UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended: December 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ____________ COMMISSION FILE NUMBER: 0-27140 NORTHWEST PIPE COMPANY (Exact name of registrant as specified in its charter) OREGON 93-0557988 (STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 12005 N. BURGARD PORTLAND, OREGON 97203 (Address of principal executive offices and zip code) 503-285-1400 (Registrant's telephone number including area code) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: COMMON STOCK, PAR VALUE $.01 PER SHARE (Title of Class) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes [ X ] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K, or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock held by non-affiliates of the Registrant was $109,631,988 as of March 17, 1998 based upon the last sales price as reported by Nasdaq. The number of shares outstanding of the Registrant's Common Stock as of March 17, 1998 was 6,413,278 shares. The Index to Exhibits appears on page 16 of this document. -------------- -------------- DOCUMENTS INCORPORATED BY REFERENCE The Registrant has incorporated into Part III of Form 10-K by reference portions of its Proxy Statement for its Annual Meeting of Shareholders to be held on May 19, 1998
NORTHWEST PIPE COMPANY 1997 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS <TABLE> <CAPTION> PART I Page ---- <S> <C> Item 1 - Business 1 Item 2 - Properties 5 Item 3 - Legal Proceedings 6 Item 4 - Submission of Matters to a Vote of Security Holders 6 PART II Item 5 - Market for the Registrant's Common Equity and Related Stockholder Matters 6 Item 6 - Selected Financial Data 7 Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Item 7A - Quantitative and Qualitative Disclosures About Market Risk 14 Item 8 - Financial Statements and Supplementary Financial Data 14 Item 9 - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 14 PART III Item 10 - Directors and Executive Officers of the Registrant 14 Item 11 - Executive Compensation 14 Item 12 - Security Ownership of Certain Beneficial Owners and Management 14 Item 13 - Certain Relationships and Related Transactions 14 PART IV Item 14 - Exhibits, Financial Statement Schedule and Reports on Form 8-K 15 </TABLE>
PART I ITEM 1. BUSINESS GENERAL Northwest Pipe Company ("the Company") manufactures welded steel pipe in two business groups. In its water transmission business group, the Company is a leading supplier in the United States and Canada of large diameter, high pressure steel pipe used primarily for water transmission (the "Water Transmission" business). In its tubular products business group, the Company manufactures smaller diameter, electric resistance welded ("ERW") steel pipe for use in a wide range of construction, agricultural and industrial applications (the "Tubular Products" business). In 1997, Water Transmission and Tubular Products revenues represented approximately 66% and 34% of the Company's net sales, respectively. Headquartered in Portland, Oregon, the Company operates five manufacturing facilities. Water Transmission products are manufactured in Portland, Oregon; Denver, Colorado; Adelanto, California, and Riverside, California (both are near Los Angeles). Tubular Products are manufactured in Portland, Oregon, and Atchison, Kansas. In May 1996, the Company acquired Thompson Pipe and Steel Company, a manufacturer of steel water transmission pipe headquartered in Denver, Colorado. The principal assets acquired were steel pipe manufacturing facilities located in Denver, Colorado and Princeton, Kentucky. The Kentucky manufacturing facility was closed by Thompson Pipe and Steel Company in 1995, and the Company intends to sell the Kentucky facility. In December 1996, the Company acquired, from California Steel Pressure Pipe Company, certain assets of its Riverside, California plant, which included two spiral mills. The Riverside, California plant was closed in December 1996 by California Steel Pressure Pipe Company. In January 1997, the Company began producing water transmission pipe at the Riverside plant and managing this facility from its Adelanto, California facility. PRODUCTS WATER TRANSMISSION PRODUCTS. Water transmission pipe is used for (i) high pressure applications, typically requiring pipe able to withstand pressures in excess of 150 pounds per square inch, (ii) low pressure applications such as gravity-flow wastewater and sewers and (iii) other industrial and structural applications. All of the Company's Water Transmission products are made to custom specifications. Most of these products are for fully engineered, large diameter, high pressure water transmission lines. Other uses include pipe for piling and hydroelectric projects, waste water transmission and treatment plant piping. The Company has the capability to manufacture Water Transmission pipe in diameters ranging from 4" to 156" with wall thicknesses of 0.135" to 3.00". The Company has the capability to coat and line these products with cement mortar, polyethylene tapes, paints and coal tar enamel according to the customers' specifications. The Company maintains complete fabrication facilities and provides installation contractors with custom fabricated sections as well as straight pipe sections. TUBULAR PRODUCTS. The Company's Tubular Products range in size from 2 3/8" to 16" in diameter with wall thicknesses from 0.075" to 0.315". These products are typically sold to pipe distributors or original equipment manufacturers and are used for a wide variety of applications. The Company has historically focused on niche markets that typically generate strong margins. The tubular products industry, however, serves very large markets with products that generally have wall thicknesses greater than those that the Company has traditionally manufactured. The Company has added new product lines in its Tubular Products business as management identified opportunities for sustainable growth. In 1989, the Company entered the fire protection sprinkler system market with its branded product FLAME-OUT. In 1993, the Company began marketing WELL-LIFE, a water well casing product. These new products represented an expansion of the Company's focus from the light-wall, large diameter niche markets to include higher volume, more competitive markets. The Company acquired and has 1
installed a new tubular products mill in its Portland, Oregon facility, which was operational late in the first quarter of 1998. This new mill gives the Company the ability to manufacture products with smaller diameters and heavier wall thicknesses for uses in industrial piping, oil and gas transmission, fire protection systems and other applications. The Company intends to continue to pursue future opportunities to broaden its product lines by adding products that will take advantage of the Company's available manufacturing capacity, existing marketing channels and manufacturing expertise. MARKETING WATER TRANSMISSION. The primary customers for Water Transmission products are installation contractors for projects funded by public water agencies, including states, municipalities and water districts. Water Transmission products are manufactured at the Company's Oregon, California and Colorado facilities and are marketed primarily in the United States, Canada and Mexico. High freight costs reduce the Company's competitiveness as the distances from its manufacturing facilities increase. The Company's Water Transmission marketing strategy emphasizes early identification of potential water projects, promotion of specifications consistent with the Company's capabilities and close contact with the project designers and owners throughout the design phase. The Company's in-house sales force is composed of sales representatives, engineers and support personnel. These representatives and engineers work with public water agencies, contractors and engineering firms, often more than a year in advance of the project being bid, in order to identify and evaluate planned projects. As the public water agency continues the process of developing a pipeline project, the Company's professional engineers provide information to the agency or its design engineers promoting the advantages of coated and lined steel pipe. In certain cases, the Company's professional engineers may be successful in influencing the specifications to favor the Company's products. After the agencies complete the design, they publicize the upcoming bidding for a water transmission project. The Company then obtains detailed plans and develops its estimate for the pipe portion of the project. The Company typically bids to installation contractors who include the Company's bid in their proposal to the public water agency. The public water agency generally awards the entire project to the contractor with the lowest bid. Because a substantial portion of the Company's Water Transmission revenue is derived from sales to installation contractors for public water transmission projects, the Company's sales could be adversely impacted by a change in the number of projects planned by public water agencies, adjustments in governmental spending, general budgetary constraints or the inability of governmental entities to issue debt. A decline in the number of such projects or in the funding available for such projects could have a material adverse effect on the Company's business, financial condition and results of operations. TUBULAR PRODUCTS. The Company's Tubular Products are marketed through a network of direct sales force personnel and independent distributors in the United States and Canada. The Company's marketing strategy focuses on customer service and customer relationships. For example, the Company is willing to sell in small lot sizes and is able to provide mixed truckloads of finished products to its customers. Approximately 90% of the Company's Tubular Products sales have been to pipe distributors, and approximately 10% of sales have been to original equipment manufacturers (primarily irrigation system manufacturers). The Company's sales effort emphasizes regular personal contact with current and potential customers. The Company supplements this effort with targeted advertising, participation in trade shows and brochures. The Company's plant locations in Kansas and Oregon allow the Company to efficiently serve customers throughout the United States and in Canada. MANUFACTURING WATER TRANSMISSION. The Company manufactures Water Transmission products at its Oregon, California and Colorado facilities. The process begins with the preparation of engineered drawings of each unique piece of pipe in the project. These drawings are prepared on the Company's proprietary computer-aided design system and are used as blueprints for the manufacture of the pipe. After the drawings are completed and approved, manufacturing begins by feeding steel coil continuously at a specified angle into a spiral weld mill which cold 2
forms the band into a tubular configuration with a spiral seam. Automated arc welders, positioned on both the inside and the outside of the tube, are used to weld the seam. The welded tube is then cut at the specified length. After completion of the forming and welding phases, the finished cylinder is tested and inspected in accordance with project specifications, which may include 100% radiographic analysis of the weld seam. The cylinders are then coated and lined as specified. Possible coatings include coal tar enamel, polyethylene tape, paint, epoxies and cement mortar. Linings may be coal tar enamel, cement mortar or epoxies. Following coating and lining, certain pieces may be custom fabricated as required for the project. This process is performed in the Company's fabrication facilities. The pipe is final inspected and prepared for shipment. The Company ships its products to project sites by truck and rail. TUBULAR PRODUCTS. Tubular Products are manufactured by the ERW process at the Company's Oregon and Kansas facilities in diameters ranging from 2 3/8" to 16". This process begins by unrolling and slitting steel coils into narrower bands sized to the circumference of the finished product. Each band is re-coiled and fed into the material handling equipment at the front end of the ERW mill and fed through a series of rolls that cold-form it into a tubular configuration. The resultant tube is welded by high-frequency electric resistance welders and cut into the appropriate lengths. After exiting the mill, the products are straightened, inspected, tested and end-finished, and certain products are coated with lacquer. The Company acquired and has installed a new tubular products mill in its Portland, Oregon facility, which was operational late in the first quarter of 1998. This new mill gives the Company the ability to manufacture products with smaller diameters and heavier wall thicknesses for uses in industrial piping, oil and gas transmission, fire protection systems and other applications. TECHNOLOGY. Advances in technology help the Company produce high quality products at competitive prices. Recent investments in technological improvements include laser seam tracking systems, steel coil slitters, an ultraviolet light coating system and an in-line ultrasonic testing system. To stay abreast of technological developments in the United States and abroad, the Company participates in trade shows, industry associations, research projects and vendor trials of new products. QUALITY ASSURANCE. The Company has adopted quality assurance techniques and policies which govern every aspect of its operations to ensure high quality. During and after the manufacturing process, the Company performs many tests, including tensile, impact, hydrostatic, ultrasonic and radiographic tests. The Quality Assurance department reports directly to the chief executive officer. As a reflection of its commitment to quality, the Company has been certified for certain products or operations by Factory Mutual, Underwriters Laboratory, Steel Plate Fabricators Association, American Society for Mechanical Engineers, National Sanitary Foundation and the American Petroleum Institute. PRODUCT LIABILITY. The manufacturing and use of steel pipe involves a variety of risks. Certain losses may result or be alleged to result from defects in the Company's products, thereby subjecting the Company to claims for damages, including consequential damages. The Company warrants its products to be free of certain defects. The Company maintains insurance coverage against potential product liability claims in the amount of $27 million which it believes to be adequate. However, there can be no assurance that product liability claims exceeding the Company's insurance coverage will not be experienced in the future or that the Company will be able to maintain such insurance with adequate coverage. 3
BACKLOG The Company's backlog includes confirmed orders, including the balance of projects in process. The backlog also includes projects for which the Company has been notified it is the successful bidder even though a binding agreement has not been executed. Projects for which a binding contract has not been executed could be canceled. Binding orders received by the Company may also be subject to cancellation or postponement, however, cancellation would generally obligate the customer to pay the costs incurred by the Company. As of December 31, 1997 and 1996, the Company's backlog of orders was approximately $54.5 million and $51.4 million, respectively. Backlog as of December 31, 1997 includes projects having a value of approximately $5.9 million for which binding contracts had not yet been executed. Backlog orders as of any particular date may not be indicative of actual operating results for any fiscal period. There can be no assurance that any amount of backlog ultimately will be realized. COMPETITION WATER TRANSMISSION. The Company has several competitors in the Water Transmission segment of its business. High freight costs may limit the ability of manufacturers located in other market areas to compete with the Company. Most of the projects in this segment are competitively bid and price competition is vigorous. Price competition may reduce the gross margin on sales, which may adversely affect overall profitability. Other competitive factors include timely delivery and ability to meet customized specifications. The Company and Ameron International, Inc. are the principal competitors in the water transmission business in the western United States and southwestern Canada. Another competitor in this region is Continental Pipe. East of the Rocky Mountains, the Company's primary competition includes American Cast Iron Pipe Company, McWane Cast Iron Company and US Pipe & Foundry Company, all of which manufacture ductile iron pipe; Price Bros. and Gifford-Hill-American, Inc., which manufacture concrete cylinder pipe. The Company is not aware of any competitors that are currently planning to enter into the water transmission business within the Company's markets. The Company believes the cost of constructing a facility, the long lead time before a manufacturing plant could compete effectively, product acceptance and the high standards for product quality and manufacturing experience required by project specifications all serve as barriers to entry. However, no assurance can be given that a new or existing competitor will not establish new facilities or expand its capacity within the Company's market areas. New or expanded facilities or competitors could have a material adverse effect on the Company's business, financial condition and results of operations. TUBULAR PRODUCTS. The market for tubular products is highly fragmented and diversified with over 100 manufacturers in the United States and a number of foreign-based manufacturers that export such pipe into the United States. Manufacturers compete with one another primarily on the basis of price, established business relationships, customer service and delivery. In a number of sectors within the tubular products industry, competition may be less vigorous due to the existence of a relatively small number of companies with the capabilities to manufacture certain products. In particular, the Company operates in a variety of different markets that require pipe with lighter wall thicknesses in relation to diameters than many of the Company's competitors can manufacture. However, the Company is increasingly introducing products into higher volume markets with more competition than it experiences with its niche products. SUPPLIERS The Company purchases hot rolled steel coil produced by a number of primary steel producers including Geneva Steel Company, California Steel Industries, Inc., Lonestar Steel, Thyssen Trading and Nucor. Additionally, Oregon Steel Mills is in the process of adding steel coil manufacturing capabilities to its facility located approximately one mile from the Company's Portland manufacturing facility. The Company orders steel according to its business forecasts for its Tubular Products business group. Steel for the Water Transmission business is normally purchased only after a project has been awarded to the Company, however, the steel price is generally negotiated in advance of the bidding process. Purchased steel represents a substantial portion of the Company's cost of sales. The steel industry is highly cyclical in nature and steel prices are influenced by 4
numerous factors beyond the control of the Company, including general economic conditions, import duties, other trade restrictions and currency exchange rates. Historically, the Company has sought to recover increases in steel prices through price increases of its products. There can be no assurance that steel prices will not increase or that the Company will be successful in implementing related price increases on its products. The Company also relies on certain suppliers of coating materials, lining materials and certain custom fabricated items. The Company has at least two suppliers for most of its raw materials. The Company believes its relationships with its suppliers are positive and has no indication that it will experience shortages of raw materials or components essential to its production processes or that it will be forced to seek alternative sources of supply. Any shortages of raw materials may result in production delays and costs which could have a material adverse effect on the Company's business, financial condition and results of operations. ENVIRONMENTAL MATTERS The Company operates under numerous governmental permits and licenses relating to air emissions and water discharges, stormwater run-off, workplace safety and other matters. The Company is not aware of any current violations or citations relating to any of these permits or licenses. The Company has a policy of reducing use and consumption of hazardous materials in its operations by substituting non-hazardous materials when possible. The Company has completed discussions with the Oregon Department of Environmental Quality ("DEQ") with respect to the reporting requirements for calculating emissions of volatile organic compounds ("VOCs") from pipe coating and lining operations at its Portland, Oregon facility. The Company and DEQ have resolved the emissions calculation issues pursuant to a Mutual Agreement and Order ("MAO") dated October 4, 1995 and amended June 20, 1997. Pursuant to the MAO, the Company was required to periodically report its progress in finding alternative coatings that comply with the VOC content levels allowed by Condition 4 of the Company's air permit. The MAO as amended also required the Company to be in full compliance with this Condition 4 by January 1, 1998, or to have submitted an application for an alternative emission limit. In December 1997, the Company submitted a report to DEQ confirming its compliance with Condition 4. The DEQ has indicated informally that it is satisfied with the Company's compliance progress. DEQ will initiate formal acknowledgment that the terms of the MAO have been fully satisfied. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources - Environmental Matters" for a discussion of certain litigation with the U.S. Environmental Protection Agency. EMPLOYEES As of December 31, 1997, the Company had 687 full-time employees. Approximately 25% were salaried and approximately 75% were employed on an hourly basis. All of the hourly employees at Thompson Pipe and Steel Company are represented by a union. The Company considers its relations with its employees to be satisfactory. ITEM 2. PROPERTIES The Oregon facility consists of 300,000 square feet of covered manufacturing space, located on approximately 25 acres. The Company operates five pipe mills at its Oregon facility. The Kansas facility consists of 60,000 square feet of covered manufacturing space located on 40 acres. The Adelanto, California facility, which was built in 1990, consists of 85,000 square feet of covered manufacturing space located on 70 acres. The Company has two pipe mills located at each of the Kansas and Adelanto, California facilities. Thompson Pipe and Steel Company has a steel pipe manufacturing facility, including approximately 157,000 square feet of covered manufacturing space, located in Denver, Colorado on approximately 40 acres, and a facility, including approximately 336,120 square feet of covered manufacturing space, located in Princeton, Kentucky, on 5
approximately 64 acres. The Kentucky manufacturing facility was closed by Thompson Pipe and Steel Company in 1995, and the Company intends to sell this facility. The principal assets acquired by the Company from California Steel Pressure Pipe Company were two spiral mills and one ERW mill located in Riverside, California. The Company owns all of its facilities, except for the Riverside, California facility, which is leased to the Company with an option to purchase. The Company exercised its option to purchase the Oregon facility in December 1997, and intends to exercise its option to purchase the Riverside, California facility in 1998. The Company has available manufacturing capacity at each of its facilities and believes its facilities are adequate for its immediate and near-term requirements, and it does not anticipate the need for significant expansion in the next twelve months. ITEM 3. LEGAL PROCEEDINGS In addition to the matters described above in "ENVIRONMENTAL MATTERS", from time to time, the Company is involved in litigation relating to claims arising out of its operations in the normal course of its business. The Company maintains insurance coverage against potential claims in amounts which it believes to be adequate. Management believes that it is not presently a party to any litigation, the outcome of which would have a material adverse effect on the Company's business, financial condition, results of operations or cash flows. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of the Company's shareholders during the quarter ended December 31, 1997. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's common stock is quoted on the Nasdaq National Market System under the symbol "NWPX." The Company's common stock commenced trading on November 30, 1995. The high and low sales prices as reported on the Nasdaq National Market System for each quarter in the years ended December 31, 1996 and 1997 were as follows. <TABLE> <CAPTION> LOW HIGH <S> <C> <C> 1996 First Quarter $ 9 7/8 $ 13 1/2 Second Quarter 12 3/4 18 1/8 Third Quarter 15 3/4 20 1/2 Fourth Quarter 15 20 1997 First Quarter $ 15 7/8 $ 20 1/4 Second Quarter 14 3/4 18 1/2 Third Quarter 17 27 Fourth Quarter 21 27 </TABLE> There were 94 shareholders of record and approximately 1700 beneficial shareholders at March 23, 1998. There were no cash dividends declared or paid in fiscal years 1997 or 1996. The Company does not anticipate paying cash dividends in the foreseeable future. 6
ITEM 6. SELECTED FINANCIAL DATA <TABLE> <CAPTION> In thousands, except per share amounts YEAR ENDED DECEMBER 31, 1997 1996 1995 1994 1993 -------- -------- ------- ------ ------- CONSOLIDATED STATEMENT OF OPERATIONS DATA: <S> <C> <C> <C> <C> <C> Net sales $150,833 $135,182 $97,715 $73,641 $54,437 Gross profit 31,117 30,942 19,576 11,980 6,529 Income (loss) before cumulative effect of accounting change (1) 1,100 10,404 5,107 2,161 (574) Net income 11,100 10,404 5,107 2,161 263 Loss per share before cumulative effect of accounting change (1) - - - - (0.27) Basic earnings per share (2) 1.73 1.92 6.11 3.10 0.38 Diluted earnings per share (2) 1.68 1.85 1.44 0.65 0.16 CONSOLIDATED BALANCE SHEET DATA: Working capital $ 51,051 $ 35,737 $22,438 $ 9,944 $ 3,234 Total assets 132,051 101,424 64,454 56,808 44,825 Long-term debt, less current maturities 39,944 14,356 12,040 20,998 16,251 Stockholders' equity 70,779 59,694 33,729 11,519 9,358 </TABLE> (1) Includes the effect of a benefit reflecting the cumulative effect of a change in method of accounting for income taxes, which was adopted on a prospective basis effective January 1, 1993. The cumulative effect of the change in accounting method was $837, which was recognized in the statement of operations for the year ended December 31, 1993. (2) Reflects, for all years, the presentation of basic and diluted earnings per share as required under Statement of Financial Accounting Standards No. 128, "Earnings Per Share", which was adopted by the Company in the year ended December 31, 1997. 7
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS This Management's Discussion and Analysis of Financial Condition and Results of Operations and other sections of this Report contain forward-looking statements within the meaning of the Securities Litigation Reform Act of 1995 that are based on current expectations, estimates and projections about the Company's business, management's beliefs and assumptions made by management. Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates" and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements due to numerous factors, including, but not limited to those discussed in this discussion and analysis of financial condition and results of operations, as well as those discussed elsewhere in this Report and from time to time in the Company's other Securities and Exchange Commission filings and reports. In addition, such statements could be affected by general industry and market conditions and growth rates, and general domestic and international economic conditions. OVERVIEW The Company manufactures Water Transmission products in facilities located in Portland, Oregon; Denver, Colorado; Adelanto, California and Riverside, California. The Adelanto facility was constructed by the Company in 1990. The Denver, Colorado facility was obtained through the acquisition of Thompson Pipe and Steel Company in May 1996. The Riverside, California facility was purchased from California Steel Pressure Pipe Company in December 1996. Tubular Products are manufactured in the Company's Portland, Oregon and Atchison, Kansas facilities. The Company believes that the Tubular Products business, in conjunction with the Water Transmission business, provides a significant degree of market diversification, because the principal factors affecting demand for Water Transmission products are different from those affecting demand for Tubular Products. Demand for Water Transmission products is generally based on population growth and movement, changing water sources and replacement of aging infrastructure. Demand can vary dramatically within the Company's market area since each population center determines its own waterworks requirements. Demand for Tubular Products is influenced by non-residential construction, the agricultural economy and general economic conditions. The Company's net sales and net income may fluctuate significantly from quarter to quarter due to the size of certain Water Transmission orders, the schedule for deliveries of those orders and the inventory management policies of certain of the Company's Tubular Products customers. The Company has experienced such fluctuations in the past and may experience such fluctuations in the future. Results of operations in any period should not be considered indicative of the results to be expected for any future period, and fluctuations in operating results may also result in fluctuations in the price of the Common Stock. No assurance can be given that the Company will remain profitable in any future period. The Company's business is subject to cyclical fluctuations based on general economic conditions and the economic conditions of the specific industries served. Future economic downturns could have a material adverse effect on the Company's business, financial condition and results of operations. 8
The following table sets forth, for the periods indicated, certain financial information regarding costs and expenses expressed as a percentage of total net sales and net sales of the Company's business segments. <TABLE> <CAPTION> Year Ended December 31, --------------------------- 1997 1996 1995 ------ ------ ------- <S> <C> <C> <C> Net sales Water transmission 65.8% 66.5% 62.6% Tubular products 34.2 33.5 37.4 ------ ------ ------- Total net sales 100.0 100.0 100.0 Cost of sales 79.4 77.1 80.0 ------ ------ ------- Gross profit 20.6 22.9 20.0 Selling, general and administrative expenses 7.5 8.5 8.0 ------ ------ ------- Income from operations 13.1 14.4 12.0 Interest expense 1.2 1.7 3.5 ------ ------ ------- Income before income taxes 11.9 12.7 8.5 Provision for income taxes 4.5 5.0 3.3 ------ ------ ------- Net income 7.4% 7.7% 5.2% ------ ------ ------- ------ ------ ------- Gross profit as a percentage of segment net sales: Water transmission 22.9% 26.0% 21.9% Tubular products 16.3 16.8 17.0 </TABLE> YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996 Net sales increased 11.6% from $135.2 million in 1996 to $150.8 million in 1997. Sales increased in both business segments. Water Transmission net sales increased 10.4% from $89.9 million in 1996 to $99.3 million in 1997. The increase was primarily due to acquisitions made in 1996. Tubular Products net sales increased 13.9% from $45.2 million in 1996 to $51.5 million in 1997. The increase was primarily the result of increased demand in certain product lines. No single customer accounted for 10% or more of total net sales in 1997 or 1996. Gross profit increased slightly from $30.9 million (22.9% of total net sales) in 1996 to $31.1 million (20.6% of total net sales) in 1997. Water Transmission gross profit decreased 2.7% from $23.4 million (26.0% of segment net sales) in 1996 to $22.7 million (22.9% of segment net sales) in 1997. Water Transmission gross profit was impacted by lower bidding activity which resulted in unfavorable pricing pressures. In addition to lower bidding activity, weather related delays and delays in receipt of steel shipments in the latter half of 1997 may impact margins adversely in the first quarter of 1998. Gross profit from tubular products increased 10.5 % to $8.4 million (16.3% of segment net sales) in 1997 from $7.6 million (16.8% of segment net sales) in 1996. Selling, general and administrative expenses decreased slightly from $11.5 million (8.5% of total net sales) in 1996 to $11.4 million (7.5% of total net sales) in 1997. Interest expense decreased 17.0% to $1.8 million in 1997 from $2.2 million in 1996, due to lower interest rates and a reduction of average borrowings in 1997. The Company's effective tax rate was approximately 38.1% in 1997 compared to approximately 39.6% in 1996. The decrease in the effective tax rate was due primarily to a state tax credit in 1997. In connection with the acquisition of Thompson Pipe and Steel Company in May 1996, the Company acquired net operating loss carryforwards which, due to an "ownership change" as defined under Section 382 of the Internal Revenue Code 9
of 1986, as amended, are subject to an annual limitation of approximately $338,000 during the 15 year carryforward period. The Company had approximately $4.5 million of net carryforwards remaining at December 31, 1997. YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995 Net sales increased 38.3% from $97.7 million in 1995 to $135.2 million in 1996. Sales increased in both business segments. Water Transmission net sales increased 46.9% from $61.2 million in 1995 to $89.9 million in 1996, primarily as a result of an increase in the number of projects bid in the Company's geographical market areas and the number of successful bids in prior periods which resulted in increased production during 1996, and the acquisition of Thompson Pipe and Steel Company in May 1996. Tubular Products net sales increased 23.9% from $36.5 million in 1995 to $45.2 million in 1996. The increase was primarily the result of increased sales of well casing products. In 1996, no customer accounted for 10% or more of total net sales. In 1995, sales to a single customer represented 12% of total net sales. Gross profit increased 58.1% from $19.6 million (20.0% of total net sales) in 1995 to $30.9 million (22.9% of total net sales) in 1996. Water Transmission gross profit increased 74.6% from $13.4 million (21.9% of segment net sales) in 1995 to $23.4 million (26.0% of segment net sales) in 1996. This increase was primarily attributable to increased Water Transmission project bidding activity in 1996, which allowed the Company to obtain projects which were well suited to its manufacturing strengths, and resulted in comparatively higher margins. Additionally, improved margins resulted from increased plant utilization. Gross profit from Tubular Products increased 22.4% from $6.2 million (17.0% of segment net sales) in 1995 to $7.6 million (16.8% of segment net sales) in 1996, primarily as a result of increased sales volume. Selling, general and administrative expenses increased 47.9% from $7.8 million (8.0% of total net sales) in 1995 to $11.5 million (8.5% of total net sales) in 1996. The increase is largely attributable to the one-time costs associated with the acquisition of Thompson Pipe and Steel Company in May 1996, and to its operating costs since that time, as well as the costs of litigating an environmental issue with the EPA. During the third quarter of 1996 the parties to this dispute reached an agreement in principle to settle the litigation. SEE "BUSINESS--ENVIRONMENTAL MATTERS." The Company recorded an expense of $1.0 million, in the third quarter of 1996, in connection with this agreement. Interest expense decreased 36.5% from $3.4 million in 1995 to $2.2 million in 1996. This resulted from a decrease in average borrowings outstanding due to the application of the proceeds of the Company's initial public offering in November 1995 and the public offering in November 1996. The Company's effective tax rate was approximately 38.7% in 1995 compared to approximately 39.6% in 1996. The provision for income taxes in 1995 reflected the use of net operating loss carryforwards and tax credits which reduced the Company's tax provision. In connection with the acquisition of Thompson Pipe and Steel Company, the Company acquired net operating loss carryforwards of approximately $5.1 million which, due to an "ownership change" as defined under Section 382 of the Internal Revenue Code of 1986, as amended, are subject to an annual limitation of approximately $338,000 during the 15 year carryforward period. 10
LIQUIDITY AND CAPITAL RESOURCES In November 1995, the Company completed an initial public offering of 1.9 million shares of its common stock, which resulted in net proceeds to the Company of approximately $14.6 million. In November 1996, the Company completed a public offering of 2.3 million shares of its common stock, 1.1 million shares by the Company and 1.2 million shares by certain shareholders of the Company, which resulted in net proceeds to the Company of approximately $15.3 million. The Company finances operations with internally generated funds and available borrowings. At December 31, 1997, the Company had cash and cash equivalents of $904,000. Net cash used in operating activities in 1997 was $4.3 million. This was primarily a net result of $11.1 million of net income and non-cash adjustments for depreciation and amortization of $2.2 million; offset by increases in trade receivables of $2.1 million, refundable income taxes of $3.3 million and costs and estimated earnings in excess of billings on uncompleted contracts of $9.2 million, and decreases in accounts payable of $1.8 million and accrued and other liabilities of $4.3 million. The decreases in accounts payable and accrued and other liabilities were primarily attributable to timing of purchases and payments. The increases in accounts receivable and costs and estimated earnings in excess of billings on uncompleted contracts resulted from delayed shipments in the latter half of 1997 primarily due to project delays, inclement weather, and other contractor related issues. Net cash used in investing activities in 1997 was $22.4 million, which primarily resulted from expenditures related to a new tubular products mill installed in its Portland, Oregon facility, which was operational late in the first quarter of 1998, and the installation of a rolled and welded manufacturing line in the Adelanto, California plant, which was operational in the fourth quarter of 1997. The remaining expenditures were for projects related to existing operations. Net cash provided by financing activities in 1997 was $23.4 million, which included the net effect of an additional $35.0 million in borrowings under Senior Notes and the repayment of long-term debt and capital lease obligations. The Company has four significant components of debt: $35.0 million of Senior Notes, without collateral, which bear interest at 6.87%; a $25.0 million credit agreement under which $7.0 million was outstanding at December 31, 1997; Industrial Development Bonds in the aggregate amount of $3.7 million with variable interest rates ranging from 3.85% to 4.55% at December 31, 1997; and capital leases aggregating $3.6 million bearing interest at rates ranging from 4.55% to 11.25% at December 31, 1997. In November 1997, the Company issued $35.0 million of 6.87% Senior Notes, without collateral (the "Notes"). Proceeds received under the Notes were used to reduce amounts outstanding under the Company's line of credit. The Notes mature November 15, 2007, and require semi-annual interest payments in November and May, and equal annual principal payments commencing on November 15, 2001 and continuing every year thereafter until final maturity. The $25.0 million line of credit agreement expires on October 20, 2000 and is without collateral. It bears interest at rates related to IBOR or LIBOR plus 0.65% (6.275% at December 31, 1997), or at prime less 0.5% (8.5% at December 31, 1997). At December 31, 1997, the Company had $7.0 million outstanding under the line of credit at a weighted average IBOR interest rate of 6.534%, and available additional borrowing capacity under the line of credit of $15.5 million. SEE NOTE 6 OF NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. The Company's working capital requirements have increased due to the increase in the Company's Water Transmission business which is characterized by lengthy production periods and extended payment cycles. The Company anticipates that its existing cash and cash equivalents, cash flows expected to be generated by operations, amounts available under its credit agreement or Notes and amounts available under additional senior 11
notes anticipated to be issued in the second quarter of 1998, will be adequate to fund its working capital and capital requirements for at least the next twelve months. To the extent necessary, the Company may also satisfy capital requirements through additional bank borrowings, senior notes, and capital leases if such resources are available on satisfactory terms. The Company has from time to time evaluated and continues to evaluate opportunities for acquisitions and expansion and, consistent with this practice, is currently engaged in discussions with other parties regarding possible acquisitions. Any such transactions, if consummated, may use a portion of the Company's working capital or necessitate additional borrowings. YEAR 2000 ISSUE. The Company has made an assessment of the effect of the Year 2000 issue on its hardware, operating and applications software. The Company has or is obtaining certification that its primary operating systems and application software packages will properly recognize calendar dates beginning in the year 2000. In addition, the Company is discussing with its major vendors and customers the possibility of interface or service difficulties relating to the Year 2000 issue. The Company plans to complete its examination of the effect of the Year 2000 issue on all of its application and operating systems by the end of 1998. To date, no significant concerns have been identified and accordingly the Company does not currently expect to incur material costs in connection with the Year 2000 issue. There can be no assurance, however, that there will not be any Year 2000 related operating problems or material expenses that will arise with the Company's computer application and operating systems. RECENT ACCOUNTING PRONOUNCEMENTS. In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"), which establishes requirements for disclosure of comprehensive income. The objective of SFAS 130 is to report a measure of all changes in equity that result from transactions and economic events other than transactions with owners. Comprehensive income is the total of net income and all other non-owner changes in equity. SFAS 130 is effective for fiscal years beginning after December 15, 1997. Reclassification of earlier financial statements for comparative purposes is required. Also in June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"). This statement will change the way public companies report information about segments of their business in their annual financial statements and requires them to report selected segment information in their quarterly reports issued to shareholders. It also requires entity-wide disclosures about the products and services an entity provides, the material countries in which it holds assets and reports revenues and its major customers. This statement is effective for fiscal years beginning after December 15, 1997. In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits" ("SFAS 132"). This statement revises employers' disclosures about pension and other postretirement benefit plans. It does not change the measurement or recognition of those plans. The statement suggests combined formats for presentation of pension and other postretirement benefit disclosures. The statement also permits reduced disclosures for nonpublic entities. This statement is effective for fiscal years beginning after December 15, 1997. The Company's management has studied the implications of SFAS 130, SFAS 131 and SFAS 132, and based on the initial evaluation, expects the adoption to have no impact on the Company's financial condition or results of operations, but will require revised disclosures when the respective statements become effective. ENVIRONMENTAL MATTERS. As described in the Company's Annual Report on Form 10-K for the year ended December 31, 1996, the Company has been identified as one of four potentially responsible parties with potential liability for a Superfund site in Clackamas, Oregon (the "Site"). In October 1995, the Company filed a complaint seeking a declaratory judgment from the Bankruptcy Court that any claims with respect to liability for 12
the costs of the Response Activities at the Site were discharged by the Bankruptcy Court's confirmation of the Company's Plan of Reorganization (the "Plan"). In September 1996, the Company entered into mediation with the EPA and the Oregon Department of Environmental Quality (the "ODEQ") (collectively, the "Agencies") in an attempt to resolve the matter without incurring the substantial additional expense of continuing the litigation. As a result of the mediation process, the Company and the Agencies entered into an agreement in principle with respect to a proposed settlement of the litigation (the "Settlement Agreement"). Pursuant to the Settlement Agreement, the Company and the Agencies prepared a consent decree which embodies the terms of the Settlement Agreement (the "Consent Decree"). The Consent Decree was entered by the Bankruptcy Court on July 22, 1997. The Consent Decree relating to the portion of the Site that is vacant (the "Hall Property") which provides for the transfer of title to the Hall Property to the Agencies, and upon which the effectiveness of the Consent Decree was conditioned, was entered by the United States District Court on August 19, 1997. Under the terms of the Consent Decree, the Company on August 22, 1997 paid the Agencies $1.0 million and deposited an additional $2.3 million in an escrow account or cash escrow (the "Cash Escrow"), with the interest income on the Cash Escrow to be distributed to the EPA. The Consent Decree provides that the EPA will complete construction of the remedial action at the Site in accordance with its standards and will have the right to sell the Hall Property at any time during the clean-up process and for one year thereafter. If the Hall Property is sold by the Agencies, the $2.3 million held in the Cash Escrow will be returned to the Company. Once construction of the remedial action has been completed as evidenced by issuance of Remedial Action Reports (or their equivalents) and a Preliminary Close Out Report, and the Hall Property is usable for a "reasonable commercial or industrial use," the Agencies will have the option to continue to market the Hall Property for one year. If the Hall Property is not sold during this period, the Company believes the Agencies will elect to have the Hall Property conveyed to the Company in exchange for the $2.3 million held in the Cash Escrow. The Company would then be required to market the Hall Property for another year. If the Hall Property sells within one year thereafter, fifty percent of any net proceeds in excess of $2.3 million would be paid to the EPA. If the Company takes title to the Hall Property, the Agencies will provide a "Prospective Purchaser Agreement" for use by the Company at its option and for use by the Company's eligible successors in interest. The EPA would specify that any eligible prospective purchaser of the Hall Property would not be liable for any past environmental contamination or any ongoing remediation resulting from past operations at the Site. If the Company elects not to take ownership of the Hall Property, the Agencies would retain the $2.3 million held in Cash Escrow. If the Agencies are unable to complete construction of the remedial action and clean up soils so that the Hall Property can be used for a reasonable commercial or industrial use within ten years, they would be required to return the $2.3 million held in the Cash Escrow to the Company. The Consent Decree also contains covenants not to sue, reservations of rights, and protection for the Company from third party claims for contribution for environmental clean-up costs at the Site. The Company believes that once the Hall Property is available for a "reasonable commercial or industrial use," it would have a current value in excess of $2.3 million. Consequently, the Company does not believe that the $2.3 million to be held in the Cash Escrow is "impaired" under generally accepted accounting principles. Accordingly, the Company segregated the $2.3 million as a restricted asset on its consolidated balance sheet. The Company recorded the $1.0 million payment as an expense in the third quarter of 1996. SUBSEQUENT EVENTS. On March 6, 1998, the Company acquired all of the outstanding capital stock of Southwestern Pipe, Inc. ("Southwestern") and P&H Tube Corporation ("P&H"), both Texas corporations. The Company paid a purchase price of $40.1 million in cash, which is subject to a post-closing adjustment based upon changes in the working capital from February 28, 1998 to the closing date and the amount of outstanding indebtedness of the purchased companies at the closing date. The principal business of both Southwestern and P&H is the manufacture and sale of structural and mechanical tubing products. Southwestern owns and operates a manufacturing facility in Houston, Texas. P&H Tube owns and operates a manufacturing facility in Bossier City, Louisiana. The Company will continue to operate the acquired plant, equipment and other property for the same purpose, and will operate each of the companies as separate wholly owned subsidiaries of the Company. 13
On March 6, 1998, the Company amended its line of credit agreement to temporarily increase the line to $55.0 million. Additionally, the restriction associated with the ratio of maximum funded debt to earnings before interest, taxes, depreciation and amortization ("EBITDA") was adjusted for one year from 3.0:1.0 to 3.25:1.0. The total commitment under the line of credit will be reduced to $30.0 million on the earliest of April 15, 1998 or the date that the Company receives the net proceeds from the issuance of senior notes in the amount of at least $20.0 million. The Company expects to issue additional senior notes totaling $40.0 million during the second quarter of 1998 to reduce the amounts borrowed under its line of credit and to reduce the available line of credit. Interest under the amended line of credit agreement is payable at IBOR plus 0.65% to 1.05% (0.65% at March 6, 1998) based on the Company's ratio, as defined, of funded debt to EBITDA. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK Substantially all of the Company's liquid investments are at fixed interest rates, and therefore the fair value of these investments is affected by changes in market interest rates. However, substantially all of the Company's liquid investments mature within one year. As a result, the Company believes that the market risk arising from its holdings of financial instruments is minimal. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY FINANCIAL DATA The information required by this item is included under the caption QUARTERLY DATA, in Note 17 of Notes to Consolidated Financial Statements as listed in Item 14 of Part IV of this Report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item is included under the captions INFORMATION AS TO NOMINEES AND CONTINUING DIRECTORS, EXECUTIVE OFFICERS and SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE in the Company's Proxy Statement for its 1998 Annual Meeting of Shareholders and is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information required by this item is included under the caption EXECUTIVE COMPENSATION in the Company's Proxy Statement for its 1998 Annual Meeting of Shareholders and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is included under the caption STOCK OWNED BY MANAGEMENT AND PRINCIPAL SHAREHOLDERS in the Company's Proxy Statement for its 1998 Annual Meeting of Shareholders and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is included under the caption CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS in the Company's Proxy Statement for its 1998 Annual Meeting of Shareholders and is incorporated herein by reference. 14
PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) (1) FINANCIAL STATEMENTS The Financial Statements, together with the report thereon of Coopers & Lybrand L.L.P., are included on the pages indicated below. <TABLE> <CAPTION> Page ------ <S> <C> Report of Independent Accountants F-1 Consolidated Statements of Income for the years ended December 31, 1997, 1996 and 1995 F-2 Consolidated Balance Sheets as of December 31, 1997 and 1996 F-3 Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 1997, 1996 and 1995 F-4 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996, and 1995 F-5 Notes to Consolidated Financial Statements F-6 </TABLE> (a) (2) FINANCIAL STATEMENT SCHEDULE The following schedule and report of independent public accountants are filed herewith: <TABLE> <CAPTION> Page ------ <S> <C> Schedule II Valuation and Qualifying Accounts S-1 Report of Independent Accountants on Financial Statement Schedule S-2 </TABLE> Schedules not listed above have been omitted because the information required to be set forth therein is not applicable or is included in the Consolidated Financial Statements or notes thereto. 15
(a) (3) EXHIBITS INCLUDED HEREIN: <TABLE> <CAPTION> Exhibit No. ----------- <S> <C> <C> (1) 3.1 Second Restated Articles of Incorporation (1) 3.2 Second Amended and Restated Bylaws (1) 10.2 1986 Incentive Stock Option Plan* (1) 10.3 1995 Stock Incentive Plan* (1) 10.4 1995 Stock Option Plan for Nonemployee Directors* (1) 10.5 Registration Rights Agreement (1) 10.6 Loan Agreement dated May 1, 1990 between the Company and California Statewide Communities Development Authority (2) 10.7 Stock Purchase Agreement dated as of May 8, 1996 among Northwest Pipe Company, Thompson Pipe and Steel Company, CHL Holdings, Inc. and Inter-City Products Corporation (3) 10.8 Amended 1995 Stock Incentive Plan* (4) 10.9 Loan Agreement dated October 20, 1997 by and among Bank of America National Trust and Savings Association, Northwest Pipe Company, Thompson Pipe and Steel Company and Thompson Steel Pipe Company (4) 10.10 First Amendment to Loan Agreement dated October 20, 1997 (4) 10.11 Second Amendment to Loan Agreement dated November 26, 1997 (4) 10.12 Third Amendment to Loan Agreement dated March 6, 1998 (4) 10.13 Note Purchase Agreement dated November 1, 1997 (5) 10.14 Stock Purchase Agreement dated March 6, 1998 by and among Southwestern Pipe, Inc., P&H Tube Corporation, and the shareholders of Southwestern Pipe, Inc. and P&H Tube Corporation (4) 21 Subsidiaries of the Registrant (4) 23 Consent of Coopers & Lybrand L.L.P. (4) 27 Financial Data Schedule </TABLE> *This exhibit constitutes a management contract or compensatory plan or arrangement. (1) Incorporated by reference to Exhibits to the Registrant's Registration Statement on Form S-1, as amended, effective November 30, 1995, Commission Registration No. 33-97308. (2) Incorporated by reference to Exhibits to the Company's Report on Form 8-K (as filed with the Securities and Exchange Commission on June 14, 1996). (3) Incorporated by reference to Exhibits to the Company's Proxy Statement for the 1997 Annual Meeting of Shareholders. (4) Filed herewith. (5) Incorporated by reference to the Company's Report on Form 8-K (as filed with the Securities and Exchange Commission on March 20, 1998). (b) REPORTS ON FORM 8-K No reports on Form 8-K were filed during the quarter ended December 31, 1997. 16
SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 23rd day of March 1998. NORTHWEST PIPE COMPANY By /s/ WILLIAM R. TAGMYER --------------------------- William R. Tagmyer Chairman of the Board and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant in the capacities indicated, on the 23rd day of March 1998. Signature Title - --------- ----- /s/ WILLIAM R. TAGMYER Chairman of the Board - ---------------------- and Chief Executive Officer William R. Tagmyer (Principal Executive Officer) /s/ BRIAN W. DUNHAM Director, President, Chief Operating Officer, - ---------------------- Treasurer and Secretary Brian W. Dunham /s/ JOHN D. MURAKAMI Vice President, Chief Financial Officer - ---------------------- (Principal Financial Officer) John D. Murakami /s/ WAYNE B. KINGSLEY Director - ---------------------- Wayne B. Kingsley /s/ NEIL R. THORNTON Director - ---------------------- Neil R. Thornton /s/ VERN B. RYLES, JR. Director - ---------------------- Vern B. Ryles, Jr. /s/ WARREN K KEARNS Director - ---------------------- Warren K. Kearns 17
REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders and Board of Directors Northwest Pipe Company We have audited the accompanying consolidated balance sheets of Northwest Pipe Company and Subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Northwest Pipe Company and Subsidiaries as of December 31, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. Coopers & Lybrand L.L.P. Portland, Oregon February 7, 1998, except for Note 18, for which the date is March 6, 1998 F-1
NORTHWEST PIPE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (DOLLAR AND SHARE AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) <TABLE> <CAPTION> Year Ended December 31, -------------------------------------------------- 1997 1996 1995 ------------- -------------- ------------ <S> <C> <C> <C> Net sales $ 150,833 $ 135,182 $ 97,715 Cost of sales 119,716 104,240 78,139 ------------- -------------- ------------ Gross profit 31,117 30,942 19,576 Selling, general and administrative expenses 11,382 11,530 7,798 ------------- -------------- ------------ Operating income 19,735 19,412 11,778 Interest expense 1,616 1,961 2,839 Interest expense to related parties 201 228 609 ------------- -------------- ------------ Income before income taxes 17,918 17,223 8,330 Provision for income taxes 6,818 6,819 3,223 ------------- -------------- ------------ Net income $ 11,100 $ 10,404 $ 5,107 ------------- -------------- ------------ ------------- -------------- ------------ Basic earnings per share $ 1.73 $ 1.92 $ 6.11 ------------- -------------- ------------ ------------- -------------- ------------ Diluted earnings per share $ 1.68 $ 1.85 $ 1.44 ------------- -------------- ------------ ------------- -------------- ------------ Shares used in per share calculations: Basic 6,405 5,408 836 ------------- -------------- ------------ ------------- -------------- ------------ Diluted 6,622 5,631 3,675 ------------- -------------- ------------ ------------- -------------- ------------ </TABLE> The accompanying notes are an integral part of these consolidated financial statements. F-2
NORTHWEST PIPE COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollar amounts in thousands) <TABLE> <CAPTION> December 31, December 31, 1997 1996 --------------- ------------- <S> <C> <C> ASSETS Current assets: Cash and cash equivalents $ 904 $ 4,302 Trade receivables, less allowance for doubtful accounts of $1,825 and $1,680 25,162 23,222 Costs and estimated earnings in excess of billings on uncompleted contracts 19,914 10,750 Inventories 20,530 20,484 Refundable income taxes 3,307 - Deferred income taxes 447 3,051 Prepaid expenses and other 1,402 1,289 --------------- ------------- Total current assets 71,666 63,098 Property and equipment, net 57,447 37,469 Restricted assets 2,300 - Other assets 638 857 --------------- ------------- $ 132,051 $ 101,424 --------------- ------------- --------------- ------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Note payable to financial institution $ 7,000 $ 7,302 Current portion of long-term debt 250 2,100 Current portion of capital lease obligations 2,175 424 Accounts payable 8,116 9,930 Accrued liabilities 3,074 7,605 --------------- ------------- Total current liabilities 20,615 27,361 Long-term debt, less current portion 38,490 10,050 Capital lease obligations, less current portion 1,454 1,760 Capital lease obligations due to related party, less current portion - 2,546 Minimum pension liability 294 - Deferred income taxes 419 13 --------------- ------------- Total liabilities 61,272 41,730 Commitments and contingencies (Notes 8 and 13) Stockholders' equity: Preferred stock, $.01 par value, 10,000,000 shares authorized, none issued or outstanding - - Common stock, $.01 par value, 15,000,000 shares authorized, 6,411,402 and 6,388,986 shares issued and outstanding 64 64 Additional paid-in-capital 38,725 38,546 Retained earnings 32,277 21,177 Minimum pension liability (287) (93) --------------- ------------- Total stockholders' equity 70,779 59,694 --------------- ------------- $ 132,051 $ 101,424 --------------- ------------- --------------- ------------- </TABLE> The accompanying notes are an integral part of these consolidated financial statements. F-3
NORTHWEST PIPE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DOLLAR AMOUNTS IN THOUSANDS) <TABLE> <CAPTION> COMMON STOCK ----------------------------------------------------------- Class A Class B Additional Minimum Total -------------- --------------- Paid in Retained Pension Stockholders' Shares Amount Shares Amount Shares Amount Capital Earnings Liability Equity ---------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> Balances at December 31, 1994 448,394 $ 5 248,609 $ 3 $ 5,845 $ 5,666 $ 11,519 Net income Conversion of Class A 5,107 5,107 to common stock (448,394) (5) 448,394 $ 5 Conversion of Class B to common stock (248,609) (3) 248,609 3 Conversion of Series B and Series C Subor- dinated debt to common stock 2,629,296 26 2,464 2,490 Proceeds from sale of common stock, net of issuance costs of $1,558 1,932,000 19 14,594 14,613 ---------------------------------------------------------------------------------------------------------- Balances at December 31, 1995 - - - - 5,258,299 53 22,903 10,773 33,729 Net income 10,404 10,404 Issuance of common stock under stock option plans 59,069 1 65 66 Repurchase of common stock (174) (2) (2) Tax benefit of stock options exercised 238 238 Proceeds from sale of common stock, net of issuance costs of $400 1,071,792 10 15,249 15,259 Reclassification 93 (93) ---------------------------------------------------------------------------------------------------------- Balances at December 31, 1996 - - - - 6,388,986 64 38,546 21,177 (93) 59,694 Net income 11,100 11,100 Issuance of common stock under stock option plans 22,416 - 49 49 Minimum pension liability (194) (194) adjustment Tax benefit of stock options exercised 130 130 ---------------------------------------------------------------------------------------------------------- Balances at December 31, 1997 - - - - 6,411,402 $64 $38,725 $32,277 $(287) $70,779 ---------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------- </TABLE> The accompanying notes are an integral part of these consolidated financial statements F-4
NORTHWEST PIPE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLAR AMOUNTS IN THOUSANDS) <TABLE> <CAPTION> Year Ended December 31, --------------------------------- 1997 1996 1995 -------- -------- -------- <S> <C> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 11,100 $ 10,404 $ 5,107 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization 2,242 2,022 1,362 Provision for doubtful accounts 145 813 296 Deferred income tax provision 3,010 3 1,070 Changes in current assets and liabilities: Trade receivables (2,085) 1,106 (2,629) Costs and estimated earnings in excess of billings on uncompleted contracts (9,164) 1,031 (7,079) Inventories (46) (6,358) 2,336 Refundable income taxes (3,307) - - Prepaid expenses and other (113) 405 280 Accounts payable (1,814) (2,860) 2,048 Accrued and other liabilities (4,301) 389 962 -------- -------- -------- Net cash (used in) provided by operating activities (4,333) 6,955 3,753 CASH FLOWS FROM INVESTING ACTIVITIES: Additions to property and equipment (20,351) (6,680) (2,556) Acquisition, net of cash acquired - (10,587) - Other assets (2,081) 96 148 -------- -------- -------- Net cash used in investing activities (22,432) (17,171) (2,408) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from sale of common stock 49 15,323 14,613 Proceeds from long-term debt 35,000 - - Payments on long-term debt (8,410) (3,286) (7,174) Net proceeds (payments) under notes payable (302) 1,845 (8,128) Payments on capital lease obligations (299) (106) (88) Payments on capital lease obligations to related party (2,671) (115) (106) -------- -------- -------- Net cash provided by (used in) financing activities 23,367 13,661 (883) -------- -------- -------- Net (decrease) increase in cash and cash equivalents (3,398) 3,445 462 Cash and cash equivalents, beginning of period 4,302 857 395 -------- -------- -------- Cash and cash equivalents, end of period $ 904 $ 4,302 $ 857 -------- -------- -------- -------- -------- -------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for: Interest $ 2,157 $ 1,969 $ 4,009 Income taxes 6,741 7,901 1,274 SUPPLEMENTAL DISCLOSURE OF NON-CASH INFORMATION: Tax benefit of nonqualified stock options exercised $ 130 $ 238 $ - Long-term debt converted to common stock - - 2,490 Capital lease obligations incurred 1,869 - 62 Acquisition: Fair value of assets acquired $ - $ 27,403 $ - Fair value of liabilities assumed - 16,816 - </TABLE> The accompanying notes are an integral part of these consolidated financial statements. F-5
NORTHWEST PIPE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN THOUSANDS, EXCEPT FOR PER SHARE AMOUNTS) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: The consolidated financial statements include the accounts of Northwest Pipe Company and its wholly owned subsidiaries (the "Company"). All significant intercompany balances have been eliminated. The Company manufactures steel pipe in two business groups at plants located in Portland, Oregon; Denver, Colorado; Adelanto, California; Atchison, Kansas and Riverside, California. CASH AND CASH EQUIVALENTS Cash and cash equivalents consist of cash and short term highly liquid investments with remaining maturities of three months or less when purchased. INVENTORIES Inventories are stated at the lower of cost or market. Finished goods are stated at standard cost which approximates the first-in, first-out method of accounting. Raw material inventories of steel coil are stated at cost on a specific identification basis. Raw material inventories of coating and lining materials, as well as materials and supplies, are stated on an average cost basis. PROPERTY AND EQUIPMENT Property and equipment, including land, buildings and equipment under capital leases, are stated at cost. Maintenance and repairs are expensed as incurred and costs of improvements and renewals, including capitalized interest, are capitalized. Depreciation and amortization are determined by the straight-line method based on the estimated useful lives of the related assets. Upon disposal, costs and related accumulated depreciation of the assets are removed from the accounts and resulting gains or losses are reflected in operations. The Company leases land, buildings and equipment under long-term capital leases, which are being amortized on a straight-line basis over estimated useful lives. Estimated useful lives by major classes of property and equipment are as follows: <TABLE> <S> <C> Land improvements 20 years Buildings 30 years Equipment 5-18 years </TABLE> REVENUE RECOGNITION Revenue from construction contracts in the Company's Water Transmission business group is recognized on the percentage-of-completion method, measured by the percentage of total costs incurred to date to the estimated total costs of each contract. Contract costs include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs and depreciation. Selling, general and administrative costs are charged to expense as incurred. Provisions for losses on uncompleted contracts are made in the period such losses are known. Changes in job performance, job conditions and estimated profitability, including those arising from contract penalty provisions, and final contract settlements may result in revisions to costs and income and are recognized in the period in which the revisions are determined. Revenue from the Company's Tubular Products business group is recognized when products are shipped. F-6
INCOME TAXES The Company records deferred income tax assets and liabilities based upon the difference between the financial statement and income tax bases of assets and liabilities using enacted income tax rates. Valuation allowances are established when necessary to reduce deferred income tax assets to the amount expected to be realized. Income tax expense is the tax payable for the period and the change during the period in net deferred income tax assets and liabilities. EARNINGS PER SHARE In February 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share" ("SFAS 128"), which supersedes APB Opinion No. 15 and specifies the computation, presentation and disclosure requirements for earnings per share. The Company adopted the provisions of SFAS 128 for the year ended December 31, 1997, which required the restatement of all previously reported per share amounts. As it relates to the Company, the principal differences between the provisions of SFAS 128 and previous authoritative pronouncements are exclusion of common stock equivalents in the determination of Basic Earnings Per Share and the market price at which common stock equivalents are calculated in the determination of Diluted Earnings Per Share. Basic earnings per common share is computed using the weighted average number of shares of common stock outstanding for the period. Diluted earnings per common share is computed using the weighted average number of shares of common stock and dilutive common equivalent shares outstanding during the year, and using the assumption that conversion of the Series B and Series C Convertible Subordinated Debentures and the Company's November 1995 initial public offering occurred as of the beginning of 1995. CONCENTRATIONS OF CREDIT RISK Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of trade receivables. Trade receivables are with a large number of customers, including municipalities, manufacturers, distributors and contractors, dispersed across a wide geographic base. FAIR VALUE OF FINANCIAL INSTRUMENTS The fair value of financial instruments are the amounts at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. The carrying amounts reflected in the consolidated balance sheets for cash and cash equivalents, trade receivables, other current assets and current liabilities approximate fair value because of the short maturity for these instruments. The fair value approximates the carrying value of the Company's borrowings under its long-term arrangements based upon interest rates available for the same or similar loans. IMPAIRMENT OF LONG-LIVED ASSETS SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", establishes criteria for and requires recognition of impairment losses on long-lived assets. SFAS 121 also prescribes the accounting for long-lived assets that are expected to be disposed of in future periods. The Company adopted SFAS 121 in 1996. The adoption of this standard did not have any effect on the consolidated financial statements of the Company. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. F-7
SEGMENTS Water Transmission products are custom manufactured in accordance with project specifications. These products are used primarily for high pressure water transmission pipelines in the United States and Canada. Water Transmission products are manufactured in Portland, Oregon; Denver, Colorado; Adelanto, California, and Riverside, California and are sold primarily to public water agencies either directly or through an installation contractor. A substantial portion of the Company's Water Transmission revenue is derived from sales to installation contractors for public water transmission projects. As such, the Company's sales could be adversely impacted by a decline in the projects planned by public water agencies, governmental spending cuts, general budgetary constraints or the inability of governmental entities to issue debt. Tubular Products are manufactured in the Company's Portland, Oregon and Atchison, Kansas facilities. Tubular Products are marketed through a network of direct sales force personnel and independent distributors throughout the United States and Canada. These products are used for a variety of construction, agricultural and industrial purposes. RECLASSIFICATIONS Certain 1996 balances have been reclassified to conform with the 1997 presentation. The reclassifications had no impact on previously reported net income. RECENT ACCOUNTING PRONOUNCEMENTS In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income" ("SFAS 130"), which establishes requirements for disclosure of comprehensive income. The objective of SFAS 130 is to report a measure of all changes in equity that result from transactions and economic events other than transactions with owners. Comprehensive income is the total of net income and all other non-owner changes in equity. SFAS 130 is effective for fiscal years beginning after December 15, 1997. Reclassification of earlier financial statements for comparative purposes is required. Also in June 1997, the FASB issued SFAS No. 131 "Disclosures about Segments of an Enterprise and Related Information", which will change the way public companies report information about segments of their business in their annual financial statements and requires them to report selected segment information in their quarterly reports issued to shareholders. It also requires entity-wide disclosures about the products and services an entity provides, the material countries in which it holds assets and reports revenues and its major customers. This Statement is effective for fiscal years beginning after December 15, 1997. In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits", which revises employers' disclosures about pension and other postretirement benefit plans. It does not change the measurement or recognition of those plans. The statement suggests combined formats for presentation of pension and other postretirement benefit disclosures and is effective for fiscal years beginning after December 15, 1997. The Company's management has studied the implications of SFAS 130, SFAS 131 and SFAS 132, and based on the initial evaluation, expects the adoption to have no impact on the Company's financial condition or results of operations, but will require revised disclosures in 1998. F-8
2. ACQUISITION: In May 1996, the Company acquired Thompson Pipe and Steel Company ("Thompson Pipe and Steel"), a manufacturer of water transmission pipe headquartered in Denver, Colorado (the "Acquisition"). The Company purchased of all of the issued and outstanding capital stock of Thompson Pipe and Steel from Inter-City Products Corporation, a corporation based in Toronto, Canada, and its affiliates ("ICP") for approximately $6.1 million in cash. The principal assets acquired by the Company in the Acquisition were steel pipe manufacturing facilities located in Denver, Colorado and Princeton, Kentucky. The Kentucky manufacturing facility was closed by Thompson Pipe and Steel in 1995. The Company intends to continue operating the manufacturing facility in Denver, Colorado, and intends to dispose of the manufacturing facility located in Princeton, Kentucky. In December 1996, the Company acquired, from California Steel Pressure Pipe Company, certain assets of its Riverside, California plant for approximately $6.4 million in cash. The Riverside, California plant was closed in December 1996 by California Steel Pressure Pipe Company. In January 1997, the Company began producing smaller diameter water transmission pipe at the Riverside plant, and managing this facility from its Adelanto, California facility. The principal assets acquired by the Company in the acquisition were trade receivables, inventory, and machinery and equipment. The acquisitions were accounted for using the purchase method of accounting, which requires that the purchase price be allocated to the net assets acquired based upon the relative fair value of assets acquired. The accompanying consolidated financial statements include the results of operations from the dates of acquisition. 3. COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS ON UNCOMPLETED CONTRACTS: <TABLE> <CAPTION> December 31, 1997 1996 ------- -------- <S> <C> <C> Costs incurred on uncompleted contracts $54,572 $ 41,944 Estimated earnings 11,804 9,588 ------- -------- 66,376 51,532 Less billings to date (46,462) (40,782) ------- -------- $19,914 $ 10,750 ------- -------- ------- -------- </TABLE> Costs and estimated earnings in excess of billings on uncompleted contracts represents revenue earned under the percentage of completion method but not billable based on the terms of the contracts. These amounts are billed based on the terms of the contracts which include achievement of milestones, partial shipments or completion of the contracts. F-9
4. INVENTORIES: <TABLE> <CAPTION> December 31, 1997 1996 -------- ------- <S> <C> <C> Finished goods $ 5,854 $ 6,564 Raw materials 12,809 12,449 Materials and supplies 1,867 1,471 -------- ------- $20,530 $20,484 -------- ------- -------- ------- </TABLE> 5. PROPERTY AND EQUIPMENT: <TABLE> <CAPTION> December 31, 1997 1996 -------- -------- <S> <C> <C> Land and improvements $ 6,461 $ 4,534 Buildings 12,762 11,424 Equipment 34,063 33,418 Property and equipment under capital leases 3,232 3,452 Construction in progress 24,608 6,078 -------- -------- 81,126 58,906 Less accumulated depreciation and amortization (23,679) (21,437) -------- -------- $ 57,447 $ 37,469 -------- -------- -------- -------- </TABLE> Accumulated amortization associated with property and equipment under capital leases was $106 and $577 at December 31, 1997, and 1996, respectively. 6. NOTE PAYABLE TO FINANCIAL INSTITUTION: The Company had, at December 31, 1997, a $25.0 million line of credit. The Company had available borrowing capacity of $15.5 million at December 31, 1997 under this line of credit. The line of credit agreement expires in October 2000 and is without collateral. The line of credit bears interest at rates related to IBOR or LIBOR plus 0.65% (6.275% at December 31, 1997), or at prime less 0.5% (8.5% at December 31, 1997). At December 31, 1997, the Company had $7.0 million outstanding under the line of credit at a weighted average IBOR interest rate of 6.534%. (See Note 18) The Company had $7.3 million outstanding at December 31, 1996 under a line of credit with interest at prime plus 1.0% (9.25% at December 31, 1996). F-10
7. LONG-TERM DEBT: <TABLE> <CAPTION> December 31, 1997 1996 -------- -------- <S> <C> <C> Industrial Development Bonds, issued in accordance with Internal Revenue Code Section 144(a), variable interest (3.85% and 4.55% at December 31, 1997 and 4.05% and 3.99% at December 31, 1996) payable monthly; annual principal payments of $250, collateralized by property and equipment and guaranteed by an irrevocable letter of credit from a bank $ 3,740 $ 3,990 Notes payable to Senior Lender - 8,100 Senior Notes, due in annual payments of $5.0 million beginning November 15, 2001, plus interest at 6.87% paid semi-annually, on May 15 and November 15, without collateral 35,000 - Other - 60 -------- -------- Total long-term debt $ 38,740 $ 12,150 -------- -------- -------- -------- Amounts are displayed on the consolidated balance sheet as follows: Current portion of long-term debt $ 250 $ 2,100 Long-term debt, less current portion 38,490 10,050 -------- -------- $ 38,740 $ 12,150 -------- -------- -------- -------- </TABLE> In November 1997, the Company issued $35.0 million of 6.87% Senior Notes (the "Notes"). Proceeds received under the Notes were used to reduce amounts outstanding under the Company's line of credit. The Notes require semi-annual interest payments in November and May, and equal annual principal payments commencing on November 15, 2001 and continuing every year thereafter until final maturity on November 15, 2007. The Company is required to maintain certain financial ratios under its loan agreements. As of December 31, 1997, the most restrictive of these are a requirement to maintain maximum funded debt, as defined, to earnings before interest, taxes, depreciation and amortization of 3.0 to 1.0 and a requirement to maintain a debt service coverage ratio of 2.0 to 1.0. (See Note 18) F-11
Future principal payments are as follows: <TABLE> <S> <C> 1998 $ 250 1999 250 2000 250 2001 5,740 2002 5,250 Thereafter 27,000 -------- $38,740 -------- -------- </TABLE> Interest expense of $1,817 is net of amounts capitalized of $707 in 1997. All interest costs incurred in 1996 and 1995 have been expensed. 8. LEASES: CAPITAL LEASES The Company leases land, buildings and improvements at its Kentucky and Riverside, California facilities. In addition, the Company has other capital leases for office and manufacturing equipment. The future minimum lease payments under these capital leases, and the present value of the minimum lease payments as of December 31, 1997 are as follows: <TABLE> <S> <C> 1998 $2,385 1999 306 2000 249 2001 240 2002 231 Thereafter 639 ------ Total minimum lease payments 4,050 Less amount representing interest 421 ------ Present value of minimum lease payments including current maturities of $2,175, with interest rates ranging from 4.55% to 11.25% $3,629 ------ ------ </TABLE> OPERATING LEASES The Company has entered into various equipment leases with terms of five years or less. Total rental expense for 1997, 1996 and 1995 was $1,323, $1,060 and $789, respectively. Future minimum payments for operating leases with initial or remaining terms in excess of one year are: <TABLE> <S> <C> 1998 $ 454 1999 295 2000 160 2001 140 2002 61 ------ $1,110 ------ ------ </TABLE> F-12
9. RELATED PARTY TRANSACTIONS: Multnomah Land & Equipment ("Multnomah") is a partnership in which a director of the Company is a general partner. In a previous year, the Company entered into two separate agreements to lease a pipe manufacturing facility and equipment from Multnomah. The amounts paid under these lease agreements were $315, $344, and $344 for 1997, 1996 and 1995, respectively. The Company exercised its option to acquire the pipe manufacturing facility in December 1997 for $2,557, in accordance with the terms of the agreement. 10. RETIREMENT PLANS: The Company has a defined contribution retirement plan covering substantially all of its employees. Total expense in 1997, 1996 and 1995 amounted to $412, $422 and $230, respectively. The Company matches up to 50% of employee contributions to the plan, subject to certain limitations. Thompson Pipe and Steel has two noncontributory defined benefit plans which cover substantially all employees. Benefits under the union pension plan are based upon a flat benefit formula, while benefits under the salaried benefit plan are based upon a final pay formula. The funding policy for each plan is based on current plan costs plus amortization of the unfunded plan liability. 11. CAPITAL STOCK: On July 28, 1995, the Board of Directors amended and restated the Company's Articles of Incorporation subject to approval by the stockholders of the Company. The revised articles, among other things, redesignated the Class A and Class B common stock of the Company as Common Stock, authorized a 0.858-for-1 reverse stock split of each outstanding share of Common Stock, increased the authorized capital stock of the Company to 15,000,000 shares of Common Stock and 10,000,000 shares of Preferred Stock, authorized the Board of Directors to issue blank check Preferred Stock, and provided for the classification of the Board of Directors into three classes with staggered terms. The Board of Directors, with stockholder approval, also authorized and approved the 1995 Stock Incentive Plan and the reservation of 429,000 shares of Common Stock after the stock split noted above for issuance thereunder, and the 1995 Stock Option Plan for Nonemployee Directors and the reservation of 100,000 shares of Common Stock (after the stock split) for issuance thereunder. On April 10, 1997, the stockholders authorized the reservation of an additional 200,000 shares of Common Stock for issuance under the 1995 Stock Incentive Plan. All share and per share amounts have been restated to retroactively reflect the aforementioned reverse stock split. On November 30, 1995, the Company completed an initial public offering (IPO) of 1,932,000 shares of common stock, including over allotments. In conjunction with the IPO, all of the Company's outstanding Series B and Series C Convertible Subordinated Debentures were converted into a total of 2,629,296 shares of the Company's Common Stock. On November 14, 1996, the Company completed a public offering of 2,300,000 shares of common stock, including over allotments; 1,071,792 shares were sold by the Company and 1,228,208 were sold by certain of the selling shareholders of the Company. 12. STOCK-BASED COMPENSATION PLANS The Company has two stock compensation plans for employees and directors. The 1995 Stock Incentive Plan provides for the grant of incentive options at an exercise price which is 100 percent of the fair value of the Company's stock on the date of grant. The 1995 Stock Option Plan for Nonemployee Directors provides for the grant of nonqualified options at an exercise price which is not less than 100 percent of the fair value on the grant date. The plans provide that options become exercisable according to vesting schedules which range from immediate to five years. Options terminate 10 years from the date of grant. F-13
There were 407,034, 362,534 and 382,001 shares of common stock reserved under the Company's stock compensation plans at December 31, 1997, 1996 and 1995, respectively. A summary of status of the Company's stock options as of December 31, 1997, 1996 and 1995 and changes during the year ended on those dates is presented below: <TABLE> <CAPTION> Exercise Price ---------------------------- Options Range -------- --------------- <S> <C> <C> Balance, December 31, 1994 173,414 $0.87 - 1.00 Options granted 146,999 4.78 -------- --------------- Balance, December 31, 1995 320,413 0.87 - 4.78 Options granted 20,000 11.50 - 17.125 Options exercised (59,069) 0.90 - 4.78 Options canceled (534) 4.78 -------- --------------- Balance, December 31, 1996 280,810 0.87 - 17.125 Options granted 155,500 15.75 - 18.875 Options exercised (22,416) 0.90 - 4.78 Options canceled - - -------- --------------- Balance, December 31, 1997 413,894 $0.87 - $18.875 -------- --------------- -------- --------------- </TABLE> The weighted average grant date fair value of options granted during the years ended December 31, 1997, 1996 and 1995 was $18.60, $14.19 and $4.78, respectively. The following table summarizes information about stock options outstanding at December 31, 1997: <TABLE> <CAPTION> Options Outstanding Options Exercisable - -------------------------------------------------------------- ------------------------- Weighted Weighted Weighted Average Average Average Range of Remaining Exercise Exercise Exercise Prices Number of Contractual Price Number of Price Per Share Options Life (years) Per Share Options Per Share - ----------------- ----------- ------------- ---------- ---------- --------- <S> <C> <C> <C> <C> <C> $0.87 - $1.00 102,195 4.04 $ 0.95 102,195 $ 0.95 $4.78 136,199 7.47 4.78 74,894 4.78 $11.50 - $15.75 20,000 8.68 13.64 12,165 14.53 $17.13 - $18.88 155,500 8.95 18.67 32,645 18.35 ----------- ---------- Totals 413,894 221,899 ----------- ---------- ----------- ---------- </TABLE> The following are the options exercisable at the corresponding weighted average exercise price at December 31, 1997, 1996 and 1995, respectively: 221,899 at $5.55; 183,978 at $2.95; and 207,199 at $1.57. SFAS No. 123, "Accounting for Stock-Based Compensation" was issued by the FASB in 1995 and, if fully adopted, changes the methods for the recognition of cost related to stock option plans. Adoption of SFAS 123 is optional. As a result, the Company continues to apply APB opinion No. 25 and related interpretations in accounting for its plans. However, in accordance with SFAS 123, pro forma disclosures as if the Company adopted the cost recognition requirements under SFAS 123 are presented below. F-14
The fair value of each option granted in 1997, 1996 and 1995 was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: <TABLE> <CAPTION> Year Ended December 31, ------------------------------------------------------- 1997 1996 1995 ------------ ----------- ------------ <S> <C> <C> <C> Risk-free interest rate 6.12% -6.61% 5.23%-6.46% 5.92%-6.17% Expected dividend yield 0% 0% 0% Expected volatility 24.70% 19.48% 19.48% Expected lives five years five years five years </TABLE> Had the Company used the fair value methodology for determining compensation expense, the Company's net income and earnings per share would approximate the pro forma amounts below (in thousands except per share data): <TABLE> <CAPTION> Year Ended December 31, ------------------------------------------------------- 1997 1996 1995 ------------ ----------- ------------ <S> <C> <C> <C> Net income - as reported $11,100 $10,404 $5,107 Net income - pro forma 10,507 10,350 4,975 Diluted earnings per share - as reported 1.68 1.85 1.44 Diluted earnings per share - pro forma 1.59 1.84 1.35 </TABLE> The effect of applying SFAS 123 in this pro forma disclosure is not indicative of future amounts. 13. COMMITMENTS AND CONTINGENCIES: ENVIRONMENTAL MATTERS GENERAL. The Company operates under numerous governmental permits and licenses relating to air emissions and water discharges, storm water run-off, workplace safety and other matters. The Company is not aware of any current violations or citations relating to any of these permits or licenses. The Company has a policy of reducing use and consumption of hazardous materials in its operations by substituting non-hazardous materials when possible. The Company has completed discussions with the Oregon Department of Environmental Quality ("DEQ") with respect to the reporting requirements for calculating emissions of volatile organic compounds ("VOCs") from pipe coating and lining operations at its Portland, Oregon facility. The Company and DEQ have resolved the emissions calculation issues pursuant to a Mutual Agreement and Order ("MAO") dated October 4, 1995 and amended June 20, 1997. Pursuant to the MAO, the Company was required to periodically report its progress in finding alternative coatings that comply with the VOC content levels allowed by Condition 4 of the Company's air permit. The MAO as amended also required the Company to be in full compliance with this Condition 4 by January 1, 1998, or to have submitted an application for an alternative emission limit. In December, 1997, the Company submitted a report to DEQ confirming its compliance with Condition 4. The DEQ has indicated informally that it is satisfied with the Company's compliance progress. DEQ will initiate formal acknowledgment that the terms of the MAO have been fully satisfied. SUPERFUND SITE. The Company has been identified as one of four potentially responsible parties with potential liability for a Superfund site in Clackamas, Oregon (the "Site"). In October 1995, the Company filed a complaint F-15
seeking a declaratory judgment from the Bankruptcy Court that any claims with respect to liability for the costs of the Response Activities at the Site were discharged by the Bankruptcy Court's confirmation of the Company's Plan of Reorganization (the "Plan"). In September 1996, the Company entered into mediation with the U.S. Environmental Protection Agency (the "EPA") and the Oregon Department of Environmental Quality (the "ODEQ") (collectively, the "Agencies"). As a result of the mediation process, the Company and the Agencies entered into an agreement in principle with respect to a proposed settlement of the litigation (the "Settlement Agreement"). Pursuant to the Settlement Agreement, the Company and the Agencies prepared a consent decree which embodies the terms of the Settlement Agreement (the "Consent Decree"). The Consent Decree was entered by the Bankruptcy Court on July 22, 1997. The Consent Decree relating to the portion of the Site that is vacant (the "Hall Property"), which provides for the transfer of title to the Hall Property to the Agencies, and upon which the effectiveness of the Consent Decree was conditioned, was entered by the United States District Court on August 19, 1997. Under the terms of the Consent Decree, the Company on August 22, 1997 paid the Agencies $1.0 million and deposited an additional $2.3 million in an escrow account or cash escrow (the "Cash Escrow"), with the interest income on the Cash Escrow to be distributed to the EPA. The Consent Decree provides that the EPA will complete construction of the remedial action at the Site in accordance with its standards and will have the right to sell the Hall Property at any time during the clean-up process and for one year thereafter. If the Hall Property is sold by the Agencies, the $2.3 million held in the Cash Escrow will be returned to the Company. Once construction of the remedial action has been completed as evidenced by issuance of Remedial Action Reports (or their equivalents) and a Preliminary Close Out Report, and the Hall Property is usable for a "reasonable commercial or industrial use," the Agencies will have the option to continue to market the Hall Property for one year. If the Hall Property is not sold during this period, the Company believes the Agencies will elect to have the Hall Property conveyed to the Company in exchange for the $2.3 million held in the Cash Escrow. The Company would then be required to market the Hall Property for another year. If the Hall Property sells within one year thereafter, fifty percent of any net proceeds in excess of $2.3 million would be paid to the EPA. If the Company takes title to the Hall Property, the Agencies will provide a "Prospective Purchaser Agreement" for use by the Company at its option and for use by the Company's eligible successors in interest. The EPA would specify that any eligible prospective purchaser of the Hall Property would not be liable for any past environmental contamination or any ongoing remediation resulting from past operations at the Site. If the Company elects not to take ownership of the Hall Property, the Agencies would retain the $2.3 million held in Cash Escrow. If the Agencies are unable to complete construction of the remedial action and clean up soils so that the Hall Property can be used for a reasonable commercial or industrial use within ten years, they would be required to return the $2.3 million held in the Cash Escrow to the Company. The Consent Decree also contains covenants not to sue, reservations of rights, and protection for the Company from third party claims for contribution for environmental clean-up costs at the Site. The Company believes that once the Hall Property is available for a "reasonable commercial or industrial use," it would have a current value in excess of $2.3 million. Consequently, the Company does not believe that the $2.3 million to be held in the Cash Escrow is "impaired" under generally accepted accounting principles. Accordingly, the Company segregated the $2.3 million as a restricted asset on its consolidated balance sheet at December 31, 1997. The Company recorded the $1.0 million payment as an expense in the third quarter of 1996. F-16
LITIGATION In addition to the matters described above, from time to time, the Company is involved in litigation relating to claims arising out of its operations in the normal course of business. The Company maintains insurance coverage against potential claims in amounts which it believes to be adequate. Management believes that it is not presently a party to any litigation, the outcome of which would have a material adverse effect on the Company's business, financial condition, results of operations or cash flows. COMMITMENTS As of December 31, 1997, the Company had outstanding raw material purchase commitments of approximately $16.8 million. 14. INCOME TAXES: The components of the provision for income taxes are as follows: <TABLE> <CAPTION> Year Ended December 31, ------------------------------ 1997 1996 1995 ------ ------ ------ <S> <C> <C> <C> Current: Federal $3,189 $5,394 $1,728 State 619 1,267 425 Deferred: Federal 2,624 136 940 State 386 22 130 ------ ------ ------ $6,818 $6,819 $3,223 ------ ------ ------ ------ ------ ------ </TABLE> The difference between the effective income tax rate and the statutory U.S. Federal income tax rate is explained as follows: <TABLE> <CAPTION> Year Ended December 31, ------------------------------ 1997 1996 1995 ------ ------ ------ <S> <C> <C> <C> Provision at statutory rate $6,092 $5,856 $2,832 State provision, net of federal benefit 896 836 280 Other (170) 127 111 ------ ------ ------ $6,818 $6,819 $3,223 ------ ------ ------ ------ ------ ------ </TABLE> F-17
The tax effect of temporary differences that give rise to significant portions of deferred tax assets and liabilities are presented below: <TABLE> <CAPTION> December 31, ----------------------- 1997 1996 ------- ------- <S> <C> <C> Deferred tax assets: Trade receivables, net $665 Property and equipment $ 730 752 Accrued warranty - 851 Accrued employee benefits 537 425 Inventories 316 453 Accrued environmental settlement - 396 Net operating loss carryforwards 1,763 2,010 Other 57 366 ------- ------- Total deferred tax assets $ 3,403 $ 5,918 ------- ------- ------- ------- Deferred tax liabilities: Trade receivables, net $ (542) $ - Property and equipment, principally due to differences in depreciation and amortization (2,815) (2,862) Other (18) (18) ------- ------- Total deferred tax liabilities (3,375) (2,880) ------- ------- Net deferred tax assets $ 28 $ 3,038 ------- ------- ------- ------- Deferred tax assets and liabilities are included in the consolidated balance sheets as follows: Deferred tax assets - current $ 447 $3,051 Deferred tax liabilities - noncurrent (419) (13) ------- ------- Net deferred tax assets $ 28 $ 3,038 ------- ------- ------- ------- </TABLE> As of December 31, 1997, the Company had approximately $4.5 million of net operating loss carryforwards as a result of the acquisition of Thompson Pipe and Steel which are limited in their use to approximately $338 per year during the 15 year carryforward period which expires in 2011. F-18
15. SEGMENT INFORMATION AND MAJOR CUSTOMERS: Information with respect to the segments of the business is as follows: <TABLE> <CAPTION> Year Ended December 31, ------------------------------------- 1997 1996 1995 -------- -------- ------- <S> <C> <C> <C> Net sales Water Transmission $ 99,317 $ 89,943 $61,215 Tubular Products 51,516 45,239 36,500 -------- -------- ------- $150,883 $135,182 $97,715 -------- -------- ------- -------- -------- ------- Identifiable assets Water Transmission $ 86,219 $ 69,576 $46,401 Tubular Products 37,813 24,267 14,755 Corporate 8,019 7,581 3,298 -------- -------- ------- $132,051 $101,424 $64,454 -------- -------- ------- -------- -------- ------- Operating income (loss) Water Transmission $ 17,543 $ 18,815 $10,994 Tubular Products 7,942 6,336 5,078 Corporate (5,750) (5,739) (4,294) -------- -------- ------- $ 19,735 $ 19,412 $11,778 -------- -------- ------- -------- -------- ------- Capital expenditures Water Transmission $ 8,235 $ 1,898 $ 1,256 Tubular Products 12,898 4,619 1,242 Corporate 1,087 163 120 -------- -------- ------- $ 22,220 $ 6,680 $ 2,618 -------- -------- ------- -------- -------- ------- Depreciation and amortization expense Water Transmission $1,781 $1,606 $ 1,020 Tubular Products 387 351 242 Corporate 74 65 100 -------- -------- ------- $2,242 $2,022 $ 1,362 -------- -------- ------- -------- -------- ------- </TABLE> No one customer represented over 10% of total sales in 1997 or 1996. During 1995 sales to one customer represented 12% of total sales. F-19
16. EARNINGS PER SHARE: The following is a reconciliation of the numerators and denominators of the basic and diluted computations of earnings per share. <TABLE> <CAPTION> Per Share Income Shares Amount -------- -------- --------- <S> <C> <C> <C> Year Ended December 31, 1997 - ----------------------------- Basic Earnings per Share: Income available to common shareholders $11,100 6,405 $1.73 --------- --------- Effect of dilutive securities Stock options issuable 217 Diluted Earnings per Share: Income available to common -------- -------- shareholders $11,100 6,622 $1.68 -------- -------- --------- -------- -------- --------- Year Ended December 31, 1996 - ----------------------------- Basic Earnings per Share: Income available to common $10,404 5,408 $1.92 shareholders --------- --------- Effect of dilutive securities Stock options issuable - 223 Diluted Earnings per Share: Income available to common -------- -------- shareholders $10,404 5,631 $1.85 -------- -------- --------- -------- -------- --------- Year Ended December 31, 1995 - ----------------------------- Basic Earnings per Share: Income available to common $ 5,107 836 $6.11 shareholders --------- --------- Effect of dilutive securities Stock options issuable 210 Conversion of Series B and C Subordinated Debentures 2,629 Diluted Earnings per Share: Net income Plus reduction in interest, net related to Series B and C Debentures 178 -------- -------- Income available to common Shareholders $ 5,285 3,675 $1.44 -------- -------- --------- -------- -------- --------- </TABLE> F-20
17. QUARTERLY DATA (UNAUDITED): Summarized quarterly financial data for 1997 and 1996 is as follows: <TABLE> <CAPTION> First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- <S> <C> <C> <C> <C> 1997 Net sales: Water transmission $25,744 $22,482 $26,208 $24,883 Tubular products 12,013 14,959 13,531 11,013 ------- ------- ------- ------- Total net sales $37,757 $37,441 $39,739 $35,896 Gross profit: Water transmission $ 5,434 $ 5,639 $ 6,342 $ 5,318 Tubular products 2,076 2,498 2,161 1,649 ------- ------- ------- ------- Total gross profit $ 7,510 $ 8,137 $ 8,503 $ 6,967 Net income $ 2,415 $ 2,962 $ 3,299 $ 2,424 Earnings per share: Basic $0.38 $ 0.46 $ 0.51 $ 0.38 Diluted $0.37 $ 0.45 $ 0.50 $ 0.36 1996 Net sales: Water transmission $20,807 $20,877 $25,518 $22,741 Tubular products 10,164 12,241 12,842 9,992 ------- ------- ------- ------- Total net sales $30,971 $33,118 $38,360 $32,733 Gross profit: Water transmission $ 5,375 $ 5,339 $ 6,462 $ 6,182 Tubular products 2,006 2,145 1,908 1,525 ------- ------- ------- ------- Total gross profit $ 7,381 $ 7,484 $ 8,370 $ 7,707 Net income $ 2,769 $ 2,600 $ 2,677 $ 2,358 Earnings per share: Basic $ 0.53 $ 0.49 $ 0.51 $ 0.41 Diluted $ 0.50 $ 0.47 $ 0.49 $ 0.39 </TABLE> 18. SUBSEQUENT EVENTS: On March 6, 1998, the Company acquired all of the outstanding capital stock of Southwestern Pipe, Inc. ("Southwestern") and P&H Tube Corporation ("P&H"), both Texas corporations. The Company paid a purchase price of $40.1 million in cash, which is subject to a post-closing adjustment based upon changes in the working capital from February 28, 1998 to the closing date and the amount of outstanding indebtedness of the purchased companies at the closing date. The principal business of both Southwestern and P&H is the manufacture and sale of structural and mechanical tubing products. Southwestern owns and operates a manufacturing facility in Houston, Texas. P&H Tube owns and operates a manufacturing facility in Bossier City, Louisiana. The Company will F-21
continue to operate the acquired plant, equipment and other property for the same purpose, and will operate each of the companies as separate wholly owned subsidiaries of the Company. On March 6, 1998, the Company amended its line of credit agreement to temporarily increase the line to $55.0 million. Additionally, the restriction associated with the ratio of maximum funded debt to earnings before interest, taxes, depreciation and amortization ("EBITDA") was adjusted for one year from 3.0:1.0 to 3.25:1.0. The total commitment under the line of credit will be reduced to $30.0 million on the earliest of April 15, 1998 or the date that the Company receives the net proceeds from the issuance of senior notes in the amount of at least $20.0 million. The Company expects to issue additional senior notes totaling $40.0 million during the second quarter of 1998 to reduce the amounts borrowed under its line of credit and to reduce the available line of credit. Interest under the amended line of credit agreement is payable at IBOR plus 0.65% to 1.05% (0.65% at March 6, 1998) based on the Company's ratio, as defined, of funded debt to EBITDA. F-22
SCHEDULE II NORTHWEST PIPE COMPANY VALUATION AND QUALIFYING ACCOUNTS (Dollars in thousands) <TABLE> <CAPTION> BALANCE AT CHARGED DEDUCTION BALANCE AT BEGINNING TO PROFIT FROM CLOSE OF OF PERIOD AND LOSS RESERVES PERIOD ---------- --------- --------- ---------- <S> <C> <C> <C> <C> Year ended December 31, 1997: Allowance for doubtful trade receivables $1,680 $266 $121 $1,825 Year ended December 31, 1996: Allowance for doubtful trade receivables $ 867 $921 $108 $1,680 Year ended December 31, 1995: Allowance for doubtful trade receivables $ 571 $427 $131 $ 867 </TABLE> S-1
REPORT OF INDEPENDENT ACCOUNTANTS Our report on the consolidated financial statements of Northwest Pipe Company and Subsidiaries is included on page F-1 of this Form 10-K. In connection with our audits of such financial statements, we have also audited the related financial statement schedule listed in the index on page 15 of this Form 10-K. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. Coopers & Lybrand L.L.P. Portland, Oregon February 7, 1998, except for Note 18, for which the date is March 6, 1998 S-2