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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended July 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from __________ to __________
Commission File No. 0-23242
WEBCO INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Oklahoma 73-1097133
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
9101 West 21st Street
Sand Springs, Oklahoma 74063
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code - (918) 241-1000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Name of Each Exchange
Title of Each Class on Which Registered
Common Stock, par value $.01 AMEX
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
As of September 30, 1998, the aggregate market value of the voting stock
held by nonaffiliates of the registrant was $17,362,000.
On September 30, 1998, the number of shares outstanding of the registrant's
common stock, $.01 par value, was 7,169,000 shares.
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. AND SUBSIDIARY
TABLE OF CONTENTS
Page
PART I
Item 1. Business 3
Item 2. Properties 14
Item 3. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security
Holders 15
PART II
Item 5. Market for Registrant's Common Stock and Related
Stockholder Matters 16
Item 6. Selected Financial Data 16
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 18
Item 8. Financial Statements and Supplementary Data 24
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 45
PART III
Item 10. Directors and Executive Officers of the Registrant 45
Item 11. Executive Compensation 45
Item 12. Security Ownership of Certain Beneficial Owners
and Management 45
Item 13. Certain Relationships and Related Transactions 45
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 46
WEBCO INDUSTRIES, INC. AND SUBSIDIARY
FORM 10-K
PART I
ITEM 1. BUSINESS
GENERAL
Webco Industries, Inc. is a specialty manufacturer of high-quality carbon
steel tubing and stainless steel tubing products designed to industry and
customer specifications. Webco's tubing products consist primarily of: welded
carbon heat exchanger tubing, welded boiler tubing, stainless tube and pipe,
and advanced carbon mechanical tubing for use in consumer durable and capital
goods. Management believes that Webco is the domestic market leader in the
manufacture of welded carbon heat exchanger tubing and welded carbon boiler
tubing, and the leading supplier of stainless tubing for certain niche
applications. The Company's subsidiary, Phillips & Johnston, Inc. ("P&J"),
represents several manufacturers in the sale of various non-competing
mechanical and specialty tubular products made from copper, brass, aluminum
and stainless and carbon steel, among others. This representation allows the
Company to better serve its customers by offering a full range of tubing
products. The Company's QuikWater division manufactures and markets a patented
direct contact water heater for commercial and industrial applications. The
Company has three production facilities in Oklahoma and Pennsylvania and five
distribution facilities in Oklahoma, Texas, Illinois and Michigan, serving
more than 1,300 customers throughout North America.
Webco Industries, Inc. is an Oklahoma corporation founded in 1969 by F.
William Weber, chairman of the board and chief executive officer. On June 29,
1998, Webco merged with P&J, a Chicago based sales organization and value
added processor of tubular products. The merger was accomplished through the
exchange of 830,000 shares of the Company's common stock for all of the
outstanding stock of P&J. As a result of the Merger, P&J is a direct,
wholly-owned subsidiary of the Company. The merger has been accounted for
under the pooling of interests method of accounting. Accordingly, all
historical financial information has been restated as if the two entities have
always been combined.
Unless the context otherwise requires, the information contained in this
report, and the terms "Webco" and the "Company" when used in this report,
include Webco Industries, Inc. and its subsidiary, P&J, on a combined basis.
INDUSTRY OVERVIEW
Specialty tubing producers occupy a niche between the primary steel
producers and customers who utilize precision tubing in the manufacture of
products primarily for the capital goods and consumer durables industries. As
contrasted with commodity pipe producers, specialty tube mills manufacture
products which are engineered and tailored for more specialized and critical
end-use applications.
The specialty tubing industry was once dominated by the major integrated
steel producers. Over time, these integrated producers lost their competitive
advantage and have largely withdrawn from this segment. In addition, the
industry continues to undergo substantial consolidation, as well as
rationalization of less efficient producers. The industry, however, continues
to be highly fragmented and is currently comprised of independent producers
that generally occupy relatively focused market niches.
The specialty tubing industry has been affected by certain trends that
are expected to continue over the next several years. First, customers'
increasing emphasis on just-in-time inventory methods has required tube
producers to increase operating efficiencies to accommodate more frequent, but
smaller sized orders and has caused tube producers to place greater emphasis
on inventory management and control. Second, customers' desires to cut
operating costs through the outsourcing of specific processing functions, such
as specialty tube manufacturing, have created the opportunity for third-party
tube producers to replace production from captive mills. Finally, the
technological evolution of thin-slab casting, higher levels of union
activities among various steel producers and the impacts of foreign steel
producers on the U.S. markets have caused volatility in the cost for sheet
coil.
MANUFACTURING TUBING PROCESSES
Manufactured Products
Electric Resistance Carbon Steel Weld Process. The Company maintains
inventories of steel sheet coils from which it manufactures electric
resistance welded tubing. This steel is in the form of a continuous sheet,
typically 48 to 60 inches wide, between .049 and .500 inches thick, and rolled
into 15 to 20 ton coils.
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. Steel coils over .180 inches thick used at the Sand
Springs facility are slit to pre-designated widths by outside vendors. Steel
coils less than .180 inches in wall thickness in Sand Springs and
substantially all coils in Oil City are slit in each facility using Company
equipment.
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 hollows (the raw material for the cold drawing process, which does
not go through the finishing process). Hollows are primarily for specific
cold draw orders, however, smaller amounts are produced for inventory.
In fiscal 1995 the Company placed into service a highly automated high
frequency welded carbon tube mill ("Mill 3") at the Sand Springs, Oklahoma
facility. In North America, the Company is aware of only one similar mill
operating in the United States and one duplicate installed in Toronto, Canada.
Prior to the third quarter of fiscal 1997, the Company was not able to fully
utilize the manufacturing capabilities of Mill 3 because certain cut-off
equipment would not perform to vendor specifications. A new cut-off machine
was installed on Mill 3 during the third quarter of fiscal 1997 to replace the
original cut-off equipment. The correction of this cut-off problem now
provides the Company the ability to manufacture tubes with diameters and wall
thickness more consistent with original expectations, thereby creating the
opportunity for the Company to further penetrate the mechanical tube markets,
as discussed below.
Carbon Steel Cold Drawing Process. The Company maintains inventories of
tubing hollows, which is raw material for the cold drawing process. Most of
this tubing is manufactured by the Company's own high frequency welded tube
mills. The Company currently offers cold drawn products from .250 inch to .375
inch in wall thickness. Cold drawing permits greater flexibility and
precision (as compared to the high frequency weld process) in meeting customer
specifications of tube diameters, wall thickness and other characteristics.
Customer orders are entered into a computerized order entry system. The
software selects the starting raw material from inventory that will optimize
yields and efficiency and meet the customer's specifications and required
delivery schedule. After the proper material has been selected for each
specific order, it is cut to the desired length. 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, instrumentation
tubing and small diameter stainless pipe. A majority of the stainless
products are made to order.
Other Tubing Products
The Company either outsources the fabrication of the Other Tubing
Products or performs value added processing using owned equipment, such as
cutting to length and end finishing the product. Highly specialized and
technical applications are generally outsourced. Other Tubing Products consist
of tubular goods made of stainless steel, carbon steel, copper, brass,
aluminum, and surgical steel purchased from other manufacturers.
QuikWater
At the QuikWater facility in Sand Springs, the Company purchases the
fabricated water tower and combustion chamber from an outside vendor, which
has been built to the Company's specifications. It then assembles the unit by
adding all of the required components, based upon the specific size and model
of the unit. Once completed, the unit is then shipped to the customer's site
where it is installed and tested by the Company prior to being placed into
service.
TUBING MANUFACTURING FACILITIES
The Company has three steel tubing manufacturing facilities where it
produces its carbon or stainless steel products. The largest facility is
located in Sand Springs, Oklahoma and produces a wide range of carbon steel
tubing products. This facility has been in operation since the Company began
in 1969. The Company also has a facility in Oil City, Pennsylvania at which it
also produces carbon steel tubing products, primarily boiler and as-welded
mechanical tubing. The third facility in Mannford, Oklahoma produces
stainless steel tubing products.
The following table sets forth the processing and other techniques
performed at Webco's facilities:
Manufacturing Distribution
Sand Oil Sand Grand Glen
Springs, City, Mannford, Springs, Nederland, Lyndon, Rapids, Ellyn,
Okla. Penn. Okla. Okla. Tx. Illinois Mich. Ill.
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 X X X
Integral Finning 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
Manufactured Tubing 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. 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 certain niche applications. The
Company continues to target the carbon mechanical tube market for future
growth. The Company is building its market share for mechanical tubing through
its low cost structure and high product quality, together with the Company's
commitment to customer service. A detailed description of the Company's
Manufactured Tubing 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: instrumentation tubing, stainless pipe,
mechanical tubing and other tubing. The end uses for these products include
appliances, industrial plant piping systems, instruments for the petrochemical
industry, and a variety of other capital goods applications. The Company is a
small, niche producer, due to both product and size and capacity constraints.
Over the past 18 months, the Company has doubled its stainless capacity.
The stainless pipe and tube industry over the last two years has been
marked by high levels of low cost foreign imports (including both raw coils
and finished tubes and pipe) that have created historically low pricing and a
highly competitive sales environment.
Mechanical Tubing. Mechanical tubing includes both as-welded and cold
drawn tubing. Most of the products the Company manufactures from its cold
draw processes are for mechanical tube applications. The end-uses for these
products are very diverse and include hydraulic cylinders, automotive
components, appliances, farm equipment, and a wide variety of consumer
durables (such as bicycles and lawnmowers) and capital goods. The Company is
currently a relatively small producer in this market.
In conjunction with the increased capabilities of Mill 3, the Company has
targeted the mechanical tubing market as a growth area over the next several
years. This market continues to undergo a major 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.
Other Tubing Products
The Company sells a variety of other tubing products, primarily through
its subsidiary, P&J. Other Tubing Products consist of tubular goods made of
stainless steel, carbon steel, copper, brass, aluminum, and surgical steel
purchased from other manufacturers. These products come in a wide range of
sizes and are used in a variety of applications. In many cases, the Company
provides just-in-time inventory management for its customers.
QuikWater
The Company's QuikWater division manufactures and sells a patented direct
contact water heater. The water heater generates hot water on demand and has
significant energy saving benefits coupled with unique environmental
advantages. It can be used in a variety of commercial applications such as
food processing, manufacturing, health care, construction, and other markets
where a high volume of hot water is required.
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. The Company believes that
it is the domestic market share leader in welded carbon heat exchanger tubing,
welded carbon boiler tubing, and certain stainless steel applications.
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 Vision Metals, Inc. 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, 1998 and 1997 were $27.2
million and $29.0 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. During 1998,
the Company obtained QS-9000 certification at its Sand Springs, Oklahoma and
Oil City Pennsylvania facilities. 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. On a test basis, physical and
chemical analyses are performed on raw materials to verify that their
mechanical and dimensional properties, cleanliness and surface characteristics
meet the Company's and industry 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
purchasing power or for their specialized processing capabilities. Webco
monitors and purchases raw material periodically from foreign sources, as
conditions dictate, to obtain a competitive landed cost. The Company orders
steel to specified physical characteristics and chemistry. By purchasing in
large quantities at consistent predetermined intervals, Webco is able to
obtain quality raw materials at lower competitive prices. All increments of
the cost of purchasing and landing steel are continually monitored, reviewed
and acted upon. Webco believes that it is not dependent on any one of its
suppliers for raw materials, although as demonstrated by the Wheeling-
Pittsburgh labor strike during much of fiscal year 1997, interruptions in
supply from its suppliers may impact the landed cost of new purchases.
Webco understands that the Company's 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 predominately by the
Company's inside and outside sales personnel.
The Company's sales and marketing efforts for its manufactured products
are directed by a vice president of sales and marketing, the President of P&J,
and Webco's 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 microstructure, 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.
Sales of the Company's Other Products are directed by the President of
Webco's subsidiary, P&J, and its sales staff, who are headquartered in Glen
Ellyn, Illinois. The Company's Other Tubing Products line and P&J's other
sales representative accounts constitute over 50% of P&J's sales effort.
CUSTOMERS AND DISTRIBUTION
The Company manufactures and distributes specialty steel tubular product
for sale to a diverse group of more than 1,300 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 16% of net sales. The Company's ten
largest customers represent approximately 25% of net sales. Approximately 86%
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 14% 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 many of its competitors. The Company
transports product for local delivery via Company-owned or leased vehicles.
Longer distance deliveries are generally made via independent trucking firms.
The Company offers its finished product for shipment directly from its
three manufacturing locations. In addition, the Company also inventories
finished goods and functions as its own distributor in some of its markets.
Such markets and customers are served on a just-in-time basis from the
Company's distribution locations in Oklahoma, Texas, Illinois and Michigan.
Finished goods inventories for distribution generally are suitable for sale to
many customers and generally are not unique to a specific customer's needs.
The Company believes that its long-term relationships with many of its
customers are a significant factor in its business and that pricing, quality,
service and the ability to fill orders on a timely basis are the most critical
factors in maintaining these relationships. Certain Company executive
officers actively participate in the Company's marketing efforts and have
developed strong business relationships with senior management of many of the
Company's principal customers.
GOVERNMENT REGULATION
The Company's distribution and manufacturing facilities are subject to
many federal, state, and local requirements relating to the protection of the
environment. The Company continually examines ways to reduce emissions and
waste and to effect cost savings relating to environmental compliance. The
Company has its own in-house environmental engineer who leads the Company's
environmental program. Management's philosophy is to implement environmental
controls that meet or exceed current and foreseeable legal requirements.
Management believes that it is in material compliance with all environmental
laws, does not anticipate any material expenditures to meet environmental
requirements, and generally believes that its processes and products do not
present any unusual environmental concerns. See "Item 3. Legal Proceedings."
The Company's operations are also governed by laws and regulations
relating to workplace safety and worker health, principally the Occupational
Safety and Health Act and regulations thereunder which, among other
requirements, establish noise and dust standards. Management believes that it
is in material compliance with these laws and regulations and does not believe
that future compliance with such laws and regulations will have a material
adverse effect on its results of operations or financial condition.
EMPLOYEES
As of August 31, 1998, the Company employed 772 people. None of the
Company's employees are covered by collective bargaining agreements. The
Company has never experienced a significant work stoppage and considers its
employee relations to be good.
FORWARD-LOOKING STATEMENTS
Certain statements in this Form 10-K constitute "forward-looking"
statements within the Company's interpretation of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements involve known
and unknown risks, uncertainties and other important factors that could cause
the actual results, performance or achievements of the Company, or industry
results, to differ materially from any future results, performance or
achievements expressed or implied herein. Such risks, uncertainties and
factors include, among others:
General Economic and Business Conditions. Many of the Company's products
are sold to industries that experience significant fluctuations in demand
based on economic conditions or other matters beyond the control of the
Company. No assurance can be given that the Company will be able to increase
or maintain its level of sales in periods of economic stagnation or downturn.
Competition from Imports. The domestic tubular products market is
affected by the level of imports of tubular products, which has varied
significantly over time. High levels of imports may reduce the volume sold by
domestic producers and depress selling prices. In addition, the strength of
the U.S. Dollar and volume motives of some foreign importers may create
circumstances where product pricing is at levels that are marginally
profitable or even unprofitable. The Company believes that import levels and
import pricing are affected by, among other things, overall worldwide demand
for tubular products, global economic conditions, the trade practices of and
government subsidies to foreign producers and the weakness or absence of
governmentally
imposed trade restrictions in the United States. Given the recent decline in
certain of the economies of Asia, South America and Eastern Europe, increased
competition from foreign imports should be anticipated.
Changes in Manufacturing Technology. Over the past 10 years, there have
been significant advances in the technology relating to the manufacture of
carbon and stainless steel tubing. Such advances have impacted the speed at
which tubing can be manufactured, the quality of the tubing and the types and
densities of materials that can be welded into tubes for advanced
manufacturing processes. In many circumstances, maintaining current
manufacturing technologies is necessary to be competitive with other domestic
producers and foreign imports or to be able to provide goods for customers'
advancing manufacturing needs and processes. Maintaining current
manufacturing technologies and capabilities requires investment of capital.
Manufacturers that do not maintain current technologies may be rationalized by
the industry as a result of their inability to compete against more
efficiently priced products.
Industry Capacity. The Company, and many of its competitors in both the
stainless and carbon steel tubing markets have expanded production capacity
over the past decade and continue to do so in connection with the growth in
product demand and benefits related to current manufacturing technology.
Continued significant expansion could result in industry over-capacity. Over-
capacity could also result from a precipitous decrease in demand or a
significant increase in foreign imported supply.
Domestic 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. The Company has
different competitors within each of its markets served. Certain of these
competitors are larger and have greater financial resources than the Company.
Sales of some of the Company's products represent a high percentage of the
market demand for these products, and could be targeted by competitors.
Raw Material Costs and Availability. The Company's largest component of
cost of sales is raw material costs. These costs can vary over time due to
changes in steel pricing which are influenced by numerous factors beyond the
control of the Company, including general economic conditions, foreign
imports, domestic competition, labor costs, import duties and other trade
restrictions. Typically, the Company passes on these changes in cost to
customers. However, reductions in the Company's raw material costs may lag
behind pressure on the Company's prices or increases in raw material costs may
precede increases in the Company's prices, affecting the Company's profit
margins.
Loss of Significant Customers and Customer and Vendor Work Stoppages. The
Company sells its tubular products to a diverse group of more than 1,300
customers. Although no single customer represents in excess of 4% of the
Company's 1998 net sales, and no one end-use sector represents more than 14%
of 1998 net sales, the loss of any significant customer, or a work stoppage
at a significant customer or in an important end-use sector, such as
automotive, could have an adverse effect on the Company's results of
operations.
Successful Implementation of Enterprise Software. The Company is
currently installing an enterprise software system designed to modernize its
information technology needs, improve management data and solve any issues the
Company may have that are associated with the Year 2000 ("Y2K"). The
Company's inability to successfully complete the implementation of the
enterprise software system would require the Company to pursue other
information technology solutions, delaying compliance with Y2K and forcing
the Company to potentially manually verify its business transactions for some
period of time. See Item 7., Management's discussion and Analysis of
Financial Condition and Results of Operations for further discussion of the
Enterprise Software and Y2K project.
Y2K Compliance by Customers and Vendors. Failure by the Company's
customers and vendors to find adequate solutions to any Y2K issues they may
face could result in customers having a significant interruption in their
buying patterns and volumes and vendors being unable to timely supply product
required for the
Company's manufacturing processes.
ITEM 2. PROPERTIES
The Company's principal properties presently consist of three
manufacturing plants and five 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 281,000 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 138,000 square feet Owned
Manufacturing Facility 13 acres
Nederland, Texas 20,000 square feet Long-term lease with a
Distribution Facility purchase option of the
greater of 93% of FMV
or $475,000
Oil City, Pennsylvania 192,000 square feet Owned
Manufacturing Facility 8 acres
Tulsa, Oklahoma 24,400 square feet Long-term lease with a
Corporate Offices purchase option of
$750,000
Tulsa, Oklahoma 28,000 square feet Long-term lease
Finning Facility
Glen Ellyn, Illinois 25,700 square feet Long-term lease
P&J Corporate Offices
and Distribution Facility
Lyndon, Illinois 30,000 square feet Long-term lease
Distribution Facility
Grand Rapids, Michigan 35,000 square feet Long-term lease
Distribution Facility
ITEM 3. LEGAL PROCEEDINGS
In August 1997, the Company filed an action, Webco Industries, Inc. vs.
Thermatool Corporation and Alpha Industries, Inc., relating to certain mill
cut-off equipment sold to the Company and installed on Mill 3, which did not
perform to manufacturer specifications. The case, filed in the United States
District Court for the Northern District of Oklahoma (Case No. 97-CV-708H(W)),
seeks recoveries including, but not limited to, the cost of the equipment,
lost profits, lost market share and other damages suffered by the Company.
The trial is currently set for November 16, 1998. There can be no assurance
that the Company will prevail in all or in part of its action, or that if
successful, any recoveries will be commensurate with the damages suffered by
the Company.
From time to time, the Company is named as a defendant in legal actions
arising out of the normal course of business. Except as described above, the
Company is not a party to any pending legal proceeding other than ordinary
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 1998.
PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON STOCK
AND RELATED STOCKHOLDER MATTERS
Webco's common stock is traded on the American Stock Exchange ("AMEX")
under the symbol "WEB." At the close of business on September 16, 1998, there
were 296 holders of record of Webco's common stock. The quarterly prices of
Webco's common stock were as follows:
Fiscal Year 1998: High Low
Fourth Quarter 10 3/16 7 1/2
Third Quarter 9 1/2 7
Second Quarter 7 7/8 6 1/2
First Quarter 8 1/2 6 3/8
Fiscal Year 1997:
Fourth Quarter 7 5 1/2
Third Quarter 6 5/8 5 1/2
Second Quarter 5 5/8 4 7/8
First Quarter 6 1/8 4 13/16
DIVIDENDS
The Company currently intends to retain earnings to support its growth
strategy and does not anticipate paying dividends in the foreseeable future.
The Board of Directors may reconsider or revise this policy from time to time
based upon conditions then existing, including the Company's results of
operations, financial condition, and capital requirements, as well as other
factors the Board of Directors may deem relevant. Under the Company's loan
agreement, the Company may not pay dividends without the lenders consent.
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected financial information for the
Company as of the end of and for each of the five years in the period ended
July 31, 1998, which has been derived from the audited Financial Statements of
the Company. On June 29, 1998, Webco merged with Phillips & Johnston, Inc.
("P&J"). Because the merger has been accounted for as a pooling of interests,
financial results for all periods presented have been restated as though the
companies have always been combined.
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."
WEBCO INDUSTRIES, INC. AND SUBSIDIARY
Selected Financial Data
For the Years Ended July 31,
(Dollars in thousands, except per share data)
Restated (1)
Income Statement Data: 1998 1997 1996 1995 1994
Net sales $ 151,431 $ 128,593 $ 112,525 $ 108,284 $ 88,746
Gross profit 28,486 20,228 17,159 15,195 9,477
Income from operations 11,305 7,234(2) 7,145 6,673 1,791
Income before income
taxes and extraordinary item 9,009 5,187 4,893 1,921(3) 627
Income (loss) before
extraordinary item 6,207 3,931 3,767 1,242 (2,080)
Net income (loss)(4) 6,207 3,931 3,767 1,242 (2,453)
Income (loss) per share before
extraordinary item(4):
Basic .87 .55 .53 .17 (.36)
Diluted .86 .55 .53 .17 (.36)
Net income (loss) per share(4):
Basic .87 .55 .53 .17 (.43)
Diluted .86 .55 .53 .17 (.43)
Pro forma income before
extraordinary item (5) 5,511 3,179 2,990 513 374
Pro forma net income (5) 5,511 3,179 2,990 513 1
Pro forma income per share
before extraordinary item (5):
Basic .77 .44 .42 .07 .07
Diluted .76 .44 .42 .07 .07
Pro forma net income per
share (5):
Basic .77 .44 .42 .07 .00
Diluted .76 .44 .42 .07 .00
Balance Sheet Data:
Working capital $ 30,861 $ 33,837 $ 22,011 $ 19,626 $ 13,647
Total assets 111,758 102,142 86,888 83,325 72,339
Long-term debt (net of
current portion) 32,894 34,470 19,797 18,313 6,904
Stockholders' equity 48,245 45,220 42,913 40,322 41,113
(1) Restated for the Company's merger with P&J which has been accounted for as
a pooling of interests.
(2) Includes an $884,000 ($548,000, or $0.08 per diluted share after tax)
charge related to the replacement and write-off of faulty equipment on the
Company's Mill 3.
(3) Includes a $3.5 million ($2.7 million, or $0.37 per diluted share after
tax) charge related to the settlement of securities litigation.
(4) Webco and P&J were S-Corporations for Federal and state income tax
purposes through January 31, 1994 and June 29, 1998, respectively, and
accordingly did not incur any Federal or state income taxes prior to these
dates, respectively.
(5) All periods presented have been adjusted on a pro forma basis for assumed
Federal and state income taxes for Webco and P&J which had not previously
recognized income taxes due to their status as S Corporations.Pro forma
income taxes were based upon the statuary (Federal & state) tax rate of
38%. In addition, the pro forma net income for 1994 excludes deferred
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
On June 29, 1998, Webco merged with Phillips & Johnston, Inc., ("P&J"),
by issuing 830,000 shares of Webco common stock for all of the out-standing
stock of P&J. The merger has been accounted for under the pooling of interests
method of accounting, accordingly the Company's financial statements have been
restated and the following discussion has been prepared as though the merger
occurred prior to the earliest period presented.
It is the Company's philosophy to pursue growth and profitability through
the identification of niche markets that preferably involve specialty tubular
products that require a high level of value engineering and can be dominated
from an industry or customer standpoint. The Company uses its quality
standards, customer service and manufacturing technology to achieve such
market penetration.
During the three year period ended July 31, 1998, the Company spent $25.2
million on capital projects. This included several major projects, such as a
doubling of the capacity of the stainless facility, purchase and installation
of a slitter and a new finish floor at Oil City, renovation of the Company's
new corporate headquarters, expansion of the Sand Springs facility shipping
bay, and expenditures towards the purchase and installation of an enterprise
software system.
Results of Operations
The following table sets forth certain income statement data for each of
the three years in the period ended July 31, 1998 (certain amounts may not
calculate due to rounding):
1998 1997 1996
Dollar % of Dollar % of Dollar % of
Amount Net Sales Amount Net Sales Amount Net Sales
(Dollars in Millions)
Net sales $151.4 100.0% $128.6 100.0% $112.5 100.0%
Gross profit 28.5 18.8 20.2 15.7 17.2 15.2
Selling, general and
administrative expenses 17.9 11.8 13.0 10.1 11.2 9.9
Income from operations 11.3 7.5 7.2 5.6 7.1 6.3
The following discussions of sales levels, prices, and gross profit
revolve around the Company's Manufactured Tubing Products (carbon and
stainless steel tubing from its three plants in Oklahoma or Pennsylvania),
Other Tubing Products (purchased tubular goods made of stainless steel, carbon
steel, copper, brass, and surgical steel) and QuikWater.
Fiscal 1998 Compared to Fiscal 1997
Manufactured Tubing Product sales increased $20.8 million, or 17.7%, to
$138.0 million in 1998 from $117.2 million in 1997. The increase in net sales
reflects a 12.8% increase in the tonnage of steel tubing sold in 1998, and a
4.4% increase in the average net selling price. The volume increase in 1998
versus 1997 reflects higher utilization at all facilities due to improving
market conditions and increased market penetration of the mechanical and heat
exchanger tubing markets. The increase in the average net selling price
resulted primarily from improved pricing structures in carbon products.
The increase in Manufactured Tubing Products gross profit to $25.4
million or 18.4% of net sales in 1998 from $17.3 million or 14.8% of net sales
in 1997 is a function of the higher selling prices above, improvements in the
manufacturing cost and higher volumes which spread fixed and semi-fixed costs
Other Tubing Products sales are made primarily by Webco's subsidiary,
P&J. Sales of these products increased 14.7% to $11.8 million in 1998 from
$10.3 million in 1997. While there were some increases in sales prices, the
increase in sales is primarily the result of volume increases in a variety of
markets, from both existing customers and the addition of new customers
Gross profit from Other Tubing Products increased to $3.3 million or
28.1% of net sales in 1998 from $2.9 million or 28.2% of net sales in 1997.
The increase in gross profit was the direct result of increased sales.
Sales for QuikWater increased 47.4% to $1.6 million in 1998 from $1.1
million in 1997. This increase is the result of greater sales efforts
resulting from an expanded sales force and a continued increase of recognition
in the market place.
Gross profit for QuikWater was ($247,000) in 1998 as compared to $3,000
in 1997. This decrease is primarily the result of low volumes relative to
manufacturing capacity, and pricing pressure from competing products.
Commission income, which is generated by P&J's non-Webco sales
representative business, decreased slightly to $758,000 in 1998 from $842,000
in 1997. The decrease relates to the loss of or resignation from customer
accounts.
Selling, general and administrative expenses increased 38.5% to $17.9
million in fiscal 1998 from $13.0 million in fiscal 1997. Factors
contributing to the increase include $2,410,000 of employee profit sharing
and bonuses in 1998 compared to $285,000 last year, $565,000 of expenses
related to the merger with P&J, $323,000 of expenses related to the
installation of an enterprise software system, and increased commissions based
on higher levels of sales.
Interest expense for fiscal 1998 increased to $2.3 million (net of
$517,000 capitalized) from $2.0 million (net of $433,000 capitalized) in
fiscal 1997. This increase is due to higher average borrowing levels during
1998 which was partially offset by a slightly lower average borrowing rate.
Fiscal 1997 Compared to Fiscal 1996
Manufactured Tubing Products sales increased $15.2 million, or 14.9%, to
$117.2 million in 1997 from $101.9 million in 1996. The increase in net sales
reflects a 20.5% increase in the tonnage of steel tubing sold in 1997, which w
as partially offset by a 4.6% decrease in the average net selling price of
tubes. This decrease in selling prices resulted primarily from downward
market pressure in the heat exchanger and stainless markets, as well as
increased volumes of as-welded mechanical tubing. The volume increase in 1997
versus 1996 reflects increased market penetration of the mechanical tubing
markets and higher utilization of the Company's Oil City facilities.
The increase in Manufactured Tubing Products gross profit to $17.3
million or 14.8% of net sales in 1997 from $14.2 million or 13.9% of net sales
in 1996 reflects a combination of increased sales levels and a 5.8% decrease
in the average manufacturing cost per ton which was partially offset by a 4.6%
decrease in the average sales price per ton.
Sales of Other Tubing Products increased slightly to $10.3 million in
1997 from $9.9 million in 1996. The 4.0% increase in sales is primarily the
result of volume increases.
Gross profit from Other Tubing Products was $2.9 million for fiscal 1997
and 1996. Expressed as a percentage of net sales, gross profit was 28.2% and
29.1% for fiscal 1997 and 1996, respectively. This is a reflection of a changed
product mix.
Sales for QuikWater increased 67.7% from $.7 million in 1996 to $1.1
million in 1997. This increase reflects the fact that the Company purchased
QuikWater in 1996 and it did not become operational until December of that year.
Gross profit for QuikWater was $87,000 in 1996 as compared to $3,000 in
1997.
Commission income decreased to $842,000 in 1997 from $1,152,000 in 1996.
The decrease relates to the loss of or resignation from customer accounts.
Selling, general and administrative expenses increased $1.8 million to
$13.0 million in 1997 from $11.2 million in 1996. The $1.8 million increase is
primarily the result of $1.6 million in development and marketing expenses
associated with QuikWater versus $626,000 in 1996. SG&A for 1997 also
included $229,000 in profit sharing (none in 1996) with the employees and
generally reflects higher overall activity for the Company.
During the second quarter of fiscal 1997 the Company recorded a special
charge of $884,000 ($548,000 or $0.08 per diluted share after tax). This
charge relates to the replacement and write-off of faulty cutoff equipment on
the Company's Mill 3 and is reflected in income from operations.
Interest expense decreased slightly to $2.0 million (net of $433,000
capitalized) in fiscal 1997 from $2.3 million (net of $168,000 capitalized) in
fiscal 1996. This decrease is a result of lower average interest rates and a
$265,000 increase, compared to 1996, in interest capitalization from the
expansion of its stainless facility and other major capital projects.
Liquidity and Capital Resources
Net cash provided by (used in) operations was $15.1 million, $(2.1)
million, and $4.3 million in fiscal 1998, 1997 and 1996, respectively. During
each of the three fiscal years, accounts receivable have increased primarily
as the result of the increase in sales during the same periods. Inventories
decreased slightly in 1996 and 1998, however they increased significantly in
1997. The increase was the result of a major supplier of steel coils to the
Company, whose steel coils were the subject of a consignment program, being
unable to consistently deliver significant quantities of steel to the Company
as a result of a strike by the supplier's employees for much of fiscal 1997.
This consignment program, with a party independent of the supplier,
effectively financed a portion of the Company's inventory. The absence of the
consignment program in 1997 required the Company to fund current purchases of
inventory with working capital. The supplier settled the strike with its
employees' union in early fiscal 1998 and the Company has reinstated the
consignment relationship on production from this supplier. The reduction in
the working capital investment in inventories from the return of the
consignment program has been partially offset by the inventory required to
meet increased production volumes. Excluding the effects of inventory on
consignment, over the past three years the Company has turned its steel tube
manufacturing inventories an average of approximately 4.1 times per year.
Net cash used in investing activities was $11.9 million, $10.2 million
and $6.1 million in fiscal 1998, 1997 and 1996, respectively. During 1998 the
Company completed the expansion of its Sand Springs shipping facility, added
new stainless mills at its stainless plant, completed the renovation of the
building it is leasing to house its corporate headquarters, and initiated the
acquisition, development and installation of new financial and operational
software. In fiscal 1997, the Company expanded its stainless plant, including
the addition of new stainless mills, purchased new cut-off equipment for Mill
3 to replace the faulty cut-off equipment, began the expansion of its shipping
facility at the Sand Springs location and began the renovation of its
corporate headquarters. Significant projects in fiscal 1996 included expansion
of the stainless facility and the additions of a slitter and a new finish
floor at the Oil City facility.
The Company's capital requirements have historically been to fund
equipment purchases and for general working capital needs resulting from the
growth that the Company experienced. The Company followed an aggressive
capital expenditure plan as part of its growth strategy and to enable it to
continue to be a leader in tubular manufacturing technologies. The Company
foresees a continuance of this strategy in the future. The Company is
currently evaluating expanding its carbon tubing manufacturing capacity.
The Company's financing arrangements provide for a term loan of $25
million and a line of credit of $20 million. As of July 31, 1998, the Company
had $25 million outstanding on the term loan, and $6.6 million under the
revolving line of credit. These loans mature on August 31, 2002 and are
collateralized by substantially all of the Company's assets other than the
Sand Springs and Oil City real estate. The Company may have borrowings and
outstanding letters of credit ($550,000 at July 31, 1998) 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. At
July 31, 1998, $12.9 million was available for borrowing under this line of
credit.
P&J has a line of credit agreement for $2,000,000 and a term note of
$500,000 with its primary lender. As of July 31, 1998 the Company had $47,000
outstanding on the term loan, and $800,000 under the line of credit. The line
of credit matures on April 30, 1999 and the term loan matures in January 2000
and is collateralized by P&J's assets. At July 31, 1998, $1.2 million was
available for borrowing under this line of credit.
In the past, the Company has funded its capital growth expenditures with
a combination of cash flow from operations and debt. With the possible
exception of the expansion of its carbon facilities, the Company currently
believes that working capital will fund capital spending in 1999. Any
significant carbon tubing capacity expansion may require an increase in
available debt facilities, or the possible issuance of common stock or other
securities.
Information Technology and the Year 2000
Over two years ago, the Company began an evaluation of its information
systems to determine the potential impact of advanced technology on the
Company's operations and profitability. During the course of this evaluation,
issues surrounding the effect of the year 2000 on date sensitive applications
became more widely publicized and understood. The Company, recognizing an
opportunity to both update its technology and to address year 2000 concerns,
decided to replace its current information systems with an Enterprise Resource
Planning ("ERP") system.
In the second quarter of fiscal 1998, the Company purchased, and began
installation of, an ERP system. The installation process, which includes the
testing of date functions, consists of four phases. The first phase of
installation, addressing the financial, purchasing and plant maintenance
functions, was successfully completed before the end of fiscal 1998. The
remaining three phases, including materials management, shop floor control,
and production planning for each of the Company's three manufacturing
locations and related facilities, are scheduled for completion late in fiscal
1999.
The Company has also been evaluating non-information technology systems
such as phone systems, e-mail and personal computers. These systems are
either currently year 2000 compliant or will have been replaced with year 2000
compliant equipment before July 31, 1999. Other important systems, including
equipment used in manufacturing and processing, are basically signal driven
systems where dates play no role in the operating logic.
The Company is currently trying to determine the impact of year 2000 non-
compliance by third parties, including vendors and customers. The impact of
such non-compliance could effect timely delivery of raw materials and cause
reductions in orders by customers who are unable to control their own
production and sales process.
The Company presently believes that with the implementation of the ERP
system and the replacement of other non-compliant systems, the year 2000 issue
will not pose significant operational problems for its computer systems.
However, if installation of the ERP is not completed in a timely manner and
non-compliant systems replaced, the year 2000 issue could have a material
impact on the operations of the Company. Ramifications could include
mismatched materials purchase orders and customer sales orders and a need to
manually operate materials planning, purchasing, order backlog and capacity
planning functions. A transition to manual operations could result in, among
other things, damage to customer relationships, lost sales, and significant
customer claims.
As of July 31, 1998, the Company had spent $2.3 million on the ERP system
and the Company currently estimates another $3.7 will be expended to complete
the project. Of the $6 million total expenditure, over 25% is hardware
related, including upgrading the Company's mid-range computers and the
placement of personal computers on the shop floor. Due to the necessity of
technology upgrades generally, it would be arbitrary to allocate any portion
of this project exclusively to the correction of year 2000 issues and
therefore no such allocation has been attempted.
The foregoing forward-looking statements, including the costs of
addressing the year 2000 issue and the dates upon which compliance will be
attained, reflect management's current assessment and estimates with respect
to the Company's year 2000 compliance effort. Various factors could cause
actual plans and results to differ materially from those contemplated by such
assessments, estimates and forward-looking statements, many of which are
beyond the control of the Company. Some of these factors include, but are not
limited to, third party modification and installation plans, representations
by vendors and customers, technological advances, economic considerations and
customer perceptions.
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. 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.
Forward-Looking Statements
Certain statements in this Annual Report constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such forward-looking statements involve known and unknown risks,
uncertainties and other important factors that could cause the actual results,
performance or achievements of the Company, or industry results, to differ
materially from any future results, performance or achievements expressed or
implied herein. Such risks, uncertainties and factors include, among others:
general economic and business conditions, competition from imports, changes in
manufacturing technology, industry capacity, domestic competition, raw
material costs and availability, loss of significant customers and customer
and vendor work stoppages, successful implementation of enterprise software
and Year 2000 compliance by customers and vendors. The reader should refer to
Part I, Item 1: "Forward Looking Statements" of the annual report on Form 10-K
for additional information regarding this matter.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Webco Industries, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, stockholders' equity and cash flows
present fairly, in all material respects, the financial position of Webco
Industries, Inc. and subsidiary at July 31, 1998 and 1997, and the results of
their operations and their cash flows for the three years in the period ended
July 31, 1998, in conformity with generally accepted accounting principles.
In addition, in our opinion, the financial statement schedule listed in the
index appearing under item 14(a)(2), presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements. 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 did not
audit the financial statements of Phillips & Johnston, Inc., a wholly-owned
subsidiary, as of December 31 1997, and for the years ended December 31, 1997
and 1996, which statements reflect total assets, revenues and net income
constituting 3.9 percent, 8.4 percent and 50.3 percent, respectively, as of
and for the year ended July 31, 1997 and 9.5 percent of revenue and 54.3
percent of net income, for the year ended July 31, 1996, of the related
consolidated totals. Those statements were audited by other auditors whose
report has been furnished to us, and our opinion, insofar as it relates to the
amounts included for Phillips & Johnston, Inc., is based solely on the report
of the other auditors. We conducted our audits of these statements in
accordance with generally accepted auditing standards which 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits and the report of the
other auditors provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Tulsa, Oklahoma
September 9, 1998
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Shareholders of
Phillips & Johnston, Inc.:
We have audited the accompanying balance sheets of Phillips & Johnston,
Inc. (an Illinois corporation) as of December 31, 1997 and 1996, and the
related statements of income, shareholders' equity, and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Phillips &
Johnston, Inc. as of December 31, 1997 and 1996, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
DUGAN & LOPATKA
Wheaton, Illinois
June 29, 1998
WEBCO INDUSTRIES, INC. AND SUBSIDIARY
BALANCE SHEETS
July 31, 1998 and 1997
(Dollars in thousands, except share amounts and par value)
1998 1997
ASSETS
Current assets:
Cash $ 266 $ 202
Accounts receivable, net 19,874 18,185
Inventories 27,775 29,393
Prepaid expenses 205 285
Deferred income tax asset 2,740 1,460
Total current assets 50,860 49,525
Property, plant and equipment, net 56,630 49,443
Notes receivable from related parties 1,774 1,582
Other assets, net 2,494 1,592
Total assets $ 111,758 $ 102,142
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 11,760 $ 11,380
Accrued liabilities 6,957 4,004
Current portion of long-term debt 1,282 304
Total current liabilities 19,999 15,688
Long-term debt 32,894 34,470
Deferred income tax liability 10,620 6,764
Commitments and contingencies (Note 7)
Stockholders' equity
Common stock, $.01 par value, 12,000,000 shares
authorized 7,169,000 shares issued and outstanding 72 72
Additional paid-in capital 36,179 36,179
Retained earnings 11,994 8,969
Total stockholders' equity 48,245 45,220
Total liabilities and stockholders' equity $ 111,758 $ 102,142
The accompanying notes are an integral part of the consolidated financial
statements.
WEBCO INDUSTRIES, INC. AND SUBSIDIARY
STATEMENTS OF OPERATIONS
For the Years Ended July 31, 1998, 1997 and 1996
(Dollars and shares in thousands, except per share amounts)
1998 1997 1996
Net sales $ 151,431 $ 128,593 $ 112,525
Cost of sales 122,945 108,365 95,366
Gross profit 28,486 20,228 17,159
Commission income (758) (842) (1,152)
Selling, general and administrative expenses 17,939 12,952 11,166
Special item: Write-off of Mill 3 cut-off equipment - 884 -
Income from operations 11,305 7,234 7,145
Interest expense 2,296 2,047 2,252
Income before income taxes 9,009 5,187 4,893
Provision for income taxes 2,802 1,256 1,126
Net income $ 6,207 $ 3,931 $ 3,767
Pro forma net income (1) $ 5,511 $ 3,179 $ 2,990
Net income per share
Basic $ .87 $ .55 $ .53
Diluted $ .86 $ .55 $ .53
Pro forma net income per share (1):
Basic $ .77 $ .44 $ .42
Diluted $ .76 $ .44 $ .42
Weighted average shares outstanding
Basic 7,169 7,169 7,169
Diluted 7,245 7,169 7,169
(1) Pro forma income taxes have been presented to compensate for the
S-Corporation tax status of P&J and were calculated using an effective
rate of 38% (34% Federal and 4% state).
The accompanying notes are an integral part of the consolidated financial
statements.
WEBCO INDUSTRIES, INC. AND SUBSIDIARY
STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended July 31, 1998, 1997 and 1996
(Dollars in thousands)
Additional Total
Common Paid-In Retained Stockholders'
Stock Capital Earnings Equity
Balances, July 31, 1995 $ 72 $ 35,701 $ 4,549 $ 40,322
Deferred tax benefit (Note 6) - 532 - 532
Purchase of treasury stock -
P&J (Note 9) - (54) (358) (412)
Distribution to shareholders - P&J - - (1,296) (1,296)
Net income - - 3,767 3,767
Balances, July 31, 1996 72 36,179 6,662 42,913
Distribution to shareholders - P&J - - (1,624) (1,624)
Net income - - 3,931 3,931
Balances, July 31, 1997 72 36,179 8,969 45,220
Distribution to shareholders - P&J - - (2,434) (2,434)
Elimination of duplicate equity
resulting from non-conforming
fiscal years (Note 2) - - (748) (748)
Net income - - 6,207 6,207
Balances, July 31, 1998 $ 72 $ 36,179 $ 11,994 $ 48,245
The accompanying notes are an integral part of the consolidated financial
statements.
WEBCO INDUSTRIES, INC. AND SUBSIDIARY
STATEMENTS OF CASH FLOWS
For the Years Ended July 31, 1998, 1997 and 1996
(Dollars in thousands)
1998 1997 1996
Cash flows from operating activities:
Net income $ 6,207 $ 3,931 $ 3,767
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 4,133 3,431 2,975
(Gain) loss on write-off and disposition
of property, plant and equipment 20 928 (53)
Deferred tax expense 2,566 1,196 730
(Increase) decrease in:
Accounts receivable (1,486) (3,862) (991)
Inventories 667 (6,077) 433
Prepaid expenses 158 60 295
Increase (decrease) in:
Accounts payable (59) (1,996) (1,722)
Accrued liabilities 2,892 262 (1,125)
Net cash provided by (used in)
operating activities 15,098 (2,127) 4,309
Cash flows from investing activities:
Capital expenditures (10,652) (9,112) (5,445)
Proceeds from sale of property,
plant and equipment 26 129 56
Advances to stockholders (38) (1,286) (5,092)
Repayments of stockholder advances - 124 5,092
Increase in other assets (1,282) (36) (746)
Net cash used in investing activities (11,946) (10,181) (6,135)
Cash flows from financing activities:
Proceeds from long-term debt 143,498 157,725 118,199
Principal payments on long-term debt (144,205) (144,616) (116,441)
Dividends paid (2,434) (1,885) (1,286)
Increase (decrease) in book overdrafts 53 722 709
Net cash provided by (used in )
financing activities (3,088) 11,946 1,181
Net change in cash 64 (362) (645)
Cash, beginning of period 202 564 1,209
Cash, end of period $ 266 $ 202 $ 564
Supplemental disclosure of cash flow information:
Cash paid during the year for interest, net of
amount capitalized of $517, $433, and $168
in 1998, 1997 and 1996, respectively $ 2,098 $ 2,027 $ 2,118
Income taxes $ - $ 262 $ 70
The accompanying notes are an integral part of the consolidated financial
statements.
WEBCO INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
MERGER - On June 29, 1998, Webco Industries, Inc. ("Webco" or the "Company")
merged with Phillips & Johnston, Inc. ("P&J"), a Chicago based sales
organization and value-added processor of tubular products. The transaction
has been accounted for under the pooling of interests method of accounting.
Accordingly, all historical financial information has been restated as if the
two entities have always been combined, with appropriate elimination of
intercompany transactions and balances. Additional disclosures about the
combination are presented in Note 2.
OPERATIONS - Webco is a specialty manufacturer of high-quality carbon steel
tubing and stainless steel tubing products designed to industry and customer
specifications. Webco's tubing products consist primarily of: welded carbon
heat exchanger tubing, welded boiler tubing, stainless tube and pipe, and
advanced carbon mechanical tubing for use in consumer durable and capital
goods. The Company's subsidiary, P&J, represents several manufacturers who
produce various non-competing mechanical and specialty tubular products made
from copper, brass, aluminum and stainless and carbon steel, among others.
This access to other tubing products allows the Company to better serve its
customers by offering a full range of tubing products. Through its QuikWater
division, the Company manufactures and markets a patented direct contact water
heater for commercial and industrial applications. The Company has three
production facilities in Oklahoma and Pennsylvania and five distribution
facilities in Oklahoma, Texas, Illinois and Michigan, serving more than 1,300
customers throughout North America.
CONCENTRATIONS - The Company maintains its cash in bank deposit accounts,
which at times may exceed the federal insurance limits. As of July 31, 1998
and 1997, the Company had cash in banks totaling $1,386,000 and $470,000 in
excess of federal depository insurance limits, respectively. The Company has
not experienced any losses on such accounts in the past.
ACCOUNTS RECEIVABLE - Accounts receivable represent short-term credit granted
to the Company's customers for which collateral is generally not required.
Accounts receivable at July 31, 1998 and 1997 are net of an allowance for
uncollectible amounts of $179,000 and $49,000, respectively. Credit risk on
receivables is considered by management to be limited due to the variety of
industries served and geographic dispersion of customers.
INVENTORIES - The Company values its inventories at the lower of cost or
market. Cost for raw materials, work-in-process, and finished goods
inventories are determined on the weighted average cost method; 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 straight-line
and
WEBCO INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued
accelerated methods over the following estimated useful lives: buildings and
improvements - 10 to 40 years, machinery and equipment - 3 to 25 years, and
furniture and fixtures - 3 to 10 years.
Depreciation expense for the years ended July 31, 1998, 1997 and 1996 amounted
to $3,917,000, $3,258,000 and $2,874,000, respectively. Fully depreciated
assets still in use at July 31, 1998 and 1997 amounted to $8,799,000 and
$8,080,000, respectively.
BOOK OVERDRAFTS - Included in accounts payable at July 31, 1998 and 1997 are
outstanding checks in excess of bank deposits totaling $2,193,000 and
$2,140,000, respectively.
SPECIAL ITEM - The special item reflected in the statement of operations for
fiscal year 1997 relates to the write-off of certain Mill 3 cut-off equipment,
which did not work to manufacturer specifications. The replacement equipment
was capitalized as new equipment upon its purchase and installation during 1997.
ACCOUNTING ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
EARNINGS PER SHARE - Earnings per share are calculated based on the number of
weighted average common shares outstanding, including the effect of dilutive
options, when applicable, in accordance with the computation, presentation and
disclosure requirements of Financial Accounting Standards Board Statement No.
128, "Earnings Per Share." Statement No. 128 was implemented by the Company
in the second quarter of 1998 and accordingly, prior periods have been
restated.
INCOME TAXES - The Company accounts for income taxes in accordance with
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.
SEGMENT REORTING - In 1998 Webco Industries, Inc. adopted Statement of
Financial Accounting Standards No. 131 ("FAS 131"), "Disclosures About
Segments of an Enterprise and Related Information". FAS 131 supersedes FAS 14
replacing the "industry segment" approach with the "management" approach. The
management approach designates the internal organization that is used by
management for making operating decisions and assessing performance as the
source of the Company's reportable segments. FAS 131 also requires
disclosures about products and services, geographic areas, and major customers.
The adoption of FAS 131 did not affect results of operations or financial
position but did affect the disclosure of segment information (see "Segment
Information" - Note 11).
WEBCO INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
2. BUSINESS COMBINATION
As previously discussed, in June 1998, Webco completed its merger with P&J.
In the transaction, Webco issued 830,000 shares of its common stock for all of
the common stock of P&J. The merger has been accounted for under the pooling
of interests method of accounting; accordingly, all historical financial
information has been restated as if the two entities have always been combined.
Because Webco and P&J had differing fiscal periods prior to the combination,
Webco's financial statements for the years ended July 31, 1997 and 1996 have
been combined with P&J's for the calendar years ended December 31, 1997 and
1996, respectively. P&J's 1998 financial statements were conformed to the
twelve months ended July 31 for purposes of consolidating with Webco's
financial statements for its year ended July 31, 1998.
As a result of the overlapping period created when P&J's calendar year was
conformed to a July 31 fiscal year, $748,000 of earnings of P&J (for the
period August 1997 through December 1997) are included in consolidated net
income for both fiscal years ended July 31, 1998 and 1997. Stockholders
equity has been adjusted so that the duplicate amount is reflected only once
in retained earnings.
Intercompany transactions and balances have been eliminated in the
consolidated statements presented herein. Such eliminations resulted in a
decrease to retained earnings of $115,000 at July 31, 1995 and did not
significantly change net income for any subsequent period. P&J inventories
have been revalued to conform to Webco's weighted average method from the last-
in, first-out (LIFO) method previously used by P&J. The adjustments to
conform this inventory accounting practice increased equity by $329,000 at
July 31, 1995, and did not significantly affect earnings of any subsequent
period.
Details of the results of operations for the previously separate companies for
the nine months ended April 30, 1998 (last period before combination) are:
Webco P&J Adjustments Combined
(Dollars in Thousands)
Net Sales $ 104,451 $ 13,192 $ (3,844)(a) $ 113,799
Net Income $ 3,260 $ 1,537 $ 30(b) $ 4,827
(a) Adjustment to eliminate intercompany sales.
(b) Adjustment to eliminate intercompany profits in inventory.
WEBCO INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
2. BUSINESS COMBINATION, Continued
The following table reconciles amounts of revenue and earnings previously
reported by Webco with the amounts presented in these financial statements:
Webco P&J Adjustments Combined
(Dollars in Thousands)
Fiscal year ended July 31, 1997:
Net Sales $ 117,739 $ 17,419 $ (6,565)(a) $ 128,593
Net Income $ 1,952 $ 2,054 $ (75)(b) $ 3,931
Fiscal year ended July 31, 1996:
Net Sales $ 101,867 $ 15,401 $ (4,743)(a) $ 112,525
Net Income $ 1,723 $ 2,031 $ 13(b) $ 3,767
(a) Adjustment to eliminate intercompany sales.
(b) Adjustment to eliminate intercompany profits in inventory and to
conform P&J inventory costing to the weighted average cost
method from the LIFO method.
Prior to the merger, P&J did not incur Federal or state income taxes as it
reported its income for income tax purposes as an S Corporation. Pro forma
net income amounts reflect consolidated earnings as if P&J accrued taxes at
the statutory (Federal and state) rate of 38%.
Merger-related transaction costs expensed in consolidated results for the
fiscal year ended July 31, 1998 amounted to $565,000 ($350,000 or $.05 per
diluted share after tax).
3. INVENTORIES
At July 31, 1998 and 1997, inventories priced using the weighted average cost
method were valued at $25,963,000 and $28,008,000, respectively. Structural
inventories and maintenance parts and supplies inventories, which are valued
using the FIFO method, amounted to $1,812,000 and $1,385,000 at July 31, 1998
and 1997, respectively.
WEBCO INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
3. INVENTORIES, Continued
Inventories at July 31, 1998 and 1997, consisted of the following:
July 31,
1998 1997
(Dollars in Thousands)
Raw materials $ 13,614 $ 18,666
Work-in-process 1,860 2,159
Finished goods 10,664 7,358
Maintenance parts and supplies 1,637 1,210
Total inventories $ 27,775 $ 29,393
4. PROPERTY, PLANT AND EQUPMENT
Net property, plant and equipment at July 31, 1998 and 1997, consisted of
the following:
July 31,
1998 1997
(Dollars in Thousands)
Land $ 1,436 $ 1,436
Buildings and improvements 14,571 11,496
Machinery and equipment 60,138 54,808
Furniture and fixtures 4,975 2,956
Construction in progress 5,261 4,896
86,381 75,592
Less accumulated depreciation and amortization (29,751) (26,149)
Net property, plant and equipment $ 56,630 $ 49,443
WEBCO INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
5. LONG-TERM DEBT
Long-term debt at July 31, 1998 and 1997, consisted of the following:
1998 1997
(Dollars In Thousands)
Term loan (A) $ 25,000 $ 25,000
Revolving loan (A) 6,620 8,281
Term loan (B) 126 174
Revolving loan (B) 800 -
Real estate and equipment term loans (C) 533 611
Other note payable (D) 806 -
Other 291 708
34,176 34,774
Less current maturities 1,282 304
Long-term debt $ 32,894 $ 34,470
Based upon the borrowing rates currently available to the Company for
borrowings with similar terms and average maturities, the Company believes
that the carrying amount of its long term debt approximates fair value.
(A) The Company has a $25 million term loan and a $20 million revolving
line of credit with its primary lender. The term loan and revolving credit
loan bear interest at the prime rate (8.50% at July 31, 1998) plus .25% and
prime rate, respectively. At the Company's option, borrowings under either
facility can bear interest at LIBOR (5.69% at July 31, 1998) plus 2.25% in the
case of the term loan borrowing or plus 2.0% in the case of revolving loan
advances. These loans mature on August 31, 2002 and are collateralized by
substantially all of the Company's assets other than the Sand Springs and Oil
City real estate. Principal payments on the term loan commence on August 1,
2000, at which time monthly payments of $208,000 plus interest are required.
The Company may have borrowings and outstanding letters of credit ($550,000 at
July 31, 1998) 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, 1998,
$12.9 million was available for borrowing under the line of credit.
Pursuant to the terms of the loan agreement, the Company is subject to
various restrictive covenants, including requirements to maintain a minimum
debt coverage ratio and to not exceed a ratio of indebtedness to net worth.
The covenants also limit capital expenditures and dividends. In addition, the
loan agreement provides for acceleration of the loans, at the option of the
lender, if F. William Weber and Dana S. Weber fail to possess the power to
direct or cause the direction of management and policies of the Company, or
the Weber Family ceases to own at least 35% of the outstanding voting stock,
WEBCO INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
5. LONG-TERM DEBT, Continued
or upon the occurrence of a material adverse change in the business. The loan
agreement also contains a pre-payment penalty ranging from 1% to 2% of amounts
outstanding under the term loan plus the revolving commitment if the debts are
prepaid prior to July 15, 2000.
(B) The Company's subsidiary, P&J, has a line-of-credit agreement
($2,000,000) and a term note ($500,000) with a bank. The line of credit
matures on April 30, 1999, bears interest at the prime rate (8.50% at July 31,
1998), and is collateralized by P&J's assets and guaranteed by Webco. The
term loan has monthly installments of $7,846 and bears interest at 8.10%.
(C) These loans were entered into with various public agencies and are
payable in monthly installments aggregating approximately $8,000 including
interest at 3%. The various notes are collateralized by the underlying real
estate and/or equipment and the guarantee of the principal stockholder/officer.
(D) This note is payable in 36 monthly installments of $30,000 through
March 31, 2000 and bears interest at 9%.
At July 31, 1998, the aggregate future maturities of long-term debt are as
follows: 1999 - $1,282,000; 2000 - $502,000; 2001 - $2,881,000;
2002 - $2,660,000; 2003 - $26,742,000; and thereafter $109,000.
6. INCOME TAXES
The provision for income taxes for fiscal 1998, 1997 and 1996 consists of the
following:
1998 1997 1996
(Dollars in Thousands)
Current:
Federal $ 115 $ - $ 326
State 111 60 70
Deferred:
Federal 2,305 1,071 632
State 271 125 98
Total income tax expense $ 2,802 $ 1,256 $ 1,126
Prior to merging with Webco on June 29, 1998, the P&J subsidiary was
treated as a Subchapter S Corporation for income tax purposes, with earnings
included in the personal income tax returns of its stockholders.
WEBCO INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
6. INCOME TAXES, Continued
The actual income tax expense for fiscal 1998, 1997 and 1996 differs from
income tax based on the federal statutory rate (34%) due to the following:
1998 1997 1996
(Dollars in Thousands)
Expected tax expense $ 3,063 $ 1,764 $ 1,664
State income taxes, net of federal benefit 386 185 168
Exclusion of S Corporation income - P&J (623) (673) (695)
Other (24) (20) (11)
Total income tax expense $ 2,802 $ 1,256 $ 1,126
At July 31, 1998 and 1997, deferred tax assets and deferred tax liabilities
consisted of the following:
1998 1997
(Dollars in Thousands)
Net current deferred tax assets (liabilities):
Accounts receivable $ 81 $ 24
Inventories 664 540
Accrued liabilities 1,476 896
Operating loss carry forwards, expiring in 2012 519 -
Net current deferred tax asset $ 2,740 $ 1,460
Net noncurrent deferred tax assets (liabilities):
Property plant and equipment $(11,007) $ (9,631)
Operating loss carry forwards, expiring in 2012 - 2,632
General business credit carry forward 189 189
Alternative minimum tax credit carry forward 446 321
Other (248) (275)
Net noncurrent deferred tax liability $(10,620) $ (6,764)
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.
WEBCO INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
7. COMMITMENTS AND CONTINGENCIES
LITIGATION - The Company is a party to various other lawsuits and claims
arising out of the ordinary course of its business. Management, believes 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 of these leases the
Company is required to pay property taxes, insurance, repairs and other costs
related to the leased property. At July 31, 1998, future minimum payments
under noncancelable leases accounted for as operating leases are $1,206,000 in
1999; $963,000 in 2000; $697,000 in 2001; $475,000 in 2002 and $362,000 in
2003. Total rent expense for all operating leases was $2,250,000, $1,879,000
and $1,595,000 in 1998, 1997 and 1996, 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 $225,000 per occurrence and retains a maximum aggregate liability of
$2,100,000 per two-year policy term with respect to all occurrences. The
Company has a letter of credit in the amount of $550,000 on file with the
State of Oklahoma Workers' Compensation Court, as required by self-insurance
regulations. Provisions for claims under both programs are accrued based upon
the Company's estimate of the aggregate liability for claims (including claims
incurred, but not yet reported).
PURCHASE COMMITMENTS - At July 31, 1998 and 1997, the Company was committed on
outstanding purchase orders for inventory approximating $19.0 million and
$18.9 million, respectively. Additionally, the Company had on its premises at
each of July 31, 1998 and 1997 raw material on consignment from certain
vendors valued at approximately $3.0 million.
8. EMPLOYEE BENEFIT PLANS
The Company maintains 401-K benefit plans covering all employees meeting
certain service requirements. The plans include 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 $439,000, $277,000 and $193,000 in
fiscal 1998, 1997 and 1996, respectively.
9. STOCKHOLDERS' EQUITY AND STOCK OPTIONS
In January 1994, the Company's stockholders approved the 1994 Stock Incentive
Plan (the "Plan"), in which directors, employees, and consultants are eligible
to participate. Four types of benefits may be granted, in any combination
under the Plan: incentive stock options, non-qualified stock options,
restricted stock, and stock appreciation rights. The Plan also provides for
certain automatic grants to outside directors. All options expire ten years
WEBCO INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
9. STOCKHOLDERS' EQUITY AND STOCK OPTIONS, Continued
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. In March 1998, the Company's Board of Directors voted to
increase the number of shares available for grant from 550,000 to 850,000
shares.
Activity under the Plan was as follows:
Number of Weighted Average
Shares Exercise Price
Balance, July 31, 1995 234,100 $ 13.11
Granted 200,300 6.43
Forfeited (161,600) 13.77
Balance, July 31, 1996 272,800 7.89
Granted 194,900 6.05
Forfeited (111,800) 9.36
Balance, July 31, 1997 355,900 6.42
Granted 188,600 7.24
Forfeited ( 30,000) 6.35
Balance, July 31, 1998 514,500 6.69
Exercisable, July 31, 1998 108,360 6.49
The weighted average exercise price of options granted to the vice-
chairman during 1997, which were at a price above the market value per share
at that date, was $6.74. For options outstanding as of July 31, 1998, the
range of exercise prices and weighted average remaining contractual life were
$5.25 to $9.25 and 8.27 years, respectively.
The Company has elected to follow APB Opinion No. 25, "Accounting for
Stock Issued to Employees," in accounting for its employee stock options
rather than the alternative fair value accounting provided for under SFAS No.
123, "Accounting for Stock-Based Compensation." Under
APB No. 25, because the exercise price of the Company's stock options is at
least equal to the market price of the underlying stock on the date of grant,
no compensation expense is recognized in the Company's financial statements.
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123. This information is required to be determined as if
the Company had accounted for its employee stock options granted subsequent to
July 31, 1995 under the fair value method of that statement. The fair
WEBCO INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
9. STOCKHOLDERS' EQUITY AND STOCK OPTIONS, Continued
value of options granted in fiscal years 1998, 1997 and 1996 reported below has
been estimated at the date of grant using a Black-Scholes option pricing model
with the following assumptions:
1998 1997 1996
Weighted average Life 4.3 years 4.1 years 4.9 years
Risk-free interest rate 5.88% 6.19% 5.41%
Expected volatility 56% 61% 61%
Expected dividend yield None None None
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions, including the expected stock price
volatility. Because the Company's options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in the
opinion of management, the existing models do not necessarily provide a
reliable single measure of fair value of its options. The weighted average
estimated fair value of employee stock options granted during 1998, 1997 and
1996 was $3.61, $3.18 and $3.63 per share, respectively. The weighted
average estimated fair value of employee stock options granted during 1997 to
the Company's vice-chairman, which were at a price above the market value per
share at that date, was $2.93.
For purposes of pro forma disclosures, the estimated fair value of
the options is amortized to expense over the options' vesting period. The
Company's pro forma information is as follows:
1998 1997 1996
Pro forma net income $ 5,296,000 $ 3,747,000 $ 3,618,000
Pro forma net income per share, diluted $ 0.82 $ 0.52 $ 0.50
The above SFAS No. 123 pro forma disclosures are not necessarily
representative of the effect SFAS No. 123 will have on the pro forma
disclosure of future years.
The purchase of treasury stock by P&J in January 1996 represented the
acquisition by P&J of shares of stock held by two of the Company's
shareholders. The purchase of treasury stock was recorded as a reduction of
retained earnings and these shares were canceled in 1998.
WEBCO INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
10. EARNINGS PER SHARE
In the second quarter of fiscal 1998 the Company adopted Statements of
Financial Accounting Standards No.128 ("FAS 128"). FAS 128 requires the
restatement of prior periods earnings per share to conform to the new standard.
The effect of adopting FAS 128 is to replace the captions "primary" and "fully
diluted" with "basic" and "diluted", and to simplify the calculation of
weighted average shares outstanding primarily by removing common stock
equivalents from the calculation of "basic" earnings per share. Presented
below is a reconciliation of the differences between actual weighted average
shares outstanding, which are used in computing basic earnings per share and
diluted weighted average shares, which are used in computing diluted earnings
per share.
1998 1997 1996
Basic EPS:
Weighted average shares outstanding 7,169 7,169 7,169
Effect of dilutive securities: Options 76 - -
Diluted EPS:
Diluted weighted average shares outstanding 7,245 7,169 7,169
Anti-dilutive options outstanding:
Number of options 8 356 273
Weighted average exercise price $ 9.05 $ 6.42 $ 7.89
11. SEGMENT INFORMATION
In 1998 Webco Industries, Inc. adopted FAS 131 "Disclosures about Segments of
an Enterprise and Related Information". The Company has two reportable
segments: tubing products and QuikWater, representing the Company's two
strategic business units offering different products. The Company internally
evaluates its business by facility, however, because of the similar economic
characteristics of the tubing operations, including the nature of products,
production processes and customers, those operations have been aggregated for
segment reporting purposes. The tubing products segment manufactures as well
as distributes tubular products principally made of carbon and stainless
steel. QuikWater manufactures a patented direct contact, high efficiency water
heater.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. The Company measures segment
profit or loss as segment income before income taxes. Information on the
Company's segments is as follows:
WEBCO INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
11. SEGMENT INFORMATION, Continued
Tubing
Products QuikWater Total
(Dollars in Thousands)
Fiscal year-ended July 31, 1998:
Revenues $ 149,810 $ 1,621 $ 151,431
Depreciation and amortization 4,059 74 4,133
Interest expense 2,214 82 2,296
Segment profit or (loss) 11,053 (2,044) 9,009
Segment assets 102,180 3,515 105,695
Capital expenditures 10,238 414 10,652
Fiscal year-ended July 31, 1997:
Revenues 127,483 1,100 128,593
Depreciation and amortization 3,405 26 3,431
Interest expense 2,029 18 2,047
Segment profit or (loss) 6,782 (1,595) 5,187
Segment assets 95,248 2,347 97,595
Capital expenditures 8,472 640 9,112
Fiscal year-ended July 31, 1996:
Revenues 111,869 656 112,525
Depreciation and amortization 2,975 - 2,975
Interest expense 2,252 - 2,252
Segment profit or (loss) 5,432 (539) 4,893
Segment assets 81,990 870 82,860
Capital expenditures 5,383 62 5,445
A reconciliation of the Company's segment information to the consolidated
financial statements is as follows:
1998 1997 1996
(Dollars in Thousands)
Total assets reported for segments $ 105,695 $ 97,595 $ 82,860
Assets not allocated to segments:
Current assets 3,211 1,947 2,853
Notes receivable and other assets 2,852 2,600 1,175
Total assets: $ 111,758 $ 102,142 $ 86,888
WEBCO INDUSTRIES, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
11. RELATED PARTY TRANSACTIONS
In October 1995 the Company entered into an agreement with an entity owned by
the majority stockholders to subcontract certain manufacturing services.
Payments made by the Company under the contract totaled $412,000 and $316,000
in fiscal 1998 and 1997. In addition, the
Company had a receivable balance of $500,000 and $367,000 at July 31, 1998 and
1997, respectively, for amounts paid on behalf of this entity.
The Company purchases certain specialty packaging and shipping materials from
an entity owned by the principal stockholder. Payments made by the Company
totaled $238,000 in fiscal 1998 and $200,000 in fiscal 1997.
Advances were made from time to time during fiscal 1998 and 1997 to the
principal stockholder with the highest amounts outstanding being $1,200,000 in
1998 and 1997. The balance outstanding at July 31, 1998 was $1,200,000 and at
July 31, 1997 was $1,162,000. The advances are subject to a three-year note
from the principal stockholder collateralized by certain assets having a
current market value at least double the highest outstanding balance advanced
pursuant to the note. The note bears interest at the prevailing rate under
the Company's loan agreement with its primary lender and is payable at
maturity of the note on August 15, 1999.
Other advances on various terms were made to certain executives during fiscal
1998, with the highest amount outstanding of $147,000 and the balance
outstanding at July 31, 1998 of $147,000.
During 1994, in the course of purchasing stock from the principal stockholder,
certain executives executed promissory notes payable to the principal
stockholder in the amount of $420,000, which, as amended, bear interest at
4.1%. The notes are collateralized by the underlying shares of common stock.
The principal stockholder subsequently assigned the executives' notes
receivable to the Company in order to liquidate certain advances and other
amounts owed by him to the Company.
A director of the Company is Chairman of the Board of a customer of the
Company. Annual sales to this company were approximately $5,281,000 in 1998,
$3,865,000 in 1997, and $1,565,000 in 1996 with outstanding receivable
balances of approximately $694,000 and $892,000 at July 31, 1998 and 1997,
respectively.
WEBCO INDUSTRIES, INC.
SUPPLEMENTAL QUARTERLY FINANCIAL DATA
(UNAUDITED)
(Dollars in thousands, except per share data)
Year Ended July 31, 1998
Quarters Ended
October 31, January 31, April 30, July 31, Total
1997 1998 1998 1998 Year
Net sales $34,538 $37,936 $41,325 $37,632 $151,431
Gross profit 5,290 6,777 8,741 7,678 28,486
Operating income 2,010 2,743 3,920 2,632 11,305
Net income 1,039 1,478 2,310 1,380 6,207
Pro forma net income (2) 845 1,304 2,083 1,279 5,511
Net income per diluted
common share $ .14 $ .21 $ .32 $ .19 $ .86
Pro forma net income per
diluted common share (2) $ .12 $ .18 $ .29 $ .18 $ .76
Weighted average shares
outstanding, diluted 7,231 7,209 7,262 7,298 7,245
Year Ended July 31, 1997
Quarters Ended
October 31, January 31, April 30, July 31, Total
1996 1997 1997 1997 Year
Net sales $31,708 $31,956 $32,090 $32,839 $128,593
Gross profit 4,747 4,960 4,731 5,790 20,228
Operating income 1,989 1,170(1) 1,925 2,150 7,234(1)
Net income 1,089 603 1,129 1,110 3,931
Pro forma net income (2) 902 412 893 972 3,179
Net income per diluted
common share $ .15 $ .08 $ .16 $ .15 $ .55
Pro forma net income per
diluted common share (2) $ .13 $ .06 $ .12 $ .14 $ .44
Weighted average shares
outstanding, diluted 7,169 7,169 7,169 7,169 7,169
Note: The above quarterly financial data have been restated to reflect the P&J
merger as though the two companies had always been combined and may not total
to the annual amounts because of rounding.
(1) Includes an $884,000 charge related to the replacement and write-off of
faulty equipment on the Company's Mill 3.
(2) Pro forma income taxes have been presented to compensate for the S-
Corporation tax status of P&J and were calculated using an effective rate
of 38% (34% Federal and 4% state).
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:
Report of Independent Accountants
Balance Sheets as of July 31, 1998 and 1997
Statements of Operations for each of the three years in the period ended
July 31, 1998
Statements of Changes in Stockholders' Equity for each of the three years
in the period ended July 31, 1998
Statements of Cash Flows for each of the three years in the period ended
July 31, 1998
Notes to Consolidated Financial Statements
Supplemental Quarterly Financial Data (Unaudited)
(2) Financial Statement Schedule:
Schedule II - Valuation and Qualifying Accounts
(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, as amended (incorporated by
reference to Exhibit 4.1 to the Company's Registration Statement on
Form S-8, No. 333-49219).
10.2 Loan and Security Agreement, dated as of July 15, 1997, between
American National Bank and Trust Company of Chicago, as agent,
certain financial institutions as lender, and the Company
(incorporated by reference to Exhibit 10.2 to the Company's Form
10-K dated July 31, 1997, File No. 0-23242).
10.3 Amendment No. 1 and Waiver Agreement to Loan and Security Agreement
dated July 15, 1997, between American National Bank and Trust Company
of Chicago, as agent, certain financial institutions as lender, and
the Company.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K - Continued
Exhibit
Number Description
10.4 Lease, dated October 22, 1996, between the Company and Baker
Performance Chemicals Incorporated (incorporated by reference to
Exhibit 10.3 to the Company's Form 10-K dated July 31, 1997, File
No. 0-23242).
10.5 Employment Agreement dated December 31, 1996, between the Company
and F. William Weber (incorporated by reference to Exhibit 10.4 to
the Company's Form 10-K dated July 31, 1997, File No. 0-23242).
10.6 Employment Agreement dated December 31, 1996, between the Company and
Dana S. Weber (incorporated by reference to Exhibit 10.5 to the
Company's Form 10-K dated July 31, 1997, File No. 0-23242).
10.7 Employment Agreement dated June 30, 1998, between the Phillips &
Johnston, Inc. Company and Christopher L. Kowalski.
10.8 Lease, dated March 16, 1998, between the Company and Tubular
Properties, Ltd.
10.9 Agreement and Plan of Reorganization dated as of June 29, 1998 by and
among Webco Industries, Inc., P&J Acquisition Corp., Phillips &
Johnston, Inc., Christopher L Kowalski and Robert N. Pressly
(incorporated by reference to Exhibit 99.1 to the Company's Form 8-K,
File No. 0-23242).
10.10 Loan and Security Agreement, dated as of April 9, 1997, between
American National Bank and Trust Company of Chicago, as agent,
certain financial institutions as lender, and Phillips & Johnston,
Inc.
23.1 Consent of PricewaterhouseCoopers, LLP
23.2 Consent of DUGAN & LOPATKA
27.1 Financial Data Schedule
Reports on Form 8-K:
On July 14, 1998 the Company filed a report 8-K, Item 2 announcing
the acquisition of Phillips & Johnston, Inc.
On September 11, 1998 the Company filed a report 8-K/A amending the
Form 8-K filed on July 14, 1998 to include the audited financial
statements of its newly acquired subsidiary, Phillips & Johnston,
Inc. and the related pro forma financial information.
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, 1998 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, 1998 By: /s/ F. William Weber
F. William Weber
Chairman, Chief Executive
Officer and Director
October 28, 1998 By: /s/ Dana S. Weber
Dana S. Weber
President, Chief Operating
Officer and Director
October 28, 1998 By: /s/ Michael P. Howard
Michael P. Howard
Chief Financial Officer
October 28, 1998 By: /s/ Christopher L. Kowalski
Christopher L. Kowalski
President-Phillips & Johnston,
Inc.
October 28, 1998 By: /s/ Frederick C. Ermel
Frederick C. Ermel
Director
October 28, 1998 By: /s/ Neven C. Hulsey
Neven C. Hulsey
Director
October 28, 1998 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, 1998
(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:
1996 126 (30) - 14 (1) 110
1997 110 (2) - (59)(1) 49
1998 49 139 - (9)(1) 179
(1) Amounts represent write-offs, net of recoveries.
Exhibit 10.3
AMENDMENT NO. 1
AND WAIVER AGREEMENT
TO LOAN AND SECURITY AGREEMENT
THIS AMENDMENT NO. 1 AND WAIVER AGREEMENT TO LOAN AND SECURITY AGREEMENT (this
"Amendment") is entered into as of October 1, 1998 by and among Webco
Industries, Inc. (the Borrower"), the financial institutions named on the
signature page hereto (the "Lenders") and American National Bank and Trust
Company of Chicago, as agent for the Lenders (the "Agent").
WITNESSETH:
WHEREAS, the Borrower, the Lenders and the Agent have entered into that
certain Loan and Security Agreement dated as of July 15, 1997 (as amended, the
"Loan Agreement");
WHEREAS, the Borrower, Phillips & Johnston, Inc., an Illinois corporation
("P&J") and P&J Acquisition Corp. ("Acquisition Sub") entered into that
certain Agreement and Plan of Reorganization dated as of June 26, 1998,
whereby the Borrower contributed shares of its capital stock to Acquisition
Sub, and Acquisition Sub merged with and into P&J, with P&J being the
surviving corporation and a wholly-owned subsidiary of the Borrower
(collectively, the "Acquisition");
WHEREAS, the Borrower, the Agent and the Lenders entered into that certain
letter agreement date June 29, 1998 whereby the Agent and the Lenders
consented to the Acquisition but only if the Borrower entered into amendments
with respect to the Loan Agreement and the Financing Agreements, and caused
P&J to enter into certain other Financing Agreements; and
WHEREAS, the Lenders and the Agent are willing so to amend the Loan Agreement,
and waive certain provisions therein, but only on the terms and subject to the
conditions set forth below;
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, the parties
hereto agree as follows:
1. Definitions. Terms defined in the Loan Agreement which are used herein
shall have the same meanings as are set forth in the Loan Agreement for such
terms unless otherwise defined herein.
2. Amendments. Subject to Section 3 below:
(a)(i) Subsection (a) is hereby amended by adding the following
definitions in their proper alphabetical place:
"Guaranty Agreement" shall mean any guarantee or similar arrangement of any
Liabilities, including the P&J Guaranty.
"P&J" shall mean Phillips & Johnson, Inc., an Illinois corporation.
"P&J Guaranty" shall mean that certain Guaranty Agreement dated as of October
1, 1998 by P&J in favor of the Agent and the Lenders.
(ii) Subsection 1.1 of the Loan Agreement is hereby further amended
by amending and restating the following definition:
"EBIDA" shall mean, as to any period, an amount equal to the sum of the
following for Borrower for such period: (i) earnings after income tax expense
(determined based on the valuation of inventory on an average cost basis);
plus (ii) interest expense subtracted in determining earnings; plus (iii)
depreciation, amortization, and other non-cash charges deducted in determining
earnings; and minus (iv) to the extent included in the earnings of Borrower
for such period, equity in undistributed earnings of Subsidiaries.
(b) Subsection 7.1 of the Loan Agreement is hereby amended and restated as
follows:
7.1 Financial Statements. Borrower and its Subsidiaries shall keep proper
books of record and account in which full and true entries will be made of all
dealings or transactions of or in relation to the business and affairs of
Borrower and its Subsidiaries, in accordance with GAAP, and Borrower shall
cause to be furnished to each Lender:
(A) Monthly. As soon as practicable, and in any event within thirty (30)
days (such period shall be forty-five (45) days in the case of the first two
fiscal months following the end of the Fiscal Year) after the end of each
fiscal month (including each fiscal month occurring during the 90-day delivery
period applicable to the delivery of annual financial statements of Borrower
and its Subsidiaries furnished to Lenders pursuant to Subsection 7.1(B) hereof):
(i) statements of income and cash flow of each of Borrower and each of its
Subsidiaries, and consolidated statements of income and cash flow of Borrower
and its Subsidiaries for such fiscal month and for the period from the
beginning of the then current Fiscal Year to the end of such fiscal month and
balance sheets of Borrower and each of its Subsidiaries, and consolidated
balance sheets of Borrower and its Subsidiaries as of the end of such fiscal
month, setting forth in each case, in comparative form, figures (1) in the
case of statements, for the corresponding periods in the preceding Fiscal Year
and (2) in the case of balance sheets, as of a date one year earlier, all in
reasonable detail and certified as accurate by an Authorized Officer pursuant
to a certificate in the form of Exhibit L attached hereto, subject to changes
resulting from normal year-end adjustments;
(ii) statements of Borrower and each of its Subsidiaries, and consolidated
statements of Borrower and each of its Subsidiaries, each in which the actual
cash flow and income for such fiscal month and for the period from the start
of the then current Fiscal Year to the end of such fiscal month, and the
actual balance sheets at the end of such fiscal month (in each case as
required to be delivered pursuant to Subsection 7.1(A)(i) hereof) are compared
with the corresponding projected statements of income and cash flow and
balance sheets for such periods and time furnished to Lenders pursuant to
Subsection 7.1(C) below, in each case in the same format as the audited
statements of income and cash flow and the audited balance sheet;
(iii) (a) as requested by Agent or any Lender, copies of operating statements
of Borrower and each of its Subsidiaries, and consolidated operating
statements of Borrower and its Subsidiaries, each for such fiscal month
prepared by Borrower and its Subsidiaries for internal use, including, without
limitation, statements of cash flow, purchases and sales of inventory and
other similar data, and (b) a comparison of actual cash flow and Capital
Expenditures with amounts budgeted for such fiscal month;
(iv) calculations setting forth the compliance with the financial
covenants set forth in Subsection 8.15 hereof for the most recently completed
fiscal quarter; and
(v) in the event that any of the foregoing statements indicate that
Borrower or any Subsidiary has varied in any material respect from any
financial projections provided by Borrower to Lenders, a statement of
explanation of such deviation from an Authorized Officer;
(B) Annual. As soon as practicable and in any event within ninety (90)
days after the end of each Fiscal Year of Borrower and its Subsidiaries: (i)
statements of income, stockholders equity and cash flow of Borrower and each
of its Subsidiaries, (ii) consolidated statements of income, stockholders
equity and cash flow of Borrower and its Subsidiaries for such Fiscal Year,
(iii) balance sheets of Borrower and each of its Subsidiaries, and (iv)
consolidated balance sheets of Borrower and its Subsidiaries as of the end
of such Fiscal Year, setting forth in each case, in comparative form,
corresponding figures for the period covered by the preceding annual audit
(in the case of statements) and as of the end of the preceding Fiscal Year
(in the case of balance sheets), all in reasonable detail and satisfactory
in scope to Lender and audited by independent certified public accountants
selected by Borrower and reasonably satisfactory to Agent, whose opinion
shall be in scope and substance satisfactory to Agent;
(C) Budget. As soon as practicable, and in any event, before the start of
each Fiscal Year of Borrower and its Subsidiaries, annual budgets of Borrower
and each of its Subsidiaries for the next Fiscal Year, a consolidated annual
budget of Borrower and its Subsidiaries for the next Fiscal Year, and within
the next 90 days, a budget for the succeeding two Fiscal Years, in reasonable
detail (on a fiscal month basis for the immediately succeeding Fiscal Year),
including statements of anticipated income and cash flow and balance sheets of
each of Borrower and each of its Subsidiaries, and consolidated statements of
anticipated income and cash flow and balance sheets of Borrower and its
Subsidiaries for the succeeding three (3) Fiscal Years (on a fiscal month
basis for the immediately succeeding Fiscal Year) in reasonable detail, and a
detailed statement of the methods and assumptions used in the preparation of
such budget;
(D) Letters from Accountants and Consultants. As soon as practicable and
in any event within ten (10) days of delivery to Borrower, a copy of (i) each
"Management Letter" prepared by Borrower's independent certified public
accountants in connection with the financial statements referred to in
Subsection 7.1(B) hereof and (ii) to the extent that such letters may from
time to time be issued by Borrower's independent certified public accountants
or other management consultants (collectively, "Accounting Systems Letters"),
any letter issued by Borrower's independent certified public accountants or
other management consultants with respect to recommendations relating to
Borrower's or any of its Subsidiaries' financial or accounting systems or
controls;
(E) Default Notices. As soon as practicable (but in any event not more
than five (5) days after any officer of Borrower or any Subsidiary obtains
knowledge of the occurrence of an event or the existence of a circumstance
giving rise to an Event of Default or a Default), notice of any and all Events
of Default or Defaults hereunder;
(F) List of Account Debtors. At the request of Agent, names, addresses
and phone numbers of Borrower's Account Debtors;
(G) Information Provided to Shareholders and Other Information. Promptly
upon transmission thereof, copies of all such financial statements, proxy
statements, notices and reports as it shall send to its public stockholders
and copies of all registration statements and all reports and filings which it
files with the Securities and Exchange Commission (or any governmental body or
agency succeeding to the functions of the Securities and Exchange Commission)
and with reasonable promptness, such other business or financial data as Agent
may reasonably request; and
(H) Other Information. With reasonable promptness, such other business or
financial data as Agent or any Lender may reasonably request.
Borrower further agrees that upon Borrower's receipt of any Accounting Systems
Letters wherein such accountants or consultants have made recommendations for
improvements to Borrower's or any of its Subsidiaries' financial or accounting
systems or controls, Borrower promptly shall, or shall cause such Subsidiary
to, commence actions to correct or cause to be corrected any material defects
in or make improvements to such financial or accounting systems or controls
unless Agent otherwise consents or Borrower reasonably disagrees with the need
for such actions.
All financial statements delivered to Lenders pursuant to the requirements of
this Subsection 7.1 (except where otherwise expressly indicated) shall be
prepared in accordance with GAAP (subject in the case of interim financial
statements to the lack of footnotes and normal year-end adjustments)
consistently applied, except for changes therein with which the independent
certified public accountants issuing the opinion on the financial statements
delivered pursuant to Subsection 7.1(B) hereof have previously concurred in
writing. Together with each delivery of financial statements required by
Subsections 7.1(A) and 7.1(B) hereof, Borrower shall deliver to Lenders a
certificate of an Authorized Officer of Borrower in the form attached hereto
as Exhibit L setting forth in such detail as is reasonably acceptable to Agent
calculations with respect to Borrower's compliance with each of the financial
covenants contained in this Agreement and stating that there exists no Default
or Event of Default, or, if any Default or Event of Default exists, specifying
the nature and the period of existence thereof and what action Borrower
proposes to take with respect thereto. Together with each delivery of
financial statements required by Subsection 7.1(B) hereof, Borrower shall
deliver to Lenders a certificate of the independent certified public
accountants who performed the audit in connection with such statements stating
that in making the audit necessary to the issuance of a report on such
financial statements, they have obtained no knowledge of any Default or Event
of Default, or, if such accountants have obtained knowledge of a Default or
Event of Default, specifying the nature and period of existence thereof. Such
accountants shall not be liable by reason of any failure to obtain knowledge
of any Default or Event of Default which would not be disclosed in the
ordinary course of an audit.
Each Lender shall exercise reasonable efforts to keep such information, and
all information acquired as a result of any inspection conducted in accordance
with Subsection 7.2 hereof, confidential, provided that each Lender may
communicate such information (a) to any other Person in accordance with the
customary practices of commercial banks relating to routine trade inquiries,
(b) to any regulatory authority having jurisdiction over Lenders, (c) to any
other Person in connection with any Lenders sale of any participations in the
Liabilities or assignment of any rights and obligations of any Lender under
this Agreement and the other Financing Agreements, (d) to any other Person in
connection with the exercise of Agents or any Lender's rights hereunder or
under any of the other Financing Agreements, (e) to any Person in any
litigation in which Agent or any Lender is a party, (f) to any other Lender,
or (g) any other Person if Agent or any Lender believes in Good Faith that
disclosure is necessary or appropriate to comply with any applicable law, rule
or regulation or in response to a subpoena, order or other legal process or
informal investigative demand, whether issued by a court, judicial or
administrative or legislative body or committee or other governmental
authority. Notwithstanding the foregoing, information shall not be deemed to
be confidential to the extent such information (i) was already lawfully in the
possession of any Lender or Agent prior to December 31, 1996, (ii) is
available in the public domain, (iii) becomes available in the public domain
other than as a result of unauthorized disclosure by Agent or a Lender or (iv)
is acquired from a Person not known by a Lender or Agent to be in breach of an
obligation of secrecy to Borrower. Borrower authorizes Agent and each Lender
to discuss the financial condition of Borrower or any Subsidiary with
Borrower's independent certified public accountants and agrees that such
discussion or communication shall be without liability to Agent, such Lender
or Borrower's independent certified public accountants.
(c) Subsection 7.9 of the Loan Agreement is hereby amended and restated as
follows:
7.9 Notice of Suit or Adverse Change in Business. Borrower shall, and
shall cause its Subsidiaries to, as soon as possible, and in any event within
five (5) days after any officer of Borrower or any Subsidiary learns of the
following, give written notice to each Lender of (i) any material
proceeding(s) (including, without limitation, litigation, arbitration or
governmental proceedings) being instituted or threatened to be instituted by
or against Borrower or any Subsidiary in any federal, state, local or foreign
court or before any commission or other regulatory body (federal, state, local
or foreign), (ii) notice that Borrower's or any Subsidiary's operations are in
material noncompliance with requirements of applicable federal, state or local
environmental, health and safety statutes and regulations, (iii) notice that
Borrower, any Subsidiary or any guarantor is subject to federal or state
investigation evaluating whether any material remedial action is needed to
respond to the release of any hazardous or toxic waste, substance or
constituent, or other substance into the environment, (iv) notice that any
material portion of the properties or assets of Borrower, any Subsidiary or
any guarantor are subject to an Environmental Lien, (v) any material adverse
change in the business, assets or condition, financial or otherwise, of
Borrower, and (vi) any changes in the locations of any Collateral from the
locations listed on Schedule 3.15.
(d) Subsection 7.11 of the Loan Agreement is hereby amended and restated
as follows:
7.10 Environmental Laws. If Borrower or any Subsidiary shall (a) receive
notice that any violation of any federal, state or local environmental law or
regulation may have been committed or is about to be committed by Borrower or
any Subsidiary, (b) receive notice that any administrative or judicial
complaint or order has been filed or is about to be filed against Borrower or
any Subsidiary alleging a violation of any federal, state or local
environmental law or regulation or requiring Borrower or any Subsidiary to
take any action in connection with the release of toxic or hazardous
substances into the environment or (c) receive any notice from a federal,
state, or local governmental agency or private party alleging that Borrower or
any Subsidiary may be liable or responsible for any material amount of costs
associated with a response to or cleanup of a release of a toxic or hazardous
substance into the environment or any damages caused thereby, Borrower shall
provide Agent with a copy of such notice within fifteen (15) days after
Borrower's or such Subsidiary's receipt thereof. Within fifteen (15) days
after Borrower or any Subsidiary has learned of the enactment or promulgation
of any federal, state or local environmental law or regulation which may
result in any material adverse change in the condition, financial or
otherwise, of Borrower, Borrower shall provide Agent with notice thereof.
(e) Subsection 8.1 of the Loan Agreement is hereby amended and restated as
follows:
8.1 Encumbrances. Except as set forth on Schedule 8.1 hereto, or
contemplated herein, neither Borrower nor any Subsidiary will create, incur,
assume or suffer to exist any security interest, mortgage, pledge, lien or
other encumbrance of any nature whatsoever on any of its assets, including,
without limitation, the Collateral, other than: (i) involuntary liens on real
property (and not personal property of Borrower or any Subsidiary), either not
yet due or the validity of which is being contested in good faith by
appropriate proceedings, and as to which Borrower or such Subsidiary shall, if
appropriate under GAAP, have set aside on its books and records adequate
reserves; (ii) deposits under workmen's compensation, unemployment insurance,
social security and other similar laws, or to secure the performance of bids,
tenders or contracts (other than for the repayment of borrowed money) or to
secure indemnity, performance or other similar bonds for the performance of
bids, tenders or contracts (other than for the repayment of borrowed money) or
to secure statutory obligations or surety or appeal bonds, or to secure
indemnity, performance or other similar bonds in the ordinary course of
business; (iii) the liens and security interests in favor of Agent; (iv) liens
which arise by operation of law, other than Environmental Liens; (v) zoning
restrictions, easements, licenses, covenants and other restrictions affecting
the use of real property; (vi) liens securing purchase money security
interests permitted under Subsection 8.2(iii) hereof; (vii) consignments of
goods to Borrower provided such consignment arrangement is permitted by
Subsection 3.17; (viii) consignment of goods to any Subsidiary; (ix) liens on
assets of P&J securing indebtedness of P&J to American National Bank and Trust
Company of Chicago and its successors, not to exceed $2,000,000 in aggregate
amount at any time outstanding; and (x) other liens and encumbrances on
property which are not in the aggregate in excess of $150,000 or, which do
not, in Agent's sole determination, (a) materially impair the use of such
property, or (b) materially lessen the value of such property for the purposes
for which the same is held by Borrower or such Subsidiary. Borrower shall
promptly give Lender notice of any liens of a type referred to in clause (i)
above (other than liens for taxes not yet due).
(f) Subsection 8.2 of the Loan Agreement is hereby amended and restated as
follows:
8.2 Indebtedness. Except as set forth on Schedule 8.2 attached hereto,
Borrower shall not, and Borrower shall not permit any of its Subsidiaries to,
incur, create, assume, become or be liable in any manner with respect to, or
permit to exist, any Indebtedness, except (i) the Liabilities, (ii) unsecured
indebtedness not to exceed $250,000 in the aggregate for Borrower and its
Subsidiaries at any time outstanding incurred on terms reasonably acceptable
to Agent, (iii) obligations of P&J in favor of Agent and the Lenders under the
P&J Guaranty, (iv) indebtedness not to exceed $500,000 in the aggregate for
Borrower and its Subsidiaries outstanding at any time incurred in connection
with the purchase of any hereafter acquired Equipment constituting office or
data processing equipment not attached to production equipment so long as
such indebtedness is used to finance not more than 100% of the purchase price
of such property and provided that, after giving effect to the incurrence of
such indebtedness, no Default or Event of Default has occurred and is
continuing, (v) indebtedness owed by Borrower to P&J permitted under
Subsection 8.4, (vi) indebtedness by P&J to Borrower permitted under
Subsection 8.4, and (vii) obligations under guaranty agreements not to exceed
$4,000,000 made by Borrower in favor of ANB and certain other parties
guarantying obligations of P&J under the financing arrangements described on
Schedule 8.2.
(g) Subsection 8.3 of the Loan Agreement is hereby amended and restated as
follows:
8.3 Consolidations, Mergers or Acquisitions. Neither Borrower nor any
Subsidiary shall recapitalize or consolidate or merge with, or otherwise
acquire all or substantially all of the assets or properties of, any other
Person; provided, however, (i) P&J may merge with and into Borrower upon ten
(10) days prior written notice to Lenders, provided that the Borrower is the
surviving corporation and no Default or Event of Default exists or will occur
as a result thereof, or (ii) Borrower may acquire the assets of any Person
that constitute a business in the same general line of business as that
presently conducted by Borrower (each such acquisition by Borrower of such
assets that is permitted by this Agreement is referred to herein as a
"Permitted Acquisition"), provided:
(A) The aggregate Acquisition Purchase Price (as defined herein) of all
Permitted Acquisitions in any Fiscal Year shall not exceed $3,000,000 (for
purposes of this Subsection 8.3, "Acquisition Purchase Price" shall mean the
total purchase price of any single acquisition of assets permitted by this
Subsection 8.3, calculated as the sum of (i) the amount of cash (or capital
stock of Borrower) paid or payable by Borrower in connection with the
Permitted Acquisition, including, without limitation, amounts paid or payable
as the deferred purchase price or under noncompete agreements, plus (ii) the
aggregate amount of all liabilities and obligations assumed by Borrower in
connection with such acquisition of assets);
(B) The Acquisition Purchase Price is paid solely in cash or capital stock
of the Borrower, or by an assumption of liabilities by Borrower;
(C) Borrower shall have provided to each Lender not less than thirty (30)
days prior to the consummation of any Permitted Acquisition, written notice
thereof together with all agreements and other documents to be executed in
connection therewith and all other information related to such Permitted
Acquisition requested by any Lender;
(D) Borrower shall have executed and delivered to Agent all financing
statements or other documents as Agent may request, in form and substance
satisfactory to Agent, to perfect and keep perfected a first priority security
interest in the assets to be purchased pursuant to any Permitted Acquisition;
(E) After giving effect to the Permitted Acquisition and the payment of
the Acquisition Purchase Price, Borrower shall have Excess Availability of at
least $5,000,000; and
(F) Both before and after giving effect to the Permitted Acquisition, no
Default or Event of Default shall exist.
(h) Subsection 8.4 of the Loan Agreement is hereby amended and restated as
follows:
8.4 Investments or Loans. Borrower shall not, and Borrower shall not
permit any of its Subsidiaries to, make or permit to exist investments or
loans in or to any other Person, except (i) investments in short-term direct
obligations of the United States Government, (ii) investments in negotiable
certificates of deposit issued by any Lender or an affiliate of a Lender or by
any other bank satisfactory to Agent, in its reasonable discretion, and
payable to the order of Borrower or to bearer and delivered to Agent, (iii)
investments in commercial paper rated A1 or P1, (iv) advances and
reimbursements for travel, entertainment and other reasonable and customary
out-of-pocket expenses to Borrower's or its Subsidiaries officers, directors
or employees incurred in the ordinary course of Borrower's or its
Subsidiaries business, (v) investments of Borrower in P&J as of the date
hereof, (vi) obligations due from P&J to Borrower representing amounts due to
Borrower for goods sold or services rendered in the ordinary course of
business of Borrower on terms not materially less favorable to Borrower than
Borrower would obtain in an arms-length transaction, provided that (a) any
such obligation is paid in full within thirty (30) days of the transaction
giving rise thereto, and (b) all such intercompany obligations due from P&J to
Borrower do not at any time exceed $2,000,000 in the aggregate, (vii)
advances and loans from P&J to Borrower, and (viii) the existing loan by
Borrower to F. William Weber described on Schedule 8.11 hereto.
(i) Subsection 8.5 of the Loan Agreement is hereby amended and restated as
follows:
8.5 Guarantees. Except as contemplated herein, Borrower shall not, and
Borrower shall not permit any of its Subsidiaries to, guarantee, endorse or
otherwise in any way become or be responsible for obligations of any other
Person, whether by agreement to purchase the indebtedness of any other Person
or through the purchase of goods, supplies or services, or maintenance of
working capital or other balance sheet covenants or conditions, or by way of
stock purchase, capital contribution, advance or loan for the purpose of
paying or discharging any indebtedness or obligation of such other Person or
otherwise, except (i) endorsements of negotiable instruments for collection in
the ordinary course of business, and (ii) as listed on Schedule 8.5 hereto.
(j) Subsection 8.8 of the Loan Agreement is hereby amended and restated as
follows:
8.8 Dividends and Stock Redemptions. Borrower shall not, and Borrower
shall not permit any of its Subsidiaries to, without the prior written consent
of the Required Lenders, directly or indirectly, (i) redeem, purchase or
otherwise retire any of its shares of capital stock, or enter into any
agreement to redeem, purchase or otherwise retire any of its shares of capital
stock, (ii) declare or pay any dividends in any Fiscal Year on any class or
classes of capital stock, (iii) return capital of Borrower or any Subsidiary
to its stockholders, or (iv) make any other distribution on or in respect of
any shares of any class of capital stock of Borrower or any Subsidiary,
including without limitation any distribution or payment on or in respect of
any stock appreciation rights, or enter into any agreement to make any such
distribution or payment (clauses (i) through (iv) are hereinafter collectively
referred to as "Dividends and Distributions"); provided, however, that if no
Default or Event of Default has occurred and is continuing or would occur as
a result thereof, then (i) Borrower may make cash payments for the redemption
or repurchase of capital stock of Borrower, provided that all such cash
payments do not exceed $500,000 in the aggregate in any Fiscal Year and
Borrower may otherwise redeem or repurchase capital stock of Borrower with
other capital stock of the Borrower, and (ii) any Subsidiary may declare and
pay (A) cash dividends and distributions to Borrower, and (B) stock dividends
if any pledge agreement from Borrower to Agent is amended to reflect the
addition of such shares and such shares are delivered to the Agent, along with
stock powers executed in blank.
(k) Subsection 8.11 of the Loan Agreement is hereby amended and restated
as follows:
8.11 Transactions with Subsidiaries and Affiliates. Except as expressly
contemplated by Subsections 8.1, 8.2, 8.3, 8.4, 8.5 and 8.8, Borrower will
not, and will not permit any of its Subsidiaries to, enter into any
transaction with any Affiliate, including, without limitation: (a) the making
of any loans to, or the payment of any bonuses, fees or other money to, any
Affiliate, and (b) the purchase, sale or exchange of property or the rendering
of any service to any Subsidiary or Affiliate, except for (i) salaries and
bonuses paid to officers of Borrower or any Subsidiary, and (ii) the
transactions listed on Schedule 8.11, to the extent the same are in the
ordinary course of and pursuant to the reasonable requirements of Borrower's
and such Subsidiary's business and upon fair and reasonable terms no less
favorable to Borrower or such Subsidiary than Borrower or such Subsidiary
would obtain in a comparable arm's-length transaction with an unaffiliated
person or corporation. The term "Affiliate" as used in this Subsection 8.11
only shall have the meaning in Subsection 1.1 and shall also include (i) any
officer, director, employee or stockholder of any Affiliate of Borrower, and
(ii) any Person related to any such Person described in clause (i) of this
Subsection within the third degree of consanguinity.
(l) Subsection 8.13 of the Loan Agreement is hereby amended and restated
as follows:
8.12 Fiscal Year. Borrower shall not, and shall not permit any Subsidiary
to, change its Fiscal Year, provided that P&J may change its Fiscal Year to
July 31.
(m) Subsection 8.14 of the Loan Agreement is hereby amended and restated
as follows:
8.13 Subsidiaries. Borrower shall not form or acquire any Subsidiaries
other than P&J.
(n) Subsection 8.15 of the Loan Agreement is hereby amended and restated
as follows:
8.15 Financial Covenants. Borrower shall not:
(A) Debt Coverage Ratio. Permit its Debt Coverage Ratio for any twelve
month period ending with the last day of a fiscal quarter ending on or after
July 31, 1997 to be less than 2.5 to 1.0. As used herein the term "Debt
Coverage Ratio" shall mean for any period, without duplication, Borrower's
ratio of (A) EBIDA to (B) an amount equal to the sum of the following for such
period: (i) the sum of interest expense; plus (ii) the sum of all principal
payments on Indebtedness of Borrower, other than required principal payments
on the Revolving Loan; plus (iii) the aggregate amount of all Dividends and
Distributions (except to the extent the same are (A) payable solely in capital
stock of Borrower or any of its Subsidiaries, or (B) are payable from any
Subsidiary to Borrower).
(B) Leverage Ratio. Permit its Leverage Ratio to at any time exceed .875
to 1.0. As used herein the term "Leverage Ratio" shall mean, at any time,
Borrowers ratio of (i) Indebtedness to (ii) net worth minus Borrower's
investment in, and loans or advances from, Borrower to any Subsidiary at such
time.
(o) Subsections 9.1(H), (I), (J), (K) and (O) are hereby amended and
restated as follows:
(G) a proceeding under any bankruptcy, reorganization, arrangement of
debt, insolvency, readjustment of debt or receivership law or statute is filed
(i) against Borrower or any of its Subsidiaries and an adjudication or
appointment is made or order for relief is entered, or such proceeding remains
undismissed for a period in excess of sixty (60) days, or (ii) by Borrower or
any of its Subsidiaries or Borrower or any of its Subsidiaries makes an
assignment for the benefit of creditors or Borrower or any of its Subsidiaries
takes any corporate action to authorize any of the foregoing;
(H) Borrower or any of its Subsidiaries voluntarily or involuntarily
dissolves or is dissolved, terminates or is terminated;
(I) Borrower or any of its Subsidiaries becomes insolvent or fails
generally to pay its debts as they become due;
(J) Borrower or any of its Subsidiaries is enjoined, restrained, or in any
way prevented by the order of any court or any administrative or regulatory
agency from conducting all or any part of its business affairs;
(O) (i) F. William Weber and Dana S. Weber shall fail to possess the power
to direct or cause the direction of the management and policies of Borrower,
(ii) F. William Weber, Martha A. Weber, Dana S. Weber, Kimberly A.W. Frank,
Ashley Roye Weber or any of their lineal descendants shall cease to own
beneficially (as defined in Rule 13d-3 under the Securities Exchange Act of
1934, as amended) 35% of the combined voting power of all classes of capital
stock of Borrower having the power to elect directors of Borrower, (iii) any
Change of Control (as defined in the Officer Employment Contracts, dated as of
December 31, 1996, between Borrower and each of F. William Weber and Dana S.
Weber, as such agreements are in effect on January 1, 1997) shall occur, or
(iii) Borrower shall cease to own 100% of the issued and outstanding capital
stock of P&J;
(p) Schedules 8.1, 8.2, 8.5 and 8.11 are amended and restated by replacing
such Schedules with Schedules 8.1, 8.2, 8.5 and 8.11 attached hereto, and
attached Schedule 8.5 is added.
3. Waivers and Agreements. Effective as of the Effective Date, Lenders
hereby waive the Events of Default (i) arising under Subsection 7.1(C) of the
Loan Agreement solely as a result of the failure of Borrower to deliver its
annual budget for the 1999 Fiscal Year to each Lender, provided that Borrower
delivers its annual budget to each Lender on or before September 9, 1998, and
(ii) solely as a result of the failure of Borrower to enter into this
Amendment and the additional Financing Agreements contemplated hereby by July
31, 1998 as required by that certain letter agreement dated June 29, 1998
among Borrower and the Lenders
4. Conditions of Effectiveness. Section 2 of this Amendment shall become
effective on the date (the "Effective Date") that the Agent has received all
of the following documents, each such document to be in form and substance
satisfactory to the Agent:
(a) seven (7) copies of this Amendment executed by each of the parties
hereto;
(b) seven (7) copies of a Pledge Agreement substantially in the form of
Exhibit A hereto executed by an authorized officer of the Borrower (the
"Pledge Agreement") and all stock certificates evidencing the shares of stock
described in the Pledge Agreement together with a stock power executed in
blank for such shares;
(c) seven (7) copies of a Guaranty Agreement substantially in the form of
Exhibit B hereto executed by an authorized officer of P&J (the "Guaranty
Agreement");
(d) seven (7) copies of certificates of an assistant secretary or
secretary of each of Borrower and P&J as to the resolutions of their
respective boards of directors, and if necessary, shareholders authorizing the
execution, delivery and performance of this Amendment, the Pledge Agreement,
the Guaranty Agreement, and the other documents contemplated hereby, with
their respective certificates or articles of incorporation (copies attached),
certified by the secretary of state of the state of such Person's
incorporation, bylaws (copies attached), and the incumbency and specimen of
the officers of such Person authorized under the resolutions referred to above;
(e) seven (7) copies of opinions of counsel to Borrower and P&J as to such
matters as Agent and its counsel may request and in form and substance
satisfactory to Agent and its counsel; and
(f) such other documents, certificates, agreements, and items as the Agent
may reasonably request in connection with this Amendment.
5. Representations, Warranties and Agreements of the Borrower.
(a) The Borrower represents and warrants that this Amendment, the Loan
Agreement as amended hereby, and the Pledge Agreement, constitute legal, valid
and binding obligations of the Borrower and are enforceable against the
Borrower in accordance with their terms, except as enforcement may be limited
by bankruptcy, insolvency, reorganization or other similar laws affecting the
enforcement of creditors' rights generally or by general equitable principles.
The Borrower further represents and warrants that the Guaranty Agreement
constitutes the legal, valid and binding obligation of P&J enforceable against
P&J in accordance with its terms, except as enforcement may be limited by
bankruptcy, insolvency, reorganization or other similar laws affecting the
enforcement of creditors' rights generally or by general equitable principles.
(b) The Borrower hereby reaffirms all covenants, representations and
warranties made in the Loan Agreement as amended hereby. The Borrower hereby
agrees that all covenants, representations and warranties made in the Loan
Agreement shall be deemed to have been remade as of the date hereof and (if
different) the Effective Date.
(c) The Borrower represents and warrants that as of the date hereof, and
(if different) as of the Effective Date, there exists no Default or Event of
Default after giving effect to this Amendment, the Pledge Agreement, the
Guaranty Agreement and consummation of the transactions contemplated hereby
and thereby.
6. Reference to the Effect on the Loan Agreement.
(a) On and after the Effective Date , (i) each reference in the Loan
Agreement to "this Agreement," "hereunder," "hereof," "herein," or words of
like import shall mean and be a reference to the Loan Agreement as amended
hereby, and (ii) each reference to the Loan Agreement in all other Financing
Agreements shall mean and be a reference to the Loan Agreement, as amended
hereby.
(b) Except as specifically amended above, the Loan Agreement, and all
other documents, instruments and agreements executed and/or delivered in
connection therewith, shall remain in full force and effect, and are hereby
ratified and confirmed.
(c) Except as expressly set forth in Section 3 above, the execution,
delivery and effectiveness of this Amendment shall not operate as a waiver of
any Default or Event of Default (including without limitation any Defaults or
Events of Default existing on the date hereof), nor operate as a waiver of any
right, power or remedy of the Agent or the Lenders (including without
limitation any rights, powers or remedies of the Agent or the Lenders with
respect to the Defaults or Events of Default existing on the date hereof), nor
constitute a waiver of, or consent to and departure from, any provision of the
Loan Agreement, or any of the other Financing Agreements.
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. 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 by any party of telecopied copies of executed
counterparts hereof shall constitute execution and delivery hereof by such
party.
IN WITNESS WHEREOF, this Amendment has been duly executed as of the day and
year first above written.
WEBCO INDUSTRIES, INC.
By: /s/Michael P. Howard
Title: Chief Financial Officer
AMERICAN NATIONAL BANK AND TRUST
COMPANY OF CHICAGO, individually
and as Agent
By: /s/Donna Evans
Title: Vice President
NATIONSBANK OF TEXAS, N.A.
By: /s/Gaye Stathis
Title: Vice President
BANK OF OKLAHOMA, NATIONAL
ASSOCIATION
By: /s/David Johnson
Title: Vice President
Exhibit 10.7
THIS AGREEMENT, entered into as of the 30th day of June, 1998, by and between
CHRISTOPHER L. KOWALSKI, an individual (the Executive) and PHILLIPS &
JOHNSTON, INC., an Illinois corporation (the Company),
W I T N E S S E T H:
WHEREAS, the Company desires to employ the Executive and to assure itself of
the continued services of the Executive for the term of employment provided
for in this Agreement, and
WHEREAS, the Executive desires to be employed by the Company for such period,
upon the terms and conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the foregoing and the mutual promises and
agreements hereinafter set forth, the Company and the Executive, intending to
be legally bound, do hereby agree as follows:
ARTICLE I
EMPLOYMENT
1.01 Office. The Company hereby employs, engages and hires the
Executive, and the Executive agrees to serve the Company, as a senior
executive employee of the Company for the term of employment specified in
Section 1.04 herein.
1.02 Responsibilities. The Executive shall serve as the President of the
Company, performing such duties as shall reasonably be required of a President
of the Company serving at the direction and under the supervision of the Board
of Directors of the Company (the Board).
1.03 Full-Time Commitment. The Executive will serve the Company
faithfully and to the best of his ability and will devote substantially all of
his time, energy, experience, and talents during regular business hours and as
otherwise reasonably necessary to such employment.
1.04 Term. The term of this Agreement shall commence as of the date
first written above and shall terminate on the earlier of (a) July 31, 2005,
or (b) the termination of the Executives employment pursuant to this Agreement
(the period commencing on the date of this Agreement and ending on such
earlier date is hereinafter called the Term).
During the Term of this Agreement, the Executive shall be entitled to receive
the compensation and the other amounts and benefits provided in Article II
hereof and upon any termination of this Agreement pursuant to Article III
hereof, the Executive shall be entitled to receive such compensation, other
amounts and benefits in such amounts and for such periods as are specified in
the applicable Section of Article III pursuant to which such termination
occurred.
ARTICLE II
COMPENSATION OF EXECUTIVE
2.01 Base Salary. The Executive will receive a base salary of $200,000
per annum, as the same may from time to time be adjusted as provided in this
Section 2.01 (the Base Salary). The Base Salary shall be paid in bi-monthly
installments in arrears and shall be subject to withholding and other
applicable taxes. The Base Salary shall be reviewed annually by the Board at
the end of each fiscal year occurring during the Term, beginning with the
period ending July 31, 1999, and may be increased (but not decreased) at that
time if the Board determines, in its sole discretion, that the Base Salary
warrants any increase.
2.02 Bonuses. The Executive shall be eligible to receive an annual bonus
(the Annual Bonus) in such amount and payable at such time as shall be
determined by the Board in its sole discretion.
2.03 Vacation. The Executive shall be entitled to take five weeks of
paid vacation annually, to be taken at such time or times as shall be mutually
convenient and consistent with his duties and obligations to the Company.
Unused vacation may not be accumulated.
2.04 Expenses. The Company shall promptly pay or reimburse the Executive
in accordance with the Companys practices consistently applied for all
reasonable expenses incurred by him in connection with the performance of his
duties and responsibilities hereunder. All requests for reimbursed expenses
referred to in this Section 2.04 shall be accompanied by such underlying
documents or other evidence as is reasonably required to support the deduction
of such expenses in accordance with the rules established by the Company for
the Companys executive officers.
2.05 Other Benefits. The Executive shall be included to the extent
thereunder permitted by virtue of his age, position, tenure, salary and other
qualifications in all employee benefit plans now existing or hereafter
established by the Company and made generally available to its executive
officers.
ARTICLE III
TERMINATION
3.01 Cause. (a) The Executive may be terminated from his employment by
the Company by action of the Board at any time for Cause (as hereinafter
defined) without prior notice except as provided below, and the Company shall,
upon such termination, have no obligation to pay or provide the compensation
and other amounts and benefits specified in Article II hereof except that the
Company shall be obligated to pay the Base Salary specified in Section 2.01
hereof through the date of such termination.
(b) For purposes of this Agreement, Cause shall mean a termination of the
Executives employment by the Company due to (a) the commission by the
Executive of an act of fraud or embezzlement, (b) the unauthorized and willful
violation of Section 5.03 of this Agreement which results in, or which
reasonably could be expected to result in, a material injury to the Company,
(c) a felony conviction or guilty plea of the Executive, (d) the willful
misconduct of the Executive as an employee of the Company or (e) the willful
failure of the Executive to render services to the Company in accordance with
his employment which failure amounts to a material neglect of his duties to
the Company.
(d) Each of the matters referred to in the definition of Cause shall be as
determined in good faith by the Board. The date of termination for Cause
shall be the date of receipt by the Executive of a written notice of
termination given by the Company with reference to this Section 3.01.
3.02 Disability; Death. (a) If the Executive shall die or become
disabled this Agreement shall terminate and the Company shall, upon such
termination, have no obligation to pay or provide the compensation and other
amounts and benefits specified in Article II hereof; provided, that, the
Company shall be obligated to (i) pay the Base Salary specified in Section
2.01 hereof prorated through the date of such death or disability, and (ii) in
the event the Executive has any accrued and unused vacation (prorated to the
date of such death or disability at the rate of one week of vacation for each
two and one-half months of the applicable annual period that has elapsed), pay
an amount equal to the Base Salary applicable thereto.
(b) In the case of the Executives death, such termination shall be deemed
to have occurred on the date of such death, and in the case of the Executives
disability, such termination shall be deemed to have occurred on earlier of
(i) the date the disability payments to the Executive commence under the
Companys long-term disability plan as then in effect or (ii) if no such plan
is in effect, as provided under the Social Security Act of 1935, as amended.
For purposes of this Agreement, the term disability shall mean the permanent
disability of the Executive in accordance with the then-applicable provisions
of the long-term disability policy of the Company as in effect from time to
time or, if no such policy is in effect, in accordance with the definition of
disability under the Social Security Act of 1935, as amended.
3.03 Termination Without Cause. (a) The Company shall have the right to
terminate the employment of the Executive at any time and for any reason or
for no reason without Cause. In such case, the Executives right to receive
the compensation and the other amounts and benefits provided for in Article II
hereof shall cease as of the date of such termination and in lieu thereof, the
Executive shall be entitled to receive the following amounts as severance:
(i) if such termination occurs on or prior to July 31, 2003, the Company
shall, subject to Section 3.03(c) below, be obligated to pay the Executive an
amount per annum equal to the Executives Base Salary as then in effect for a
period of two years following the date of such termination, and
(ii) if such termination occurs after July 31, 2003, the Company shall,
subject to Section 3.03(c) below, be obligated to pay the Executive an amount
per annum equal to the Executives Base Salary as then in effect for a period
equal to what would have been the remaining Term of this Agreement had such
termination not occurred.
(b) The date of such termination shall be the date specified in a written
notice given to the Executive by the Board, which date shall be the earlier of
the date so specified or, if no date is specified, ten (10) business days
following the date such notice is received by the Executive.
(c) The amounts referred to in clauses (i) and (ii) of Section 3.03(a)
above shall be paid to the Executive only if and for so long as the Executive
does not compete with the Company as provided in Article IV hereof and does
not disclose confidential or proprietary information as provided in Article V
hereof. If the Executive accepts other gainful employment during the period
referred to in clauses (i) and (ii), any amounts otherwise payable to the
Executive pursuant to said clauses shall be reduced by the amount of any
compensation due the Executive in connection with such other employment.
3.04 Voluntary Termination. (a) The Executive may voluntarily terminate
his employment hereunder at any time, for any reason or for no reason.
In such case, the Executives right to receive the compensation and the other
amounts and benefits provided for in Article II hereof shall cease as of the
date of such termination; provided, that, the Company shall be obligated to
pay the Base Salary specified in Section 2.01 hereof prorated through the date
of such termination.
(b) The date of such termination shall be the earlier of the date
specified (which specified date shall be at least three days from the date
such notice was given) in a written notice of resignation from the Executive
to the Company or, if no date is so specified, ten (10) business days after
the Company receives actual or written notice of resignation from the Executive.
3.05 Termination for Good Reason. (a) The Executive shall have the
right to terminate his employment with the Company for Good Reason upon
written notice delivered to the Company as hereinafter provided after the
event or cause constituting Good Reason. For purposes of this Agreement, Good
Reason shall mean (i) the imposition upon the Executive of the requirements to
perform duties materially less in stature than those required by a President
of the Company, or (ii) the failure by the Company to pay any compensation or
other amount or to provide the benefits due the Executive under Article II of
this Agreement. Unless the Executive provides written notification of an event
described in clauses (i) or (ii) above within 30 days after the Executive
knows or has reason to know of the occurrence of any such event, the Executive
shall be deemed to have consented thereto and such event shall no longer
constitute Good Reason for purposes of this Agreement. If the Executive
provides such written notice to the Company, the Company shall have 20
business days from the date of receipt of such notice to effect a cure of the
event described therein and, upon cure thereof by the Company to the
reasonable satisfaction of the Executive, such event shall no longer
constitute Good Reason for purposes of this Agreement. The Executive
acknowledges that a change in ownership or control of the Company that does
not result in one of the circumstances or events specified in clauses (i) or
(ii) above shall not constitute Good Reason.
(b) The date of termination hereunder for Good Reason shall be the date of
expiration of the applicable 20-day period afforded the Company to effect a
cure and during which period no cure was effected.
(c) The Executives termination for Good Reason hereunder shall be treated
for purposes of this Agreement as if the Executive were terminated without
Cause pursuant to Section 3.03 hereof and the Company shall be obligated to
pay to the Executive the compensation and other amounts referred to in Section
3.03.
ARTICLE IV
COVENANT NOT TO COMPETE
4.01 Non-Competition. So long as the Executive is employed by the
Company and for a period thereafter expiring on the earlier of (i) the second
anniversary of the termination of the Executives employment, or (ii) July 31,
2005 (the Restrictive Period), the Executive shall not, directly or
indirectly, by or for himself or as the agent of another or through another as
his agent:
(a) Own, manage, operate, control or engage or participate in the
ownership, management, operation or control of, or be connected as a
stockholder, agent, partner, employee or joint venturer with, any business or
organization, wherever located, which engages in a business which is
competitive with the business of the Company as conducted by the Company on
the date of such termination.
(b) Call upon any person who is, on the date of such termination, an
employee of the Company or any subsidiary thereof for the purpose or with the
intent of enticing such employee away from or out of the employ of the Company
or any subsidiary thereof.
(c) Call upon any person or entity which is, on the date of such
termination, or which has been, within one (1) year prior to such date, a
customer of the Company or any subsidiary thereof, for the purpose of
soliciting or selling products or services in direct competition with the
Company; and
(d) disclose customers, whether in existence or proposed, of the Company
to any Person except to the extent that the Company has in the past disclosed
such information to the public for valid business reasons.
For purposes of this Section 4.01, customers shall mean any person and any
affiliate of such person who has purchased any goods or services of the
Company during the twelve month period preceding the Executives termination,
or upon whom the Executive called, or with whom the Executive became
acquainted or whose name the Executive learned during the course of the
Executives employment with the Company.
4.02 Restitution. In addition to all other remedies provided for
hereunder, the Executive agrees that if he shall violate any of the provisions
of this Article IV, the Company shall be entitled to an accounting and
repayment of all profits, compensation, remuneration or other benefits that
the Executive may realize arising from or related to any such violation.
4.03 Modification. The parties agree and acknowledge that the duration,
scope and geographic area of the covenant not to compete described in Section
4.01 are fair, reasonable and necessary in order to protect the good will and
other legitimate interests of the Company, that adequate compensation has been
received by the Executive for such obligations, and that these obligations do
not prevent the Executive from earning a livelihood. If, however, for any
reason any court determines under applicable law that the provisions in
Section 4.01 pertaining to duration, scope and geographic area in relation to
non-competition are too broad or otherwise unreasonable, that the
consideration provided for hereunder is inadequate or that the Executive has
been prevented unlawfully from earning a livelihood (together, such provisions
being hereinafter referred to as Restrictions), such Restrictions shall be
interpreted, modified or rewritten, and such court is hereby requested and
authorized by the parties hereto to revise the Restrictions, to include the
maximum Restrictions as are valid and enforceable under applicable law.
ARTICLE V
CONFIDENTIAL INFORMATION
5.01 Proprietary Information. In the course of his service to the
Company, the Executive has had and shall continue to have in the future access
to confidential and proprietary information, including, but not limited to
strategic plans or data, financial statements, information concerning the
products, business, operations or financial condition of the Company, its
subsidiaries or affiliates, marketing data, customer research and data,
information concerning sources of supply, pricing information and data, and
trade secrets. Such information shall be referred to hereinafter as
Proprietary Information and shall include any and all items enumerated in the
preceding sentence, whether previously existing, now existing or arising
hereafter, whether conceived or developed by others or by the Executive alone
or with others, and whether or not conceived or developed during regular
working hours. Proprietary Information which is in the public domain during
the period of service by the Executive, provided the same is not in the public
domain as a consequence of disclosure directly or indirectly by the Executive
in violation of this Agreement, shall not be subject to the restrictions of
Sections 5.01-5.03 herein.
5.02 Fiduciary Obligations. The Executive acknowledges that the Company
has expended, and that the Company will continue to expend, significant
amounts of time, effort and money in the procurement of its Proprietary
Information, that the Company will take, all reasonable steps in protecting
the secrecy of the Proprietary Information, that said Proprietary Information
is of critical importance to the Company and that a violation of Article V of
this Agreement would seriously and irreparably impair and damage the Companys
business, and the Executive agrees to keep all Proprietary Information in a
fiduciary capacity for the sole benefit of the Company.
5.03 Non-Disclosure. The Executive shall not disclose, at any time,
whether during or after the Term of this Agreement, directly or indirectly
(except as the Executives duties in the regular and proper course of the
Companys business may require and except as required by law), any Proprietary
Information to any person other than the Company or authorized employees
thereof at the time of such disclosure, or to such other persons to whom the
Executive has been specifically instructed to make disclosure by the Board and
in all such cases only to the extent required in the regular and proper course
of business of Company, if the effect of such disclosure results in, or could
reasonably be expected to result in, a material injury to the Company. At the
termination of his employment, the Executive shall deliver to the Company all
notes, letters, documents and records which may contain Proprietary
Information which are then in his possession or control and shall not retain
or use any copies or summaries thereof, it being agreed by the Company that
the Executive shall be entitled to his personal effects.
ARTICLE VI
COMPANYS REMEDIES
6.01 Remedies. The Executive acknowledges that he has carefully read and
considered the terms of this Agreement and knows them to be essential to
induce the Company to enter into this Agreement and that any breach of the
provisions contained herein will result in serious and irreparable injury to
the Company. Therefore, in the event of a breach of this Agreement, the
Company shall be entitled to equitable relief against the Executive,
including, without limitation, an injunction to restrain the Executive from
such breach and to compel compliance with this Agreement in protecting or
enforcing its rights and remedies.
ARTICLE VII
MISCELLANEOUS
7.01 Notices. All notices hereunder, to be effective, shall be in
writing and shall be deemed delivered when delivered by hand or upon receipt
when sent by telecopy (answer back received) or upon the second day after the
same has been sent by first-class, certified mail, postage and fees prepaid,
as follows (or at such other address as is from time to time specified by the
party entitled to such Notice in writing):
(i) If to the
Company: Webco Industries, Inc.
9101 West 21st Street
Sand Springs, Oklahoma 74063
Attention: Michael P. Howard
Telecopy: (918) 245-1305
Copy to: Larry W. Sandel
Hall, Estill, Hardwick, Gable,
Golden & Nelson, P.C.
320 South Boston, Suite 400
Tulsa, Oklahoma 74103-3708
Telecopy: (918) 594-0505
(ii) If to the
Executive Christopher L. Kowalski
21 West 179th Hill Avenue
Glen Ellyn, Illinois 60137
Copy to: Rolewick & Gutzke, P.C.
1776 South Naperville Road
Wheaton, Illinois 60187
Attention: David Rolewick
Telecopy: (630) 653-1579
7.02 Modification. This Agreement constitutes the entire Agreement
between the parties hereto with regard to the subject matter hereof,
terminating and superseding all prior understandings and agreements, whether
written or oral. This Agreement may not be amended or revised except by a
writing signed by the parties.
7.03 Assignment. This Agreement and all rights hereunder are personal to
the Executive and may not be assigned by him. Notwithstanding anything else in
this Agreement to the contrary, (a) the Company may assign this Agreement to
and all rights hereunder shall inure to the benefit of any person, firm or
corporation succeeding to all or substantially all of the business or assets
of the Company whether by purchase, merger or consolidation and (b) the
Executive may assign his rights under this Agreement to his heirs by will or
pursuant to the laws of intestate distribution. This Agreement and all of the
provisions hereof shall be binding upon and shall inure to the benefit of the
parties hereto and their respective successors and permitted assigns.
7.04 Captions. Captions herein have been inserted solely for
convenience of reference and in no way define, limit or describe the scope or
substance of any provision of this Agreement.
7.04 Severability. The provisions of this Agreement are severable, and
the invalidity of any provision shall not affect the validity of any other
provision. In the event that any court of competent jurisdiction shall
determine that any provision of this Agreement or the application thereof is
unenforceable because of the duration or scope thereof, the parties hereto
agree that said court in making such determination shall have the power to
reduce the duration and scope of such provision to the extent necessary to
make it enforceable, and that this Agreement in its reduced form shall be
valid and enforceable to the full extent permitted by law.
7.05 Taking Effect. The terms and conditions set forth in this Agreement
shall take effect and be binding upon the parties on the date first above
written.
7.06 Governing Law. This Agreement shall be construed under and governed
by the laws of the State of Illinois, without regard to the conflict of law
rules thereof.
7.07 Withholding. The Company shall be entitled to withhold, or cause to
be withheld, from payment to the Executive any amount of withholding taxes
required by law with respect to payments made to the Executive in connection
with his employment hereunder.
7.09 Ownership of Intellectual Property. The Executive shall promptly
disclose to the Company all ideas, improvements, inventions and innovations,
in whatever form, suggested or resulting from the efforts of the Executive on
behalf of the Company during the Term, including those conceived by the
Executive alone or with other employees of the Company during employment with
the Company. The Executive acknowledges and agrees that all such property
shall be the exclusive property of the Company.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as a
binding contract as of the day and year first above written.
PHILLIPS & JOHNSTON, INC.
By: /s/Michael P. Howard
EXECUTIVE
/s/Christopher L. Kowalski
CHRISTOPHER L. KOWALSKI
Exhibit 10.8
LEASE AGREEMENT
This lease agreement (Lease) is made and entered on March 16, 1998, between
TUBULAR PROPERTIES, LTD., a Texas limited partnership (Lessor) and WEBCO
INDUSTRIES, INC., an Oklahoma corporation (Lessee). This Lease is effective
as of March 16, 1998 (the Effective Date). In consideration of the mutual
covenants and agreements, Lessor and Lessee agree as follows:
1. Grant. In consideration of the rental to be paid and the covenants to
be performed by Lessee, Lessor leases to Lessee, and Lessee rents from Lessor,
the real property and the improvements thereon described on Exhibit A attached
(the leased premises). The leased premises shall not include, and Lessor
shall obtain no right, title or interest in and to any equipment, machinery,
furniture, fixtures or other apparatus previously or subsequently installed or
placed upon the leased premises, at the cost and expense of Lessee, whether or
not attached or affixed, except equipment and fixtures which shall be
permanently attached and incorporated into the structure of the improvements
upon the leased premises so as to constitute an integral part of the leased
premises. All of the equipment, machinery, furniture, fixtures and apparatus
furnished at Lessees cost is referred to as Lessees Property.
2. Term. This Lease shall be for a term of five years, commencing on
March 16, 1998, and expiring on March 15, 2003.
3. Rent.
3.1 Lessee shall pay to Lessor, as rental for the use and occupation of
the leased premises during the term of this Lease, the sum of $5,400 per
month, without offset, commencing on the Effective Date, and continuing in the
same amount on the first day of each month thereafter until this Lease shall
terminate. The rent for the month of March shall be pro rated on a daily basis.
3.2 Rental shall be remitted to Lessor in advance on or before the 10th
business day of every calendar month during the term, without notice or
demand, at the address of Lessor as noted in paragraph 20.
3.3 Lessor will immediately notify Lessee of any default or late payment
by Lessor of any amount due under a mortgage encumbering the Leased Premises.
Thereafter, Lessee shall be authorized to remit its rental obligation to
Lessors mortgagee, and such remittance shall constitute payment to Lessor.
4. Use. Lessee shall use the leased premises only for any lawful purpose.
5. Payment of Taxes, Assessments and other Charges. Lessee shall pay all
general ad valorem taxes and pay all special assessments which may be levied,
assessed, or imposed upon the leased premises, and upon any subsequent
improvements. All personal property taxes assessed against Lessees Property
shall be paid by Lessee. If Lessee fails to pay any taxes when due, then
Lessor may, at its option, but without any obligation to do so, pay such
taxes, which shall be repaid by Lessee on demand as additional rent. Lessee
shall have the same right as Lessor to contest the amount of ad valorem taxes.
6. Compliance with Laws. Lessee shall not use or occupy the leased
premises in any manner which would cause any violation of any laws or
ordinances affecting the leased premises and shall comply with all laws and
ordinances affecting the leased premises and its use and occupancy. Lessee
shall be responsible for, and shall indemnify and hold Lessor harmless
resulting from any loss attributable to, any violation of any law, ordinance
or regulation by Lessee, including but not limited to any
environmental-related law or regulation. Such indemnity shall include the
costs of remediation, if necessary.
7. Public Utility Charges. Lessor will provide utility connections to the
leased premises for electricity, gas, water, sewer and telephone. Lessee
shall pay all charges for gas, water, sewer, electricity, telephone or other
service or services furnished to the leased premises or to Lessee.
8. Discharge of Liens. If the leased premises, any part thereof or
Lessees leasehold interest shall, at any time during the term of this Lease,
become subject to any mechanics, laborers or materialmens lien based upon the
furnishing of material or labor to Lessee or the leased premises, which was
contracted for by Lessee, Lessee shall, at its sole cost and expense, cause
the lien to be discharged within 15 days after written notice from Lessor.
9. Condemnation. If any part of the leased premises shall be taken or
condemned for a public or quasi-public use (or any transfer is made in lieu
thereof), and a part remains which is reasonably suitable for Lessees use,
this Lease shall, as to the part taken, terminate as of the date title is
taken by the condemnor and the rent shall be adjusted so that the Lessee shall
be required to pay for the remainder of the term only such portion of the
rental as the value of the part remaining after the condemnation bears to the
whole of the leased premises at the date of condemnation. If all of the
leased premises is taken or condemned, or so much that the use by Lessee shall
be substantially impaired, Lessee may terminate this Lease.
Lessee shall not be entitled to any part of the condemnation award (or payment
in lieu of condemnation), except that Lessee shall be entitled to any portion
of any separate award specifically allocated to Lessor for the loss of Lessees
business or Lessees cost of removal of Lessees Property. Lessee shall have no
claim to any part of Lessors award for the value of Lessees leasehold estate.
10. Lessees Property.
10.1 Lessee shall, upon Lessors prior consent, which consent will not be
unreasonably withheld, have the right at any time during the term of this
Lease to erect or install upon or in the leased premises such improvements,
fixtures, signs, machinery and equipment as Lessee deems appropriate for the
conduct of its business. Plans for any remodeling of or addition to the
leased premises must be approved in writing by Lessor, which approval will not
be unreasonably withheld. At the termination of the term of this Lease, Lessee
shall, at the request of Lessor, and at the sole expense of Lessee, repair all
damages to the leased premises which shall have been occasioned by the removal
of Lessees Property.
10.2 Any alteration or improvement commenced by Lessee shall be completed
in compliance with all applicable laws, ordinances and regulations. All such
alterations and improvements (except Lessees Property) shall upon the
termination of this Lease become the property of Lessor.
10.3 Lessor shall not be responsible for any loss or damage to Lessees
Property in or upon the leased premises.
10. Maintenance. Lessee accepts the leased premises as is. Lessor makes
no warranty concerning the condition of the leased premises or the fitness of
the leased premises for Lessees intended use. Lessee, at its cost and
expense, shall maintain the leased premises, including all improvements, in
good condition and repair, reasonable wear and tear excepted, in a clean
condition and in compliance with all requirements of law.
11. Right of Entry by Lessor. Lessor may, during the term of this Lease,
at all reasonable times and during usual business hours, enter upon the leased
premises for the purpose of inspection and may, at any reasonable time within
6 months preceding the expiration of this Lease show the leased premises to
prospective lessees. Lessor shall conduct visits to the leased premises in
such a. manner so as not to interfere with Lessees business operations.
12. Assignment and Subletting. Lessee shall not assign this Lease or any
interest, or sublease all or any part of the leased premises without Lessors
written consent, which consent shall not be unreasonably withheld. Any such
assignment or sublease will not relieve Lessee of its financial obligations
under this Lease.
13. Indemnification of Lessor. Lessee shall indemnify and save harmless
Lessor from and against all liabilities, obligations, losses, damages,
penalties, claims, actions, suits, costs, charges and expenses, including
reasonable attorneys fees, which may be imposed upon or incurred by or
asserted against Lessor in respect to any use or manner of use of the leased
premises by Lessee. If any claim is made, or action or proceeding is brought,
against Lessor by reason of Lessees use of the leased premises, upon written
notice from Lessor, Lessee shall at its sole cost and expense, defend or
resolve the claim.
15. Insurance.
15.1 At all times during the term of this Lease, and during such other
periods as Lessee occupies the leased premises or any part thereof, Lessee, at
its sole expense, shall carry and maintain general public liability insurance,
including liability coverage, against claims for injury, wrongful death and
property damage occurring in or about the leased premises, in companies
acceptable to Lessor, with minimum limits of $ 1,000,000 on account of bodily
injuries to or death of one person and $1,500,000 on account of bodily
injuries to or death of more than one person as the result of any one accident
or disaster, and property damage insurance with minimum limits of $500,000.
Lessee will furnish Lessor certificates of such insurance. Lessor and Lessee
shall be named as co-insureds under all such liability insurance.
15.2 Lessee shall, at its sole cost, keep all buildings and improvements
on the leased premises insured against loss or damage by fire and the hazards
covered by broad form and extended coverage insurance in an amount equal to
not less than the full replacement value (excluding foundation and footings)
of the buildings and improvements. The policy or policies shall name Lessor
as insured and shall be payable to the parties as their respective interests
may appear. Certificates of coverage under the policy shall be delivered to
Lessor. The parties grant to each other on behalf of any insurer providing
fire and extended coverage to either of them covering the leased premises,
improvements and contents, a waiver of any right of subrogation which any such
insurer may acquire against the other by virtue of payment of any loss under
such insurance. Neither party shall have an interest in the proceeds of
insurance received by the other party.
15.3 Lessee shall keep in force at its sole expense required workers
compensation or similar insurance affording statutory coverage and containing
statutory limits.
15.4 If any indebtedness of Lessor shall be secured by a mortgage covering
the leased premises, every insurance policy covering loss to buildings and
improvements shall, to the extent obtainable, bear a standard first mortgage
endorsement in favor of the mortgagee under such mortgage, and any loss under
such policy shall be made payable to the mortgagee. Such policy shall
contain, to the extent obtainable, an agreement by the insurer that it will
not cancel the policy except upon 10 days prior written notice to Lessor and
to the mortgagee.
15.5 Should Lessee fail to effect, maintain or renew any kind of required
insurance, pay the premium, or deliver to Lessee evidence of such insurance,
then Lessor, at its option but without obligation to do so, may procure such
insurance, the premium for which shall be repaid by Lessee on demand as
additional rent.
16. Damage by Fire or other Casualty.
16.1 If all or any portion of the building or improvements on the leased
premises are destroyed or damaged by fire or other casualty, Lessee shall file
all necessary proofs of claim and negotiate the loss with the insurance
companies. The proceeds of the insurance applicable to the building and
improvements shall be paid to Lessor and shall be disbursed by Lessor as
necessary in restoring the buildings and improvements.
16.2 If the proceeds of insurance are not sufficient to restore the leased
premises, then Lessee shall contribute such amount in addition to the proceeds
of such insurance as may be required. Lessor shall not be responsible for any
delay or failure by any insurance carrier to pay the proceeds of such insurance.
16.3 If the damage to or destruction of the improvements by fire or other
casualty prevent Lessee from conducting its business substantially in its
customary manner, then the rental and other payments required of the Lessee
shall abate or be reduced appropriately during any period of rebuilding. If
the repair and restoration of the improvements cannot reasonably be expected
to be completed within 120 days from the occurrence of damage, or are not in
fact completed, Lessee may terminate this Lease upon written notice to Lessor.
17. Default.
17.1 If Lessee defaults at any time during the term of this Lease thereof
in the payment of any rent or other amount and such default shall continue for
10 days after written notice to Lessee, or in case the Lessee defaults in the
performance of any other obligation of this Lease and such default continues
for 30 days after written notice to Lessee (except in the case of any such
default which cannot with due diligence be remedied within such 30 day period,
a course of action adequate to remedy the default shall be commenced by Lessee
within such period and shall thereafter be prosecuted with diligence and
continuity), then Lessor may at its option, without further notice or demand,
lawfully enter into and upon the leased premises and evict Lessee and all
persons claiming under and through Lessee, and remove Lessees Property without
being guilty of trespass and without prejudice to any other remedies which may
be available for Lessees breach. Lessor shall have the option, within 30 days
from obtaining possession to either (a) terminate this Lease and all of
Lessees rights and obligations, or (b) declare the Lease breached and hold the
Lessee liable for damages for such breach. Lessor may from time to time,
without terminating this Lease, relet the leased premises or any part thereof
for the account of Lessee for such term or terms and at such rental or rentals
and upon such other terms and conditions as are commercially reasonable at the
time. Rentals received from such reletting shall be applied first to the
payment of any indebtedness, other than rent, due from Lessee; second, to the
payment of unpaid rent; and third, to the payment of the cost of reletting,
including, without limitation, brokerage fees and the cost of remodeling,
renovating and alterations to make the leased premises suitable for a
successor tenant. Should such rentals received from such reletting during any
month be less than that agreed to be paid during that month by Lessee, Lessee
shall pay such deficiency to Lessor.
17.2 If Lessee fails to pay when due rent or any amounts due to Lessor,
and such default continues for 10 days after written notice by Lessor, then
Lessor may itself advance such amounts as may be due to third parties to cure
such default on behalf of and at the expense of Lessor, and Lessee agrees
thereafter on demand to pay Lessor the amount involved, with interest at the
annual rate of 12%.
17.3 If Lessee fails to surrender possession to Lessor, either after
default as stated in this paragraph, or upon any termination of this Lease,
Lessee shall be obligated for Lessors costs of recovering possession,
including attorneys fees.
17.4 If either party institutes any action against the other party under
the terms of this Lease, the prevailing party shall be entitled to recover, in
addition to any amount due or other relief, a reasonable attorneys fee.
18. Bankruptcy of Lessee. If proceedings in bankruptcy shall be
instituted by or against Lessee which result in an adjudication of bankruptcy,
or if a receiver of the business or assets of Lessee is appointed and such
appointment is not vacated within 60 days after notice to Lessee, or the
Lessee makes an assignment for the benefit of creditors, Lessor may, at its
option, upon compliance with the requirements of applicable law, immediately
take possession of the leased premises and terminate this Lease. Upon such
termination, all installments of rent earned to the date of termination and
unpaid shall at once become due and payable.
19. Holding Over. Any holding over by Lessee beyond the expiration of the
term of this Lease shall give rise to a tenancy from month to month at a
monthly rental rate of 150% of the monthly rental set out in this Lease.
20. Notices. All notices and other communications to be given by either
party shall be in writing and shall be by personal delivery, by mailing,
postage prepaid, certified mail, return receipt requested, by a delivery by a
nationally recognized overnight delivery service, delivered or addressed to
the parties as follows:
To Lessor: Tubular Properties, Inc.
ATTN: Mr. Mike Howard
10127 South 72nd East Avenue
Tulsa, Oklahoma 74133
To Lessee: Webco Industries, Inc.
ATTN: Dana S. Weber, President
9101 West 21st
Sand Springs, Oklahoma 74063
or at such other address as either party may designate to the other by written
notice in the manner provided above. Notice shall be deemed served as of the
date of mailing in the care of U.S. mail, as of the date of tendering the
notice to the courier, in the case of overnight delivery service, and as of
the date of physically tendering notice to Mr. Howard, or any other person
designated by Lessor in the event of a relocation by Mr. Howard, in the case
of personal delivery.
21. Recording. The parties agree not to record this Lease, but each party
agrees to execute upon request of the other a memorandum of the Lease suitable
for recording.
22. Entire Agreement. This Lease supersedes all prior agreements,
representations and commitments, oral and written, and contains the entire
agreement between the parties. This Lease may not be changed, waived,
discharged or terminated except by a written document executed by both parties.
23 Successors and Assigns. The terms, covenants and conditions of this
Lease shall inure to the benefit of and be binding upon the parties and their
respective legal representatives, successors and assigns.
23. Invalidity of Particular Provisions. If any provision of this Lease
or its application to any person or circumstances shall, to any extent, be
invalid or unenforceable, the remainder of this Lease, or the application of
such provision to persons or circumstances other than those as to which it is
invalid or unenforceable, shall not be affected, and each provision of this
Lease shall be valid and be enforced to the fullest extent permitted by law.
25. Mortgages.
25.1 This lease and the estate granted hereby shall be subject and
subordinate to the lien of any mortgage which may at any time constitute a
lien on the leased premises and to any agreements at any time made modifying,
supplementing, extending or renewing any such mortgage. The subordination
shall be upon the condition that so long as Lessee shall not be in default,
this Lease shall not be terminated and Lessees possession of the leased
premises shall not be interfered with in any foreclosure or other action or
proceeding instituted under or in connection with such mortgage.
Subordination of this lease shall be self-operative and no further instrument
shall be required to effect such subordination, but Lessee agrees to execute
and deliver all instruments that may be reasonably necessary or proper to
effect or confirm such subordination.
25.2 At any time, Lessee agrees upon request in writing from Lessor, to
execute, acknowledge and deliver to Lessor a statement in writing certifying
that this lease is unmodified and in full force and effect (or if there have
been modifications, that it is in full force and effect as modified) and the
dates to which the rental and other charges have been paid, and specifying
whether or not the Lessee claims that the Lessor has defaulted in any of their
obligations.
25.3 No mortgagee of the leased premises or collateral assignee of Lessors
interest in this Lease shall be obligated for the performance of any
obligations of the Lessor, except that if any mortgagee of the leased premises
or any such collateral assignee acquires Lessors interest in the leased
premises or in this Lease at a judicial sale (or by conveyance or assignment
in lieu of foreclosure), the mortgagee or assignee, or any other purchaser at
a judicial sale, shall be obligated for all of the covenants of the Lessor
after the effective date of the transfer of Lessors interest.
26. Lessors Covenants. Lessor represents and warrants that:
(a) it is the sole owner of the leased premises,
(b) there are no liens, claims or title defects, except for an existing
first mortgage in favor of Bank of Oklahoma, N.A.,
(c) the leased premises is properly zoned for the intended use by Lessee,
and
(d) so long as Lessee performs its obligations under this Lease, it shall
have undisturbed and continuous use and enjoyment of the leased premises.
27. Option to Purchase.
27.1 Provided Lessee is not in default under the terms and conditions of
this Lease, Lessee shall have the option to purchase the leased premises
(Option) during the primary term of this Lease (Option Period). Lessee may
exercise its Option during the Option Period by written notice delivered to
Lessor in accordance with the provisions of Section 20 hereof, notifying
Lessor of Lessees intention to exercise its Option (Notice). Time shall be of
the essence as to Lessees obligation to deliver such Notice during the Option
Period. The Notice shall set forth the date on which Lessee will purchase the
leased premises (Closing and Closing Date, respectively), which date shall be
not more than sixty (60) days after the date of delivery of the Notice. This
Option shall terminate upon expiration or termination of the primary term of
this Lease.
27.2 The purchase price for the premises shall be the greater of (a) Four
Hundred and Seventy Five Thousand and 00/ 100 ($475,000.00) Dollars or (b) 93%
of the fair market value of the leased premises as of the date of the Notice
(Purchase Price), payable in cash at the Closing.
27.3 If Lessee timely exercises its Option, Lessor shall convey or cause
to be conveyed by general warranty deed fee simple title in full ownership of
the leased premises to Lessee; subject, however, to the condition of the
leased premises on the Closing Date. With the exception of warranty of title,
Lessor shall not make any warranties concerning the condition of the leased
premises. Notwithstanding the closing, Lessees indemnification obligation set
forth in paragraph 6 shall survive the Closing. The sale of the leased
premises shall also be subject to such other permitted encumbrances agreed
upon by Lessor and Lessee as disclosed by Lessees examination of title to the
leased premises.
27.4 At the Closing, Lessee shall deliver the Purchase Price to Lessor in
cash by bank wire transfer of immediately available funds or as otherwise
reasonably directed by Lessor together with all rent and other sums due under
the Lease as of the Closing Date. Lessor shall deliver to Lessee the
necessary instruments to convey title to the leased premises to Lessee, and
such other documents reasonably requested by Lessee and its counsel.
27.5 Lessee shall pay all closing costs and charges incident to the
conveyance of the leased premises, including but not limited to appraisal
fees, escrow fees, recording costs, title examination and/or title insurance
premiums, survey costs, environmental audits, and all applicable transfer
taxes imposed by reason of the conveyance. Lessor shall only be responsible
for any reasonable curative title work required by Lessee and agreed upon by
Lessor and the cost of recording the same and the fees of its attorneys.
27.6 The Lease shall terminate as of the Closing Date and upon transfer of
the leased premises from Lessor to Lessee.
27.7 The parties will execute and cause to be recorded, a memorandum of
this Lease and Lessees option to purchase the leased premises.
28. Miscellaneous.
28. Nothing contained herein shall be deemed or construed by the parties,
nor by any third party, as creating the relationship of principal and agent or
of partnership or of joint venture between the parties.
28.2 Lessor shall not assert any claim related to or arising under this Lease
against any shareholder or affiliate of Lessee, but shall look solely to the
Lessee and its assets for performance of the Lease.
28.3 No delay or omission of the right to exercise any remedy by either
party shall impair any such remedy nor be construed as a waiver of any default
or as acquiescence, nor shall acceptance of any rental or other payment after
the date it becomes due be deemed a departure from the terms of this Lease.
28.4 Lessee, at its expense, will promptly comply with all governmental
requirements, will procure and maintain all permits, licenses and other
authorizations required for any use of the leased premises and for the
installation, operation and maintenance of all equipment and appliances
necessary or appropriate for the operation and maintenance of the leased
premises.
28.5 This lease shall be governed by the law of the state of Texas.
WEBCO INDUSTRIES, INC.,
an Oklahoma corporation
By: /s/Dana S. Weber
Dana S. Weber, President
Lessee
TUBULAR PROPERTIES, LTD.,
a Texas limited partnership
By: Its sole general partner,
TUBULAR HOLDINGS, INC.,
a Texas corporation
By: /s/Michael P. Howard
Michael P. Howard
President
Lessor
Exhibit 10.10
LOAN AND SECURITY AGREEMENT
(All Assets With Advance Rate)
THIS LOAN AND SECURITY AGREEMENT (this Agreement), made as of the 9th day of
April, 1997, by and between AMERICAN NATIONAL BANK AND TRUST COMPANY OF
CHICAGO (Bank), a national banking association with its principal place of
business at 33 North LaSalle Street, Chicago, Illinois 60690, and PHILLIPS &
JOHNSTON, INC. (Borrower), an Illinois corporation with its principal place of
business at 21W179 Hill Avenue, Glen Ellyn, Illinois 60137 has reference to
the following facts and circumstances:
A. Pursuant to Borrowers request, Bank heretofore, now and from time to
time hereafter, has and/or may loan or advance monies, extend credit, and/or
extend other financial accommodations to or for the benefit of Borrower.
B. To secure repayment of the same and all of Borrowers Liabilities (as
hereinafter defined), Borrower wishes to provide Bank with a security interest
in and/or collateral assignment of Borrowers assets.
NOW, THEREFORE, in consideration of terms and conditions set forth herein and
of any loans or extensions of credit heretofore, now or hereafter made to or
for the benefit of Borrower by Bank, the parties hereto agree as follows:
1. DEFINITIONS AND TERMS
1.1 When used herein, the words, terms and/or phrases set forth below
shall have the following meanings:
A. Accounts: all present and future rights of Borrower to payment for
goods sold or leased or for services rendered, which are not evidenced by
instruments or chattel paper, and whether or not they have been earned by
performance.
B. Borrowers Liabilities: all obligations and liabilities of Borrower to
Bank (including without limitation all debts, claims, indebtedness and
attorneys fees and expenses as provided for in Paragraph 8.13) whether
primary, secondary, direct, contingent, fixed or otherwise, including Rate
Hedging Obligations (as defined in subparagraph L herein), heretofore, now
and/or from time to time hereafter owing, due or payable, however evidenced,
created, incurred, acquired or owing and however arising, whether under this
Agreement or the Other Agreements (hereinafter defined) or by operation of law
or otherwise.
C. Charges: all national, federal, state, county, city, municipal and/or
other governmental (or any instrumentality, division, agency, body or
department thereof, including without limitation the Pension Benefit Guaranty
Corporation) taxes, levies, assessments, charges, liens, claims or
encumbrances upon and/or relating to the Collateral (as hereinafter defined),
Borrowers Liabilities, Borrowers business, Borrowers ownership and/or use of
any of its assets, and/or Borrowers income and/or gross receipts.
D. Collateral: shall have the meaning set forth in Paragraph 3.2.
E. Indebtedness: (i) indebtedness for borrowed money or for the deferred
purchase price of property or services; (ii) obligations as lessee under
leases which shall have been or should be, in accordance with generally
accepted accounting principles, recorded as capital leases; (iii) obligations
under direct or indirect guaranties in respect of, and obligations
(contingent or otherwise) to purchase or otherwise acquire, or otherwise to
assure a creditor against loss in respect of, indebtedness or obligations of
others of the kinds referred to in clauses (i) or (ii) above; and (iv)
liabilities with respect to unfunded vested benefits under plans covered by
Title IV of the Employee Retirement Income Security Act of 1974, as amended
(ERISA), and in effect from time to time.
F. Letter of Credit Obligations: shall mean any and all existing and
future indebtedness, obligations and liabilities of every kind, nature and
character, direct or indirect, absolute or contingent, of the Borrower to
Bank, arising under, pursuant to or in connection with any letter of credit
issued under the Maximum Revolving Facility.
G. Loans: shall mean collectively any Revolving Loans as defined in
Paragraph 2.5 and Term Loans as defined in Paragraph 2.6.
H. Maximum Revolving Facility: shall mean the maximum amount of the
Revolving Loans as evidenced by a revolving note(s) which amount Bank has
agreed to consider as a ceiling on the outstanding principal balance of
Revolving Loans (other than Term Loans) to be made by Bank pursuant to this
Agreement.
I. Obligor: any Person who is and/or may become obligated to Borrower
under or on account of Accounts.
J. Other Agreements: all agreements, instruments and documents, including
without limitation, guaranties, mortgages, deeds of trust, notes, pledges,
powers of attorney, consents, assignments, contracts, notices, security
agreements, leases, subordination agreements, financing statements and all
other written matter heretofore, now and/or from time to time hereafter
executed by and/or on behalf of Borrower and delivered to Bank.
K. Persons: any individual, sole proprietorship, partnership, joint
venture, trust, unincorporated organization, association, corporation, limited
liability company, institution, entity, party or government (whether national,
federal, state, county, city, municipal or otherwise, including without
limitation, any instrumentality, division, agency, body or department thereof).
L. Rate Hedging Obligations: shall mean any and all obligations of the
Borrower, whether absolute or contingent and howsoever and whenever created,
arising, evidenced or acquired (including all renewals, extensions and
modifications thereof and substitutions therefor), under (i) any and all
agreements designed to protect the Borrower from the fluctuations of interest
rates, exchange rates or forward rates applicable to such partys assets,
liabilities or exchange transactions, including, but not limited to: interest
rate swap agreements, dollar-denominated or cross-currency interest rate
exchange agreements, forward currency exchange agreements, interest rate cap,
floor or collar agreements, forward rate currency agreements or agreements
relating to interest rate options, puts and warrants, and (ii) any and all
agreements relating to cancellations, buy backs, reversals, terminations or
assignments of any of the foregoing.
1.2 Except as otherwise defined in this Agreement or the Other Agreements,
all words, terms and/or phrases used herein and therein shall be defined by
the applicable definition therefor (if any) in the Illinois Uniform Commercial
Code.
2. LOANS
2.1 Loans made by Bank to Borrower pursuant to this Agreement shall be
evidenced by notes or other instruments issued or made by Borrower to Bank.
Except as otherwise provided in this Agreement or in any notes executed and
delivered by Borrower to Bank in connection herewith, the principal portion of
Borrowers Liabilities shall be payable by Borrower to Bank on the maturity
date(s) described in any such note(s) or other instruments evidencing
Borrowers Liabilities (as the same may be amended, renewed or replaced) and
all costs, fees and expenses payable hereunder or under the Other Agreements,
shall be payable by Borrower to the Bank on demand, in either case at Banks
principal place of business or such other place as Bank shall specify in
writing to Borrower.
2.2 All of Borrowers Liabilities shall constitute one obligation secured
by Banks security interest in the Collateral and by all other security
interests, liens, claims and encumbrances heretofore, now and/or from time to
time hereafter granted by Borrower to Bank.
2.3 Each loan made by Bank to Borrower pursuant to this Agreement or the
Other Agreements shall constitute an automatic warranty and representation by
Borrower to Bank that there does not then exist an Event of Default (as
hereinafter defined) or any event or condition, which with notice, lapse of
time and/or the making of such loan would constitute an Event of Default.
2.4 This Agreement shall be in effect until all of Borrowers Liabilities
have been paid in full and any and all commitments of Bank to make loans have
terminated.
2.5 Provided that an Event of Default does not then exist or would not
then be created or any event which with notice or lapse of time or both would
constitute an Event of Default does not then exist, Bank shall advance to
Borrower on a revolving credit basis (the Revolving Loans) up to the lesser
of: (i) the Maximum Revolving Facility minus any Letter of Credit Obligations,
or (ii) the Borrowing Base minus any Letter of Credit Obligations. As used
herein. Borrowing Base shall mean up to 80% (Advance Rate) of the face amount
(less maximum discounts, credits or allowances which may be taken by or
granted to Obligors in connection therewith) of all then existing Eligible
Accounts (as hereinafter defined) that are scheduled on the most recent
schedule of accounts delivered to Bank. If applicable, any amount calculated
pursuant to Paragraph 2.9, shall be included in the Borrowing Base.
Notwithstanding any contrary provision contained herein, Bank may elect at its
option to at any time and upon fourteen (14) days prior written notice to
Borrower change the foregoing method of calculating the Borrowing Base by
reducing the advances against Eligible Accounts, or to deduct reserves from
the Borrowing Base.
2.6 Bank may from time to time advance to Borrower term loans (Term Loans)
in such amounts and on such terms and conditions as the Bank and Borrower from
time to time may agree in writing.
2.7 Notwithstanding anything contained in this Agreement or the Other
Agreements to the contrary, the principal portion of Borrowers outstanding
liabilities due at any one time under the Revolving Loans shall not exceed the
lesser of: (i) the Maximum Revolving Facility minus the amount of all Letter
of Credit Obligations, or (ii) the Borrowing Base minus the amount of all
Letter of Credit Obligations.
2.8 Banks commitment to loan shall expire on the earlier of: (i) the date
on which Borrowers Liabilities mature under the terms of any note given by
Borrower to Bank, or (ii) the occurrence of an Event of Default pursuant to
Section 7 hereof.
2.9 The Borrowing Base shall also include the lesser of: (i) $750,000.00;
or (ii) up to 50% of the Value of Eligible Inventory (each term as hereinafter
defined) set forth in the Designation of Inventory then most recently
delivered by Borrower to Bank, which amount shall be reduced by 100% of the
Value of any reductions in such Eligible Inventory made since the date of such
Designation of Inventory. Value shall mean the lesser of Borrowers cost
thereof calculated on a first-in, first-out basis or the wholesale market
value thereof. Eligible Inventory shall mean any Inventory (as hereinafter
defined) which meets each of the following requirements: (a) it is in
condition to be sold in the ordinary course of Borrowers business; (b) in case
of goods held for sale or lease, it is (except as Bank may otherwise consent
in writing) new and unused, (c) it is subject to a first priority, fully
perfected security interest in favor of Bank; (d) it is owned by Borrower and
is not subject to any other lien or security interest whatsoever except for:
(i) the security interest in favor of Bank; (ii) tax liens for taxes not past
due; and (iii) warehouse liens for warehouse charges not past due: and (e)
Bank has reasonably determined, it is not unacceptable for any reason;
including, but without limitation, due to age, type, category and/or quantity.
Any Inventory which is at any time Eligible Inventory, but which subsequently
fails to meet any of the foregoing requirements shall forthwith cease to be
Eligible Inventory. Inventory shall mean all goods held by Borrower for sale
or lease, or furnished by Borrower under contract of service, or held by
Borrower as raw materials, work in progress or materials used or consumed in a
business.
3. COLLATERAL: GENERAL TERMS
3.1 To secure the prompt payment to Bank of Borrowers Liabilities and the
prompt, full and faithful performance by Borrower of all of the provisions to
be kept, observed or performed by Borrower under this Agreement and/or the
Other Agreements, Borrower grants to Bank a security interest in and to, and
collaterally assigns to Bank, all of Borrowers property, wherever located,
whether now or hereafter existing, owned, licensed, leased (to the extent of
Borrowers leasehold interest therein), consigned (to the extent of Borrowers
ownership therein), arising and/or acquired, including without limitation all
of Borrowers: (a) Accounts, chattel paper, tax refunds, contract rights,
leases, leasehold interests, letters of credit, instruments, documents,
documents of title, patents, copyrights, trademarks, tradenames, licenses,
goodwill, beneficial interests and general intangibles; (b) all goods whose
sale, lease or other disposition by Borrower have given rise to Accounts and
have been returned to or repossessed or stopped in transit by Borrower; (c)
certificated and uncertificated securities; (d) goods, including without
limitation all its consumer goods, machinery, equipment, farm products,
fixtures and inventory; (e) liens, guaranties and other rights and privileges
pertaining to any of the Collateral; (f) monies, reserves, deposits, deposit
accounts and interest or dividends thereon, cash or cash equivalents; (g) all
property now or at any time or times hereafter in the possession, or under the
control of Bank or its bailee; (h) all accessions to the foregoing, all
litigation proceeds pertaining to the foregoing and all substitutions,
renewals, improvements and replacements of and additions to the foregoing; and
(i) all books, records and computer records in any way relating to the
Collateral herein described.
3.2 All of the aforesaid property and products and proceeds of the
foregoing in Paragraph 3.1 above, including without limitation, proceeds of
insurance policies insuring the foregoing are herein individually and
collectively called the Collateral. The terms used herein to identify the
Collateral shall have the same meaning as are assigned to such terms as of the
date hereof in the Illinois Uniform Commercial Code.
3.3 Borrower shall make appropriate entries upon its financial statements
and its books and records disclosing Banks security interest in the Collateral.
3.4 Borrower shall execute and deliver to Bank, at the request of Bank,
all agreements, instruments and documents (Supplemental Documentation) that
Bank reasonably may request, in form and substance acceptable to Bank, to
perfect and maintain perfected Banks security interest in the Collateral and
to consummate the transactions contemplated in or by this Agreement and the
Other Agreements. Borrower agrees that a carbon, photographic or photostatic
copy, or other reproduction of this Agreement or of any financing statement,
shall be sufficient to evidence Banks security interest.
3.5 Bank shall have the right, at any time during Borrowers usual business
hours, to inspect the Collateral and all related records (and the premises
upon which it is located) and to verify the amount and condition of or any
other matter relating to the Collateral.
3.6 Borrower warrants and represents to and covenants with Bank that: (a)
Banks security interest in the Collateral is now and at all times hereafter
shall be perfected and have a first priority except as expressly agreed to in
writing by the Bank; (b) the offices and/or locations where Borrower keeps the
Collateral are specified at the end of this Paragraph and Borrower shall not
remove such Collateral therefrom except as may occur in the ordinary course of
business, and shall not keep any of such Collateral at any other offices or
locations unless Borrower gives Bank written notice thereof at least thirty
(30) days prior thereto and the same is within the United States of America;
and (c) the addresses specified at the end of this Paragraph include and
designate Borrowers principal executive office, principal place of business
and other offices and places of business and are Borrowers sole offices and
places of business. Borrower, by written notice delivered to Bank at least
thirty (30) days prior thereto, shall advise Bank of Borrowers opening of any
new office or place of business or its closing of any existing office or place
of business and any new office or place of business shall be within the United
States of America. Borrower has places of business at the address shown at the
beginning of this Agreement and at the locations listed below:
1) 21W155 Hill Avenue, Glen Ellyn, DuPage County, Illinois
2) 21W159 Hill Avenue, Glen Ellyn, DuPage County, Illinois
3) 21W177 Hill Avenue, Glen Ellyn, DuPage County, Illinois
4) 900 Commercial Street, Lyndon, Illinois
5) 655 Godfrey Street SW, Grand Rapids, Michigan
All of the Collateral currently owned by Borrower and all of the Collateral
hereafter acquired is, or will be held or stored at the locations listed below:
1) The address of the Borrower shown at the beginning of this Agreement:
2) 21W155 Hill Avenue, Glen Ellyn, DuPage County, Illinois
3) 21W159 Hill Avenue, Glen Ellyn, DuPage County, Illinois
4) 21W177 Hill Avenue, Glen Ellyn, DuPage County, Illinois
5) 900 Commercial Street, Lyndon, Illinois
6) 655 Godfrey Street SW, Grand Rapids, Michigan
3.7 At the request of Bank, Borrower shall receive, as the sole and
exclusive property of Bank and as trustee for Bank, all monies, checks, notes,
drafts and all other payments for and/or proceeds of Collateral which come
into the possession or under the control of Borrower and immediately upon
receipt thereof, Borrower shall remit the same (or cause the same to be
remitted), in kind, to Bank or at Banks direction.
3.8 Upon demand or upon an Event of Default, Bank may take control of, in
any manner, and may endorse Borrowers name to any of the items of payment or
proceeds described in Paragraph 3.7 above and, pursuant to the provisions of
this Agreement, Bank shall apply the same to and on account of Borrowers
Liabilities.
3.9 Bank may, at its option, at any time or times hereafter, but shall be
under no obligation to pay, acquire and/or accept an assignment of any
security interest, lien, encumbrance or claim asserted by any Person against
the Collateral.
3.10 Immediately upon Borrowers receipt of that portion of the Collateral
evidenced by an agreement, instrument and/or document (Special Collateral),
Borrower shall mark the same to show that such Special Collateral is subject
to a security interest in favor of Bank and shall deliver the original thereof
to Bank, together with appropriate endorsement and/or specific evidence of
assignment (in form and substance acceptable to Bank) thereof to Bank.
3.11 Regardless of the adequacy of any Collateral securing Borrowers
Liabilities hereunder, any deposits or other sums at any time credited by or
payable or due from Bank to Borrower, or any monies, cash, cash equivalents,
securities, instruments, documents or other assets of Borrower in possession
or control of Bank or its bailee for any purpose may, upon demand or an Event
of Default or event or condition which with notice or lapse of time would
constitute an Event of Default, be reduced to cash and applied by Bank to or
setoff by Bank against Borrowers Liabilities hereunder.
3.12 At the request of Bank, Borrower shall instruct the Obligors of its
Accounts to make payments directly to a lockbox or cash collateral account
maintained by Bank in Borrowers name. All such collections shall be Banks
property to be applied against Borrowers Liabilities, and not Borrowers
property. Bank may endorse Borrowers name to any of the items of payment or
proceeds described herein.
4. COLLATERAL: ACCOUNTS
4.1 An Eligible Account is an Account of Borrower which meets each of the
following requirements: (a) it arises from the sale or lease of goods, such
goods having been shipped or delivered to the Obligor thereof, or from
services rendered to the Obligor; (b) it is a valid, legally enforceable
obligation of the Obligor thereunder, and is not subject to any offset,
counterclaim or other defense on the part of such Obligor denying liability
thereunder in whole or in part; (c) it is subject to a perfected security
interest in favor of Bank and is not subject to any other lien or security
interest whatsoever, except those of Bank; (d) it is evidenced by an invoice
(dated not later than the date of shipment to the Obligor or performance and
having a due date not more than thirty (30) days after the date of invoice)
rendered to such Obligor, and is not evidenced by any instrument or chattel
paper: (e) it is payable in United States dollars; (f) it is owing by Obligor
residing, located or having its principal activities or place of business
outside the United States of America or who is not subject to service of
process in the United States of America, said Obligor has furnished Borrower
with an irrevocable letter of credit which has been issued or confirmed by a
financial institution acceptable to Bank has been pledged to Bank, and is
payable in United States dollars in an amount not less than the face value of
the account or there is FCIA (Foreign Credit Insurance Association) insurance
in effect covering such account with Bank named Lenders Loss Payee; (g) it is
not owing by any Obligor involved in any bankruptcy or insolvency proceeding;
(h) it is not owing by any affiliate of Borrower; (i) it is not unpaid more
than ninety (90) days after the date of such invoice; 0) it is not owing by an
Obligor which shall have failed to pay in full any invoice evidencing any
account within ninety (90) days after the date of such invoice, unless the
total invoice amounts of such Obligor which have not been paid within ninety
(90) days of the date represents less than 50% of the total invoice amounts
then outstanding of such Obligor; and (k) it is not an Account as to which
Bank, at any time or times hereafter, determines, in good faith, that the
prospect of payment or performance by the Obligor thereof is or will be
impaired. Notwithstanding the foregoing, Accounts with respect to which the
Account Debtor is the United States of America or any department, agency or
instrumentality thereof, shall not be included as an Eligible Account unless,
with respect to any such Account. Borrower has complied to Banks satisfaction
with the provisions of the Federal Assignment of Claims Act of 1940,
including, without limitation, executing and delivering to Bank all statements
of assignment and/or notification which are in form and substance acceptable
to Bank and which are deemed necessary by Bank to effectuate the assignment to
Bank of such Accounts. An Account which is at any time an Eligible Account,
but which subsequently fails to meet any of the foregoing requirements, shall
forthwith cease to be an Eligible Account. Bank may in its sole discretion at
any time reduce the percentage set forth in clause (j) above upon seven (7)
days prior notice to Borrower. Borrower, immediately upon demand from Bank,
shall pay to Bank an amount of money equal to the monies advanced by Bank to
Borrower upon an Account that is no longer an Eligible Account. Borrower
warrants and represents to and covenants with Bank that the principal portion
of Borrowers Liabilities represented by Revolving Loans made by Bank to
Borrower, pursuant to Paragraph 2.5 above, shall not exceed the total of the
then outstanding amounts (less maximum discounts, credits and allowances which
may be taken by or granted to Obligors in connection therewith) of all then
existing Eligible Accounts multiplied by the Advance Rate.
4.2 With respect to Accounts, except as otherwise disclosed by Borrower to
Bank in writing, Borrower warrants and represents to Bank that: (a) they are
genuine, are in all respects what they purport to be and are not evidenced by
a judgment; (b) they represent undisputed, bona fide transactions completed in
accordance with the terms and provisions contained in the invoices and other
documents delivered to Bank with respect thereto; (c) the amounts shown on any
Schedule of Accounts and/or all invoices and statements delivered to Bank with
respect thereto are actually and absolutely owing to Borrower and are not in
any way contingent; (d) no payments have been made or shall be made thereon
except payments immediately delivered to Bank pursuant to this Agreement; (e)
there are no setoffs, counterclaims or disputes existing or asserted with
respect thereto and Borrower has not made any agreement with any Obligor
thereof for any deduction therefrom except a regular discount allowed by
Borrower in the ordinary course of its business for prompt payment; (f) there
are no facts, events or occurrences which in any way impair the validity or
enforcement thereof or tend to reduce the amount payable thereunder, which may
be shown on any schedule of accounts and on all invoices and statements
delivered to Bank with respect thereto; (g) to the best of Borrowers
knowledge, all Obligors have the capacity to contract and are solvent; (h) the
services furnished and/or goods sold or leased giving rise thereto are not
subject to any lien, claim, encumbrance or security interest except that of
Bank; (i) Borrower has no knowledge of any fact or circumstance which would
impair the validity or collectability thereof; (j) to the best of Borrowers
knowledge, there are no proceedings or actions which are threatened or pending
against any Obligor which might result in any material adverse change in its
financial condition; and (k) Borrower has filed a Notice of Business
Activities Report or a Certificate of Authority or similar report with the
appropriate office or department in states where Account Obligors are located
and where such reports are required as a condition to commencing or
maintaining an action in the courts of such states, or Borrower has
demonstrated to Banks satisfaction that it is exempt from any such
requirements under such states law.
4.3 Any of Banks officers, employees or agents shall have the right, at
any time or times hereafter, in Banks name or in the name of a nominee of
Bank, to verify the validity, amount or any other matter relating to any
Accounts by mail, telephone, facsimile or otherwise and to sign Borrowers name
on any verification of Accounts and notices thereof to Obligors. All costs,
fees and expenses relating thereto incurred by Bank (or for which Bank becomes
obligated) shall be part of Borrowers Liabilities, payable by Borrower to Bank
on demand.
4.4 Unless Bank notifies Borrower in writing that Bank suspends any one or
more of the following requirements, Borrower shall: (a) promptly upon
Borrowers learning thereof, inform Bank, in writing, of any material delay in
Borrowers performance of any of its obligations to any Obligor and of any
assertion of any claims, offsets or counterclaims by any Obligor and of any
allowances, credits and/or other monies granted by Borrower to any Obligor;
(b) not permit or agree to any extension, compromise or settlement with
respect to Accounts which constitute, in the aggregate, more than 5% of all
Accounts then owing to Borrower; and (c) keep all goods returned by any
Obligor and all goods repossessed or stopped in transit by Borrower from any
Obligor segregated from other property of Borrower, immediately notify Bank of
Borrowers possession of such goods, and hold the same as trustee for Bank
until otherwise directed in writing by Bank.
4.5 Bank shall have the right, now and at any time or times hereafter, at
its option, without notice thereof to Borrower: (a) to notify any or all
Obligors that the Accounts and Special Collateral have been assigned to Bank
and the Bank has a security interest therein; (b) to direct such Obligors to
make all payments due from them to Borrower upon the Accounts and Special
Collateral directly to Bank; and (c) to enforce payment of and collect, by
legal proceedings or otherwise, the Accounts and Special Collateral in the
name of Bank and Borrower.
4.6 Borrower, irrevocably, hereby designates, makes, constitutes and
appoints Bank (and all Persons designated by Bank) as Borrowers true and
lawful attorney (and agent-in-fact), with power, upon an Event of Default, or
an event or condition which with notice or lapse of time would constitute an
Event of Default, without notice to Borrower and in Borrowers or Banks name:
(a) to demand payment of Accounts; (b) to enforce payment of the Accounts by
legal proceedings or otherwise; (c) to exercise all of Borrowers rights and
remedies with respect to the collection of the Accounts; (d) to settle,
adjust, compromise, discharge, release, extend or renew the Accounts; (e) to
settle, adjust or compromise any legal proceedings brought to collect the
Accounts; (f) to sell or assign the Accounts upon such terms, for such amounts
and at such time or times as Bank deems advisable: (g) to prepare, file and
sign Borrowers name on any Notice of Lien, Assignment or Satisfaction of Lien
or similar document in connection with the Accounts and Special Collateral; or
(h) to prepare, file and sign Borrowers name on any Proof of Claim in
Bankruptcy or similar document against any Obligor.
5. WARRANTIES, REPRESENTATIONS AND COVENANTS:
INSURANCE AND TAXES
5.1 Borrower, at its sole cost and expense, shall keep and maintain: (a)
the Collateral insured for the full insurable value against all hazards and
risks ordinarily insured against by other owners or users of such properties
in similar businesses; and (b) business interruption insurance and public
liability and property damage insurance relating to Borrowers ownership and
use of its assets. All such policies of insurance shall be in a form with
insurers and in such amounts as may be satisfactory to Bank. Borrower shall
deliver to Bank the original (or certified) copy of each policy of insurance,
or a certificate of insurance, and evidence of payment of all premiums for
each such policy. Such policies of insurance (except those of public
liability) shall contain a standard form lenders loss payable clause, in form
and substance acceptable to Bank, showing loss payable to Bank, and shall
provide that: (i) the insurance companies will give Bank at least thirty (310)
days written notice before any such policy or policies of insurance shall be
altered or canceled; and (ii) no act or default of Borrower or any other
Person shall effect the right of Bank to recover under such policy or policies
of insurance in case of loss or damage. Borrower hereby directs all insurers
under such policies of insurance (except those of public liability) to pay all
proceeds payable thereunder directly to Bank and hereby authorizes Bank to
make, settle, and adjust claims under such policies of insurance and endorse
the name of Borrower on any check, draft, instrument or other item of payment
for the proceeds of such policies of insurance.
5.2 Borrower shall pay promptly, when due, all Charges, and shall not
permit any Charges to arise, or to remain and will promptly discharge the same.
6. WARRANTIES, REPRESENTATIONS AND COVENANTS:
GENERAL
6.1 Borrower warrants and represents to and covenants with Bank that: (a)
Borrower has the right, power and capacity and is duly authorized and
empowered to enter into, execute, deliver and perform this Agreement and Other
Agreements; (b) the execution, delivery and/or performance by Borrower of this
Agreement and Other Agreements shall not, by the lapse of time, the giving of
notice or otherwise, constitute a violation of any applicable law or a breach
of any provision contained in Borrowers Articles of Incorporation, By-Laws,
Articles of Partnership, Articles of Organization, Operating Agreement or
similar document, or contained in any agreement, instrument or document to
which Borrower is now or hereafter a party or by which it is or may be bound;
(b) Borrower has and at all times hereafter shall have good, indefeasible and
merchantable title to and ownership of the Collateral free and clear of all
liens, claims, security interests and encumbrances except those of Bank: (d)
Borrower is now and at all times hereafter, shall be solvent and generally
paying its debts as they mature and Borrower now owns and shall at all times
hereafter own property which, at a fair valuation, is greater than the sum of
its debts; (e) Borrower is not and will not be during the term hereof in
violation of any applicable federal, state or local statute. regulation or
ordinance that, in any respect materially and adversely affects its business,
property, assets, operations or condition, financial or otherwise; and (f)
Borrower is not in default with respect to any indenture, loan agreement,
mortgage, deed or other similar agreement relating to the borrowing of monies
to which it is a party or by which it is bound.
6.2 Borrower warrants and represents to and covenants with Bank that
Borrower shall not, without Banks prior written consent thereto: (a) grant a
security interest in or assign any of the Collateral to any Person or permit,
grant, or suffer a lien, claim or encumbrance upon any of the Collateral, (b)
sell or transfer any of the Collateral not in the ordinary course of business;
(c) receiver, trustee, custodian or assignee for the benefit of creditors: (f)
if a notice of lien, levy or assessment is filed of record or given to
Borrower with respect to all or any of Borrowers assets by any federal, state,
local department or agency; (g) if Borrower or any guarantor of Borrowers
Liabilities becomes insolvent or generally fails to pay or admits in writing
its inability to pay debts as they become due, if a petition under Title 11 of
the United States Code or any similar law or regulation is filed by or against
Borrower or any such guarantor, if Borrower or any such Guarantor shall make
an assignment for the benefit of creditors, if any case or proceeding is filed
by or against Borrower or any such guarantor for its dissolution or
liquidation. if Borrower or any such guarantor is enjoined, restrained or in
any way prevented by court order from conducting all or any material part of
its business affairs; (h) the death or incompetency of Borrower or any
guarantor of Borrowers Liabilities, or the appointment of a conservator for
all or any portion of Borrowers assets or the Collateral; (i) the revocation,
termination, or cancellation of any guaranty of Borrowers Liabilities without
written consent of Bank; (j) if a contribution failure occurs with respect to
any pension plan maintained by Borrower or any corporation, trade or business
that is, along with Borrower, a member of a controlled group of corporations
or controlled group of trades or businesses (as described in Sections 414(b)
and (c) of the Internal Revenue Code of 1986 or Section 4001 of ERISA)
sufficient to give rise to a lien under Section 302(f) of ERISA, (k) if
Borrower or any guarantor of Borrowers Liabilities is in default in the
payment of any obligations, indebtedness or other liabilities to any third
party and such default is declared and is not cured within the time, if any,
specified therefor in any agreement governing the same; (1) if any material
statement, report or certificate made or delivered by Borrower, any of
Borrowers partners, officers, employees or agents or any guarantor of
Borrowers Liabilities is not true and correct; or (m) if Bank is reasonably
insecure.
7.2 All of Banks rights and remedies under this Agreement and the Other
Agreements are cumulative and non-exclusive.
7.3 Upon an Event of Default or the occurrence of any one of the events
described in Paragraph 7.1, without notice by Bank to or demand by Bank of
Borrower, Bank shall have no further obligation to and may then forthwith
cease advancing monies or extending credit to or for the benefit of Borrower
under this Agreement and the Other Agreements. Upon an Event of Default,
without notice by Bank to or demand by Bank of Borrower, Borrowers Liabilities
shall be immediately due and payable.
7.4 Upon an Event of Default, Bank, in its sole and absolute discretion,
may exercise any one or more of the rights and remedies accruing to a secured
party under the Uniform Commercial Code of the relevant state and any other
applicable law upon default by a debtor.
7.5 Upon an Event of Default, Borrower, immediately upon demand by Bank,
shall assemble the Collateral and make it available to Bank at a place or
places to be designated by Bank which is reasonably convenient to Bank and
Borrower. Borrower recognizes that in the event Borrower fails to perform,
observe or discharge any of its obligations or liabilities under this
Agreement or the Other Agreements, no remedy of law will provide adequate
relief to Bank, and agrees that Bank shall be entitled to temporary and
permanent injunctive relief in any such case without the necessity of proving
actual damages.
7.6 Upon an Event of Default, without notice, demand or legal process of
any kind, Bank may take possession of any or all of the Collateral (in
addition to Collateral of which it already has possession), wherever it may be
found, and for that purpose may pursue the same wherever it may be found, and
may enter into any of Borrowers premises where any of the Collateral may be or
is supposed to be, and search for, take possession of, remove, keep and store
any of the Collateral until the same shall be sold or otherwise disposed of,
and Bank shall have the right to store the same in any of Borrowers premises
without cost to Bank.
7.7 Any notice required to be given by Bank of a sale, lease, or other
disposition of the Collateral or any other intended action by Bank, (i)
deposited in the United States mail, postage prepaid and duly addressed to
Borrower at the address specified at the beginning of this Agreement, or (ii)
sent via certified mail, return receipt requested, or (iii) sent via
facsimile, or (iv) delivered personally, not less than ten (10) days prior to
such proposed action, shall constitute commercially reasonable and fair notice
to Borrower.
7.8 Upon an Event of Default, Borrower agrees that Bank may, if Bank deems
it reasonable, postpone or adjourn any such sale of the Collateral from time
to time by an announcement at the time and place of sale or by announcement at
the time and place of such postponed or adjourned sale, without being required
to give a new notice of sale. Borrower agrees that Bank has no obligation to
preserve rights against prior parties to the Collateral. Further, to the
extent permitted by law. Borrower waives and releases any cause of action and
claim against Bank as a result of Banks possession, collection or sale of the
Collateral, any liability or penalty for failure of Bank to comply with any
requirement imposed on Bank relating to notice of sale, holding of sale or
reporting of sale of the Collateral, and any right of redemption from such sale.
8. GENERAL
8.1 Borrower waives the right to direct the application of any and all
payments at any time or times hereafter received by Bank on account of
Borrowers Liabilities and Borrower agrees that Bank shall have the continuing
exclusive right to apply and re-apply any and all such payments in such manner
as Bank may deem advisable, notwithstanding any entry by Bank upon any of its
books and records.
8.2 Borrower covenants, warrants and represents to Bank that all
representations and warranties of Borrower contained in this Agreement and the
Other Agreements shall be true from the time of Borrowers execution of this
Agreement to the end of the original term and each renewal term hereof. All of
Borrowers warranties, representations, undertakings, and covenants contained
in this Agreement or the Other Agreements shall survive the termination or
cancellation of the same.
8.3 The terms and provisions of this Agreement and the Other Agreements
shall supersede any prior agreement or understanding of the parties hereto,
and contain the entire agreement of the parties hereto with respect to the
matters covered herein. This Agreement and the Other Agreements may not be
modified, altered or amended except by an agreement in writing signed by
Borrower and Bank. Except for the provisions of Section 2 hereof which shall
terminate as provided in paragraph 2.8, this Agreement shall continue in full
force and effect so long as any portion or component of Borrowers Liabilities
shall be outstanding. Should a claim (Recovery Claim) be made upon the Bank at
any time for recovery of any amount received by the Bank in payment of
Borrowers Liabilities (whether received from Borrower or otherwise) and should
the Bank repay all or part of said amount by reason of (1) any judgment,
decree or order of any court or administrative body having jurisdiction over
Bank or any of its property; or (2) any settlement or compromise of any such
Recovery Claim effected by the Bank with the claimant (including Borrower),
this Agreement and the security interests granted Bank hereunder shall
continue in effect with respect to the amount so repaid to the same extent as
if such amount had never originally been received by the Bank, notwithstanding
any prior termination of this Agreement, the return of this Agreement to
Borrower, or the cancellation of any note or other instrument evidencing
Borrowers Liabilities. Borrower may not sell, assign or transfer this
Agreement, or the Other Agreements or any portion thereof
8.4 Banks failure to require strict performance by Borrower of any
provision of this Agreement shall not waive, affect or diminish any right of
Bank thereafter to demand strict compliance and performance therewith. Any
suspension or waiver by Bank of an Event of Default by Borrower under this
Agreement or the Other Agreements shall not suspend, waive or affect any other
Event of Default by Borrower under this Agreement or the Other Agreements,
whether the same is prior or subsequent thereto and whether of the same or of
a different type. None of the undertakings, agreements, warranties, covenants
and representations of Borrower contained in this Agreement or the Other
Agreements and no Event of Default by Borrower under this Agreement or the
Other Agreements shall be deemed to have been suspended or waived by Bank
unless such suspension or waiver is by an instrument in writing signed by an
officer of Bank and directed to Borrower specifying such suspension or waiver.
8.5 If any provision of this Agreement or the Other Agreements or the
application thereof to any Person or circumstance is held invalid or
unenforceable, the remainder of this Agreement and the Other Agreements and
the application of such provision to other Persons or circumstances will not
be affected thereby and the provisions of this Agreement and the Other
Agreements shall be severable in any such instance.
8.6 This Agreement and the Other Agreements shall be binding upon and
inure to the benefit of the successors and assigns of Borrower and Bank. This
provision, however, shall not be deemed to modify Paragraph 83 hereof.
8.7 Borrower hereby appoints Bank as Borrowers agent and attorney-in-fact
for the purpose of carrying out the provisions of this Agreement and taking
any action and executing any agreement, instrument or document which Bank may
reasonably deem necessary or advisable to accomplish the purposes hereof which
appointment is irrevocable and coupled with an interest. All monies paid for
the purposes herein, and all costs, fees and expenses paid or incurred in
connection therewith, shall be part of Borrowers Liabilities, payable by
Borrower to Bank on demand.
8.8 This Agreement, or a carbon, photographic or other reproduction of
this Agreement or of any Uniform Commercial Code financing statement covering
the Collateral or any portion thereof, shall be sufficient as a Uniform
Commercial Code financing statement and may be filed as such.
8.9 Except as otherwise provided in the Other Agreements, if any provision
contained in this Agreement is in conflict with, or inconsistent with, any
provision in the Other Agreements, the provision contained in this Agreement
shall govern and control.
8.10 Except as otherwise specifically provided in this Agreement, Borrower
waives any and all notice or demand which Borrower might be entitled to
receive by virtue of any applicable statute or law, and waives presentment,
demand and protest and notice of presentment, protest, default, dishonor, non-
payment, maturity, release, compromise, settlement, extension or renewal of
any and all agreements, instruments or documents at any time held by Bank on
which Borrower may in any way be liable.
8.11 Until Bank is notified by Borrower to the contrary in writing by
registered or certified mail directed to Banks principal place of business,
the signature upon this Agreement or upon any of the Other Agreements of any
partner, manager, employee or agent of the Borrower, or of any other Person
designated in writing to Bank by any of the foregoing, shall bind Borrower and
be deemed to be the duly authorized act of Borrower.
8.12 This Agreement and the Other Agreements shall be governed and
controlled by the internal laws of the State of Illinois; and not the law of
conflicts.
8.13 If at anytime or times hereafter, whether or not Borrowers
Liabilities are outstanding at such time, Bank: (a) employs counsel for advice
or other representation, (i) with respect to the Collateral, this Agreement,
the Other Agreements or the administration of Borrowers Liabilities, (ii) to
represent Bank in any litigation, arbitration, contest, dispute, suit or
proceeding or to commence, defend or intervene or to take any other action in
or with respect to any litigation, arbitration, contest, dispute, suit or
proceeding (whether instituted by Bank, Borrower or any other Person) in any
way or respect relating to the Collateral, this Agreement, the Other
Agreements, or Borrowers affairs, or (iii) to enforce any rights of Bank
against Borrower or any other Person which may be obligated to Bank by virtue
of this Agreement or the Other Agreements, including, without limitation, any
Obligor; (b) takes any action with respect to administration of Borrowees
Liabilities or to protect, collect, sell, liquidate or otherwise dispose of
the Collateral; and/or (c) attempts to or enforces any of Banks rights or
remedies under this Agreement or the Other Agreements, including, without
limitation, Banks rights or remedies with respect to the Collateral, the
reasonable costs and expenses incurred by Bank in any manner or way with
respect to the foregoing, shall be part of Borrowers Liabilities, payable by
Borrower to Bank on demand.
8.14 BORROWER IRREVOCABLY AGREES THAT, SUBJECT TO BANKS SOLE AND ABSOLUTE
ELECTION, ALL ACTIONS OR PROCEEDINGS IN ANY WAY, MANNER OR RESPECT, ARISING
OUT OF OR FROM OR RELATED TO THIS AGREEMENT, THE OTHER AGREEMENTS OR THE
COLLATERAL SHALL BE LITIGATED ONLY IN COURTS HAVING SITUS WITHIN THE CITY OF
CHICAGO, STATE OF ILLINOIS. BORROWER HEREBY CONSENTS AND SUBMITS TO THE
JURISDICTION OF ANY LOCAL, STATE OR FEDERAL COURT LOCATED WITHIN SAID CITY AND
STATE. BORROWER HEREBY WAIVES ANY RIGHT IT MAY HAVE TO TRANSFER OR CHANGE THE
VENUE OF ANY LITIGATION BROUGHT AGAINST BORROWER BY BANK IN ACCORDANCE WITH
THIS PARAGRAPH.
8.15 BORROWER HEREBY IRREVOCABLY WAIVES ANY RIGHT TO TRIAL BY JURY IN ANY
ACTION, SUIT, COUNTERCLAIM OR PROCEEDING (1) TO ENFORCE OR DEFEND ANY RIGHTS
UNDER OR IN CONNECTION WITH THIS AGREEMENT, THE OTHER AGREEMENTS, OR ANY
AMENDMENT, INSTRUMENT, DOCUMENT OR AGREEMENT DELIVERED OR WHICH MAY IN THE
FUTURE BE DELIVERED IN CONNECTION HEREWITH OR THEREWITH, OR (11) ARISING FROM
ANY DISPUTE OR CONTROVERSY ARISING IN CONNECTION WITH OR RELATED TO THIS
AGREEMENT, THE OTHER AGREEMENTS, OR ANY SUCH AMENDMENT, INSTRUMENT, DOCUMENT
OR AGREEMENT, AND AGREES THAT ANY SUCH ACTION, SUIT, COUNTERCLAIM OR
PROCEEDING SHALL BE TRIED BEFORE A COURT AND NOT BEFORE A JURY.
IN WITNESS WHEREOF, this Agreement has been duly executed as of the day and
year specified at the beginning hereof.
BORROWER:
Phillips & Johnston, Inc.
an Illinois corporation
By: /s/Christopher L. Kowalski
Christopher L. Kowalski
President
By: /s/ Robert N. Pressly
Robert N. Pressly
Vice President
Accepted this 9th day of April, 1997, at Barks principal place of business in
the City of Chicago, State of Illinois.
AMERICAN NATIONAL BANK AND
TRUST COMPANY OF CHICAGO
By: /s/Richard D. Yanney
Print or Type Name: Richard D. Yanney
Its: Vice President
Exhibit 23.1
Webco Industries, Inc.
9101 West 21st Street
Sand Springs, OK 70463
We consent to the incorporation by reference in the registration statements of
Webco Industries, Inc. on Form S-3 (File No. 333-49219) and Form S-8 (File No.
333-22779) of our report dated September 9, 1998, on our audits of the
consolidated financial statements and financial statement schedule of Webco
Industries, Inc. as of July 31, 1998 and 1997, and for the years ended July
31, 1998, 1997, and 1996, which report is included in the Annual Report on
Form 10-K of Webco Industries, Inc. for the fiscal year ended July 31, 1998.
PricewaterhouseCoopers LLP
Tulsa, Oklahoma
October 27, 1998
Exhibit 23.2
Webco Industries, Inc.
9101 West 21st Street
Sand Springs, OK 70463
We consent to the incorporation by reference in the registration statements of
Webco Industries, Inc. on Form S-3 (File No. 333-49219) and Form S-8 (File No.
333-22779) of our report dated June 29, 1998, on our audits of the financial
statements of Phillips & Johnston, Inc. as of December 31, 1997, and for the
years ended December 31, 1997, and 1996, which report is included in the
Annual Report on Form 10-K of Webco Industries, Inc. for the fiscal year ended
July 31, 1998.
Dugan & Lopatka
Wheaton, Illinios
October 27, 1998