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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 [Fee Required]
For the fiscal year ended July 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 [No Fee Required]
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)
201 Woodland Drive
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 (ss229.405 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, 1996, the aggregate market value of the voting
stock held by nonaffiliates of the registrant was $16,982,675.
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 15
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 37
PART III
Item 10. Directors and Executive Officers of the Registrant 37
Item 11. Executive Compensation 37
Item 12. Security Ownership of Certain Beneficial Owners
and Management 37
Item 13. Certain Relationships and Related Transactions 37
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 38
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 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 700 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. As a result of improving production technologies, the
welded tube industry has grown over the years as a replacement for higher cost
seamless tubing. Webco produces only precision welded tubing and buys a small
amount of seamless tubing for further processing and distribution.
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 which generally occupy relatively focused market niches.
The specialty tubing industry has been affected by certain trends which
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. Second, customers' desires to cut operating costs
through the outsourcing of specific processing functions, such as specialty
tube manufacturing, will allow third-party tube mills to replace production
from captive mills. Finally, as a direct result of the technological revolution
of thin-slab casting, as developed by Nucor Corporation ("Nucor"), the Company
believes that the cost for sheet coil will decline in relative terms over time,
thus reducing the cost of welded steel tubular products and potentially
increasing demand for this product.
MILL 3
The core of the Company's most recent major capital investment strategy is
a highly-automated high frequency welded tube mill ("Mill 3") at the Sand
Springs, Oklahoma facility, which was placed into service near the end of the
second quarter of fiscal 1995. During fiscal 1992 through 1996, the Company
spent $20.9 million for capital projects, of which approximately 30% has been
spent on the installation and enhancement of this mill. While Mill 3 is
currently producing approximately 20,000 tons annually, the Company anticipates
that it has the potential when fully staffed to double the Company's tonnage
production capacity to 140,000 tons annually, while improving operating
efficiency, reducing operating costs, and broadening the Company's product
line.
As a result of advanced mechanical design and computer aided operations,
Mill 3 has reduced the changeover time for producing varying products to under
four hours, compared to approximately 14 to 16 hours for comparably sized
welding equipment predominantly used in domestic mills. When computerized
controls are fully implemented, this technology is expected to further improve
changeover times and reduce tooling costs by approximately 75% as compared to
conventional domestic mills and to reduce by over 90% the amount of scrap
material produced when restarting the equipment after a changeover. The
improved speed and efficiency of changeovers should reduce operating costs and
enable the Company to economically produce smaller order quantities, thereby
improving Webco's flexibility in responding to customers' needs.
Mill 3 is designed to produce .500 inch wall thickness products. In the
future as cold draw facilities are increased this will enable the Company to
produce .437 inch maximum wall thickness cold drawn products. The mill is
successfully producing .425 inch wall thickness tubing allowing .375 inch wall
thickness tubing to be produced from its cold draw process, which is the maximum
thickness under current cold draw limitations. The Mill 3 installation is
successful except for the cut-off machine that was supplied by
Thermatool/Alpha. After considerable effort with the manufacturer to correct
design deficiencies in order to meet original specifications, the Company has
decided to purchase replacement equipment with alternative, but proven
technology. Installation is expected to be completed during the second quarter
of fiscal 1997, and be fully operational thereafter. The Company expects that
the new cut-off will allow Mill 3 to produce tubing to its original design
sizes. The Company is aware of only three competitors in the United States
that are capable of manufacturing products in these increased thickness to a
diameter (T to D) ratios.
Most of the components of Mill 3 were purchased during fiscal 1989 and
1990 and stored at the Sand Springs facility. Due to financial constraints
imposed by its prior lender, the Company was unable to commence installation
of the new weld mill until November 1993 following the refinancing of its
principal indebtedness. Production from the mill commenced late in the second
quarter of fiscal 1995. The Company is aware of only one similar mill
operating in the United States, a duplicate recently installed in Toronto,
Canada and at least six comparable mills currently operating in Europe and
Asia.
MANUFACTURING PROCESSES
Electric Resistance Weld Process. The Company maintains a substantial
inventory 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 used at the Oil City facility through July 1996 and
steel coils over .180 inches thick used at the Sand Springs facility are slit
to pre-designated width by outside vendors. In the fourth quarter of fiscal
1996 the Company completed the installation of a slitter at its Oil City
facility which will allow for slitting of steel sheet coils up to .315 inches
thick and reduce outside costs including freight.
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.
Cold Drawing Process. The Company maintains a substantial inventory 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. Since
the implementation of Mill 3 near the end of the second quarter of fiscal 1995,
the production of welded tube hollows has shifted from Oil City to
Sand Springs. This shift in production has allowed the Company to reduce
inventories of steel sheet coils and steel tubing while reducing freight costs
and better meeting the needs of its customers. In addition, Mill 3 has allowed
the Company to increase its offering of cold drawn products from .250 inch to
.375 inch 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.
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. Prior
to the implementation of Mill 3, capacity limitations prevented the Company
from actively pursuing this market. However, with these limitations
eliminated, the Company is building a market share for mechanical tubing given
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.
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 Mill 3, the Company has targeted the mechanical tubing
market as a major 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, 1996 and July 31, 1995
were $19.8 million and $19.5 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.
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. 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 all 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
purchases 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.
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 700 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 15% of net sales. The Company's ten
largest customers represent approximately 25% 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, it 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
and service are the most critical factors in maintaining these relationships.
Certain Company executive officers actively participate in the Company's
marketing efforts and have developed sound 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, 1996, the Company employed 640 people. None of the
Company's employees is 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
Some of the information in this Form 10-K constitutes "forward looking"
statements within the Company's interpretation of the Private Securities
Litigation Reform Act of 1995.
Although the company believes its expectations are based on reasonable
assumptions within the framework of its knowledge of the specialty tubing
business and the markets served by its products, there is no assurance that
financial goals will be achieved.
Factors that could cause actual results to differ from those in forward
looking statements, or used as a basis for forward looking statements, include
the availability and cost of stainless and carbon sheet coils, the labor supply
near the Company's manufacturing facilities, interest rate fluctuations and
other capital market conditions. Other factors include competitive
developments by domestic and global suppliers of specialty steel tubing and
pipe.
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, Texas20,000 square feet Long-term lease (2 years
remaining) with a purchase
option of $500,000
Oil City, Pennsylvania 192,000 square feet Owned
Manufacturing Facility 8 acres
ITEM 3. LEGAL PROCEEDINGS
In April 1995, the Company reached an agreement in principle with
plaintiffs to settle the previously reported securities litigation filed in the
United States District Court for the Northern District of Oklahoma entitled In
re Webco Securities Litigation, pursuant to which the portion of the settlement
paid by the Company was $2,400,000. The action resulted from the Company's
announcement in August 1994 of a financial restatement due to certain inventory
accounting errors. The settlement was approved by the court in February 1996
and distribution was made to shareholders included in the class during August
1996. 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 in the
cleanup of a site within 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, without authorization
from the Company, having dumped at the Sand Springs Site non-hazardous cutting
fluids generated by the Company. Cutting fluids and acids generated by the
Company were properly dumped at the Hardage Site. At the time of such
dumpings,both the Sand Springs Site and the Hardage Site had all permits then
required to receive 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. However, substantially all required remedial work
has been completed at the Sand Springs Site. The remedy at Hardage is also
complete and proven effective,and the cleanup has entered its 30 year operation
and maintenance (O&M) phase. At July 31, 1996, the Company estimated its
remaining potential liability for remediation of the waste disposal sites and
legal costs for both sites in the aggregate to be approximately $125,000
(primarily Hardage operation and maintenance) which has been recorded as an
accrued liability.
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 1996.
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 30, 1996, there were 340 holders of record of Webco's common stock.
The quarterly prices of Webco's common stock were as follows:
Fiscal Year 1996: High Low
First Quarter 8 1/8 5 3/4
Second Quarter 6 11/16 5 3/8
Third Quarter 8 3/16 5 13/16
Fourth Quarter 8 3/4 5 1/8
Fiscal Year 1995:
First Quarter 15 3/8 6
Second Quarter 9 5/8 7
Third Quarter 9 5/8 7 5/8
Fourth Quarter 8 5 13/16
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 pay dividends out of excess cash flow (as defined
in the loan agreement) if and so long as it maintains stockholders' equity
(as defined) of at least $37.5 million after July 31, 1996.
Prior to the initial public offering, the Company, as an S corporation for
federal and state income tax purposes, paid dividends on the Common Stock to
permit stockholders to pay their taxes on the Company's income. On the day
prior to the effective date of the offering, the Company declared a dividend
to its stockholders, payable at the closing of the offering, of an aggregate
amount of $1.9 million (all of which had been previously advanced). The
aggregate amount of the dividend represented the estimated undistributed
earnings of the Company through the closing date of the offering.
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, 1996,
which information has been derived from the Financial Statements of the
Company, audited by Coopers & Lybrand L.L.P., independent accountants. 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)
1996 1995 1994 1993 1992
Income Statement Data:
Net sales $101,867 $ 97,724 $ 80,142 $ 67,561 $ 69,683
Gross profit 14,510 12,208 7,289 9,332 8,539
Income from operations 5,915 5,061 941 4,504 3,846
Income (loss) before income
taxes and extraordinary item 3,744 361 (178) 2,004 1,479
Income (loss) before
extraordinary item 2,321 (430) (3,161) 2,004 1,479
Income (loss) (1) 2,321 (430) (3,534) 2,004 1,479
Income (loss) per
common share:
Before extraordinary item .37 (.07) (.64) .56 .42
Net income (loss) $.37 $(.07) $(.72) $.56 $.42
Pro forma income (loss)
before extraordinary item (2) (110) 1,242 917
Pro forma net income (loss) (2) (483) 1,242 917
Pro forma income (loss) per
common share (2):
Before extraordinary item (.02) .34 .26
Net income (loss) $(.10) $.34 $.26
Balance Sheet Data:
Working capital $19,444 $16,932 $10,440 $4,033 $(1,441)
Total assets 82,912 79,358 68,041 54,920 52,837
Long-term debt (net of
current portion) 19,413 17,985 6,594 27,912 21,045
Stockholders' equity $40,175 $37,322 $37,752 $8,828 $8,433
(1) 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.
(2) Net income for fiscal 1994, 1993 and 1992 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
Raw materials costs averaged approximately 62% of cost of sales (55% of
net sales) for carbon and stainless steel products combined during the three
year period ended July 31, 1996. 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 five years ended July 31, 1996 the Company spent $20.9 million
to expand and modernize its manufacturing capabilities. During the three year
period ended July 31, 1996, the Company spent $18.2 million in a major
expansion phase highlighted by the installation of a new carbon weld mill
("Mill 3") at its Sand Springs facility. During the five-year period ended
July 31, 1996, the Company incurred approximately $13 million of debt to
finance the initial purchase and installation of Mill 3. As Mill 3 only
commenced production at the end of the second quarter of fiscal 1995, it did
not contribute significantly to production until fiscal 1996.
In fiscal 1994, steel prices rose by approximately 10%. Due largely to
erroneous internally-generated financial information, the Company's sales
prices did not keep pace with these increases, resulting in an operating margin
decrease to 1.2% in fiscal 1994. A price increase was instituted in July 1994
to bring sales prices and material costs back into balance. Due to the sizable
backlog of orders at the time of the increase, its impact was not fully
realized until the third quarter of fiscal 1995. Nonetheless, operating income
margin improved to 5.2% for the year ended July 31, 1995 and further increased
to 5.8% for the year ended July 31, 1996.
While the Company was in the process of expanding its operations in the
early 1990's its business was also affected by the recessionary environment in
general and weak demand for consumer durables and industrial capital goods.
However, 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 17.8% from 1992 to 1996. 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, which the Company
believes will enhance its future performance.
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, and dependent upon sales of this licensed design for
the next five calendar years (ending in 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 the patent for the water heater,
rights to the name "QuikWater", product designs, etc.
Assuming that the present economic conditions remain stable in the market
sectors served by the Company, Webco believes that in fiscal 1997 it will
continue to experience increases in shipment volumes and reductions in costs.
These efficiencies should result primarily from the improved operation of
Mill 3 and the continuous improvements generated through the implementation of
the team approach in its manufacturing operations.
Results of Operations
The following table sets forth certain income statement data for each of
the three years in the period ended July 31, 1996 (certain amounts may not
calculate due to rounding):
1996 1995 1994
Dollar % of Dollar % of Dollar % of
Amount Net Sales Amount Net Sales Amount Net Sales
(Dollars in Millions)
Net sales $101.9 100.0% $97.7 100.0% $80.1 100.0%
Gross profit 14.5 14.2 12.2 12.5 7.3 9.1
Selling, general and
administrative expenses 8.6 8.4 7.1 7.3 6.3 7.9
Income from operations $5.9 5.8% $5.1 5.2% $0.9 1.2%
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%. 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 $2.3 million to $14.5 million in 1996 from
$12.2 million in 1995, which is an increase of 18.9%. Expressed as a
percentage of net sales, gross profit increased from 12.5% in fiscal 1995 to
14.2% in fiscal 1996. 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 4.% decrease in the
manufactured cost per ton.
Selling, general and administrative expenses increased to $8.6 million or
8.4% of net sales in fiscal 1996 from $7.1 million or 7.3% of net sales in
fiscal 1995. Factors contributing to the increase include 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 due to the unusually high employee turnover experienced throughout
the year.
The Company's income from operations increased 16.9% to $5.9 million in
fiscal 1996 as compared to $5.1 million in fiscal 1995. Expressed as a
percentage of net sales, income from operations increased from 5.2% in 1995 to
5.8% in 1996. This increase is a reflection of the decrease in the average
cost of materials per ton and increases in tons sold, partially offset by a
slight reduction in the average sales price per ton.
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 the reduction of interest capitalization on Mill 3, which
commenced production in February 1995.
Fiscal 1995 Compared to Fiscal 1994
Net sales increased $17.6 million, or 21.9%, to $97.7 million in 1995 from
$80.1 million in 1994. The increase in net sales reflects a 14% increase in
the tonnage of steel tubing sold in 1995 and an increase in the average net
selling price of 6.7%. This increase in selling prices resulted primarily from
a change in product mix to a higher volume of cold drawn and stainless
products. The volume increase in 1995 versus 1994 reflects higher utilization
of the Company's Oil City facilities due to improving market conditions and
increased market penetration of the mechanical and boiler tube markets. The
Company continued to maintain higher selling prices instituted in July 1994 as
a result of the increase in the cost of steel coils, although due to the
incorrect internally-generated financial data during fiscal 1994, the price
increases did not keep pace with the costs of materials until the third quarter
of fiscal 1995.
Total gross profit increased $4.9 million, or 67.5%, to $12.2 million in
1995 from $7.3 million in 1994. The average selling price per ton of steel
tubing increased 6.7% while manufacturing costs per ton increased only 3.8%.
Higher manufacturing yields more than offset increases in the prices of carbon
and stainless sheet coil resulting in little change in the average cost of
materials per ton.
Selling, general and administrative expenses increased $0.8 million, or
12.6%, to $7.1 million in 1995 from $6.3 million in 1994. Expressed as a
percentage of net sales, selling, general, and administrative expenses
decreased to 7.3% from 7.9% in 1994. The $0.8 million increase reflects higher
commissions due to a greater volume of sales and personnel increases and other
expenses related to the Company's growth and public status.
In April 1995 the Company negotiated an agreement in principle to settle a
shareholders' class action securities litigation, resulting from the Company's
disclosure of certain inventory accounting errors. The $2.4 million settlement
paid by the Company and the related litigation costs of $1.1 million have been
reported as an unusual item and excluded from operating income.
The Company's income from operations increased $4.1 million to $5.1
million in 1995 from $1.0 million in 1994. Expressed as a percentage of net
sales, income from operations increased to 5.2% in 1995 from 1.2% in 1994.
The increase in income from operations reflects the overall increases in
selling prices, efficiency related cost reductions in the Company's
manufacturing operations, and increases in tons sold, partially offset by
generally higher costs of raw materials.
Interest expense increased slightly in fiscal 1995 as a result of somewhat
higher average interest rates and lower capitalization of interest following
completion of Mill 3 in January 1995.
Liquidity and Capital Resources
Net cash provided by (used in) operations was $2.0 million, $(0.3)
million, and $(5.2) million in fiscal 1996, 1995 and 1994, respectively. Net
income (loss) plus depreciation, amortization and deferred taxes was $6.1
million, $2.6 million and $1.0 million in the same respective periods. The
difference between net cash provided by (used in) operations and net income
(loss) plus depreciation, amortization and deferred taxes for the respective
periods primarily represents increases in working capital.
Over the past three years, the Company has turned its steel tube
manufacturing inventories an average of approximately 4.5 times per year. The
Company believes that as productivity increases on Mill 3, the Company will be
able to reduce its relative inventory of steel sheet coils and steel tubing.
The Company takes advantage of quick-pay discounts offered by primary steel
producers as its line of credit and working capital permit.
Net cash used in investing activities was $5.9 million, $8.0 million and
$5.1 million in fiscal 1996, 1995 and 1994, respectively. The large amount of
cash used in investing activities in 1995 was primarily the result of capital
expenditures made by the Company for Mill 3 at the Sand Springs facility, a
sixth stainless mill at the stainless facility, and a wide array of
productivity improvement projects. 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.
The Company's capital requirements are primarily to fund equipment
purchases and for general working capital needs. The Company expects
maintenance capital expenditures to be $2 million in each of fiscal 1997 and
1998. The Company expects additional capital expenditures to be $4 million in
fiscal 1997, principally for completing the expansion of the stainless facility
at Mannford, Oklahoma and shipping facility improvements, acquiring and
implementing new computer software and various other productivity improvements.
The Company expects additional capital expenditures of $6 million in fiscal
1998 for various capital improvements.
On February 8, 1994, the Company completed an initial public offering of
shares of its common stock which resulted in net proceeds to the Company of
$33.6 million The Company decreased its long-term debt obligations during
fiscal 1994 by a net of $21.3 million, primarily from the proceeds of the
public offering. Effective June 30, 1995, the Company amended its bank Loan
and Security Agreement to provide for an additional $3 million borrowing
capacity primarily to fund the settlement of the shareholder litigation. As of
July 31, 1996, the Company had approximately $6.9 million outstanding on the
term loan, and $13.1 million under the revolving line of credit. The term loan
and revolving credit loan bear interest at the prime rate (8.25% at July 31,
1996) plus 1.25% or the LIBOR rate (5.54% effective at July 31, 1996) plus
3.25% (each subject to certain adjustments), at the Company's option. These
loans mature on May 31, 1998 and are secured by substantially all of the
Company's assets other than real estate. The Company may borrow 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, 1996, $6.6 million was
available for borrowing under the line of credit. At September 30, 1996, $2.8
million was available.
Pursuant to the terms of the term loan and revolving credit loan, the
Company is subject to various restrictive covenants, including requirements to
maintain levels of net worth and cash flow coverage and limits on capital
expenditures. The Company is permitted to pay dividends from excess cash flow
so long as stockholders' equity equals or exceeds $37.5 million. 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 35% of the outstanding voting stock, or upon the
occurrence of certain other change in control events. The loan agreement also
requires the Company to use the proceeds of any future issuances of common
stock to repay the loans. The Company does not believe these provisions will
have a material adverse affect on the Company or its ability to finance its
operations.
The Company expects cash flow from operations to fund most of its cash
flow needs in fiscal 1997. 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 provided by operations will provide the Company with adequate capital
to fund its 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 may reduce
net sales and net income in the first quarter. 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.
Accounting Pronouncements
See Note 1 of the Notes to Financial Statements regarding newly issued
accounting pronouncements.
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, 1996 and 1995, and the related statements of operations, stockholders'
equity and cash flows and the financial statement schedule for each of the
three years in the period ended July 31, 1996. 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, 1996 and 1995, and the results of its operations and its cash flows
for each of the three years in the period ended July 31, 1996, 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.
COOPERS & LYBRAND L.L.P.
Tulsa, Oklahoma
September 18, 1996
WEBCO INDUSTRIES, INC.
BALANCE SHEETS
July 31, 1996 and 1995
(Dollars in thousands, except share amounts and par value)
1996 1995
ASSETS
Current assets:
Cash $ 508 $ 1,659
Accounts receivable, net 13,106 12,297
Inventories 21,241 20,687
Prepaid expenses 235 510
Notes receivable from related parties 420 420
Deferred income tax asset 1,574 933
Total current assets 37,084 36,506
Property, plant and equipment:
Land 1,436 1,436
Buildings and improvements 8,630 8,488
Machinery and equipment 50,403 47,272
Furniture and fixtures 1,989 1,894
Construction in progress 3,883 2,369
Less accumulated depreciation and
amortization (22,174) (19,622)
Net property, plant and equipment 44,167 41,837
Other assets, net 1,661 1,015
Total assets $ 82,912 $ 79,358
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 12,419 $ 13,699
Accrued liabilities 3,523 4,803
Current portion of long-term debt 1,698 1,072
Total current liabilities 17,640 19,574
Long-term debt 19,413 17,985
Deferred income tax liability 5,684 4,477
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 35,412
Retained earnings 4,168 1,847
40,175 37,322
Total liabilities and stockholders' equity $ 82,912 $ 79,358
The accompanying notes are an integral
part of the financial statements.
WEBCO INDUSTRIES, INC.
STATEMENTS OF OPERATIONS
For the Years Ended July 31, 1996, 1995 and 1994
(Dollars and shares in thousands, except per share amounts)
1996 1995 1994
Net sales $ 101,867 $ 97,724 $ 80,142
Cost of sales 87,357 85,516 72,853
Gross profit 14,510 12,208 7,289
Selling, general and
administrative expenses 8,595 7,147 6,348
Income from operations 5,915 5,061 941
Interest expense 2,171 1,245 1,119
Unusual item:
Shareholder litigation
settlement and related
litigation costs (Note 5) - 3,455 -
Income (loss) before income
taxes and extraordinary item 3,744 361 (178)
Provision for income taxes (Note 4):
Current income tax (expense) (326) - -
Deferred income tax
benefit (expense) (1,097) (791) 854
Deferred taxes resulting from
change in corporate tax status - - (3,837)
Income (loss) before extraordinary item 2,321 (430) (3,161)
Extraordinary loss on early extinguishment
of debt, net of $231 of income taxes - - (373)
Net income (loss) $ 2,321 $ (430) $ (3,534)
Earnings (loss) per common share:
Before extraordinary item $ .37 $ (.07) $ (.64)
Extraordinary item - - (.08)
Net income (loss) $ .37 $ (.07) $ (.72)
Weighted average common shares
outstanding 6,339 6,339 4,907
The accompanying notes are an integral
part of the financial statements.
WEBCO INDUSTRIES, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended July 31, 1996, 1995 and 1994
(Dollars in thousands, except per share amounts)
Additional Advances Total
Common Paid-In to Retained Stockholders'
Stock Capital Stockholders Earnings Equity
Balances, July 31, 1993 $ 36 $ 1,140 $ (1,002) $ 8,654 $ 8,828
Proceeds from public
offering of stock, net
of offering expenses 26 33,534 - - 33,560
Issuance of stock to
related party forproperties 1 738 - - 739
Dividends ($.79 per share) - - 1,002 (2,843) (1,841)
Net loss - - - (3,534) (3,534)
Balances, July 31, 1994 63 35,412 - 2,277 37,752
Net loss - - - (430) (430)
Balances,July 31, 1995 63 35,412 - 1,847 37,322
Deferred tax benefit (Note 4) - 532 - - 532
Net Income - - - 2,321 2,321
Balances, July 31, 1996 $ 63 $ 35,944 $ - $ 4,168 $ 40,175
The accompanying notes are an integral
part of the financial statements.
WEBCO INDUSTRIES, INC.
STATEMENTS OF CASH FLOWS
For the Years Ended July 31, 1996, 1995 and 1994
(Dollars in thousands)
1996 1995 1996
Cash flows from operating activities:
Net income (loss) $ 2,321 $ (430) $ (3,534)
Adjustments to reconcile net
income (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization 2,726 2,217 1,818
Deferred tax expense 1,097 791 2,754
Extraordinary loss, net - - 373
Gain on sale of property,
plant and equipment (56) 1 -
(Increase) decrease in:
Accounts receivable (809) (1,776) (1,634)
Inventories (554) (3,059) (4,879)
Prepaid expenses 275 378 (528)
Increase (decrease) in:
Accounts payable (1,714) (1,393) 53
Accrued liabilities (1,280) 2,992 369
Net cash provided by (used in)
operating activities 2,006 (279) (5,208)
Cash flows from investing activities:
Capital expenditures (5,230) (7,994) (5,011)
Proceeds from sale of property,
plant and equipment 56 38 -
Advances to stockholder (5,092) (3,437) -
Repayments of stockholder advances 5,092 3,437 -
Other (746) (63) (114)
Net cash used in investing activities (5,920) (8,019) (5,125)
Cash flows from financing activities:
Proceeds from long-term debt 106,615 113,200 71,170
Principal payments on long-term debt (104,561) (102,309) (93,543)
Proceeds from the issuance of stock in
initial public offering, net of $1,266
of related costs - - 33,560
Dividends paid - - (937)
Increase (decrease) in book overdrafts 709 (1,445) 550
Net cash provided by financing activities 2,763 9,446 10,800
Net change in cash (1,151) 1,148 467
Cash, beginning of year 1,659 511 44
Cash, end of year $ 508 $ 1,659 $ 511
Supplemental disclosure of cash flow information:
Cash paid during the year for interest,
net of amount capitalized of $168,
$616 and $693 in 1996, 1995 and 1994,
respectively $ 2,037 $ 1,104 $ 1,140
Income taxes $ - $ - $ 293
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 facilities in Sand Springs and Mannford, Oklahoma, as well as in
Oil City, Pennsylvania, and Nederland, Texas. The Company provides steel
tubing products to the industrial boiler and heat exchanger markets, the
mechanical tubing markets and the high-efficiency residential furnace market.
In fiscal 1996 the Company obtained the patent for a high-efficiency water
heater 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, 1996 and
1995, the Company had concentrations of cash in one bank totaling $504,000 and
$1,629,000, 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, 1996 and 1995, are net of an allowance for
uncollectible amounts of $110,000 and $126,000, 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's raw materials, work-in-process, and finished goods
inventories are valued at lower of cost (last-in, first-out ("LIFO")) or
market. 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
Furniture and fixtures 3 to 10 years
Depreciation expense for the years ended July 31, 1996, 1995 and 1994
amounted to $2,625,000, $2,098,000 and $1,613,000, respectively. Fully
depreciated assets still in use at July 31, 1996 and 1995 amounted to
$7,285,000 and $7,012,000, respectively.
BOOK OVERDRAFTS - Included in accounts payable at July 31, 1996 and 1995 are
outstanding checks in excess of bank deposits totaling $1,160,000 and $451,000,
respectively.
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.
STOCK SPLIT-UPS AND EARNINGS PER SHARE - In connection with the Company's
initial public offering in February 1994, the Company's board of directors
effected a stock split-up of 158 to 1 for each share of common stock
outstanding at that date. For financial statement purposes, including earnings
per share and dividends per share, the split-up was assumed to have occurred
prior to August 1, 1993.
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 - Prior to February 1994, the stockholders elected to be taxed on
the Company's earnings as an S Corporation under the Internal Revenue Code.
During that period of time, earnings and losses of the Company were reported in
the personal income tax returns of the stockholders. On January 31, 1994, in
contemplation of the Company's initial public offering, the Company terminated
its election to be taxed as an S Corporation and income taxes on the Company's
earnings are now a direct liability of the Company.
At the time the Company terminated its S Corporation status, it became
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.
Pro forma loss before extraordinary item, net loss and the related loss per
share amounts, assuming the Company had been a C-Corporation during all of
fiscal 1994, were $110,000 and $483,000, or $.02 and $.10 per share,
respectively.
IMPACT OF FINANCIAL ACCOUNTING PRONOUNCEMENTS - In March 1995, Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and Long-Lived Assets to Be Disposed Of," was issued.
The statement establishes accounting standards for the impairment of
long-lived assets, such as property and equipment and intangibles. The Company
does not believe the new standard will significantly impact its financial
statement evaluation of impairment of long-lived assets.
In October 1995, Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" was issued. The statement requires
the computation of compensation for grants of stock, stock options and other
equity instruments issued to employees based on fair value. The compensation
calculated is to be either recorded as an expense in the financial statements
or, alternatively, disclosed. The Company anticipates it will elect the
disclosure method of complying with the new standard. Under existing
accounting rules, the Company's stock option grants have not resulted in
compensation expense. Accordingly, under the provisions of the new statement,
pro forma net income to be disclosed may be lower than net income reported in
the financial statements.
These pronouncements will be effective for the Company in fiscal 1997.
2. INVENTORIES
At July 31, 1996 and 1995, inventories priced using the LIFO method were
valued at $19,869,000 and $19,536,000, respectively, which was $2,000 more and
$962,000 less, respectively, than average cost. Inventories valued using the
FIFO method amounted to $1,372,000 and $1,151,000 at July 31, 1996 and 1995,
respectively.
July 31,
1996 1995
(Dollars in Thousands)
Raw materials $ 12,471 $ 11,690
Work-in-process 1,987 1,206
Finished goods 5,766 6,815
Maintenance parts and supplies 1,017 976
Total inventories $ 21,241 $ 20,687
3. LONG-TERM DEBT
In February 1994, the Company completed a public offering of its common
stock receiving net proceeds of $33,560,000. The proceeds of the offering were
used to pay a substantial portion of the Company's then outstanding long-term
debt, resulting in an extraordinary loss of $373,000 (net of the related income
tax benefit of $231,000).
Long-term debt at July 31, 1996 and 1995, consisted of the following:
1996 1995
(Dollars In Thousands)
Credit agreement (A) $20,031 $17,817
Real estate and equipment term loans (B) 687 761
Other 393 479
----- -----
21,111 19,057
Less current maturities 1,698 1,072
----- -----
Long-term debt $19,413 $17,985
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 at July 31, 1996, approximates fair
value.
The various debt agreements include restrictive covenants which require
the Company to maintain certain levels of net worth and cash flow coverage,
restrict the payment of dividends and limit capital expenditures, among others.
During fiscal 1996 and 1995, the Company was not in compliance with certain
covenants and received appropriate waivers.
(A) On June 15, 1993, the Company entered into a Loan and Security
Agreement ("Loan Agreement") with a bank (the "Bank"). The Loan
Agreement, as amended, provides for a $7,817,000 term loan and a
$20,000,000 revolving loan and letter of credit facility. Outstanding
borrowings under the term loan and revolving loan cannot exceed the
lesser of $27,817,000 or the Company's current asset base ("CAB").
The CAB is defined as 85% of eligible accounts receivable plus 60% of
eligible inventories valued at average cost (limited to $10,000,000),
less outstanding letters of credit. The Bank, at its sole discretion,
may add $3,000,000 to the CAB.
At the Company's election, outstanding borrowings bear interest at the
Bank's corporate borrowing rate (8.25% at July 31, 1996) plus 1.25% or
LIBOR (5.54% effective at July 31, 1996) plus 3.25% (each subject to
certain adjustments). The Company pays a commitment fee of .25% per
annum on any unused and available borrowings under the revolving loan
and letter of credit facility. Monthly installments on the amended
term loan of $130,000, which commenced January 31, 1996, are due
through April 30, 1998. Interest on both the revolving loan and the
term loan is due monthly for outstanding amounts subject to the Bank's
corporate borrowing rate option and is due periodically at the end of
the period nominated for borrowings under the LIBOR rate option. All
outstanding principal and interest under the Loan Agreement is due on
May 31, 1998.
The Loan Agreement is collateralized by substantially all assets of the
Company, excluding real estate. At July 31, 1996, $6,905,000 was
outstanding under the term loan and $13,126,000 was outstanding under
the revolving loan with $6,624,000 available for borrowings at that
date.
(B) These loans were entered into with various public agencies payable in
monthly installments aggregating approximately $16,000 including
interest, with interest rates ranging from 3% to 13%. The various
notes are collateralized by the underlying real estate and/or equipment
and the guarantee of the principal stockholder/officer.
At July 31, 1996, the aggregate future maturities of long-term debt are as
follows: 1997 - $1,698,000; 1998 - $18,589,000; 1999 - $110,000;
2000 - $113,000;2001 - $112,000; and thereafter $489,000.
4. INCOME TAXES
The provision for income taxes on income before extraordinary item for
fiscal 1996, 1995 and 1994 consists of the following:
1996 1995 1994
(Dollars in Thousands)
Current federal $ 326 $ - $ -
Deferred:
Federal $ 949 $ 672 $2,466
State 148 119 517
Total deferred $1,097 $ 791 $2,983
On January 31, 1994, the Company terminated its status as an S Corporation
forfederal and state income tax purposes. Prior to that date, the Company's
earnings wereincluded in the personal income tax returns of its stockholders.
As a result of the change intax status, the Company recorded deferred income
taxes of $3,837,000 for the differencebetween the tax basis of assets and
liabilities and their basis for financial reporting at that date.
The actual income tax expense for fiscal 1996, 1995 and 1994 on income
before extraordinary item differs from income tax based on the federal
statutory rate due to the following:
1996 1995 1994
(Dollars in Thousands)
Expected tax expense (benefit) $ 1,273 $ 123 $ (61)
Exclusion of S Corporation income - - (754)
State income taxes, net of federal 148 86 (135)
Tax resulting from change in
tax status (federal and state) - - 3,837
Nondeductible costs related to
settlement of litigation 3 540 -
Other (1) 42 96
Total income tax expense $1,423 $ 791 $2,983
At July 31, 1996 and 1995, the deferred tax assets and deferred tax liabilities
were as follows:
1996 1995
(Dollars in Thousands)
Net current deferred tax assets (liabilities):
Accounts receivable $ 47 $ 53
Inventory 182 (62)
Accrued liabilities 855 644
Operating loss carry forwards, expiring in 2009 490 298
Net current deferred tax asset $1,574 $ 933
Net noncurrent deferred tax assets (liabilities):
Property, plant and equipment $(6,286) $(4,746)
General business credit carry forward 217 256
Alternative minimum tax credit carry forward 357 -
Other 28 13
Net noncurrent deferred tax liability $(5,684) $(4,477)
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 agreement in principle reached by the Company in April, 1995
to settle the previously reported securities litigation was approved by the
court in February, 1996. Pursuant to the agreement, the portion of the
settlement paid by the Company into escrow on August 8, 1995 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 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, 1996, the Company estimated its
remaining potential liability for remediation of the waste disposal sites and
legal costs to be approximately $125,000 which has been recorded as an accrued
liability.
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.
LEASES - The Company leases certain buildings and machinery and equipment under
noncancelable operating leases. Under certain leases the Company is required
to pay property taxes, insurance, repairs and other costs related to the leased
property. At July 31, 1996, future minimum payments under noncancelable leases
accounted for as operating leases were $809,000 in 1997; $289,000 in 1998;
$138,000 in 1999; $76,000 in 2000 and $30,000 in 2001. Total rent expense for
all operating leases was $1,350,000, $1,153,000 and $1,260,000 in 1996, 1995
and 1994, 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 up
to certain limits as specified in an insurance policy. The policy provides
coverage for claims in excess of $225,000 per occurrence and 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 $250,000 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
made and claims incurred, but not yet reported.
PURCHASE COMMITMENTS - At July 31, 1996, the Company was committed on
outstanding purchase orders for inventory approximating $25.9 million.
Additionally, the Company had on its premises at July 31, 1996 raw material on
consignment from its vendors valued at approximately $3.0 million.
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 $63,000 in fiscal 1996. No contributions
were made to the plan in fiscal 1995 or 1994.
7. STOCKHOLDERS' EQUITY AND STOCK OPTIONS
Effective January 19, 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 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 Option Price
Shares Per Share
Balance - July 31, 1994 221,200 $14.00 to $15.40
Granted 40,900 $6.25 to $9.25
Forfeited (28,000) $9.25 to $14.00
Balance - July 31, 1995 234,100 $6.25 to $15.40
Granted 200,300 $5.75 to $6.88
Forfeited or canceled (161,600) $6.38 to $14.00
Balance - July 31, 1996 272,800 $5.75 to $15.40
Exercisable at July 31, 1996 35,880 $5.75 to $15.40
On September 7, 1995 the Compensation Committee of the Board of
Directors authorized the cancellation of 157,200 incentive options (excluding
the Directors' and the 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.
8. RELATED PARTY TRANSACTIONS
In prior years, the Company leased buildings, unimproved land, and
equipment from stockholders and entities owned by the stockholders of the
Company. Payments under the leases were $91,000 in fiscal 1994. During fiscal
1994, the Company issued 52,775 shares of its common stock to a related party
in exchange for the properties previously leased from the related party. In
connection with the transaction, the Company recorded $855,000 as property,
plant and equipment and assumed outstanding obligations on the properties
amounting to $1,079,000, $1,060,000 of which were subsequently liquidated with
a portion of the proceeds from the initial public offering.
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 $130,000 in fiscal
1996. In addition, the Company had a receivable balance of $247,000 at July
31, 1996 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 $181,238 in fiscal 1996 and $207,538 in fiscal 1995.
Temporary advances were made from time to time during fiscal 1996 and 1995
to the principal stockholder with the highest amounts outstanding being
$1,389,000 and $1,261,000 in 1996 and 1995, respectively. These advances were
repaid at the end of each quarter and accordingly there were no outstanding
balances at July 31, 1996 or 1995. 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 which is payable at maturity of the note on August 15,
1997.
In October 1992 the principal stockholder's trust granted options to
acquire up to 259,812 shares of common stock to certain executives of the
Company at $2.92 per share, the estimated fair market value at that date.
No compensation expense was recognized related to the grant of these options.
During fiscal 1994, certain executives exercised options to acquire 144,322
shares of common stock from the principal stockholder by assigning their rights
to payment of certain vested compensation owed to them by the Company to the
principal stockholder and the execution of promissory notes to the principal
stockholder in the amount of $420,000 which, as amended, bear interest at 4.01%
and are due February 15, 1997. The notes are collateralized by the underlying
shares of common stock. The principal stockholder subsequently assigned the
executives' rights to payment of the deferred benefits and the 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 President, chief executive officer and a
director of a customer of the Company. Annual sales to this company were
approximately $1,565,000 in 1996, $3,672,000 in 1995 and $3,936,000 in 1994
with outstanding receivable balances of approximately $216,000 and $753,000 at
July 31, 1996 and 1995, respectively.
WEBCO INDUSTRIES, INC.
SUPPLEMENTAL QUARTERLY FINANCIAL DATA (UNAUDITED)
(Dollars in thousands, except per share data)
Year Ended July 31, 1996
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 2,551 3,662 3,951 4,346 14,510
Operating income 729 1,574 1,549 2,063 5,915
Net income 117 617 621 966 2,321
Net income per
common share $ .02 $ .10 $ .10 $ .15 $ .37
Weighted average
shares outstanding 6,339 6,339 6,339 6,339 6,339
Year Ended July 31, 1995
Quarters Ended
October 31, January 31, April 30, July 31, Total
1994 1995 1995 1995 Year
Net sales $22,510 $23,802 $26,282 $25,130 $97,724
Gross profit 1,668 2,799 3,810 3,931 12,208
Operating income (loss) (120) 954 1,979 2,248 5,061
Net income (loss) (281) 305 (1,465) 1,011 (430)
Net income (loss) per
common share $ (.04) $ .05 $ (.23) $ .15 $ (.07)
Weighted average
shares outstanding 6,339 6,339 6,339 6,339 6,339
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, 1996 and 1995 22
Statements of Operations for each of the three
years in the period ended July 31, 1996 23
Statements of Changes in Stockholders' Equity
for each of the three years in the period
ended July 31, 1996 24
Statements of Cash Flows for each of the three
years in the period ended July 31, 1996 25
Notes to Consolidated Financial Statements 26
Supplemental Quarterly Financial Data
(Unaudited) 36
(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 June 15, 1993,
between American National Bank and Trust Company of Chicago
and the Company (incorporated by reference to Exhibit 10.2
to the Company's Registration Statement on Form S-1,
No. 33-72994).
10.3 Amendment, dated January 31, 1994, to the Loan and
Security Agreement (incorporated by reference to Exhibit
10.3 to the Company's Registration Statement on Form S-1.
No. 33-72994).
10.3(a) Amendment, dated June 30, 1995, to the Loan and Security
Agreement, item 10.2 above (incorporated by reference to
Exhibit 10.3(a) to the Company's Annual Report on Form 10-K
for the year ended July 31, 1995).
10.3(b) Amendment, dated October 15, 1996, to the Loan and Security
Agreement, item 10.2 above, is attached hereto as Exhibit
"10.3(b)."
10.4 Engagement Agreement, dated September 11, 1993, between the
Company and Carreden Group, Inc. (incorporated by reference
to Exhibit 10.4 to the Company's Registration Statement on
Form S-1, No. 33-72994).
10.5 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).
10.6 Employment Agreement, dated December 31, 1993, between the
Company and F. William Weber (incorporated by reference
to Exhibit 10.6 to the Company's Registration Statement on
Form S-1, No. 33-72994).
10.7 Employment Agreement, dated December 31, 1993, between the
Company and Dana S. Weber (incorporated by reference to
Exhibit 10.7 to the Company's Registration Statement on
Form S-1, No. 33-72994).
10.8 Promissory note effective August 15, 1994, between the
Company and F. William Weber is attached hereto as Exhibit
"10.8."
Reports on Form 8-K:
There were no reports on Form 8-K filed during the three months
ended July 31, 1996.
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, 1996 By: ______________________
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, 1996 By: _______________________
F. William Weber
Chairman, Chief Executive
Officer and Director
October 28, 1996 By: _______________________
Dana S. Weber
President, Chief Operating Officer,
and Director
October 28, 1996 By: _______________________
Harry G. Dandelles
Chief Financial Officer
October 28, 1996 By: _______________________
Frederick C. Ermel
Director
October 28, 1996 By: _______________________
Neven C. Hulsey
Director
October 28, 1996 By: _______________________
Kenneth E. Case
Director
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, 1996 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, 1996 By: /s/F. William Weber
F. William Weber
Chairman, Chief Executive
Officer and Director
October 28, 1996 By: /s/Dana S. Weber
Dana S. Weber
President, Chief Operating
Officer, and Director
October 28, 1996
By: /s/Harry G. Dandelles
Harry G. Dandelles
Chief Financial Officer
October 28, 1996 By: /s/Frederick C. Ermel
Frederick C. Ermel
Director
October 28, 1996 By: /s/Neven C. Hulsey
Neven C. Hulsey
Director
October 28, 1996 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, 1996
(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:
1994 $23 - - $(20) (1) $3
1995 3 173 - (50) (1) 126
1996 126 (30) - 14 (1) 110
Allowance to reduce
inventory to estimated
net realizable value:
1995 $980 - - $(980) -
1996 - - - - -
(1) Amounts represent write-offs, net of recoveries.
Exhibit 10.3(b)
AMENDMENT NO. 3 TO
LOAN AND SECURITY AGREEMENT
THIS AMENDMENT NO. 3 TO LOAN AND SECURITY AGREEMENT (the "Amendment") is
entered into as of the 15th day of October, 1996 by and among AMERICAN NATIONAL
BANK AND TRUST COMPANY OF CHICAGO ("Lender") and WEBCO INDUSTRIES, INC., an
Oklahoma corporation ("Borrower").
WITNESSETH:
WHEREAS, Borrower and Lender have entered into that certain Loan and
Security Agreement dated as of June 15, 1993 (as heretofore amended, the
"Agreement"); and
WHEREAS, Borrower has requested that Lender amend and waive certain
provisions of the Agreement, and Lender is willing to do so on the terms and
subject to the conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the premises set forth above, the
terms and conditions contained herein, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
Lender and Borrower hereby agree as follows:
1. Definitions. Terms defined in the Agreement, as amended hereby,
which are used herein shall have the same meanings as set forth in the
Agreement for such terms unless otherwise defined herein.
2. Amendment to Agreement. Upon the Effective Time (as defined in
Section 4):
(a) Subsection 8.4 of the Agreement is amended by adding a new
clause (v) as follows:
and (v) loans to F. William Weber ("F.W.Weber") pursuant to the promissory
note dated August 15, 1994, executed by F.W. Weber in favor of Borrower
(the "Weber Note"), provided, that (a) the outstanding amount of such
loans does not exceed $1,200,000 at any time, (b) all loans are repaid in
full on or before August 15, 1997, (c) such loans are secured at all times
in accordance with the Weber Note, (d) the Weber Note is held by Lender as
Collateral pursuant to Subsection 3.8 and (e) Borrower may not amend,
supplement or otherwise modify the Weber Note or grant any waiver
thereunder.
(b) Subsection 8.11 of the Agreement is amended by adding the
following as the last sentence of such subsection:
Notwithstanding the other provisions of this Subsection 8.11, Borrower may
make loans to F. W. Weber in accordance with Subsection 8.4(v).
(c) Subsection 8.15(A) of the Agreement is amended deleting
the amount opposite the time period July 31, 1996 through July 30, 1997 and
inserting in lieu thereof the amount "$37,500,000".
(d) Subsection 8.15(B) of the Agreement is hereby amended and
restated as follows:
(B) Cash Flow Coverage Ratio. Permit its Cash Flow Coverage
Ratio for
(i) the twelve month period ending on October 31, 1996 to be less than .50
to 1.0,
(ii) the twelve month period ending on January 31, 1997 to be less than
.55 to 1.0,
(iii) the twelve month period ending on April 30, 1997 to be less than .90
to 1.0, and
(iv) the twelve month period ending with the last day of each fiscal
quarter ending on or after July 31, 1997 to be less than 1.20
to 1.0.
3. Waiver of Defaults. Upon the Effective Time, Lender hereby waives the
Default arising under the Agreement to the extent it results from Borrower's
failure to comply with Subsection 8.4 and 8.11 of the Agreement with respect to
loans made by Borrower to F. William Weber pursuant to the Weber Note in an
aggregate amount of $1,389,000 and $1,261,000 for the fiscal years ending
July 31, 1996 and 1995, respectively.
4. Conditions of Effectiveness. The amendments and waiver herein shall
become effective (the "Effective Time") when and only when each of the
following conditions has been satisfied in a manner satisfactory in form and
substance to Lender (or waived in writing by Lender):
(a) the representations and warranties made in the Agreement
and in Section 5 hereof shall be true and correct as if made at the
Effective Time: and
(b) Lender shall have received all of the following documents:
(1) this Amendment, duly executed by Borrower;
(2) the original Weber Note duly endorsed by Borrower in favor
of Lender;
(3) if requested by Lender, certificates representing all
shares of stock of Borrower which are pledged to secure F. William Weber's
obligations under
the Weber Note, together with duly executed stock powers;
and
(4) such instruments, agreements, opinions and other items as
Lender may request, in each case in form and substance satisfactory to
Lender and its counsel, Schiff Hardin & Waite.
5. Representations and Warranties, Etc.
(a) Borrower represents and warrants as follows: (i) Borrower has all
necessary power and authority to execute and deliver this Amendment and perform
its obligations hereunder; (ii) the execution, delivery and performance of this
Amendment has been duly authorized by Borrower, (iii) this Amendment and the
Agreement, as amended hereby, constitute the legal, valid and binding
obligations of Borrower and are enforceable against Borrower in accordance with
their terms, (iv) all representations and warranties of Borrower contained in
the Agreement and all other Financing Agreements are true and complete as of
the Effective Time, and (v) no Default or Event of Default has occurred and is
continuing or will occur after giving effect to this Amendment in its entirety.
(b) Upon the Effective Time, Borrower hereby reaffirms all covenants,
representations and warranties made in the Agreement to the extent the same are
not amended hereby and agrees that all such covenants, representations and
warranties shall be deemed to have been remade as of the Effective Time
and that the Agreement remains in full force and effect.
6. Reference to the Effect on the Agreement.
(a) Upon the Effective Time, (i) each reference in the Agreement to
"this Agreement," "hereunder," "hereof," "herein" or words of like import shall
mean and be a reference to the Agreement as amended hereby, (ii) each reference
to the Agreement in all other Financing Agreements shall mean and be a
reference to the Agreement, as amended hereby.
(b) Except as specifically amended above, the Agreement, and all
other Financing Agreements, shall remain in full force and effect and are
hereby ratified and confirmed.
(c) The execution, delivery and effectiveness of this Amendment shall
not, except as expressly provided herein, operate as an amendment to any
provision of the Agreement nor a waiver of any right, power or remedy of
Lender, nor constitute a waiver of, or consent to any departure from, any
provision of the Agreement or any other Financing Agreement. This Amendment
shall not operate as a waiver of any Default or Event of Default (other than
the Default waived in Section 3 hereof) that has occurred and is continuing
on the date hereof or limit Lender's rights, power or remedies under the
Agreement in respect of any such Default or Event of Default.
7. Governing Law. This Amendment shall be governed by and construed in
accordance with the internal laws (as opposed to conflicts of law provisions)
of the State of Illinois.
8. Headings. Section headings in this Amendment are included herein for
convenience of reference only and shall not constitute a part of this Amendment
for any other purpose.
9. Counterparts, Etc. This Amendment may be executed by one or more of
the parties to this Amendment on any number of separate counterparts and all
of said counterparts taken together shall be deemed to constitute one and the
same instrument. Delivery of a duly executed counterpart copy of this
Amendment may be made by telecopy.
IN WITNESS WHEREOF, this Amendment has been duly executed as of the day
and year first above written.
AMERICAN NATIONAL BANK AND TRUST
COMPANY OF CHICAGO
By: /S/ Donald A. Tomlinson
Title: Vice President
WEBCO INDUSTRIES, INC.
By: /S/ Harry G. Dandelles
Title: V.P. Finance & Administration and C.F.O.
Exhibit 10.8
PROMISSORY NOTE
For value received, F. William Weber ("Weber"), with his principal place of
residence located at 7449 S. Indianapolis, Tulsa, Oklahoma 74136 hereby
promises to pay to Webco Industries, Inc., ("Webco") an Oklahoma Corporation,
with its principal place of business located at 201 Woodland Drive, Sand
Springs, Oklahoma 74063 in lawful money of the United States of America, the
outstanding balance of advances made together with interest thereon as follows:
1. Principal Term and Interest.
From time-to-time, Weber may have funds advanced to him by Webco. While
these amounts are expected to be borrowed and repaid throughout the term
of this note, the entire outstanding balance shall be payable in total
August 15, 1997 plus simple accrued interest calculated at Webco's
borrowing rate from its primary working capital lender, now American
National Bank & Trust.
Such note shall be collateralized by certain shares of Webco, initially
1,012,095 shares of Webco common stock (certificate W-0009) owned by F.
William Weber and Martha A. Weber, co-trustees of the revocable living
trust established by Martha A. Weber on December 23, 1983. Other shares
of Webco stock may from time-to-time be substituted for these amounts as
long as they are substantially equivalent and have a market value of at
least double the largest outstanding balance during the term of this
note.
2. Default.
If this note is unpaid at the end of the term, Webco shall have the right
to offset any amounts unpaid by the then current market value of the
appropriate number of shares of Webco common stock held as collateral.
This note is effective August 15, 1994 and shall be binding upon Weber and
Webco, their heirs, successors, legal representatives, and assigns.
IN WITNESS WHEREOF, THIS NOTE is executed effective as of the date indicated.
ATTEST: F. WILLIAM WEBER
/s/ Sharron Wattenbarger /s/ F. William Weber
WEBCO INDUSTRIES, Inc.
/s/ Dana S. Weber