SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended
June 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 0-19580
INDUSTRIAL HOLDINGS, INC.
(exact name of registrant as specified in its charter)
TEXAS
(STATE OR OTHER JURISDICTION
OF INCORPORATION OR ORGANIZATION)
76-0289495
(IRS EMPLOYER
IDENTIFICATION NO.)
7135 ARDMORE, HOUSTON, TEXAS 77054
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(713) 747-1025
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (i) 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 (ii) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
At July 29, 1996, there were 3,756,162 shares of Common Stock
outstanding.
<PAGE>
INDUSTRIAL HOLDINGS, INC.
INDEX
PART I FINANCIAL INFORMATION PAGE
NO.
Item 1. Financial Statements
Consolidated Balance Sheets at June 30, 1996
and December 31, 1995 1
Consolidated Statements of Income for
the Quarters ended June 30, 1996 and 1995 2
Consolidated Statements of Income for
the Six Months ended June 30, 1996 and 1995 3
Consolidated Statements of Cash Flows for
the Six Months ended June 30, 1996 and 1995 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 6
PART II OTHER INFORMATION
Item 1. Legal Proceedings 9
Item 2. Changes in Securities (no response required)
Item 3. Defaults upon Senior Securities
(no response required)
Item 4. Submission of Matters to a Vote of
Security Holders 9
Item 5. Other Information (no response required)
Item 6. Exhibits and reports on Form 8-K 9
INDUSTRIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
June 30 December 31
1996 1995
----------- -----------
ASSETS
Current assets:
Cash and equivalents ............................ $ 244,793 $ 428,430
Accounts receivable - trade, net ................ 6,729,562 5,640,253
Inventories ..................................... 9,345,904 7,945,871
Equipment held for sale ......................... 100,000 275,000
Advances to shareholders ........................ 17,436 65,210
Notes receivable, current portion ............... 306,627 259,452
Other current assets ............................ 425,055 267,330
----------- -----------
Total current assets ....................... 17,169,377 14,881,546
Property and equipment, net ........................ 9,683,180 9,125,422
Notes receivable ................................... 1,277,748 1,475,956
Other assets ....................................... 119,458 127,658
Goodwill, net ...................................... 1,875,605 1,882,974
----------- -----------
Total assets ............................... $30,125,368 $27,493,556
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable ................................... $ 6,668,030 $ 6,688,570
Accounts payable - trade ........................ 5,688,520 4,748,339
Accrued expenses and other ...................... 914,015 1,213,176
Current portion of long-term debt ............... 988,851 772,858
----------- -----------
Total current liabilities .............. 14,259,416 13,422,943
Long-term debt, less current portion ............... 5,001,834 5,890,849
Deferred income taxes payable ...................... 863,227 576,771
----------- -----------
Total liabilities .......................... 20,124,477 19,890,563
----------- -----------
Shareholders' equity:
Common stock, $.01 par value, 7,500,000
shares authorized 3,641,162 and 3,091,162
shares issued and outstanding ............. 36,412 30,912
Additional paid-in capital ...................... 9,389,994 7,553,662
Retained earnings ............................... 574,485 18,419
----------- -----------
Total shareholders' equity ................. 10,000,891 7,602,993
----------- -----------
Total liabilities and shareholders' equity ......... $30,125,368 $27,493,556
=========== ===========
See notes to consolidated financial statements.
1
INDUSTRIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Quarter ended June 30
1996 1995
------------ ------------
Sales ...................................... $ 13,612,320 $ 9,316,893
Cost of sales .............................. 10,639,739 7,167,823
------------ ------------
Gross profit ............................... 2,972,581 2,149,070
Operating expenses
Selling, general and administrative ..... 2,089,506 1,661,627
Depreciation and amortization ........... 95,244 99,396
------------ ------------
Total operating expenses ........... 2,184,750 1,761,023
Income from operations ..................... 787,831 388,047
Other income (expenses)
Interest expense ........................ (329,880) (248,648)
Other income ............................ 25,828 36,865
------------ ------------
Total other income (expenses) ...... (304,052) (211,783)
------------ ------------
Income before income taxes ................. 483,779 176,264
Income tax expense ......................... 164,484 23,733
------------ ------------
Net income ................................. $ 319,295 $ 152,531
============ ============
Earnings per share ......................... $ .07 $ .05
============ ============
See notes to consolidated financial statements.
2
INDUSTRIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Six Months ended June 30
1996 1995
------------ ------------
Sales ...................................... $ 25,627,328 $ 19,722,795
Cost of sales .............................. 19,936,905 15,530,349
------------ ------------
Gross profit ............................... 5,690,423 4,192,446
Operating expenses
Selling, general and administrative ..... 4,032,846 3,226,207
Depreciation and amortization ........... 186,868 200,287
------------ ------------
Total operating expenses ........... 4,219,714 3,426,494
Income from operations ..................... 1,470,709 765,952
Other income
Interest expense ........................ (678,221) (486,175)
Other income ............................ 50,031 108,650
------------ ------------
Total other income (expenses) ...... (628,190) (377,525)
Income before income taxes ................. 842,519 388,427
Income tax expense ......................... 286,456 34,341
------------ ------------
Net income ................................. $ 556,063 $ 354,086
============ ============
Earnings per share ......................... $ .14 $ .12
============ ============
See notes to consolidated financial statements.
3
INDUSTRIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Six Months ended June 30
1996 1995
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income ................................................... $ 556,063 $ 354,086
Adjustments to reconcile net income
to net cash provided (used) by operating
activities:
Depreciation and amortization ............................. 641,863 406,776
Deferred income tax provision ............................. 286,456 34,341
Loss on sales of equipment ................................ 7,120
Changes in current assets and liabilities:
Accounts receivable and advances to
shareholders .......................................... (1,050,358) (881,562)
Inventory ............................................... (1,400,033) 81,575
Notes receivable ........................................ 151,033 51,541
Other current assets .................................... (149,525) (178,159)
Accounts payable and accrued expenses ................... 641,020 300,272
----------- -----------
Net cash provided (used) by
operating activities .................................. (323,481) 175,990
Cash flows from investing activities:
Purchase of property and equipment ........................... (932,743) (349,704)
Purchase of Milford .......................................... (19,000)
Additional consideration paid to former
shareholders of LEC ......................................... (99,320) (88,515)
----------- -----------
Net cash used by investing activities .................... (1,051,063) (438,219)
----------- -----------
Cash flows from financing activities:
Net borrowings under revolving
line of credit .............................................. 876,131 285,086
Proceeds from long-term debt ................................. 184,422
Principal payments on notes payable,
long-term debt and capital lease obligations ................ (950,015) (145,886)
Proceeds from issuance of common stock ....................... 1,080,369
----------- -----------
Net cash provided by
financing activities ............................... 1,190,907 139,200
----------- -----------
Net decrease in cash and equivalents ............................ (183,637) (123,029)
Cash and equivalents, beginning of period ....................... 428,430 188,627
----------- -----------
Cash and equivalents, end of period ............................. $ 244,793 $ 65,598
=========== ===========
Non-cash financing activities:
Debt conversion to equity .................................... $ 804,100
Supplemental disclosures of cash flow information:
Cash paid for:
Interest ................................................ $ 267,020 $ 259,856
Income taxes ............................................ 145,000
</TABLE>
4
INDUSTRIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1996
NOTE A BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have
been prepared in accordance with generally accepted accounting
principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered
necessary for fair presentation have been included. Operating
results for the six month period ended June 30, 1996 are not
necessarily indicative of the results that may be expected for the
year ended December 31, 1996. For further information, refer to the
consolidated financial statements and footnotes thereto included in
the Company's annual report on Form 10-K for the year ended December
31, 1995.
NOTE B INVENTORY
Inventory consists of the following:
June 30 December 31
1996 1995
------------- -------------
Raw materials $ 1,220,205 $ 593,396
Finished goods 6,818,586 6,246,340
Other 1,307,113 1,106,135
------------- -------------
$ 9,345,904 $ 7,945,871
============= =============
NOTE C RECLASSIFICATION
Reclassifications of amounts have been made from selling, general
and administrative expenses to cost of sales for the quarter and six
months ended June 30, 1995 to conform to the classification in the
quarter and six months ended June 30, 1996.
5
PART I
FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The financial information in the following discussion of Industrial
Holdings, Inc. (including its subsidiaries, the "Company"), includes
the operating results of Industrial Holdings, Inc. ("IHI") and its
subsidiaries. The Company's business is organized into two
divisions: the Fastener Manufacturing and Sales Division, comprised
of Landreth Engineering Company ("LEC") and Connecticut Rivet ("C
Rivet"), acquired December 1995 and the Energy Products and Services
Division comprised of the Valve and Supplies Sales Group which
includes Pipeline Valve Specialty ("PVS") and Industrial Municipal
Supply Company ("IMSCO"); the New Machine Sales and Services Group
which includes Regal Machine Tools ("Regal") and Rex Machinery
Movers ("RMM"); the Export Crating Group which includes U.S. Crating
("USC"); and the Used Machine Sales Group which includes Rex/Paul's
Machine Sales ("RPMS").
RESULTS OF OPERATIONS
QUARTER ENDED JUNE 30, 1996 COMPARED WITH QUARTER ENDED
JUNE 30, 1995.
SALES. On a consolidated basis, sales increased $4,295,427 or 46%
for the quarter ended June 30, 1996 compared to the quarter ended
June 30, 1995. This increase was primarily the result of the
acquisition of C Rivet and the inclusion of a full quarter of its
operating results coupled with an increase in sales of machine tools
by Regal.
COST OF SALES. Cost of sales increased $3,471,916 or 48% for the
quarter ended June 30, 1996 compared to the quarter ended June 30,
1995, primarily as a result of the increase in sales described in
the preceding paragraph.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $427,879 or 26% for the quarter
ended June 30, 1996 compared to the quarter ended June 30, 1995.
This increase is primarily attributable to the acquisition of C
Rivet and the inclusion of a full quarter of its operating results.
DEPRECIATION AND AMORTIZATION EXPENSE. There was no significant
change in depreciation and amortization included in operating
expenses for the quarter ended June 30, 1996 compared to the quarter
ended June 30, 1995.
INTEREST EXPENSE. Interest expense increased $81,232 or 33% for the
quarter ended June 30, 1996 compared to the quarter ended June 30,
1995 primarily as a result of debt incurred in the acquisition of C
Rivet.
INCOME TAXES. The Company's effective tax rate was 34% for the
quarter ended June 30, 1996 compared to 13.5% for the quarter ended
June 30, 1995. In the quarter ended June 30, 1996, there was no
adjustment to the deferred tax asset valuation allowance compared to
a $36,000 reduction in the valuation allowance in the quarter ended
June 30, 1995.
6
SIX MONTHS ENDED JUNE 30, 1996 COMPARED WITH SIX MONTHS ENDED
JUNE 30, 1995.
SALES. On a consolidated basis, sales increased $5,904,533 or 30%
for the six months ended June 30, 1996 compared to the six months
ended June 30, 1995. This sales increase was primarily the result of
the acquisition of C Rivet and the inclusion of a full six months of
its operating results coupled with an increase in sales of machine
tools by Regal. Additionally, the six months ended June 30, 1995
included $1,036,580 in low margin wire sales by LEC to C Rivet prior
to its acquisition by LEC.
COST OF SALES. Cost of sales increased by $4,406,556 or 28% for the
six months ended June 30, 1996 compared to the six months ended June
30, 1995, primarily as a result of the increase in sales for the
comparable period.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $806,639 or 25% for the six months
ended June 30, 1996 compared to the six months ended June 30, 1995.
This increase is primarily attributable to the acquisition of C
Rivet and the inclusion of a full six months of its operating
results.
DEPRECIATION AND AMORTIZATION. There was no significant change in
depreciation and amortization for the six months ended June 30, 1996
compared to the six months ended June 30, 1995.
INTEREST EXPENSE. Interest expense increased $192,046 or 40% for the
six months ended June 30, 1996 compared to the six months ended June
30, 1995 primarily as a result of debt incurred in the acquisition
of C Rivet.
INCOME TAXES. The Company's effective tax rate was 34% for the
quarter ended June 30, 1996 compared to 9% for the quarter ended
June 30, 1995. In the quarter ended June 30, 1996, there was no
adjustment to the deferred tax asset valuation allowance compared to
a $98,000 reduction in the valuation allowance in the quarter ended
June 30, 1995.
NET INCOME. As a result of the foregoing factors, the Company had
net income of $556,063 for the six months ended June 30, 1996
compared to $354,086 for the six months ended June 30, 1995. This
increase was primarily attributable to the acquisition of C Rivet
and increased sales at Regal.
TOTAL ASSETS. Total assets were $30,125,368 at June 30, 1996
compared to $27,493,556 at December 31, 1995. This increase was
primarily attributable to an increase in accounts receivable and
inventory as a result of the acquisition of C Rivet in December 1995
in which no accounts receivable and below average operating levels
of inventory were acquired and at which accounts receivable and
inventory have reached average operating levels at June 30, 1996.
TOTAL LIABILITIES. Total liabilities were $20,124,477 at June 30,
1996 compared to $19,890,561 at December 31, 1995. This increase was
primarily attributable to increased trade accounts payable as a
result of the acquisition of C Rivet in which below average
operating levels of accounts payable were assumed and at which
accounts payable have reached average operating levels at June 30,
1996.
LIQUIDITY AND CAPITAL RESOURCES. At June 30, 1996, the Company had
cash of $244,793 and additional borrowing capacity under its line of
credit of $1,329,575. The Company's operations used cash of $323,481
during the six months ended June 30, 1996 compared to providing cash
of $175,990 during the six months ended June 30, 1995. This
increased use of cash was primarily attributable to increases in
accounts receivable and inventory as a result of the acquisition of
C Rivet.
7
Capital expenditures for property and equipment increased 167% for
the six months ended June 30, 1996 compared to the six months ended
June 30, 1995 primarily as a result of the purchase of new equipment
and leasehold improvements for the Company's fastener manufacturing
operations.
Financing activities provided cash of $1,190,907 for the six months
ended June 30, 1996 compared to $139,200 for the six months ended
June 30, 1995. During the six months ended June 30, 1996, the
Company used $1,080,369 in proceeds from the issuance of common
stock to repay long-term debt and purchase property and equipment
for its fastener division. Additionally, net borrowing under the
revolving line of credit increased as a result of borrowings by C
Rivet to fund increases in working capital.
At June 30, 1996, the Company had working capital of $2,909,961,
long-term debt of $5,001,834 and shareholders' equity of
$10,000,891. The Company anticipates that its operating cash needs
for fiscal 1996 can be met with cash generated from operations,
borrowings under its credit facilities with Comerica Bank-Texas. and
private placements of debt securities. However, any acquisition of
companies in connection with the Company's acquisition strategy will
require additional financing, which likely would include a
combination of debt and equity financing.
8
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is involved in litigation arising in the ordinary
course of its business. In the opinion of management, the
ultimate liability, if any, as a result of these matters will not
have a material adverse effect on the Company's consolidated
financial condition or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders.
(a) The annual meeting of the shareholders of the Company was
held on June 28, 1996.
(b) The following persons were elected at that meeting as
Class II Directors to serve until the third annual meeting
of shareholders following their election:
NUMBER OF VOTES
NAME OF NOMINEE FOR AGAINST
--------------- --------- -------
William J. Argeroplos 2,776,361 5,360
John P. Madden 2,765,561 6,160
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 11 - Earnings per Share
(b) Reports on Form 8-K
1. The Company amended its Current Report on Form 8-K
dated December 7, 1995 to include the Statements of
Assets Sold and Liabilities Assumed and Direct
Revenues and Direct Expenses of the MRMC, Inc.
Fastener Division as of and for the three years
ended June 30, 1995 and the quarter ended September
30, 1995.
9
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, as amended, the Registrant, Industrial Holdings, Inc., has duly
caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
INDUSTRIAL HOLDINGS, INC.
Date: July 29, 1996 By: /s/ CHRISTINE A. SMITH
Christine A. Smith
Chief Financial Officer and
Vice President
10
EXHIBIT 11
INDUSTRIAL HOLDINGS, INC. AND SUBSIDIARIES
EARNINGS PER SHARE
JUNE 30, 1996
Earnings per share is based upon the weighted average number of common and
common equivalent shares outstanding during the period as follows:
<TABLE>
<CAPTION>
Quarter Ended June 30 Six Months Ended
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Average common shares outstanding .. 3,505,393 3,011,750 3,363,239 3,011,750
Net effect of dilutive stock
options and warrants, based on the
treasury stock method using
average market price ............. 750,210 55,393 601,986 68,260
---------- ---------- ---------- ----------
4,255,602 3,067,143 3,965,225 3,080,010
========== ========== ========== ==========
Net income ......................... $ 319,295 $ 145,785 $ 556,063 $ 354,086
========== ========== ========== ==========
Earnings per share $ .07 $ .05 $ .14 $ .12
========== ========== ========== ==========
</TABLE>
The above table represents primary earnings per share. Fully diluted earnings
per share for the quarter and six month periods ended June 30, 1996 and 1995
were the same as primary earnings per share.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM PART 1 OF FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JAN-1-1996
<CASH> 244,793
<SECURITIES> 0
<RECEIVABLES> 6,729,562
<ALLOWANCES> 0
<INVENTORY> 9,345,904
<CURRENT-ASSETS> 17,169,377
<PP&E> 9,683,180
<DEPRECIATION> 641,863
<TOTAL-ASSETS> 30,125,368
<CURRENT-LIABILITIES> 14,259,416
<BONDS> 0
0
0
<COMMON> 36,412
<OTHER-SE> 9,964,479
<TOTAL-LIABILITY-AND-EQUITY> 30,125,368
<SALES> 25,627,328
<TOTAL-REVENUES> 25,627,328
<CGS> 19,936,905
<TOTAL-COSTS> 24,156,619
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 678,221
<INCOME-PRETAX> 842,519
<INCOME-TAX> 286,456
<INCOME-CONTINUING> 556,063
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 556,063
<EPS-PRIMARY> .14
<EPS-DILUTED> .14
