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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended July 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from __________ to __________
Commission File No. 0-23242
WEBCO INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Oklahoma 73-1097133
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
9101 West 21st Street
Sand Springs, Oklahoma 74063
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code - (918) 241-1000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Name of Each Exchange
Title of Each Class on Which Registered
Common Stock, par value $.01 AMEX
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 (229.405 of this chapter) 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]
As of September 30, 1997, the aggregate market value of the voting stock
held by nonaffiliates of the registrant was $22,466,000.
DOCUMENTS INCORPORATED BY REFERENCE: Part III, Items 10 through 13.
Portions of the Company's definitive Proxy Statement in connection with its
Annual Meeting.
WEBCO INDUSTRIES, INC.
TABLE OF CONTENTS
Page
PART I
Item 1. Business 3
Item 2. Properties 12
Item 3. Legal Proceedings 12
Item 4. Submission of Matters to a Vote of Security Holders 13
PART II
Item 5. Market for Registrant's Common Stock and Related
Stockholder Matters 14
Item 6. Selected Financial Data 14
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 16
Item 8. Financial Statements and Supplementary Data 21
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 38
PART III
Item 10. Directors and Executive Officers of the Registrant 38
Item 11. Executive Compensation 38
Item 12. Security Ownership of Certain Beneficial Owners
and Management 38
Item 13. Certain Relationships and Related Transactions 38
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 39
WEBCO INDUSTRIES, INC.
FORM 10-K
PART I
ITEM 1. BUSINESS
GENERAL
Webco Industries, Inc. ("Webco" or the "Company"), an Oklahoma corporation
founded in 1969 by F. William Weber, chairman of the board and chief executive
officer, is a specialty manufacturer of high-quality carbon steel tubing and
stainless steel tubing and pipe designed to industry and customer
specifications. Based on the Company's knowledge of the specialty tube
industry, management believes that Webco is the domestic market leader in the
manufacture of welded carbon heat exchanger tubing and welded carbon boiler
tubing, and the leading supplier of stainless tubing for the high efficiency
furnace market. Commencing in fiscal 1996, the Company manufactures and
markets, through its QuikWater division, a patented direct contact water heater
with unique environmental and energy saving advantages for a wide variety of
end use markets. The Company's products are delivered from its three
production facilities in Oklahoma and Pennsylvania and from two distribution
facilities in Oklahoma and Texas to more than 800 customers located primarily
in the continental United States, southern Canada, and northern Mexico.
INDUSTRY OVERVIEW
Specialty tubing producers occupy a niche between the primary steel
producers and customers who utilize precision tubing in the manufacture of
products primarily for the capital goods and consumer durables industries.
As contrasted with commodity pipe producers, specialty tube mills manufacture
products which are engineered and tailored for more specialized and critical
end-use applications.
The specialty tubing industry was once dominated by the major integrated
steel producers. Over time, these integrated producers lost their competitive
advantage and have largely withdrawn from this segment. In addition, over the
past decade the industry has undergone substantial consolidation, as well as
rationalization of less efficient producers. The industry, however, continues
to be highly fragmented and is currently comprised of approximately 125
third-party producers that generally occupy relatively focused market niches.
The specialty tubing industry has been affected by certain trends that are
expected to continue over the next several years. First, customers' increasing
emphasis on just-in-time inventory methods has required tube producers to
increase operating efficiencies to accommodate more frequent, but smaller sized
orders and has caused tube producers to place greater emphasis on inventory
management and control. Second, customers' desires to cut operating costs
through the outsourcing of specific processing functions, such as specialty
tube manufacturing, has created the opportunity for third-party tube producers
to replace production from captive mills. Finally, the technological evolution
of thin-slab casting, higher levels of union activities among various steel
producers and the impacts of foreign steel producers on the U.S. markets has
caused volatility in the cost for sheet coil.
MANUFACTURING PROCESSES
Electric Resistance Carbon Steel Weld Process. The Company maintains
inventories of steel sheet coils from which it manufactures electric resistance
welded tubing. This steel is in the form of a continuous sheet, typically 48
to 60 inches wide, between .049 and .425 inches thick, and rolled into 15 to 20
ton coils. Steel coils over .180 inches thick used at the Sand Springs
facility are slit to pre-designated widths by outside vendors. Steel coils
less than .180 inches in wall thickness in Sand Springs and substantially all
coils in Oil City are slit in each facility using Company equipment.
All customer orders for manufactured products are entered into a
computerized order entry system, and appropriate coiled steel inventory is
then selected and scheduled for processing in accordance with the customer's
delivery date and product specifications. The Company attempts to maximize
efficiency by combining orders for optimum size runs.
The manufacturing cycle begins with the slitting of wide coils into narrow
bands. The outside diameter of the tube to be produced determines the width of
the slit band. Conversion from slit band to carbon and alloy tubes is
accomplished by (i) continuously roll forming into the desired tubular
diameter; (ii) continuously welding the edges using the high frequency welding
process; and (iii) cutting to approximate finished length or multiples thereof.
After the tube has been welded and depending upon product specifications, it
may be moved to three further processing stations for annealing (heat treatment
through an atmospherically controlled roller hearth furnace), straightening
through rotary straighteners, and finishing (i.e., cut-to-length,
non-destructive test, stencil, oil coat and package).
This process produces heat exchanger tubing, boiler tubing, mechanical
tubing and raw material for the cold drawing process (which does not go through
the finishing process). This tubing is primarily made-to-order, with smaller
amounts produced for inventory.
In fiscal 1995 the Company placed into service a highly automated high
frequency welded carbon tube mill ("Mill 3") at the Sand Springs, Oklahoma
facility. In North America, the Company is aware of only one similar mill
operating in the United States and one duplicate installed in Toronto, Canada.
Prior to the third quarter of fiscal 1997 the Company was not able to fully
utilize the manufacturing capabilities of Mill 3 because certain cut-off
equipment would not perform to vendor specifications. A new cut-off machine was
installed on Mill 3 during the third quarter of fiscal 1997 to replace the
original cut-off equipment. The correction of this cut-off problem now
provides the Company the ability to manufacture tubes with diameters and wall
thickness more consistent with original expectations, thereby creating the
opportunity for the Company to further penetrate the mechanical tube markets,
as discussed below.
Carbon Steel Cold Drawing Process. The Company maintains inventories of
tubing which is raw material for the cold drawing process. Most of this tubing
is manufactured by the Company's own high frequency welded tube mills. The
Company currently offers cold drawn products from .250 inch to .375 inch in
wall thickness. Cold drawing permits greater flexibility and precision
(as compared to the high frequency weld process) in meeting customer
specifications of tube diameters, wall thickness and other characteristics.
Customer orders are entered into a computerized order entry system. The
software selects the starting raw material from inventory that will optimize
yields and efficiency and meet the customer's specifications and required
delivery schedule. After the proper material has been selected for each
specific order, it is cut to the desired piece weight. The tube is then
(i) pickled and lubricated through a series of tanks, (ii) cold reduced to
point the tube ends, and (iii) cold drawn (cold reduction of outside diameter
and inside diameter and elongation of tube). After the cold drawn tube has been
manufactured to finished size, it is moved to three further processing stations
for annealing, straightening and finishing.
This process provides precision tubular products for mechanical tubing and
a limited amount of heat exchanger tubing, primarily made-to-order.
Welded Stainless Tube Processing. The manufacturing cycle for the
stainless steel weld mill operations begins with the receipt by the Company
of stainless steel coils slit to a pre-designated width by their supplier.
Customer orders are entered into the computerized order entry system.
The proper slit coils are selected and fed into the stainless weld mills to be
formed into a tubular shape and welded by a tungsten inert gas process. After
welding, the tube is annealed, cooled, straightened, stenciled,
non-destructively tested, cut to length and packaged for shipment. For some
special customer requirements, the tubing is coiled to various lengths. All of
this processing is performed in a continuous operation.
This process provides air-cooled heat exchanger tubing for residential
furnaces, instrumentation tubing and small diameter stainless pipe. A majority
of the stainless products are made to order.
MANUFACTURING FACILITIES
The Company has three steel tubing manufacturing facilities where it produces
it's carbon or stainless steel products. The largest facility is located in
Sand Springs, Oklahoma and produces a wide range of carbon steel tubing
products. This facility has been in operation since the Company began in 1969.
The Company also has a facility in Oil City, Pennsylvania at which it also
produces carbon steel tubing products, primarily boiler and as-welded
mechanical tubing. The third facility in Mannford, Oklahoma produces stainless
steel tubing products.
The following table sets forth the processing and other techniques performed
at Webco's facilities:
Manufacturing Distribution
Sand Sand
Springs, Oil City, Mannford, Springs, Nederland,
Oklahoma Penn. Oklahoma Oklahoma Texas
Cold Drawing X
Slitting X X
Welding X X X
Annealing X X X X X
Straightening X X X
Cut-to-Length X X X X X
Electronic Non-Destructive
Testing:
Eddy Current X X X
Flux Leakage X
Ultra-Sonic X X
Hydro Static Testing X X X
Stenciling X X X
Bending X X
Bar Coding X X X X X
Computerized Shop Floor
Control X X
Metallurgical Lab &
Spectrometer X
Statistical Process Control X X X
PRODUCTS
The Company produces tubing for a wide variety of markets and end use
applications. The Company seeks to identify niche markets and customers that
have been serviced by high cost and low service competitors. The heat
exchanger and boiler tube markets are examples of the Company achieving
significant penetration following this strategy. Based on the Company's
knowledge of the specialty tube industry, management believes that Webco is
the domestic market leader in the manufacture of welded carbon heat exchanger
tubing and welded carbon boiler tubing, and that it is the leading supplier of
stainless steel tubing for the high efficiency furnace market. The Company is
currently targeting the carbon mechanical tube market for future growth. The
Company is building its market share for mechanical tubing through its low cost
structure and high product quality, together with the Company's commitment to
customer service. A detailed description of the Company's products by the four
major end-use markets follows:
Carbon Heat Exchanger Tubing. Most of the tubing the Company manufactures
for this application comes directly from the weld mill process. The Company
believes it is currently the market leader in the manufacture of welded carbon
heat exchanger tubing in the United States. Due to the Company's leading market
position, the Company expects growth to come from growth in the total market.
Heat exchangers generally fall into two broad categories, shell and tube,
and air cooled. Shell and tube heat exchangers are used to control
temperatures or to recover waste heat in, among other things, power stations,
petrochemical plants, and refineries. Air cooled heat exchangers are used to
dissipate heat generated by industrial processes in, among other things, gas
compressor stations and petrochemical plants. The Company manufactures carbon
tubing suitable for both shell and tube and air cooled heat exchangers.
Boiler Tubing. The Company produces welded boiler tubing from both the
Sand Springs, Oklahoma, and Oil City, Pennsylvania, facilities. This
capability enables the Company to cost-effectively serve this market throughout
the continental United States and eastern Canada. Since the opening of the Oil
City facility in fiscal 1990, the Company believes it has significantly
expanded its market share.
The Company's products are used for the manufacture and maintenance of
boiler systems for utilities, waste-heat recovery units, industrial and
commercial facilities, and co-generation plants. While maintenance is an
ongoing requirement, new boiler manufacturing generally depends on industrial
plant expansion and construction of new energy production facilities.
Stainless Products. The Company serves four sub-markets within the small
welded stainless product category: furnace tubing, instrumentation tubing, pipe,
and mechanical tubing. The end uses for these products include appliances,
industrial plant piping systems, instruments for the petrochemical industry,
and a variety of other capital goods applications. The Company is a small,
niche producer, due to both product and size and capacity constraints. Over
the past 18 months, the Company has doubled its stainless capacity and expects
to continue expansion into the future.
The Company has targeted the high efficiency furnace market and believes
it is currently the leading supplier of stainless tubing to this market. To
achieve this position, the Company worked closely with both its customers and
suppliers to develop what at the time was the only as-welded (i.e., produced
directly from the weld mill) tubing product in the industry which meets this
market's strict tolerance specifications.
Mechanical Tubing. Mechanical tubing includes both as-welded and cold
drawn tubing. Most of the products the Company manufactures from its cold draw
processes are for mechanical tube applications. The end-uses for these
products are very diverse and include hydraulic cylinders, automotive
components, appliances, farm equipment, and a wide variety of consumer durables
(such as bicycles and lawnmowers) and capital goods. The Company is currently
a relatively small producer in this market.
In conjunction with the increased capabilities of Mill 3, the Company has
targeted the mechanical tubing market as a growth area over the next several
years. This market continues to undergo a major structural change in which
final assembly manufacturers (automotive, appliance, etc.) outsource component
parts and emphasize just-in-time inventory management to reduce production
costs. Webco believes that this market, which is largely comprised of original
equipment manufacturers ("OEMs"), provides an opportunity for the Company to
gain market share by utilizing its technological capabilities to offer superior
quality, customer service, and customized products at competitive prices.
COMPETITION
Specialty steel tube manufacturing is a highly competitive market in which
companies compete on the basis of price, quality, service and ability to fill
orders on a timely basis. Public data concerning the size of the markets in
which the Company participates is not available. Based on the Company's
knowledge of the specialty tube industry, the Company believes that it is the
domestic market share leader in welded carbon heat exchanger tubing, stainless
steel high efficiency furnace tubing and welded carbon boiler tubing. Although
the Company has a small share of the mechanical tubing market, management
believes that it is well positioned to increase its market share over the next
several years.
The Company's major competitors include Quanex Corporation for carbon heat
exchanger tubing, Plymouth Tube Company for carbon boiler tubing,
Damascus/Bishop Tube, Inc. and Gibson Tube, Inc. for stainless products, and
Copperweld Corporation, John Roberts Industries, Pittsburgh Tube Company and
Lone Star Steel Company for mechanical tubing. Certain of these competitors
are larger and have access to greater financial resources than the Company.
Most of these competitors are unionized.
The Company believes that its non-union status, geographic balance, focused
niche strategy, product quality, customer service and continued emphasis on
technical innovations position it to compete effectively within each of its
niche markets.
BACKLOG
The Company's firm backlog of orders at July 31, 1997 and 1996 were $29.0
million and $19.8 million, respectively. Orders, including a portion of the
orders considered firm, are generally cancelable by the customer until work has
commenced and the Company has committed resources; thereafter, orders are
generally cancelable by the customer only upon payment of a cancellation
penalty.
QUALITY CONTROL
The supply of quality products and service is critical to the Company's
success. To help foster continuous improvements in quality and service, the
Company, through its corporate quality management department, instituted a
total quality management system based upon ISO 9000 quality system standards.
In early 1994, the Company achieved ISO 9002 certification at its Sand Springs,
Oklahoma manufacturing facility. ISO 9002 certification at its Oil City,
Pennsylvania manufacturing facility followed in early 1995. In support of the
total quality management system, the Company has created an environment that
emphasizes and utilizes teamwork to support continuous improvement of quality
and service. The Company is currently in the process of trying to obtain
QS-9000 certification and expects to have such certification complete by the
third quarter of fiscal 1998.
Fundamental to the Company's quality system is the control of the product
and process, from raw material procurement to the ultimate delivery of finished
goods to the Company's customers. On a test basis, physical and chemical
analyses are performed on raw materials to verify that their mechanical and
dimensional properties, cleanliness and surface characteristics meet the
Company's requirements. The Company has also developed stringent process
controls, including Statistical Process Control, non-destructive testing
methods, and standardized operating and inspection procedures, to provide
assurance of quality, and to ensure that the customer's requirements are met,
throughout the manufacturing process.
SUPPLIERS
The Company purchases steel sheet coil produced by a number of primary
steel producers, including but not limited to Wheeling-Pittsburgh Steel Corp.
and Nucor for carbon steel and J & L Specialty Products Corporation, and
Allegheny Teledyne Inc., for stainless steel. In addition, Webco purchases
from intermediate steel processors and brokers in order to benefit from their
continued purchasing power or for their specialized processing capabilities.
Webco monitors and purchases raw material periodically from foreign sources, as
conditions dictate, to obtain a competitive landed cost. The Company orders
steel to specified physical characteristics and chemistry. By purchasing in
large quantities at consistent predetermined intervals, Webco is able to
obtain quality raw materials at lower competitive prices. All increments of
the cost of purchasing and landing steel are continually monitored, reviewed
and acted upon. Webco believes that it is not dependent on any one of its
suppliers for raw materials, although as demonstrated by the
Wheeling-Pittsburgh strike during much of fiscal year 1997, interruptions
in supply from its suppliers may impact the landed cost of new purchases.
Webco understands that the supplier base is critical to its economic
health. Consistent effort is made to develop long-term partners who provide
material at acceptable quality, cost and delivery and are, themselves,
economically stable. Many of Webco's suppliers have been supplying product to
the Company for 15 to 20 years.
MARKETING AND CUSTOMER SERVICE
The Company's products and services are sold primarily by the Company's
direct sales personnel and its network of manufacturers' representatives
throughout the United States. The Company's product line represents over 50%
of most of these representative organization's total sales. The Company's
representative network does not sell products which compete with the Company's
products. Sales made through one manufacturers' representative organization
accounted for approximately 52% of the Company's annual sales. The Company
does not believe that loss of this or any other representative organization
would have a material adverse effect on the Company.
The Company's sales and marketing efforts are directed by a vice president
of sales and marketing and its product sales managers. These efforts are
supported by its distribution organization, internal sales staff and technical
services group. The Company also emphasizes the use of its technical and
engineering support staff in its product development and marketing efforts.
The Company's technical services, operating, engineering, quality, sales,
product planning and purchasing staffs work closely with its customers and
suppliers to develop products that meet specific customer applications.
Variables in the product development process include the steel's micro
structure, chemistry, mechanical properties, surface finish, machinability,
and product consistency. The Company believes this process is integral to
its sales effort and provides the Company with a competitive advantage.
CUSTOMERS AND DISTRIBUTION
The Company manufactures and distributes specialty steel tubular product
for sale to a diverse group of more than 800 customers. No single customer
represents in excess of 4% of the Company's net sales. In addition, no one
end-use sector represents more than 14% of net sales. The Company's ten
largest customers represent approximately 26% of net sales. Approximately 80%
of the Company's sales are directly to industrial customers, including
manufacturers of heat exchangers, high efficiency home heating furnaces,
appliances, automotive components, power generation equipment, waste heat
recovery systems, industrial and commercial boilers, and other consumer
durables. The remaining 20% of the Company's tubing sales are made to steel
service centers and distributors, one of the largest customer categories of the
steel industry.
While the Company ships product throughout North America, many of its
markets and customers are located within a 500-mile radius of its manufacturing
and distribution locations. As it concerns these markets and customers, this
geographic advantage places the Company in a more cost competitive position
relative to most of its competitors. The Company transports product for local
delivery via Company-owned or leased vehicles. Longer distance deliveries are
generally made via independent trucking firms.
The Company offers its finished product for shipment directly from its
three manufacturing locations. In addition, the Company also inventories
finished goods and functions as its own distributor in some of its markets.
Such markets and customers are served on a just-in-time basis from the
Company's Oklahoma and Texas distribution locations. Finished goods
inventories for distribution generally are suitable for sale to many customers
and generally are not unique to a specific customer's needs.
The Company believes that its long-term relationships with many of its
customers are a significant factor in its business and that pricing, quality,
service and the ability to fill orders on a timely basis are the most
critical factors in maintaining these relationships. Certain Company executive
officers actively participate in the Company's marketing efforts and have
developed strong business relationships with senior management of many of
the Company's principal customers.
GOVERNMENT REGULATION
The Company's distribution and manufacturing facilities are subject to
many federal, state, and local requirements relating to the protection of the
environment. The Company continually examines ways to reduce emissions and
waste and to effect cost savings relating to environmental compliance. The
Company has its own in-house environmental engineer who leads the Company's
environmental program. Management's philosophy is to implement environmental
controls that meet or exceed current and foreseeable legal requirements.
Management believes that it is in material compliance with all environmental
laws, does not anticipate any material expenditures to meet environmental
requirements, and generally believes that its processes and products do not
present any unusual environmental concerns. See "Item 3. Legal Proceedings."
The Company's operations are also governed by laws and regulations
relating to workplace safety and worker health, principally the Occupational
Safety and Health Act and regulations thereunder which, among other
requirements, establish noise and dust standards. Management believes that it
is in material compliance with these laws and regulations and does not believe
that future compliance with such laws and regulations will have a material
adverse effect on its results of operations or financial condition.
EMPLOYEES
As of September 30, 1997, the Company employed 647 people. None of the
Company's employees are covered by collective bargaining agreements. The
Company has never experienced a significant work stoppage and considers its
employee relations to be good.
FORWARD LOOKING STATEMENTS
Certain statements in this Form 10-K constitute "forward looking"
statements within the Company's interpretation of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements involve known
and unknown risks, uncertainties and other important factors that could cause
the actual results, performance or achievements of the Company, or industry
results, to differ materially from any future results, performance or
achievements expressed or implied herein. Such risks, uncertainties and
factors include, among others: general economic and business conditions,
interest rate fluctuations, the Company's ability to access capital markets,
industry capacity, industry trends, competition, raw material costs and
availability, the loss of any significant customers, the successful
implementation of business strategies, availability of qualified personnel,
and changes in, or the failure or inability to comply with government
regulations.
ITEM 2. PROPERTIES
The Company's principal properties presently consist of three manufacturing
plants and two distribution facilities. The following sets forth the location,
area and whether the property is owned or leased for each existing facility:
Location Area Owned or Leased
Sand Springs, Oklahoma 250,000 square feet Owned
Manufacturing Facility 26 acres
Sand Springs, Oklahoma 50,000 square feet Owned
Distribution Facility 18 acres
Sand Springs, Oklahoma 19,850 square feet Owned
Cutoff Facility 4 acres
Mannford, Oklahoma 50,000 square feet Owned
Manufacturing Facility 13 acres
Nederland, Texas 20,000 square feet Long-term lease
(1 year remaining)
with a purchase
option of $500,000
Oil City, Pennsylvania 192,000 square feet Owned
Manufacturing Facility 8 acres
Tulsa, Oklahoma 24,400 square feet Long-term lease with a
Corporate Offices purchase option of
$750,000
ITEM 3. LEGAL PROCEEDINGS
In April 1995, the Company reached an agreement in principle with
plaintiffs to settle previously reported securities litigation, pursuant to
which the portion of the settlement paid by the Company was $2,400,000. The
litigation settlement and related litigation costs have been reported as an
unusual item in the statement of operations for the period ended July 31, 1995.
The Company has been identified as a potentially responsible party at the Sand
Springs Petrochemical Complex Superfund Site (the "Sand Springs Site") and the
Hardage-Criner Superfund Site (the "Hardage Site"). The Company became a
potentially responsible party with respect to the Sand Springs Site as a result
of a licensed waste hauler delivering non-hazardous cutting fluids generated by
the Company to the Sand Springs Site ostensibly for recycling. Cutting fluids
and acids generated by the Company were properly disposed at the Hardage Site,
the only permitted hazardous waste disposal site in the State of Oklahoma. At
the time of disposal, both the Sand Springs Site and the Hardage Site had all
permits and met all statutory requirements required to receive and manage such
wastes. Under the Comprehensive Environmental Response, Compensation, and
Liability Act of 1980, as amended, each responsible party is jointly and
severally liable for all cleanup and remedial costs at a site. However,
potentially responsible parties generally apportion liability based on the
relative volumes of waste disposed by them. Webco's percentages of the
liabilities have been established at approximately 2.2% and 1.0% at the Sand
Springs Site and the Hardage Site, respectively. The potential legal and
cleanup costs allocated to the Company are affected by the complexity of
environmental laws and regulations, the uncertainty of the total legal and
remediation costs for the sites, and insurance policies in effect at the time
the waste disposal occurred. Substantially all required remedial work has been
completed at the Sand Springs Site. Furthermore, the Oklahoma Department of
Environmental Quality (ODEQ) has petitioned Federal EPA to remove (i.e. delist)
the Sand Springs Petrochemical Complex Superfund Site from the National
Priorities List (NPL.) The remedy at Hardage is also complete and proven
effective, and the cleanup is in its third year of a 30 year operation and
maintenance (O&M) phase. At July 31, 1997, the Company estimated its remaining
potential liability for both waste disposal sites in the aggregate to be
approximately $227,000 (primarily Hardage operation and maintenance) which
has been recorded as an accrued liability.
In August 1997, the Company filed an action, Webco Industries, Inc. vs.
Thermatool Corporation and Alpha Industries, Inc., relating to certain cut-off
equipment sold to the Company and installed on Mill 3, which did not perform to
manufacturer specifications. The case, filed in the United States District
Court for the Northern District of Oklahoma (Case No. 97-CV-708H(W)), seeks
recoveries including, but not limited to, the cost of the equipment, lost
profits, lost market share and other damages suffered by the Company. There
can be no assurance that the Company will prevail in all or in part of its
action, or that if successful, any recoveries will be commensurate with the
damages suffered by the Company.
From time to time, the Company is named as a defendant in legal actions
arising out of the normal course of business. Except as described above, the
Company is not a party to any pending legal proceeding other than routine
litigation incidental to its business. Management believes the resolution of
such matters will not have a material adverse effect on the Company's results
of operations or financial condition. The Company maintains liability
insurance against risks arising out of the normal course of business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to Webco security holders during the
fourth quarter of fiscal year 1997.
PART II
ITEM 5. MARKET FOR WEBCO'S COMMON STOCK
AND RELATED STOCKHOLDER MATTERS
Webco's common stock is traded on the American Stock Exchange ("AMEX")
under the symbol "WEB." Prior to March 17, 1995, the Company's common stock
was traded on the NASDAQ/NNS. At the close of business on September 23, 1997,
there were 330 holders of record of Webco's common stock. The quarterly prices
of Webco's common stock were as follows:
Fiscal Year 1997: High Low
Fourth Quarter 7 5 1/2
Third Quarter 6 5/8 5 1/2
Second Quarter 5 5/8 4 7/8
First Quarter 6 1/8 4 13/16
Fiscal Year 1996:
Fourth Quarter 8 3/4 5 1/8
Third Quarter 8 3/16 5 13/16
Second Quarter 6 11/16 5 3/8
First Quarter 8 1/8 5 3/4
DIVIDENDS
The Company currently intends to retain earnings to support its growth strategy
and does not anticipate paying dividends in the foreseeable future. The Board
of Directors may reconsider or revise this policy from time to time based upon
conditions then existing, including the Company's results of operations,
financial condition, and capital requirements, as well as other factors the
Board of Directors may deem relevant. Under the Company's loan agreement,
the Company may not pay dividends without the lenders consent.
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected financial information for the Company as
of the end of and for each of the five years in the period ended July 31, 1997,
which has been derived from the Financial Statements of the Company, audited by
Coopers & Lybrand L.L.P., independent accountants. In the fourth quarter of
fiscal 1997 the Company changed its method of accounting for its inventories
from the last-in, first-out method to the weighted average cost method.
Financial results for all periods presented have been restated to reflect the
new method of accounting for inventories.
The selected financial data should be read in conjunction with the Financial
Statements of the Company and notes thereto and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
For the Years Ended July 31,
(Dollars in thousands except per share data)
Restated (1)
1997 1996 1995 1994 1993
Income Statement Data:
Net sales $117,739 $101,867 $ 97,724 $ 80,142 $ 67,561
Gross profit 16,466 13,545 11,809 6,499 9,434
Income from operations 5,131 (2) 4,950 4,662 151 4,606
Income (loss) before income
taxes and extraordinary item 3,148 2779 (38) (3) (968) 2,106
Income (loss) before
extraordinary item 1,952 1,723 (677) (3,651) 2,106
Net income (loss) (4) 1,952 1,723 (677) (4,024) 2,106
Income (loss) per
common share:
Before extraordinary item . 31 .27 (.11) (.74) .58
Net income (loss) .31 .27 (.11) (.82) .58
Pro forma income (loss) (5):
Before extraordinary item (600) 1,306
Net income (loss) (973) 1,306
Pro forma income (loss) per
common share (5):
Before extraordinary item (.12) .36
Net income (loss) (.20) .36
Balance Sheet Data:
Working capital $ 31,150 $ 19,444 $ 17,530 $ 11,285 $ 5,368
Total assets 98,184 82,912 79,956 68,886 56,255
Long-term debt (net of
current portion) 34,108 19,413 17,985 6,594 27,912
Stockholders' equity 42,127 40,175 37,920 38,597 10,163
(1) In the fourth quarter of fiscal 1997 the Company changed the method of accounting for
its inventories from the last-in, first-out method to the weighted average cost method.
Financial results for all periods presented have been restated to reflect the new
method of accounting for inventories.
(2) Includes an $884,000 charge related to the replacement and write-off of faulty
equipment on the Company's Mill 3.
(3) Includes a $3.5 million charge related to the settlement of securities litigation.
(4) The Company was an S-Corporation for federal and state income tax purposes through
January 31, 1994 and accordingly did not incur any federal or state income taxes prior
to that date.
(5) Net income for fiscal 1994 and 1993 has been adjusted, on a pro forma basis, for
assumed federal and state income taxes based on the statutory (federal and state) tax
rate of 38% and for fiscal 1994 excludes income taxes of $3.8 million attributable to
the change in tax status.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the "Selected
Financial Data" and the Financial Statements of the Company and notes thereto.
Overview
During the fourth quarter of fiscal 1997, the Company changed its method
of accounting for its inventories from the last-in, first-out method to the
weighted average cost method, which the Company believes provides a more
accurate presentation of underlying operating performance. Financial results
for all periods presented in this report have been restated to reflect the new
method of accounting for inventories.
Raw material costs averaged approximately 63% of cost of sales (54% of
net sales) for carbon and stainless steel products combined during the
three-year period ended July 31, 1997. The Company's manufacturing expenses
are a substantially smaller percentage of total costs than raw material costs
and do not increase proportionately with volume.
During the three year period ended July 31, 1997, the Company spent $21.6
million on capital expenditures. This included several major projects, such
as the installation of Mill 3, a doubling of the capacity of the stainless
facility, purchase and installation of a slitter and a new finish floor at
Oil City, improvements to the Company's new corporate headquarters and the
commencement of the Sand Springs facility shipping bay expansion. These
projects are consistent with the Company's growth strategy and it is
anticipated that the Company will continue with such growth and capital
improvement strategy.
While the Company was in the process of expanding its operations in the
early 1990's, its business was affected by the recessionary environment in
general and weak demand for consumer durables and industrial capital goods.
Due to improving market conditions beginning in fiscal 1994, the Company was
able to increase the tonnage of steel tubing sold by an aggregate of 67.4% from
1993 to 1997. In addition, as a direct result of its capital addition program,
the Company lowered its manufacturing cost structure while diversifying its
customer base and product offerings.
In fiscal 1996 the Company purchased certain assets of QuikWater, a Tulsa,
Oklahoma based company which manufactured a patented direct contact,
high-efficiency water heater. The initial purchase commitment was
approximately $685,000. Dependent upon sales of this licensed design through
the year 2000, the Company may be required to pay an additional amount of up to
$750,000. The water heater has both commercial and industrial applications.
The assets acquired consisted primarily of intangible assets, which include
rights to the name "QuikWater" and product designs, etc. as well as an
exclusive license of the patent to manufacture the QuikWater product through
the end of the life of the original patent, fiscal year 2004. The Company has
supplementally filed for and has a patent pending for certain technological
enhancements of the QuikWater design.
Assuming that the present economic conditions remain stable in the market
sectors served by the Company, Webco believes that in fiscal 1998 it will
continue to experience increases in shipment volumes. These incremental volume
increases will be primarily from stainless steel tubing and lesser value added,
lower margin as-welded carbon mechanical tubing.
Results of Operations
The following table sets forth certain income statement data for each of
the three years in the period ended July 31, 1997 (certain amounts may not
calculate due to rounding):
1997 1996 1995
Dollar % of Dollar % of Dollar % of
Amount Net Sales Amount Net Sales Amount Net Sales
(Dollars in Millions)
Net sales $117.7 100.0% $101.9 100.0% $ 97.7 100.0%
Gross profit 16.5 14.0 13.5 13.3 11.8 12.1
Selling, general
and administrative
expenses 10.5 8.9 8.6 8.4 7.1 7.3
Income from operations 5.1 4.3 5.0 4.9 4.7 4.8
Fiscal 1997 Compared to Fiscal 1996
Net sales increased $15.9 million, or 15.6%, to $117.7 million in 1997
from $101.9 million in 1996. The increase in net sales reflects a 21.2%
increase in the tonnage of steel tubing sold in 1997, which was partially
offset by a 4.9% decrease in the average net selling price of tubes. This
decrease in selling prices resulted primarily from downward market pressure
in the heat exchanger and stainless markets, as well as increased volumes of
as-welded mechanical tubing. The volume increase in 1997 versus 1996 reflects
increased market penetration of the mechanical and heat exchanger markets and
higher utilization of the Company's Oil City facilities.
Total gross profit increased $2.9 million, or 21.6%, to $16.5 million in
1997 from $13.5 million in 1996. Expressed as a percentage of net sales, gross
profit increased from 13.3% to 14.0%. The decrease in the total cost per ton of
5.8% was the result of decreases in both the average cost per ton of steel
sheet coil of 5.5% and the average manufacturing cost per ton of 6.4%. This
was partially offset by a 4.9% decrease in the average selling price per ton of
steel tubing.
Selling, general and administrative expenses increased $1.9 million to
$10.5 million in 1997 from $8.6 million in 1996. The $1.9 million increase is
primarily the result of $1.6 million in development and marketing associated
with QuikWater in the current year versus $626,000 in 1996. SG&A for the year
also included $229,000 in profit sharing (none in 1996) with the employees and
generally reflect higher overall activity for the Company.
During the second quarter of fiscal 1997 the Company recorded a special
charge of $884,000. This charge relates to the replacement and write-off of
faulty cutoff equipment on the Company's Mill 3 and is reflected in income
from operations.
Interest expense decreased slightly to $2.0 million in fiscal 1997 from $2.2
million in fiscal 1996. This decrease is a result of lower average interest
rates and a $265,000 increase, compared to 1996, in interest capitalization
from the expansion of its stainless facility and other major capital projects.
Fiscal 1996 Compared to Fiscal 1995
Net sales increased $4.1 million, or 4.2%, to $101.9 million in 1996 from
$97.7 million in 1995. The increase in net sales reflects a 6.4% increase in
the tonnage of steel tubing sold in 1996, which was partially offset by a
decrease in the average net selling price of 2.7%. The volume increase in 1996
versus 1995 reflects higher utilization at all facilities due to improving
market conditions and increased market penetration of the boiler tube and heat
exchanger markets. The decrease in the average net selling price resulted
primarily from downward market pressure in the heat exchanger and stainless
markets.
Total gross profit increased $1.7 million to $13.5 million in 1996 from
$11.8 million in 1995, which is an increase of 14.7%. Gross profit improvement
resulted from the volume driven higher net sales combined with a lower average
cost per ton. Decreases in the average cost of materials per ton for both
carbon and stainless sheet coil coupled with improved efficiencies resulted in
a 3.4% decrease in the manufactured cost per ton.
Selling, general and administrative expenses increased to $8.6 million or
20.3% in fiscal 1996 from $7.1 million in fiscal 1995. Factors contributing to
the increase include $626,000 of new product development and marketing costs
associated with QuikWater, a patented direct contact water heater for
commercial and industrial applications that was introduced during 1996, and
higher costs associated with employee recruitment and training.
Interest expense for fiscal 1996 increased to $2.2 million from $1.2
million in fiscal 1995. This increase is due primarily to higher average
borrowing levels and a $448,000 reduction of interest capitalization, due in
part to Mill 3, which commenced production in February 1995.
Liquidity and Capital Resources
Net cash provided by (used in) operations was $(4.3) million, $2.0
million, and $(0.3) million in fiscal 1997, 1996 and 1995, respectively.
During each of the three fiscal years, accounts receivable and inventories
have increased (with the exception of a slight decrease in inventories in
fiscal 1996). The increases are primarily the result of the increase in sales
during the same periods and the working capital required to finance such
growth. In addition, a major supplier of steel coil to the Company, whose
steel coils were the subject of a consignment program, was unable to
consistently deliver significant quantities of steel to the Company as a result
of a strike by the supplier's employees for much of fiscal 1997. This
consignment program, with a party independent of the supplier, effectively
financed a portion of the Company's inventory. The absence of the consignment
program required the Company to fund current purchases of inventory with
working capital. The supplier has announced a contract agreement with its
employees' union and it is anticipated that production from this supplier will
be available before the end of the calendar year. The Company believes it will
be able to continue the consignment relationship on future production from this
supplier, thereby decreasing the working capital investment in inventories.
Excluding the effects of inventory on consignment, over the past three years
the Company has turned its steel tube manufacturing inventories an average of
approximately 4.1 times per year.
Net cash used in investing activities was $9.6 million, $5.9 million and $8.0
million in fiscal 1997, 1996 and 1995, respectively. During fiscal 1997, the
Company expanded its stainless plant, including the addition of two new
stainless mills, began an expansion of its shipping facility at the Sand
Springs location and renovated the building it is leasing to house its
corporate headquarters. Significant projects in fiscal 1996 included expansion
of the stainless facility and the additions of a slitter and a new finish floor
at the Oil City facility. Investing activities in 1995 consisted primarily
of capital expenditures made by the Company for Mill 3 at the Sand Springs
facility and for production expansion at the stainless facility.
The Company's capital requirements are primarily to fund equipment purchases
and for general working capital needs resulting from the growth that the
Company is experiencing. The Company has historically followed an aggressive
capital expenditure plan as part of its growth strategy and to enable it to
continue to be a leader in the use of new tubular manufacturing technologies.
The Company foresees a continuance of this strategy in the future.
On July 15, 1997, the Company refinanced the term loan and a revolving
line of credit with its primary lender to facilitate its capital growth plan.
The new debt agreement increased the term loan to $25 million and the line of
credit to $20 million. As of July 31, 1997, the Company had $25 million
outstanding on the term loan, and $8.3 million under the revolving line of
credit. The revolving credit loan and term loans bear interest at the prime
rate and prime rate plus .25%, respectively. At the Company's option, borrowing
under either facility can bear interest at LIBOR plus 2.25% in the case of the
term loan borrowing or plus 2.0% in the case of revolving loan advances. Prior
to the refinancing, interest on the Company's debt was, at the Company's
election, prime plus 1.25% or LIBOR plus 3.5%. These loans mature on
August 31, 2002 and are collateralized by substantially all of the Company's
assets other than the Sand Springs and Oil City real estate. The Company may
have borrowings and outstanding letters of credit ($550,000 at July 31, 1997)
under the revolving credit facility up to the lesser of $20.0 million or an
amount determined by a formula based on the amount of eligible inventories and
accounts receivable. The Company pays a commitment fee of 0.25% per annum on
any unused and available line of credit. At July 31, 1997, $11.2 million was
available for borrowing under the line of credit
Pursuant to the terms of the term loan and revolving credit loan, the
Company is subject to various restrictive covenants, including requirements to
maintain a minimum debt coverage ratio and to not exceed a ratio of
indebtedness to net worth. The covenants also limit capital expenditures and
dividends. In addition, the loan agreement provides for acceleration of the
loans, at the option of the lender, if F. William Weber and Dana S. Weber fail
to possess the power to direct or cause the direction of management and
policies of the Company, or the Weber Family ceases to own at least 35% of the
outstanding voting stock, or upon the occurrence of a material adverse change
in the business. The loan agreement also contains a pre-payment penalty
ranging from 1% to 2% of amounts outstanding under the term loan plus the
revolving commitment if the debts are prepaid prior to July 15, 2000. The
Company does not believe these provisions will have a material adverse affect
on the Company or its ability to finance its operations.
Over the next two years, the Company will be acquiring, developing and
installing significant financial and operational computer systems. These
new systems are currently expected to replace substantially all of the
Company's existing systems and will be designed to be year 2000 complaint.
The Company expects cash flow from operations to fund a portion of its
capital growth expenditures in fiscal 1998, with the remainder being financed
with debt. Long-term needs have been, and the Company expects they will
continue to be, satisfied through borrowings from commercial lenders or, in the
case of acquisitions, the possible issuance of additional common stock or other
securities. Management believes that credit line availability and cash flow
from operations will provide the Company with adequate capital to fund its
currently anticipated operations and future growth for at least the next two
years.
Inflation
The Company's operations have not been, nor are they expected to be,
materially affected by inflation. However, the Company's operations are
affected by changes in the price of steel charged by the primary producers,
which are not considered to be inflation-sensitive, but rather sensitive to
changes in steel demand as the primary producers use pricing policy to attempt
to control their order levels and backlog.
Quarterly Effects and Seasonality
Order rates generally tend to be lower during late summer as many of the
Company's customers schedule plant shutdowns for vacations. This, in
conjunction with one of the annealing furnaces being down for routine
maintenance, may reduce net sales and net income in the first quarter.
The Company currently anticipates that one of its carbon steel mills in Sand
Springs will be down during the second quarter for maintenance purposes. In
addition, the Company experiences some seasonality in stainless during its
third fiscal quarter, which may result in reduced net sales and income for that
period. Assuming a strong economy, volumes are expected to increase, though
possibly not at growth rates as high as in fiscal 1997.
Impact of New Accounting Pronouncements
See Note 1 of the Notes to Financial Statements regarding newly issued
accounting pronouncements.
Forward Looking Statements
Certain statements in this Annual Report constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform
Act of 1995. Such forward-looking statements involve known and unknown risks,
uncertainties and other important factors that could cause the actual results,
performance or achievements of the Company, or industry results, to differ
materially from any future results, performance or achievements expressed or
implied herein. Such risks, uncertainties and factors include, among others:
general economic and business conditions, interest rate fluctuations, the
Company's ability to access capital markets, industry capacity, industry
trends, competition, raw material costs and availability, the loss of any
significant customers, the successful implementation of business strategies,
availability of qualified personnel, and changes in, or the failure or
inability to comply with government regulation.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Webco Industries, Inc.
We have audited the balance sheets of Webco Industries, Inc. as of July
31, 1997 and 1996, and the related statements of operations, stockholders'
equity and cash flows and financial statement schedule for each of the three
years in the period ended July 31, 1997. These financial statements and
financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Webco Industries, Inc. as
of July 31, 1997 and 1996, and the results of its operations and its cash flows
for each of the three years in the period ended July 31, 1997, in conformity
with generally accepted accounting principles. In addition, in our opinion,
the financial statement schedule referred to above, when considered in relation
to the basic financial statements taken as a whole, presents fairly, in all
material respects, the information required to be included therein.
As discussed in Note 2, during 1997 the Company changed its method of
accounting for inventories from the Last-In, First-Out method to the weighted
average cost method. Accordingly, previously reported amounts have been
restated to reflect this change in accounting.
COOPERS & LYBRAND L.L.P.
Tulsa, Oklahoma
September 18, 1997
/AUDIT-REPORT
WEBCO INDUSTRIES, INC.
BALANCE SHEETS
July 31, 1997 and 1996
(Dollars in thousands, except share amounts and par value)
1997 1996
ASSETS (Restated -
Note 2)
Current assets:
Cash $ 466 $ 508
Accounts receivable, net 17,159 13,106
Inventories 26,982 21,239
Prepaid expenses 268 235
Notes receivable from related parties - 420
Deferred income tax asset 1,460 1,576
Total current assets 46,335 37,084
Property, plant and equipment:
Land 1,436 1,436
Buildings and improvements 11,448 8,630
Machinery and equipment 53,305 50,403
Furniture and fixtures 2,628 1,989
Construction in progress 4,896 3,883
Less accumulated depreciation and amortization (24,972) (22,174)
Net property, plant and equipment 48,741 44,167
Notes receivable from related parties 1,582 -
Other assets, net 1,526 1,661
Total assets $ 98,184 $ 82,912
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 11,264 $ 12,419
Accrued liabilities 3,800 3,523
Current portion of long-term debt 121 1,698
Total current liabilities 15,185 17,640
Long-term debt 34,108 19,413
Deferred income tax liability 6,764 5,684
Commitments and contingencies (Note 5) - -
Stockholders' equity (Note 7):
Common stock, $.01 par value, 12,000,000 shares
authorized, 6,339,000 shares issued and outstanding 63 63
Additional paid-in capital 35,944 35,944
Retained earnings 6,120 4,168
42,127 40,175
Total liabilities and stockholders' equity $ 98,184 $ 82,912
The accompanying notes are an integral
part of the financial statements.
WEBCO INDUSTRIES, INC.
STATEMENTS OF OPERATIONS
For the Years Ended July 31, 1997, 1996 and 1995
(Dollars and shares in thousands, except per share amounts)
1997 1996 1995
(Restated - Note 2)
Net sales $ 117,739 $ 101,867 $ 97,724
Cost of sales 101,273 88,322 85,915
Gross profit 16,466 13,545 11,809
Selling, general and administrative expenses 10,451 8,595 7,147
Special item: Write-off of Mill 3 cut-off equipment 884 - -
Income from operations 5,131 4,950 4,662
Interest expense 1,983 2,171 1,245
Unusual item: Shareholder litigation settlement and
related litigation costs (Note 5) - - 3,455
Income (loss) before income taxes 3,148 2,779 (38)
Provision for income taxes:
Current - (326) -
Deferred (1,196) (730) (639)
Net income (loss) $ 1,952 $ 1,723 $ (677)
Net income (loss) per common share $ .31 $ .27 $ (.11)
Weighted average common shares
outstanding 6,339 6,339 6,339
The accompanying notes are an integral
part of the financial statements.
WEBCO INDUSTRIES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended July 31, 1997, 1996 and 1995
(Dollars in thousands)
Additional Total
Common Paid-In Retained Stockholders'
Stock Capital Earnings Equity
Balances, July 31, 1994, as
previously reported $ 63 $ 35,412 $ 2,277 $ 37,752
Effect of change in accounting for
inventories (Note 2) - - 845 845
Balances, July 31, 1994, as
restated 63 35,412 3,122 38,597
Net loss - - (677) (677)
Balances, July 31, 1995 63 35,412 2,445 37,920
Deferred tax benefit (Note 4) - 532 - 532
Net income - - 1,723 1,723
Balances, July 31, 1996 63 35,944 4,168 40,175
Net income - - 1,952 1,952
Balances, July 31, 1997 $ 63 $ 35,944 $ 6,120 $ 42,127
The accompanying notes are an integral
part of the financial statements.
WEBCO INDUSTRIES, INC.
STATEMENTS OF CASH FLOWS
For the Years Ended July 31, 1997, 1996 and 1995
(Dollars in thousands)
1997 1996 1995
(Restated - Note 2)
Cash flows from operating activities:
Net income (loss) $ 1,952 $ 1,723 $ (677)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 3,099 2,726 2,217
(Gain) loss on write-off and disposition
of property, plant and equipment 928 (56) 1
Deferred tax expense 1,196 730 639
(Increase) decrease in:
Accounts receivable (4,053) (809) (1,776)
Inventories (5,743) 410 (2,659)
Prepaid expenses (33) 275 378
Increase (decrease) in:
Accounts payable (1,910) (1,713) (1,394)
Accrued liabilities 277 (1,280) 2,992
Net cash provided by (used in) operating activities (4,287) 2,006 (279)
Cash flows from investing activities:
Capital expenditures (8,409) (5,230) (7,994)
Proceeds from sale of property, plant and equipment 12 56 38
Advances to stockholder (1,286) (5,092) (3,437)
Repayments of stockholder advances 124 5,092 3,437
Other (36) (746) (63)
Net cash used in investing activities (9,595) (5,920) (8,019)
Cash flows from financing activities:
Proceeds from long-term debt 154,847 106,615 113,200
Principal payments on long-term debt (141,729) (104,561) (102,309)
Increase (decrease) in book overdrafts 722 709 (1,445)
Net cash provided by financing activities 13,840 2,763 9,446
Net change in cash (42) (1,151) 1,148
Cash, beginning of year 508 1,659 511
Cash, end of year $ 466 $ 508 $ 1,659
Supplemental disclosure of cash flow information:
Cash paid during the year for interest, net of
amount capitalized of $433, $168 and $616 in
1997, 1996 and 1995, respectively $ 1,963 $ 2,037 $ 1,104
Income taxes $ 202 $ - $ -
The accompanying notes are an integral
part of the financial statements.
WEBCO INDUSTRIES INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
OPERATIONS - Webco Industries, Inc. (the "Company") is a specialty manufacturer
of high-quality carbon and stainless steel tubing and pipe. The Company has
manufacturing facilities in Sand Springs and Mannford, Oklahoma, and in Oil
City, Pennsylvania, as well as distribution facilities in Sand Springs,
Oklahoma and Nederland, Texas. The Company provides carbon steel tubing
products to the industrial boiler, heat exchanger and mechanical tubing
markets and stainless steel tubing products to the high-efficiency residential
furnace, stainless pipe and general service instrumentation tubing markets.
In fiscal 1996 the Company purchased a license to use the patent for a
high-efficiency water heater, under the name "QuikWater," and has begun
production and marketing of this product.
CONCENTRATIONS - The Company maintains its cash in bank deposit accounts, which
at times may exceed the federal insurance limits. As of July 31, 1997 and
1996, the Company had cash in banks totaling $407,000 and $404,000 in excess
of federal depository insurance limits, respectively. The Company has not
experienced any losses on such accounts in the past.
ACCOUNTS RECEIVABLE - Accounts receivable represent short-term credit granted
to the Company's customers for which collateral is generally not required.
Accounts receivable at July 31, 1997 and 1996 are net of an allowance for
uncollectible amounts of $49,000 and $110,000, respectively. Credit risk on
receivables is considered by management to be limited due to the variety of
industries served and geographic dispersion of customers.
INVENTORIES - The Company values its inventories at the lower of cost or
market. In fiscal 1997 the Company changed its method of determining cost
for raw materials, work-in-process, and finished goods inventories from the
last-in, first-out ("LIFO") method to the weighted average cost method. The
change was made to improve interim financial reporting and to achieve a better
presentation and comparability of period to period operating and financial
results. Maintenance parts and supplies and structural steel inventories are
valued at the lower of cost (first-in, first-out ("FIFO")) or market.
PROPERTY, PLANT AND EQUIPMENT - Property, plant and equipment, including
tooling, is stated at cost and includes interest capitalized on major
construction projects. Sales and retirements of depreciable property are
recorded by removing the related cost and accumulated depreciation from the
accounts. Gains or losses on sales and retirements of property are reflected
in operations. Depreciation and amortization are provided using the
straight-line method over the following estimated useful lives: buildings and
improvements - 10 to 40 years, machinery and equipment - 5 to 25 years, and
furniture and fixtures - 3 to 10 years.
Depreciation expense for the years ended July 31, 1997, 1996 and 1995
amounted to $2,926,000, $2,625,000 and $2,098,000, respectively. Fully
depreciated assets still in use at July 31, 1997 and 1996 amounted to
$7,378,000 and $7,285,000, respectively.
WEBCO INDUSTRIES INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
BOOK OVERDRAFTS - Included in accounts payable at July 31, 1997 and 1996 are
outstanding checks in excess of bank deposits totaling $1,882,000 and
$1,160,000, respectively.
SPECIAL ITEM - The special item reflected in the statement of operations for
fiscal year 1997 relates to the write-off of certain Mill 3 cut-off equipment,
which did not work to manufacturer specifications. The replacement equipment
was capitalized as new equipment upon its purchase and installation during 1997.
ACCOUNTING ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
EARNINGS PER SHARE - Earnings per share are calculated based on the number of
weighted average common shares outstanding, including the effect of dilutive
options, when applicable.
INCOME TAXES - The Company is subject to Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" ("FAS No. 109"). The
provisions of FAS No. 109 require the recording of deferred tax assets and
liabilities to reflect the expected tax consequences in future years, of
differences between the tax basis of assets and liabilities and their
financial reporting amounts at each year end.
IMPACT OF FINANCIAL ACCOUNTING PRONOUNCEMENTS - In February 1997 the Financial
Accounting Standards Board issued Statement No. 128, "Earnings Per Share" and
No. 129, "Disclosure of Information About Capital Structure". Statement
No. 128 specifies the computation, presentation, and disclosure requirements
for earnings per share and is substantially similar to the standard recently
issued by the International Accounting Standards Committee. Statement
No. 129 consolidates the existing requirements to disclose certain information
about an entity's capital structure. Both statements are effective for
financial statements issued for periods ending after December 15, 1997.
Based on the Company's present capital structure and common stock equivalents
(stock options), the Company does not believe that the implementation of these
new standards will have a material impact on its financial statements.
2. INVENTORIES
In the fourth quarter of fiscal 1997 the Company changed its method of
valuation for raw materials, work-in-process, and finished goods inventories
from the last-in, first-out ("LIFO") to the weighted average cost method.
The financial statements for fiscal 1997, 1996 and 1995 have been restated
to reflect the change. Accordingly, the value of steel tubing inventories
WEBCO INDUSTRIES INC.
NOTES TO FINANCIAL STATEMENTS
2. INVENTORIES, Continued
was decreased by $956,000 and $2,000 for fiscal 1997 and 1996 respectively.
The effect of the change in accounting for inventories was to decrease net
income by $594,000 ($0.09 per share), $598,000 (0.10 per share) and $247,000
($0.04 per share) for fiscal 1997, 1996, and 1995, respectively. Structural
inventories and maintenance, parts and supplies inventories, which are valued
using the FIFO method, amounted to $1,385,000 and $1,372,000 at July 31, 1997
and 1996, respectively.
Inventory at July 31, 1997 and 1996, consisted of the following:
July 31,
1997 1996
(Dollars in Thousands)
Raw materials $ 18,666 $ 12,597
Work-in-process 2,159 1,883
Finished goods 4,947 5,742
Maintenance parts and supplies 1,210 1,017
Total inventories $ 26,982 $ 21,239
The impact of this change in accounting upon each of the quarters in fiscal
years 1997 and 1996 is as follows (Dollars in thousands, except per share
amounts.):
Three-Month Periods Ended
(Unaudited)
Year
Ended
October 31, January 31, April 30, July 31, July 31,
1996 1997 1997 1997 1997
Net income:
As previously reported $ 634 $ 131 $ 498 $ 1,283 $ 2,546
Effect of change (37) (31) 9 (535) (594)
As restated $ 597 $ 100 $ 507 $ 748 $ 1,952
Earnings per share:
As previously reported $ 0.10 $ 0.02 $ 0.08 $ 0.20 $ 0.40
Effect of change (0.01) - - (0.08) (0.09)
As restated $ 0.09 $ 0.02 $ 0.08 $ 0.12 $ 0.31
WEBCO INDUSTRIES INC.
NOTES TO FINANCIAL STATEMENTS
2. INVENTORIES, Continued
Three-Month Periods Ended
(Unaudited)
Year
Ended
October 31, January 31, April 30, July 31, July 31,
1995 1996 1996 1996 1996
Net income:
As previously reported $ 117 $ 617 $ 621 $ 966 $ 2,321
Effect of change (73) (139) (65) (321) (598)
As restated $ 44 $ 478 $ 556 $ 645 $ 1,723
Earnings per share:
As previously reported $ 0.02 $ 0.10 $ 0.10 $ 0.15 $ 0.37
Effect of change (0.01) (0.03) (0.01) (0.05) (0.10)
As restated $ 0.01 $ 0.07 $ 0.09 $ 0.10 $ 0.27
3. LONG-TERM DEBT
Long-term debt at July 31, 1997 and 1996, consisted of the following:
1997 1996
(Dollars In Thousands)
Term loan (A) $ 25,000 $ 13,126
Revolving loan (A) 8,281 6,905
Real estate and equipment term loans (B) 611 687
Other 337 393
34,229 21,111
Less current maturities 121 1,698
Long-term debt $ 34,108 $ 19,413
Based upon the borrowing rates currently available to the Company for bank
borrowings with similar terms and average maturities, the Company believes that
the carrying amount of these borrowings approximate their fair value.
(A) On July 15, 1997, the Company refinanced the term loan and a revolving
line of credit with its primary lender to facilitate its capital growth
plan. The new debt agreement increased the term loan to $25 million and
the revolving line of credit to $20 million. The revolving credit loan
and term loan bear interest at the prime rate (8.5% at July 31, 1997) and
prime rate plus .25%, respectively. At the Company's option, borrowings
WEBCO INDUSTRIES INC.
NOTES TO FINANCIAL STATEMENTS
3. LONG-TERM DEBT, Continued
under either facility can bear interest at LIBOR (5.44% at July 31, 1997)
plus 2.25% in the case of the term loan borrowing or plus 2.0% in the case
of revolving loan advances. Prior to the refinancing, interest on the
Company's debt was, at the Company's election, prime plus 1.25% or LIBOR
plus 3.25%. These loans mature on August 31, 2002 and are collateralized
by substantially all of the Company's assets other than the Sand Springs
and Oil City real estate. Principal payments on the term loan commence on
August 1, 2000, at which time monthly payments of $208,000 plus interest
are required. The Company may have borrowings and outstanding letters of
credit ($550,000 at July 31, 1997) under the revolving credit facility up
to the lesser of $20.0 million or an amount determined by a formula based
on the amount of eligible inventories and accounts receivable. The
Company pays a commitment fee of 0.25% per annum on any unused and
available line of credit. At July 31, 1997, $11.2 million was available
for borrowing under the line of credit.
Pursuant to the terms of the loan agreement, the Company is subject to
various restrictive covenants, including requirements to maintain a
minimum debt coverage ratio and to not exceed a ratio of indebtedness to
net worth. The covenants also limit capital expenditures and dividends. In
addition, the loan agreement provides for acceleration of the loans, at
the option of the lender, if F. William Weber and Dana S. Weber fail to
possess the power to direct or cause the direction of management and
policies of the Company, or the Weber Family ceases to own at least 35%
of the outstanding voting stock, or upon the occurrence of a material
adverse change in the business. The loan agreement also contains a
pre-payment penalty ranging from 1% to 2% of amounts outstanding under
the term loan plus the revolving commitment if the debts are prepaid
prior to July 15, 2000.
(B) These loans were entered into with various public agencies and are
payable in monthly installments aggregating approximately $8,000 including
interest at 3%. The various notes are collateralized by the underlying
real estate and/or equipment and the guarantee of the principal
stockholder/officer.
At July 31, 1997, the aggregate future maturities of long-term debt are
as follows: 1998 - $121,000; 1999 - $110,000; 2000 - $113,000; 2001 -
$1,154,000; 2002 - $2,617,000; and thereafter $30,114,000.
WEBCO INDUSTRIES INC.
NOTES TO FINANCIAL STATEMENTS
4. INCOME TAXES
The provision for income taxes for fiscal 1997, 1996 and 1995 consists
of the following:
1997 1996 1995
(Dollars in Thousands)
Current federal $ - $ 326 $ -
Deferred:
Federal 1,071 632 543
State 125 98 96
Total income tax expense $ 1,196 $ 1,056 $ 639
The actual income tax expense for fiscal 1997, 1996 and 1995 differs from
income tax based on the federal statutory rate due to the following:
1997 1996 1995
(Dollars in Thousands)
Expected tax expense (benefit) $ 1,070 $ 945 $ (13)
State income taxes, net of federal 125 111 63
Nondeductible costs related to settlement
of litigation - 3 540
Other 1 (3) 49
Total income tax expense $ 1,196 $ 1,056 $ 639
At July 31, 1997 and 1996, deferred tax assets and deferred tax liabilities
consisted of the following:
1997 1996
(Dollars in Thousands)
Net current deferred tax assets (liabilities):
Accounts receivable $ 24 $ 47
Inventories 540 184
Accrued liabilities 896 855
Operating loss carry forwards, expiring in 2009 - 490
Net current deferred tax asset $ 1,460 $ 1,576
WEBCO INDUSTRIES INC.
NOTES TO FINANCIAL STATEMENTS
4. INCOME TAXES, Continued
1997 1996
(Dollars in Thousands)
Net noncurrent deferred tax assets (liabilities):
Property plant and equipment $ (9,631) $ (6,286)
Operating loss carry forwards, expiring in 2012 2,632 -
General business credit carry forward 189 217
Alternative minimum tax credit carry forward 321 357
Other (275) 28
Net noncurrent deferred tax liability $ (6,764) $ (5,684)
During fiscal 1996 the Company recorded $532,000 as additional paid-in
capital for the tax benefit related to a stock gift in 1994 by the majority
shareholder to substantially all non-executive employees and the tax benefit
resulting from a "step-up" for tax purposes in the basis of certain property,
plant and equipment sold to the Company in 1994 by an affiliated entity owned
by the majority shareholders. For financial reporting purposes these assets
were recorded at the affiliated entities' basis and no compensation cost was
recorded for the stock gift.
5. COMMITMENTS AND CONTINGENCIES
LITIGATION - The Company has been identified as a potentially responsible
party in the cleanup of certain EPA Superfund cleanup sites. The potential
legal and cleanup costs allocated to the Company are impacted by the complexity
of environmental laws and regulations, the uncertainty of the total legal and
remediation costs for the site, and insurance policies in effect at the time
the waste disposal occurred. At July 31, 1997, the Company estimated its
remaining potential liability for remediation of the waste disposal sites and
legal costs to be approximately $227,000, which has been recorded as an accrued
liability.
In April 1995, the Company settled certain previously reported shareholder
securities litigation. Pursuant to the settlement agreement, the Company's
$2,400,000 portion of the settlement was paid into escrow on August 8, 1995.
The litigation settlement and related litigation costs totaling $3,455,000 have
been reported as an unusual item in the statement of operations for the period
ended July 31, 1995.
In addition, the Company is a party to various other lawsuits and claims
arising out of the ordinary course of its business. Management, after review
and consultation with legal counsel, considers that any liability resulting
from these matters would not materially affect the results of operations or
the financial position of the Company.
WEBCO INDUSTRIES INC.
NOTES TO FINANCIAL STATEMENTS
5. COMMITMENTS AND CONTINGENCIES, Continued
LEASES - The Company leases certain buildings and machinery and equipment under
noncancelable operating leases. Under certain of these leases the Company is
required to pay property taxes, insurance, repairs and other costs related to
the leased property. At July 31, 1997, future minimum payments under
noncancelable leases accounted for as operating leases are $408,000 in 1998;
$258,000 in 1999; $198,000 in 2000; $154,000 in 2001 and $128,000 in 2002.
Total rent expense for all operating leases was $1,589,000, $1,350,000 and
$1,153,000 in 1997, 1996 and 1995, respectively.
SELF-INSURANCE - The Company maintains an unfunded hospitalization and medical
coverage program for its employees. Claims under this program are limited to
annual losses of $60,000 per participant and aggregate annual claims of up to
approximately $1,455,000 through the use of a stop-loss insurance policy.
Additionally, the Company self-insures Oklahoma workers' compensation claims in
excess of $225,000 per occurrence and retains a maximum aggregate liability of
$2,100,000 per two-year policy term with respect to all occurrences. The
Company has a letter of credit in the amount of $550,000 on file with the
State of Oklahoma Workers' Compensation Court, as required by self-insurance
regulations. Provisions for claims under both programs are accrued based upon
the Company's estimate of the aggregate liability for claims (including claims
incurred, but not yet reported).
PURCHASE COMMITMENTS - At July 31, 1997 and 1996, the Company was committed on
outstanding purchase orders for inventory approximating $18.9 million and $25.9
million, respectively. Additionally, the Company had on its premises at
July 31, 1997 and 1996 raw material on consignment from certain vendors valued
at approximately $2.6 million and $3.0 million, respectively.
6. EMPLOYEE BENEFIT PLAN
The Company maintains a 401-K benefit plan covering all employees who have
completed one year of service. Participants are fully vested in Company
contributions after two years of service. The plan includes a cash or deferred
compensation arrangement permitting elective contributions to be made by the
participants. Company contributions are made at the discretion of the Board
of Directors. Company contributions were $117,000 and $63,000 in fiscal
1997 and 1996, respectively. No contributions were made to the plan in fiscal
1995.
7. STOCKHOLDERS' EQUITY AND STOCK OPTIONS
In January 1994, the Company's stockholders approved the 1994 Stock
Incentive Plan (the "Plan"), in which directors, employees, and consultants
are eligible to participate. Four types of benefits may be granted, in any
combination under the Plan: incentive stock options, non-qualified stock
WEBCO INDUSTRIES INC.
NOTES TO FINANCIAL STATEMENTS
7. STOCKHOLDERS' EQUITY AND STOCK OPTIONS, Continued
options, restricted stock, and stock appreciation rights. The Plan also
provides for certain automatic grants to outside directors. All options expire
ten years from the date of grant (except the vice-chairman's options, which
expire five years from the date of grant) and are exercisable at a price which
is at least equal to fair market value on the date of grant (110% of fair
market value in the case of the vice-chairman). The employee options vest
evenly over periods of two to five years from date of grant. The maximum
number of shares of common stock with respect to which incentive stock options,
non-qualified stock options, restricted stock, and stock appreciation rights
may be issued under the Plan is 550,000.
Activity under the Plan was as follows:
Number of Weighted Average
Shares Exercise Price
Balance, July 31, 1995 234,100 $ 13.11
Granted 200,300 6.43
Forfeited (161,600) 13.77
Balance, July 31, 1996 272,800 7.89
Granted 194,900 6.05
Forfeited (111,800) 9.36
Balance, July 31, 1997 355,900 6.42
Exercisable, July 31, 1997 43,000 6.90
The weighted average exercise price of options granted to the
vice-chairman during 1997, which were at a price above the market value per
share at that date, was $6.74. For options outstanding as of July 31, 1997,
the range of exercise prices and weighted average remaining contractual life
were $6.13 to $15.75 and 8.75 years, respectively.
On September 7, 1995, the Compensation Committee of the Board of
Directors authorized the cancellation of 157,200 incentive options (excluding
the directors' and vice-chairman's options) granted in fiscal 1994 at $14.00
per share and the reissuance of the same number of new options at a price of
$6.50 per share, which was the market value per share at that date.
The Company has elected to follow APB Opinion No. 25, "Accounting for
Stock Issued to Employees," in accounting for its employee stock options rather
than the alternative fair value accounting provided for under SFAS No. 123,
"Accounting for Stock-Based Compensation." Under APB No. 25, because the
exercise price of the Company's stock options is at least equal to the market
WEBCO INDUSTRIES INC.
NOTES TO FINANCIAL STATEMENTS
7. STOCKHOLDERS' EQUITY AND STOCK OPTIONS, Continued
price of the underlying stock on the date of grant, no compensation expense is
recognized in the Company's financial statements.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123. This information is required to be determined as
if the Company had accounted for its employee stock options granted subsequent
to July 31, 1995 under the fair value method of that statement. The fair value
of options granted in fiscal years 1997 and 1996 reported below has been
estimated at the date of grant using a Black-Scholes option pricing model with
the following assumptions:
1997 1996
Weighted average Life 4.1 years 4.9 years
Risk-free interest rate 6.19% 5.41%
Expected volatility 61% 61%
Expected dividend yield None None
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility. Because the Company's options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in the opinion
of management, the existing models do not necessarily provide a reliable single
measure of fair value of its options. The weighted average estimated fair
value of employee stock options granted during 1997 and 1996 was $3.18 and
$3.62 per share, respectively. The weighted average estimated fair value of
employee stock options granted during 1997 to the Company's vice-chairman,
which were at a price above the market value per share at that date, was
$2.93.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Company's pro forma information is as follows:
1997 1996
Pro forma net income $ 1,838,000 $ 1,563,000
Pro forma earnings per share $ 0.29 $ 0.25
The above SFAS No. 123 pro forma disclosures are not necessarily
representative of the effect SFAS No. 123 will have on the pro forma disclosure
of future years.
WEBCO INDUSTRIES INC.
NOTES TO FINANCIAL STATEMENTS
8. RELATED PARTY TRANSACTIONS
In October 1995 the Company entered into an agreement with an entity
owned by the majority stockholders to subcontract certain manufacturing
services. Payments made by the Company under the contract totaled $316,000 and
$130,000 in fiscal 1997 and 1996. In addition, the Company had a receivable
balance of $367,000 and $247,000 at July 31, 1997 and 1996, respectively, for
amounts paid on behalf of this entity.
The Company purchases certain specialty packaging and shipping materials
from an entity owned by the principal stockholder. Payments made by the
Company totaled $200,000 in fiscal 1997 and $181,000 in fiscal 1996.
Advances were made from time to time during fiscal 1997 and 1996 to the
principal stockholder with the highest amounts outstanding being $1,200,000 and
$1,389,000 in 1997 and 1996, respectively. The balance outstanding at July 31,
1997 was $1,162,000 and there was no outstanding balance at July 31, 1996. The
advances are subject to a three-year note from the principal stockholder
collateralized by certain assets having a current market value at least double
the highest outstanding balance advanced pursuant to the note. The note bears
interest at the prevailing rate under the Company's loan agreement with its
primary lender and is payable at maturity of the note on August 15, 1999.
During 1994, in the course of purchasing stock from the principal
stockholder, certain executives executed promissory notes payable to the
principal stockholder in the amount of $420,000 which, as amended, bear
interest at 4.1%. The notes are collateralized by the underlying shares
of common stock. The principal stockholder subsequently assigned the
executives' notes receivable to the Company in order to liquidate certain
advances and other amounts owed by him to the Company.
A director of the Company is Chairman of the Board of a customer of the
Company. Annual sales to this company were approximately $3,865,000 in 1997,
$1,565,000 in 1996, and $3,672,000 in 1995 with outstanding receivable balances
of approximately $892,000 and $216,000 at July 31, 1997 and 1996, respectively.
WEBCO INDUSTRIES, INC.
SUPPLEMENTAL QUARTERLY FINANCIAL DATA
(UNAUDITED)
(Dollars in thousands, except per share data)
Year Ended July 31, 1997
Quarters Ended
October 31, January 31, April 30, July 31, Total
1996 (1) 1997 (1) 1997 (1) 1997 Year
Net sales $28,444 $28,678 $28,993 $31,624 $117,739
Gross profit 3,776 4,007 3,767 4,916 16,466
Operating income 1,468 627 (2) 1,271 1,765 5,131(2)
Net income 597 100 507 748 1,952
Net income per
common share $ .09 $ .02 $ .08 $ .12 $ .31
Weighted average
shares outstanding 6,339 6,339 6,339 6,339 6,339
Year Ended July 31, 1996 (1)
Quarters Ended
October 31, January 31, April 30, July 31, Total
1995 1996 1996 1996 Year
Net sales $22,581 $25,086 $26,338 $27,862 $101,867
Gross profit 2,431 3,435 3,846 3,833 13,545
Operating income 611 1,346 1,444 1,549 4,950
Net income 44 478 556 645 1,723
Net income per
common share $ .01 $ .07 $ .09 $ .10 $ .27
Weighted average
shares outstanding 6,339 6,339 6,339 6,339 6,339
(1) Restated to reflect change in accounting to weighted average cost method for inventories.
(2) Includes an $884,000 charge related to the replacement and write-off of faulty equipment on the Company's Mill 3.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no changes in or disagreements between the Company and its
independent auditors.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is hereby incorporated by reference
from the Company's definitive proxy statement for the Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission (the
"Commission") within 120 days of the end of the Company's fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is hereby incorporated by reference
from the Company's definitive proxy statement for the annual Meeting of
Stockholders to be filed with the Commission within 120 days of the end of the
Company's fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is hereby incorporated by reference
from the Company's definitive proxy statement for the Annual Meeting of
Stockholders to be filed with the Commission within 120 days of the end of the
Company's fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is hereby incorporated by reference
from the Company's definitive proxy statement for the Annual Meeting of
Stockholders to be filed with the Commission within 120 days of the end of the
Company's fiscal year.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) Financial Statements of Webco Industries, Inc. which are included
in Part II, Item 8:
Page
Report of Independent Accountants 21
Balance Sheets as of July 31, 1997 and 1996 22
Statements of Operations for each of the three
years in the period ended July 31, 1997 23
Statements of Changes in Stockholders' Equity
for each of the three years in the period
ended July 31, 1997 24
Statements of Cash Flows for each of the three
years in the period ended July 31, 1997 25
Notes to Consolidated Financial Statements 26
Supplemental Quarterly Financial Data
(Unaudited) 37
(2) Financial Statement Schedule:
Schedule II - Valuation and Qualifying
Accounts 41
(3) Exhibits:
Exhibit
Number Description
3 (i) Form of Amended and Restated Certificate of Incorporation
(incorporated by reference to Exhibit 3(i) to the Company's
Registration Statement on Form S-1, No. 33-72994).
3 (ii) By-Laws (incorporated by reference to Exhibit 3(ii) to the Company's
Registration Statement on Form S-1, No. 33-72994).
10.1 Form of 1994 Stock Incentive Plan (incorporated by reference to
Exhibit 10.1 to the Company's Registration Statement on Form S-1,
No. 33-72994).
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K - Continued
Exhibit
Number Description
10.2 Loan and Security Agreement, dated as of July 15, 1997, between
American National Bank and Trust Company of Chicago, as agent,
certain financial institutions as lender, and the Company.
10.3 Lease, dated October 22, 1996, between the Company and Baker
Performance Chemicals Incorporated.
10.4 Employment Agreement dated December 31, 1996, between the Company and
F. William Weber.
10.5 Employment Agreement dated December 31, 1996, between the Company and
Dana S. Weber.
10.6 Promissory note effective August 15, 1994, between the Company and F.
William Weber.
10.7 Lease, dated March 29, 1993, between the Company and Crest, Inc.
(incorporated by reference to Exhibit 10.5 to the Company's
Registration Statement on Form S-1, No. 33-72994).
18.1 Letter re: Change in Accounting Principles
23.1 Consent of Coopers & Lybrand, LLP
27.1 Financial Data Schedule
Reports on Form 8-K:
There were no reports on Form 8-K filed during the three months
ended July 31, 1997.
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.
WEBCO INDUSTRIES, INC.
October 28, 1997 By: /s/F. William Weber
F. William Weber
Chairman, Chief Executive
Officer and Director
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.
October 28, 1997 By: /s/F. William Weber
F. William Weber
Chairman, Chief Executive
Officer and Director
October 28, 1997 By: /s/Dana S. Weber
Dana S. Weber
President, Chief Operating
Officer, and Director
October 28, 1997 By: /s/Michael P. Howard
Michael P. Howard
Chief Financial Officer
October 28, 1997 By: /s/Frederick C. Ermel
Frederick C. Ermel
Director
October 28, 1997 By: /s/Neven C. Hulsey
Neven C. Hulsey
Director
October 28, 1997 By: /s/Kenneth E. Case
Kenneth E. Case
Director
WEBCO INDUSTRIES, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the Three Years Ended July 31, 1997
(Dollars in Thousands)
Additions
Balance at Charged to Charged to Balance at
Beginning of Costs and Other End of
Description Period Expenses Accounts Deductions Period
Allowance for bad debts:
1995 3 173 - (50)(1) 126
1996 126 (30) - 14 (1) 110
1997 110 (2) - (59)(1) 49
(1) Amounts represent write-offs, net of recoveries.
Exhibit 10.2
LOAN AND SECURITY AGREEMENT
Dated as of July 15, 1997
among
AMERICAN NATIONAL BANK
AND TRUST COMPANY OF CHICAGO,
as Agent
Certain Financial Institutions,
as Lender
and
WEBCO INDUSTRIES, INC.
TABLE OF CONTENTS
1. DEFINITIONS 1
1.1 General Terms 1
1.2 Accounting Terms 16
1.3 Other Terms Defined in Illinois Uniform Commercial Code 16
1.4 Other Definitional Provisions; Construction 16
2. CREDIT 17
2.1 Term Loan Facility 17
2.2 Revolving Loan Facility 18
2.3 Determination of Current Asset Base 18
2.4 Borrowing Mechanics 19
2.5 Settlements Among Agent and Lenders. 21
2.6 Mandatory Payments; Reduction of Commitments. 23
2.7 Payments and Computations. 24
2.8 Borrower's Loan Account 24
2.9 Statements 25
2.10 Taxes. 25
2.11 Affected Lenders. 28
2.12 Sharing of Payments. 29
2.13 Defaulting Lenders 29
2.14 Term of this Agreement 30
2.15 Additional Costs, Etc. With Respect to LIBOR Rate Advances 31
2.16 Indemnification for Losses 32
2.17 Capital Adequacy 33
2.18 Certificate 33
2.19 Letters of Credit 34
(A) Issuance of Letters of Credit 34
(B) Terms of Letters of Credit 34
(C) Lenders' Participation. 34
(D) Notice of Issuance 35
(E) Payment of Amounts Drawn Under Letters of Credit 35
(F) Payment by Lenders 36
(G) Obligations Absolute 36
2.20 Interest, Fees and Expenses 36
(A) Interest 36
(B) Facility Fees 37
(C) Prepayment Fee; Commitment Reduction Fee 37
(D) Maximum Lawful Rate 38
(E) Early Termination Charge 38
(F) Reimbursement of Expenses 39
(G) Letter of Credit Fees 39
(H) Additional Fees 40
(I) Authorization to Charge Loan Account 40
(J) Indemnification in Certain Events 40
(K) Audit Fees 41
3. REPORTING AND ELIGIBILITY REQUIREMENTS 41
3.1 Monthly Reports and Intra-Monthly Reports 41
3.2 Eligible Accounts 43
3.3 Account Warranties 44
3.4 Verification of Accounts 45
3.5 Account Covenants 45
3.6 Collection of Accounts and Payments 45
3.7 Appointment of Agent as Borrower's Attorney-in-Fact 46
3.8 Instruments and Chattel Paper 47
3.9 Notice to Account Debtors 47
3.10 Eligible Inventory; Valuation of Eligible Inventory 47
3.11 Inventory Warranties 48
3.12 Inventory Records 48
3.13 Safekeeping of Inventory and Inventory Covenants 48
3.14 Equipment Warranties 49
3.15 Equipment Records 49
3.16 Safekeeping of Equipment 49
3.17 Third Party Goods 50
4. CONDITIONS OF LOANS, ADVANCES AND LETTER OF CREDIT 50
4.1 Conditions to Initial Loans and Letters of Credit 50
4.2 Conditions to Each Term Loan, Revolving Loan, Advance and
Letter of Credit 50
5. COLLATERAL 51
5.1 Security Interest 51
5.2. Preservation of Collateral and Perfection of Security
Interests Therein 52
5.3 Loss of Value of Collateral 52
5.4 Set off 52
5.5 Cash Collateral 53
6. WARRANTIES, ETC 54
6.1 Corporate Existence 54
6.2 Corporate Authority 54
6.3 Binding Effect 54
6.4 Financial Data 54
6.5 Collateral 55
6.6 Solvency 55
6.7 Chief Place of Business 55
6.8 Other Corporate Names 56
6.9 Tax Liabilities 56
6.10 Loans 56
6.11 Margin Security 56
6.12 Survival of Warranties 56
6.13 Subsidiaries 56
6.14 Litigation and Proceedings 56
6.15 Other Agreements 57
6.16 Empl