Exhibit 99
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
As used herein, unless the context otherwise requires, the terms "we," "us" or
"our" refers to Maverick Tube Corporation and its subsidiaries.
Certain statements contained in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" regarding matters that are not
historical facts (including statements as to the beliefs or expectations of
Maverick) are forward-looking statements. Because such forward-looking
statements include risks and uncertainties, actual results may differ materially
from those expressed or implied by such forward-looking statements. For example,
uncertainty continues to exist as to future levels and volatility of oil and gas
price expectations and their effect on drilling levels and demand for our energy
related products, the future impact of industry-wide draw-downs of inventories
and future import levels. Uncertainty also exists as to the trend and direction
of both product pricing and purchased steel costs. Reference is made to the
"Risk Factors" discussed in Exhibit 99.1 of Maverick's Form 10-K for its fiscal
year ended September 30, 1999.
All amounts are expressed in U.S. dollars unless otherwise indicated.
ACQUISITION OF PRUDENTIAL
On June 11, 2000, the Company entered into a definitive Combination Agreement
providing for the combination of Prudential Steel Ltd. ("Prudential"), a
corporation existing under the laws of the Province of Alberta, Canada, with the
Company. The transaction was completed on September 22, 2000.
Under the terms of the Combination, Prudential stockholders received .52 of an
exchangeable share, issued by Maverick Tube (Canada) Inc., a wholly-owned
Canadian subsidiary of the Company, for each Prudential common share.
Consequently, Prudential stockholders received a total of 15,813,088
exchangeable shares. The exchangeable shares are Canadian securities that began
trading on The Toronto Stock Exchange on September 27, 2000 under the symbol
MAV. These shares have the same voting rights, dividend entitlements and other
attributes as shares of Maverick common stock and are exchangeable, at each
exchangeable stockholder's option, for Maverick common stock on a one for one
basis. The transaction was accounted for as a pooling of interests and thus the
financial statements and management's discussion and analysis for the fiscal
years ended September 30, 1999, 1998 and 1997 have been restated to include the
operations and activities of Prudential.
As a result of the differing year ends of the Company and Prudential, results of
operations for dissimilar year ends have been combined. The Company's results of
operations for its fiscal year ended September 30, 1999, 1998 and 1997 have been
combined with Prudential's results of operations for the years ended December
31, 1999, 1998 and 1997.
OVERVIEW
Our products include Electric Resistance Welded (ERW) Oil Country Tubular Goods
(OCTG) and line pipe, which are sold primarily to distributors who supply end
users in the energy industry, and structural tubing and standard pipe, which are
sold primarily to service centers who supply end users in construction,
transportation, agriculture and other industrial enterprises. During the quarter
ended December 31, 1998, we began the production of cold drawn tubing products
for industrial applications. During the year ended September 30, 1999, sales of
cold drawn mechanical tubing had not reached material levels.
Demand for our energy related products depends primarily upon the number of oil
and natural gas wells being drilled, completed and worked over in the United
States and Canada and the depth and drilling conditions of these wells. The
levels of these activities are primarily dependent on oil and natural gas
prices. U.S. end-users obtain OCTG from domestic and foreign pipe producers and
from draw-downs of the end user, distributor or mill inventories. Canadian
distributors do not generally hold significant amounts of inventories.
The following table illustrates certain factors related to industry-wide
drilling activity, energy prices, oil country tubular goods consumption,
shipments, imports and inventories for the periods presented:
Twelve Month Period Ended September 30,
1999 1998 1997
----------------------------------------
U.S. Market activity:
Average rig count 602 903 905
Average U.S. energy prices:
Oil per barrel (West Texas Intermediate) $16.36 $16.94 $21.94
Natural gas per MCF (Average U.S.) $ 2.06 $ 2.26 $ 2.47
U.S. oil country tubular goods consumption
(in thousands of tons)
U.S. producer shipments 661 1,548 2,021
Imports 134 402 360
Inventory (increase)/decrease 370 (66) (299)
Used pipe 158 139 187
Total U.S. consumption 1,323 2,023 2,269
Twelve Month Period Ended December 31,
1999 1998 1997
--------------------------------------
Canadian Market Activity:
Average rig count 246 261 375
Average energy prices
Natural gas per U.S. $/MCF
(Average Alberta spot price) $1.86 $1.33 $1.35
Canadian oil country tubular goods consumption
(in thousands of tons)
Canadian producer shipments 303 350 584
Imports 160 157 226
Inventory (increase)/decrease 10 (15) (62)
Total Canadian consumption 472 492 748
The rig count in the table is based on weekly rig count reporting from Baker
Hughes, Inc. Energy prices in the table are monthly average period prices as
reported by Spears and Associates for West Texas Intermediate grade crude oil
and the average U.S. monthly natural gas cash price as reported by Natural Gas
Week. Imports are as reported by Duane Murphy and Associates in "The OCTG
Situation Report." Inventory (increase)/decrease are our estimates based upon
independent research by Duane Murphy and Associates. Inventory
(increase)/decrease (in thousands of tons) as reported by Pipe Logix, Inc., an
independent domestic OCTG industry reporting service, for fiscal 1998 and 1997
was (116) and (717) (fiscal year ended September 30, 1999 not available). Used
pipe quantities are calculated by multiplying 8.3 recoverable tubing and casing
tons by the number of abandoned oil and gas wells. U.S. consumption of OCTG is
management estimates based on estimated per rig consumption of OCTG multiplied
by the Baker Hughes rig count. Total U.S. consumption (in thousands of tons) as
reported by Pipe Logix, Inc., for fiscal 1998 and 1997 was 1,939 and 1,943
(fiscal year ended September 30, 1999 not available). U.S. producer shipments
are our estimates calculated based on the components listed above.
The Canadian rig count in the table is based on weekly rig count reporting from
Baker Hughes, Inc. Energy prices in the table are the average Alberta natural
gas spot price. Imports are as reported by Statistics Canada. Inventory
(increase)/decrease are management estimates based upon data reported by
Statistics Canada. Canadian producer shipments are reported by Statistics Canada
Steel Pipe and Tube Report.
According to published industry reports, average U.S. drilling declined by 33.3%
from fiscal 1998 to fiscal 1999, averaging approximately 602 rigs, with
gas-related drilling declining by 22.3% and oil-related drilling declining by
55.6%. Average energy prices decreased during fiscal 1999, with natural gas
decreasing 8.8% and oil decreasing by 3.4%. The decreases in energy prices seen
throughout the year had a negative effect on drilling levels in fiscal 1999. At
the end of fiscal 1998, drilling was at 754 rigs, down 24.4% from its fiscal
1997 year end level of 998 rigs, and continued to decline to 488 rigs by April
1999. Drilling activity during the last half of 1999 increased substantially
from its April low to close the fiscal year at 730 rigs, down by only 3.2% from
fiscal 1998 year end levels.
According to published industry reports, average Canadian drilling declined by
5.75% from calendar 1998 to calendar 1999, averaging approximately 15 rigs.
Average energy prices decreased during calendar 1999, with natural gas
decreasing 39.8% and oil decreasing by 3.4%. The decreases in crude oil prices
seen throughout the year had a negative effect on drilling levels in calendar
1999. At the end of calendar 1998, drilling was at 248 rigs, down 49% from its
calendar 1997 year end level of 486 rigs, and continued to decline to 62 rigs by
April 1999. Drilling activity during the last half of 1999 increased
substantially from its April low to close the calendar year at 385 rigs, up by
55% from calendar 1998 year end levels.
Imports into the U.S. decreased during fiscal 1999 from a 19.9% market share in
1998 to 10.1% market share in fiscal 1999. During fiscal 1998, U.S. industry
inventory increases resulted in an estimated additional demand of 3.3% of total
U.S. OCTG consumption. During fiscal 1999, U.S. industry inventory decreases
adversely affected U.S. producer shipments by satisfying an estimated 28.0% of
consumption. Management believes that at September 30, 1999, U.S. industry
inventories were at or below normal levels in relation to demand, as inventory
months of supply decreased 34.9%, from 8.3 months at fiscal year end 1998 to 5.4
months at fiscal year end 1999.
As a result of declining drilling activity and a substantial decline in U.S.
industry inventories, partially offset by decreased imports, we estimate that
total U.S. producer shipments declined by 57.3% as compared to the fiscal year
ended September 30, 1998. During that same period, our shipments of U.S. OCTG
were down 32.8% and our export sales, primarily to Canada, declined by 22.9%.
However, we estimate that our domestic OCTG market share increased to 22% during
fiscal 1999 from 14% during fiscal 1998.
Imports into Canada increased during calendar 1999 from a 31% market share in
1998 to 34.5% market share in calendar 1999. During calendar 1999, Canadian
producer shipments of OCTG decreased by 13.4%. Shipments in Canada were
adversely impacted by low priced imports and high inventory levels. As a
result of the decreased drilling activity, we estimate that total Canadian
consumption increased by 4% in calendar 1999 as compared to calendar 1998.
During that same period, our Canadian shipments of OCTG increased 24.4%. We
estimate that our Canadian OCTG market share increased from 18.6% during
calendar 1998 to 25.5% during calendar 1999.
Published information suggests that demand for line pipe was also down during
fiscal 1999 by an estimated 3.7%. However, domestic shipments rose by 7.4% as
the import market share fell from 41.6% to 34.8%. Canadian demand for line pipe
decreased during calendar 1999 by an estimated 8.6% and domestic shipments fell
by 19.4% as the import market share increased from 56.5% to 62%.
Given the numerous applications for our industrial products, sources of demand
for these products are diversified. Demand depends on the general level of
economic activity in the construction, transportation, agricultural, material
handling and recreational market segments, the use of structural tubing as a
substitute for other structural steel forms, such as I-beams and H-beams, and
draw-downs of existing customer inventories.
We estimate that the U.S. demand for structural tube products (commonly referred
to as hollow structural sections or HSS) of the type we produce declined by 2.1%
in fiscal 1999 as compared to fiscal 1998 and total U.S. producer shipments
declined by 3.0% as import market share increased slightly. According to
published reports, the U.S. standard pipe market demand decreased 10.3%, while
total U.S. domestic producer shipments declined by 15.7% as the import market
share increased from 28.4% to 32.6%.
Pricing of our products was down during fiscal 1999 compared to fiscal 1998.
Average pricing of our U.S. OCTG, line, structural and standard product pricing
decreased by 19.9%, 19.7%, 10.2% and 12.2%, respectively. Energy product pricing
was down due to the decrease in drilling activity. Structural and standard
pricing was down primarily due to declining steel prices during most of the
year. Pricing of our Canadian energy products was down by 11.0%, while
industrial products pricing fell by 14.3%, respectively.
U.S Steel costs included in cost of goods sold decreased during fiscal 1999 by
$42 per ton, or 13.0%, from $321 per ton to $279 per ton. Our major supplier of
steel announced three price decreases from mid-September 1998 to November 1998,
reducing our replacement cost of steel by $50 per ton. These price reductions
were reflected in our cost of goods sold in the second, third and fourth
quarters of fiscal 1999. However, this same supplier has announced five price
increases since December 1998, which will increase our replacement cost of steel
by approximately $45 per ton. We estimate that these increases will not be fully
reflected in cost of goods sold until the second quarter of fiscal 2000.
The same factors that have influenced steel costs and costs of goods sold in our
U.S. operations have also affected the steel costs and cost of goods sold in our
Canadian operations. Canadian cost of goods sold had decreased in the calendar
year as compared to the prior year but will also increase during calendar year
2000 as increased replacement costs are realized.
The supply of steel in the United States increased significantly during calendar
1998, primarily due to previous capacity additions and increased import levels.
These market conditions kept steel costs relatively low during 1999. However,
steel trade cases filed with the International Trade Commission by U.S. steel
producers against foreign steel producers in September 1998 have been a
contributing factor to the recent steel cost increases and could have an
additional adverse impact on our future replacement costs of steel. As a result
of these factors, anticipated future steel price increases may impact our
product margins.
The OCTG market conditions described above impacted our operations and our
competitors significantly during 1999, as sales were substantially reduced
throughout the year due to the rapid fall in oil prices and the resulting
significant decrease in drilling activity. Consequently, industry-wide inventory
levels were excessive and the impact of these industry draw-downs sharply
reduced domestic shipments. As our recent experience indicates, oil and gas
prices are volatile and can have a substantial effect on drilling levels and
resulting demand for our energy related products. Uncertainty also exists as to
the future demand and pricing for HSS and other industrial related products.
Although drilling activity has been recovering from the recently depressed
levels, no assurance can be given regarding the timing and extent of such
recovery.
RESULTS OF OPERATIONS
The following table sets forth, for the periods presented, certain information
relating to our operations expressed as a percentage of net sales:
Year Ended September 30,
1999 1998 1997
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Net sales 100.0% 100.0% 100.0%
Cost of goods sold 94.0 86.4 83.1
-----------------------------------------------
Gross profit 6.0 13.6 16.9
Selling, general and
administrative 7.0 5.2 3.6
Interest income (0.1) (0.1) (0.1)
Start-up costs 1.2 0.2 --
-----------------------------------------------
Income (loss) from operations (2.1) 8.3 13.4
Interest expense 0.7 0.5 0.4
-----------------------------------------------
Income (loss) before
income taxes (2.8) 7.8 13.0
Provision (benefit) for income
taxes (0.5) 2.8 4.6
-----------------------------------------------
Net income (loss) (2.3) 5.0 8.4
===============================================
Fiscal Year Ended September 30, 1999 Compared to Fiscal Year Ended September 30,
1998
Overall Company
In fiscal 1999, net sales decreased $69.4 million, or 18.1%, from $383.8 million
in fiscal 1998 to $314.4 million in fiscal 1999. These results were attributable
primarily to a decrease of 4.7% in total product shipments, from 591,785 tons in
fiscal 1998 to 564,181 tons in fiscal 1999 and a 14.1% decrease in the overall
average net selling price during fiscal 1999 from an average of $649 per ton to
$557 per ton.
Cost of goods sold decreased $35.8 million, or 10.8%, from $331.4 million in
fiscal 1998 to $295.6 million in fiscal 1999. The overall decrease was due
primarily to decreased product shipments. However, the overall unit cost per ton
of products sold decreased 6.4% (from an average of $560 per ton to $524 per
ton) in fiscal 1999. The decrease was due primarily to a decrease in steel
costs. U.S. steel cost of goods sold decreased 13.0%. See "Overview." Overall
conversion costs increased during fiscal 1999 primarily due to lower fixed cost
absorption.
Gross profit decreased $33.7 million, or 64.2%, from $52.4 million in fiscal
1998 to $18.7 million in fiscal 1999. Gross profit per ton for fiscal 1998 was
$89 per ton as compared to $33 per ton for fiscal 1999. Gross profit per ton was
impacted by falling selling prices and higher conversion costs partially offset
by lower steel costs. Gross profit as a percentage of net sales was 6.0% for
fiscal 1999, as compared to 13.6% for fiscal 1998. The change in the gross
profit is due to the factors discussed above.
Selling, general and administrative expenses increased $1.9 million or 9.6%,
from $20.1 million in fiscal 1998 to $22.0 million in fiscal 1999. These
expenses increased principally as a result of an increase in bad debt expense,
early retirement costs for Prudential senior executive and management personnel
and additional expenses for the Longview, Washington facility. These increased
expenses were partially offset by the write-down of software development costs
of $1.6 million in fiscal 1998 and lower sales commissions on industrial
products sales. Selling, general and administrative expenses as a percentage of
net sales increased from 5.2% in fiscal 1998 to 7.0% in fiscal 1999 due
primarily to the decreased sales level.
Interest income remained relatively stable from fiscal 1998 to fiscal 1999.
During September 1998, we acquired assets that are being utilized in the
production of cold drawn tubular products at a facility in Beaver Falls,
Pennsylvania. We incurred operating losses of approximately $3.5 million in
fiscal 1999 related to the operations at this facility that had not reached
normal production capacity. Also, during 1998, we acquired the equipment and
began the construction of a new facility in Longview, Washington. Initial
production focused on industrial tubing. Finishing lines were completed by March
1999, which added the capability to produce energy products and standard pipe.
We incurred net costs of $283,000 during fiscal 1999 related to the operations
of this facility. These costs are comprised primarily of salary and related
costs for the production, sales and administrative personnel prior to the fully
integrated operation of the facility. These start-up costs increased our net
loss by $0.08 per diluted share for fiscal 1999.
Interest expense increased $120,000, or 5.9%, from $2.0 million in fiscal 1998
to $2.1 million in fiscal 1999 as a result of increased interest rates. The
increased interest rates were primarily due to revisions to our Revolving Credit
Facility to reflect our operating results, largely attributable to the effects
of the unfavorable energy market, and to provide additional availability in the
borrowing base.
The benefit from income taxes was $1.6 million for fiscal 1999, compared to the
prior year when we recorded a provision of $10.6 million. This change is
attributable to the generation of pre-tax losses of $8.9 million in fiscal 1999,
compared to pre-tax income in fiscal 1998 of $29.9 million. During fiscal 1999,
we incurred a loss of $1.7 million at our Longview, Washington facility that has
not yet been recognized for tax purposes and thus, no benefit has been
recognized in our financial statements.
At September 30, 1999, we had available net operating loss carryforwards of $2.3
million that were acquired in prior years and expire in 2000. In addition, we
had $10.3 million of net operating loss carryforwards that were generated during
fiscal 1999 and expire in 2019. $8.6 million of the net operating loss
carryforwards can be utilized in fiscal 2000 to offset financial statement
earnings after temporary differences from Maverick Tube L.P. The remaining $1.7
million can be utilized to offset financial statement earnings after temporary
differences from the Longview, Washington facility as they file a separate,
stand-alone tax return. At September 30, 1999, we had alternative minimum tax
credit carryforwards of $2.5 million available for income tax purposes. See Note
10 of the Notes to the Consolidated Financial Statements.
Realization of our net operating loss carryforwards that expire in 2000 is
dependent on generating approximately $3.0 million of taxable income from normal
operations during fiscal 2000, or the adoption of certain available tax planning
strategies. Although realization is not assured, we believe it is more likely
than not that the net deferred tax assets will be realized.
As a result of the decreased gross profit and the other factors discussed above,
we generated a net loss of $7.3 million, or $0.24 diluted loss per share in
fiscal 1999, a decrease of $26.6 million from the $19.3 million, or $0.61
diluted earnings per share reported for fiscal 1998.
Maverick Tube L.P. Segment
In conjunction with the Prudential transaction, we changed our segment
reporting. Accordingly, the segments are now based on geographic regions instead
of product lines as previously reported. Maverick Tube L.P. ("Maverick"), a
wholly-owned subsidiary of the Company, is responsible for our operations in
Hickman, Arkansas, Beaver Falls, Pennsylvania and Conroe, Texas. Prudential is
responsible for our operations in Calgary, Alberta and Longview, Washington.
Maverick's sales decreased $93.0 million, or 35.0%, from $265.4 million in
fiscal 1998 to $172.4 million in fiscal 1999. Maverick's shipments decreased
90,257 tons, or 21.1%, from 428,216 tons to 337,959 tons. Energy sales decreased
78,285 tons. Our domestic shipments of OCTG fell by 32.8% due to a declining rig
count throughout the fiscal year and inventory draw-downs by our customers. Our
export sales, primarily to Canada, decreased by 22.9%, from 25,866 tons in
fiscal 1998 to 19,931 tons in fiscal 1999, as the average Canadian rig count
fell 34.4% from 323 rigs to 212 rigs. Industrial products shipments decreased
11,972 tons. Overall average selling price for Maverick products decreased by
17.7% from an average of $620 per ton to $510 per ton. The average selling price
for energy products was $551 per ton, a decrease of $151 per ton. The decrease
was principally due to the deterioration in the energy market throughout fiscal
1999. The average selling price of industrial products was $461 per ton, a
decrease of $27 per ton.
Maverick's cost of goods sold of $169.5 million decreased $62.5 million, or
26.9% in fiscal 1999, compared with the prior year. The decrease was primarily
due to decreased product shipments. However, the overall unit cost per ton of
products sold decreased 7.4% (from an average of $542 per ton to $502 per ton)
in fiscal 1999. The decreased was due primarily to a decrease in steel costs.
Steel cost of goods sold decreased 13.0%, or $42 per ton during fiscal 1999. See
"Overview." Overall conversion costs remained relatively stable during fiscal
1999.
Maverick's gross profit decreased $30.5 million, or 91.4%, from $33.4 million in
fiscal 1998 to $2.9 million in fiscal 1999. Gross profit per ton fell
dramatically from $78 per ton in fiscal 1998 to $8 per ton in fiscal 1999. Gross
profit as a percentage of net sales was 1.7% for fiscal 1999, as compared to
12.6% for fiscal 1998. The change in the gross profit is due to the factors
discussed above.
Prudential Segment
Prudential's sales increased $23.6 million, or 19.9%, from $118.4 million in
1998 to $142.0 million in 1999. Prudential's shipments increased 62,653 tons, or
38.3%, from 163,569 tons to 226,222 tons. Energy sales increased 45,811 despite
the average Canadian rig count falling 5.7% from 261 rigs in 1998 to 246 rigs in
1999. We believe our increase in energy shipments was due to our ability to
respond quickly to changes in the market. Industrial products shipments
increased 16,842 tons. Overall average selling price for Prudential products
decreased by 13.3% from an average of $724 per ton to $628 per ton. The average
selling price for energy products was $655 per ton, a decrease of $82 per ton.
The decrease was principally due to the deterioration in the energy market
throughout 1999 and increased competition from imports. The average selling
price of industrial products was $459 per ton, a decrease of $78 per ton.
Prudential's cost of goods sold of $126.1 million increased $26.7 million, or
26.9% in 1999, compared with the prior year. The increase was primarily due to
increased product shipments. However, the overall unit cost per ton of products
sold decreased 8.3% (from an average of $607 per ton to $557 per ton) in fiscal
1999. The decrease in unit costs was due primarily to a decrease in steel costs.
See "Overview."
Prudential's gross profit decreased $3.2 million, or 16.7%, from $19.1 million
in fiscal 1998 to $15.9 million in fiscal 1999. Gross profit per ton decreased
from $117 per ton in fiscal 1998 to $70 per ton in fiscal 1999. Deteriorating
selling prices partially offset by lower steel costs impacted gross profit
margin per ton. Gross profit as a percentage of net sales was 11.2% for fiscal
1999, as compared to 16.1% for fiscal 1998. The change in the gross profit is
due to the factors discussed above.
Fiscal Year Ended September 30, 1998 Compared to Fiscal Year Ended September 30,
1997
Overall Company
In fiscal 1998, net sales decreased $161.5 million, or 29.6%, from $545.3
million in fiscal 1997 to $383.8 million in fiscal 1998. These results were
attributable primarily to a decrease of 25.9% in total product shipments, from
799,030 tons in fiscal 1997 to 591,785 tons in fiscal 1998 and a 4.8% decrease
in the overall average net selling price during fiscal 1998 from an average of
$682 per ton to $649 per ton.
Cost of goods sold decreased $121.6 million, or 26.8%, from $453.0 million in
fiscal 1997 to $331.4 million in fiscal 1998. The overall decrease was due
primarily to decreased product shipments. However, the overall unit cost per ton
of products sold decreased 1.2% (from an average of $567 per ton to $560 per
ton) in fiscal 1998. This decrease was due primarily to a decrease in steel
costs that was mostly offset by higher conversion costs from less favorable
fixed cost absorption due to lower production. U.S. steel cost of goods sold
decreased 5.3%. See "Overview."
Gross profit decreased $40.0 million, or 43.3%, from $92.4 million in fiscal
1997 to $52.4 million in fiscal 1998. Gross profit per ton for fiscal 1997 was
$116 per ton as compared to $89 per ton for fiscal 1998. Gross profit per ton
was impacted by decreased shipments and falling selling prices. Gross profit as
a percentage of net sales was 13.6% for fiscal 1998, as compared to 16.9% for
fiscal 1997. The change in the gross profit is due to the factors discussed
above.
Selling, general and administrative expenses increased $293,000, or 1.5%, from
$19.8 million in fiscal 1997 to $20.1 million in fiscal 1998. These expenses
increased principally as a result of the write-down of software development
costs of $1.6 million in fiscal 1998. These costs were partially offset by
decreased employee incentive compensation and decreased selling expenses related
to lower energy sales volumes. Selling, general and administrative expenses as a
percentage of net sales increased from 3.6% in fiscal 1997 to 5.2% in fiscal
1998.
Interest income decreased $255,000 or 40.1%, from $622,000 in fiscal 1997 to
$367,000 in fiscal 1998. The decrease in interest income was due to the decrease
in cash balances on hand from the beginning of 1998. These funds were utilized
to fund capital expenditures and for increased working capital needs.
Interest expense remained relatively stable from fiscal 1997 to fiscal 1998.
The provision for income taxes decreased $14.7 million from $25.3 million in
fiscal 1997 to $10.6 million in fiscal 1998 as a result of the reduced level of
income before income taxes recorded in fiscal 1998.
As a result of the foregoing factors, net income decreased $26.5 million from
net income of $45.8 million, or $1.46 diluted earnings per share, in fiscal 1997
to net income of $19.3 million, or $0.61 diluted earnings per share, in fiscal
1998.
Maverick Tube L.P. Segment
Maverick's net sales decreased $25.7 million, or 8.8%, from $291.1 million in
fiscal 1997 to $265.4 million in fiscal 1998. Maverick's shipments decreased
41,742 tons, or 8.9%, from 469,958 tons in fiscal 1997 to 428,216 tons in fiscal
1998. Energy sales decreased 71,686 tons. Our domestic shipments of OCTG fell
14.7% due to excessive industry inventory and a declining rig count throughout
the fiscal year. Our export sales primarily to Canada decreased by 37.1%, from
41,092 tons in fiscal 1997 to 25,866 tons in fiscal 1998, as Canadian drilling
activity fell from 392 rigs at the end of fiscal 1997 to 161 at the end of
fiscal 1998. Industrial products shipments increased 29,944 tons. Overall
average net selling prices for Maverick products remained relatively constant at
$620 per ton during fiscal 1998. The average selling price for energy products
was $702 per ton, an increase or $34 per ton. The increase was principally due
to higher product pricing early in the year and an improved mix of higher value
products. The average selling price of industrial products was $488 per ton, a
decrease of $10 per ton from the prior year.
Maverick's cost of goods sold decreased $20.8 million, or 8.2%, from $252.8
million in fiscal 1997 to $232.0 million in fiscal 1998. The overall decrease
was due primarily to decreased product shipments. However, the overall unit cost
per ton of products sold increased 0.7% (from an average of $538 per ton to $542
per ton) in fiscal 1998. This increase was due primarily to an increase in
conversion costs from a higher cost product mix and less favorable fixed cost
absorption due to lower production. The increase in conversion costs was mostly
offset by a decrease in steel costs by $18 per ton, or 5.3% in fiscal 1998.
Maverick's gross profit decreased $4.9 million, or 12.8%, from $38.3 million in
fiscal 1997 to $33.4 million in fiscal 1998. Gross profit per ton fell from $81
per ton in fiscal 1997 to $78 per ton in fiscal 1998. Gross profit as a
percentage of net sales was 12.6% for fiscal 1998, as compared to 13.1% for
fiscal 1997. The change in the gross profit is due to the factors discussed
above.
Prudential Segment
Prudential's sales decreased $135.9 million, or 53.4%, from $254.3 million in
1997 to $118.4 million in 1998. Prudential's shipments decreased 165,503 tons,
or 50.3%, from 329,072 tons to 163,569 tons. Energy sales decreased 158,646 due
to the average Canadian rig count falling 30.4% from 375 rigs in 1997 to 261
rigs in 1998. Industrial products shipments decreased 6,857 tons. Overall
average selling price for Prudential products decreased by 6.3% from an average
of $773 per ton to $724 per ton. The average selling price for energy products
was $738 per ton, a decrease of $26 per ton. The decrease was principally due to
the deterioration in the energy market throughout 1998. The average selling
price of industrial products was $537 per ton, a decrease of $97 per ton.
Prudential's cost of goods sold of $99.4 million decreased $100.8 million, or
50.4% in 1998, compared with the prior year. The decrease was primarily due to
decreased product shipments. The overall unit cost per ton of products sold
remained relatively stable at $608 per ton in fiscal 1998. The overall unit
costs was impacted by lower steel costs offset by higher conversion costs.
Prudential's gross profit decreased $35.0 million, or 64.8%, from $54.1 million
in fiscal 1997 to $19.1 million in fiscal 1998. Gross profit per ton fell
dramatically decreased from $164 per ton in fiscal 1997 to $117 per ton in
fiscal 1998. Deteriorating selling prices and reduced shipments impacted the
gross profit per ton. Gross profit as a percentage of net sales was 16.1% for
fiscal 1998, as compared to 21.3% for fiscal 1999. The change in the gross
profit is due to the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Working capital at September 30, 1999 was $93.6 million and the ratio of current
assets to current liabilities was 2.2 to 1, compared to working capital of
$108.3 million and a current ratio of 3.6 to 1 at September 30, 1998. The
decrease in working capital was principally due to a $25.8 million increase in
accounts payable, a $5.6 million increase in accrued expenses and other
liabilities and a $3.6 million decrease in inventories, partially offset by a
$20.7 million increase in accounts receivable. The increase in accounts payable
and accrued expenses and the increase in accounts receivable was due to the
increased volume was due to increased volume of energy business experienced in
the last three months of the year. Cash provided by operating activities for
fiscal 1999 was $17.4 million. The primary source of cash was the
above-described changes in operating assets and liabilities, which offset the
net cash provided from operations of $4.1 million (excluding depreciation and
amortization of $11.4 million).
During fiscal 1998 and 1997, net cash provided by operating activities was $4.0
million and $42.7 million, respectively. In these years, the net cash provided
by operating activities was primarily used to fund capital expenditures and the
pay-down of net long-term borrowings.
Cash used in investing activities in fiscal 1999, 1998 and 1997 was $18.8
million, $43.1 million and $14.6 million, respectively. In fiscal 1999, this use
was primarily for purchases of equipment of $7.3 million, our new enterprise
resource planning system of $4.6 million, the completion of the Longview,
Washington facility of $3.0 million and for the deposit on equipment of $2.1
million discussed below. We funded the remaining $9.65 million of the purchase
price for the equipment on November 10, 1999. See Note 3 of the Notes to the
Consolidated Financial Statements. In 1998 and 1997, we purchased property,
plant and equipment of $43.2 (of which $11.5 million was spent on the purchase
of the production facility for cold drawn mechanical tubing and $17.8 million
was spent on the Longview, Washington facility) and $14.8 million, respectively.
During fiscal 1999 cash provided by financing activities was $2.4. Cash provided
by financing activities in fiscal 1999 was primarily attributable to a $7.5
million net increase in our Revolving Credit Facilities. The increase in our
Revolving Credit Facilities was offset by other regularly scheduled term debt
payments of $853,000. Dividends paid to the former stockholders of Prudential
prior to the Company's combination with Prudential, reduced the cash provided by
financing activities by $4.1 million.
During fiscal 1998 and 1997, cash provided by (used in) in financing activities
was $19.3 million and ($8.6) million, respectively. Cash provided by financing
activities in fiscal 1998 was primarily attributable to a $23.5 million net
increase in our Revolving Credit Facilities used to fund the purchase of the
production facility for cold drawn mechanical tubing and other working capital
needs. These borrowings were partially offset by dividends paid to the former
stockholders of Prudential of $4.1 million. Cash used in financing activities in
fiscal 1997 was primarily attributable to the pay-off of a $3.7 million term
note used to finance the relocation of the energy facility to Arkansas, a $3.8
million net decrease in our Revolving Credit Facilities and $4.0 million in
dividends paid to former Prudential stockholders, partially offset by $2.9
million of proceeds from the exercise of stock options.
Consistent with the Company's business strategy prior to the combination, the
Company currently intends to retain earnings to finance the growth and
development of our business and do not anticipate paying cash dividends in the
near future. Any payment of cash dividends in the future will depend upon our
financial condition, capital requirements and earnings as well as other factors
the Board of Directors may deem relevant. Our Long-Term Revolving Credit
Facility with commercial lenders restricts the amount of dividends we can pay to
our stockholders.
Our capital expenditure budget for fiscal 2000 is $55.8 million, of which $40.0
million will be used for the construction and equipping of a new large diameter
pipe and tubing facility which will be built adjacent to our existing facilities
in Hickman, Arkansas. We funded this project principally through the issuance of
2,300,000 shares of common stock. Total proceeds from the sale, net of the
underwriting discount and other expenses are expected to be $35.1 million. The
remaining $15.8 million of our capital expenditure budget will be used to
acquire new equipment for our existing manufacturing facilities and to enhance
our new enterprise resource planning system. We expect to meet ongoing working
capital and the remaining capital expenditure requirements from a combination of
cash flow from operating activities, including a $3.7 million income tax refund
and available borrowings under our Revolving Credit Facilities, all of which
constitutes our primary source of liquidity.
We have three Revolving Credit Facilities. The Short-Term Revolving Credit
Facility is with a Canadian financial institution, the Operating Line of Credit
is with a U.S. Financial institution and the Long-Term Revolving Credit Facility
is with a group of U.S. financial institutions. The Short-Term Facility is a
$34.0 million (C$50.0 million Canadian) unsecured demand operating credit
facility. This facility is considered to be short-term and is included in our
current liabilities. The Operating Line of Credit is a $10.0 million facility
that is used to fund the working capital requirements of the Longview,
Washington operation. It is secured by letters of credit drawn on the Canadian
bank and any borrowings on the U.S. Operating Line reduce the availability of
the Short-Term revolving Credit Facility. The Long-Term Revolving Credit
Facility provides for maximum borrowings up to the lesser of the eligible
borrowing base or $50.0 million, and bears interest at either the prevailing
prime rate or the Eurodollar rate, adjusted by an interest margin, depending
upon certain financial measurements. The Revolving Credit Facility was amended
as of March 31, 1999 to revise financial covenants in order to reflect our
operating results, largely attributable to the effects of the unfavorable energy
market, and to provide additional availability in our borrowing base. The
Revolving Credit Facility is secured by accounts receivable, inventories and
certain equipment and will mature on September 30, 2003.
As of September 30, 1999, the applicable interest rate on the Short-Term
Revolving Credit Facility/Operating Line of Credit and the Long-Term Credit
Facility was 6.27 and 7.36 percent per annum, respectively. We had $23.9 million
and $15.8 million in additional available borrowings as of September 30, 1999 on
the Short-Term Revolving Credit Facility and Long-Term Revolving Credit
Facility, respectively. As of September 30, 1999, we had $1.6 million in cash
and cash equivalents.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's reported cash flows related to its Canadian operations is based on
cash flows measured in Canadian dollars converted to the U.S. dollar equivalent
based on published exchange rates for the period reported. The Company believes
its current risk exposure to the exchange rate movements, based on net cash
flows, to be immaterial.
<PAGE>
Report of Independent Auditors
Board of Directors and Stockholders
Maverick Tube Corporation
We have audited the supplemental consolidated balance sheets of Maverick Tube
Corporation and subsidiaries (formed as a result of the consolidation of
Maverick Tube Corporation and Prudential Steel Ltd.) as of September 30, 1999
and 1998, and the related supplemental consolidated statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended September 30, 1999. The supplemental consolidated financial statements
give retroactive effect to the merger of Maverick Tube Corporation and
Prudential Steel Ltd. on September 22, 2000, which has been accounted for using
the pooling of interest method as described in the notes to the supplemental
consolidated financial statements. These supplemental consolidated financial
statements are the responsibility of Maverick Tube Corporation. Our
responsibility is to express an opinion on these supplemental financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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 supplemental consolidated financial statements referred to
above present fairly, in all material respects, the supplemental consolidated
financial position of Maverick Tube Corporation and subsidiaries at September
30, 1999 and 1998, and the consolidated results of their operations and their
cash flows for each of the three years in the period ended September 30, 1999,
after giving retroactive effect to the merger of Prudential Steel Ltd., as
described in the notes to the supplemental consolidated financial statements, in
conformity with accounting principles generally accepted in the United States.
St. Louis, Missouri
December 1, 2000
<PAGE>
MAVERICK TUBE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
September 30,
----------------------------
1999 1998
ASSETS
Current assets:
Cash and cash equivalents $ 1,625 $ 748
Accounts receivable, less allowances of $1,581
and $2,024 in 1999 and 1998, respectively 54,952 32,170
Inventories 106,638 107,335
Deferred income taxes 3,000 3,069
Income taxes refundable 3,739 5,078
Prepaid expenses and other current assets 2,054 1,717
----------------------------
Total current assets 172,008 150,117
Property, plant and equipment (net) 114,160 106,470
Other assets 3,073 1,614
----------------------------
$ 289,241 $ 258,201
============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 46,593 $ 20,128
Accrued expenses and other liabilities 17,338 11,276
Deferred revenue 3,716 3,584
Revolving credit facility 10,067 6,133
Current maturities of long-term debt 708 653
----------------------------
Total current liabilities 78,422 41,774
Long-term debt, less current maturities 7,518 8,226
Revolving credit facility 31,000 27,400
Deferred income taxes 5,527 7,655
Commitments and contingencies (Notes 7, 14 and 15) - -
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; 5,000,000
authorized shares; 1 share issued and
outstanding in 1999 and 1998 - -
Common stock, $.01 par value; 80,000,000
authorized shares; 31,164,809 and 31,159,971
shares issued and outstanding in 1999 and 1998,
respectively 311 311
Additional paid-in capital 74,007 73,966
Retained earnings 95,612 107,016
Accumulated other comprehensive loss
Foreign currency translation (3,156) (8,147)
----------------------------
166,774 173,146
----------------------------
$ 289,241 $ 258,201
============================
See accompanying notes
<PAGE>
MAVERICK TUBE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, except per share data)
Year ended September 30,
-------------------------------------------------
1999 1998 1997
Net sales $ 314,391 $ 383,827 $ 545,337
Cost of goods sold 295,649 331,406 452,951
-------------------------------------------------
Gross profit 18,742 52,421 92,386
Selling, general and
administrative 22,036 20,103 19,810
Start-up costs 3,745 775 -
-------------------------------------------------
Income (loss) from operations (7,039) 31,543 72,576
Interest income (277) (367) (622)
Interest expense 2,145 2,025 2,067
-------------------------------------------------
Income (loss) before income
taxes (8,907) 29,885 71,131
Provision (benefit) for income
taxes (1,573) 10,587 25,330
-------------------------------------------------
Net income (loss) $ (7,334) $ 19,298 $ 45,801
=================================================
Basic earnings (loss) per share $ (0.24) $ 0.62 $ 1.49
=================================================
Diluted earnings (loss) per
share $ (0.24) $ 0.61 $ 1.46
=================================================
See accompanying notes
<PAGE>
<TABLE>
<CAPTION>
MAVERICK TUBE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
Accumulated
Common Stock Additional Other
-------------------------- Paid-in Comprehensive Retained Stockholders'
Shares Amount Capital Income (loss) Earnings Equity
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at September 30, 1996 30,570,512 $ 306 $ 66,948 $ 992 $ 49,993 $ 118,239
Net income - - - - 45,801 45,801
Foreign currency translation - - - (3,388) - (3,388)
------------------------
Comprehensive income 42,413
Dividends paid to Prudential
Steel Ltd. stockholders - - - - (3,999) (3,999)
Exercise of stock options -
Prudential Steel Ltd. stockholders 84,462 1 411 - - 412
Exercise of stock options - Maverick
stockholders 466,832 4 2,482 - - 2,486
Tax benefit associated with the
exercise of non-qualified Maverick stock
options - - 3,250 - - 3,250
------------------------------------------------------------------------------------------
Balance at September 30, 1997 31,121,806 311 73,091 (2,396) 91,795 162,801
Net income - - - - 19,298 19,298
Foreign currency translation - - - (5,751) - (5,751)
------------------------
Comprehensive income 13,547
Dividends paid to Prudential
Steel Ltd. stockholders - - - - (4,077) (4,077)
Exercise of stock options -
Prudential Steel Ltd. stockholders 11,665 - 65 - - 65
Exercise of stock options - Maverick
stockholders 26,500 - 162 - - 162
Tax benefit associated with the
exercise of non-qualified Maverick stock
options - - 648 - - 648
------------------------------------------------------------------------------------------
Balance at September 30, 1998 31,159,971 311 73,966 (8,147) 107,016 173,146
Net loss - - - - (7,334) (7,334)
Foreign currency translation - - - 4,991 - 4,991
------------------------
Comprehensive loss (2,343)
Dividends paid to Prudential
Steel Ltd.stockholders - - - - (4,070) (4,070)
Exercise of stock options -
Prudential Steel Ltd. stockholders 1,838 - 9 - - 9
Exercise of stock options - Maverick
stockholders 3,000 - 19 - - 19
Tax benefit associated with the
exercise of non-qualified Maverick stock
options - - 13 - - 13
------------------------------------------------------------------------------------------
Balance at September 30, 1999 31,164,809 $ 311 $ 74,007 $ (3,156) $ 95,612 $ 166,774
==========================================================================================
<FN>
See accompanying notes
</FN>
</TABLE>
<PAGE>
MAVERICK TUBE CORPORATION AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year ended September 30,
-------------------------------
1999 1998 1997
OPERATING ACTIVITIES
Net income (loss) $ (7,334) $19,298 $ 45,801
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization 11,420 8,553 8,453
Deferred income taxes (2,105) 810 2,329
Provision for losses on accounts receivable (522) 3 44
(Gain) loss on sale of equipment (28) 49 77
Loss on write-down of software development costs - 1,605 -
Changes in operating assets and liabilities:
Accounts receivable (20,749) 30,868 (13,489)
Inventories 3,562 3,987 (32,932)
Prepaid expenses and other current assets 1,034 (1,800) 49
Other assets 571 193 (263)
Accounts payable 25,807 (27,334) 19,345
Accrued expenses and other liabilities 5,571 (19,573) 5,210
Deferred revenue 132 (12,667) 8,075
-------------------------------
Cash provided by operating activities 17,359 3,992 42,699
INVESTING ACTIVITIES
Expenditures for property, plant and equipment (16,917) (43,151) (14,771)
Deposit on equipment (2,125) - -
Proceeds from disposal of equipment 194 30 131
Collection of notes receivable - - 18
-------------------------------
Cash used by investing activities (18,848) (43,121) (14,622)
FINANCING ACTIVITIES
Proceeds from borrowings and notes 79,331 173,663 92,400
Principal payments on borrowings and notes (72,923) (150,537) (99,911)
-------------------------------
6,408 23,126 (7,511)
Dividends paid to Prudential Steel Ltd.
stockholders (4,070) (4,077) (3,999)
Proceeds from exercise of stock options 28 223 2,904
-------------------------------
Cash provided (used) by financing activities 2,366 19,272 (8,606)
Effect on exchange rate changes on cash - (669) (614)
-------------------------------
Increase (decrease) in cash and cash equivalents 877 (20,526) 18,857
Cash and cash equivalents at beginning of period 748 21,274 2,417
-------------------------------
Cash and cash equivalents at end of period $ 1,625 $ 748 $ 21,274
===============================
Supplemental disclosures of cash flow information:
Cash paid (received) during the period for:
Interest (net of amounts capitalized of $543,
$355 and $268) $ 1,862 $ 1,660 $ 1,516
Income taxes $ (682) $ 20,207 $ 18,300
See accompanying notes
<PAGE>
1. Summary of Significant Accounting Policies
Principles of Consolidation
The supplemental consolidated financial statements include the accounts of
Maverick Tube Corporation and its direct and indirect wholly-owned subsidiaries
(collectively referred to as "the Company", whereas "Maverick" is the Company
exclusive of its subsidiary Prudential Steel Ltd.). All significant intercompany
accounts and transactions have been eliminated. The accompanying supplemental
consolidated financial statements include the financial statements of Prudential
Steel Ltd. ("Prudential") for all periods presented.
As a result of the differing year ends of Maverick and Prudential, financial
statements for dissimilar year ends have been combined. Maverick's financial
statements as of and for the years ended September 30, 1999, 1998 and 1997 have
been combined with Prudential's financial statements as of and for the years
ended December 31, 1999, 1998 and 1997, respectively.
Functional Currency
The assets, liabilities and operations of Prudential's Calgary, Alberta
operations are measured using the Canadian dollar as the functional currency but
are presented in this report in U.S. dollars unless otherwise indicated. Foreign
currency translation adjustments are reported as accumulated other comprehensive
loss in the stockholders' equity section of the supplemental consolidated
balance sheets.
Revenue Recognition
The Company records revenue from product sales when the product is shipped from
its facilities.
Inventories
Inventories are principally valued at the lower of average cost or market.
Property, Plant and Equipment
Property, plant and equipment are stated on the basis of cost. Depreciation is
computed under the straight-line method over the respective assets' useful
lives. Useful lives of the Company's assets are as follows:
Land and leasehold improvements 10 to 20 years
Buildings 20 to 40 years
Transportation equipment 4 to 10 years
Machinery and equipment 2 to 12 years
Furniture and fixtures 2 to 10 years
Computer software 3 to 7 years
Income Taxes
Deferred taxes are provided on an asset and liability method whereby deferred
tax assets are recognized for deductible temporary differences and operating
loss and other tax credit carryforwards and deferred tax liabilities are
recognized for taxable temporary differences. Temporary differences are the
differences between the reported amounts of assets and liabilities and their tax
bases.
Stock-Based Compensation
As permitted by Statement of Financial Accounting Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation," the Company follows Accounting
Principles Board Opinion No. 25 and related interpretations in accounting for
its director and employee stock options.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to periodically make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Earnings (Loss) per Common Share
Effective December 31, 1997, the Company adopted SFAS No. 128, "Earnings per
Share." SFAS No. 128 replaced the calculation of primary and fully diluted
earnings per share with basic and dilutive earnings per share. Basic earnings
per share exclude any dilutive effects of options, but include the exchangeable
shares (as further discussed in Notes 2 and 17) from the business combination
with Prudential on an as-if exchanged basis. Diluted earnings per share are very
similar to the previously reported fully diluted earnings per share and include
the exchangeable shares on an as-if exchanged basis and the net effect of stock
options. All earnings per share amounts have been presented and, where
appropriate, restated to conform to the SFAS No. 128 requirements.
The reconciliation for diluted earnings (loss) per share for years ended
September 30, 1999, 1998 and 1997 is as follows (in thousands):
1999 1998 1997
-----------------------------------
Average shares outstanding 31,160 31,154 30,685
Dilutive effect of outstanding stock options -- 415 591
-----------------------------------
Average shares deemed outstanding 31,160 31,569 31,276
===================================
Net income (loss) used in basic and diluted
earnings (loss) per share $ (7,334) $19,298 $45,801
===================================
Business Segments
The Company changed its segment reporting in conjunction with the acquisition of
Prudential. Accordingly, the segments are now based on geographic regions
instead of product lines as previously reported. Maverick Tube L.P., a
wholly-owned subsidiary of the Company, is responsible for the Company's
operations in Hickman, Arkansas, Beaver Falls, Pennsylvania and Conroe, Texas.
Prudential, a wholly-owned subsidiary of the Company, is responsible for the
Company's operations in Calgary, Alberta and Longview, Washington.
Cash Equivalents
The Company's policy is to consider demand deposits and short-term investments
with a maturity of three months or less when purchased as cash equivalents.
Financial Instruments
Financial instruments consist of cash and cash equivalents, accounts receivable,
accounts payable and long-term debt obligations. The carrying value of amounts
reported in the supplemental consolidated balance sheets for cash and cash
equivalents, accounts receivable and accounts payable approximate a fair value.
Management's estimate of the fair value of long-term debt obligations is
discussed in Note 7 to the supplemental consolidated financial statements.
2. Business Combination
On June 11, 2000, Maverick and Prudential entered into a definitive Combination
Agreement providing for the combination of Prudential with the Maverick. The
transaction was completed on September 22, 2000.
Under the terms of the transaction, the Prudential stockholders received 0.52 of
an exchangeable share, issued by Maverick Tube (Canada) Inc., a wholly-owned
Canadian subsidiary of the Company, for each Prudential common share.
Consequently, Prudential stockholders received a total of 15,813,088
exchangeable shares. The exchangeable shares are Canadian securities that began
trading on The Toronto Stock Exchange on September 27, 2000. These shares have
the same voting rights, dividend entitlements, and other attributes as shares of
the Company's common stock and are exchangeable, at each stockholder's option,
for the Company's common stock on a one for one basis. The transaction was
accounted for as a pooling of interests.
The historical consolidated financial statements of Prudential, although
previously issued in Canadian dollars, are included in the supplemented
consolidated financial statements in U.S. dollars. The separate results of
operations and stockholders' equity of Maverick as of and for the years ended
September 30, 1999, 1998 and 1997 and Prudential as of and for the years ended
December 31, 1999, 1998 and 1997 are as follows:
1999 1998 1997
------------------------------------------------------
Revenues:
Maverick $ 172,417 $ 265,389 $ 291,060
Prudential 141,974 118,438 254,277
Combined $ 314,391 $ 383,827 $ 545,337
Net Income (Loss):
Maverick $ (10,449) $ 11,385 $ 14,885
Prudential 3,115 7,913 30,916
Combined $ (7,334) $ 19,298 $ 45,801
Stockholders' Equity:
Maverick $ 79,646 $ 90,063 $ 77,868
Prudential 87,128 83,083 84,933
Combined $ 166,774 $ 173,146 $ 162,801
3. Purchase of Equipment and Sale of Stock
On September 3, 1999, the Company entered into an Asset Purchase Agreement to
purchase mill equipment for $11.75 million. In September 1999, the Company made
a deposit of $2.1 million on the equipment and funded the remaining $9.65
million of the purchase price on November 10, 1999. This equipment will be used
by the Company in connection with the construction and equipping of a new large
diameter pipe and tubing facility adjacent to its existing facilities in
Hickman, Arkansas. The Company estimates that the total cost for this project
will be $47 million.
The Company funded this project principally through the issuance of 2,300,000
shares of its common stock. The original 2,000,000 shares offered to the public
closed on October 6, 1999. The underwriters' overallotment of 300,000 shares
closed on October 21, 1999. Total proceeds to the Company from the sale, net of
the underwriting discount and other expenses, were $35.2 million. The remaining
portion of the funds necessary to finance the facility will come from the
Company's Long-Term Revolving Credit Facility
4. Start-Up Costs
On September 18, 1998, the Company acquired assets to be used in the production
of cold drawn tubular products at a production facility in Beaver Falls,
Pennsylvania from PMAC, Ltd. for $11,464,000. The Company incurred operating
losses of $3,462,000 in the fiscal year ended September 30, 1999 related to the
operations at this facility which had not reached normal production capacity.
These costs are comprised primarily of salary and related costs for production,
sales and administrative personnel prior to the fully integrated operation of
the facility. These start-up costs increased the net loss of the Company for
fiscal 1999 by $0.07 per share.
During 1998, the Company began construction on a new production facility in
Longview, Washington. The Company incurred costs of $283,000 and $775,000 in
1999 and 1998, respectively, related to the commencement of operations of this
facility which began in December 1998. These costs are comprised primarily of
salary and related costs for the production, sales personnel prior to the fully
integrated operation of the facility. These start-up costs increased the net
loss of the Company for fiscal 1999 by $0.01 per share and decreased the net
income of the Company by $0.02 per share in fiscal 1998.
5. Write-Down of Software Developments Costs
During the year ended September 30, 1998, the Company recorded a charge of
$1,605,000 in selling, general and administrative expense for the write-down of
certain software development costs relating to information systems being
replaced by a new enterprise resource planning system.
6. Stock Split
On August 1, 1997, the Company declared a two-for-one stock split effected in
the form of a 100 percent stock dividend to all stockholders of record as of
August 12, 1997. The dividend was paid on August 21, 1997 and increased the
number of shares outstanding from 15,399,487 to 30,798,974. Approximately
$150,000 was transferred from retained earnings to common stock to record this
dividend. All share and per share amounts, including stock option information,
in the accompanying consolidated financial statements have been restated to
reflect this stock dividend.
7. Long-Term Debt and Revolving Credit Facilities
Long-term debt, including Maverick's long-term revolving credit facility, at
September 30, 1999 and 1998 consists of the following (in thousands):
1999 1998
------------------------------
Capital lease obligation, secured by
property, plant and equipment (net
book value $9,390,000 at September
30, 1999); payable in monthly
installments (including interest at
8.0%) of $59,479; final payment due
on August 1, 2007 $ 4,176 $ 4,540
Capital lease obligation, secured by
property and plant (net book value
$6,444,000 at September 30, 1999);
interest of 7.5% payable monthly;
payable in monthly principal
installments of approximately
$20,000 (plus interest) commencing
on March 1, 1996; gradually
increasing to $31,250 by year seven
and increasing to $240,417 in year
eight; final payment due on February
1, 2004 4,050 4,339
Revolving credit notes, secured by
certain accounts receivable,
inventories and equipment; due on
September 30, 2003; interest payable
monthly at either prime or the
Eurodollar rate, adjusted by an
interest margin, depending upon
certain financial measurements
(7.36% at September 30, 1999) 31,000 27,400
------------------------------
39,226 36,279
Less current maturities (708) (653)
------------------------------
$ 38,518 $ 35,626
==============================
Maverick has a revolving credit facility that provides for advances up to the
lesser of $70,000,000 or the eligible borrowing base as defined in the facility
agreement. In addition, Maverick had an outstanding letter of credit under this
revolving credit agreement of $350,000 at September 30, 1999 (which expired in
September 2000). Additional available borrowings under the credit agreement at
that date were $15,842,000. The agreement includes restrictive covenants
relating to levels of funded debt and other financial measurements and restricts
the amount of dividends that can be paid on common stock. The revolving credit
agreement requires an annual commitment fee based upon certain financial
measurements.
In addition to Maverick's long-term credit facility, Prudential has two credit
facilities, a C$50,000,000 ($34,643,000 as September 30, 1999) unsecured demand
operating facility through a Canadian chartered bank, and a $10,000,000 demand
credit facility through a U.S. institution for use in funding the working
capital requirements of the Longview, Washington operation. The $10,000,000
facility is secured by letters of credit drawn on the Canadian bank line and any
borrowings on the U.S. line reduce the amount available on the Canadian line.
Interest is payable monthly at either Canadian prime, U.S. base rate, Libor plus
0.5%, or Bankers' Acceptance rates plus stamping fees. The rate was 6.27% at
September 30, 1999. The aggregate outstanding balance of the two credit
facilities at September 30, 1999 and 1998 was $10,067,000 and $6,133,000,
respectively.
The present value of future minimum lease payments under the capital lease
obligations as of September 30, 1999 is as follows (in thousands):
Present Value of
Total Minimum Minimum Lease
Lease Payments Interest Payments
------------------------------------------------------------------
2000 $ 1,320 $ 612 $ 708
2001 1,315 555 760
2002 1,315 493 822
2003 2,711 371 2,340
2004 1,959 215 1,744
Thereafter 2,113 261 1,852
------------------------------------------------------------------
$ 10,733 $ 2,507 $ 8,226
==================================================================
Property, plant and equipment at September 30, 1999 and 1998 include $18,654,000
and $18,295,000, respectively, under leases that have been capitalized.
Accumulated depreciation for these assets was $2,820,000 and $2,307,000 at
September 30, 1999 and 1998, respectively.
The fair value of the Company's total debt is based on estimates using
discounted cash flow analyses, based on quoted market prices for similar issues.
The estimated fair value of total debt at September 30, 1999 was $49,450,000.
8. Inventories
Inventories at September 30, 1999 and 1998 consist of the following (in
thousands):
1999 1998
--------------------------------
Finished goods $ 58,156 $ 65,827
Work-in-process 3,436 3,022
Raw materials 25,163 24,151
In-transit materials 13,626 8,273
Storeroom parts 6,257 6,062
--------------------------------
$ 106,638 $ 107,335
================================
Finished goods at September 30, 1999 and 1998 include $3,560,000 and $3,538,000,
respectively, of customer-obligated inventory.
9. Property, Plant and Equipment
Property, plant and equipment at September 30, 1999 and 1998 consist of the
following (in thousands):
1999 1998
--------------------------------
Land $ 3,219 $ 3,122
Land and leasehold improvements 5,952 3,946
Buildings 37,056 35,143
Transportation equipment 3,026 2,843
Machinery and equipment 130,267 119,343
Computer software 5,822 1,171
Furniture and fixtures 5,213 4,691
--------------------------------
190,555 170,259
Less accumulated depreciation (76,395) (63,789)
--------------------------------
$ 114,160 $ 106,470
================================
10. Income Taxes
The jurisdictional components of income (loss) before income taxes for the years
ended September 30, 1999, 1998 and 1997 are as follows (in thousands):
1999 1998 1997
------------------------------------------------
Domestic $ (16,171) $ 16,805 $ 22,224
Foreign 7,264 13,080 48,907
------------------------------------------------
Total $ (8,907) $ 29,885 $ 71,131
================================================
The components of the provision (benefit) for income taxes for the years ended
September 30, 1999, 1998 and 1997 are as follows (in thousands):
1999 1998 1997
------------------------------------------------
Current:
Federal $ (3,399) $ 4,120 $ 3,804
State (112) 139 958
Foreign 4,027 5,367 18,240
------------------------------------------------
516 9,626 23,002
------------------------------------------------
Deferred
Domestic (2,211) 1,161 2,577
Foreign 122 (200) (249)
------------------------------------------------
(2,089) 961 2,328
------------------------------------------------
Total $ (1,573) $ 10,587 $ 25,330
================================================
The difference between the effective income tax rate and the U.S. federal income
tax rate for the years ended September 30, 1999, 1998 and 1997 is explained as
follows (in thousands):
1999 1998 1997
------------------------------------------------------
Provision (benefit) at U.S.
statutory tax rate $ (3,117) 35.0% $ 10,161 34.0% $ 25,038 35.2%
State and local taxes, net
of federal tax benefit (112) 1.3% 139 0.5% 958 1.4%
Taxes on foreign income in
excess of U.S. Statutory
rate 698 (7.8%) 1,736 5.8% 4,629 6.5%
Alternative minimum tax -- -- -- -- (510) (0.7%)
Increase (decrease) in
valuation allowance 1,717 (19.3%) -- -- (1,147) (1.6%)
Manufacturing and
processing deduction (900) 10.1% (1,129)(3.8%) (3,936) (5.6%)
Benefit of foreign sales
corporation -- -- (354)(1.2%) -- --
Other items 141 (1.6%) 34 0.1% 298 0.4%
------------------------------------------------------
$ (1,573) 17.7% $ 10,587 35.4% $ 25,330 35.6%
======================================================
The 1999 increase in the valuation allowance relates to the losses at the
Company's Longview, Washington facility that are fully reserved. The 1997
decrease in the valuation allowance relates primarily to the utilization of
alternative minimum tax credit carryforwards.
Temporary differences which give rise to deferred tax assets and liabilities at
September 30, 1999 and 1998 are as follows (in thousands):
1999 1998
-------------------------
Deferred tax assets:
Various accrued liabilities and reserves $ 3,550 $ 2,972
Net operating loss carryforwards 5,849 818
Alternative minimum tax carryforwards 2,541 598
Tax benefit associated with the exercise
of non-qualified stock options 13 --
Valuation allowance (1,717) --
-------------------------
Total deferred tax assets 10,236 4,388
Deferred tax liabilities:
Accelerated depreciation 8,957 7,731
Pension plan 608 581
Asset valuations 3,198 662
-------------------------
Total deferred tax liabilities 12,763 8,974
-------------------------
Net deferred tax liabilities $(2,527) $(4,586)
=========================
All cumulative undistributed earnings of foreign subsidiaries prior to
consummation of the business combination with Prudential on September 22, 2000
are considered permanently reinvested in the foreign location. As such, no
deferred income taxes on such undistributed earnings have been provided.
Determination of the potential deferred income taxes amount is not practicable
at this time.
Maverick has available net operating loss carryforwards of $2,320,000 at
September 30, 1999 which were acquired in prior years and expire in 2000. In
addition, Maverick has $8,611,000 of net operating loss carryforwards which were
generated during fiscal 1999 and expire in 2019. In 2000, all of these net
operating loss carryforwards can be utilized to offset financial statement
earnings after temporary differences. At September 30, 1999, Maverick had
alternative minimum tax credit carryforwards of $2,541,000 available for income
tax purposes. These credit carryforwards do not expire.
Realization of the Company's net operating loss carryforwards which expire in
2000 is dependent on Maverick's generating approximately $2,320,000 million of
taxable income during fiscal 2000 as a result of normal operations or the
adoption of certain available tax planning strategies. Although realization is
not assured, management believes it is more likely than not that the net
deferred tax assets will be realized.
Prudential has available net operating loss carryfowards of $5,430,000 at
September 30, 1999 which were generated during fiscal 1999 and expire in 2019.
These net operating loss carryfowards can be utilized to offset taxable income
for the Longview, Washington facility.
11. Defined Contribution Plans
The Company sponsors two defined contribution 401(k) plans that are available to
all U.S. employees. The plans may be amended or terminated at any time by the
Board of Directors. The Company, although not required to, has provided matching
contributions to the plans for the years ended September 30, 1999, 1998 and 1997
of $718,000, $704,000 and $590,000, respectively.
The Company also sponsors two deferred compensation plans covering certain
Maverick officers and key employees. One plan provides for discretionary
contributions based solely upon the Company's profitability and the individuals'
gross wages. The other plan provides for fixed contributions to certain officers
of the Company. The Company contribution to these plans for the years ended
September 30, 1999, 1998 and 1997 was $60,000, $310,000 and $200,000,
respectively.
12. Defined Benefit Plans
Prudential sponsors two pension plans and an other postretirement benefit plan
for substantially all of its Canadian employees. A reconciliation of changes in
the plan's benefit obligations, fair value of assets, and statement of funded
status for the years ended September 30, 1999 and 1998 are as follows (in
thousands):
Other
Postretirement
Pension Benefits Plans
---------------------------------------------
1999 1998 1999 1998
---------------------------------------------
Change in benefit obligation
Benefit obligation at
beginning of year $18,083 $17,847 $ 1,157 $ 991
Service cost 719 67 197 160
Interest cost 1,420 1,280 97 72
Actuarial gain (644) -- -- --
Benefits paid (634) (534) -- --
Foreign currency
translation change 1,093 (1,182) 69 (66)
--------------------------------------------
Benefit obligation at end of year $20,037 $18,083 $ 1,520 $ 1,157
============================================
Change in fair value of plan assets
Fair value of plan assets at
beginning of year $21,215 $21,687 $ -- $ --
Actual return on plan assets 3,650 1,500 -- --
Benefits paid (634) (535) -- --
Foreign currency
translation change 1,283 (1,437) -- --
--------------------------------------------
Fair value of plan assets
at end of year $25,514 $21,215 $ -- $ --
============================================
Funded status
Overfunded (underfunded) status
at end of year $ 5,477 $ 3,132 $(1,520) $(1,157)
Unrecognized (gain) loss (3,844) (1,570) 242 256
--------------------------------------------
Prepaid benefit cost $ 1,633 $ 1,562 $(1,278) $ (901)
============================================
Benefit costs consists of the following for the years ended September 30, 1999,
1998 and 1997 (in thousands):
Other
Postretirement
Pension Benefits Benefits
---------------- --------
Benefit Cost 1999 1998 1997 1999 1998 1997
-------------------------------------------------------
Service cost $ 719 $ 672 $ 646 $ 39 $ 29 $ 31
Interest cost 1,420 1,280 1,247 -- 71 61
Expected return on
plan assets (1,802) (1,500) (1,477) -- -- --
Amortization of prior
service costs (12) (12) (115) -- -- 87
Recognized net actuarial
(gain) loss (303) (113) -- 187 127 --
-------------------------------------------------------
$ 22 $ 327 $ 301 $ 226 $ 227 $ 179
=======================================================
The prior service costs are amortized on the straight-line basis over the
average remaining service period of active participants. Gains and losses are
amortized over the average remaining service period of active participants.
The Company has a non-pension postretirement benefit plan. The health care and
life insurance plans are contributory, with participants' contributions adjusted
annually.
The weighted average assumptions used in accounting for the Company's plans at
September 30, 1999,1998 and 1997 are as follows:
Other
Postretirement
Pension Benefits Benefits
---------------- --------
1999 1998 1997 1999 1998 1997
-------------------------------------------------------
Discount rate 7.5% 7.5% 7.5% 7.5% 7.5% 7.5%
Expected return on plan assets 7.5% 7.5% 7.5% 7.5% 7.5% 7.5%
Rate of compensation increase 5.0% 5.0% 5.0% -- -- 7.5%
13. Segment Information
The following table sets forth data (in thousands) for the years ended September
30, 1999, 1998 and 1997 for the reportable industry segments of Maverick Tube
L.P. and Prudential. Inter-segment sales are not material. Identifiable assets
are those used in the Company's operations in each segment.
Maverick
Tube L.P. Prudential Corporate Total
---------------------------------------------------
1999
Net sales $172,417 $141,974 $ - $ 314,391
Operating income (loss) (14,310)(1) 7,271(2) - (7,039)
Identifiable assets 142,630 129,093 17,518 289,241
Depreciation and amortization 6,831 4,065 524 11,420
Capital expenditures 7,196 5,048 4,673 16,917
1998
Net sales $265,389 118,438 $ - $ 383,827
Operating income (loss) 20,141 13,007(2) (1,605)(3) 31,543
Identifiable assets 145,452 101,316 11,433 258,201
Depreciation and amortization 5,703 2,381 469 8,553
Capital expenditures 19,698 20,970 2,483 43,151
1997
Net sales $291,060 $254,277 $ - $ 545,337
Operating income 24,291 48,285 - 72,576
Identifiable assets 150,998 123,430 11,066 285,494
Depreciation and amortization 5,215 2,756 482 8,453
Capital expenditures 8,748 5,234 789 14,771
(1) During the year ended September 30, 1999, the Company incurred operating
losses of $3,462,000 related to the operations of its Beaver Falls, Pennsylvania
facility which had not reached normal production capacity.
(2) During the years ended September 30, 1999 and 1998, the Company incurred
operating losses of $283,000 and $775,000, respectively related to the
operations of its Longview, Washington facility which had not reached normal
production capacity.
(3) During the year ended September 30, 1998, the Company recorded a charge of
$1,605,000 million in selling, general and administrative expense for the
write-down of certain software development costs relating to information systems
being replaced by a new enterprise resource planning system.
The following table sets forth the energy and industrial product sales for the
years ended September 30, 1999, 1998 and 1997 (in thousands).
1999 1998 1997
-------------------------------------------------
Energy product sales $ 225,149 $ 289,813 $ 453,667
Industrial product sales $ 89,242 $ 94,014 $ 91,670
Transactions with six significant customers for the years ended September 30,
1999 and 1997 represented approximately 35 percent of total sales. Transactions
with five significant customers for the year ended September 30, 1998
represented approximately 24 percent of total sales.
14. Operating Leases
The Company rents office facilities and equipment under various operating
leases. Future minimum payments under noncancelable operating leases with
initial or remaining terms in excess of one year are as follows at September 30,
1999 (in thousands):
2000 $ 3,745
2001 3,300
2002 2,468
2003 2,225
2004 2,234
-------------
$ 13,972
=============
Rent expense for all operating leases was $3,076,000, $2,170,000 and $1,437,000
for the years ended September 30, 1999, 1998 and 1997, respectively.
15. Contingencies
Various claims, incidental to the ordinary course of business, are pending
against the Company. In the opinion of management, after consultations with
legal counsel, resolution of these matters is not expected to have a material
effect on the accompanying financial statements.
16. Stock Option Plans
The Company sponsors two employee stock option plans (the "1990 Plan" and the
"1994 Plan") allowing for incentive stock options and non-qualified stock
options. In addition, the Company sponsors a stock option plan for eligible
directors (the "Director Plan") allowing for non-qualified stock options.
Lastly, the Company sponsors a combined employee and director stock option plan
(the "Prudential Plan") allowing for incentive stock options and non-qualified
stock options. The 1990 Plan, 1994 Plan, Director Plan and Prudential Plan
provide that 340,000, 1,000,000, 200,000 and 650,187 shares, respectively, may
be issued under the plans at an option price not less than the fair market value
of the stock at the time the option is granted. The 1990 Plan, 1994 Plan,
Director Plan and Prudential Plan expire in December 2000, November 2004,
November 1999 and March 2000, respectively. The options vest pursuant to the
schedule set forth for each option. In general, the options issued under the
Director Plan vest six months from the date of grant and the options issued
under the 1990 Plan, 1994 Plan and Prudential Plan vest ratably over periods
ranging from one to five years. Effective August 29, 1997, the Compensation
Committee of the Board of Directors removed the exercise restriction with
respect to certain options granted in 1995, which made them immediately
exercisable. At September 30, 1999 and 1998, 225,509 and 796,922 shares were
available for grant under all of the option plans.
The Company grants stock options for a fixed number of shares to directors and
employees with an exercise price equal to the fair value of the shares at the
time of the grant. Accordingly, the Company has not recognized compensation
expense for any of its stock option grants. If the Company had elected to
recognize compensation cost based on the fair value of the options granted at
the grant date as prescribed by SFAS No. 123, net income (loss) and earnings
(loss) per share would have been reduced (or increased) to the pro forma amounts
in the table below. The fair value of the options granted in 1999, 1998 and 1997
was determined to be $2,946,000, $1,916,000 and $593,000, respectively. For the
purposes of these pro forma disclosures, the estimated fair value of the options
is recognized as compensation expense over the options' vesting period.
1999 1998 1997
------------------------------------------
Pro Forma (in thousands)
Net income (loss) $(8,353) $18,406 $45,318
Basic earnings (loss) per share $(.27) $ .59 $ 1.48
Diluted earnings (loss) per share $(.27) $ .58 $ 1.45
The compensation expense associated with the fair value of the options
calculated in 1999, 1998 and 1997 is not necessarily representative of the
potential effects on reported net income (loss) in future years.
The fair value of the options granted was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted average
assumptions for the fiscal years ended September 30, 1999, 1998 and 1997,
respectively: risk-free interest rate of 4.99%, 5.66% and 6.38%; no dividend
payments expected; volatility factors of the expected market price of the
Company's common stock of 0.613, 0.555 and 0.478; and a weighted average
expected life of the options of 8.6 years, 7.8 years and 6.4 year.
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
subjective assumptions including the expected stock price volatility. Because
the Company's 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 stock options.
The following table summarizes option activity and related information for years
ended September 30, 1999, 1998 and 1997:
Weighted Weighted
Shares Under Average Average
Option Exercise Price Fair Value
--------------------------------------------
Options outstanding at
October 1, 1996 1,310,146 $5.17
Options exercised (577,663) 5.19
Options expired (3,000) 5.92
Options granted 114,714 9.76 $5.17
---------- ----- ------
Options outstanding at
September 30, 1997 844,197 5.78
Options exercised (38,166) 5.86
Options expired (71,500) 5.71
Options granted 189,993 16.15 $10.09
----------- ----- ------
Options outstanding at
September 30, 1998 924,524 7.91
Options expired (5,000) 7.13
Options exercised (3,000) 6.46
Options granted 576,413 7.26 $5.11
----------- ----- ------
Options outstanding at
September 30, 1999 1,492,937 $7.67
=========== =====
The following table summarizes information about fixed stock options outstanding
at September 30, 1999:
Options Outstanding Options Exercisable
------------------------------------ ----------------------
Range of Weighted Average Weighted Weighted
Exercise Remaining Average Average
Prices Options Contractual Life Exercise Price Options Exercise Price
--------------------------------------------------------------------------------
$4.00 to $5.88 542,573 4.6 years $ 4.80 432,573 $ 5.00
$6.13 to $8.75 625,591 7.4 $ 7.00 124,000 $ 7.01
$10.24 to $21.75 324,773 7.8 $ 13.73 136,707 $ 15.33
--------------------------------------------------------------------------------
$4.00 to $21.75 1,492,937 6.5 $ 7.67 693,280 $ 7.40
================================================================================
17. Capital Stock
In conjunction with the Prudential transaction, the Company's Board of Directors
designated one share of the Company's authorized preferred stock as Special
Voting Stock. The Special Voting Stock is entitled to a number of votes equal to
the number of outstanding exchangeable shares of Maverick Tube (Canada) Inc., on
all matters presented to the common stockholders of the Company. The one share
of Special Voting Stock is issued to CIBC Mellon Trust Company, as trustee
pursuant to the Voting and Exchange Trust Agreement among the Company, Maverick
Tube (Canada) Inc. and CIBC Mellon Trust Company, for the benefit of the holders
of the exchangeable shares of Maverick Tube (Canada) Inc. For financial
statement purposes, the exchangeable shares that have not been exchanged for
shares of the Company's common stock have been treated as if they had been
exchanged and are included in the Company's outstanding shares of common stock.
Upon the liquidation, dissolution or winding up of the Company, the holder of
the Special Voting Stock shall be entitled on behalf of all holders of
exchangeable shares, prior to and in preference to any distribution to the
holders of common stock and after the distribution to the holders of any class
or series of Preferred Stock ranking senior to the Special Voting Stock of all
amounts to which such holders are entitled, to receive an amount equal to the
par value of the Special Voting Stock. Except as noted above, no dividends or
distributions are payable to the holder of the Special Voting Stock. The Special
Voting Stock is not convertible into any other class or series of capital stock
or into cash, property or other rights, and may not be redeemed. If the Special
Voting Stock shall be purchased or otherwise acquired by the Company, it shall
be deemed retired, cancelled, and may not thereafter be reissued or otherwise
disposed of by the Company. As long as any exchangeable shares of Maverick Tube
(Canada) Inc. are outstanding, the number of shares comprising the Special
Voting Stock shall not be increased or decreased and no other term of the
Special Voting Stock shall be amended, except upon the unanimous approval of all
common stockholders of the Company.
18. Shareholder Rights Plan
In July 1998, the Company's Board of Directors adopted a common stock
shareholder rights plan pursuant to which the Company declared a dividend
distribution of one Preferred Stock Purchase Right (the "Right") for each
outstanding share of Common Stock of the Company (other than shares held in the
Company's treasury). As of September 22, 2000, the Company undertook to
distribute at the Separation Time (as defined below) to the then record holders
of exchangeable shares one Right for each exchangeable share then held of
record. The Right becomes exercisable the day that a public announcement is made
that a person or group of affiliated or associated persons has acquired, or
obtained the right to acquire, beneficial ownership of 20% or more of the
outstanding shares of common stock, or the tenth day following the commencement
of a tender offer or exchange offer that would result in a person or a group
becoming the beneficial owners of 20% or more of such outstanding share of
common stock (each, the "Separation Time"). After such Right becomes exercisable
and upon a "flip-in event" (as such item is defined in the plan), each Right
entitles the holder to purchase $100 worth of the Company's common stock or
preferred stock, as the case may be, for $50. Until a Right is exercised or
exchanged, the holder thereof will have no rights as a shareholder of the
Company, including, without limitation, the right to receive dividends. The
Right is subject to redemption by the Company's Board of Directors for $.01 per
Right at any time prior to the date which a person or group acquires beneficial
ownership of 20% or more of the Company's common stock or subsequent thereto at
the option of the Board of Directors. The Rights expire July 23, 2008.
19. Quarterly Financial Data (Unaudited)
The results of operations by quarter for 1999 and 1998 were as follows (in
thousands):
Quarter Ended
-----------------------------------------------------
December 31, March 31, June 30, September 30,
1999 1999 1999 1998
-----------------------------------------------------
1999
Net sales $ 68,968 $52,948 $79,065 $113,410
Gross profit 4,088 (1) 291 3,338 11,025
Net income (loss) (1,455)(2)(4) (4,414)(2) (2,371)(2) 906(2)
Basic earnings (loss) per share (.05)(2)(4) (.14)(2) (.08)(2) .03(2)
Diluted earnings (loss) per share (.05)(2)(4) (.14)(2) (.08)(2) .03(2)
Quarter Ended
-----------------------------------------------------
December 31, March 31, June 30, September 30,
1998 1998 1998 1997
-----------------------------------------------------
1998
Net sales $129,813 $93,174 $80,017 $80,823
Gross profit 21,418 14,120 9,244 7,639
Net income 10,573(4) 6,182(4) 2,511(4) 32(3)(4)
Basic earnings per share .34(4) .20(4) .08(4) --(3)(4)
Diluted earnings per share .34(4) .19(4) .08(4) --(3)(4)
(1) Gross profit for the three months ended December 31, 1998 includes a
$707,000 ($451,000 after tax effect or $0.02 per share) charge to
earnings for the reduction in carrying value of finished goods
inventory, primarily related to a decline in the selling prices of the
Company's energy products.
(2) Net income (loss) for the quarters ended December 31, 1998, March 31,
1999, June 30, 1999 and September 30, 1999 included charges for the
start-up of the cold drawn tubular production facility of $719,000,
$952,000, $825,000 and $966,000, respectively ($460,000, $609,000,
$528,000 and $618,000 after tax effect or $0.02, $0.02, $0.02 and
$0.02 per share, respectively).
(3) During the quarter ended September 30, 1998, the Company recorded a
pretax charge of $1.6 million ($1.1 million after tax effect or $0.04
per share) in selling, general and administrative expense for the
write-down of certain software development costs relating to
information systems being replaced by a new enterprise resource
planning system.
(4) Net income (loss) for the quarters ended December 31, 1997, March 31,
1998, June 30, 1998, September 30, 1998 and December 31, 1998 included
charges for the start-up of the Longview, Washington facility of
$458,000, $168,000, $64,000, $85,000 and $283,000, respectively
($0.01, $0.01, $0.00, $0.00 and $0.01 per share, respectively).
<PAGE>
HISTORICAL FINANCIAL INFORMATION
The selected financial data for Maverick set fort below for the five years ended
September 30, 1999 should be read in conjunction with the consolidated financial
statements, related notes and other financial information included herein. All
amounts have been restated to include Prudential.
Year Ended September 30,
---------------------------------------------------------
(in thousands) 1999 1998 1997 1996 (2) 1995 (3)
---------------------------------------------------------
Statement of Operations Data:
Net sales $ 314,391 $ 383,827 $ 545,337 $ 382,338 $ 296,818
Cost of goods sold 295,649 331,406 452,951 329,553 272,297
---------------------------------------------------------
Gross profit 18,742 52,421 92,386 52,785 24,521
Selling, general and
administrative 22,036 20,103 (4) 19,810 15,927 12,329
Other income - - - - (772)
Start-up costs 3,745 (1) 775 (1) - - 245
---------------------------------------------------------
Income (loss) from
operations (7,039) 31,543 72,576 36,858 12,719
Interest income (277) (367) (622) - -
Interest expense 2,145 2,025 2,067 2,386 3,872
---------------------------------------------------------
Income (loss) before
income taxes (8,907) 29,885 71,131 34,472 8,847
Provision (benefit)
for income taxes (1,573) 10,587 25,330 11,126 4,169
---------------------------------------------------------
Net income (loss) $ (7,334) $ 19,298 $ 45,801 $ 23,346 $ 4,678
=========================================================
Diluted earnings
(loss) per share $ (.24) $ .61 $ 1.46 $ .76 $ .15
=========================================================
Average shares
deemed outstanding 31,160 31,569 31,276 30,705 30,521
=========================================================
Other Data:
Depreciation and
amortization 11,420 8,553 8,453 7,876 7,088
Capital expenditures 16,917 43,151 14,771 7,630 8,317
EBITDA (5) 4,658 40,463 81,651 44,734 19,807
Balance Sheet Data:
(End of period)
Working capital 93,586 108,343 111,380 75,810 59,839
Total assets 289,241 258,201 285,494 214,490 187,836
Current maturities
of long-term debt 708 653 604 1,843 2,795
Short-term revolving
credit facility 10,067 6,133 - - 15,983
Long-term debt (less
current maturities) 7,518 8,226 8,879 11,901 18,045
Revolving credit
facility 31,000 27,400 10,000 13,250 15,000
Stockholders' equity 166,774 173,146 162,801 118,239 97,702
(1) Represents the operating loss of our cold drawn mechanical tubing
facility which began operations in October 1998 and the Longview
facility which began operations in December 1998.
(2) Includes the one-time effect of the change in accounting practice
which resulted in a reduction in net sales, gross profit, net income
and basic and diluted net income per share of $8,700,000, $1,000,000,
$839,000 and $0.03, respectively.
(3) Includes the first period of results of operation of our structural
tube facility which began operations in October 1994.
(4) Includes a write-down of software costs of $1,605,000.
(5) EBITDA represents earnings (loss) before interest, income taxes,
depreciation and amortization. We believe EBITDA is a widely accepted,
supplemental financial measurement used by many investors and analysts
to analyze and compare companies' performances. However, EBITDA should
not be considered as an alternative to income from operations or to
cash flows from operating, investing or financing activities, as
determined in accordance with generally accepted accounting
principles. Because EBITDA excludes some, but not all, items that
affect net income and because these measures may vary among companies,
the EBITDA data presented above may not be comparable to similarly
titled measures of other companies.
