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
September 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 76-0289495
(STATE OR OTHER JURISDICTION (IRS EMPLOYER
OF INCORPORATION OR ORGANIZATION) 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 November 14, 1996, there were 4,219,580 shares of Common Stock
outstanding.
<PAGE>
INDUSTRIAL HOLDINGS, INC.
INDEX
PAGE
NO.
----
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheets at September 30, 1996
and December 31, 1995 ...................................... 1
Consolidated Statements of Income for
the Quarters ended September 30, 1996 and 1995 ............. 2
Consolidated Statements of Income for
the Nine Months ended September 30, 1996 and 1995 .......... 3
Consolidated Statements of Cash Flows for
the Nine Months ended September 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
<PAGE>
INDUSTRIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
September 30 December 31
1996 1995
----------- -----------
ASSETS
Current assets:
Cash and equivalents ............................ $ 1,131,091 $ 428,430
Accounts receivable - trade, net ................ 6,026,847 5,640,253
Inventories ..................................... 8,781,641 7,945,871
Equipment held for sale ......................... 100,000 275,000
Advances to shareholders ........................ 17,436 65,210
Notes receivable, current portion ............... 284,058 259,452
Other current assets ............................ 494,726 267,330
----------- -----------
Total current assets ....................... 16,835,799 14,881,546
Property and equipment, net ........................ 10,258,069 9,125,422
Notes receivable ................................... 1,249,150 1,475,956
Other assets ....................................... 151,698 127,658
Goodwill, net ...................................... 1,830,758 1,882,974
----------- -----------
Total assets ............................... $30,325,474 $27,493,556
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable ................................... $ 6,500,295 $ 6,688,570
Accounts payable - trade ........................ 4,609,891 4,748,339
Accrued expenses and other ...................... 1,049,947 1,213,176
Current portion of long-term debt ............... 1,135,751 772,858
----------- -----------
Total current liabilities .............. 13,295,884 13,422,943
Long-term debt, less current portion ............... 4,252,190 5,890,849
Deferred income taxes payable ...................... 819,120 576,771
----------- -----------
Total liabilities .......................... 18,367,194 19,890,563
----------- -----------
Shareholders' equity:
Common stock, $.01 par value, 20,000,000
shares authorized 4,081,580 and 3,091,162
shares issued and outstanding ............. 40,816 30,912
Additional paid-in capital ...................... 11,134,824 7,553,662
Retained earnings ............................... 782,640 18,419
----------- -----------
Total shareholders' equity ................. 11,958,280 7,602,993
----------- -----------
Total liabilities and shareholders' equity ......... $30,325,474 $27,493,556
=========== ===========
See notes to consolidated financial statements.
1
<PAGE>
INDUSTRIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Quarter ended September 30
1996 1995
------------ ------------
Sales ...................................... $ 12,870,367 $ 9,072,490
Cost of sales .............................. 10,037,865 6,978,432
------------ ------------
Gross profit ............................... 2,832,502 2,094,058
Operating expenses
Selling, general and administrative ..... 2,152,545 1,634,198
Depreciation and amortization ........... 106,557 107,740
------------ ------------
Total operating expenses ........... 2,259,102 1,741,938
Income from operations ..................... 573,400 352,120
Other income (expenses)
Interest expense ........................ (282,119) (240,826)
Other income ............................ 41,097 57,231
------------ ------------
Total other income (expenses) ...... (241,022) (183,595)
------------ ------------
Income before income taxes ................. 332,378 168,525
Income tax expense ......................... 126,584 38,708
------------ ------------
Net income ................................. $ 205,794 $ 129,817
============ ============
Earnings per share ......................... $ .05 $ .04
============ ============
See notes to consolidated financial statements.
2
<PAGE>
INDUSTRIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Nine Months ended September 30
1996 1995
------------ ------------
Sales ...................................... $ 38,497,695 $ 28,795,285
Cost of sales .............................. 29,974,770 22,508,781
------------ ------------
Gross profit ............................... 8,522,925 6,286,504
Operating expenses
Selling, general and administrative ..... 6,185,391 4,860,405
Depreciation and amortization ........... 293,425 308,027
------------ ------------
Total operating expenses ........... 6,478,816 5,168,432
Income from operations ..................... 2,044,109 1,118,072
Other income
Interest expense ........................ (960,340) (726,998)
Other income ............................ 93,492 165,881
------------ ------------
Total other income (expenses) ...... (866,848) (561,117)
Income before income taxes ................. 1,177,261 556,955
Income tax expense ......................... 413,040 73,049
------------ ------------
Net income ................................. $ 764,221 $ 483,906
============ ============
Earnings per share ......................... $ .19 $ .16
============ ============
See notes to consolidated financial statements.
3
<PAGE>
INDUSTRIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
Nine Months ended September 30
1996 1995
----------- -----------
Cash flows from operating activities:
Net income ..................................... $ 764,221 $ 483,906
Adjustments to reconcile net income
to net cash provided (used) by operating
activities:
Depreciation and amortization ............... 912,348 621,324
Deferred income tax provision ............... 242,349 73,049
Loss on sales of equipment .................. 14,768
Changes in current assets and liabilities:
Accounts receivable and advances to
shareholders ............................ (347,643) (898,502)
Inventory ................................. (835,770) (68,515)
Notes receivable .......................... 202,200 5,688
Other current assets ...................... (251,436) (159,067)
Accounts payable and accrued expenses ..... (301,677) 272,329
----------- -----------
Net cash provided by operating activities 384,592 344,980
Cash flows from investing activities:
Purchase of property and equipment ............. (1,752,269) (496,211)
Additional consideration paid to former
shareholders of LEC and PVS ................. (99,396) (202,629)
----------- -----------
Net cash used by investing activities ...... (1,851,665) (698,840)
----------- -----------
Cash flows from financing activities:
Net borrowings under revolving
line of credit ........................... 708,396 86,446
Proceeds from long-term debt ................... 468,361
Principal payments on notes payable,
long-term debt and capital lease obligations (1,021,698) (103,301)
Proceeds from issuance of common stock ......... 2,014,675 261,300
----------- -----------
Net cash provided by financing activities ... 2,169,734 244,445
----------- -----------
Net increase (decrease) in cash and equivalents ... 702,661 (109,415)
Cash and equivalents, beginning of period ......... 428,430 188,627
----------- -----------
Cash and equivalents, end of period ............... $ 1,131,091 $ 79,212
=========== ===========
Non-cash financing activities:
Debt converted to equity ....................... $ 1,619,100
4
<PAGE>
INDUSTRIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 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 nine month period ended September 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:
September 30 December 31
1996 1995
---------- ----------
Raw materials ........................ $ 984,715 $ 593,396
Finished goods ....................... 6,496,077 6,246,340
Other ................................ 1,300,849 1,106,135
---------- ----------
$8,781,641 $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
nine months ended September 30, 1995 to conform to the
classification in the quarter and nine months ended September 30,
1996.
5
<PAGE>
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 ("CRivet"), 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"). Regal, RMM, USC and
RPMS comprise the Rex Group ("Rex").
RESULTS OF OPERATIONS
QUARTER ENDED SEPTEMBER 30, 1996 COMPARED WITH QUARTER ENDED
SEPTEMBER 30, 1995.
SALES. On a consolidated basis, sales increased $3,797,877 or 42% for
the quarter ended September 30, 1996 compared to the quarter ended
September 30, 1995. This increase was primarily the result of the
acquisition of CRivet 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 $3,059,433 or 44% for the quarter
ended September 30, 1996 compared to the quarter ended September 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 $518,347 or 32% for the quarter ended
September 30, 1996 compared to the quarter ended September 30, 1995.
This increase is primarily attributable to the acquisition of CRivet 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 September 30, 1996 compared to the quarter ended September
30, 1995.
INTEREST EXPENSE. Interest expense increased $41,293 or 17% for the
quarter ended September 30, 1996 compared to the quarter ended September
30, 1995 primarily as a result of debt incurred in the acquisition of
CRivet.
INCOME TAXES. The Company's effective tax rate was 38% for the quarter
ended September 30, 1996 compared to 23% for the quarter ended September
30, 1995. In the quarter ended September 30, 1996, there was no
adjustment to the deferred tax asset valuation allowance compared to a
$18,000 reduction in the valuation allowance in the quarter ended
September 30, 1995.
6
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED WITH NINE MONTHS ENDED
SEPTEMBER 30, 1995.
SALES. On a consolidated basis, sales increased $9,702,410 or 34% for
the nine months ended September 30, 1996 compared to the nine months
ended September 30, 1995. This sales increase was primarily the result
of the acquisition of CRivet and the inclusion of a full nine months of
its operating results coupled with an increase in sales of machine tools
by Regal. Additionally, the nine months ended September 30, 1995
included $1,036,580 in low margin wire sales by LEC to CRivet prior to
its acquisition by LEC.
COST OF SALES. Cost of sales increased by $7,465,989 or 33% for the nine
months ended September 30, 1996 compared to the nine months ended
September 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 $1,324,986 or 27% for the nine months
ended September 30, 1996 compared to the nine months ended September 30,
1995. This increase is primarily attributable to the acquisition of
CRivet and the inclusion of a full nine months of its operating results.
DEPRECIATION AND AMORTIZATION. There was no significant change in
depreciation and amortization for the nine months ended September 30,
1996 compared to the nine months ended September 30, 1995.
INTEREST EXPENSE. Interest expense increased $233,342 or 32% for the
nine months ended September 30, 1996 compared to the nine months ended
September 30, 1995 primarily as a result of debt incurred in the
acquisition of CRivet.
INCOME TAXES. The Company's effective tax rate was 35% for the quarter
ended September 30, 1996 compared to 13% for the quarter ended September
30, 1995. In the quarter ended September 30, 1996, there was no
adjustment to the deferred tax asset valuation allowance compared to a
$116,000 reduction in the valuation allowance in the quarter ended
September 30, 1995.
NET INCOME. As a result of the foregoing factors, the Company had net
income of $764,221 for the nine months ended September 30, 1996 compared
to $483,906 for the nine months ended September 30, 1995. This increase
was primarily attributable to the acquisition of CRivet and increased
sales at Regal.
TOTAL ASSETS. Total assets were $30,325,474 at September 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 CRivet 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 September 30, 1996.
TOTAL LIABILITIES. Total liabilities were $18,367,194 at September 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 CRivet in which below average operating levels of
accounts payable were assumed and at which accounts payable have reached
average operating levels at September 30, 1996.
LIQUIDITY AND CAPITAL RESOURCES. At September 30, 1996, the Company had
cash of $1,131,091 and additional borrowing capacity under its line of
credit of $958,849. The Company's operations provided cash of $384,592
during the nine months ended September 30, 1996 compared to providing
cash of $344,590 during the nine months ended September 30, 1995. This
12% increase was primarily attributable to increased net income for the
nine months ended September 30, 1996 compared to the same period in 1995
which was offset by increases in accounts receivable and inventory as a
result of the acqusition of CRivet.
7
<PAGE>
Capital expenditures for property and equipment increased 253% for the
nine months ended September 30, 1996 compared to the nine months ended
September 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 $2,169,734 for the nine months
ended September 30, 1996 compared to $244,445 for the nine months ended
September 30, 1995, primarily as a result of proceeds from the issuance
of Common Stock during the nine months ended September 30, 1996. During
the nine months ended September 30, 1996, the Company used $1,021,698 in
proceeds from the issuance of common stock to repay long-term debt.
Additionally, net borrowing under the revolving line of credit increased
as a result of borrowings by CRivet to fund increases in working
capital.
At September 30, 1996, the Company had working capital of $3,539,915,
long-term debt of $4,252,190 and shareholders' equity of $11,958,280.
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
<PAGE>
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) A special meeting of the Shareholders of the Company was held on
September 30, 1996.
(b) The Articles of Incorporation of the Company were amended
to increase the authorized shares of Common Stock from
7,500,000 to 20,000,000
NUMBER OF VOTES
---------------
For 3,054,194
Against 68,640
Abstain 16,509
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 11 - Earnings per Share
(b) Reports on Form 8-K
On October 15, 1996, the Company filed a Report on Form 8-K disclosing
the execution of a Stock Purchase Agreement by and among the Company,
Trust "B" Under the Will of Bernard J. Bauer, Sr. ("Trust B") and
Gertrude Bauer Trust dated December 24, 1993 (the "G Bauer Trust") to
purchase all the outstanding capital stock of American Rivet Company,
Inc. ("American") for $11,125,000 adjusted for certain purchase price
adjustments. American is a manufacturer of semi-tubular rivets and cold
headed specials.
9
<PAGE>
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: November 14, 1996 By: /s/ CHRISTINE A. SMITH
Christine A. Smith
Chief Financial Officer and
Vice President
10
<PAGE>
INDUSTRIAL HOLDINGS, INC. AND SUBSIDIARIES
EARNINGS PER SHARE
SEPTEMBER 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 September 30 Nine Months Ended September 30
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Average common shares outstanding .. 3,806,843 3,029,956 3,485,934 3,016,480
Net effect of dilutive stock
options and warrants, based on the
treasury stock method using
average market price ............. 752,368 120,800 616,164 85,400
---------- ---------- ---------- ----------
4,559,211 3,150,756 4,102,098 3,101,880
========== ========== ========== ==========
Net income ......................... $ 205,794 $ 129,817 $ 764,221 $ 483,906
========== ========== ========== ==========
Earnings per share ................. $ .05 $ .04 $ .19 $ .16
========== ========== ========== ==========
</TABLE>
The above table represents primary earnings per share. Fully diluted earnings
per share for the quarter and nine month periods ended September 30, 1996 and
1995 were the same as primary earnings per share.
11
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 1,131,091
<SECURITIES> 0
<RECEIVABLES> 6,026,847
<ALLOWANCES> 0
<INVENTORY> 8,781,641
<CURRENT-ASSETS> 16,835,799
<PP&E> 10,258,069
<DEPRECIATION> 0
<TOTAL-ASSETS> 30,325,474
<CURRENT-LIABILITIES> 13,295,884
<BONDS> 0
0
0
<COMMON> 40,816
<OTHER-SE> 11,917,464
<TOTAL-LIABILITY-AND-EQUITY> 30,325,474
<SALES> 38,497,695
<TOTAL-REVENUES> 38,497,695
<CGS> 29,974,770
<TOTAL-COSTS> 36,453,586
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 960,340
<INCOME-PRETAX> 1,177,261
<INCOME-TAX> 413,040
<INCOME-CONTINUING> 764,221
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 764,221
<EPS-PRIMARY> .19
<EPS-DILUTED> .19
</TABLE>
