucky Northern Kentucky Management Kentucky EX-23 4 EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included or incorporated by reference in this Form 10-K, into the Company's previously filed Registration Statements, File Nos. 33-24182, 33-24183, 33-51899, 33-28995, 33-37454, 33-39695, 33-56637 and 333-03657. /s/Arthur Andersen LLP Cincinnati, Ohio Arthur Andersen LLP December 16, 1997 EX-27 5
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 27, 1997, included in the Company's Annual Report on Form 10-K and is qualified in its entirety by reference to such consolidated financial statements. 0000745026 NS GROUP, INC. 1 US 12-MOS SEP-27-1997 SEP-30-1996 SEP-27-1997 1 6,998 188,345 63,863 712 73,474 364,921 278,779 154,962 500,316 137,990 76,424 0 0 262,980 9,835 500,316 481,170 481,170 412,845 412,845 0 0 24,261 19,182 5,478 13,704 0 (9,256) 0 4,448 .28 .26
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