UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark one)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15D OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _________________ to ____________________.
Commission File Number: 0-23242
WEBCO INDUSTRIES, INC.
(Exact name of registrant as specified in its charter)
Oklahoma 73-1097133
(State or other jurisdiction of (I.R.S. Employer Identification No)
incorporation or organization)
9101 West 21st Street, SAND SPRINGS, OKLAHOMA 74063
(Address of principal executive offices) (Zip Code)
(918) 241-1000
(Registrant's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months ( or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] Yes [ ] No
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to distribution of securities under a plan
confirmed by a court.
NOT APPLICABLE [ ] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practical date: 7,073,955 shares of Common
Stock, $0.01 par value, as of May 31, 1999.
<PAGE>
WEBCO INDUSTRIES, INC. AND SUBSIDIARY
TABLE OF CONTENTS
Page
Number
--------
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
Balance Sheets 3
Statements of Income 4
Statements of Cash Flows 5
Notes to Unaudited Financial Statements 6-8
Report of Review by Independent
Accountants 9
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 10-15
PART II OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of
Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES 17
<PAGE>
<TABLE>
WEBCO INDUSTRIES, INC. AND SUBSIDIARY
BALANCE SHEETS
(Dollars in thousands, except par value)
(Unaudited)
<CAPTION>
April 30, July 31,
ASSETS 1999 1998
------- -------
<S> <C> <C>
Current assets:
Cash $ 919 $ 266
Accounts receivable, net 16,736 19,874
Inventories 31,272 27,775
Prepaid expenses 699 205
Deferred income tax asset 2,027 2,740
------- -------
Total current assets 51,653 50,860
Property, plant and equipment:
Land 1,436 1,436
Buildings and improvements 15,520 14,571
Machinery and equipment 65,230 60,138
Furniture and fixtures 8,128 4,975
Construction in progress 5,375 5,261
Less accumulated depreciation and amortization (33,105) (29,751)
------- -------
Net property, plant and equipment 62,584 56,630
Notes receivable from related parties 1,795 1,774
Other assets, net 2,461 2,494
------- -------
Total assets $118,493 $111,758
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 11,964 $ 11,760
Accrued liabilities 5,490 6,957
Current portion of long-term debt 738 1,282
------- -------
Total current liabilities 18,192 19,999
Long-term debt 40,211 32,894
Deferred income tax liability 10,556 10,620
Contingencies (Note 3)
Stockholders' equity:
Common stock, $.01 par value, 12,000,000
shares authorized, 7,075,255 shares issued
and outstanding 71 72
Additional paid-in capital 35,739 36,179
Retained earnings 13,724 11,994
------- -------
Total stockholders' equity 49,534 48,245
------- -------
Total liabilities and stockholders' equity $118,493 $111,758
======= =======
<FN>
See accompanying notes to unaudited financial statements.
</TABLE>
<PAGE>
<TABLE>
WEBCO INDUSTRIES, INC. AND SUBSIDIARY
STATEMENTS OF INCOME
(Dollars and shares in thousands, except per share amounts)
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
April 30, April 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Net sales $ 31,970 $ 41,325 $100,678 $113,799
Cost of sales 27,067 32,584 84,195 92,991
------- ------- ------- -------
Gross profit 4,903 8,741 16,483 20,808
Commission income 128 116 557 550
Selling, general and administrative expenses 3,878 4,937 12,449 12,685
------- ------- ------- -------
Income from operations 1,153 3,920 4,591 8,673
Interest expense 617 551 1,816 1,811
------- ------- ------- -------
Income before income taxes 536 3,369 2,775 6,862
Provision for income taxes 189 1,059 1,045 2,035
------- ------- ------- -------
Net income $ 347 $ 2,310 $ 1,730 $ 4,827
======= ======= ======= =======
Pro forma net income (1) $ 2,083 $ 4,232
======= =======
Net income per common share:
Basic $ .05 $ .32 $ .24 $ .67
======= ======= ======= =======
Diluted $ .05 $ .32 $ .24 $ .67
======= ======= ======= =======
Pro forma net income per common share: (1)
Basic $ .29 $ .59
======= =======
Diluted $ .29 $ .59
======= =======
Weighted average common shares outstanding:
Basic 7,129 7,169 7,156 7,169
======= ======= ======= =======
Diluted 7,130 7,262 7,160 7,227
======= ======= ======= =======
<FN>
(1) Pro forma net income for the three months and nine months ended April 30,
1998 include a provision for income taxes on the earnings of Phillips &
Johnston, Inc., which prior to its merger with Webco in June 1998 was an
S-Corporation. Pro forma income taxes have been calculated using an effective
tax rate of 38% (34% Federal and 4% state).
See accompanying notes to unaudited financial statements.
</TABLE>
<PAGE>
<TABLE>
WEBCO INDUSTRIES, INC. AND SUBSIDIARY
STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
<CAPTION>
Nine Months Ended
April 30,
1999 1998
------- -------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,730 $ 4,827
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 3,677 2,851
Loss (gain) on write-off and disposition
of property, plant and equipment (8) 36
Deferred tax expense 649 2,002
(Increase) decrease in:
Accounts receivable 3,138 (2,078)
Inventories (3,497) 2,024
Prepaid expenses (494) (21)
Increase (decrease) in:
Accounts payable 1,557 848
Accrued liabilities (1,467) 2,123
------- -------
Net cash provided by operating activities 5,285 12,612
------- -------
Cash flows from investing activities:
Capital expenditures (9,121) (7,707)
Proceeds from sale of property, plant and equipment 7 20
Advances to stockholder - (38)
Other (237) (126)
------- -------
Net cash used in investing activities (9,351) (7,851)
------- -------
Cash flows from financing activities:
Proceeds from long-term debt 105,970 103,493
Principal payments on long-term debt (99,197) (106,934)
Dividends paid - (1,483)
Purchases of common stock (440) -
Increase (decrease) in book overdrafts (1,614) 807
------- -------
Net cash provided by (used in) financing activities 4,719 (4,117)
------- -------
Net change in cash 653 644
Cash, beginning of period 266 202
------- -------
Cash, end of period $ 919 $ 846
======= =======
<FN>
See accompanying notes to unaudited financial statements.
</TABLE>
<PAGE>
WEBCO INDUSTRIES, INC. AND SUBSIDIARY
Notes to Unaudited Financial Statements
Note 1 - General
The accompanying unaudited condensed consolidated financial statements of
Webco Industries, Inc. and Subsidiary ("Webco" or the "Company") include, in
the opinion of management, all adjustments (which are of a normal recurring
nature) necessary for a fair presentation of financial position at April 30,
1999, and results of operations for the three months and nine months ended
April 30, 1999 and April 30, 1998, and cash flows for the nine months ended
April 30, 1999 and April 30, 1998. Results for the three months and nine
months ended April 30, 1999 are not necessarily indicative of results that will
be realized for the full fiscal year. Results for the three months and nine
months-ended April 30, 1998 have been restated to reflect the June 1998 merger
(accounted for as a pooling of interests) with Phillips & Johnston, Inc. The
year-end balance sheet was derived from the audited consolidated financial
statements but does not include all disclosures required by generally accepted
accounting principles. The unaudited condensed consolidated financial
statements should be read in conjunction with the audited consolidated
financial statements and related notes which can be found in the Company's Form
10-K for the year ended July 31, 1998.
Note 2 - Inventories
At April 30, 1999 and July 31, 1998, inventories were as follows (in
thousands):
April 30, 1999 July 31, 1998
-------------- -------------
Raw materials $15,700 $13,614
Work-in-process 2,252 1,860
Finished goods 11,533 10,664
Maintenance parts
and supplies 1,787 1,637
------- -------
Total inventories $ 31,272 $ 27,775
======= =======
Note 3 - Contingencies
The Company is a party to various lawsuits and claims arising in the
ordinary course of business. Management, after review and consultation with
legal counsel, considers that any liability resulting from these matters would
not materially affect the results of operations or the financial position of
the Company.
<PAGE>
WEBCO INDUSTRIES, INC. AND SUBSIDIARY
Notes to Unaudited Financial Statements
Note 4 - Common Stock and Common Stock Equivalents
Presented below is a reconciliation of the differences between actual
weighted average shares outstanding and diluted weighted average shares (in
thousands, except per share amounts).
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
April 30, April 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Basic EPS:
Weighted average shares outstanding 7,129 7,169 7,156 7,169
Effect of dilutive securities: Options 1 93 4 58
----- ----- ----- -----
Diluted EPS:
Diluted weighted average shares outstanding 7,130 7,262 7,160 7,227
===== ===== ===== =====
Anti-dilutive options outstanding:
Number of options 515 9 412 9
===== ===== ===== =====
Weighted average exercise price $6.68 $10.46 $6.87 $10.46
===== ===== ===== =====
</TABLE>
In March 1999, the Company's Board of Directors approved a plan to acquire
up to $500,000 of its common stock. Of the approved $500,000 repurchase, the
Company has acquired 94,000 shares of stock for approximately $440,000. The
Company intends to purchase shares from time to time in the open market,
subject to the price of the stock and securities laws, which significantly
limit the volume, timing and prices of such purchases.
Note 5 - Segment Information
In 1998 Webco Industries, Inc. adopted FAS 131 "Disclosures about Segments
of an Enterprise and Related Information". The Company has two reportable
segments: tubing products and QuikWater, representing the Company's two
strategic business units offering different products. The Company internally
evaluates its business by facility, however, because of the similar economic
characteristics of the tubing operations, including the nature of products,
production processes and customers, those operations have been aggregated for
segment reporting purposes. The tubing products segment manufactures as well
as distributes tubular products principally made of carbon and stainless steel.
QuikWater manufactures a patented direct contact high efficiency water heater.
<PAGE>
WEBCO INDUSTRIES, INC. AND SUBSIDIARY
Notes to Unaudited Financial Statements
Note 5 - Segment Information, Continued
The Company measures segment profit or loss as segment income before income
taxes. Information on the Company's segments is as follows (Dollars in
thousands):
Tubing
Products QuikWater Total
-------- --------- -------
Quarter-ended April 30, 1999:
Revenues $ 31,228 $ 742 $ 31,970
Segment pre tax income or (loss) 941 (405) 536
Quarter-ended April 30, 1998:
Revenues 40,980 345 41,325
Segment pre tax income or (loss) 3,795 (426) 3,369
Year to date April 30, 1999:
Revenues 98,342 2,336 100,678
Segment pre tax income or (loss) 3,925 (1,150) 2,775
Year to date April 30, 1998:
Revenues 112,717 1,082 113,799
Segment pre tax income or (loss) 8,137 (1,275) 6,862
<PAGE>
<AUDIT-REPORT>
INDEPENDENT ACCOUNTANT'S REPORT
To the Board of Directors and Stockholders
Webco Industries, Inc.
We have reviewed the accompanying condensed consolidated balance sheet of
Webco Industries, Inc. and subsidiary as of April 30, 1999, and the related
condensed consolidated statements of income for the three month and nine month
periods ended April 30, 1999 and 1998 and cash flows for the nine-month
periods ended April 30, 1999 and 1998. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying consolidated financial statements for them
to be in conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Webco Industries, Inc. and
subsidiary as of July 31, 1998, and the related consolidated statements of
operations, stockholders' equity and cash flows for the year then ended (not
presented herein); and in our report dated September 9, 1998, we expressed an
unqualified opinion on those financial statements. In our opinion, the
information set forth in the accompanying condensed consolidated balance sheet
as of July 31, 1998 is fairly stated in all material respects in relation to
the balance sheet from which it has been derived.
PricewaterhouseCoopers LLP
Tulsa, Oklahoma
May 19,1999
</AUDIT-REPORT>
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
Webco Industries, Inc., an Oklahoma corporation founded in 1969 by F.
William Weber, Chairman of the Board and Chief Executive Officer, is a
specialty manufacturer of high-quality carbon steel tubing and stainless steel
tubing products designed to industry and customer specifications. Webco's
tubing products consist primarily of: heat exchanger tubing, welded boiler
tubing, specialty stainless tube and pipe, and advanced carbon mechanical
tubing for use in consumer durable and capital goods. Management believes that
Webco is the domestic market leader in the manufacture of welded carbon heat
exchanger and boiler tubing, and the leading supplier of stainless tubing for
certain niche applications. The Company's subsidiary, Phillips & Johnston, Inc.
("P&J"), represents several manufacturers in the sale of various non-competing
mechanical and specialty tubular products made from copper, brass, aluminum,
stainless steel and carbon steel, among others. This representation allows the
Company to better serve its customers by offering a full range of tubing
products. The Company's QuikWater division manufactures and markets a patented
direct contact water heater for commercial and industrial applications. The
Company has three production facilities in Oklahoma and Pennsylvania and five
distribution facilities in Oklahoma, Texas, Illinois, and Michigan, serving
more than 1,300 customers throughout North America.
Unless the context otherwise requires, the information contained in this
report, and the terms "Webco" and the "Company" when used in this report,
include Webco Industries, Inc. and its subsidiary, P&J, on a consolidated
basis.
Results of Operations for the Three Months Ended April 30, 1999 Compared
to the Three Months Ended April 30, 1998
Manufactured Tubing Product sales for the quarter ended April 30, 1999
were $28,276,000, a decrease of 25.4% from the $37,907,000 for the same quarter
last year. The $9,631,000 decrease in net sales is primarily the result of a
26.5% decrease in the tonnage of tubing sold, which was partially offset by a
1.4% increase in the average net sales price per ton. A decrease in sales of
carbon tubing products, which was the result of low priced foreign imports and
low demand for foreign exports, was primarily responsible for the overall
decrease in the tonnage of tubing sold. The slight increase in the average net
selling price is a combination of a change in sales mix and improved pricing
structures in certain stainless products, which more than offset the decrease
in the net sales price per ton obtained for carbon products.
Gross profit for Manufactured Tubing Products decreased to $4,210,000 or
14.9% of net sales for the third quarter of fiscal 1999 from $8,009,000 or
21.1% of net sales for the same period in fiscal 1998. This is a function of a
decrease in the tonnage sold and continued pricing pressures in the carbon
market.
<PAGE>
Other Tubing Products sales are made primarily by Webco's subsidiary, P&J.
Sales of these products decreased 3.9% to $2,952,000 for the period ended April
30, 1999 from $3,073,000 for the period ended April 30, 1998. This was
primarily the result of pricing pressure in the market place, which
necessitated pricing reductions in order to maintain the existing customer
base, and a change in sales mix from the prior year period.
Gross profit from Other Tubing Products decreased to $637,000 or 21.6% of
net sales for the third quarter of fiscal 1999 from $744,000 or 24.2% of net
sales for the same period in fiscal 1998. This was primarily the result of a
reduction in sales prices and a change in sales mix, noted above.
Sales for QuikWater were $742,000 for the third quarter of fiscal 1999,
which is 115% more than the $345,000 in sales for the same period in fiscal
1998. The increase in sales is the result of a concentrated sales effort and
increased recognition in the market place.
Gross profit for QuikWater was $56,000 for the third quarter of fiscal
1999 as compared to ($12,000) for the same period of fiscal 1998. This
increase is a reflection of increased sales and manufacturing fixed and semi-
fixed costs being spread over higher volumes.
Selling, general and administrative expenses were $3,878,000 for the third
quarter of fiscal 1999 compared to $4,937,000 for the same quarter of fiscal
1998. The decrease in the current quarter is primarily the result of a
$1,265,000 decrease in profit sharing and bonuses to employees, which was
partially offset by an increase of $166,000 in legal fees related to the
Thermatool litigation.
Interest expense for the current period was $617,000 ($760,000 prior to
interest capitalization) as compared to interest expense of $551,000 ($696,000
prior to interest capitalization) for the same quarter last year. The slight
increase in interest prior to interest capitalization is the result of the
average level of debt under the bank Loan and Security Agreement for the three
months ended April 30, 1999 being $36.4 million as compared to $32.3 million
for the same period last year. This increase was partially offset by a decline
in the average interest rate to 7.03% in the third quarter of fiscal 1999 from
7.76% in the third quarter of fiscal 1998.
The recorded income tax expense for the quarter ended April 30, 1999 is
based upon the estimated annual combined effective federal and state income tax
rates.
Results of Operations for the Nine Months Ended April 30, 1999 Compared to the
Nine Months Ended April 30, 1998
Manufactured Tubing Product sales for the nine months ended April 30, 1999
decreased 14.2% to $89,347,000 as compared to $104,177,000 for the same period
last year. The $14,830,000 decrease in net sales is primarily the result of a
18.2% decrease in the tonnage of tubing sold, which was partially offset by a
4.9% increase in the average net sales price per ton. The overall decrease in
the tonnage of tubing sold reflects a decrease in sales of carbon tubing
products, which was the result of low priced foreign imports and low demand for
foreign exports. The increase in the average net selling price is a combination
of a change in sales mix and improved pricing structures in certain stainless
products, which more than offset the decrease in the net sales price per ton
obtained for carbon products.
<PAGE>
Gross profit for Manufactured Tubing Products was $14,317,000 or 16.0% of
net sales for the first nine months of fiscal 1999 compared to $18,755,000 or
18.0% of net sales for the same period in fiscal 1998. This is a function of a
decrease in the tonnage sold and continued pricing pressures in the carbon
market.
Other Tubing Products sales are made primarily by Webco's subsidiary, P&J.
Sales of these products increased 5.3% to $8,995,000 for the nine month period
ended April 30, 1999 from $8,540,000 for the same period in fiscal 1998. The
increase in sales is primarily the result of volume increases.
Gross profit from Other Tubing Products decreased to $1,906,000 or 21.2%
of net sales for the first nine months of fiscal 1999 from $2,156,000 or 25.2%
of net sales for the same period in fiscal 1998. This was primarily the result
of pricing pressure in the market place, which necessitated pricing reductions
in order to maintain the existing customer base, and a change in sales mix from
the prior year period.
Sales for QuikWater were $2,336,000 for year to date fiscal 1999, which is
116% more then the $1,082,000 in sales for the same period in fiscal 1998. The
increase is the result of a concentrated sales effort and increased recognition
in the market place.
Gross profit for QuikWater was $260,000 for the first nine months of
fiscal 1999 as compared to ($103,000) for the same period of fiscal 1998. This
increase is a reflection of increased sales and manufacturing fixed and semi-
fixed costs being spread over higher volumes.
Selling, general and administrative expenses year to date for fiscal 1999
were $12,449,000 compared to $12,685,000 for the same period of fiscal 1998.
The decrease in the current period is primarily the result of a $1,439,000
decrease in profit sharing and bonuses to employees offset by increases of
$375,000 in legal fees related to the Thermatool litigation, $410,000 in
depreciation of capitalized costs relating to the Enterprise Resource Planning
System, and $262,000 of expense related to the installation of the Enterprise
Resource Planning software.
Interest expense for the current period was $1,816,000 ($2,176,000 prior
to interest capitalization) as compared to interest expense of $1,811,000
($2,060,000 prior to interest capitalization) for the same period last year.
The slight increase in interest prior to interest capitalization is the result
of the average level of debt under the bank Loan and Security Agreement for the
nine months ended April 30, 1999 being $34.4 million as compared to $33.8
million for the same period last year. In addition, the related average
interest rate decreased slightly to 7.27% for the first nine months of fiscal
1999 from 7.73% for the same period in fiscal 1998.
The recorded income tax expense for the nine months ended April 30, 1999
is based upon the estimated combined annual effective federal and state income
tax rates.
<PAGE>
Liquidity and Capital Resources
Net cash provided by operations was $5,285,000 for the nine months ended
April 30, 1999 versus $12,612,000 for the nine-month period ended April 30,
1998. Receivables decreased $3,138,000 during the current period and increased
$2,078,000 for the same period last year, while inventories increased
$3,497,000 during fiscal 1999 and decreased $2,024,000 during fiscal 1998.
Accounts payable increased $1,557,000 and $848,000 for the period ended April
30, 1999 and 1998, respectively. In addition, accrued liabilities decreased by
$1,467,000 for the period ended April 30, 1999 as compared to an increase of
$2,123,000 during the same period last year.
Net cash used in investing activities for the nine months ended April 30,
1999 was $9,351,000, which was $1,500,000 greater than the $7,851,000 used in
investing activities during the same period in fiscal 1998. Capital
expenditures made during the current period related to progress with the
expansion of the Oil City facility, installation of new enterprise resource
planning software and continued progress with the expansion of the stainless
facility, as well as other projects, which are expected to increase capacity
and improve productivity.
The Company's capital needs have historically been to fund equipment
purchases and for general working capital needs resulting from the growth that
the Company experienced. The Company has followed an aggressive capital
expenditure plan as part of its growth strategy and to enable it to continue to
be a leader in tubular manufacturing technologies. The Company foresees a
continuance of this strategy in the future.
Dividends in 1998 were paid by Phillips & Johnston to its former
shareholders prior to its merger with Webco in June 1998. Webco currently
intends to retain earnings to support its growth strategy and does not
anticipate paying dividends in the foreseeable future.
The Company's financing arrangements provide for a term loan of $25
million and a line of credit of $25 million. As of April 30, 1999, the Company
had $25 million outstanding on the term loan, and $12.7 million under the
revolving line of credit. These loans mature on August 31, 2002 and are
collateralized by substantially all of the Company's assets other than the Sand
Springs and Oil City real estate. The Company may have borrowings and
outstanding letters of credit ($1,071,000 at April 30, 1999) under the
revolving credit facility up to the lesser of $25.0 million or an amount
determined by a formula based on the amount of eligible inventories and
accounts receivable. At April 30, 1999, $4.5 million was available for
borrowing under this line of credit.
The Company has arranged for approximately $2.8 million of public agency
financing related to the Oil City project, of which $1 million has been
advanced, and is outstanding, as of April 30, 1999. The agency loans have
interest rates ranging from 3.5% to 5.75% and maturities of 5 to 10 years.
<PAGE>
P&J has a line of credit agreement for $2,000,000 and term loans of
$250,000 and $500,000 with its primary lender. As of April 30, 1999 the Company
had $345,000 outstanding under the line of credit and $61,000 and $500,000,
respectively, outstanding on the term loans. The line of credit matures on
November 30, 1999 and the term loans mature in January 2000 and April 2004,
respectively, and are collateralized by P&J's assets. At April 30, 1999,
$1,655,000 was available for borrowing under this line of credit.
In the past, the Company has funded its capital growth expenditures with a
combination of cash flow from operations and debt. With the exception of the
expansion of its facilities in Oil City, Pennsylvania, the Company currently
believes that working capital provided by operations will fund capital spending
through 2000.
Stock Repurchase Plan
In March 1999, the Company's Board of Directors approved a plan to acquire
up to $500,000 of its common stock. Of the approved $500,000 repurchase, the
Company has acquired 94,000 shares of stock for approximately $440,000. The
Company intends to purchase shares from time to time in the open market
subject to the price of the stock and securities laws, which significantly
limit the volume, timing and prices of such purchases.
Information Technology and the Year 2000
Over two years ago, the Company began an evaluation of its information
systems to determine the potential impact of advanced technology on the
Company's operations and profitability. During the course of this evaluation,
issues surrounding the effect of the year 2000 on date sensitive applications
became more widely publicized and understood. The Company, recognizing an
opportunity to both update its technology and to address year 2000 concerns,
decided to replace its current information systems with an Enterprise Resource
Planning ("ERP") system.
In the third quarter of fiscal 1998, the Company purchased, and began
installation of, an ERP system. The installation process, which includes the
testing of date functions, consists of four phases. The first phase of
installation, addressing the financial, purchasing and plant maintenance
functions, was successfully completed before the end of fiscal 1998. The
remaining three phases, including materials management, shop floor control, and
production planning for each of the Company's three manufacturing locations and
related facilities, are scheduled for completion in the Fall of 1999.
The Company has also been evaluating non-information technology systems
such as phone systems, e-mail and personal computers. These systems are either
currently year 2000 compliant or will have been replaced with year 2000
compliant equipment before July 31, 1999. Other important systems, including
equipment used in manufacturing and processing, are basically signal driven
systems where dates play no role in the operating logic.
<PAGE>
The Company is currently trying to determine the impact of year 2000 non-
compliance by third parties, including vendors and customers. The impact of
such non-compliance could effect timely delivery of raw materials and cause
reductions in orders by customers who are unable to control their own
production and sales process.
The Company presently believes that with the implementation of the ERP
system and the replacement of other non-compliant systems, the year 2000 issue
will not pose significant operational problems for its computer systems.
However, if installation of the ERP is not completed in a timely manner and
non-compliant systems replaced, the year 2000 issue could have a material
impact on the operations of the Company. Ramifications could include
mismatched material purchase orders and customer sales orders and a need to
manually operate materials planning, purchasing, order backlog and capacity
planning functions. A transition to manual operations could result in, among
other things, damage to customer relationships, lost sales, and significant
customer claims.
As of April 30, 1999, the Company had spent $4.5 million on the ERP system
and the Company currently estimates another $1.5 million will be expended to
complete the project. Of the $6 million total expenditure, over 25% is hardware
related, including upgrading the Company's mid-range computers and the
placement of personal computers on the shop floor. Due to the necessity of
technology upgrades generally, it would be arbitrary to allocate any portion of
this project exclusively to the correction of year 2000 issues, therefore no
such allocation has been attempted.
The foregoing forward-looking statements, including the costs of
addressing the year 2000 issue and the dates upon which compliance will be
attained, reflect management's current assessment and estimates with respect to
the Company's year 2000 compliance effort. Various factors could cause actual
plans and results to differ materially from those contemplated by such
assessments, estimates and forward-looking statements, many of which are beyond
the control of the Company. Some of these factors include, but are not limited
to, third party modification and installation plans, representations by vendors
and customers, technological advances, economic considerations and customer
perceptions.
Safe Harbor for Forward Looking Statements: Certain statements in this Form
10-Q, including statements preceded by, or predicated upon the words "expects"
and "believes", constitute "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. Such forward-looking
statements involve known and unknown risks, uncertainties and other important
factors that could cause the actual results, performance or achievements of the
Company, or industry results, to differ materially from any future results,
performance or achievements expressed or implied herein. Such risks,
uncertainties and factors include, among others: general economic and business
conditions, competition from imports, changes in manufacturing technology,
industry capacity, domestic competition, raw material costs and availability,
loss of significant customers and customer and vendor work stoppages,
successful implementation of enterprise software and Year 2000 compliance by
customers and vendors. The reader should refer to Part I, Item 1: "Forward
Looking Statements" of the Company's Form 10-K for the year ended July 31, 1998
for additional information regarding this matter.
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal Proceedings
In August 1997, the Company filed an action, Webco Industries, Inc. vs.
Thermatool Corporation and Alpha Industries, Inc., relating to certain cut-off
equipment sold to the Company and installed on Mill 3, which did not perform to
specifications. The case, filed in the United States District Court for the
Northern District of Oklahoma (Case No. 97-CV-708H (W)), sought recoveries
including, but not limited to, the cost of the equipment and other incidental
and consequential damages, including lost profits, suffered by the Company. On
May 27, 1999 a jury awarded the Company $1.1 million in its claims against
Thermatool. On December 1, 1998, the court ruled that the Company could not
collect lost profits and certain other incidental and consequential damages,
and limited the Company's possible recovery to the purchase price of the
equipment plus the cost of improvements and interest. The damages awarded by
the jury, accordingly, do not include lost profits by the Company. Now that
the first trial has been decided in the Company's favor, the Company will
petition the court for attorneys fees and appeal the pre-trial order, and, if
successful, pursue lost profits. There can be no assurances that the Company
will be successful on appeal or that if successful, lost profits awarded in the
succeeding trial, if any, will be commensurate with actual lost profits
suffered by the Company. There can also be no assurance that Thermatool will
not appeal the jury's verdict or what the outcome of that appeal would be.
In addition, the Company is a party to various other lawsuits and claims
arising in the ordinary course of business. Management, after review and
consultation with legal counsel, considers that any liability resulting from
these matters would not materially affect the results of operations or the
financial position of the Company.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
Exhibit 15.1: Letter Regarding Unaudited Interim Financial Information.
B. Reports on Form 8-K
None
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WEBCO INDUSTRIES, INC.
June 8, 1999 /s/Michael P. Howard
Michael P. Howard
Treasurer
Chief Financial Officer
Vice President of Finance and Administration
<PAGE>
EXHIBIT 15.1
WEBCO INDUSTRIES, INC.
LETTER RE UNAUDITED INTERIM FINANCIAL INFORMATION
Securities and Exchange Commission
450 Fifth Street, N. W.
Washington, D.C. 20549
Re: Webco Industries, Inc.
Registration on Form S-3 and S-8
We are aware that our report dated May 19, 1999, on our review of the interim
financial information of Webco Industries, Inc. for the periods ended April 30,
1999 and 1998, and included in this Form 10-Q is incorporated by reference in
the Company's registration statements on Form S-3 (File nos. 333-22779 and 333-
67923) and S-8 (File no. 333-49219).
PricewaterhouseCoopers LLP
Tulsa, Oklahoma
June 7, 1999
<PAGE>
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