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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 December 31, 1997
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ___________to_____________
Commission file number 1-12164
WOLVERINE TUBE, INC.
-------------------------
(Exact name of registrant as specified in its charter)
Delaware 63-0970812
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(State of incorporation) (I.R.S. Employer Identification No.)
1525 Perimeter Parkway, Suite 210
Huntsville, Alabama 35806
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(Address of principal executive offices) Zip Code
(205)353-1310
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(Registrant's Telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of exchange on which registered:
Common Stock, $0.01 Par Value New York Stock Exchange
- ----------------------------- -----------------------
Securities registered pursuant to Section 12 (g) of the Act. None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of voting stock held by nonaffiliates of the
registrant as of March 13, 1998 was approximately $399,383,902 based upon the
closing price reported for such date on the New York Stock Exchange. For
purposes of this disclosure, shares of Common Stock held by persons who hold
more than 5% of the outstanding shares of Common Stock and shares held by
executive officers and directors of the registrant have been excluded because
such persons my be deemed to be affiliates. This determination is not
necessarily conclusive.
Indicate the number of shares outstanding of each class of Common Stock, as of
the latest practicable date:
Class Outstanding at March 13, 1998
----- -----------------------------
Common Stock, $0.01 Par Value 14,096,460 shares
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for the annual stockholders meeting
to be held May 21, 1998 are incorporated by reference into Part III.
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FORM 10-K
ANNUAL REPORT
YEAR ENDED DECEMBER 31, 1997
TABLE OF CONTENTS
<TABLE>
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Page No.
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PART I
<S> <C>
Item 1. Business .......................................................................................... 1
Item 2. Properties ........................................................................................ 12
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 Equity and Related
Stockholder Matters............................................................................ 16
Item 6. Selected Financial Data............................................................................ 18
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations ........................................................... 20
Item 8. Financial Statements and Supplementary Data ....................................................... 31
Item 9. Changes in and Disagreement with Accountants on Accounting and Financial Disclosures.............. 31
PART III
Item 10. Directors and Executive Officers of the Registrant ............................................... 32
Item 11. Executive Compensation ........................................................................... 32
Item 12. Security Ownership of Certain Beneficial
Owners and Management ........................................................................ 32
Item 13. Certain Relationships and Related Transactions ................................................... 32
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K .......................................................................... 33
</TABLE>
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ITEM 1
BUSINESS
INTRODUCTION
Wolverine Tube, Inc. ("Wolverine" or the "Company") is a leading North American
manufacturer and distributor of copper and copper alloy tube, and other tubular
products, and believes that it offers the broadest product line of any North
American tube manufacturer. The Company also manufactures and distributes copper
and copper alloy rod, bar and strip products. The Company believes that in 1997
it was the largest North American producer of copper and copper alloy tube for
commercial products.
Copper's unique attributes--thermal conductivity, ease of bending and joining,
and resistance to erosion and corrosion--make it an attractive material for a
broad range of applications in a large number of diverse industries. The Company
focuses on custom-engineered, high value-added copper and copper alloy tube,
which enhances performance and energy efficiency in many applications. Customers
include commercial and residential air conditioning and refrigeration equipment
manufacturers, appliance manufacturers, automotive manufacturers, industrial
equipment manufacturers, utilities and other power generating companies,
refining and chemical processing companies and plumbing wholesalers.
HISTORY AND STRUCTURE
The Company is the successor to a business founded in Detroit in 1916. In 1987,
the Company was purchased through a leveraged acquisition of substantially all
the assets of the seamless copper tube business of The Henley Group, Inc. and
its Canadian affiliates by an investor group that included the then-existing
management of the Company. In 1988, the Company's wholly-owned subsidiary,
Wolverine Tube (Canada) Inc. ("Wolverine Canada"), acquired substantially all of
the assets of Noranda Metal Industries Limited, a Canadian company. In January
1991, Genstar Capital Corporation ("Genstar") acquired a controlling interest in
the Company. At that time, Genstar owned 72.8% of the Common Stock with the
balance of the Common Stock owned by the management of the Company (the
"Management Stockholders") and certain other investors.
In August 1993, the Company and certain stockholders engaged in an initial
public offering of 6,555,000 shares of Common Stock. Of those shares, 3,280,000
were sold by Wolverine and 3,275,000 were sold by certain stockholders. Net
proceeds to the Company were approximately $46.4 million.
In November 1994, the Company completed its acquisition of Small Tube Products
Company, Inc. ("STP") a Delaware corporation, by means of a merger of a
wholly-owned subsidiary of the Company with and into STP. The Company acquired
all of the outstanding stock of STP in exchange for 400,000 shares of Wolverine
Common Stock and $54.6 million in cash. As a result
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of the merger, STP became a wholly-owned subsidiary of Wolverine and was renamed
"STPC Holding, Inc."
In September 1995, the Company completed a secondary public offering of
4,882,700 shares of Wolverine Common Stock (the "Secondary Stock Offering") in
which Genstar and its affiliates sold substantially all of their shares of
Wolverine Common Stock. No additional shares of Common Stock were issued by the
Company in conjunction with the Secondary Stock Offering.
In September 1996, the Company completed the acquisition of Tube Forming, Inc.,
a manufacturer of value-added copper fabricated products based in Carrollton,
Texas, for $34.6 million cash.
The Company, a Delaware corporation, was organized in 1987. The Company's
principal executive offices are located at 1525 Perimeter Parkway, Suite 210,
Huntsville, Alabama 35806, and its telephone number is (205) 353-1310.
PRODUCTS
COMMERCIAL PRODUCTS
The Company includes in the commercial products category several types of
technically sophisticated tube and fabricated tubular products that it sells
directly to equipment manufacturers and that are generally custom designed and
manufactured. Because of the high level of added value, profitability tends to
be higher for commercial products than for the Company's other products.
The Company's commercial products include:
Industrial Tube. Small (as small as .01") and medium diameter copper tube used
primarily by residential air conditioning, appliance and refrigeration equipment
manufacturers is known as "industrial" tube. Industrial tube is made to customer
specifications for equipment manufacturing. The Company's industrial tube
products include coils in lengths of up to one mile (to permit economical
transport to customers for further processing), smooth straight tube, internally
enhanced tube with internal surface ridges to increase heat transfer in air
conditioning coils, and very small diameter capillary tube (for control valve
applications).
Technical Tube. Technical tube is used to increase heat transfer in large
commercial air conditioners, heat exchangers for power generating and chemical
processing plants, water heaters, swimming pool and spa heaters and large
industrial equipment oil coolers. Small, wedge-like grooves (fins) on the outer
surface, and internal enhancements of technical tube, increase surface area and
refrigerant agitation, thereby increasing heat transfer efficiency. The Company
was the first to develop integral finned tube, in which the fins are formed
directly from the wall of the tube, and holds many patents in that area.
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Copper Alloy Tube. Copper alloy tube (principally copper mixed with nickel) is
manufactured for certain severe uses and corrosive environments such as
condenser tubes and heat exchangers in power generating plants, chemical plants,
refineries and ships. The Company's copper alloy tube products include smooth
and surface enhanced tube produced from a variety of alloys, U-bends for heat
exchangers and the Company's patented Korodense corrugated heat transfer tube.
Also included in the alloy tube category are surface enhanced titanium and steel
tube produced by the Company from smooth tube supplied by outside sources.
Fabricated Products. Fabricated products encompass a wide variety of copper,
copper alloy and aluminum tubing for a myriad of different applications. Tubing
can be supplied in various cut lengths, long straight lengths or coils.
Specialty fabricated parts, sub-assemblies and components (such as return bends
and manifolds) are also produced. Capabilities include cutting, bending,
swaging, flaring, end-finishing and brazing, which can be applied to a wide
range of products.
WHOLESALE PRODUCTS
Wholesale products include plumbing tube and refrigeration service tube.
Plumbing tube and refrigeration service tube are produced in standard sizes and
lengths primarily for plumbing, air conditioning and refrigeration service
applications. Many major competitors manufacture the most common 3/4" and 1/2"
diameter plumbing tube. These products are considered commodity products because
price and delivery are the primary competitive factors. Plumbing tube and
refrigeration service tube are sold primarily through wholesalers.
ROD, BAR AND STRIP PRODUCTS
Copper and Copper Alloy Rod and Bar. Copper and copper alloy rod and bar
products include a broad range of copper and copper alloy solid products,
including round, rectangular, hexagonal and specialized shapes. Brass rod and
bar are used by industrial equipment and machinery manufacturers for valves,
fittings and plumbing goods. Copper bars are used in electrical distribution
systems and switchgear.
Copper and Copper Alloy Strip. Copper and copper alloy strip products are used
primarily by automotive, hardware and electrical equipment manufacturers, by
roofing contractors and by mints for coins. Copper and copper alloy strip
products are sold directly to manufacturers and to service centers that keep an
inventory of standard sizes.
PHASEOUT OF CFCS
In September 1987, the United States, Canada and many other countries signed The
Montreal Protocol on Substances that Deplete the Ozone Layer (the "Montreal
Protocol"). As originally drafted, the Montreal Protocol provided for the
limitation on production and consumption of chlorofluorocarbons ("CFCs") over
various periods of time. On November 15, 1990, the President of the United
States signed The Clean Air Act Amendments of 1990 (the "1990 Amendments").
Title VI, Section 604 of the Clean Air Act (the "Act") requires the phase out of
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CFCs (other than methyl chloroform) by the year 2000. On November 23, 1992, the
fourth meeting of the parties to the Montreal Protocol was convened in
Copenhagen. At that meeting the parties agreed, among other things, to
accelerate the phase out of CFC production to January 1, 1996. On December 10,
1993, the United States Environmental Protection Agency (the "EPA") promulgated
regulations requiring domestic producers to cease production of CFCs by January
1, 1996.
The 1990 Amendments, the Montreal Protocol and the EPA regulations generally
contain exceptions for essential uses of CFCs and permit recycling. CFCs are
used as refrigerants in major air conditioning and refrigeration applications
(other than household air conditioning and refrigeration units which rely
exclusively on hydrochlorofluorocarbon-22). Alternatives to CFCs include
hydrofluorocarbons ("HFCs") and hydrochlorofluorocarbons ("HCFCs"), and to a
lesser extent, ammonia. HFCs and HCFCs are generally less efficient refrigerants
than CFCs.
The Company has benefited and expects to continue to benefit from the CFC
phaseout as existing large chillers are replaced over the next five to seven
years with units utilizing alternative refrigerants. Based upon data from the
EPA and the Air Conditioning and Refrigeration Institute ("ARI"), the Company
estimates that there are approximately 130,000 large industrial chillers
worldwide, including 80,000 large industrial chillers in North America that are
affected by the 1990 Amendments and the Montreal Protocol. Industry sources
estimate that as of December 31, 1997, there were 55,500 of the large industrial
chillers in North America that have not been replaced or retrofitted. These
chillers are used to regulate the temperature and humidity in offices, hotels,
shopping centers and other large buildings.
The Company expects demand for its high value-added energy efficient tubes to
increase as manufacturers produce more energy efficient and lower operating cost
units and as existing chillers are replaced in response to the ban on production
of CFCs. There can be no assurance that this anticipated demand will
materialize, or that the Company will not face increased competition, with an
adverse effect on profitability, from other manufacturers in this high
value-added segment. In addition, new refrigerants or technologies that are not
compatible with copper tube may be developed in response to the requirements of
the 1990 Amendments, the Montreal Protocol and the EPA regulations. The
development of any such new refrigerant or technology could have a material
adverse effect on the Company's results. Furthermore, there can be no assurance
that an effective CFC recycling program will not develop, allowing the continued
use of CFCs, that the pace of the replacement and retrofitting of chillers using
CFC's will proceed as anticipated, or that significant exceptions will not be
made that allow continued production of CFCs.
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MARKETS
Major markets for each of the Company's product lines are set forth below:
MAJOR MARKETS
PRODUCTS
<TABLE>
<S> <C>
Commercial Products:
Industrial Tube........... Residential and small commercial air conditioning manufacturers,
appliance manufacturers, automotive manufacturers, industrial
equipment manufacturers, refrigeration equipment manufacturers
and redraw mills (which further process the tube).
Technical Tube.............. Commercial air conditioning manufacturers, power and
process industry heat exchanger manufacturers, water,
swimming pool and spa heater manufacturers and oil
cooler manufacturers.
Copper Alloy Tube........ Utilities and other power generating companies, refining
and chemical processing companies, heat exchanger
manufacturers and shipbuilders.
Fabricated Products....... Consumer appliance, air conditioning and refrigeration,
automotive, heavy equipment, marine, building and heating
industries.
Wholesale Products Plumbing wholesalers and refrigeration
service wholesalers.
Rod, Bar and Strip Products Electrical equipment and automotive parts
manufacturers, coin mints, locomotive and other
industrial equipment manufacturers, metal
service centers and rerollers (which
further process the product).
</TABLE>
York International accounted for 11% of the Company's consolidated net sales in
1996. No customer accounted for as much as 10% of the Company's consolidated net
sales in 1997 or 1995.
A significant part of the Company's sales are based on short-term purchase
orders. For this reason, the Company does not maintain a backlog and believes
that backlog is not necessarily a meaningful indicator of future results. A
significant and increasing amount of the Company's sales result from
"partnership" relationships wherein the Company provides a high degree of
specialized service and generally becomes the largest supplier of a customer's
copper tube
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requirements. Under these arrangements, the Company's customers provide
forecasts of their requirements, against which purchase orders are periodically
released. While these relationships do not involve long-term supply or purchase
contracts from either party, they have provided the Company with an increased
degree of order flow predictability.
SALES AND MARKETING
The Company generally uses a direct field sales force rather than the
agent-based approach used by many of its competitors. The Company believes its
direct sales force forms a critical link in the communication between the
Company and its customers. This link is particularly important in the high
value-added product segments, in which the Company often works with customers in
their product enhancement and new product development efforts.
North America. The sales force in North America consists of the Vice President
of Sales and field marketing representatives who are responsible for selling and
servicing accounts for the entire product line. The sales force is coordinated
by regional managers located in Dallas, Texas and London, Ontario.
Overseas. The Company's overseas export sales are carried out both directly with
major overseas customers and through foreign agents. These sales are coordinated
by the Senior Vice President, Sales and Marketing from the Company's offices in
Huntsville, Alabama. The Company has sales, marketing and business development
offices in Lyon, France, Leeds, England and Hong Kong.
For information concerning the amount of sales, income from operations and
certain other financial information about foreign and domestic operations see
Note 15 of the Notes to Consolidated Financial Statements.
COMPETITION
While no single company competes with Wolverine in all of the Company's product
lines, the Company faces significant competition in each of its product lines.
The Company has numerous competitors, some of which are larger and have greater
financial resources than the Company. Cerro Copper Products Co., Inc. ("Cerro"),
Halstead Industries Inc. ("Halstead"), Industrias Nacobre S.A. de C.V., Kobe
Copper Products Inc., Mueller Industries Inc., Olin Corporation, Outokumpu
American Brass Company and others compete with the Company in one or more
product lines. There can be no assurance that the Company will be able to
compete successfully or that competition will not have an adverse effect on the
Company's operating results. Minimal product differentiation among competitors
in the Company's wholesale and rod, bar and strip product lines creates a
pricing structure for these products resembling "commodity" pricing (i.e., a
price structure where customers differentiate between products almost
exclusively on price). In these product areas certain of the Company's
competitors, primarily Cerro and Halstead, have significantly larger market
shares than the Company, and tend to be the industry pricing leaders. If the
Company's competitors in these product lines were to significantly reduce
prices, the Company's operating results could be adversely affected.
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The Company currently faces limited competition for certain high value-added
commercial products. If other companies, or some of the Company's existing
customers, begin or expand operations in these categories, the Company could be
adversely affected. Because the Company competes primarily on the basis of the
technical advantages of its commercial products, technical improvements by
competitors could reduce the Company's competitive advantage in these product
lines and thereby adversely affect the Company. The Company could also be
adversely affected if new technologies emerge in the refrigeration industry, or
other consumer industries, including technologies developed in response to the
elimination of CFCs, that would reduce or eliminate the need for copper and
copper alloy tube. Certain of the Company's products, such as plumbing tube,
compete with products made of alternative substances, such as polybutylene
plastic. A substantial increase in the price of copper could decrease the
relative attractiveness of copper products in cases where an alternative exists
and thereby adversely affect the Company's operating results.
MANUFACTURING
The manufacture of seamless tube and tubular products consists of casting,
extruding, drawing, forming and finishing processes. In most cases, the raw
material is first cast into a solid cylindrical shape or "billet". The billet is
then heated to a high temperature and extruded under high pressure into a tube.
At one of the Company's facilities, the raw material is cast directly into a
tubular product. The tube is either drawn to smaller sizes or reduced on a
forging machine and then drawn to smaller sizes. The outside and/or inside
surface can be enhanced to achieve the desired heat transfer qualities.
Depending on customer needs, bending, annealing (heating to restore
flexibility), coiling or other operations may be required to finish the product.
Virtually all of the tube produced by the Company is seamless as opposed to
welded tube. Welded tube is made from a flat strip that is rolled and welded
together at the edges. A seamless tube has no welded edge because it is formed
by piercing a hole through the center of a cylinder of heated metal and
extruding the tube under pressure.
RAW MATERIALS, SUPPLIERS AND PRICING
The Company's principal raw materials are copper, nickel, zinc and tin. In 1997,
the Company purchased approximately 335.5 million pounds of metal, approximately
89% of which was copper. The Company contracts for its copper requirements with
a variety of sources, including producers, merchants, brokers, dealers and
industrial suppliers. The Company's raw materials are available from a wide
variety of sources, and the Company does not believe that the loss of any one
source would materially affect its operations.
The key elements of the Company's copper procurement and product pricing
strategies are the assurance of a stable supply and the avoidance of exposure to
metal price fluctuations. The price of copper purchased by the Company is based
upon fluctuating market prices, usually with the COMEX price as a benchmark. The
Company generally has an "open pricing" option under which the Company may set
the price of all or a portion of the metal subject to a purchase
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contract at any time up to the last COMEX trading day (usually two days before
the end of the month) of the last month in the contract period.
In the majority of cases, the price to the customer contains two components: (i)
a metal charge based upon the market value of the metal content on the date of
shipment of the product to the customer; and (ii) a fixed fabrication charge. In
other cases, the Company quotes a firm price to the customer which covers both
the metal price and the fabrication charge. In either case, the Company
minimizes its exposure to metal price fluctuations through various strategies.
Generally, at the time the metal price for the customer is established, the
Company prices an equivalent amount of metal under its open pricing arrangements
with its suppliers. It is the Company's policy not to attempt to profit from
fluctuations in copper prices by taking commodity risks or speculative commodity
positions.
RESEARCH AND DEVELOPMENT
The Company's research and development efforts are devoted to new product
development and manufacturing process improvements. The Company's research and
development is primarily conducted at the Decatur, Alabama facility.
Heat transfer products, including the Company's line of "Turbo" products,
account for over 30% of commercial product gross profit. Turbo products include
Turbo-A, the Company's internally enhanced tube, Turbo-B, and Turbo-C, the
proprietary line of enhanced surface boiling and condenser tube for chillers.
Demand for enhanced tube products is driven by the need for improved energy
efficiency. New product development will continue to be concentrated in the heat
transfer area. The Company is involved in several industry, university and
government sponsored research projects relating to CFC alternative refrigerants
as well as more energy efficient tube for the power and petro-chemical
industries. The ARI has chosen the Company's tube as the "standard" to measure
the efficiency of alternative refrigerants. See "Phaseout of CFCs."
The Company's research and development expense was $1.4 million, $1.6 million
and $1.5 million for the years ended December 31, 1997, 1996 and 1995,
respectively. The Company uses its existing manufacturing facilities and
personnel to assist in manufacturing process research and development efforts.
In addition, the Company engages in new product development efforts with certain
of its major customers.
ENVIRONMENTAL MATTERS
The Company's operations are subject to extensive environmental regulations
imposed by federal, state, provincial and local authorities in the United States
and Canada with respect to emissions to air, discharges to waterways, and the
generation, handling, storage, transportation, treatment and disposal of waste
materials. In addition, the Company has incurred, and in the future may incur,
liability under environmental statutes and regulations with respect to the
contamination of sites owned or operated by the Company (including contamination
caused by prior owners and operators of such sites) and the off-site disposal of
hazardous substances.
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The Company believes its operations are in substantial compliance with the terms
of all applicable environmental laws and regulations as currently interpreted.
However, the Company expects that future regulations and changes in the text or
interpretation of existing regulations may subject the Company's operations to
increasingly stringent standards. While the precise effect of these changes on
the Company cannot be estimated, compliance with such requirements may make it
necessary, at costs which may be substantial, to retrofit existing facilities
with additional pollution-control equipment and to undertake new measures in
connection with the storage, transportation, treatment and disposal of
by-products and wastes.
The Company has a reserve of $2.5 million for environmental remediation costs.
This reserve is reflected in the Company's December 31, 1997 Consolidated
Balance Sheet and does not anticipate any recovery for amounts indemnified by
other parties. The total cost of environmental assessment and remediation
depends on a variety of regulatory, technical and factual issues, some of which
cannot be anticipated. While the Company believes that the reserve, under
existing laws and regulations, is adequate to cover presently identified
environmental remediation liabilities, there can be no assurance that such
amount will be adequate to cover the ultimate costs of these liabilities, or the
costs of environmental remediation liabilities that may be identified in the
future. See "Item 3 - Legal Proceedings" and "Item 7 - Management's Discussion
and Analysis of Financial Condition and Results of Operations - Environmental
Matters".
EMPLOYEES
As of December 31, 1997, the Company had a total of 3,467 employees. None of the
United States or the London, Ontario employees is represented by a union. A
majority of the hourly employees at the Montreal and Fergus plants are unionized
and are covered by collective bargaining agreements that expire in 1999 and
2000, respectively. In December 1996, an attempt to organize the employees at
the Shawnee, Oklahoma facility by the International Brotherhood of Teamsters,
Local Union 886, AFL-CIO was defeated. As a whole, the Company believes its
relationships with its employees are very good.
PATENTS AND TRADEMARKS
The Company owns a number of United States and other patents and trademarks and
has granted licenses under some of such patents and trademarks. While the
Company believes that its patents and trademarks have competitive value, it does
not consider the business of the Company as a whole to be dependent on its
patents, patent rights or trademarks.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Certain of the statements and subject areas contained herein in "Business" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" that are not based upon historical or current facts deal with or may
be impacted by potential future circumstances and developments. Such statements
and the discussion of such subject areas involve, and are therefore qualified
by, the inherent risks and uncertainties surrounding future expectations
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generally, and also may materially differ from the Company's actual future
experience involving any one or more of such subject areas. The Company has
attempted to identify, in context, certain of the factors that it currently
believes may cause actual future experience and results to differ from current
expectations regarding the relevant statement or subject area. The Company's
operations and results also may be subject to the effect of other risks and
uncertainties in addition to the relevant qualifying factors identified
elsewhere herein, including, but not limited to, cyclicality and seasonality in
the industries to which Wolverine sells its products, the impact of competitive
products and pricing, extraordinary fluctuations in the pricing and supply of
the Company's raw materials, volatility of commodities markets, unanticipated
developments in the areas of environmental compliance, and other risks and
uncertainties identified from time to time in the Company's reports filed with
the Securities and Exchange Commission.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information with respect to each
executive officer of the Company as of March 27, 1998:
<TABLE>
<CAPTION>
Years in the
Name Age Industry Positions with the Company
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<S> <C> <C> <C>
John M. Quarles 57 26 Chairman and Director
Dennis J. Horowitz 51 -- President, Chief Executive Officer and
Director
James E. Deason 50 4 Executive Vice President, Chief Financial Officer,
Secretary, and Director
Thomas J. Ruble 45 3 Senior Vice President, Operations
Alan L. Smith 49 2 Senior Vice President and General Manager,
Fabricated Products Group
Dale G. Barnhart 45 14 Senior Vice President, Sales and Marketing
Norman R. Clevinger 50 25 Vice President, Development and Planning
William H. Hartman 57 36 Vice President, Purchasing
Thomas J. Malone 50 19 Vice President, International Operations
Sam Alfano 42 2 Corporate Controller
</TABLE>
Mr. Quarles has been a Director since January 1991 and Chairman since May, 1994.
Mr. Quarles had served as President and Chief Executive Officer since 1990,
until his retirement from those positions in September, 1996 and served as
Interim Chief Executive Officer from March 1997 until March 1998.
Mr. Horowitz has been the President and Chief Executive Officer and a director
of the Company since March 1998. Prior to joining the Company, Mr. Horowitz
served as Corporate Vice President and President of the Americas of AMP
Incorporated ("AMP"), a high technology electric connector and interconnection
systems company, since September 1994. Prior to joining AMP, Mr. Horowitz was
employed for over fourteen years at North American Philips Corporation where he
served from October 1993 to August 1994 as President and Chief Executive
Officer of Philips Technologies and previously served as President and Chief
Executive Officer Philips Magnavox CATV Systems and President and Chief
Executive Officer of Philips Discrete Products Division. Mr. Horowitz also
serves as a director of Aerovox Incorporated, Superconductor Techologies, Inc.
and Amonix, Inc.
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Mr. Deason has been the Executive Vice President, Chief Financial Officer and
Secretary of the Company since September 1994 and a Director of the Company
since October 1995. Prior to joining the Company, Mr. Deason, a Certified
Public Accountant, was most recently a partner with Ernst & Young LLP in
Birmingham, Alabama.
Mr. Ruble has been Senior Vice President, Operations of Wolverine since April
1995. Prior to joining Wolverine, Mr. Ruble spent over 20 years with Delphi
Chassis Systems of General Motors Corporation, where he was most recently
responsible for multiplant operations.
Mr. Smith has been Senior Vice President and General Manager, Fabricated
Products Group since January 1996. For more than five years prior to joining
Wolverine, Mr. Smith was Vice President, General Manager at Copperweld
Corporation, where he was responsible for sales and marketing, manufacturing and
distribution of their Bimetallic Products Company.
Mr. Barnhart has been the Senior Vice President, Marketing and Sales since
January 1997. For more than five years prior to joining Wolverine Tube, Mr.
Barnhart was with Copeland Corporation where he held the positions of Vice
President Sales and Marketing and Vice President Business Development.
Mr. Clevinger has been the Vice President, Development and Planning of the
Company since March 1990. Mr. Clevinger has spent 25 years with the Company,
holding numerous positions in product engineering.
Mr. Hartman has been the Vice President, Purchasing of the Company since 1988.
Mr. Hartman has spent 36 years with the Company, holding numerous positions in
material control.
Mr. Malone has been the Vice President, International Operations since November
1997. Mr. Malone joined the Company as Vice President, Corporate Development in
March 1997. Prior to joining the Company, he served in a variety of positions at
Carrier Transicold, a division of United Technologies Inc., since 1978, most
recently serving as Vice President, Asia Pacific Operations.
Mr. Alfano has been the Corporate Controller since May 1996. For more than five
years prior to joining Wolverine, Mr. Alfano, a Certified Public Accountant, was
with Citation Corporation where he held the positions of Corporate Controller
and Director of Administration of the Texas Foundries Division.
11
<PAGE> 14
ITEM 2
PROPERTIES
UNITED STATES FACILITIES The Company owns and operates manufacturing facilities
in Decatur, Alabama; Ardmore, Tennessee; Booneville and Greenville, Mississippi;
Roxboro, North Carolina; Shawnee, Oklahoma; and Carrollton, Texas. The Altoona,
Pennsylvania facility is partially owned and partially leased from a local
industrial development agency for $3,500 per year in perpetuity. All of these
facilities are operating at or near capacity. The Company's corporate offices
are comprised of approximately 7,200 square feet of a leased facility in
Huntsville, Alabama. The following table describes each of the Company's United
States manufacturing facilities:
<TABLE>
<CAPTION>
Number of
Property Plant Size Year Employees at
Location Size (acres) (sq. ft.) Opened Dec. 31, 1997 Description
-------- ------------ --------- ------ ------------- -----------
<S> <C> <C> <C> <C> <C>
Decatur, AL 166 590,442 1948 970 Produces each of the Company's tube product
lines. A significant portion of production
is industrial, technical and copper alloy
tube. Produces smooth feedstock tube for
the Ardmore and Booneville facilities.
Also houses a portion of the Corporate
staff.
Ardmore, TN 6 56,724 1974 75 A redraw facility that produces higher
margin commercial products such as
capillary tube and specially fabricated
components.
Booneville, MS 30 152,200 1989 176 Processes feedstock tube from Decatur
facility into enhanced surface industrial
tube and technical copper tube.
Greenville, MS 10 50,000 1982 160 A redraw facility that produces higher
margin commercial products such as
capillary tube and specially fabricated
parts.
Roxboro, NC 33 137,450 1994 291 Produces technical copper tube, plumbing
tube and refrigeration service tube.
Shawnee, OK 51 309,450 1974 489 Produces each of the Company's copper tube
product lines. Capable of producing
feedstock tube for the Ardmore and
Booneville facilities.
Altoona, PA 32 169,000 1956 285 A redraw facility that produces higher
margin commercial products such as
capillary tube, specially fabricated parts
and smaller diameter tube.
Carrollton, TX 8 65,000 1987 172 A redraw facility that produces higher mar-
gin commercial products such as specialty
fabricated parts, return bends and mani-
folds.
</TABLE>
12
<PAGE> 15
CANADIAN FACILITIES The Company's Canadian manufacturing facilities are located
in London and Fergus, Ontario, and in Montreal, Quebec. The facilities are
operating at or near capacity. The following table describes each of the
Company's Canadian manufacturing facilities:
<TABLE>
<CAPTION>
Number of
Property Plant Size Year Employees at
Location Size (acres) (sq. ft.) Opened Dec. 31, 1997 Description
-------- ------------ --------- ------ ------------- -----------
<S> <C> <C> <C> <C> <C>
London, Ontario 45 195,000 1958 313 Produces plumbing tube,
refrigeration service tube and
industrial tube. Also houses
corporate offices.
Fergus, Ontario 26 150,000 1968 120 Produces copper and copper alloy
strip.
Montreal, Quebec 25 424,000 1942 416 Produces plumbing tube and
refrigeration service tube,
copper alloy tube and copper and
copper alloy rod and bar.
</TABLE>
13
<PAGE> 16
ITEM 3
LEGAL PROCEEDINGS
The Company's facilities and operations are subject to extensive environmental
laws and regulations, and the Company is currently involved in various
proceedings relating to environmental matters as described under "Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Environmental Matters." The Company is not involved in any legal
proceeding that it believes could have a material adverse effect upon its
financial condition, results of operations or liquidity.
14
<PAGE> 17
ITEM 4
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders by the Company during
the final quarter of the fiscal year covered by this report.
15
<PAGE> 18
PART II
ITEM 5
MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The Company's Common Stock is traded on the New York Stock Exchange under the
symbol "WLV." On March 13, 1998, the Company had 379 stockholders of record and
the closing price of the Company's Common Stock was $39.625.
The following table sets forth, for the periods indicated, the range of high and
low reported sale prices for the Company's Common Stock on the New York Stock
Exchange for each quarter of fiscal years 1997 and 1996:
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
Fiscal Year Ended December 31, 1997:
First quarter $39 1/4 $24 1/4
Second quarter $31 $24 1/2
Third quarter $32 7/8 $26 1/2
Fourth quarter $33 $28 1/4
</TABLE>
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
Fiscal Year Ended December 31, 1996:
First quarter $43 1/8 $34 1/2
Second quarter $40 5/8 $31
Third quarter $43 1/4 $32 3/4
Fourth quarter $43 3/8 $34 1/2
</TABLE>
The Company did not declare or pay cash dividends on its Common Stock during the
years ended December 31, 1997 or 1996. The Company does not currently plan to
pay cash dividends on the Common Stock. Any future determination to pay cash
dividends will depend on the Company's results of operations, financial
condition, contractual restrictions and other factors deemed relevant by the
Board of Directors. The Company intends to retain earnings to support the growth
of the Company's business.
16
<PAGE> 19
Under the terms of the Company's Cumulative Preferred Stock, the Company must
pay all accrued dividends on outstanding Cumulative Preferred Stock prior to
making any cash dividend payments on the Common Stock. See Note 10 of the Notes
to Consolidated Financial Statements. In addition, the Company's credit
agreement with a group of banks permits the Company to pay dividends on the
Common Stock only if certain financial and other tests are met. See "Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
17
<PAGE> 20
ITEM 6
SELECTED FINANCIAL DATA
The historical consolidated financial data presented below for the years ended
December 31, 1997, 1996, 1995, 1994 and 1993 were derived from the audited
consolidated financial statements of the Company, and should be read in
conjunction therewith and with the information set forth under "Item 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations".
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------------------------------
(In thousands, except per share amounts)
Statement of Income Data: 1997 1996 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net sales $ 667,686 $699,863 $664,605 $525,619 $ 468,987
Cost of goods sold 585,060 606,157 580,749 459,043 406,590
- ----------------------------------------------------------------------------------------------------------------
Gross profit 82,626 93,706 83,856 66,576 62,397
Selling, general and administrative expenses 22,081 21,903 23,391 17,877 22,942
Write-down of fixed assets (a) -- -- -- -- 2,259
Non-recurring charge (b) 4,384 -- -- -- --
- ----------------------------------------------------------------------------------------------------------------
Income from operations 56,161 71,803 60,465 48,699 37,196
Other expenses:
Interest expense, net 7,367 9,321 9,038 6,728 8,761
Amortization and other, net 712 1,107 1,604 1,376 1,264
- ----------------------------------------------------------------------------------------------------------------
Income before income taxes, extraordinary item
and cumulative effect of accounting change 48,082 61,375 49,823 40,595 27,171
Income tax expense 17,506 21,792 17,587 15,550 11,138
- ----------------------------------------------------------------------------------------------------------------
Income before extraordinary item and
cumulative effect of accounting change 30,576 39,583 32,236 25,045 16,033
Extraordinary item, net of income tax benefit (4,738) -- -- -- --
Cumulative effect of accounting change,
net of income tax benefit -- -- -- -- (1,768)
- ----------------------------------------------------------------------------------------------------------------
Net income $ 25,838 $ 39,583 $ 32,236 $ 25,045 $ 14,265
================================================================================================================
Net income applicable to common shares (c) $ 25,558 $ 39,303 $ 31,956 $ 24,765 $ 13,966
================================================================================================================
Earnings per common share-basic:
Income before extraordinary item and
cumulative effect of accounting change $ 2.16 $ 2.85 $ 2.35 $ 1.89 $ 1.44
Extraordinary item (0.34) -- -- -- --
Cumulative effect of accounting change -- -- -- -- (0.16)
- ----------------------------------------------------------------------------------------------------------------
Net income per share $ 1.82 $ 2.85 $ 2.35 $ 1.89 $ 1.28
================================================================================================================
Basic weighted average common shares 14,022 13,772 13,605 13,087 10,932
================================================================================================================
Earnings per common share-diluted:
Income before extraordinary item and
cumulative effect of accounting change $ 2.13 $ 2.77 $ 2.26 $ 1.82 $ 1.39
Extraordinary item (0.33) -- -- -- --
Cumulative effect of accounting change -- -- -- -- (0.16)
- ----------------------------------------------------------------------------------------------------------------
Net income per share $ 1.80 $ 2.77 $ 2.26 $ 1.82 $ 1.23
================================================================================================================
Diluted weighted average common
and common equivalent shares 14,232 14,196 14,118 13,643 11,331
================================================================================================================
</TABLE>
18
<PAGE> 21
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------------------------------------
Other Data: 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------
(In thousands, except per pound amounts)
<S> <C> <C> <C> <C> <C>
Pounds shipped 339,313 349,297 313,145 303,813 288,483
Depreciation and amortization $ 16,796 $ 16,346 $ 15,790 $ 12,891 $ 11,815
Capital expenditures 21,598 8,540 15,805 34,382 22,330
Average COMEX price of copper per 1.04 1.06 1.35 1.07 0.85
pound (d)
</TABLE>
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------
Balance Sheet Data: 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Total assets $424,922 $397,020 $357,225 $340,552 $276,036
Total long-term debt 98,411 100,473 100,547 100,715 100,010
Redeemable cumulative
preferred stock 2,000 2,000 2,000 2,000 2,000
Stockholders' equity 232,763 209,222 164,526 128,719 97,644
</TABLE>
(a) The Company discontinued the majority of its aluminum tube operations in
1993. The Company recorded a one-time, pre-tax charge of $2.3 million for
fixed asset write-downs and disposal costs in the quarter ended July 3,
1993.
(b) The Company recognized a non-recurring, pre-tax charge of approximately
$4.4 million in 1997. This charge included $1.8 million of expenses related
to the implementation of the Company's 1997 Voluntary Early Retirement
Program; $1.3 million of severance costs; $0.6 million of professional fees
and other costs associated with an acquisition that was not completed; and
$0.7 million of costs for discontinuing the Poland operations of Small Tube
Manufacturing Corporation (a wholly-owned subsidiary of the Company).
(c) Reflects the payment of preferred stock dividends and accretion of
preferred stock redemption requirements.
(d) Source: Metals Week
19
<PAGE> 22
ITEM 7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
The following general factors should be considered in analyzing the Company's
results of operations:
Components of Cost of Goods Sold
A substantial portion of the Company's cost of goods sold reflects the cost of
raw material, principally copper. These costs, which fluctuate with the markets
for such raw material, are generally passed along to the Company's customers.
Accordingly, the levels of the Company's net sales and cost of goods sold are
affected by the rise and fall of copper prices, even in the absence of increases
or decreases in business activity. Such increases or decreases cause variations
in the Company's gross margin (gross profit as a percentage of net sales), but
have little direct impact on the Company's levels of gross profit.
Variability of Wholesale Product Gross Profit
Gross profit attributable to sales of the Company's wholesale products has
fluctuated and may continue to fluctuate substantially from period to period. In
1997, 1996 and 1995, gross profit from sales of these products was $2.8 million,
$7.9 million, and $2.2 million respectively. Gross profit derived from the sale
of wholesale products is mainly affected by changes in selling prices. Selling
prices for these products are affected by general economic conditions
(especially the rate of housing starts), industry competition and manufacturing
capacity, industry production levels and other market factors, all of which are
beyond the control of the Company.
Impact of Product Mix
The Company's products range from higher value-added and higher margin
commercial products to commodity type products such as wholesale tube and rod,
bar and strip. The Company's overall profitability from period to period is
affected by the mix in sales within these categories. The Company has
substantial sales in Canada, and its product mix in that market, as compared to
the United States market, reflects a much higher percentage of commodity type
products, such as wholesale tube and rod, bar and strip. The results of Canadian
operations reflect both this different product mix and the impact of Canadian
market and economic trends, which can be independent of United States trends.
Cyclical and Seasonal Nature of Demand
Because the Company primarily supplies component parts, the Company's operations
are affected by changes in its customers' markets. Demand in certain industries
to which the Company sells is cyclical. In particular, sales of plumbing tube
and refrigeration service tube are affected by changes in residential
construction rates. Demand in certain industries to which Company sells,
including the residential air conditioning industry, is also seasonal. Sales to
the
20
<PAGE> 23
residential air conditioning market are generally greater in the first and
second quarters of the year and lower in the third and fourth quarters because
manufacturers typically build inventories in the early part of the year in
anticipation of summer air conditioning sales and housing starts. In addition,
sales of industrial tube are affected adversely in years with unusually cool
summers.
RESULTS OF OPERATIONS
Year Ended December 31, 1997 Compared with Year Ended December 31, 1996
Consolidated net sales for the year ended December 31, 1997 were $667.7 million,
a decrease of 4.6% from net sales of $699.9 million in 1996. Pounds shipped
decreased by 2.8% in 1997 to 339.3 million from 349.3 million in 1996. Net sales
reflect a decrease in the price of copper, the Company's main raw material and
pounds shipped. The average COMEX copper price for 1997 was $1.04 per pound
compared with $1.06 per pound in 1996. Net sales were also impacted by a
decrease in fabrication charges to customers for wholesale and rod, bar and
strip products which were offset by increased fabrication charges in the
commercial product line.
Shipments of commercial tube decreased 5.8% in 1997 from 1996, primarily as a
result of decreased shipments of industrial tube used in the residential air
conditioning industry, as well as a 3.4% decrease in technical tube shipments.
The decrease in shipments of industrial tube was principally attributable to a
decline in orders from customers in the residential air conditioning industry,
which generally did not meet its anticipated levels of production for 1997, and
the decrease in technical tube shipments was primarily because the manufacturers
of large commercial air conditioners reduced their production from previous
years' levels. The decline in commercial shipments was offset somewhat by a
10.8% increase in shipments of fabricated products, primarily resulting from the
acquisition of Tube Forming, Inc. in September 1996. Shipments of the Company's
wholesale products increased 5.8% as a result of increased participation by the
Company in the United States market. Rod, bar and strip product shipments
decreased 2.3%, primarily as a result of a decline in shipments of strip
products. Pounds shipped in the United States were 223.9 million in 1997
representing an increase of 4.8% from 1996. Canadian pounds shipped in 1997 were
115.4 million, 14.9% less than 1996.
Consolidated gross profit decreased 11.8% for 1997 to $82.6 million from $93.7
million in 1996. This decline was primarily the result of the decreased
shipments of commercial products, which are generally the Company's highest
margin products, and a shift in product mix to products within the commercial
product category. In addition, the fabrication price charged to customers for
the Company's wholesale products decreased 24.8%, which resulted in decreased
gross profit. Consolidated gross margin decreased to 12.4% in 1997, from 13.4%
in 1996.
Gross profit from United States operations decreased by 7.9% to $69.6 million,
from $75.6 million in 1996, due to the factors outlined above. Gross profit from
the Canadian operations decreased by 28.2% to $13.0 million from $18.1 million
in 1996, principally due to decreased wholesale product fabrication charges and
reduced pounds shipped.
Consolidated selling, general and administrative expenses for the year ended
December 31, 1997 were $22.1 million compared with $21.9 million in 1996.
21
<PAGE> 24
During the year ended December 31, 1997, the Company recognized a non-recurring,
pre-tax charge ("the non-recurring charge") to operations of approximately $4.4
million ($3.0 million after tax). This one-time charge to operations included
$1.8 million of expenses related to the implementation of the Company's 1997
Voluntary Early Retirement Program; $1.3 million of severance costs primarily
associated with the departure of the Company's former Chief Executive Officer;
$0.6 million of professional fees and other costs associated with an acquisition
that was not completed; and $0.7 million of costs for discontinuing the Poland
operations of Small Tube Manufacturing Corporation (a wholly-owned subsidiary of
the Company).
As a result of decreased gross profit, slightly increased selling, general and
administrative expenses and the recognition of the non-recurring charge,
consolidated income from operations decreased by 21.7% to $56.2 million in 1997,
from $71.8 million in 1996. United States income from operations decreased by
21.3% to $45.1 million, from $57.3 million, and Canadian income from operations
decreased by 23.4% to $11.1 million in 1997, from $14.5 million in 1996.
Consolidated net interest expense decreased by 20.4% to $7.4 million in 1997
from $9.3 million in 1996. This decrease is primarily due to reduced interest
expense resulting from the Company's refinancing of debt outstanding under its
10 1/8% Senior Subordinated Notes due 2002 ("Notes") in April 1997, but was
partially offset by reduced interest income resulting from a reduced amount of
cash holdings during 1997 as a result of the Company's use of cash to purchase
Tube Forming, Inc. in the third quarter of 1996. During the year ended December
31, 1997, the Company incurred an extraordinary charge associated with the early
extinguishment of the Notes for unamortized debt issuance cost, professional
fees and prepayment premiums. The charge on the extinguishment net of tax was
$4.7 million ($7.5 million pre-tax).
The effective tax rate for the year ended December 31, 1997 was 36.4% compared
to 35.5% for the year ended December 31, 1996. Upon an evaluation of the
Company's income tax position during the period ended December 31, 1996, the tax
provision was reduced to reflect the settlement of certain tax issues.
For the year ended December 31, 1997, net income was $25.8 million, or $1.80 per
diluted share, compared with $39.6 million, or $2.77 per diluted share, for the
year ended December 31, 1996. Excluding the non-recurring charge and the
extraordinary charge relating to the extinguishment of the Notes, net income was
$33.6 million or $2.34 per diluted share, for the year ended December 31, 1997.
Year Ended December 31, 1996 Compared with Year Ended December 31, 1995
Consolidated net sales for the year ended December 31, 1996 were $699.9 million,
an increase of 5.3% from net sales of $664.6 million in 1995. Pounds shipped
increased by 11.5% in 1996 to 349.2 million from 313.1 million in 1995. Net
sales for 1996 reflect a decrease in the price of copper, the Company's main raw
material. The average COMEX copper price for 1996 was $1.06 compared with $1.35
for 1995. Shipments of commercial tube increased by 5.5% in 1996 over 1995 due
to continued demand from large commercial air conditioning equipment
manufacturers as the CFC phaseout continued, and increased shipments of
industrial tube used in
22
<PAGE> 25
residential air conditioning and appliance applications partially resulting from
the acquisition of Tube Forming, Inc., in September 1996. As fabrication charges
in the wholesale tube products market increased, the Company increased its
offering of wholesale products in the United States. As a result, shipments of
Wolverine's wholesale products increased by 49.7% in 1996. Pounds shipped in the
United States were 213.7 million in 1996 for an increase of 10.6% from 1995.
Canadian pounds shipped in 1996 were 135.6 million, 13.2% more than 1995.
Consolidated gross profit increased by 11.7% for 1996 to $93.7 million from
$83.9 million in 1995. The gross profit improvement was due to increased sales
of higher margin commercial products and increased sales of wholesale tube,
especially in the United States. Consolidated gross margin increased to 13.4% in
1996 from 12.6% in 1995. Gross profit from United States operations improved by
9.6% to $75.6 million from $69.0 million in 1995 due to the factors outlined
above. Gross profit for the Canadian operations increased by 21.5% to $18.1
million from $14.9 million in 1995, principally due to improvements in wholesale
product fabrication charges.
Consolidated selling, general and administrative expenses for the year ended
December 31, 1996, were $21.9 million compared with $23.4 million in 1995. This
decrease is primarily the result of decreased pension expenses resulting from
the pension plan's investment performance and reduced incentive expenses which
were partially offset by increased professional fees and general management
salaries.
As a result of the increased gross profit and reduced selling, general and
administrative expenses, consolidated income from operations increased by 18.8%
to $71.8 million in 1996 from $60.5 million in 1995. United States income from
operations increased 15.8% to $57.3 million in 1996 from $49.5 million in 1995.
Canadian income from operations increased by 31.8% to $14.5 million in 1996 from
$11.0 million in 1995.
Consolidated net interest expense increased by $0.3 million to $9.3 million for
the year ended December 31, 1996, from $9.0 million in 1995. This increase was
due to decreased capitalized interest as a result of completed capital projects
which was offset by increased interest income on cash and equivalents.
The effective tax rate for the year ended December 31, 1996, was 35.5% compared
with 35.3% for the year ended December 31, 1995.
For the year ended December 31, 1996, net income was $39.6 million or $2.77 per
diluted share compared with $32.2 million or $2.26 per diluted share for the
year ended December 31, 1995. Included in the 1995 results was the one-time
after tax charge of $685,000, or $0.05, per share relating to the costs of a
secondary stock offering.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities is the Company's primary source of
liquidity and totaled $46.7 million, $39.4 million and $27.2 million for the
years ending December 31, 1997, 1996 and 1995 respectively. The increase from
1996 was primarily due to an increase in
23
<PAGE> 26
accounts payable which was partially offset by a decrease in net income, net of
non-recurring charges and the extraordinary item. The decrease in accounts
receivable from December 31, 1996 is primarily due to decreased sales activity
and reduced COMEX copper prices over the prevailing prices at year end 1996.
The ratio of current assets to current liabilities was 3.52 in 1997 and 3.61 in
1996. The current ratio decreased in 1997 from 1996 as increased current
liabilities were only partially offset by increased current assets. Comparing
1997 to 1996, increases in accounts payable primarily offset the increases in
inventories.
On April 30, 1997, the Company entered into a new five-year $200 million
unsecured credit agreement (the "New Credit Agreement") to replace the Company's
existing credit facility as well as to finance a tender offer for the $99
million in outstanding principal amount of the Notes. The New Credit Agreement
(i) provides for an aggregate available revolving credit facility of $200
million, including a $20 million sub-limit facility available to Wolverine Tube
(Canada) Inc., (ii) matures in full in April 2002, and (iii) provides for an
interest rate, at the Company's selection, at a floating base rate that is
either (a) the higher of the federal funds effective rate plus .50% or the prime
rate or (b) LIBOR plus a specified margin of .25% to .875%. Upon the
consummation of the refinancing, the Company borrowed approximately $107 million
under the New Credit Agreement, substantially all of which was used to refinance
the purchase of the $98.225 million in Notes that were tendered in the tender
offer and to pay for related refinancing expenses. On October 31, 1997 the
balance of $775,000 in aggregate principal amount of the Notes that had remained
outstanding was called for redemption by the Company at 103.8%, pursuant to the
terms of the Notes. As of December 31, 1997, the Company had approximately $100
million in outstanding borrowings and obligations under the New Credit Agreement
and approximately $100 million in additional borrowing availability thereunder.
Upon review of current business and market conditions, the Company elected to
adopt the 1997 Voluntary Early Retirement Program (the "Plan"). This Plan
rewards certain eligible employees who elected on a voluntary basis to take
early retirement from the Company between March 26, 1997 and May 12, 1997. After
the execution of a binding Voluntary Early Retirement Agreement and General
Release by each eligible employee, the Company paid each such employee an early
retirement payment and provided certain other considerations. The payment was an
amount equal to four weeks' base pay plus one additional week's pay for each
year of service, up to a maximum of twenty-six weeks' total, less applicable
taxes and withholdings required by law. Twenty-six employees from various
locations and departments throughout the Company elected to participate in the
Plan. At the end of the second quarter, the implementation of the Plan was
completed. The Company expects to realize approximately $2.0 million in reduced
salary and related expenses per year as a result of the Plan. Implementation of
the Plan resulted in an approximate $1.8 million charge that was included in the
Company's non-recurring charge and recognized in the second quarter of 1997. The
primary components of the charge relating to the Plan include approximately $1.0
million relating to severance and vacation pay and $0.6 million in increased
pension expense and $0.2 million for professional fees and miscellaneous
expenses resulting from these early retirements.
24
<PAGE> 27
During 1997, the Company experienced weak demand for its tubular products used
in the commercial market and unusually weak demand in the residential air
conditioning market. The unanticipated availability of reclaimed
chlorofluorocarbons ("CFCs") at reasonable prices slowed the rate of replacing
large commercial air conditioners using CFC refrigerants. In addition, the
record levels of manufacturer and distributor residential inventories,
compounded by a cool spring and early summer, softened demand for the Company's
high margin residential air conditioner products. In addition, wholesale
products experienced price decreases due to a slowdown in product demand and
increases in foreign competition. In order to manage these weak markets, the
Company exercised its flexibility and shifted manufacturing to lower margin
products. These markets are very volatile and are subject to rapid change.
However, if these market conditions persist in 1998, the Company could continue
to experience a decrease in fabrication charges similar to what was experienced
in 1997.
Capital expenditures were $21.6 million in 1997, $8.5 million in 1996 and $15.8
million in 1995. The Company currently expects to spend approximately $40
million in 1998 under its capital improvement program. The Company's 1998
capital improvement program includes asset maintenance, environmental compliance
and asset improvement items as well as the relocation or expansion of certain
of the Company's facilities. The Company believes that it will be able to
satisfy its existing working capital needs, interest obligations, and capital
expenditure requirements with cash flow from operations and funds available
under the Credit Agreement.
IMPACT OF YEAR 2000
The Company utilizes a number of computer software programs and operating
systems throughout its organization, including applications used in order
processing, shipping and receiving, accounts payable and receivable processing,
financial reporting and in various other administrative functions. The Company
recognizes the need to ensure that its operations will not be adversely impacted
by applications and processing issues related to the upcoming calendar year 2000
(the "Year 2000 Issue"). The Year 2000 Issue is the result of computer programs
that have been written to recognize two digit, rather than four digit, date
codes to define the applicable year. To the extent that the Company's software
applications contain source codes that are unable to appropriately interpret a
code using "00" as the upcoming year 2000 rather than 1900, the Company could
experience system failures or miscalculations that could disrupt operations and
cause a temporary inability to process transactions, send and process invoices
or engage in similar normal business activities.
Based on a recent assessment of its systems, the Company has determined that it
will be required to modify or replace significant portions of its software so
that its computer systems will function properly with respect to dates in the
year 2000 and thereafter. The Company presently believes that with modifications
to its existing software and certain conversions to new software, the Year 2000
Issue will not pose significant operational problems for its computer systems.
In addition, the Company's systems and operations are dependent, in part, on
interaction with systems operated or provided by vendors or other third-parties,
and the Company is surveying those parties about their progress in identifying
and addressing problems
25
<PAGE> 28
that their computer systems may face in connection with the Year 2000 Issue. The
Company estimates that it has no exposure for contingencies related to the Year
2000 Issue for the products it has sold.
The Company will utilize both internal and external resources to reprogram, or
replace, and test its software for Year 2000 modifications. The Company
anticipates completing the modifications necessary to make its systems Year 2000
compliant by March 31, 1999, which is prior to any anticipated impact on its
operating systems. The total cost of the Year 2000 project is estimated at $5.5
million and is being funded through operating cash flow. Of the total project
cost, approximately $5.3 million is attributable to the purchase of new
software, which will be capitalized. The remaining $0.2 million, which will be
expensed as incurred, is not expected to have a material effect on the results
of operations. To date, the Company has incurred approximately $0.8 million in
expenses related to the assessment of, and preliminary efforts on, its Year 2000
modification project, the development of the plan for the purchase of new
systems and system modifications.
The costs of the project and the timeframe in which the Company believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources, third-party modification plans
and other factors. Specific factors that might result in additional costs or
time delays include, but are not limited to, the availability and cost of
personnel trained in this area, the ability to locate and correct all relevant
computer codes, and similar uncertainties. Based upon the Company's current
estimates, the Company does not anticipate that the cost of compliance with the
Year 2000 Issue will be material to its business, financial condition or results
of operations; however, there can be no assurance that the Company's systems, or
those of its vendors, customers or other third parties, will be made Year 2000
compliant in a timely manner or that the impact of the failure to achieve such
compliance will not have a material adverse effect on the Company's business,
financial condition or results of operations.
ENVIRONMENTAL
The Company's facilities and operations are subject to extensive
environmental laws and regulations. During the year ended December 31, 1997, the
Company spent approximately $1.0 million on environmental matters which include
remediation costs, monitoring costs, legal and other costs. The Company has a
reserve of $2.5 million for environmental remediation costs which is reflected
in the Company's Consolidated Balance Sheet. The Company spent approximately
$2.6 million in capital expenditures relating to environmental matters during
1997 and has budgeted approximately $0.4 million for such capital expenditures
for 1998. Based upon information currently available, the Company believes that
the costs of the environmental matters described below are not reasonably likely
to have a material adverse effect on the Company's consolidated financial
condition, results of operations or liquidity.
26
<PAGE> 29
Oklahoma City, Oklahoma
The Company is one of a number of Potentially Responsible Parties
("PRPs") named by the Environmental Protection Agency ("EPA") with respect to
the soil and groundwater contamination at the Double Eagle Refinery Superfund
site in Oklahoma City, Oklahoma. The costs associated with the cleanup of this
site will be entirely borne by the PRP group (the "Group"), as the site owner
has filed for bankruptcy protection. In March 1993, twenty-three PRPs named with
respect to the soil contamination of the site, including the Company, submitted
a settlement offer to the EPA. Settlement negotiations between the Group and the
EPA are continuing, but currently contemplate a settlement and consent order
among the PRPs, the EPA and the State of Oklahoma, which would provide for each
PRPs liability to be limited to a prorate share of an aggregate amount based
upon the EPA's worst-cast cost scenario to remediate the site. Under the current
proposal, the Company's settlement amount is estimated to be $390,000.
Decatur, Alabama
The Company is subject to an order under Section 3008(h) of the
Resource Conservation and Recovery Act ("RCRA") to perform a facilities
investigation of its site in Decatur, Alabama, including a portion of the site
where wastes were buried (the "Burial Site"). Should the EPA decide to order
remediation, the remaining monitoring, legal and other costs are estimated to be
$1.2 million. Under an agreement between the Company and an affiliate of the
Henley Group, Inc. (collectively, "Henley"), the prior owner of the property,
Henley took control of investigation and any required cleanup of the Burial
Site. In February 1997, the Company exercised its option to release Henley from
liability for further remediation, monitoring and related costs with respect to
the Burial Site in exchange for a settlement payment, all pursuant to the terms
of the existing agreements with Henley. In June 1997, the Company released
Henley from liability of the Burial Site following the receipt of the settlement
payment. The Company is currently awaiting comments and approval from the EPA on
a Corrective Measures Study ("CMS") that Henley had submitted to the EPA
regarding the Burial Site. The cost to the Company to comply with the CMS, as
currently presented, will not have an adverse effect on the Company's
consolidated financial position, results of operations or liquidity.
New Westminster, British Columbia
In February 1988, the Company purchased substantially all of the assets
of Noranda Metal Industries Limited ("NMI" and, collectively with its parent,
Noranda, Inc. "Noranda"), which included property located in Montreal, Quebec
(the "Montreal Property"), Fergus, Ontario (the "Fergus Property"), and a
leasehold interest in property located on Annacis Island in Delta, British
Columbia (the "New Westminster Property", and collectively with the Montreal
Property and the Fergus Property, the "Properties"). In 1993, the Company
commissioned a series of environmental assessments of the Properties, which
resulted in the finding of PCBs above permissible limits at the New Westminster
Property and in an adjacent tidal flat of the Fraser River. Additional findings
include traces of PCBs within the Montreal Property, as well as the
27
<PAGE> 30
presence of heavy metal and other contaminants at the New Westminster Property
and the Montreal Property.
The Company discontinued operations at the New Westminster facility in
April 1991, and the facility was sold in November 1995 to Juker Holdings Ltd.
("Juker"). Terms of the sales agreement provide that Juker assume responsibility
for the remediation of the New Westminster and neighboring properties (excluding
the Fraser River) and indemnify Wolverine from any liability with respect to the
remediation of the New Westminster Property.
The Company currently has no obligation to remediate the soil
contamination at its Montreal Property under current Quebec statutes. The traces
of PCBs within the Montreal Property have been remediated. The Company has
instituted a program to prevent further contamination and is monitoring the
existing contamination. The Company intends to continue to operate the Montreal
Property and does not currently plan to remediate the heavy metal contamination,
thus, no estimate has been made of the costs to remove the heavy metal from the
soil and no amount has been accrued in the accompanying Consolidated Financial
Statements.
On October 13, 1993, the Company filed a Statement of Claim against
Noranda and other parties, contending that Noranda was liable for substantially
all of the cleanup costs at New Westminster and Montreal under the environmental
indemnity contained in the purchase agreement and that Noranda materially
breached the agreement by failing, among other things, to provide full and
complete disclosure of the conditions of the facilities. The Statement of Claim
sought certain declaratory judgments, specific performance of the agreement, and
general specific prospective damages of up to $25,000,000 (Canadian). In
September 1997, the Company and Noranda reached an agreement to settle the
Statement of Claim. The settlement provides that Noranda will reimburse the
Company for a portion of the costs incurred in the remediation study and other
related costs associated with the New Westminster Property. In addition, the
agreement contemplates that Noranda and the Company would enter into a cost
sharing arrangement with respect to future remediation costs at the Montreal
Property, up to a maximum amount of $9.9 million. Pursuant to the proposed
arrangement, which would expire in September 2002, Noranda would be responsible
for a maximum of $6 million and the Company would be responsible for a maximum
of $3.9 million of such costs. Any remediation costs in excess of $9.9 million
would be the sole responsibility of the Company.
The Ministry of Environment, Lands and Parks of the Province of British
Columbia (the "B.C. Ministry") has issued a Pollution Abatement Order to the
Company and NMI regarding the New Westminster facility and a tidal flat in the
Fraser River immediately adjacent to an outfall from the property's drainage
system. The order requires the Company and NMI to prevent discharge of
contaminants from the property, to undertake further investigation of this site
and to prepare a remediation plan and implementation schedule for cleanup of the
contaminant area, including the Fraser River. Pursuant to the sale agreement
with Juker, Juker assumed responsibility for the remediation of the New
Westminster Property, other than with respect to Fraser River. The Company has
been informed that Juker has completed the remediation of the New Westminster
Property, and that NMI has completed the remediation of the Fraser River and
associated uplands, all as outlined in the implementation plan that was
28
<PAGE> 31
approved by the B.C. Ministry. The Company does not anticipate that it will have
any further liability under the Pollution Abatement Order.
Ardmore, Tennessee
On December 28, 1995, the Company entered into a Consent Order and
Agreement with the Tennessee Division of Superfund (the "Tennessee Division"),
relating to the Ardmore facility, under which the Company agreed to conduct a
preliminary investigation regarding whether volatile organics detected in and
near the municipal drinking water supply are related to the Ardmore facility
and, if necessary, to undertake an appropriate response. That investigation has
disclosed contamination, including elevated concentrations of certain volatile
organic compounds, in soils of certain areas of the Ardmore facility and also
has disclosed elevated levels of certain volatile organic compounds in the
shallow residuum groundwater zone at the Ardmore facility. Under the terms of
the Consent Order and Agreement, the Company submitted a Remedial Investigation
and Feasibility Study ("RI/FS") work plan, which was accepted by the Tennessee
Division, and the Company has initiated the RI/FS. Based on the available
information, and recognizing that the nature and scope of remediation will be
affected by the results of the RI/FS, the Company preliminary estimates a range
of between $1,255,000 and $2,055,000 to complete the investigation and
remediation of this site, of which approximately $835,000 has been spent through
December 31, 1997.
A recent report of a 1995 EPA site inspection of the Ardmore facility
recommended further action for the site. The Company believes, however, that
because the Tennessee Division is actively supervising an ongoing investigation
of the Ardmore facility, it is unlikely that EPA will intervene and take
additional action. If the EPA should intervene, however, the Company could incur
additional costs for any further investigation or remedial action required.
Greenville, Mississippi
Following the Company's acquisition of its Greenville, Mississippi
facility, (the "Greenville facility"), a preliminary investigation disclosed
volatile organic contaminants in soil and groundwater at the site. Based on
further investigation, it appears that the contamination has not spread off
site. The Company entered into a Consent Order with the Mississippi Department
of Environmental Quality ("MDEQ") for a pilot study program which helped
determine the effectiveness of certain technology and further defined the scope
of remediation for the site. The pilot study program concluded on June 1, 1997.
The Company entered into a final consent agreement with the MDEQ on July 15,
1997. Remediation efforts began in the third quarter of 1997 and are expected to
continue for approximately three years. However, there can be no assurance that
remediation efforts will be allowed to be discontinued after three years, and
operations, maintenance and expenses of the remedial system may continue for a
longer period of time. The remaining total investigative and remedial costs
could total $936,000 under the remediation plan the Company adopted, and it
could increase further if the remedial system is required to operate for more
than three years. Applicable costs of testing and remediation required at the
Greenville facility are being shared with the former owners of the facility on a
dollar for dollar basis, not to exceed $750,000, pursuant to the terms of an
Escrow Agreement
29
<PAGE> 32
established at the time the facility was acquired. Any remediation costs in
excess of the shared amount would be the sole responsibility of the Company.
Other
The Company has been identified by the EPA as one of a number of PRPs
at Superfund sites in Athens, Alabama and in Criner, Oklahoma. The Company
believes that its potential liability with respect to these Superfund sites is
not material. However, there can be no assurance that the Company will not be
named a PRP at additional Superfund sites in the future or that the costs
associated with those sites would not be substantial.
The Company believes that it faces no significant liability for the
Athens, Alabama site because it has removed all of the material that it
contributed to the site. The Company believes that it faces no significant
liability for the Criner, Oklahoma site because Henley, the prior owner of the
site, has retained liability for all cleanup costs resulting from past disposal
of used oil at the Criner, Oklahoma site pursuant to an indemnification
agreement between the Company and Henley. Henley, which is not affiliated with
the Company, has discharged these obligations to date.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income," and No. 131, "Disclosures about Segments of an Enterprise and Related
Information". These statements establish standards for reporting and display of
comprehensive income and its components and for reporting information about
business segments and products in financial statements, and are effective for
years beginning after December 15, 1997. Adoption of these statements is not
expected to have a material effect on the Company's consolidated financial
statements.
In February 1998, the Financial Accounting Standards Board issued
Statement No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits". This Statement revises employers' disclosures about
pension and other postretirement benefit plans. It does not change the
measurement or recognition of those plans. It standardizes the disclosure
requirements for pensions and other postretirement benefits to the extent
practicable, requires additional information on changes in the benefit
obligations and fair values of plan assets that will facilitate financial
analysis, and eliminates certain disclosures. The Statement suggests combined
formats for presentation of pension and other postretirement benefit
disclosures. This Statement is effective for fiscal years beginning after
December 15, 1997. Adoption of this Statement is not expected to have a material
effect on the Company's consolidated financial statements.
30
<PAGE> 33
ITEM 8
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
Page
----
<S> <C>
Consolidated Statements of Income - For the years ended December 31, 1997, 1996
and 1995. F-1
Consolidated Balance Sheets - December 31, 1997 and 1996. F-2
Consolidated Statements of Stockholders' Equity - For the years ended
December 31, 1997, 1996 and 1995. F-3
Consolidated Statements of Cash Flows - For the years ended December 31, 1997,
1996 and 1995. F-4
Notes to Consolidated Financial Statements. F-5
Report of Ernst & Young LLP, Independent Auditors. F-25
</TABLE>
ITEM 9
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURES
No changes in or disagreements with accountants on accounting and financial
disclosure matters existed during the most recent two years.
31
<PAGE> 34
PART III
ITEM 10
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item with respect to directors is incorporated
by reference from the information under the caption "Election of Directors"
contained in the Company's definitive proxy statement for the 1998 Annual
Meeting of Stockholders. The required information concerning executive officers
of the Company is contained in Part I of this report.
ITEM 11
EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference from the
information under the caption "Executive Compensation" in the Company's
definitive proxy statement for the 1998 Annual Meeting of Stockholders.
ITEM 12
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference from the
information under the caption "Stock Ownership of Management and Certain
Beneficial Owners" in the Company's definitive proxy statement for the 1998
Annual Meeting of Stockholders.
ITEM 13
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from the
information contained under the caption "Certain Transactions" in the Company's
definitive proxy statement for the 1998 Annual Meeting of Stockholders.
32
<PAGE> 35
PART IV
ITEM 14
EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K
(a) Index to exhibits, financial statements and schedules.
(1) The following consolidated financial statements for the Company and
Report of Independent Auditors are included beginning on page F-1
hereof:
Consolidated Statements of Income - For the years ended December 31,
1997, 1996 and 1995.
Consolidated Balance Sheets - December 31, 1997 and 1996.
Consolidated Statements of Stockholders' Equity - For the years ended
December 31, 1997, 1996 and 1995.
Consolidated Statements of Cash Flows - For the years ended December
31, 1997, 1996 and 1995.
Notes to Consolidated Financial Statements.
Report of Ernst & Young LLP, Independent Auditors.
(2) The following consolidated financial statement schedule of the Company
is included on page S-1 hereof:
SCHEDULE II Valuation and Qualifying Accounts
All other schedules are omitted as inapplicable or because the required
information is included in the consolidated financial statements or
notes thereto.
(3) Exhibits required by Item 601 of Regulation S-K.
33
<PAGE> 36
The following exhibits are included in this Form 10-K:
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
21 List of Subsidiaries
23 Consent of Ernst & Young LLP,
Independent Auditors
27 Financial Data Schedule (for SEC use only)
</TABLE>
The following exhibit is incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 27, 1997:
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
3.2 By-Laws of the Company, as amended
</TABLE>
The following exhibits are incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the quarter ended March 29, 1997:
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
10.1* Agreement and General Release, dated April 1,1997
between the Company and Thomas B. Roller
10.2 Supplemental Indenture, dated as of April 25, 1997,
between the Company and Mellon Bank, F.S.B.
10.3 Credit Agreement, dated as of April 30, 1997
among the Company, the lenders, named therein,
Credit Suisse First Boston as Administrative
Agent and Mellon Bank, N.A., as Documentary Agent
</TABLE>
The following exhibits are incorporated by reference to the Company's
Annual Report on Form 10-K for the year ended December 31, 1996.
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
10.1* Employment Agreement, dated as
of September 16, 1996, between the
Company and John M. Quarles
10.2* Severance Agreement, dated as of
September 16, 1996, between the
Company and Thomas B. Roller
</TABLE>
34
<PAGE> 37
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
10.3* 1996 Key Manager Bonus Plan
10.4* Long Term Incentive Plan
</TABLE>
The following exhibit is incorporated by reference to the Company's
Registration Statement on Form 8-A, filed on February 22, 1996:
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
1 Rights Agreement, dated as of February 13, 1996,
between the Company and Society National Bank,
as Rights Agent
</TABLE>
The following exhibits are incorporated by reference to the Company's
Annual Report on Form 10-K for the year ended December 31, 1995.
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
3.1 Restated Certificate of Incorporation of
the Company, as amended
10.1* Amended No. 1 to Employment Agreement,
dated December 7, 1995, between the Company
and John M. Quarles
</TABLE>
The following exhibits are incorporated by reference to the Company's
Annual Report on Form 10-K for the year ended December 31, 1994:
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
10.13* Form of Indemnity Agreement
10.19* Supplemental Executive Retirement Plan
</TABLE>
The following exhibit is incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the quarter ended October 1, 1994:
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
10.18* Employment Agreement between the Company
and John M. Quarles
</TABLE>
35
<PAGE> 38
The following exhibit is incorporated by reference to the Company's
Quarterly Report on Form 10-Q for the quarter ended July 2, 1994:
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
10.15 Form of Non-Qualified Stock Option Agreement
under the Company's 1993 Equity Incentive Plan
</TABLE>
The following exhibit is incorporated by reference to the Company's Annual
Report on Form 10-K for the year ended December 31, 1993.
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
10.10 First Supplemental Indenture, dated as of
August 2, 1993
</TABLE>
The following exhibits are incorporated by reference to the Company's
Registration Statement on Form S-1 (File No. 33-65148).
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
10.1* Severance Pay Plan, dated as of May 10, 1990
10.3* Form of Severance Agreement
10.4 The Company's 1991 Stock Option Plan
10.5 Form of Non-Qualified Stock Option Agreement
under the Company's 1991 Stock Option Plan
10.7 The Company's 1993 Equity Incentive Plan
10.8 The Company's 1993 Stock Option Plan for
Outside Directors
10.9 Indenture, dated as of September 1, 1992,
between the Company and Society National
Bank, as Trustee
</TABLE>
* Identifies each exhibit that is a "management contract or compensatory plan or
arrangement" required to be included as an exhibit to this Form 10-K pursuant to
Item 14(c) of Form 10-K.
36
<PAGE> 39
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, in the City of Huntsville,
State of Alabama, on the 27th day of March, 1998.
WOLVERINE TUBE, INC.
By /s/ JAMES E. DEASON
----------------------------
Name: James E. Deason
Title: Executive Vice President,
Chief Financial Officer
Secretary and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ JOHN M. QUARLES Chairman and Director March 27, 1998
- ---------------------------
John M. Quarles
/s/ DENNIS J. HOROWITZ President and Chief Executive March 27, 1998
- --------------------------- Officer and Director (Principal
Dennis J. Horowitz Executive Officer)
/s/ JAMES E. DEASON Executive Vice President, March 27, 1998
- --------------------------- Chief Financial Officer,
James E. Deason Secretary and Director (Principal
Financial Officer and Principal
Accounting Officer)
/s/ JOHN L. DUNCAN Director March 27, 1998
- ---------------------------
John L. Duncan
Director March 27, 1998
- ---------------------------
Thomas P. Evans
/s/ JAN K. VER HAGEN Director March 27, 1998
- ---------------------------
Jan K. Ver Hagen
/s/ CHRIS A. DAVIS Director March 27, 1998
- ---------------------------
Chris A. Davis
/s/ GAIL O. NEUMAN Director March 27, 1998
- ---------------------------
Gail O. Neuman
</TABLE>
<PAGE> 40
Wolverine Tube, Inc. and Subsidiaries
Consolidated Statements of Income
(In thousands except per share amounts)
<TABLE>
<CAPTION>
Year ended December 31,
1997 1996 1995
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales $ 667,686 $ 699,863 $ 664,605
Cost of goods sold 585,060 606,157 580,749
- ---------------------------------------------------------------------------------------------
Gross profit 82,626 93,706 83,856
Selling, general and administrative expenses 22,081 21,903 23,391
Non-recurring charge (Note 16) 4,384 -- --
- ---------------------------------------------------------------------------------------------
Income from operations 56,161 71,803 60,465
Other expenses:
Interest expense, net (Note 5) 7,367 9,321 9,038
Amortization and other, net 712 1,107 1,604
- ---------------------------------------------------------------------------------------------
Income before income taxes and extraordinary item 48,082 61,375 49,823
Income taxes (Note 9) 17,506 21,792 17,587
- ---------------------------------------------------------------------------------------------
Income before extraordinary item 30,576 39,583 32,236
Extraordinary item, net of income tax
benefit of $2,782 (Note 5) (4,738) -- --
- ---------------------------------------------------------------------------------------------
Net income 25,838 39,583 32,236
Less preferred stock dividends (280) (280) (280)
- ---------------------------------------------------------------------------------------------
Net income applicable to common shares $ 25,558 $ 39,303 $ 31,956
=============================================================================================
Earnings per common share-basic:
Income before extraordinary item $ 2.16 $ 2.85 $ 2.35
Extraordinary item (0.34) -- --
- ---------------------------------------------------------------------------------------------
Net income per common share-basic $ 1.82 $ 2.85 $ 2.35
=============================================================================================
Basic weighted average number of common
shares (Note 17) 14,022 13,772 13,605
=============================================================================================
Earnings per common share-diluted:
Income before extraordinary item $ 2.13 $ 2.77 $ 2.26
Extraordinary item (0.33) -- --
- ---------------------------------------------------------------------------------------------
Net income per common share-diluted $ 1.80 $ 2.77 $ 2.26
====================================================================-------------------------
Diluted weighted average number of common and
common equivalent shares (Note 17) 14,232 14,196 14,118
=============================================================================================
</TABLE>
See accompanying notes.
F-1
<PAGE> 41
WOLVERINE TUBE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
December 31,
1997 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 15,096 $ 2,967
Accounts receivable, net 71,879 79,128
Inventories (Note 2) 87,829 73,525
Prepaid expenses and other 1,067 205
- --------------------------------------------------------------------------------------------
Total current assets 175,871 155,825
Property, plant and equipment, net (Note 3) 153,917 150,221
Deferred charges and intangible assets, net (Note 4) 87,937 84,946
Prepaid pensions (Note 6) 7,197 6,028
- --------------------------------------------------------------------------------------------
Total assets $ 424,922 $ 397,020
============================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 39,937 $ 27,318
Accrued liabilities 6,429 11,231
Deferred income taxes (Note 9) 3,659 4,613
- --------------------------------------------------------------------------------------------
Total current liabilities 50,025 43,162
Deferred income taxes (Note 9) 27,057 25,857
Long-term debt (Note 5) 98,411 100,473
Postretirement benefit obligation (Note 7) 12,126 12,505
Accrued environmental remediation (Note 8) 2,540 3,732
- --------------------------------------------------------------------------------------------
Total liabilities 190,159 185,729
Commitments and contingencies (Notes 8 and 13)
Minority interest -- 69
Redeemable cumulative preferred stock, par value $1 per
share; 20,000 shares issued and outstanding
at December 31, 1997 and 1996 (Note 10) 2,000 2,000
Stockholders' equity:
Cumulative preferred stock, par value $1 per share;
500,000 shares authorized (Note 10) -- --
Common stock, par value $.01 per share; 20,000,000 shares
authorized, 14,069,064 and 13,980,517 shares
issued and outstanding at December 31, 1997
and 1996, respectively (Notes 11 and 12) 141 140
Additional paid-in capital 100,064 98,870
Retained earnings 143,073 117,515
Accumulated currency translation adjustments (10,515) (7,303)
- --------------------------------------------------------------------------------------------
Total stockholders' equity 232,763 209,222
- --------------------------------------------------------------------------------------------
Total liabilities, redeemable cumulative preferred
stock and stockholders' equity $ 424,922 $ 397,020
============================================================================================
</TABLE>
See accompanying notes.
F-2
<PAGE> 42
Wolverine Tube, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
(In thousands, except number of shares)
<TABLE>
<CAPTION>
Redeemable Accumulated Total
Cumulative Additional Currency Stock-
Preferred Stock Common Stock Paid-In Retained Translation holders'
Shares Amount Shares Amount Capital Earnings Adjustments Equity
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 20,000 $2,000 13,476,821 $135 $ 90,838 $ 46,256 ($ 8,510) $ 128,719
Common stock issued -- -- 192,782 2 1,024 -- -- 1,026
Net income -- -- -- -- -- 32,236 -- 32,236
Tax benefit from stock options exercised -- -- -- -- 1,327 -- -- 1,327
Preferred stock dividends -- -- -- -- -- (280) -- (280)
Translation adjustments -- -- -- -- -- -- 1,498 1,498
- ------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 20,000 2,000 13,669,603 137 93,189 78,212 (7,012) 164,526
Common stock issued -- -- 310,914 3 2,702 -- -- 2,705
Net income -- -- -- -- -- 39,583 -- 39,583
Tax benefit from stock options exercised -- -- -- -- 2,979 -- -- 2,979
Preferred stock dividends -- -- -- -- -- (280) -- (280)
Translation adjustments -- -- -- -- -- -- (291) (291)
- ------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 20,000 2,000 13,980,517 140 98,870 117,515 (7,303) 209,222
Common stock issued -- -- 88,547 1 715 -- -- 716
Net income -- -- -- -- -- 25,838 -- 25,838
Tax benefit from stock options exercised -- -- -- -- 479 -- -- 479
Preferred stock dividends -- -- -- -- -- (280) -- (280)
Translation adjustments -- -- -- -- -- -- (3,212) (3,212)
- ------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1997 20,000 $2,000 14,069,064 $141 $100,064 $ 143,073 ($10,515) $ 232,763
==============================================================================================================================
</TABLE>
See accompanying notes.
F-3
<PAGE> 43
WOLVERINE TUBE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year ended December 31,
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $25,838 $39,583 $32,236
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation 14,116 14,127 13,481
Amortization 2,680 2,219 2,309
Deferred income taxes 520 4,708 1,708
Non-cash portion of non-recurring charge 3,533 - -
Extraordinary loss on retirement of debt 4,738 - -
Changes in operating assets and liabilities, net of
effect from purchase of subsidiaries:
Accounts receivable, net 6,219 4,752 (10,835)
Inventories (14,606) (17,171) 433
Prepaid expenses and other (1,670) (224) 43
Accounts payable 10,652 (10,339) (10,397)
Accrued liabilities, including pension,
postretirement benefit and environmental (5,351) 1,775 (1,783)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 46,669 39,430 27,195
INVESTING ACTIVITIES
Additions to property, plant and equipment (21,598) (8,540) (15,805)
Proceeds received from sale of assets held for sale - - 1,926
Purchase of subsidiaries - (34,614) -
Acquisition of business assets (4,210) - -
Other (496) (1,233) 28
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (26,304) (44,387) (13,851)
FINANCING ACTIVITIES
Financing fees (820) (8) (11)
Net borrowing (repayment) from revolving credit facility 97,000 - (8,500)
Issuance of common stock 716 2,705 1,026
Premium and fees paid on retirement of debt (5,517) - -
Principal payments on long-term debt (99,213) (68) (228)
Dividends paid on preferred stock (280) (280) (280)
- -----------------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities (8,114) 2,349 (7,993)
Effect of exchange rate on cash and equivalents (122) 81 35
- -----------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and equivalents 12,129 (2,527) 5,386
Cash and equivalents at beginning of year 2,967 5,494 108
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and equivalents at end of year $15,096 $2,967 $5,494
===================================================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW:
Interest paid $9,321 $10,594 $10,557
Income taxes paid 13,721 15,758 13,001
NONCASH FINANCING ACTIVITIES:
Tax benefit from stock options exercised $479 $2,979 $1,327
</TABLE>
See accompanying notes.
F-4
<PAGE> 44
WOLVERINE TUBE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business
The accompanying consolidated financial statements include the accounts of
Wolverine Tube, Inc. (the "Company") and its wholly-owned subsidiaries. The
minority interest represented a 26% ownership of Small Tube Europe B.V., a
subsidiary of STPC Holding, Inc., which was a wholly-owned subsidiary of the
Company prior to June 1997. All significant intercompany transactions and
balances have been eliminated.
The Company is engaged in the manufacturing and distribution of seamless copper
and copper alloy tubular products as well as rod, bar and strip products. The
Company's focus is developing and manufacturing high value added products used
in engineered applications which require tubular products that have superior
heat transfer capability. The Company's major customers are primarily located in
North America and include the residential and commercial building industries,
plumbing wholesalers, air conditioning and refrigeration manufacturers,
utilities and automobile manufacturers, refining and chemical processing
companies and industrial manufactures. Sales are made under normal terms and
generally do not require collateral.
On September 6, 1996, the Company completed the acquisition of the outstanding
stock of Tube Forming, Inc., and selected assets (the "TFI Acquisition") from
two related entities for $34.6 million cash. The acquisition was financed with
existing cash holdings of $14.6 million and borrowing under the Company's
revolving credit facility of $20 million.
The following summarizes the unaudited consolidated pro forma results of
operations, assuming the TFI Acquisition had occurred on January 1, 1995. This
pro forma summary does not necessarily reflect what the results of operations
would have been had the acquisition actually occurred on that date.
<TABLE>
<CAPTION>
1996 1995
- ------------------------------------------------------------------------
(In thousands, except per
share amounts)
<S> <C> <C>
Net sales $725,803 $689,135
Net income applicable to common shares 42,304 34,436
Net income per common share - diluted 2.98 2.44
- ------------------------------------------------------------------------
</TABLE>
Cash and Equivalents
The Company considers all highly liquid financial instruments with a maturity of
three months or less at the time of purchase to be cash equivalents.
F-5
<PAGE> 45
Inventories
Inventories are stated at the lower of cost or market. Approximately 73% and 75%
of the total amounts of consolidated inventories at December 31, 1997 and 1996
are stated on the basis of last-in, first-out (LIFO) method. The remaining
inventories which primarily include supplies are valued using the average cost
method.
Property, Plant and Equipment
Property, plant and equipment is stated at cost. Depreciation is provided on the
straight-line method over the following periods:
<TABLE>
<S> <C>
Furniture and fixtures 2-9 years
Tooling 3-10 years
Building and improvements 3-39 years
Machinery and equipment 5-25 years
</TABLE>
Impairment of Long-Lived Assets
Impairment losses are recorded on long-lived assets used in operations where
indicators of impairment are present and the undiscounted cash flows estimated
to be generated by these assets are less than their carrying amount.
Income Taxes
Deferred income taxes are provided for the temporary differences between the
financial reporting basis and the tax basis of the Company's assets and
liabilities. Property, plant and equipment, inventories, prepaid pension,
postretirement benefit obligations and certain other accrued liabilities are the
primary sources of these temporary differences.
Deferred Charges and Intangible Assets
Debt issuance costs are deferred and amortized over the term of the debt to
which they relate using the interest method. Intangible assets consist of
patents and goodwill. Patents are amortized on the straight-line method over
their estimated lives. Excess cost over the fair value of net assets acquired
(or goodwill) generally is amortized on a straight-line basis over 40 years. The
carrying value of goodwill is reviewed if the facts and circumstances suggest
that it may be impaired. Negative operating results, negative cash flows from
operations, among other factors, could be indicative of the impairment of
goodwill. If this review indicates that goodwill will not be recoverable, the
Company's carrying value of the goodwill would be reduced.
Earnings Per Common Share
Basic net income per share is based on the weighted average number of common
shares outstanding and net income reduced by preferred dividends. Diluted net
income per share is based on the weighted average number of common shares
outstanding plus the effect of dilutive employee stock options and net income
reduced by preferred dividends.
F-6
<PAGE> 46
Fair Values of Financial Instruments
The following methods are used by the Company in estimating fair value
disclosures for financial instruments:
Cash and equivalents: The carrying amount reported in the consolidated
balance sheets for cash and equivalents approximates its fair value.
Financing arrangement, long-term debt and redeemable cumulative
preferred stock: The carrying amount of the Company's borrowings under
its financing arrangement approximates its fair value. The fair value
of the Company's long-term debt and derivative financial instruments
are based upon quoted market price. The fair value of the Company's
redeemable cumulative preferred stock is based upon its dividend rate
and call provisions.
Environmental Expenditures
Environmental expenditures that pertain to current operations and relate to
future revenues are expensed or capitalized consistent with the Company's
capitalization policy. Expenditures that result from the remediation of an
existing condition caused by past operations, that do not contribute to future
revenues, are expensed. Liabilities are recognized for remedial activities
when the cleanup is probable and the cost can be reasonably estimated.
Interest Rate Swaps
The Company enters into interest-rate swap agreements to modify the interest
characteristics of its outstanding debt. Each interest-rate swap agreement is
designated as a hedge with the principal balance and term of a specific debt
obligation. These agreements involve the exchange of amounts based on a fixed
interest rate for amounts based on variable interest rates over the life of
the agreement without an exchange of the notional amount upon which the
payments are based. The differential to be paid as interest rates change is
accrued and recognized as an adjustment of interest expense related to the
debt (the accrual accounting method). The fair value of the swap agreements
and changes in the fair value as a result of changes in market interest rates
are not recognized in the financial statements. The estimated fair value of
these interest rate swaps are a net payable of $1.8 million at December 31,
1997.
Gains and losses on terminations of interest-rate swap agreements are deferred
as an adjustment to the carrying amount of the outstanding debt and amortized
as an adjustment to interest expense related to the debt over the remaining
term of the original contract life of the terminated swap agreement. In the
event of the early extinguishment of a designated debt obligation, any
realized or unrealized gain or loss from the swap would be recognized in
income coincident with the extinguishment gain or loss. The Company mitigates
the risk that counter parties to these over-the-counter agreements will fail
to perform by only entering into agreements with major international financial
institutions.
F-7
<PAGE> 47
Foreign Currency Forwards
The Company sometimes uses foreign exchange contracts to reduce its exposure
to foreign currency risk associated with purchasing contracts denominated in
foreign currency. A forward foreign exchange contract obligates the Company to
exchange predetermined amounts of specified foreign currencies at specified
exchange rates on specified dates or to make an equivalent U.S. dollar payment
equal to the value of such exchange.
These contracts are designated and effective as hedges and discounts or
premiums (the difference between the spot exchange rate and the forward
exchange rate at inception of the contract) are accreted or amortized to other
operating expenses over the contract lives using the straight-line method
while realized and unrealized gains and losses resulting from changes in the
spot exchange rate (included those from open, matured, and terminated
contracts), net of related taxes, are included in the cumulative translation
adjustment account in shareholders' equity (the deferral accounting method).
The Company mitigates the risk that counter parties to these over-the-counter
agreements will fail to perform by only entering into agreements with major
international financial institutions. At December 31, 1997, the Company had
not entered into a material contract relating to foreign currency forward
agreements.
Derivative Commodity Instruments
In connection with the purchase of certain raw materials, principally copper,
on behalf of certain customers for future manufacturing requirements, the
Company has entered into commodity forward contracts as deemed appropriate for
these customers to reduce the risk of future price increases. These forward
contracts are accounted for as hedges and, accordingly, gains and losses are
deferred and recognized in cost of sales as part of the product cost. At
December 31, 1997, the Company had entered into contracts hedging certain
future-commodity purchases through June, 1999 of approximately $38.4 million.
The estimated fair value of these outstanding contracts was approximately
$33.2 million at December 31, 1997. The Company is exposed to loss on the
forward contracts in the event of non-performance by the customers whose
orders are covered by such contracts. However, the Company does not anticipate
non-performance by such customers. Historically, the Company has not closed
any contracts prior to the execution of the underlying sale transactions nor
have any of the underlying sale transactions failed to occur.
Stock Options
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," encourages, but does not require, companies to
record compensation costs for stock-based employee compensation plans at fair
value. The Company has chosen to continue to account for stock-based
compensation using the method prescribed in Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. The Company grants stock options for a fixed number of shares
to employees with an exercise price equal to the fair value of the shares at
the date of grant. Accordingly, the Company recognizes no compensation expense
for stock option grants.
F-8
<PAGE> 48
Translation to U.S. Dollars
Assets and liabilities of Wolverine Tube, Inc., denominated in foreign currency,
are translated to U.S. dollars at rates of exchange at the balance sheet date.
Income statement items are translated at average exchange rates during the
period. Translation adjustments arising from changes in exchange rates are
included in the accumulated currency translation adjustment component of
stockholders' equity. Realized exchange gains and losses are included in income.
Research and Development Costs
Expenditures relating to the development of new products and processes,
including significant improvements and refinements to existing products, are
expensed as incurred. The amounts charged to expense were $1.4 million, $1.6
million and $1.5 million for the years ended December 31, 1997, 1996 and 1995,
respectively.
Use of Estimates
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial
statements and accompanying notes. Actual results could differ from those
estimates.
2. INVENTORIES
Inventories are as follows:
<TABLE>
<CAPTION>
1997 1996
- ---------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Finished products $21,235 $13,626
Work-in-process 23,515 26,646
Raw materials and supplies 43,079 33,253
- ---------------------------------------------------------------------------------------------------------------
$87,829 $73,525
===============================================================================================================
</TABLE>
The reserves for LIFO included in inventories at December 31, 1997 and 1996 are
($11,102,000) and $4,038,000 respectively.
3. PROPERTY, PLANT AND EQUIPMENT
Property, Plant and Equipment is as follows at December 31:
<TABLE>
<CAPTION>
1997 1996
- ---------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Land and improvements $ 10,673 $ 10,886
Buildings and improvements 39,763 39,094
Machinery and equipment 171,263 161,737
Construction-in-progress 11,534 4,695
- ---------------------------------------------------------------------------------------------------------------
233,233 216,412
Less accumulated depreciation (79,316) (66,191)
- ---------------------------------------------------------------------------------------------------------------
$153,917 $150,221
===============================================================================================================
</TABLE>
F-9
<PAGE> 49
4. DEFERRED CHARGES AND INTANGIBLE ASSETS
Deferred charges and intangible assets are as follows at December 31:
<TABLE>
<CAPTION>
1997 1996
- ---------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Deferred debt issuance costs $ 821 $ 3,891
Goodwill 93,090 87,686
Patents and other 4,234 2,789
- ---------------------------------------------------------------------------------------------------------------
98,145 94,366
Less accumulated amortization (10,208) (9,420)
- ---------------------------------------------------------------------------------------------------------------
$87,937 $84,946
===============================================================================================================
</TABLE>
5. FINANCING ARRANGEMENTS AND LONG TERM DEBT
The Company completed a refinancing in April, 1997 which consisted of entering
into a new five year $200 million unsecured credit agreement (the "New Credit
Agreement") to replace the Company's existing credit facility, as well as a
tender offer for the $99 million in outstanding principal amount of the
Company's 10 1/8% Senior Subordinated Notes due 2002 ("Notes"). The New Credit
Agreement (i) provides for an aggregate available revolving credit facility of
$200 million, including a $20 million sublimit available to Wolverine Tube
(Canada) Inc., (ii) matures in full in April 2002, and (iii) provides for an
interest rate, at the Company's election, at a floating base rate that is either
(a) the higher of the federal funds effective rate plus .50% or the prime rate
or (b) LIBOR plus a specified margin of .25% to .875%. Upon consummation of the
refinancing on April 30, 1997, the Company borrowed approximately $107 million
under the New Credit Agreement, substantially all of which was used to finance
the purchase of the $98.225 million in Notes that were tendered as well related
financing expenses. Accordingly, the Company recorded an extraordinary after-tax
charge of $4,738,000 ($7,520,000 pre-tax) resulting from the early retirement of
the Notes. On October 31, 1997, the balance of $775,000 in aggregate principal
amount of the Notes that had remained outstanding was called for redemption by
the Company at 103.8%, pursuant to the terms of the Notes. As of December 31,
1997, the Company had approximately $100 million in additional borrowing
available under the New Credit Agreement.
During 1997, the Company entered into two interest rate swap agreements with a
certain lender providing bank financing. These agreements effectively fix the
interest rates on $82,000,000 of the floating rate debt provided under the New
Credit Agreement. The floating rate notes of $65,000,000 and $17,000,000 are
fixed at a rate of 6.82% and 5.86%, respectively, plus the specified margin from
the New Credit Agreement of .25% to .875%. The interest rate swaps expire on May
7, 2002 and February 7, 1999, and are based on 3-month LIBOR. These interest
rate swaps are accounted for as hedges; the differential to be paid as interest
rates change is accrued and recognized as an adjustment to interest expense.
F-10
<PAGE> 50
The Company has a non interest-bearing loan agreement with the government of
Canada. As of December 31, 1997 and 1996, the Company had outstanding advances
of $1,399,000 and $1,459,000 respectively. The loan is to be repaid in four
annual installments commencing in 1998.
The Company's credit agreement contains covenants that include requirements to
maintain certain financial ratios and certain other restrictions and
limitations, including the restrictions on payment of dividends by the Company,
limitations on the issuance of additional debt, limitations on investments and
contingent obligations, the redemption of capital stock and the sale or transfer
of assets.
Interest expense is net of interest income and capitalized interest of $383,000
and $381,000 in 1997, $954,000 and $184,000 in 1996 and $500,000 and $1,236,000
in 1995, respectively.
6. RETIREMENT AND PENSION PLANS
U.S. Plans
The Company has established trusteed, noncontributory defined benefit pension
plans covering the majority of all U.S. employees fulfilling minimum age and
service requirements. Benefits are based upon years of service and the average
of the employees' highest five years of compensation during the last ten years
of employment. The Company contributes annual amounts that fall within the range
determined to be deductible for federal income tax purposes.
F-11
<PAGE> 51
Certain assumptions utilized in accounting for the U.S. defined benefit plans
were:
<TABLE>
<CAPTION>
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Discount rate 7.5% 7.75% 7.5%
Rate of increase in compensation 4.0-4.25 4.0-4.25 4.0-4.25
Expected long-term rate of return on plan assets 9.0 9.0 9.0
</TABLE>
A summary of the components of net periodic pension cost for the U.S. defined
benefit plans for the periods ended December 31 is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Service cost $ 3,266 $ 3,194 $ 2,619
Interest cost 6,768 6,226 5,743
Expected return on plan assets (18,185) (10,792) (14,193)
Deferred gain on assets 10,215 4,010 8,926
- ------------------------------------------------------------------------------------------------------------------------
$ 2,064 $ 2,638 $ 3,095
========================================================================================================================
</TABLE>
The following table sets forth the funded status of the plans and the amounts
recognized in the Company's consolidated balance sheets at December 31:
<TABLE>
<CAPTION>
1997 1996
- -----------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Actuarial present value of accumulated benefit obligations:
Vested $ 74,639 $ 66,640
Non-vested 6,365 5,843
- -----------------------------------------------------------------------------------------------
$ 81,004 $ 72,483
- -----------------------------------------------------------------------------------------------
Plan assets at fair value $ 108,632 89,708
Actuarial present value of projected benefit obligation (98,570) (87,745)
- -----------------------------------------------------------------------------------------------
Fair value of plan asset over projected benefit obligation 10,062 1,963
Unrecognized prior service cost 604 654
Unrecognized net loss (gain) (4,912) 1,157
- -----------------------------------------------------------------------------------------------
Prepaid pension obligation $ 5,754 $ 3,774
===============================================================================================
</TABLE>
Plan assets at December 31, 1997 were invested in common stock (53%), fixed
income securities (44%) and cash equivalents (3%).
The Company has 401(k) plans covering substantially all U.S. employees. The
Company provides a 30%-50% match for the first 5% to 7.5% of the employee's
salary contributed to the plans. The amount of expense recorded by the Company
with respect to these plans for the years ended December 31, 1997, 1996 and 1995
was $1,317,000, $1,010,309 and $734,000, respectively.
F-12
<PAGE> 52
The Wolverine Tube, Inc. Supplemental Benefit Restoration Plan (the "Restoration
Plan") is a defined benefit pension plan, which is non-funded and provides
benefits to certain eligible executives of the Company. The benefits provided
under the Restoration Plan are identical to the benefits provided by the
Retirement Plan. During 1997, 1996 and 1995, the Company incurred expenses of
$261,451, $148,000 and $121,000, respectively, relating to the Restoration Plan.
At December 31, 1997, the Restoration Plan had accrued pension costs of
$648,000.
Canadian Plans
The Company sponsors a defined contribution profit-sharing retirement plan for
the London, Ontario facility employees who are required to contribute 4% of
regular wages, subject to a maximum contribution limit specified by Canadian
income tax regulations. Employer contributions are determined based upon the
facility's operating results which will not be less than the greater of 1% of
regular earnings of participants up to 10% of an adjusted net income as defined
in the agreement. Contributions to this plan were $630,000 in 1997, $750,000 in
1996 and $577,000 in 1995.
The Company has established noncontributory defined benefit pension plans
covering substantially all employees at the Montreal, Quebec and Fergus, Ontario
facilities. The Company contributes the actuarially determined amounts annually
into the plans. Benefits for the hourly employees at the Montreal, Quebec and
Fergus, Ontario facilities are based on years of service and a negotiated rate.
Benefits for salaried employees are based on years of service and the employee's
highest annual average compensation over five consecutive years.
Significant assumptions utilized in accounting for the Salaried Employees,
Canadian Operational Employees and Quebec Operational Employees pension plans
for the years ended December 31, 1997, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
Canadian Quebec
Salaried Operational Operational
Employees Employees Employees
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Discount rate 7.0% 7.0% 7.0%
Rate of increase in compensation 3.0 N/A N/A
Expected long-term rate of return on plan assets 8.0 8.0 8.0
</TABLE>
A summary of the components of net periodic pension cost for the Salaried
Employees, Canadian Operational Employee and Quebec Operational Employees
pension plans for the years ended December 31, is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- -------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Service cost $ 514 $ 523 $ 445
Interest cost 1,135 1,052 971
Expected return on plan assets (2,883) (3,123) (2,514)
Deferred gain on assets 1,420 1,753 1,337
- -------------------------------------------------------------------------------------------------------------------
$ 186 $ 205 $ 239
===================================================================================================================
</TABLE>
F-13
<PAGE> 53
The following table sets forth the funded status and the amounts recognized in
the Company's consolidated balance sheets for the Salaried Employees, Canadian
Operational Employees and Quebec Operational Employees pension plans at December
31:
<TABLE>
<CAPTION>
1997 1996
- ---------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Actuarial present value of accumulated benefit obligations:
Vested $ 16,240 $ 16,116
Non-vested 699 139
- ---------------------------------------------------------------------------------------------------------------
$ 16,939 $ 16,255
===============================================================================================================
Plan assets at fair value $ 21,072 $ 19,641
Actuarial present value of projected benefit obligation (16,939) (16,803)
- ---------------------------------------------------------------------------------------------------------------
Fair value of plan assets over projected benefit obligation 4,133 2,838
Unrecognized net (gain) (2,042) (436)
- ---------------------------------------------------------------------------------------------------------------
Prepaid pension obligation $ 2,091 2,402
===============================================================================================================
</TABLE>
Plan assets at December 31, 1997 were invested in common stock (63%), fixed
income securities (33%) and cash equivalents (4%).
7. POSTRETIREMENT BENEFIT OBLIGATION
In addition to the Company's U.S. defined benefit pension plan, the Company
sponsors a defined benefit health care plan and life insurance plan that
provides postretirement medical benefits and life insurance to substantially all
full-time U.S. employees who have worked ten years after age 50, and widows of
employees who die while employed after age 55 and have at least five years of
service with the Company. The plan is contributory, with retiree contributions
adjusted annually.
Net periodic postretirement benefit cost for the years ended December 31, 1997,
1996 and 1995 includes the following components:
<TABLE>
<CAPTION>
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Service cost $ 328 $ 363 $ 498
Interest cost 486 537 731
Amortization of deferred gain (773) (669) (372)
- -----------------------------------------------------------------------------------------------------------------------
Net periodic postretirement benefit cost $ 41 $ 231 $ 857
=======================================================================================================================
</TABLE>
F-14
<PAGE> 54
The following table sets forth the funded status of the plan and the amounts
recognized in the Company's consolidated balance sheets at December 31:
<TABLE>
<CAPTION>
1997 1996
- ------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Retirees $ 3,998 $ 4,579
Fully eligible active plan participants 720 718
Other active plan participants (spouses of retirees) 2,089 2,212
- ------------------------------------------------------------------------------------------------------------
Total accumulated postretirement benefit obligation 6,807 7,509
Unrecognized net gain 5,319 4,996
- ------------------------------------------------------------------------------------------------------------
Net accrued postretirement benefit obligation $12,126 $12,505
============================================================================================================
</TABLE>
The assumed rate of annual increase in the per capita cost of covered benefits
(i.e. health care cost trend rate) is 5% for 1997 and is assumed to remain at
that level thereafter. The health care cost trend rate assumption has a
significant effect on the amounts reported. For example, increasing the assumed
health care cost trend rate by one percentage point in each year would have
resulted in an increase in the postretirement medical benefit obligation at
December 31, 1997 of $358,000 and an increase in the aggregate of the service
cost and interest cost components of net periodic postretirement benefit cost
for 1997 of $52,000. The weighted average discount rate used in determining the
accumulated postretirement benefit obligation was 7.50% and 7.75% at December
31, 1997 and 1996, respectively.
8. ENVIRONMENTAL REMEDIATION
The Company is subject to extensive U.S. and Canadian federal, state, provincial
and local environmental laws and regulations. These laws, which are constantly
changing, regulate the discharge of materials into the environment. The Company
has received various communications from regulatory authorities concerning
certain environmental matters and has currently been named as a potentially
responsible party ("PRP") at various waste disposal sites. The Company believes
that its potential liability with respect to these waste disposal sites is not
material.
The Company has accrued environmental remediation costs of $2,540,000 at
December 31, 1997, consisting primarily of $38,000 for estimated remediation
costs for the London and Fergus facilities, $1,224,219 for the Decatur facility,
$468,000 for the Greenville facility and an aggregate of $809,781 for the
Ardmore facility and the Shawnee facility (with respect to the Double Eagle
Refinery site). Based on information currently available, the Company believes
that the costs of these matters are not reasonably likely to have a material
effect on the Company's consolidated financial condition, results of operations
or liquidity.
F-15
<PAGE> 55
9. INCOME TAXES
The components of income before income taxes for the years ended December 31,
are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- -------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
U.S. $38,193 $47,014 $38,100
Canadian 9,889 14,361 11,723
- -------------------------------------------------------------------------------------------------
$48,082 $61,375 $49,823
=================================================================================================
</TABLE>
The provision for income taxes for the years ended December 31, consists of the
following:
<TABLE>
<CAPTION>
1997 1996 1995
- -------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Current:
U.S. Federal $12,627 $12,340 $10,726
Canadian 3,252 3,309 3,549
State 1,107 1,435 1,604
- -------------------------------------------------------------------------------------------------
16,986 17,084 15,879
Deferred:
U.S 587 3,913 2,309
Canadian (67) 795 (601)
- -------------------------------------------------------------------------------------------------
520 4,708 1,708
- -------------------------------------------------------------------------------------------------
$17,506 $21,792 $17,587
=================================================================================================
</TABLE>
F-16
<PAGE> 56
The components of net deferred tax amounts recognized in the consolidated
balance sheets at December 31, are as follows:
<TABLE>
<CAPTION>
1997 1996
- -----------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C>
Deferred tax liabilities:
Basis of property, plant and equipment $30,080 $30,948
Inventory valuation 5,287 4,613
Prepaid pension 2,443 2,377
Other 22 55
- ------------------------------------------------------------------------------------------------
Total deferred tax liabilities 37,832 37,993
Deferred tax assets:
Environmental remediation accrual 960 1,373
Pension obligation 144 126
Postretirement benefit obligation 4,547 4,803
Other 1,465 1,221
- -----------------------------------------------------------------------------------------------
Total deferred tax assets 7,116 7,523
- -----------------------------------------------------------------------------------------------
Net deferred tax liability $30,716 $30,470
===============================================================================================
</TABLE>
The Company's effective tax rate differs from the applicable U.S. federal
statutory rate for the periods ended December 31, due to the following:
<TABLE>
<CAPTION>
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal statutory rate 35.0% 35.0% 35.0%
Increase (decrease) in taxes resulting from:
State and local taxes, net of federal benefit 2.3 1.5 2.1
Effect of difference in U.S. and Canadian rates (0.6) (0.3) (0.1)
Permanent differences 0.7 0.1 1.2
Other (1.0) (0.8) (2.9)
- ----------------------------------------------------------------------------------------------------------
36.4% 35.5% 35.3%
==========================================================================================================
</TABLE>
The Internal Revenue Service and Revenue Canada are conducting examinations of
the Company's U.S. federal and Canadian federal income tax returns for the years
1991 through 1994 and 1991 through 1995, respectively. The Company believes that
it has made an adequate provision for these matters and will not have a material
adverse effect on its consolidated financial condition, results of operations or
liquidity.
F-17
<PAGE> 57
10. CUMULATIVE PREFERRED STOCK
The Company has 500,000 shares authorized for issuance of $1 par value
cumulative preferred stock. Of these shares, there are currently 20,000 shares
of cumulative preferred stock issued and outstanding which must be redeemed by
the Company on March 1, 2002, if not earlier, for $100 per share plus accrued
and unpaid dividends. The cumulative preferred stock provides for annual
dividends at the rate of $14 per share. The dividends accrue quarterly whether
declared or not, and compound quarterly at 14% per annum to the extent unpaid.
At December 31, 1997 and 1996, all accrued dividends had been paid.
The cumulative preferred stock is entitled to a preference, in liquidation, in
the amount of $100 per share, plus any accrued and unpaid dividends and any
related interest. The owners of the cumulative preferred stock are not entitled
to any voting rights, except that in the event that six consecutive quarterly
dividends are not paid, the holders of the cumulative preferred stock are
entitled to vote separately as a class to elect 20% of the directors of the
Company. There are also certain restrictions against the declaration or payment
of dividends on common stock or the acquisition of common stock by the Company
if it is in default on any dividends or redemption payments on the cumulative
preferred stock. Additionally, amendment of the Company's Articles of
Incorporation or changes in the number of authorized stock ranking on a parity
with the preferred stock must be approved by the holders of the cumulative
preferred stock.
At December 31, 1997, 20,000 shares remain outstanding with a fair value of
$2,268,000.
11. COMMON STOCK
All holders of common stock are entitled to receive dividends when and if
declared by the Company's Board of Directors provided that all dividend
requirements of the cumulative preferred stock have been paid. Additionally, the
payment of dividends on the Company's common stock is restricted under the terms
of the Company's various financing agreements. To date, no dividends have been
paid to the holders of the common stock and there are no immediate plans to
institute a dividend.
The Board of Directors (the "Board") has adopted a Stockholder Rights Plan
designed to protect the Company and its stockholders from coercive, unfair or
inadequate takeover bids. Pursuant to the Rights Plan, a dividend of one
Preferred Share Purchase Right ( the "Rights") was declared for each share of
Common Stock outstanding at the close of business on February 23, 1996. The
Rights are generally not exercisable until ten days after a person or group
acquires, or commences a tender offer that could result in the party acquiring
15% of the outstanding shares of Common Stock. Each Right, should it become
exercisable, will enable the owner to buy one one-thousandth of a share of newly
created Series A Junior Participating Preferred Stock at an exercise price of
$175, and in certain circumstances, to purchase shares of Common Stock at a
substantially reduced price. The Board is generally entitled to redeem the
Rights at $0.01 per Right at any time prior to the date they become exercisable.
The Rights will expire on February 23, 2006.
F-18
<PAGE> 58
12. STOCK OPTION PLAN
The Company has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Options Issued to Employees" (APB 25) and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under
Financial Accounting Standards Board Statement No. 123, "Accounting for
Stock-Based Compensation," requires use of option valuation models that were not
developed for use in valuing employee stock options. Under APB 25, no
compensation expense is recognized because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant.
Pro forma information regarding net income and earnings per share is required by
Statement 123, and has been determined as if the Company had accounted for its
employee stock options under the fair value method of that statement. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions for 1997,
1996 and 1995, respectively: risk free interest rates of 6.32%, 6.34% and 6.50%;
volatility factors of the expected market price of the Company's common stock of
.371 and a weighted-average expected life of the option of 7 years.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options which 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 employee stock 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 management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock options.
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 follows:
<TABLE>
<CAPTION>
1997 1996 1995
- --------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C>
Net income applicable to common shares:
As reported $ 25,558 $ 39,303 $ 31,956
Pro forma 24,670 38,684 31,756
Diluted earnings per share:
As reported $ 1.80 $ 2.77 $ 2.26
Pro forma 1.74 2.75 2.26
=========================================================================================================
</TABLE>
F-19
<PAGE> 59
The 1993 Equity Plan provides for the issuance of stock options, restricted
shares, stock appreciation rights, phantom shares and other additional awards to
key executives and employees. The maximum number of additional shares issuable
under the 1993 Equity Plan is 1,225,000 at a price no less than fair market
value at the date of grant. Options granted under the 1993 Equity Plan vest 20%
on each anniversary thereafter and terminate on the 10th anniversary of the date
of grant. Options granted under prior plans remain outstanding but are governed
by the provisions of the 1993 Equity Plan.
The 1993 Directors' Plan provides for the issuance of stock options to outside
directors at the fair market value on the date of grant. A maximum of 50,000
shares are issuable under the 1993 Directors' Plan. The initial options granted
vest at 33.3% per year and all subsequent options granted will vest immediately
and terminate on the 10th anniversary of the date of grant. All initially
granted options must be held one year before being exercised.
The weighted-average exercise price of options outstanding at the beginning of
the year, granted during the year, exercised during the year, forfeited during
the year and outstanding at the end of the year is $20.62, $35.70, $8.91, $33.85
and $24.64, respectively. The weighted average remaining life for options
outstanding at December 31, 1997 is 7.2 years.
The number of options outstanding, weighted-average exercise price,
weighted-average remaining contractual life, vested options and the
weighted-average exercise price of vested options outstanding at December 31,
1997 which were issued prior to August 1993 were 175,503, $6.20, 4.7 years,
138,495 and $5.90. The number of options outstanding, weighted-average exercise
price, weighted-average remaining contractual life, vested options and the
weighted-average exercise price of vested options outstanding at December 31,
1997 which were issued after August 1993 were 475,620, $31.45, 8.1 years,
119,757 and $27.33.
F-20
<PAGE> 60
The Company's stock option plans are summarized as follows:
<TABLE>
<CAPTION>
Weighted
1993 1993 Average
Directors Equity Option Exercise
Plan Plan Price Price
- -------------------------------------------------------------------------------------------
(Number of Shares)
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Outstanding at December 31, 1994 12,000 819,036 $ 4.44-$26.25 $ 8.21
Granted 7,000 138,000 $25.25-$34.00 $ 25.68
Exercised -- (192,782) $ 4.44-$20.88 $ 5.68
Forfeited -- (3,420) $20.88-$25.50 $ 23.19
- -------------------------------------------------------------------------------------------
Outstanding at December 31, 1995 19,000 760,834 $ 4.44-$34.25 $ 12.01
Granted 8,000 178,500 $35.38-$41.13 $ 36.35
Exercised -- (310,914) $ 4.44-$25.25 $ 8.70
Forfeited -- (13,454) $ 4.44-$25.25 $ 19.43
- -------------------------------------------------------------------------------------------
Outstanding at December 31, 1996 27,000 614,966 $ 4.44-$41.13 $ 20.62
Granted 13,000 177,750 $25.63-$37.25 $ 35.70
Exercised -- (88,547) $ 4.44-$25.25 $ 8.91
Forfeited -- (93,046) $ 4.44-$37.25 $ 33.85
- -------------------------------------------------------------------------------------------
Outstanding at December 31, 1997 40,000 611,123 $ 4.44-$41.13 $ 24.64
===========================================================================================
Exercisable at:
December 31, 1995 10,666 262,400 $ 4.44-$34.25 $ 7.51
December 31, 1996 18,666 167,947 $ 4.44-$36.88 $ 12.60
December 31, 1997 22,667 235,585 $ 4.44-$30.88 $ 15.83
</TABLE>
13. COMMITMENTS
Pursuant to various operating lease agreements, at December 31, 1997, the
Company has payment obligations totaling $5,136,000 during the next five years
and thereafter in annual amounts ranging from $1,739,000 to $488,000. Total
rental expense for operating leases amounted to approximately $2,027,000,
$1,564,000 and $1,634,000 for the years 1997, 1996 and 1995, respectively. At
December 31, 1997, the Company had commitments of $10,928,000 for capital
expenditures.
14. RELATED PARTY TRANSACTIONS
During 1996 and 1995, pursuant to a management consulting and advisory agreement
(the "Agreement"), the Company paid management fees and out-of-pocket expenses
of $450,000 and $463,892, respectively, to Genstar Investment Corporation
("GIC"), an affiliate of Genstar Capital Corporation, a former controlling
stockholder of the Company. Under the terms of the Agreement, the Company paid
GIC a management fee of $150,000 per quarter through September 30, 1996, at
which time the Agreement terminated.
F-21
<PAGE> 61
15. GEOGRAPHIC DATA
The Company operates in the metal products industry as more fully described in
Note 1. These operations are conducted in the U.S. and Canada. In 1997 and 1995,
no customer accounted for as much as 10% of the Company's net sales. In 1996,
one customer accounted for approximately 11% of the Company's net sales. The
following summarized geographic data is based on estimates that do not consider
fully the extent to which the Company's product development, engineering,
marketing and management activities are interrelated. Thus, the data is not
totally indicative of the extent that each geographic area contributed to the
Company's consolidated operating results.
<TABLE>
<CAPTION>
U.S. Canada Consolidated
- ----------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C>
Year ended December 31, 1997:
Sales $454,448 $213,238 $667,686
Income from operations 45,056 11,105 56,161
Identifiable assets 335,708 89,214 424,922
Year ended December 31, 1996:
Sales $476,090 $223,773 $699,863
Income from operations 57,347 14,456 71,803
Identifiable assets 317,720 79,300 397,020
Year ended December 31, 1995:
Sales $441,908 $222,697 $664,605
Income from operations 49,438 11,027 60,465
Identifiable assets 268,980 88,245 357,225
</TABLE>
16. NON-RECURRING CHARGE
During the second quarter of 1997, the Company recognized a non-recurring,
pre-tax charge of $4,384,000 ($2,997,000 net of tax). This charge included $1.8
million of expenses related to the implementation of the Company's 1997
Voluntary Early Retirement Program; $1.3 million of severance costs primarily
associated with the departure of the Company's former Chief Executive Officer;
$0.6 million professional fees and other costs associated with an acquisition
that was not completed; and $0.7 million of costs for discontinuing the Poland
operations of Small Tube Manufacturing Corporation (a wholly-owned subsidiary of
the Company).
F-22
<PAGE> 62
17. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
1997 1996 1995
- ------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C>
Income before extraordinary item $ 30,576 $ 39,583 $ 32,236
Extraordinary item (4,738) -- --
Net income 25,838 39,583 32,236
Dividends on preferred stock (280) (280) (280)
- ------------------------------------------------------------------------------------------
NET INCOME AVAILABLE TO COMMON SHARES $ 25,558 $ 39,303 $ 31,956
==========================================================================================
Basic weighted average common shares 14,022 13,772 13,605
Employee stock options 210 424 513
- ------------------------------------------------------------------------------------------
DILUTED WEIGHTED AVERAGE COMMON AND COMMON 14,232 14,196 14,118
EQUIVALENT SHARES
==========================================================================================
Earnings per common share-basic:
Income before extraordinary item 2.16 2.85 $ 2.35
Extraordinary item (0.34) -- --
- ------------------------------------------------------------------------------------------
NET INCOME PER COMMON SHARE $ 1.82 $ 2.85 $ 2.35
==========================================================================================
Earnings per common share-diluted:
Income before extraordinary item $ 2.13 $ 2.77 $ 2.26
Extraordinary item (0.33) -- --
- ------------------------------------------------------------------------------------------
NET INCOME PER COMMON SHARE $ 1.80 $ 2.77 $ 2.26
==========================================================================================
</TABLE>
F-23
<PAGE> 63
18. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations for
the years ended December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 March 29 June 28 September 27 December 31
- ---------------------------------------------------------------------------------------------------------------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
Net sales $ 173,576 $ 178,082 $ 159,380 $ 156,648
Gross profit 21,595 23,322 18,509 19,200
Non-recurring charge -- 4,384 -- --
Income before extraordinary item 8,837 7,063 7,289 7,387
Extraordinary item, net of income tax benefits -- 4,738 -- --
Net income 8,837 2,325 7,289 $ 7,387
===============================================================================================================
Basic earnings per common share:
Income before extraordinary item $ 0.63 $ 0.50 $ 0.51 $ 0.52
Extraordinary item, net of income tax benefit -- (0.34) -- --
- ---------------------------------------------------------------------------------------------------------------
Net income per share $ 0.63 $ 0.16 $ 0.51 $ 0.52
===============================================================================================================
Diluted earnings per common share:
Income before extraordinary item $ 0.62 $ 0.49 $ 0.51 $ 0.51
Extraordinary item, net of income tax benefit -- (0.33) -- --
- ---------------------------------------------------------------------------------------------------------------
Net income per share $ 0.62 $ 0.16 $ 0.51 $ 0.51
===============================================================================================================
</TABLE>
<TABLE>
<CAPTION>
1996 March 30 June 29 September 28 December 31
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 179,414 $ 180,279 $ 168,653 $ 171,517
Gross profit 23,414 25,584 22,847 21,861
Net income 10,263 10,434 9,580 9,306
===============================================================================================================
Basic earnings per common share: $ 0.75 $ 0.75 $ 0.69 $ 0.66
===============================================================================================================
Diluted earnings per common share $ 0.72 $ 0.73 $ 0.67 $ 0.65
===============================================================================================================
</TABLE>
F-24
<PAGE> 64
Wolverine Tube, Inc. and Subsidiaries
Report of Ernst & Young LLP, Independent Auditors
The Board of Directors
Wolverine Tube, Inc.
We have audited the accompanying consolidated balance sheets of Wolverine Tube,
Inc. and Subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Wolverine Tube,
Inc. and Subsidiaries at December 31, 1997 and 1996, and the consolidated
results of their operations and their cash flows for each of the years in the
period ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ ERNST & YOUNG LLP
February 6, 1998
Birmingham, Alabama
F-25
<PAGE> 65
Schedule 11
Wolverine Tube, Inc.
Valuation and Qualifying Accounts
(In thousands)
<TABLE>
<CAPTION>
Additions
-----------------------
Charged to
Balance Charged to Other
Beginning Cost and Accounts- Deductions- Balance at
Description of Period Expenses Describ Describe End of Period
----------- --------- -------- ------- -------- -------------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1995
Deducted from assets accounts:
Reserve for sales returns and
allowances .................. $ 410 $ -- $ -- $ 111(1) $ 299
Allowances for doubtful
accounts .................... 892 119 -- (53)(2) 1,064
------ ---- ----- ----- ------
Totals ...................... $1,302 $119 $ -- $ 58 $1,363
====== ==== ===== ===== ======
Year ended December 31, 1996
Deducted from assets accounts:
Reserve for sales returns and
allowances ................ $ 299 $ -- $ -- $ 107(1) $ 192
Allowances for doubtful
accounts .................... 1,064 100 25(3) 607(1) 582
------ ---- ----- ----- ------
Totals ...................... $1,363 $100 $ 25 $ 714 $ 774
====== ==== ===== ===== ======
Year ended December 31, 1997
Deducted from assets accounts:
Reserve for sales returns and
allowances ................... $ 192 $300 $ -- $ 28(1) $ 464
Allowances for doubtful
accounts ..................... 582 45 -- 72(1) 555
------ ---- ----- ----- ------
Totals ....................... $ 774 $345 $ -- $ 100 $1,019
====== ==== ===== ===== ======
</TABLE>
(1) Reduction of reserve, net of translation adjustments.
(2) Uncollectible accounts written off, net of translation adjustments and
recoveries.
(3) Reflects the addition of Tube Forming, Inc.'s allowance for doubtful
accounts effective September 6, 1996.
<PAGE> 66
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
21 List of Subsidiaries
23 Consent of Ernst & Young LLP, Independent Auditors
27 Financial Data Schedule (for SEC use only)
</TABLE>
<PAGE> 1
Exhibit 2l
SUBSIDIARIES OF WOLVERINE TUBE, INC.
<TABLE>
<CAPTION>
Name Jurisdiction of Incorporation
- ---- -----------------------------
<S> <C>
Wolverine Tube (Canada) Inc. Canada
STPC Holding, Inc. Delaware
Small Tube Manufacturing Corporation Delaware
Wolverine Tube International Limited Virgin Islands of the United States
TFI Holdings, Inc. Delaware
TF Investors, Inc. Delaware
Tube Forming, LP Delaware
Wolverine Finance Company Tennessee
Wolverine Europe (EURL) France
Wolverine Asia, Ltd. Hong Kong
Wolverine China Investments LLC Delaware
Wolverine Tube (Shanghai) Co. Ltd. China
</TABLE>
<PAGE> 1
EXHIBIT 23
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in (i) the Registration Statement
(Form S-8 No. 33-73550) pertaining to the 1993 Equity Incentive Plan of
Wolverine Tube, Inc.; (ii) the Registration Statement (Form S-8 No. 33-73490)
pertaining to the 1993 Stock Option Plan for Outside Directors of Wolverine
Tube, Inc.; and, (iii) the Registration Statement (Form S-8 No. 33-87687)
pertaining to the Savings Plan of Wolverine Tube, Inc. of our report dated
February 6, 1998, with respect to the consolidated financial statements of
Wolverine Tube, Inc. included in the Annual Report (Form 10-K) for the year
ended December 31, 1997.
Our audits also included the financial statement schedule of Wolverine Tube,
Inc. listed in Item 14(a). This schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Birmingham, Alabama
March 27, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENTS OF INCOME OF WOLVERINE TUBE, INC. FOR THE TWELVE MONTH
PERIOD ENDED DECEMBER 31, 1997, AND THE CONSOLIDATED BALANCE SHEET OF WOLVERINE
TUBE, INC. AT DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 15,096
<SECURITIES> 0
<RECEIVABLES> 71,879
<ALLOWANCES> 0<F1>
<INVENTORY> 87,829
<CURRENT-ASSETS> 175,871
<PP&E> 153,917
<DEPRECIATION> 0<F1>
<TOTAL-ASSETS> 424,922
<CURRENT-LIABILITIES> 50,025
<BONDS> 98,411
0
2,000
<COMMON> 141
<OTHER-SE> 232,622
<TOTAL-LIABILITY-AND-EQUITY> 424,922
<SALES> 667,686
<TOTAL-REVENUES> 667,686
<CGS> 585,060
<TOTAL-COSTS> 585,060
<OTHER-EXPENSES> 27,177
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 7,367
<INCOME-PRETAX> 48,082
<INCOME-TAX> 17,506
<INCOME-CONTINUING> 30,576
<DISCONTINUED> 0
<EXTRAORDINARY> 4,738
<CHANGES> 0
<NET-INCOME> 25,838
<EPS-PRIMARY> 1.82
<EPS-DILUTED> 1.80
<FN>
<F1>The values for the tags Receivable and PP&E are shown net of their respective
allowance accounts.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED STATEMENTS OF INCOME OF WOLVERINE TUBE, INC. FOR THE TWELVE MONTH
PERIOD ENDED DECEMBER 31, 1996, AND THE CONSOLIDATED BALANCE SHEET OF WOLVERINE
TUBE, INC. AT DECEMBER 31, 1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 2,967
<SECURITIES> 0
<RECEIVABLES> 79,128
<ALLOWANCES> 0<F1>
<INVENTORY> 73,525
<CURRENT-ASSETS> 155,825
<PP&E> 150,221
<DEPRECIATION> 0<F1>
<TOTAL-ASSETS> 397,020
<CURRENT-LIABILITIES> 43,162
<BONDS> 100,473
0
2,000
<COMMON> 140
<OTHER-SE> 209,082
<TOTAL-LIABILITY-AND-EQUITY> 397,020
<SALES> 699,863
<TOTAL-REVENUES> 699,863
<CGS> 606,157
<TOTAL-COSTS> 606,157
<OTHER-EXPENSES> 23,010
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,321
<INCOME-PRETAX> 61,375
<INCOME-TAX> 21,792
<INCOME-CONTINUING> 39,583
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 39,583
<EPS-PRIMARY> 2.85
<EPS-DILUTED> 2.77
<FN>
<F1>The values for the tags Receivable and PP&E are shown net of their respective
allowance accounts.
</FN>
</TABLE>
