SCHEDULE 13E-4
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 30549
ISSUER TENDER OFFER STATEMENT
(Pursuant to Section 13(e)(1) of the Securities Exchange Act of 1934)
INDUSTRIAL HOLDINGS, INC.
------------------------
(Name of Issuer)
INDUSTRIAL HOLDINGS, INC.
------------------------------------
(Name of Person(s) Filing Statement)
Class A Redeemable Common Stock Purchase Warrants
--------------------------------------------------
(Title of Class of Securities)
456160118
-------------------------------------
(CUSIP Number of Class of Securities)
Robert E. Cone, 7135 Ardmore, Houston, Texas 77054, (713) 747-1025
------------------------------------------------------------------
(Name, Address and Telephone Number of Person Authorized to
Receive Notices and Communications on Behalf of the Person(s)
Filing Statement)
November 12, 1996
----------------------------------
(Date Tender Offer First Published,
Sent or Given to Security Holders)
Calculation of Filing Fee
- --------------------------------------------------------------------------------
Transaction Valuation(1) Amount of Filing Fee
$3,795,000 $759.00
- --------------------------------------------------------------------------------
(1) Calculated in accordance with Rule 0-11(b), on the basis of 632,500
Class A Redeemable Common Stock Purchase Warrants outstanding as of
November 6, 1996, which were valued at the exercise price of $6.00 per
warrant.
[X] Check box if any part of the fee is offset as provided by
Rule 0-11 (a)(2) and identify the filing with which the
offsetting fee was previously paid. Identify the previous filing
by registration statement number, or the Form or Schedule and the
date of its filing.
Amount Previously Paid: $9,609.64
Form or Registration No.: 333-13323
Filing Party: Industrial Holdings, Inc.
Date Filed: October 2, 1996
<PAGE>
This Schedule 13E-4 relates to an offer (the "Offer") by Industrial
Holdings, Inc. (the "Company"), upon the terms and conditions set forth in the
Offering Circular-Prospectus, dated November 12, 1996, (the "Offering
Circular-Prospectus"), a copy of which is filed as Exhibit 9(a) (2) hereto, to
the holders ("Warrantholders") of its issued and outstanding Class A Redeemable
Common Stock Purchase Warrants ("Class A Warrants") to exchange each Class A
Warrant and $6.00 cash for one share of the Company's Common Stock, $.01 par
value, one Class B Redeemable Common Stock Purchase Warrant ("Class B Warrant"),
and one Class C Redeemable Common Stock Purchase Warrant ("Class C Warrant"),
commencing on November 12, 1996 and ending on December 13, 1996, (the
"Expiration Date") unless extended.
The Offering-Circular Prospectus contains certain information
relating to the Company's business, management and financial condition and is
incorporated herein by this reference. The Offering Circular-Prospectus is part
of the Company's Amendment No. 1 to its Registration Statement on Form S-1,
which was declared effective by the Securities and Exchange Commission on
November 12, 1996. The Offering Circular-Prospectus relates to up to an
aggregate of 1,265,000 Class B and Class C Warrants to be issued in the Offer
and to the issuance of up to 2,530,000 shares of the Company's Common Stock upon
exercise of the Class A Warrants (632,500 shares), currently outstanding Class B
Warrants (632,500 shares), and Class B and Class C Warrants to be issued in the
Offer (1,265,000 shares).
Warrantholders electing to accept the Offer prior to the Expiration
Date may withdraw such acceptance, so long as a notice of such withdrawal is
received by the Company on or prior to the Expiration Date. Thereafter, such
exercises are irrevocable, except that they may be withdrawn after January 9,
1997, unless theretofore accepted for exercise.. All Class A Warrants tendered
and not withdrawn on the Expiration Date will be accepted by the Company, and
the Common Stock, Class B and Class C Warrants issuable upon the exercise of
such warrants will be delivered to the respective Warrantholders as soon as
practicable after the Expiration Date.
ITEM 1. SECURITY AND ISSUER.
(a) The Company has its principal executive offices at 7135
Ardmore, Houston, Texas 77054.
(b) The Company is seeking the Class A Warrants, which represent
all the issued and outstanding securities of such class of
securities. Information with respect to the securities being
sought and consideration offered therefor is incorporated by
reference herein to the section of the Offering
Circular-Prospectus titled "The Offer--Terms of the Offer." No
Class A Warrants are being purchased from an officer, director
or affiliate of the Company.
(c) Information concerning the principal market in which the Class
A Warrants are traded is incorporated by reference herein to
the section titled "Price Range of Common Stock and Warrants"
in the Offering Circular-Prospectus.
(d) Not applicable.
ITEM 2. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION
(a) The Company will issue the consideration (I.E., Common Stock,
Class B Warrants and Class C Warrants) it is offering to
acquire the Class A Warrants out of its authorized but
unissued shares of Common Stock and Board of Directors
approved Class B
2
<PAGE>
Warrants and Class C Warrants.
(b) Not applicable.
ITEM 3. PURPOSE OF THE TENDER OFFER AND PLANS OR PROPOSALS OF THE ISSUER OR
AFFILIATE.
The purpose of the Offer is to induce persons holding Class A
Warrants to exercise such Class A Warrants. If all Class A Warrants
being sought are exercised, the Company will obtain net proceeds of
$3,695,000. The securities being sought by the Company will be
cancelled upon receipt and acceptance, subject to the withdrawal
rights discussed in the section of the Offering Circular-Prospectus
titled "The Offer-Withdrawal Rights" which is incorporated by
reference.
The Company has no plans or proposals which relate to or would result
in the matters referred to in paragraphs (a) through (j) of this Item
3, except that the Company intends to utilize the proceeds received
from the Offer for the reduction of short-term debt as described in
the section of the Offering Circular-Prospectus titled "Use of
Proceeds," which is hereby incorporated by reference.
ITEM 4. INTEREST IN SECURITIES OF THE ISSUER.
Neither the Company, nor, to the best knowledge of the Company, any
of the executive officers or directors of the Company or any
associate of any of the foregoing, has engaged in any transactions
involving the Class A Warrants during the 40 business days prior to
the date hereof.
ITEM 5. CONTRACTS, ARRANGEMENTS, UNDERSTANDINGS OR RELATIONSHIPS WITH RESPECT
TO THE ISSUER'S SECURITIES.
Neither the Company nor, to the best knowledge of the Company, any of
the executive officers or directors or affiliates of the Company, is
a party to any contract, arrangement, understanding or relationship
relating directly or indirectly to the Offer with respect to the
securities of the Company which would require disclosure under
applicable rules and regulations of the Securities Exchange Act of
1934, as amended.
ITEM 6. PERSONS RETAINED, EMPLOYED OR TO BE COMPENSATED.
Incorporated herein by reference to the section titled "The
Offer--Payment of Fees and Expenses" in the Offering
Circular-Prospectus.
ITEM 7. FINANCIAL INFORMATION.
Except for the ratio of earnings to fixed charges which is not
material to the Company's tender Offer, the matters referred to in
(a) and (b) of this Item can be found under the sections titled
"Dilution," "Selected Consolidated Financial Data" and in the
Consolidated Financial Statements included in the Offering
Circular-Prospectus, which are hereby incorporated by reference.
3
<PAGE>
ITEM 8. ADDITIONAL INFORMATION.
(a) Neither the Company nor, to the best knowledge of the Company,
any of its executive officers, directors or affiliates, is a
party to any present or proposed contract, arrangement,
understanding or relationship between them and the Company
that is material to a decision by a Warrantholder whether to
sell, exercise, or hold the Class A Warrants.
(b) The regulatory requirement that has been complied with or
approval that has been obtained in connection with the Offer
is the effectiveness of the Offering-Circular Prospectus in
accordance with the Securities Act of 1933, as amended.
(c) Not applicable.
(d) There are no pending legal proceedings relating to the Offer
which would be material to a Warrantholder's decision to sell,
exercise or hold the Class A Warrants.
(e) Other than the information contained in the Offering-Circular
Prospectus, there is no additional material information which
is necessary to make the above required statements, in light
of the circumstances under which they are made, not materially
misleading.
ITEM 9. MATERIAL TO BE FILED AS EXHIBITS.
(a) (1) Letter of Transmittal.
(2) Offering Circular-Prospectus dated November 12, 1996.
(3) Notice of Guaranteed Delivery.
(4) Form of press release issued by the Company.
(5) President's letter to Warrantholders.
(6) Form of letter to brokers, dealers, banks, trust companies
and other nominees (collectively, "Brokers").
(7) Form of letter from Brokers to customers.
(b) Not applicable.
(c) Not applicable.
(d) Not applicable.
(e) See (a)(2) of this Item 9.
(f) None other than material in (a) of this Item 9.
4
<PAGE>
SIGNATURE
After due inquiry and to the best of my knowledge and belief, I
certify that the information set forth in this statement is true, complete and
correct.
DATED: November 12, 1996
INDUSTRIAL HOLDINGS, INC.
By:/s/ ROBERT E. CONE
Robert E. Cone, President
5
<PAGE>
ITEM 9(A)(1)
LETTER OF TRANSMITTAL
TO ACCOMPANY CLASS A REDEEMABLE COMMON
STOCK PURCHASE WARRANTS ("CLASS A WARRANTS") OF AND CASH TENDERED TO
INDUSTRIAL HOLDINGS, INC.
PURSUANT TO THE OFFER DATED NOVEMBER 12, 1996
- --------------------------------------------------------------------------------
THIS OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE ON DECEMBER 13,
1996 AT 5:00 P.M., NEW YORK CITY TIME, UNLESS EXTENDED
- --------------------------------------------------------------------------------
To: CHASEMELLON SHAREHOLDER SERVICES, Exchange Agent
BY MAIL: FACSIMILE TRANSMISSION:
ChaseMellon Shareholder Services (201) 329-8936
Reorganization Department (for Eligible Institutions Only)
Midtown Station
P.O. Box 798 Confirm by Telephone:
New York, NY 10018 (201) 296-4983
BY HAND OR OVERNIGHT COURIER:
ChaseMellon Shareholder Services
Reorganization Department
120 Broadway - 13th Floor
New York, NY 10271
<TABLE>
<CAPTION>
<S> <C>
- -------------------------------------------------------------------------------------------------------------------
DESCRIPTION OF CLASS A WARRANTS TENDERED
- -------------------------------------------------------------------------------------------------------------------
NAME(S) AND ADDRESS(ES) OF REGISTERED HOLDER(S) CLASS A WARRANTS TENDERED
(PLEASE FILL IN EXACTLY AS NAME(S) ON CERTIFICATE(S)
- -------------------------------------------------------------------------------------------------------------------
CLASS A NUMBER OF
WARRANT CLASS A WARRANTS NUMBER OF
Print Name and Address CERTIFICATE REPRESENTED BY CLASS A WARRANTS
of Registered Owner(s) NUMBER* CERTIFICATE TENDERED**
- -------------------------------------------------------------------------------------------------------------------
| | |
---------------------------------------------------------
| | |
---------------------------------------------------------
| | |
---------------------------------------------------------
Total Class A | | |
Warrants Tendered | | |
- -------------------------------------------------------------------------------------------------------------------
* Need not be completed by warrantholders tendering by book-entry transfer.
** The number of Class A Warrants evidenced by certificates delivered to the
Exchange Agent and accompanied by the aggregate Warrant Exercise Price are
deemed tendered. See Instruction 3.
- --------------------------------------------------------------------------------
</TABLE>
Each Class A Warrant tendered must be accompanied by Six Dollars and
no/cents ($6.00) (the "Warrant Exercise Price") in the form of certified or
official bank check made payable to Industrial Holdings, Inc. or by wire
transfer to the Exchange Agent for the benefit of the Company.
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE
OR TRANSMISSION OF INSTRUCTIONS VIA A FACSIMILE NUMBER OTHER THAN ONE LISTED
ABOVE WILL NOT CONSTITUTE A VALID DELIVERY.
<PAGE>
THE INSTRUCTIONS ACCOMPANYING THIS LETTER OF TRANSMITTAL SHOULD BE READ
CAREFULLY BEFORE THE LETTER OF TRANSMITTAL IS COMPLETED.
This Letter of Transmittal is to be used if certificates for Class A
Warrants and the certified or official bank check or the wire transfer in
payment of the aggregate Warrant Exercise Price are to be forwarded herewith or
if delivery of Class A Warrant certificates is to be made by book-entry transfer
to the Exchange Agent's account at The Depository Trust Company ("DTC") or the
Philadelphia Depositary Trust Company ("PDTC") (hereinafter collectively
referred to as the "Book-Entry Transfer Facilities") pursuant to the procedures
set forth in the section of the accompanying Offering Circular-Prospectus of the
Company dated November 12, 1996 (the "Offering Circular-Prospectus") titled "The
Offer--Procedure for Tendering Class A Warrants." All capitalized terms herein
shall have the same meanings ascribed to them in the Offering
Circular-Prospectus.
Warrantholders who are unable to deliver their certificates for Class A
Warrants, the certified or official bank check or the wire transfer in payment
of the aggregate Warrant Exercise Price and all other documents required hereby
to the Exchange Agent by the Expiration Date (or who cannot comply with the
book-entry transfer procedures on a timely basis), may tender their Class A
Warrants pursuant to the guaranteed delivery procedure set forth in the section
of the Offering Circular-Prospectus titled "The Offer--Guaranteed Delivery
Procedure". See Instruction 1. Delivery of documents to the Company or to a
Book-Entry Transfer Facility does not constitute a valid delivery.
(BOXES BELOW FOR USE BY ELIGIBLE INSTITUTIONS ONLY)
[ ] CHECK HERE IF TENDERED CLASS A WARRANTS ARE BEING DELIVERED BY BOOKENTRY
TRANSFER TO THE EXCHANGE AGENT'S ACCOUNT AT ONE OF THE BOOKENTRY TRANSFER
FACILITIES AND COMPLETE THE FOLLOWING:
Name of Tendering Institution
Check Applicable Box: [ ] DTC [ ] PDTC
Account No.
Transaction Code No.
[ ] CHECK HERE IF TENDERED CLASS A WARRANTS ARE BEING DELIVERED PURSUANT
TO A NOTICE OF GUARANTEED DELIVERY PREVIOUSLY SENT TO THE EXCHANGE
AGENT AND COMPLETE THE FOLLOWING:
Name(s) of Tendering Warrantholder(s)
Date of Execution of Notice of Guaranteed Delivery
Name of Institution that Guaranteed Delivery
If delivery is by book-entry transfer:
Name of Tendering Institution
Account No. _________________________ at [ ] DTC [ ] PDTC
Transaction Code No.
NOTE: SIGNATURES MUST BE PROVIDED BELOW.
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY.
<PAGE>
Ladies and Gentlemen:
The undersigned hereby tenders to Industrial Holdings, Inc., a Texas
corporation (the "Company"), the above-described Class A Redeemable Common Stock
Purchase Warrants (the "Class A Warrants") to purchase shares of Common Stock of
the Company, together with a certified or official bank check made payable to
Industrial Holdings, Inc. or by wire transfer to the account of the Exchange
Agent specified in Instruction 6 hereof, in the amount of Six Dollars and
no/cents ($6.00) (the "Warrant Exercise Price") for every Class A Warrant
tendered. Such amounts must be tendered in accordance with the terms and
conditions of the Offer as set forth in the accompanying Offering
Circular-Prospectus of the Company dated November 12, 1996 ("Offering
Circular-Prospectus") and this Letter of Transmittal, receipt of which is hereby
acknowledged. The Class A Warrants (cusip #456160118) are referred to in the
accompanying Offering Circular-Prospectus as the Class A Warrants solely for
clarity and to avoid confusion with the Class B Redeemable Common Stock Purchase
Warrants ("Class B Warrants") and Class C Redeemable Common Stock Purchase
Warrants ("Class C Warrants") being delivered pursuant to the Offer.
Subject to, and effective upon, acceptance of the Class A Warrants tendered
herewith in accordance with the terms and conditions of the Offer (including, if
the Offer is extended or amended, the terms and conditions of any such extension
or amendment), the undersigned hereby sells, assigns and transfers to, or upon
the order of, the Company all right, title and interest in and to the Class A
Warrants being tendered hereby and constitutes and appoints the Exchange Agent
its true and lawful attorney-in-fact with respect to such Class A Warrants with
full power of substitution to (i) deliver certificates for such Class A Warrants
or transfer the ownership of such Class A Warrants on the account books
maintained by a Book-Entry Transfer Facility and the required payment of the
aggregate Warrant Exercise Price together with all accompanying evidences of
authority, to or upon the order of the Company and (ii) tender such Class A
Warrants for registration and transfer on the books of the Company.
The undersigned represents and warrants that he or she has full authority
to sell and to transfer the tendered Class A Warrants and that the Company will
acquire good, marketable and unencumbered title thereto, free and clear of all
liens, claims, restrictions, charges and encumbrances, and the same will not be
subject to any adverse claims. The undersigned will, upon request, execute any
additional documents necessary to complete the sale and transfer of the tendered
Class A Warrants. All authority conferred or agreed to be conferred in this
Letter of Transmittal shall be binding upon the successors, assigns, heirs,
executors, administrators and legal representatives of the undersigned and shall
not be affected by and shall survive the death or incapacity of the undersigned.
Except as stated in the section of the Offering Circular-Prospectus titled "The
Offer--Withdrawal Rights," this tender is irrevocable.
<PAGE>
The undersigned understands that the tender of Class A Warrants pursuant to
any one of the procedures described in the section of the Offering
Circular-Prospectus titled "The Offer--Procedure for Exercising Class A
Warrants" will constitute the undersigned's acceptance of the terms and
conditions of the Offer. The Company's acceptance of Class A Warrants tendered
pursuant to the Offer will constitute a binding agreement between the
undersigned and the Company upon the terms and subject to the conditions of the
Offer.
================================================================================
SPECIAL ISSUANCE INSTRUCTIONS
(SEE INSTRUCTIONS 4 AND 5)
To be completed ONLY if the certificates for
Common Stock, Class B Warrants and Class C
Warrants and/or the certificates for Class A
Warrants not tendered or not accepted for exercise
are to be issued in the name of someone other
the undersigned.
Issue certificates to:
Name_____________________________________________
(Please Print)
Address__________________________________________
_________________________________________________
(Include Zip Code)
_________________________________________________
(Taxpayer Identification or Social Security No.)
[ ] Credit Class A Warrants not tendered or not
accepted by book-entry transfer to the Book-
Entry Transfer Facility account set forth
below:
[ ] DTC [ ] PDTC
_________________________________________________
Book Entry Transfer Facility
Account Number, if applicable
================================================================================
================================================================================
SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 4 AND 5)
To be completed ONLY if the certificates for
Common Stock, Class B Warrants and Class C
Warrants and/or the certificates for Class A
Warrants tendered or not accepted for exercise are
to be mailed to someone other than the than
undersigned or to the undersigned at an address
other than that shown below the undersigned's
signature(s).
Mail Certificates to:
Name_____________________________________________
(Please Print)
Address__________________________________________
_________________________________________________
(Include Zip Code)
================================================================================
<PAGE>
================================================================================
SIGN HERE
X_______________________________________________________________________________
X_______________________________________________________________________________
Signature(s) of Warrantholder(s)
(Must be signed by registered holder(s) as name(s) appear(s) on warrant
certificate(s) or by person authorized to become registered holder(s) by
certificates and documents transmitted. If signing is by executor,
administrator, trustee, guardian, attorney, agent or other person acting in a
fiduciary or representative capacity, please set forth full title. (See
Instruction 1.)
Dated ______________________
Name(s)_________________________________________________________________________
________________________________________________________________________________
(Please print)
Capacity (full title)___________________________________________________________
Address_________________________________________________________________________
Area Code and Telephone No._____________________________________________________
Tax I.D. No. or Soc. Sec. No.___________________________________________________
GUARANTEE OF SIGNATURE(S)
(SEE INSTRUCTIONS 1 AND 4)
Name of Firm____________________________________________________________________
Authorized Signature___________________________________________________________
Dated _____________________
================================================================================
<PAGE>
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE OFFER
1. GUARANTEE OF SIGNATURES. Except as otherwise provided below, all
signatures on this Letter of Transmittal must be guaranteed by a firm or other
entity that is a member in good standing of the Security Transfer Agent's
Medallion Program, the New York Stock Exchange Medallion Program or the Stock
Exchange Medallion Program (an "Eligible Institution"). Signatures on this
Letter of Transmittal need not be guaranteed (a) if this Letter of Transmittal
is signed by the registered holder(s) of the Class A Warrants (which term, for
purposes of this document, shall include any participant in one of the BookEntry
Transfer Facilities whose name appears on a security position listing as the
owner of Class A Warrants) tendered herewith and such holder(s) have not
completed the box entitled "Special Issuance Instructions" or the box entitled
"Special Delivery Instructions" on this Letter of Transmittal or (b) if such
Class A Warrants are tendered for the account of an Eligible Institution. See
Instruction 4.
2. DELIVERY OF LETTER OF TRANSMITTAL, AGGREGATE WARRANT EXERCISE PRICE
AND CLASS A WARRANT CERTIFICATES; GUARANTEED DELIVERY PROCEDURES. This Letter of
Transmittal is to be used either if certificates for Class A Warrants and the
certified or official bank check or the wire transfer in payment of the
aggregate Warrant Exercise Price are to be forwarded herewith or if delivery of
Class A Warrant certificates is to be made by book-entry transfer pursuant to
the procedures set forth in the section of the Offering Circular-Prospectus
titled "The Offer--Procedure for Tendering Class A Warrants." Certificates for
all physically delivered Class A Warrants, or a confirmation of a book-entry
transfer into the Exchange Agent's account at one of the Book-Entry Transfer
Facilities of all Class A Warrants delivered electronically, as well as a
properly completed and duly executed Letter of Transmittal (or facsimile
thereof), and the certified or official bank check or the wire transfer and any
other documents required by this Letter of Transmittal, must be received by the
Exchange Agent at one of its addresses set forth on the front page of this
Letter of Transmittal on or prior to the Expiration Date.
Warrantholders who cannot deliver their certificates and the certified
or official bank check or the wire transfer and all other required documents to
the Exchange Agent on or prior to the Expiration Date (or who cannot comply with
the book-entry transfer procedures on a timely basis) may tender their Class A
Warrants pursuant to the guaranteed delivery procedure set forth in the section
of the Offering Circular-Prospectus titled "The Offer--Guaranteed Delivery
Procedure." Pursuant to such procedure: (a) such tender must be made by or
through an Eligible Institution, (b) on or prior to the Expiration Date, a
properly completed and duly executed Notice of Guaranteed Delivery substantially
in the form provided by the Company (with any required signature guarantees)
must be received by the Exchange Agent and (c) the certificates for all
physically delivered Class A Warrants, or a confirmation of a book-entry
transfer into the Exchange Agent's account at one of the Book-Entry Transfer
Facilities of all Class A Warrants delivered electronically, as well as a
properly completed and duly executed Letter of Transmittal (or facsimile
thereof) and the certified or official bank check or the wire transfer and any
other documents required by this Letter of Transmittal, must be received by the
Exchange Agent within three New York Stock Exchange, Inc. trading days after the
Expiration Date, all as provided in the section of the Offering
Circular-Prospectus titled "The Offer--Guaranteed Delivery Procedure."
THE METHOD OF DELIVERY OF CLASS A WARRANTS, THE AGGREGATE WARRANT
EXERCISE PRICE AND ALL OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF
THE TENDERING WARRANTHOLDER. IF DELIVERY IS SENT BY MAIL, IT IS RECOMMENDED THAT
THE WARRANTHOLDER USE REGISTERED MAIL WITH RETURN RECEIPT REQUESTED, PROPERLY
INSURED, AND THAT THE MAILING BE MADE SUFFICIENTLY IN ADVANCE OF THE EXPIRATION
DATE TO PERMIT DELIVERY TO THE EXCHANGE AGENT ON OR PRIOR TO THE EXPIRATION
DATE.
<PAGE>
By executing this Letter of Transmittal (or facsimile thereof), the
tendering Warrantholder waives any right to receive any notice of the acceptance
for exercise of the Class A Warrants.
3. PARTIAL TENDERS (NOT APPLICABLE TO WARRANTHOLDERS WHO TENDER BY
BOOK-ENTRY TRANSFER). If fewer than all the Class A Warrants evidenced by any
certificates submitted are to be tendered, write in the number of Class A
Warrants which are to be tendered in the box which is entitled "Class A Warrants
Tendered." In such case, a new certificate for the remainder of the Class A
Warrants which were evidenced by your old certificate(s) will be sent to you
unless otherwise provided in the "Special Issuance Instructions" or "Special
Delivery Instructions" boxes on this Letter of Transmittal as soon as
practicable after the Expiration Date. The number of Class A Warrants
represented by the certificates for Class Warrants listed and accompanied by the
aggregate Warrant Exercise Price are deemed to have been tendered.
4. SIGNATURES ON LETTER OF TRANSMITTAL; ASSIGNMENTS AND ENDORSEMENTS.
If this Letter of Transmittal is signed by the registered holder(s) of the Class
A Warrants tendered hereby, the signature(s) must correspond with the name(s) as
written on the face of the certificates without alteration, enlargement or any
change whatsoever.
If any of the Class A Warrants tendered hereby are held of record by
two or more persons, all such persons must sign this Letter of Transmittal.
If any of the Class A Warrants tendered hereby are registered in
different names on different certificates, it will be necessary to complete,
sign and submit as many separate Letters of Transmittal as there are different
registrations of certificates.
If this Letter of Transmittal is signed by the registered holder(s) of
the Class A Warrants tendered hereby, no endorsements or instruments of transfer
are required unless Class A Warrants not tendered or not accepted for exercise
are to be registered in the name of any person other than the registered
holder(s). Signatures on any such certificates or instruments of transfer must
be guaranteed by an Eligible Institution. See Instruction 1.
If this Letter of Transmittal is signed by a person other than the
registered holder(s) of the Class A Warrants tendered hereby, certificates must
be endorsed on the reverse side thereof or accompanied by appropriate evidence
of assignment, in either case, signed exactly as the name(s) of the registered
holder(s) appear(s) on the certificates for such Class A Warrants. Signature(s)
on any such certificates or assignments must be guaranteed by an Eligible
Institution. See Instruction 1.
If this Letter of Transmittal or any certificate or instrument of
transfer is signed by a trustee, executor, administrator, guardian,
attorney-in-fact, officer of a corporation or other person acting in a fiduciary
or representative capacity, such person should so indicate when signing, and
proper evidence satisfactory to the Company of the authority of such person so
to act must be submitted.
5. SPECIAL ISSUANCE AND DELIVERY INSTRUCTIONS. If any certificates for
shares of Common Stock, Class B Warrants and Class C Warrants or for Class A
Warrants not tendered or not accepted for exercise are to be returned to a
person other than the person(s) signing this Letter of Transmittal or if the
certificates for shares of Common Stock, Class B Warrants and Class C Warrants
or for Class A Warrants not tendered or not accepted are to be mailed to someone
other than the person(s) signing this Letter of Transmittal or to an address
other than that shown above in the box captioned "Description of Class A
<PAGE>
Warrants Tendered," then the boxes captioned "Special Issuance Instructions"
and/or "Special Delivery Instructions" on this Letter of Transmittal should be
completed. Warrantholders tendering Class A Warrants by book-entry transfer will
have any Class A Warrants not accepted for exercise returned by crediting the
account maintained by such Warrantholder at the Book-Entry Transfer Facility
from which such transfer was made.
6. PAYMENTS OF THE AGGREGATE WARRANT EXERCISE PRICE. The applicable
payments representing the aggregate Warrant Exercise Price to accompany the
Class A Warrants tendered must be made by certified or official bank check,
payable in United States dollars to the order of Industrial Holdings, Inc., or
by wire transfer to the Exchange Agent for the benefit of the Company. Wire
transfers must be made to the following account according to the following
instructions:
The Chase Manhattan Bank, New York, NY
ABA# 021 000 021
Attn: ChaseMellon Shareholder Services, L.L.C.
Reorg Acct 323-213057
Re: Industrial Holdings Class A Warrants
Attn: Evelyn O'Connor
Tel: #(201) 296-4515
7. NO CONDITIONAL TENDERS. No alternative, conditional, irregular or
contingent tenders will be accepted.
8. INADEQUATE SPACE. If the space provided herein is inadequate, the
certificate numbers and number of Class A Warrants should be listed on a
separate signed schedule to be affixed hereto.
9. WAIVER OF CONDITIONS. The Company reserves the absolute right to
waive any of the specified conditions in the Offer in the case of any Class A
Warrants tendered.
10. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Questions and
requests for assistance or additional copies of the Offering Circular-Prospectus
and the Letter of Transmittal may be directed to the Company as set forth below:
Industrial Holdings, Inc.
7135 Ardmore
Houston, Texas 77054
Attention: Christine A. Smith
(713) 747-1025
<PAGE>
ITEM 9(A)(2)
OFFERING CIRCULAR - PROSPECTUS
INDUSTRIAL HOLDINGS, INC.
OFFER TO EXCHANGE ONE CLASS A REDEEMABLE WARRANT FOR
ONE SHARE OF COMMON STOCK, ONE CLASS B REDEEMABLE WARRANT AND
ONE CLASS C REDEEMABLE WARRANT
- --------------------------------------------------------------------------------
THIS OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE ON
DECEMBER 13, 1996 AT 5:00 P.M., NEW YORK
CITY TIME, UNLESS EXTENDED.
- --------------------------------------------------------------------------------
INDUSTRIAL HOLDINGS, INC. (THE "COMPANY") HEREBY OFFERS TO THE
HOLDERS OF ITS 632,500 ISSUED AND OUTSTANDING CLASS A REDEEMABLE COMMON STOCK
PURCHASE WARRANTS ("CLASS A WARRANTS") THE OPPORTUNITY TO EXCHANGE EACH CLASS A
WARRANT AND CASH FOR ONE SHARE OF THE COMPANY'S COMMON STOCK, $.01 PAR VALUE,
ONE CLASS B REDEEMABLE COMMON STOCK PURCHASE WARRANT ("CLASS B WARRANT") AND ONE
CLASS C REDEEMABLE COMMON STOCK PURCHASE WARRANT ("CLASS C WARRANT") BEGINNING
ON THE DATE HEREOF AND ENDING ON DECEMBER 13, 1996, UNLESS EXTENDED ON THE TERMS
HEREINAFTER DESCRIBED.
THIS OFFER IS BEING MADE ON THE FOLLOWING TERMS (SEE "THE OFFER"
FOR A MORE COMPLETE DESCRIPTION OF THE TERMS OF THIS OFFER):
AN EXCHANGING CLASS A WARRANTHOLDER ("WARRANTHOLDER") WHO TENDERS
CLASS A WARRANTS AND PAYS SIX DOLLARS ($6.00) PER CLASS A WARRANT (THE "WARRANT
EXERCISE PRICE") WILL RECEIVE FOR EACH CLASS A WARRANT TENDERED ONE SHARE OF
COMMON STOCK, ONE CLASS B WARRANT AND ONE CLASS C WARRANT.
EACH CLASS B WARRANT TO BE ISSUED WILL ENTITLE THE HOLDER THEREOF
TO PURCHASE ONE SHARE OF THE COMPANY'S COMMON STOCK AT AN EXERCISE PRICE OF
$10.00 PER SHARE THROUGH AND INCLUDING JANUARY 14, 1999. THE TERMS OF CURRENTLY
OUTSTANDING CLASS B WARRANTS, WHICH ARE EXERCISABLE THROUGH AND INCLUDING
JANUARY 14, 1997, WILL AFTER THE EXPIRATION DATE, AUTOMATICALLY BE EXTENDED TO
JANUARY 14, 1999. EACH CLASS C WARRANT TO BE ISSUED WILL ENTITLE THE HOLDER TO
PURCHASE ONE SHARE OF THE COMPANY'S COMMON STOCK AT AN EXERCISE PRICE OF $15.00
PER SHARE THROUGH AND INCLUDING JANUARY 14, 1999. THE COMPANY MAY REDEEM THE
(CONTINUED ON NEXT PAGE)
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS OFFERING CIRCULAR-PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
---------------------
The date of this Offering Circular-Prospectus is November 12, 1996.
<PAGE>
CLASS B AND CLASS C WARRANTS AT $.05 PER WARRANT UPON 30 DAYS PRIOR WRITTEN
NOTICE IF THE CLOSING BID PRICE OF THE COMPANY'S COMMON STOCK EQUALS OR EXCEEDS
$12.00 AND $20.00, RESPECTIVELY, FOR 20 CONSECUTIVE TRADING DAYS. THE EXERCISE
PRICE OF THE CLASS B AND CLASS C WARRANTS WERE ARBITRARILY DETERMINED BY THE
COMPANY'S BOARD OF DIRECTORS AND IS NOT NECESSARILY RELATED TO THE COMPANY'S
ASSETS, EARNINGS, BOOK VALUE OR OTHER GENERALLY ACCEPTED CRITERIA OF VALUE.
The exercise of the Class A Warrants pursuant to this Offer may be
withdrawn prior to 5:00 p.m., New York City time, on December 13, 1996 (the
"Expiration Date") (or the latest time and date at which this Offer, as extended
by the Company, shall expire). Thereafter, such exercises are irrevocable,
except that they may be withdrawn after January 9, 1997 unless theretofore
accepted for exercise as provided in this Offering Circular- Prospectus. This
Offer is subject to a number of customary conditions, any or all of which may be
waived by the Company, but is not conditioned upon the exercise of a minimum
number of Class A Warrants. The Company also reserves the right to extend this
Offer. See "The Offer--Expiration Date; Extensions" and "--Conditions of the
Offer."
Warrantholders who desire to exercise their Class A Warrants should
(a) complete and submit the accompanying Letter of Transmittal and their Class A
Warrant Certificate, together with (i) a certified or official bank check in the
amount of the aggregate Warrant Exercise Price made payable to Industrial
Holdings, Inc.; or (ii) a wire transfer to ChaseMellon Shareholder Services (the
"Exchange Agent") in the amount of the aggregate Warrant Exercise Price for the
benefit of the Company, and any other required documents to the Exchange Agent,
or (b) request a broker or bank to effect the transaction for him or her.
Holders of Class A Warrants registered in the name of a broker, dealer, bank,
trust or nominee should instruct such institutions to exercise their Class A
Warrants. The Company does not intend to pay broker-dealers solicitation fees
for the exercise of its Class A Warrants. See "The Offer--Procedure for
Tendering Class A Warrants."
If a holder of Class A Warrants does not want to tender his Class A
Warrants pursuant to the terms of this Offer, he may exercise such Class A
Warrants under the present terms of the Class A Warrants. Each Class A Warrant
entitles the registered holder to purchase one share of Common Stock at an
exercise price of $6.00 per share through and including January 14, 1997, after
which date unexercised Class A Warrants will expire.
The Common Stock, Class A Warrants and Class B Warrants are
currently traded on the Nasdaq National Market under the symbols "IHII,"
"IHIIW," and "IHIIZ," respectively. On November 6, 1996, the closing sale prices
of the Common Stock, Class A and Class B Warrants were $10.63, $8.00 and $2.81,
respectively. The Company has applied for listing of the Class C Warrants on the
Nasdaq National Market.
Questions and requests for assistance or for additional copies of
this Offering Circular-Prospectus may be made by calling Christine A. Smith,
Vice President of the Company, at (713) 747-`025, or by writing to Industrial
Holdings, Inc., 7135 Ardmore, Houston, Texas 77054.
2
<PAGE>
AVAILABLE INFORMATION
The Company has filed a Registration Statement on Form S-1 under
the Securities Act of 1933, as amended (the "Securities Act"), with the
Securities and Exchange Commission (the "Commission") with respect to the
securities offered hereby (the "Registration Statement"), as well as a Schedule
13E-4 Issuer Tender Offer Statement (the "Schedule 13E-4") under the Securities
Exchange Act of 1934, as amended (the "Exchange Act'). This Offering
Circular-Prospectus does not contain all information set forth in the
Registration Statement, the Schedule 13E-4 and the exhibits thereto, to which
reference is hereby made. The Company is subject to the informational
requirements of the Exchange Act, and in accordance therewith, files reports,
proxy statements and other information with the Commission. Such reports, proxy
statements and other information can be inspected at the public reference
facilities of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. Copies of such material may also be obtained from the
Public Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549, at prescribed rates. Such materials may also be
inspected at the offices of Nasdaq/NMS, 1735 K Street, N.W. Washington, D.C.,
20006- 1506, on which the Common Stock, Class A Warrants and Class B Warrants
are listed and Class C Warrants are anticipated to be listed.
TABLE OF CONTENTS
PAGE NO.
Available Information ........................................................ 3
Summary ...................................................................... 4
Summary Consolidated Financial Data........................................... 8
Risk Factors.................................................................. 9
The Offer.....................................................................12
Use of Proceeds...............................................................21
Price Range of Common Stock and Warrants .....................................21
Dividend Policy...............................................................22
Capitalization................................................................23
Dilution......................................................................24
Pro Forma Condensed Consolidated Financial Statements (unaudited).............25
Selected Consolidated Financial Data..........................................33
Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................................34
Business......................................................................40
Management....................................................................48
Certain Transactions..........................................................59
Principal Shareholders........................................................60
Description of Securities.....................................................61
Shares Eligible for Future Sale...............................................64
Legal Matters.................................................................64
Additional Information........................................................65
Index to Financial Statements................................................F-1
3
<PAGE>
SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS AND NOTES THERETO CONTAINED ELSEWHERE IN
THIS OFFERING CIRCULAR-PROSPECTUS.
THE COMPANY
Industrial Holdings, Inc. (including its subsidiaries, the "Company")
was incorporated in Texas in August 1989. The Company's principal executive
offices are located at 7135 Ardmore, Houston, Texas 77054, and its telephone
number is (713) 747-1025.
The Company's business is organized into two divisions: the Fastener
Manufacturing and Sales Division, comprised of Landreth Engineering Company
("Landreth") and Connecticut Rivet ("CRivet") (collectively, "LEC") 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").
The Fastener Manufacturing and Sales Division manufactures industrial
metal fasteners, including special cold-formed fasteners and threaded fastener
products for sale primarily to manufacturers in the home furniture, home
appliance and automotive industries. In the Energy Products and Services
Division, the Valve and Supplies Sales Group remanufactures pipeline valves and
distributes pipe, valves, fittings and other products primarily to the
petrochemical, chemical and petroleum refining industries and to the pipeline
transportation and product storage industries. The New Machine Sales and
Services Group sells new machine tools and conducts a machine moving operation.
The Export Crating Group provides international export crating services. The
Used Machine Sales Groups sells used machine tools.
The Company's strategy is to identify and pursue acquisitions within
the lines of business in which the Company currently operates. The Company
believes that it is a leading manufacturer of semi-tubular rivets and
cold-headed specials with pro forma revenues for that segment for the twelve
months ended December 31, 1995 of approximately $22,068,000. The Company's
growth strategy includes an emphasis on the continued acquisition of fastener
manufacturing companies with a particular emphasis on expansion into new
customer bases and geographical markets.
Since its inception, the Company has expanded its business through
acquisition. PVS was acquired in connection with the Company's initial public
offering in January 1992. Landreth was acquired in October 1992. The companies
comprising the New Machine Sales and Services Group, the Export Crating Group
and the Used Machine Sales Group were acquired as part of The Rex Group, Inc.
("REX") in 1993. Most recently, in December, 1995, CRivet was acquired. The
Company has financed these acquisitions with cash provided by operations,
borrowings under its credit agreements and public and private financings. The
Company anticipates that future acquisitions, if any, will be similarly
financed.
4
<PAGE>
RECENT DEVELOPMENTS
In October 1996, the Company signed a Stock Purchase Agreement to purchase
all of the outstanding stock of American Rivet Company, Inc. ("American"), a
primary competitor of LEC, for a purchase price of $11,125,000, subject to
closing adjustments (the "American Acquisition"). The Company anticipates that
the closing will occur on or before November 15, 1996. While there is no
assurance that the American Acquisition will occur, the Company presently
anticipates that it will obtain approximately $2,075,000 of the purchase price
with bridge financing from a private source ("Bridge Financing"). The remainder
of the purchase price will be funded with cash and marketable securities of
American, an increase in the Company's demand note and line of credit payable to
Comerica Bank-Texas ("Demand Note") to be secured by the inventory and
receivables of American and a term note secured by the real estate and equipment
of American. The Bridge Financing will be repaid through future debt or equity
financing. The Company anticipates that it will use the majority of the
estimated $3,695,000 net proceeds from the exercise of the Class A Warrants to
repay the Company's Demand Note to be incurred in connection with the American
Acquisition.
American is a manufacturer of semi-tubular rivets and cold-headed specials
located in a suburb of Chicago, Illinois. American's customers are primarily
national manufacturers in the office furniture, automotive and appliance
industries. Net sales of American were $9,188,341 for its fiscal year ended
August 31, 1995 and $7,431,141 for the ten months ended June 30, 1996. After the
acquisition, American will operate within the Fastener Manufacturing and Sales
Division as part of LEC.
THE OFFER
The Offer............................. Each holder of Class A Warrants may
exchange one Class A Warrant and $6.00
cash (the "Warrant Exercise Price") for
one share of the Company's Common Stock,
one Class B Redeemable Common Stock
Purchase Warrant ("Class B Warrant") and
one Class C Redeemable Common Stock
Purchase Warrant ("Class C Warrant").
Expiration Date....................... 5:00 p.m., New York City time, on
December 13, 1996, unless extended (the
"Expiration Date"). See "The Offer--
Expiration Date; Extensions."
Withdrawal Rights..................... Acceptance of the Offer may be withdrawn
at any time prior to 5:00 p.m., New York
City time, on the Expiration Date.
Thereafter, such exercises are
irrevocable, except that they may be
withdrawn after January 9, 1997 unless
theretofore accepted for exercise as
provided in this Offering
Circular-Prospectus.
Risk Factors.......................... Class A Warrantholders (the
"Warrantholders") who elect to exercise
their Class A Warrants and receive
Common Stock, Class B and Class C
Warrants should consider certain factors
regarding the Company. See "Risk
Factors."
5
<PAGE>
Warrant Terms......................... Each Class B and Class C Warrant will
entitle the holder to purchase one share
of Common Stock at $10.00 per share and
$15.00 per share, respectively, through
and including January 14, 1999.
Effect of the Offer on Non-
Exercising Warrantholders.......... THE CLASS A WARRANTS ARE EXERCISABLE
THROUGH AND INCLUDING JANUARY 14, 1997,
AFTER WHICH DATE THEY WILL EXPIRE. IN
ADDITION, PRIOR TO THEIR EXPIRATION, THE
REDUCED NUMBER OF OUTSTANDING CLASS A
WARRANTS AS A RESULT OF THE ACCEPTANCE
OF THE OFFER MAY LIMIT THE TRADING
MARKET FOR THE CLASS A WARRANTS AND MAY
ADVERSELY AFFECT THEIR LIQUIDITY AND
MARKET PRICE. TO THE EXTENT THE NUMBER
OF CLASS A WARRANTS AND WARRANTHOLDERS
IS REDUCED PURSUANT TO THE OFFER, THE
CLASS A WARRANTS MAY NOT BE ELIGIBLE TO
BE QUOTED BY NASDAQ AND MAY CEASE TO BE
REGISTERED UNDER THE EXCHANGE ACT.
Use of Proceeds....................... It is anticipated that the net proceeds
of the Offer of up to $3,695,000 will be
used by the Company to repay the demand
note and line of credit to be incurred
in connection with the American
Acquisition. See "Use of Proceeds."
Acceptance of the Class A Warrants.... The Company will accept all Class A
Warrants duly exercised and not properly
withdrawn on the Expiration Date,
subject to certain conditions. See "The
Offer-- Conditions of the Offer."
Conditions of the Offer............... The Offer is subject to a number of
customary conditions, any or all of
which may be waived by the Company. See
"The Offer--Acceptance of the Class A
Warrants; Delivery of Common Stock,
Class B Warrants and Class C Warrants"
and "--Conditions of the Offer."
How to Tender the Class A Warrants.... Any holder of Class A Warrants desiring
to accept the Offer should either (a)
complete and submit the accompanying
Letter of Transmittal and his Class A
Warrant certificate and forward same
together with (i) a certified or
official bank check in the amount of the
aggregate Warrant Exercise Price made
payable to
6
<PAGE>
Industrial Holdings, Inc.; or (ii) a
wire transfer to ChaseMellon Shareholder
Services (the "Exchange Agent") in the
amount of the Warrant Exercise Price and
any other required documents to the
Exchange Agent; or (b) request a broker
or bank to effect the transaction for
him or her. Holders of Class A Warrants
registered in the name of a broker,
dealer, bank or nominee should instruct
such institutions to accept the Offer.
See "The Offer--Procedure for Tendering
Class A Warrants."
Certain Income Tax Consequences...... The tax consequences of the Offer are
uncertain under federal income tax law,
and Warrantholders are urged to consult
their own tax advisors regarding this
matter. The recognition of income or
gain characterized as capital gain or
ordinary income could result from the
acceptance of the Offer by a
Warrantholder. See "The Offer--Certain
Federal Income Tax Consequences."
Delivery of Securities............... The Exchange Agent will deliver the
certificates for shares of Common Stock,
Class B and Class C Warrants as soon as
practicable after the Expiration Date.
See "The Offer--Acceptance of the Class
A Warrants; Delivery of Common Stock,
Class B Warrants and Class C Warrants."
Common Stock Outstanding............ There are presently 20,000,000
authorized shares of Common Stock, and
as of November 6, 1996, there were
4,219,580 shares of Common Stock,
632,500 Class A Warrants and 632,500
Class B Warrants outstanding. Assuming
the acceptance of the Offer by all
Warrantholders, there will be 4,852,080
shares of Common Stock outstanding.
Market Prices........................ As of November 6, 1996, the last
reported sales prices of the Common
Stock, Class A and Class B Warrants on
the Nasdaq National Market were $10.63,
$8.00, and $2.81, respectively. The
Company has applied for listing of the
Class C Warrants on the Nasdaq National
Market. See "Price Range of Common Stock
and Warrants."
7
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT FOR SHARES AND PER SHARE DATA)
The selected financial data presented below are derived from and should
be read in conjunction with the Company's Consolidated Financial Statements and
related notes and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included elsewhere herein. The unaudited pro forma
income statement data for the year ended December 31, 1995 and the six months
ended June 30, 1996 are presented as if, at the beginning of each period, the
American Acquisition (which transaction is expected to close in the fourth
quarter of 1996) had taken place and the proceeds of the Offer were used to
repay the Demand Note incurred in connection with the American Acquisition. The
unaudited pro forma income statement data for the year ended December 31, 1995
also assumes that the December 1995 purchase of CRivet had taken place at the
beginning of the period. The unaudited pro forma balance sheet data at June 30,
1996 are presented as if, at such date, the American Acquisition had taken place
and the proceeds of the Offer were used to repay the Demand Note incurred in
connection with the American Acquisition. The unaudited pro forma data should be
read in conjunction with the unaudited pro forma condensed consolidated
financial statements included elsewhere herein.
<TABLE>
<CAPTION>
PRO FORMA
SIX MONTHS HISTORICAL PRO FORMA
ENDED SIX MONTHS ENDED YEAR ENDED HISTORICAL
JUNE 30 JUNE 30 DECEMBER 31 YEARS ENDED DECEMBER 31
--------- -------------------- --------- ---------------------------------------------------
1996 1996 1995 1995 1995 1994 1993 1992 1991
--------- --------- --------- --------- --------- --------- --------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Sales ......................... $30,366 $25,627 $19,722 $56,565 $38,983 $34,730 $35,113 $20,769 $16,878
Cost of sales ................. 23,464 19,937 15,530 43,808 30,613 26,933 26,924 15,882 14,098
Gross profit .................. 6,902 5,690 4,192 12,757 8,370 7,797 8,189 4,887 2,780
Operating expenses:
Selling, general &
administrative .......... 4,542 4,033 3,226 8,492 6,512 6,689 6,204 4,089 3,097
Depreciation & amortization 276 187 200 623 413 485 478 434 249
Total operating expenses ... 4,818 4,220 3,426 9,115 6,925 7,174 6,682 4,523 3,346
Operating income (loss) ....... 2,084 1,470 766 3,642 1,445 623 1,507 364 (566)
Other income (expense) ........ (892) (628) (378) (1,875) (824) (575) (666) (261) (432)
Income (loss) before income
taxes ...................... 1,192 842 388 1,767 621 48 841 103 (998)
Income tax expense (benefit) .. 426 286 34 526 76 16 78 (279) --
Net income (loss) ............. 766 556 354 1,241 545 32 763 382 (998)
Earnings (loss) per share ..... .17 .14 .12 .32 .17 .01 .27 .17 (1.39)
Weighted average common and
common equivalent shares
outstanding(1) .............. 4,454,704 3,868,158 3,080,010 3,828,297 3,149,579 3,029,574 2,828,635 2,101,503 716,239
--------- --------- --------- --------- --------- --------- --------- --------- -------
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA HISTORICAL HISTORICAL
JUNE 30 JUNE 30 DECEMBER 31
----------- ------------------ ----------------------------------------------------
1996 1996 1995 1995 1994 1993 1992 1991
------ ------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)............ $2,815 $ 2,819 $ 2,403 $ 1,459 $ 2,254 $ 1,164 $ 1,551 $(2,367)
Total assets ........................ 41,638 30,126 21,654 27,494 20,848 20,819 13,972 5,139
Long-term obligations(2) ............ 8,127 5,002 3,236 5,891 3,568 3,229 3,242 218
Total liabilities ................... 27,942 20,125 14,408 19,891 13,965 14,386 9,312 6,367
Shareholders' equity (deficit) ..... 13,696 10,001 7,246 7,603 6,883 6,433 4,660 (1,228)
</TABLE>
- -------------------------------
(1) Calculated on the basis of the weighted average number of common and
common equivalent shares outstanding pursuant to Securities and
Exchange Commission Staff Accounting Bulletin No. 83.
(2) Excludes deferred income taxes and deferred compensation.
8
<PAGE>
RISK FACTORS
THE SHARES OF COMMON STOCK, CLASS B AND CLASS C WARRANTS OFFERED HEREBY
INVOLVE MATERIAL RISKS. IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS
OFFERING CIRCULAR-PROSPECTUS, PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER
THE FOLLOWING RISK FACTORS BEFORE MAKING A DECISION TO EXERCISE THEIR CLASS A
WARRANTS AND PURCHASE ANY SHARES OF COMMON STOCK.
LIMITED CAPITAL; RISKS RELATED TO BUSINESS STRATEGY AND ACQUISITIONS.
The Company's ability to effect its business plan depends on its ability to
raise funds to consummate acquisitions and provide necessary working capital.
The Company's future growth through acquisitions will require substantial
capital expenditures. While the Company evaluates business opportunities on a
regular basis, there can be no assurance that the Company will be successful in
identifying any additional acquisitions or will have sufficient financial
resources with which to make additional acquisitions. In the event that the
Company is unable to obtain cash in order to effect additional acquisitions, the
Company may issue additional shares, and further dilution to shareholders may
result. As the Company effects acquisitions and expands its operations, it will
be subject to all of the risks inherent in an expanding business, including
integrating financial reporting, establishing satisfactory budgetary and other
financial controls, funding increased capital needs and overhead expenses,
obtaining management personnel required for expanded operations, and funding
cash flow shortages that may occur if anticipated sales and revenues are not
realized or are delayed, whether by general economic or market conditions.
At June 30, 1996, the Company had working capital of $2,819,101,
long-term debt of $5,001,834, shareholders' equity of $10,000,888 and
availability of $1,536,352 under its credit facilities with Comerica Bank -
Texas. 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 equity and debt
securities. Any future 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. There can be no assurance
that the Company will be able to obtain such financing on terms acceptable to
it, if at all.
COMPETITION. The industries in which the Company and its subsidiaries
operate are highly competitive. Many of these competitors have greater financial
and other resources than the Company. Competitive factors for the Company's
subsidiaries include price sensitivity and customer service. The industries in
which the Company's subsidiaries operate are highly fragmented and dominated by
privately-owned businesses. Management's marketing strategy is to institute
centralized inventory controls, reduce personnel costs and achieve greater
buying power through expansion. Management believes that these strategies will
allow the Company and its subsidiaries to be more competitive. However, there
can be no assurance that the Company will be able to successfully compete
against presently known or future competitors.
FOREIGN SUPPLIERS. Certain of the Company's subsidiaries purchase
products from United States manufacturing companies operating abroad and from
foreign manufacturers. Accordingly, the Company is subject to the risks of doing
business abroad, including fluctuations in currency exchange rates, changes in
import duties or quotas, transportation costs, labor disputes and strikes. The
occurrence of any one or more of the foregoing events could materially adversely
affect the Company's product supply. All payables are settled in U.S. dollars.
9
<PAGE>
GOVERNMENTAL REGULATION. The Company's business is affected by
governmental regulations relating to its industry segments in general, as well
as environmental and safety regulations that have specific application to the
Company's business. While the Company is not aware of any proposed or pending
legislation, there can be no assurance that future legislation will not have an
adverse effect on the Company's business or competitive position. The Company
believes that it disposes of environmentally sensitive materials in accordance
with present rules and regulations. In the event the Company is required to
adopt additional environmental measures, the cost may be substantial.
DEPENDENCE ON KEY PERSONNEL. The success of the Company is dependent
on, among other things, the services of Robert E. Cone, President and Chief
Executive Officer, James H. Brock, Jr., President - Energy Products and Services
Division and Thomas C. Landreth, President - Fastener Manufacturing and Sales
Division. The Company has entered into employment agreements with Messrs. Cone,
Brock and Landreth. The loss of the services of any of these officers, for any
reason, may have a material adverse effect on the business and prospects of the
Company.
VOTING CONTROL BY CERTAIN SHAREHOLDERS. Directors and officers of the
Company own approximately 21% of the Company's outstanding shares and are
therefore able to elect a majority of the Company's Board of Directors and to
control the business and affairs of the Company. After the Offer is consummated
(assuming the exercise of all of the Class A Warrants), such officers and
directors will own approximately 19% of the Company's then outstanding shares,
and will continue to have the ability to control the business and affairs of the
Company.
LIMITED BACKLOG. Due to the nature of the distribution and
remanufacturing businesses, there exists no firm backlog for products of the
Company's Energy Products and Services Division. The Companies that comprise the
Energy Products and Services Division have historically operated without firm
backlog, which is standard practice in the industry.
LACK OF CONTRACTUAL SUPPLY AGREEMENTS. The Company's subsidiaries
purchase products from various sources of supply. The Company does not maintain
firm contractual agreements with any of its suppliers with respect to the
product purchases. Instead, the Company purchases its products from suppliers on
the most favorable terms that can be negotiated. Since product purchases are
negotiated on a continuing basis, the Company's reserve stream may not be as
secure as if they were negotiated pursuant to a long-term contract. The
Company's inability to obtain sufficient product from its suppliers would have a
material adverse effect on its business and operations.
DIVIDENDS NOT LIKELY. The Company has never paid cash dividends on its
Common Stock and does not anticipate paying cash dividends for the foreseeable
future. It is anticipated that any earnings that may be generated from the
Company's operations will be used to finance the Company's growth. Certain of
the Company's outstanding debt instruments currently prohibit the Company from
paying dividends. See "Dividend Policy."
DILUTION. Exercising Warrantholders will incur immediate and
substantial dilution of $3.07 per share from their exercise price of $6.00,
since the pro forma net tangible book value per share of Common Stock will be
considerably less than the Exercise Price. See "Dilution."
FUTURE SALES OF COMMON STOCK. Of the Company's currently outstanding
4,219,580 shares, 887,364 are "restricted securities" within the meaning of Rule
144 promulgated under the Securities Act ("Restricted Shares"). All of the
Restricted Shares are currently eligible for public sale in accordance with
10
<PAGE>
the requirements of Rule 144. The remaining 3,332,216 shares are freely
tradeable without restrictions or further registration under the Securities Act,
except for shares held by "affiliates" of the Company, which will be subject to
resale limitations of Rule 144. In addition, the Company has filed registration
statements on Form S-3 under the Securities Act relating to 746,735 shares of
Common Stock issued or issuable upon the exercise of warrants or conversion of
convertible securities and offered by certain selling securityholders. Such
shares of Common Stock are (or if not issued, will be when issued) freely
tradeable without restriction or further registration under the Securities Act,
except for shares held by "affiliates" of the Company, which shares will be
subject to the resale limitations of Rule 144. The Company has also filed a
registration statement under the Securities Act to register the shares of Common
Stock issuable under its stock option plans. Shares issued under such plans,
other than shares issued to affiliates of the Company, will be freely tradeable
in the public market.
The Company is unable to predict the effect that sales made under Rule
144 or otherwise may have on the then-prevailing market price of the Common
Stock. The issuance of a significant number of additional securities, or even
the possibility thereof, could depress the market price of such securities.
See "Shares Eligible for Future Sale."
POSSIBLE INABILITY TO EXERCISE CLASS B AND CLASS C WARRANTS. The Class
B or Class C Warrants to be issued in the Offer may not be exercised unless at
the time of exercise there is a current prospectus under an effective
registration statement covering shares of Common Stock issuable upon exercise of
such warrants and such shares have been registered or qualified or deemed to be
exempt under the securities laws of the state of residence of the holder. The
Company will use its best efforts to have a current registration statement in
effect and to have all such shares so registered or qualified at any time when
the holders thereof may exercise their warrants. While it is the Company's
intention to do so, there is no assurance that it will be able to do so.
POTENTIAL ADVERSE EFFECT OF REDEMPTION OF CLASS B AND CLASS C WARRANTS.
The Class B and Class C Warrants to be issued in the Offer may be redeemed by
the Company at any time prior to their expiration, at a price of $.05 per
warrant upon at least 30 days notice if the closing bid price of the Common
Stock has equaled or exceeded $12.00 and $20.00 per share, respectively, for a
period of 20 consecutive trading days. Redemption of the warrants could force
the holders to exercise the warrants and pay the exercise price at a time when
it may be disadvantageous for the holders to do so, to sell the warrants at the
then-current market price when they might otherwise wish to hold the warrants,
or to accept the redemption price, which is likely to be substantially less than
the market value of the warrants at the time of redemption.
ADVERSE EFFECT OF OFFER ON NON-EXERCISING CLASS A WARRANTHOLDERS. The
effect of the Offer on non-exercising Class A Warrantholders will be
significant. First, the Class A Warrants are exercisable through and including
January 14, 1997, after which date they expire. In addition, prior to their
expiration, to the extent that the Offer is accepted and Class A Warrants are
exercised, the trading market for unexercised Class A Warrants will become more
limited, and their price is likely to be adversely affected. To the extent that
the number of outstanding Class A Warrants is reduced, the remaining Class A
Warrants may not be eligible to be quoted by Nasdaq and may cease to be
registered under the Exchange Act.
ANTI-TAKEOVER EFFECT. The provisions of the Amended and Restated
Articles of Incorporation ("Amended Articles") may be deemed to have an
anti-takeover effect or may delay, defer or prevent a tender offer or takeover
attempt that a shareholder might consider in such shareholder's best interest,
11
<PAGE>
including those attempts that might result in a premium over the market price
for the shares held by a shareholder. Pursuant to the Amended Articles, the
Board of Directors may, by resolution, establish one or more series of preferred
stock, having such number of shares, designation, relative voting rights,
dividend rates, liquidation or other rights, preferences and limitations as may
be fixed by the Board of Directors without any further shareholder approval.
Such rights, preferences, privileges and limitations as may be established could
have the effect of impeding or discouraging the acquisition of control of the
Company.
LIMITATION OF DIRECTOR LIABILITY. Texas law authorizes a Texas
corporation to eliminate or limit the personal liability of a director to the
Company and its shareholders for monetary damages for breach of certain
fiduciary duties as a director. The Company believes that such a provision is
beneficial in attracting and retaining qualified directors, and accordingly, its
Amended Articles include a provision eliminating a director's liability for
monetary damages for any breach of fiduciary duty as a director, except in
certain specified instances. The foregoing provision of the Amended Articles may
reduce the likelihood of derivative litigation against directors and may
discourage or deter shareholders or management from bringing a lawsuit against
directors for breaches of their fiduciary duties, even though such an action, if
successful, might otherwise have benefited the Company and its shareholders.
THE OFFER
TERMS OF THE OFFER
The Company hereby offers to the holders of its issued and outstanding
Class A Warrants the opportunity to exchange each Class A Warrant and $6.00 cash
for one share of the Company's Common Stock, $.01 par value, one Class B Warrant
and one Class C Warrant beginning on the date hereof and ending at 5:00 p.m.,
New York City time, on December 13, 1996 (the "Expiration Date") unless
extended, subject to the terms and conditions set forth herein. The Offer
applies to all of the outstanding Class A Warrants, and the Company's obligation
to consummate the Offer is not subject to the exercise of any minimum number of
Class A Warrants.
In accordance with this Offer, the Company will issue Common Stock, Class B
Warrants and Class C Warrants for Class A Warrants effectively exercised, and
not withdrawn, on the Expiration Date or as soon as practicable after such
Expiration Date, subject to certain conditions set forth herein. See "Conditions
of the Offer" below.
AN EXCHANGING WARRANTHOLDER WHO TENDERS CLASS A WARRANTS AND PAYS SIX
DOLLARS ($6.00) PER CLASS A WARRANT WILL RECEIVE FOR EACH CLASS A WARRANT
TENDERED ONE SHARE OF COMMON STOCK, ONE CLASS B WARRANT AND ONE CLASS C WARRANT.
EACH CLASS B WARRANT TO BE ISSUED WILL ENTITLE THE HOLDER THEREOF TO
PURCHASE ONE SHARE OF THE COMPANY'S COMMON STOCK AT A PURCHASE PRICE OF $10.00
THROUGH AND INCLUDING JANUARY 14, 1999. THE TERMS OF CURRENTLY OUTSTANDING CLASS
B WARRANTS, WHICH ARE EXERCISABLE THROUGH AND INCLUDING JANUARY 14, 1997, WILL
AFTER THE EXPIRATION DATE, AUTOMATICALLY BE EXTENDED TO JANUARY 14, 1999. EACH
CLASS C WARRANT TO BE ISSUED WILL ENTITLE THE HOLDER TO PURCHASE ONE SHARE OF
THE COMPANY'S COMMON STOCK AT AN EXERCISE PRICE OF $15.00 PER SHARE THROUGH AND
INCLUDING JANUARY 14, 1999. THE
12
<PAGE>
COMPANY MAY REDEEM THE CLASS B AND CLASS C WARRANTS AT $.05 PER WARRANT UPON 30
DAYS PRIOR WRITTEN NOTICE IF THE CLOSING BID PRICE OF THE COMPANY'S COMMON STOCK
EQUALS OR EXCEEDS $12.00 AND $20.00, RESPECTIVELY, FOR 20 CONSECUTIVE TRADING
DAYS. THE EXERCISE PRICES OF THE CLASS B AND CLASS C WARRANTS WERE ARBITRARILY
DETERMINED BY THE COMPANY'S BOARD OF DIRECTORS AND ARE NOT NECESSARILY RELATED
TO THE COMPANY'S ASSETS, EARNINGS, BOOK VALUE OR OTHER GENERALLY ACCEPTED
CRITERIA OF VALUE.
If a holder of Class A Warrants does not want to tender his Class A
Warrants pursuant to the terms of this Offer, he may exercise such Class A
Warrants under the present terms of the Class A Warrants. Each Class A Warrant
entitles the registered holder to purchase one share of Common Stock at an
exercise price of $6.00 per share through and including January 14, 1997.
EXPIRATION DATE; EXTENSIONS
Subject to the terms and conditions as set forth herein, the Company
will accept all Class A Warrants tendered under the terms of this Offer which
are not withdrawn prior to 5:00 p.m., New York City time, on the Expiration
Date. The Company at its sole option may extend this Offer for an additional
period of time by giving written notification of such extension to the Exchange
Agent. In addition, the Company may at its election cause notice of any
extension of the Offer to be published in the "New York Times," the "Wall Street
Journal" or any other newspaper selected by the Company.
The Company has no present intention to extend this Offer beyond the
Expiration Date. If, however, the Company does extend this Offer beyond such
date, the Company intends that such extension will not exceed an additional 10
business days. Any extension or expiration of the Offer will be followed as soon
as practicable, but in no event later than 9:00 a.m., New York City time, on the
next business day after the previously scheduled Expiration Date, by public
announcement thereof, and any amendment of the Offer will be followed as soon as
practicable by public announcement. Without limiting the manner by which the
Company may choose to make such public announcement, the Company shall not,
unless otherwise required by law, have any obligation to publish, advertise or
otherwise communicate any such public announcement other than by making a
release to the Dow Jones News Service.
If the Company decides to waive, modify or amend a material provision
of the Offer, it may do so at any time, provided that it gives notice thereof in
the manner specified above and extends such Offer to the extent required by the
Exchange Act. With respect to an increase or decrease in the percentage of the
class of securities being tendered for or a change in the consideration offered,
Rule 13e-4(f)(1) of the Exchange Act generally requires that a tender offer
remain open for at least 10 business days from the date the notice of such
change is first published or sent or given to security holders. The minimum
period during which an offer must remain open following other material changes
in the terms of the offer will depend on the facts and circumstances, including
the relative materiality of the change in the terms of information concerning
the Offer. Any amendment to the Offer will apply to all Class A Warrants
exercised pursuant thereto, regardless of when or in what order the Class A
Warrants are exercised.
PROCEDURE FOR TENDERING CLASS A WARRANTS
To accept the Offer and tender the Class A Warrants, the accompanying
Letter of Transmittal ("Letter of Transmittal"), must be completed and executed
as indicated thereon and the Letter of Transmittal and the Class A Warrants must
be accompanied by payment of the aggregate Warrant Exercise Price by
13
<PAGE>
certified or official bank check made payable to Industrial Holdings, Inc. or by
wire transfer to the Exchange Agent for the benefit of the Company, together
with any other required documents. The foregoing materials must be delivered to
and received by the Exchange Agent at one of its addresses set forth on the back
cover of this Offering Circular-Prospectus on or before the Expiration Date.
However, in lieu of the foregoing, a Warrantholder may either (i) exercise the
Class A Warrants pursuant to the procedure for book-entry exercise set forth
below (and a confirmation of such book-entry exercise must be received by the
Exchange Agent on or before the Expiration Date) or (ii) comply with the
guaranteed delivery procedure set forth below. The beneficial holders of Class A
Warrants that are held by or registered in the name of a broker, dealer,
commercial bank, trust company or other nominee or custodian are urged to
contact such entity promptly if they wish to accept the Offer. LETTERS OF
TRANSMITTAL, PAYMENT OF THE AGGREGATE EXERCISE PRICE AND CLASS A WARRANTS SHOULD
NOT BE SENT TO THE COMPANY.
THE METHOD OF DELIVERY OF LETTERS OF TRANSMITTAL, CLASS A WARRANTS, THE
AGGREGATE WARRANT EXERCISE PRICE AND ALL OTHER REQUIRED DOCUMENTS TO THE
EXCHANGE AGENT IS AT THE ELECTION AND RISK OF THE HOLDER, BUT IF SUCH DELIVERY
IS BY MAIL, IT IS SUGGESTED THAT THE HOLDER USE PROPERLY INSURED, REGISTERED
MAIL WITH RETURN RECEIPT REQUESTED, AND THAT THE MAILING BE MADE SUFFICIENTLY IN
ADVANCE OF THE EXPIRATION DATE TO PERMIT DELIVERY TO THE EXCHANGE AGENT ON OR
PRIOR TO THE EXPIRATION DATE.
Within two business days after the date hereof, the Exchange Agent will
establish accounts with respect to the Class A Warrants at each of The
Depository Trust Company and Philadelphia Depository Trust Company (each a
"Book-Entry Transfer Facility" and collectively referred to as "Book-Entry
Transfer Facilities") for purposes of the Offer. Any financial institution that
is a participant in a Book- Entry Transfer Facility's system may make book-entry
delivery of Class A Warrants by causing the Book- Entry Transfer Facility to
transfer the same into the Exchange Agent's account at such Book-Entry Transfer
Facility in accordance with such Book-Entry Transfer Facility's procedure for
such transfer and to confirm such transfer to the Exchange Agent in writing.
Although delivery of the Class A Warrants may be effected through book-entry
transfer, either (i) a properly completed Letter of Transmittal (or facsimile
thereof) executed by the holder of record, together with the proper signature
guarantees, and the certified or official bank check made payable to Industrial
Holdings, Inc. or a wire transfer for the benefit of the Company, together with
all other documents required, must be transmitted to and received by the
Exchange Agent at one of its addresses set forth on the back cover page of this
Offering Circular-Prospectus on or before the Expiration Date or (ii) the
guaranteed delivery procedure set forth below must be complied with. Delivery of
documents to a Book-Entry Transfer Facility in accordance with such Book-Entry
Transfer Facility's procedure does not constitute delivery to the Exchange
Agent.
Except as otherwise provided below, each signature on the Letter of
Transmittal, Class A Warrant certificate or instrument of transfer must be
guaranteed by a firm or other entity that is a member in good standing of the
Security Transfer Agent's Medallion Program, the New York Stock Exchange
Medallion Program or the Stock Exchange Medallion Program (singularly, an
"Eligible Institution"). Signatures on a Letter of Transmittal need not be
guaranteed (i) if the Letter of Transmittal is signed by the registered holder
of the Class A Warrants tendered and the holder has not completed the box titled
"Special Payment Instructions" or "Special Issuance Instructions" on the Letters
of Transmittal; or (ii) if such Class A Warrants are tendered for the account of
an Eligible Institution.
If the certificates for Class A Warrants are registered in the name of
a person other than the person exercising such Class A Warrants, or if Class A
Warrants that are not accepted for exercise pursuant to the Offer are to be
returned to a person other than the registered owner, then the certificates
14
<PAGE>
for such Class A Warrants must be endorsed or accompanied by an appropriate
instrument of transfer, signed exactly as the name of the registered owner
appears on the certificates, with the signatures on the certificates or
instruments of transfer guaranteed by an Eligible Institution.
The issuance of Common Stock in exchange for Class A Warrants exercised
pursuant to the Offer will be made only after timely receipt by the Exchange
Agent of the Letters of Transmittal and certificates for such Class A Warrants
(or a confirmation of a book-entry transfer of such Class A Warrants into the
Exchange Agent's account at one of the Book-Entry Transfer Facilities as
described above) and the certified or official bank check or the wire transfer,
together with all other documents required. If less than the number of Class A
Warrants evidenced by a submitted certificate are to be exercised, the
exercising Warrantholder should indicate on the Letter of Transmittal the number
of Class A Warrants being exercised. The number of Class A Warrants represented
by the certificates for Class A Warrants delivered to the Exchange Agent and
accompanied by a Letter of Transmittal and the aggregate Warrant Exercise Price
will be deemed to have been exercised.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of the Class A Warrants or payments of the aggregate
Warrant Exercise Price tendered will be determined by the Company, which
determination shall be final and binding. The Company reserves the absolute
right to reject any or all tenders of any particular Class A Warrants and
payments of the aggregate Warrant Exercise Price not properly tendered or the
acceptance of which would, in the opinion of the Company, be unlawful. The
Company also reserves the right to waive any irregularities or conditions of
tender as to any particular Class A Warrants, and the Company's interpretation
of the terms and conditions of this Offer (including the instructions and Letter
of Transmittal) shall be final and binding. Any irregularities in connection
with the tenders, unless waived, must be cured within such time as the Company
shall determine, which time may be extended beyond the Expiration Date. Neither
the Company nor the Exchange Agent shall be under any duty to give notification
of defects in such tenders or incur any liability for failure to give such
notification. Tenders of the Class A Warrants and payments of the aggregate
Warrant Exercise Price received by the Exchange Agent that are not properly
tendered and as to which the irregularities have not been cured or waived will
be returned (without interest on the cash payment or deduction therefrom) by the
Exchange Agent to the appropriate Warrantholder as soon as practicable.
GUARANTEED DELIVERY PROCEDURE
If a holder of Class A Warrants desires to exercise such Class A
Warrants pursuant to the Offer but is unable either to (i) deliver his
certificates, the certified or official bank check or the wire transfer and all
other required documents to the Exchange Agent on or before the Expiration Date
or (ii) comply with the procedure for book-entry exercise on a timely basis,
such Class A Warrants may nevertheless be exercised pursuant to the Offer,
provided that all of the following conditions are satisfied:
(i) such exercises are made by or through an Eligible
Institution;
(ii) prior to the Expiration Date, a properly completed and
duly executed Notice of Guaranteed Delivery (by telegram,
telex, facsimile transmission, mail or hand delivery) setting
forth the name and address of the Warrantholder and the number
of Class A Warrants exercised, stating that the exercise is
being made thereby and guaranteeing that within three trading
days after the Expiration Date, the Class A Warrants and the
certified
<PAGE>
or official bank check or the wire transfer, together with all
other documents required, will be deposited by the Eligible
Institution with the Exchange Agent; and
(iii) the certificates for all exercised Class A Warrants in
proper form for transfer (or a written confirmation of
book-entry transfer into the Exchange Agent's account at a
Book-Entry Transfer Facility as described above), a properly
completed and duly executed Letter of Transmittal and the
certified or official bank check or the wire transfer,
together with all other documents required, are received by
the Exchange Agent within three trading days after the
Expiration Date.
WITHDRAWAL RIGHTS
Any exercise of Class A Warrants pursuant to the Offer may be withdrawn
subject to the procedures described below, at any time prior to the Expiration
Date. Thereafter, such exercises are irrevocable, except that they may be
withdrawn after January 9, 1997 unless theretofore accepted for exercise as
provided in this Offering Circular-Prospectus. If the Company extends the period
of time during which the Offer is open, is delayed in its acceptance of the
Class A Warrants for exercise or is unable to accept the Class A Warrants for
exercise for any reason, then, without prejudice to the Company's rights under
the Offer, the Exchange Agent may, on behalf of the Company, retain all Class A
Warrants exercised, and such Class A Warrants may not be withdrawn except as
provided herein, subject to Rule 13E-4(f)(5) under the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), which provides that the person making
an issuer exchange offer shall either pay the consideration offered or return
tendered securities, promptly after the termination or withdrawal of the Offer.
For a withdrawal to be effective, a written, telegraphic or facsimile
transmission notice of withdrawal must (i) be timely received by the Exchange
Agent at one of its addresses on the back cover of this Offering
Circular-Prospectus before the Exchange Agent receives notice of acceptance by
the Company of the Class A Warrants, (ii) set forth the name of the tendering
Warrantholder, (iii) if the Class A Warrants have been deposited with or
otherwise identified to the Exchange Agent, contain the description of the Class
A Warrants to be withdrawn and indicate the certificate numbers shown on the
certificates evidencing such Class A Warrants (except in the case of book-entry
exercise), and (iv) be executed by the Warrantholder in the same manner as the
original Class A Warrant certificate tendered or be accompanied by evidence
satisfactory to the Company that the person withdrawing the exercise pursuant to
this Offer has succeeded to the beneficial ownership of the Class A Warrants. In
the case of Class A Warrants tendered by book-entry transfer, a notice of
withdrawal must specify, in lieu of certificate numbers, the name and number of
the account at one of the Book-Entry Transfer Facilities to be credited with the
withdrawn Class A Warrants. All questions as to the validity (including the time
of receipt) of notices of withdrawal will be determined by the Company, whose
determination shall be final and binding. Class A Warrants and payments
withdrawn in the manner specified above will not be considered to have been duly
tendered. However, withdrawn Class A Warrants may be re-exercised at any time
prior to the Expiration Date.
No interest shall be paid on any amount returned to a Warrantholder
pursuant to a proper withdrawal or otherwise, regardless of any delay in the
Offer.
16
<PAGE>
ACCEPTANCE OF CLASS A WARRANTS; DELIVERY OF COMMON STOCK, CLASS B WARRANTS AND
CLASS C WARRANTS
Upon the terms and subject to the conditions of this Offer, Class A
Warrants tendered for exercise and not properly withdrawn will be accepted for
exercise on the Expiration Date. For purposes of this Offer, the Company will be
deemed to have accepted for exercise properly tendered Class A Warrants when, as
and if the Company has given oral or written notice thereof to the Exchange
Agent. All exercising warrantholders will be deemed to have waived any right to
receive notice of the acceptance of their Class A Warrants.
The Exchange Agent will act as agent for the exercising holders of
Class A Warrants for the purposes of receiving from the Company the Common
Stock, Class B Warrants and Class C Warrants and Class A Warrants not accepted
for exercise and transmitting such securities to the holders. Tendered Class A
Warrants not accepted for exercise by the Company will be returned (or, in the
case of Class A Warrants exercised by book-entry transfer through a Book-Entry
Transfer Facility, will be credited to an account maintained with such
Book-Entry Transfer Facility) without expense to the exercising holders as
promptly as practicable following the Expiration Date.
If the Company extends the period during which the Offer is open, is
delayed in its acceptance for exercise or is unable to accept for exercise any
Class A Warrants pursuant to the Offer for any reason, then, without prejudice
to the Company's rights hereunder, the Exchange Agent, at the request of the
Company, may nevertheless retain Class A Warrants exercised together with any
certified or official bank check or wire transfer and any other required
documents subject to the withdrawal rights of holders thereof as set forth
herein and applicable securities laws.
Delivery of the Common Stock, Class B Warrants and Class C Warrants in
exchange for Class A Warrants and payments validly tendered and accepted by the
Company will be made as soon as practicable after the Expiration Date. All
deliveries will be made through the Exchange Agent.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following summary is a general discussion of certain of the
anticipated federal income tax consequences of the acceptance of the Offer. No
discussion is included regarding any applicable state, local or foreign tax
laws.
This summary is limited to Warrantholders who hold the Class A Warrants
as "capital assets" (generally, property held for investment) within the meaning
of Section 1221 of the Internal Revenue Code of 1986, as amended (the "Code").
The tax consequences to any particular Warrantholder may be affected by matters
not discussed below. In addition, the Company has not sought a ruling from the
Internal Revenue Service or an opinion of counsel with respect to such tax
consequences. Accordingly, each Warrantholder is advised to consult with his or
her own tax advisor regarding the tax consequences of holding or exercising the
Class A Warrants.
ACCEPTANCE OF THE OFFER. It is possible that the acceptance of the
Offer would require the recognition of income by a Warrantholder, as the Class B
and Class C Warrants received by any Warrantholder accepting the Offer
constitute new and independent value (in the form of an inducement to exercise
the Class A Warrants), which is in addition to the original rights granted under
the Class A Warrants. Thus, those Warrantholders who accept the Offer may
recognize income to the extent of the extra value received, measured by the fair
market value of the Class B and C Warrants. The character
17
<PAGE>
of the income will be either capital gain realized from the exchange of a Class
A Warrant for Common Stock and the Class B and Class C Warrant or ordinary
income in the form of a taxable receipt of intangible property. Each
Warrantholder who exercises his Class A Warrants pursuant to this Offer will
have an adjusted basis in the Common Stock received equal to the aggregate
Warrant Exercise Price paid and Class B and Class C Warrants received equal to
the amount of income reported on receipt thereof.
EXERCISE OF THE CLASS B AND CLASS C WARRANTS. If a Warrantholder who
accepts the Offer reports income upon the receipt of the Class B and Class C
Warrants based upon their fair market value, he will not report income to that
extent when he subsequently exercises the Warrants. The character of the income
will depend upon whether the Class B and Class C Warrants are properly
considered to have been received in a capital transaction (which would result in
capital gain) or are characterized as intangible property (which would result in
ordinary income), as discussed above. The adjusted tax basis of the Common Stock
received in exchange for the Class B and Class C Warrants would be equal to the
amount reported as income (whether upon acceptance of the Offer or later) plus
the amount paid upon exercise of the Class B and Class C Warrants. The holding
period for the Class B and C Warrants will begin on the date this Offer is
consummated.
TAX CONSEQUENCES TO THE COMPANY. No gain or loss will be recognized to
the Company as a result of the Offer or the acceptance of the Offer by the
Warrantholders.
Pursuant to Section 382 of the Code, utilization of net operating loss
("NOL") carryforwards is limited if there has been a change in control of the
Company during a specified time period. The Company's issuance of Common Stock
in its initial public offering in January 1992 has previously resulted in
limitations under Section 382 with respect to the Company's ability to use NOL
carryforwards. In addition, the Company issued Common Stock in private offerings
in 1995 and 1996. However, the Company has been advised that the exercise of the
Class A Warrants under this Offer, when added to the 1995 and 1996 Common Stock
issuances, will not create an additional change in control under Section 382 and
an additional limitation on the Company's NOL carryforwards.
EFFECT ON NON-EXERCISING CLASS A WARRANTHOLDERS
THE EFFECT OF THE OFFER ON NON-EXERCISING CLASS A WARRANTHOLDERS WILL
BE SIGNIFICANT. FIRST, THE CLASS A WARRANTS WILL EXPIRE AFTER JANUARY 14, 1997.
IN ADDITION, PRIOR TO THEIR EXPIRATION, TO THE EXTENT THAT THE OFFER IS ACCEPTED
AND CLASS A WARRANTS ARE EXERCISED, THE TRADING MARKET FOR UNEXERCISED CLASS A
WARRANTS WILL BECOME MORE LIMITED, AND THEIR PRICE IS LIKELY TO BE ADVERSELY
AFFECTED. TO THE EXTENT THAT THE NUMBER OF OUTSTANDING CLASS A WARRANTS IS
REDUCED, THE REMAINING CLASS A WARRANTS MAY NOT BE ELIGIBLE TO BE QUOTED BY
NASDAQ AND MAY CEASE TO BE REGISTERED UNDER THE EXCHANGE ACT.
CONDITIONS OF THE OFFER
Notwithstanding any other provision of the Offer, the Company may
cancel, modify or terminate the Offer and is not required to accept for exercise
any Class A Warrants pursuant to the Offer if prior to the Expiration Date:
18
<PAGE>
(i) there shall be pending, instituted or threatened any legal
action or administrative proceeding before any court or governmental
agency, by any governmental agency or any other person, prohibiting,
restricting or delaying the Offer;
(ii) any statute, rule or regulation shall have been enacted,
or any action shall have been taken by any governmental authority,
which would prohibit or materially restrict or delay consummation of
the Offer; or
(iii) there shall have occurred (and the adverse effect of
such occurrence will be continuing): (a) any general suspension of, or
limitation on prices for trading on, the Nasdaq National Market or in
the other over-the-counter markets; (b) a declaration of a banking
moratorium by United States or New York authorities; or (c) a
commencement of a war, armed hostilities or other international or
national calamity directly or indirectly involving the United States of
America which would reasonably be expected to affect materially and
adversely (or to delay materially) the consummation of the Offer.
If the Company terminates the Offer pursuant to any of the conditions
set forth above, the Exchange Agent will promptly return the applicable Class A
Warrants and funds for the aggregate Warrant Exercise Price to the holders
thereof.
The Company reserves the absolute right to waive satisfaction of any
conditions and compliance with any terms of the Offer. The Company further
reserves the absolute right to reject any and all exercises not in proper form.
On the Expiration Date, the Company will accept any and all Class A Warrants
which are properly exercised, subject to the conditions stated herein.
LISTING OF THE CLASS C WARRANTS
The Company has applied for listing of the Class C Warrants on the
Nasdaq National Market. However, even if initially listed, there can be no
assurance that the Class C Warrants will meet the requirements for continued
inclusion and continue to be listed on the Nasdaq National Market. Failure to
continue to be listed may adversely affect the market value and liquidity of the
Class C Warrants.
POSITION OF THE BOARD OF DIRECTORS
The Board of Directors of the Company believes the Company will benefit
from the receipt of net cash proceeds of up to $3,695,000 received pursuant to
this Offer and the possible receipt of additional financing in the future from
the exercise of the Class B Warrants and subsequently from the Class C Warrants
of up to $22,137,500 in the aggregate. However, the Board of Directors is not
making any recommendations to the holders of the Class A Warrants as to whether
they should exchange or refrain from exchanging any or all of their Class A
Warrants. Each Warrantholder must make his or her own decision as to whether to
exchange all or any portion of the Class A Warrants owned.
PAYMENT OF FEES AND EXPENSES
The Company has agreed to pay the Exchange Agent a fee of $7,500 to act
in such capacity reasonable and customary fees for its services and will
reimburse it for its reasonable out-of-pocket expenses in connection therewith.
The Company will also pay brokerage houses and other custodians, nominees and
fiduciaries the reasonable out-of-pocket expenses incurred by them in forwarding
copies
19
<PAGE>
of this Offering Circular-Prospectus and related documents to the beneficial
owners of the Class A Warrants, and in handling or forwarding tenders for their
customers. However, the Company will not make any other payments to brokers,
dealers or others soliciting tenders of Class A Warrants. Employees of the
Company may solicit tenders of Class A Warrants, for which they will receive no
additional compensation.
MUTILATED, LOST, STOLEN OR DESTROYED CERTIFICATES
Any Warrantholder whose Class A Warrant certificates have been
mutilated, lost, stolen or destroyed should contact the Company at its address
set forth below for further information.
REQUESTS FOR ASSISTANCE
Requests for additional copies of this Offering Circular-Prospectus or
the Letter of Transmittal or assistance in completing an exchange should be made
by calling Christine A Smith, Vice-President of the Company, at (713) 747-1025,
or by mail to the Company as follows:
Industrial Holdings, Inc.
7135 Ardmore
Houston, Texas 77054
20
<PAGE>
USE OF PROCEEDS
The Company estimates that the net proceeds from the exercise of the
Class A Warrants assuming the exercise of all outstanding Class A Warrants
(after deducting the estimated expenses of the Offer payable by the Company)
will be $3,695,000.
In October 1996, the Company signed a Stock Purchase Agreement to
purchase all of the outstanding stock of American Rivet Company, Inc.
("American"), a primary competitor of LEC, for a purchase price of $11,125,000,
subject to closing adjustments (the "American Acquisition"). The Company
anticipates that the closing will occur on or before November 15, 1996. While
there is no assurance that the American Acquisition will occur, the Company
presently anticipates that it will obtain approximately $2,075,000 of the
purchase price with bridge financing from a private source ("Bridge Financing").
The remainder of the purchase price will be funded with cash and marketable
securities of American, an increase in the Company's Demand Note secured by the
inventory and receivables of American and a term note secured by the real estate
and equipment of American. The Bridge Financing will be repaid through future
debt or equity financing. The Company anticipates that it will use the majority
of the estimated $3,695,000 net proceeds from the exercise of the Class A
Warrants to repay the Company's Demand Note to be incurred in connection with
the American Acquisition.
PRICE RANGE OF COMMON STOCK AND WARRANTS
The Common Stock, Class A Warrants and Class B Warrants are traded on
the Nasdaq National Market under the symbols "IHII," "IHIIW" and "IHIIZ,"
respectively. The following table sets forth the high and low closing sales
prices of the Common Stock, Class A Warrants and Class B Warrants for the
periods indicated below:
<TABLE>
<CAPTION>
Common Stock Class A Warrant Class B Warrant
PRICE RANGE PRICE RANGE PRICE RANGE
----------- ----------- -----------
HIGH LOW HIGH LOW HIGH LOW
---- --- ---- --- ---- ---
<S> <C> <C> <C> <C> <C> <C>
1994
First Quarter $5.25 $3.88 $1.31 $0.75 $0.81 $0.31
Second Quarter 4.81 3.50 1.25 0.38 0.38 0.13
Third Quarter 3.63 2.25 0.50 0.25 0.06 0.06
Fourth Quarter 3.75 2.00 0.94 0.31 0.19 0.09
1995
First Quarter $4.00 $3.25 $0.88 $0.63 $0.22 0.13
Second Quarter 3.63 2.88 0.75 0.63 0.34 0.19
Third Quarter 4.75 3.00 1.00 0.63 0.38 0.19
Fourth Quarter 4.38 3.31 0.81 0.63 0.38 0.28
1996
First Quarter $6.75 $3.75 $1.44 $0.63 $0.53 $0.31
Second Quarter 10.50 6.50 5.13 1.25 2.13 0.53
Third Quarter 10.13 7.00 6.38 3.75 3.25 1.50
</TABLE>
All of the foregoing prices reflect interdealer quotations, without
retail mark-up, mark-downs or commissions and may not necessarily represent
actual transactions in the Common Stock, Class A Warrants or Class B Warrants.
21
<PAGE>
On November 6, 1996, the last reported sales prices of the Common
Stock, Class A Warrants and Class B Warrants as quoted by the Nasdaq National
Market, were $10.63, $8.00, and $2.81 per share or warrant, respectively. On
November 6, 1996 there were approximately 180, 20 and 28 record holders of the
Common Stock, Class A Warrants and Class B Warrants, respectively.
DIVIDEND POLICY
The Company has never paid dividends on its Common Stock and does not
anticipate paying any cash dividends in the foreseeable future. The Company
presently intends to retain future earnings to support the Company's operations
and growth. Any payment of cash dividends in the future will be dependent on the
amount of funds legally available therefor, the Company's earnings, financial
condition, capital requirements and other factors that the Board of Directors
may deem relevant. The payment of cash dividends is currently prohibited under
the terms of certain of the Company's long-term indebtedness.
22
<PAGE>
CAPITALIZATION
The following table sets forth (i) the capitalization of the Company at
June 30, 1996 and (ii) such capitalization as adjusted to reflect the
consummation of the American Acquisition; the exercise of all 632,500
outstanding Class A Warrants, the issuance of 632,500 shares of Common Stock and
the application of the estimated $3,695,000 in net proceeds therefrom. This
table should be read in conjunction with the Company's Consolidated Financial
Statements and notes thereto and "Use of Proceeds" that are included elsewhere
in this Offering Circular-Prospectus.
JUNE 30, 1996
-----------------
(in thousands)
PRO FORMA
ACTUAL AS ADJUSTED(2)
------- -------
(UNAUDITED)
Short-term debt ........................................ $ 7,657 $ 9,992
======= =======
Long-term debt ......................................... 5,002 8,127
Shareholders' equity:
Common stock, $.01 par value; 7,500,000 shares
authorized, 3,641,162 shares issued and
outstanding (1) and 4,273,662 shares issued
and outstanding, pro forma as adjusted (2) .. 36 43
Additional paid-in capital .................... 9,390 13,078
Retained earnings ............................. 575 575
------- -------
Total shareholders' equity ........... $10,001 $13,696
------- -------
Total capitalization ................................... $15,003 $21,823
======= =======
- ------------------------------------------
(1) As of June 30, 1996, excludes (i) 632,500 shares underlying the
outstanding Class B Warrants; (ii) an aggregate of 511,000 shares of
Common Stock issuable upon the exercise of options granted to directors
or employees under the Company's 1994 Amended and Restated Incentive
Plan and 1995 Non-Employee Director Stock Option Plan and exercisable
at an average exercise price of $3.68 per share of Common Stock
("Shareholders' Options"), and an additional 20,000 shares that may be
granted in the future under the Company's 1995 Non-Employee Director
Stock Option Plan; (iii) an aggregate of 745,000 shares of Common Stock
issuable upon the exercise of warrants other than the outstanding Class
A and Class B Warrants and exercisable at an average exercise price of
$4.08 per share of Common Stock ("Other Warrants"); and (iv) 575,153
shares of Common Stock issuable upon the conversion of a debenture
granted to Renaissance Capital Partners II, Ltd. ("Renaissance") and
convertible at $3.26 per share ("Renaissance Debenture"). From July
through October 1996, an aggregate of 323,418 Other Warrants were
exercised, leaving 421,582 remaining Other Warrants. Proceeds from
these exercises were $1,579,097. On September 11, 1996, Renaissance
converted $815,000 of the Renaissance Debenture into 250,000 shares of
Common Stock, leaving 325,153 shares of Common Stock issuable upon the
conversion of the remaining Renaissance Debenture. See "Description of
Securities," "Management--Stock Option Plans" and "Shares Eligible for
Future Sale."
(2) Pro Forma as adjusted gives effect to the exercise of all 632,500
outstanding Class A Warrants.
23
<PAGE>
DILUTION
As of June 30, 1996, giving effect to the exercise of warrants and
conversion of debt to Common Stock occurring from July 1, 1996 to November 6,
1996, the Company had adjusted net tangible book value of $10,519,380 or $2.50
per share. Giving effect to the exercise of 632,500 Class A Warrants at an
exercise price of $6.00 per share and the issuance of 632,500 shares of Common
Stock and deducting the estimated offering expenses of $100,000, the Company's
adjusted pro forma net tangible book value at June 30, 1996 would have been
$14,214,380 or $2.93 per share. This represents an immediate increase in net
tangible book value of $.43 per share to existing shareholders and an immediate
dilution of $3.07 per share to new investors exercising Class A Warrants.
Dilution per share represents the difference between the price per share to be
paid by persons exercising the Class A Warrants and the adjusted pro forma
consolidated net tangible book value per share after the exercise of the Class A
Warrants.
Exercise price per share....................................... $6.00
Adjusted net tangible book value per share before the Offer.... $2.50
Increase per share attributable to new investors............... .43
-----
Adjusted net tangible book value per share after the Offer..... 2.93
-----
Dilution per share to new investors............................ $3.07
=====
The foregoing table excludes the effect of the unexercised Other
Warrants, Shareholders' Options and the Renaissance Debenture.
24
<PAGE>
INDUSTRIAL HOLDINGS, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
The following unaudited pro forma financial statements give effect to
the planned acquisition by Industrial Holdings, Inc. ("IHI") of American Rivet
Company, Inc. ("American") in a transaction to be accounted for as a purchase
which is expected to close in the fourth quarter of 1996. The allocation of
purchase price is based on preliminary information currently available and will
be revised as necessary prior to the issuance of the 1996 financial statements,
although no material adjustments are anticipated. The following unaudited pro
forma financial statements also give effect to the exercise of 632,500 Class A
Warrants, the issuance of 632,500 shares of Common Stock and the application of
the net proceeds therefrom.
The unaudited pro forma condensed consolidated balance sheet is based
on the June 30, 1996 balance sheets of IHI and American, included in the
financial statements of IHI and American appearing elsewhere in this Offering
Circular-Prospectus, and has been prepared to reflect the acquisition of
American as if the acquisition had been consummated at June 30, 1996. The
acquisition of MRMC, Inc's ("MRMC") Fastener Division ("CRivet") was completed
in December 1995 and its balance sheet as of June 30, 1996 is included in that
of IHI.
The unaudited pro forma condensed consolidated statements of operations
are based on the income statements of IHI appearing elsewhere in this Offering
Circular-Prospectus, and the income statement of American for the 12-month
period ended December 31, 1995 and the six-month period ended June 30, 1996 (not
presented separately herein). Additionally, the unaudited pro forma condensed
consolidated statement of operations for the year ended December 31, 1995 is
based on the Statement of Direct Revenues and Direct Expenses of CRivet for the
period from January 1, 1995 through December 7, 1995 (not presented separately
herein). The unaudited pro forma condensed consolidated statements of operations
combine the results of operations of IHI, CRivet, and American for the year
ended December 31, 1995, as if the acquisitions had occurred on January 1, 1995
and combine the results of operations of IHI and American for the six months
ended June 30, 1996 as if the acquisition had occurred on January 1, 1996.
These unaudited pro forma financial statements should be read in
conjunction with the historical financial statements and notes thereto of IHI,
CRivet and American included elsewhere in this Offering Circular-Prospectus.
25
<PAGE>
INDUSTRIAL HOLDINGS, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
JUNE 30, 1996
(000'S OMITTED)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
-------------------------- ----------------------------------
ADJUSTMENTS
IHI AMERICAN (NOTE 1) COMBINED
--------- -------- -------- --------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 245 $ 798 $ (452) (d) $ 591
Marketable securities 1,648 (1,648) (d)
Accounts receivable-trade 6,730 1,316 8,046
Inventories 9,346 584 570 (a) 10,500
Property and equipment held for sale 100 100
Advances to shareholders 17 17
Notes receivable, current portion 307 307
Other current assets 425 66 109 (g) 600
--------- ------- ----------- --------
Total current assets 17,170 4,412 (1,421) 20,161
Property and equipment, net 9,683 1,901 3,159 (a) 14,543
(200) (c)
Notes receivable 1,278 1,278
Other assets 119 470 (200) (g) 389
Goodwill, net 1,876 118 3,273 (b) 5,267
--------- -------- -------- --------
Total assets $ 30,126 $ 6,901 $ 4,611 $41,638
========= ======== ======== =======
</TABLE>
26
<PAGE>
INDUSTRIAL HOLDINGS, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
JUNE 30, 1996
(000'S OMITTED)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
-------------------------- ------------------------------
ADJUSTMENTS
IHI AMERICAN (NOTE 1) COMBINED
--------- ----------- ------- -------
<S> <C> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $ 6,668 $ $ 5,675 (d) $ 8,648
(3,695) (f)
Accounts payable-trade 5,689 237 5,926
Accrued expenses and other 1,005 423 1,428
Current portion of long-term debt 989 355 (d) 1,344
--------- ----------- ------- -------
Total current liabilities 14,351 660 2,335 17,346
Long-term debt, less current portion 5,002 3,125 (d) 8,127
Deferred compensation payable 427 80 (a) 507
(91) (g)
Deferred income taxes payable 772 1,281 (h) 1,962
-------- ---------- -------- -------
Total liabilities 20,125 1,087 6,730 27,942
Shareholders' equity
Net unrealized gain on marketable
securities 177 (177) (e)
Common stock 36 1,000 (1,000) (e) 43
7 (f)
Less: Treasury stock (508) 508 (e)
Additional paid-in capital 9,390 3,688 (f) 13,078
Retained earnings 575 5,145 (5,145) (e) 575
--------- -------- -------- ---------
Total shareholders' equity 10,001 5,814 (2,119) 13,696
-------- -------- -------- --------
Total liabilities and shareholders' equity $ 30,126 $ 6,901 $ 4,611 $ 41,638
======== ======== ======== =========
</TABLE>
27
<PAGE>
Note 1 - The pro forma balance sheet reflects the acquisition of American for a
purchase price of $11,125,000 plus estimated purchase price adjustments of
$95,000 and estimated acquisition expenses of $235,000, for a total of
$11,455,000, the exercise of 632,500 Class A Warrants, the issuance of 632,500
shares of Common Stock and the application of the net proceeds therefrom. Pro
forma adjustments are made to:
a. Adjust the assets and liabilities of American to the estimated
fair market values at the acquisition date.
b. Record goodwill on the purchase of American.
c. Reflect the distribution of Florida condominium to sellers.
d. Record the issuance of a 12% bridge note payable in the amount
of $2,075,000, the drawdown of $3,600,000 on the 8.25%
Comerica Bank Demand Note, the issuance of 8.25% term notes
totaling $3,480,000, the distribution of a Florida condominium
and the disbursement of $2,100,000 of American cash and
marketable securities to complete the purchase acquisition.
e. Eliminate the common stock, treasury stock, unrealized gains
and retained earnings of American.
f. Reflect the repayment of the Comerica Bank demand note and
lines of credit with the $3,695,000 in net proceeds from the
exercise of the 632,500 Class A Warrants and the related
issuance of 632,500 shares of Common Stock. (See Note 2)
g. Reclassify spare parts inventory to other current assets and
to net the deferred tax asset against deferred tax adjustment.
h. Establish a net deferred income tax liability for deferred
income taxes applicable to differences in fair market values
and book bases of assets acquired and liabilities assumed in
a. above.
NOTE 2 - If the balance sheet amounts were adjusted to assume the tender offer
did not occur, notes payable would increase by $3,695,000 to $12,343,000,
working capital would decrease by $3,695,000 to an $880,000 deficit and
shareholders' equity would decrease by $3,695,000 to $10,001,000.
28
<PAGE>
INDUSTRIAL HOLDINGS, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(000'S OMITTED)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
------------------------------ ------------------------------------
ACQUISITION
ADJUSTMENTS
IHI AMERICAN (NOTE 1) COMBINED
--------- ------------ ---------- ----------
<S> <C> <C> <C>
Sales $ 25,627 $ 4,739 $ $ 30,366
Cost of sales 19,937 3,535 (10) (a) 23,464
8 (b)
(6) (c)
--------- ------------ ---------- ----------
Gross profit 5,690 1,204 8 6,902
Operating expenses:
Selling, general and 4,033 755 (246) (a) 4,542
administrative
Depreciation and amortization 187 19 70 (b) 276
--------- ------------ ---------- ----------
Total operating expenses 4,220 774 (176) 4,818
--------- ------------ ---------- ----------
Income from operations 1,470 430 184 2,084
Other income (expense)
Interest expense (678) (264) (d) (942)
Interest income 45 (45) (e)
Other income 50 16 (16) (e) 50
--------- ------------ ----------- ----------
Total other income (expense) (628) 61 (325) (892)
--------- ------------ ---------- ----------
Income before income taxes 842 491 (141) 1,192
Income tax expense 286 196 (56) (i) 426
--------- ------------ ---------- ----------
Net income $ 556 $ 295 $ (85) $ 766
======== ========== ========== ==========
Earnings per share (j) $ .14 $ .17
========= ===========
</TABLE>
29
<PAGE>
INDUSTRIAL HOLDINGS, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE YEAR ENDED DECEMBER 31, 1995
(000'S OMITTED)
<TABLE>
<CAPTION>
PRO FORMA
----------------------------------------
ACQUISITION ADJUSTMENTS
HISTORICAL (NOTE 1)
--------------------------------- --------------------------
IHI CRIVET AMERICAN CRIVET AMERICAN COMBINED
---------- -------- --------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Sales $ 38,983 $ 9,986 $ 8,718 $ (1,122) (k) $ 56,565
Cost of sales 30,613 7,979 6,790 (557) (f) 43,808
(389) (g)
180 (h)
312 (b) 38
(1,122) (k)
(c) (13)
(a) (23)
---------- -------- --------- --------- -------- ---------
Gross profit 8,370 2,007 1,928 454 (2) 12,757
Cost of sales
Selling, general and 6,512 779 1,461 210 (1) 8,492
administrative 100 (m)
(a) (570)
Depreciation and amortization 413 40 (b) 170 623
---------- -------- --------- --------- -------- ---------
Total operating expenses 6,925 779 1,501 310 (400) 9,115
---------- -------- --------- --------- -------- ---------
Income from operations 1,445 1,228 427 144 398 3,642
Other income (expense):
Interest expense (982) (523) (d) (528) (2,033)
Interest income 140 130 (e) (130) 140
Other income (expense) 18 57 (e) (57) 18
---------- -------- --------- ---------- --------- ---------
Total other income (expense) (824) 187 (523) (715) (1,875)
---------- -------- --------- --------- --------- ----------
Income before income taxes 621 1,228 614 (379) (317) 1,767
Income tax expense 76 0 238 335 (i) (123) 526
---------- -------- --------- --------- --------- ----------
Net income $ 545 $ 1,228 $ 376 $ (714) $ (194) $ 1,241
========== ======== ========= ========= ======== ==========
Earnings per share (j) $ .17 $ .32
========= ==========
</TABLE>
30
<PAGE>
Note 1 - The above statements give effect to the following pro forma adjustments
necessary to reflect the acquisition and the issuance of debt related to the
acquisition outlined in Note 1 to the pro forma balance sheet:
a. Reduce cost of sales and selling, general and administrative
expenses for reductions in executive payrolls, reductions in
professional fees, elimination of directors fees, reduction in
executive benefits, elimination of profit sharing plan
contributions and elimination of expenses related to Florida
condominium.
b. Record increased depreciation and amortization expense
resulting from (i) the increase in property, plant and
equipment acquired as a result of the allocation of the
purchase price and (ii) amortization of goodwill acquired over
20 years.
c. Reduce cost of sales for the effect of the difference in lifo
and fifo basis of accounting for inventory.
d. Reflect interest charges (i) for American on $3,480,000 of
8.25% term debt, $3,600,000 8.25% Comerica Bank Demand Note,
12% $2,075,000 bridge note and $3,695,000 reduction in short
term borrowings as a result of application of net proceeds
from the exercise of 632,500 Class A Warrants; (ii) for CRivet
on $1,000,000 of 12% convertible notes, $2,800,000 of 9.85%
term note and $1,400,000 line of credit secured to finance the
acquisition. (See Note 2)
e. Eliminate interest income and other income.
f. Reduce payroll expense for employees not hired upon
acquisition of CRivet and which are not needed to operate at
historical levels of operations when the operations of CRivet
are combined with those of IHI. Proforma production staffing
levels are comparable to those at Landreth and include 65
employees compared to 71 production employees at Landreth.
Proforma sales and engineering staffing levels include 8
employees at CRivet compared to 8 employees at Landreth.
Substantially all other administrative functions will be
performed by Landreth. These staffing reductions are as a
result of Landreth's more efficient operating and management
techniques. Proforma adjustments for 1995 include the
elimination of an additional 32 production employees not hired
by Landreth at acquisition.
g. Reverse the effect of the CRivet obsolescence reserve recorded
in the period ended December 7, 1995.
h. Increase expense for the rental of CRivet plant facility at
$15,000 per month.
i. Increase in income taxes as a result of the pro forma pretax
earnings of CRivet and American.
j. Increase in earnings per share as a result of pro forma
earnings of CRivet and American and increase in weighted
average of common stock equivalents (i) for American for the
effect of 415,000 warrants sold in connection with $2,075,000
bridge note and (ii) for CRivet for the effect of 400,000
warrants sold in connection with $1,000,000 convertible note.
k. Eliminate intercompany sales and cost of goods sold between
CRivet and Landreth.
l. Increase CRivet general and administrative expenses for office
supplies, data processing, telephone, professional fees and
travel and entertainment. Pro forma amounts based on
Landreth's historical usage, data processing system to be
implemented, number of telephones, estimated additional audit
and legal fees and travel anticipated between Houston and
Connecticut.
31
<PAGE>
m. Increase CRivet commission expense by 1% to percentage
expected to be paid by Landreth.
Note 2 - If the pro forma condensed consolidated statements of operations were
not adjusted to reflect the repayment of short term borrowings with the proceeds
from the tender offer (i) interest expense for the six months ended June 30,
1996 and twelve months ended December 31, 1995 would be $152,000 and $305,000
greater, respectively; (ii) net income for the six months ended June 30, 1996
and twelve months ended December 31, 1995 would be $91,000 and $186,000 less,
respectively; and (iii) pro forma earnings per share for the six months ended
June 30, 1996 and twelve months ended December 31, 1995 would be $.17 and $.33,
respectively.
32
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below are derived
from and should be read in conjunction with the Company's Consolidated Financial
Statements and related notes and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere herein. This
information is in thousands except for shares and per share amounts.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED JUNE 30 YEARS ENDED DECEMBER 31
----------------------- ------------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
---------- ----------- ---------- ----------- ------------ ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Sales.................................. $ 25,627 $ 19,722 $ 38,983 $ 34,730 $ 35,113 $ 20,769 $16,878
Cost of sales.......................... 19,937 15,530 30,613 26,933 26,924 15,882 14,098
Gross profit........................... 5,690 4,192 8,370 7,797 8,189 4,887 2,780
Operating expenses:
Selling, general &
administrative....................... 4,033 3,226 6,512 6,689 6,204 4,089 3,097
Depreciation & amortization.......... 187 200 413 485 478 434 249
Total operating expenses............. 4,220 3,426 6,925 7,174 6,682 4,523 3,346
Operating income (loss)................ 1,470 766 1,445 623 1,507 364 (566)
Other income (expense)................. (628) (378) (824) (575) (666) (261) (432)
Income (loss) before income taxes...... 842 388 621 48 841 103 (998)
Income tax expense (benefit).......... 286 34 76 16 78 (279) --
Net income (loss)...................... 556 354 545 32 763 382 (998)
Earnings (loss) per share.............. .14 .12 .17 .01 .27 .17 (1.39)
Weighted average common and
common equivalent shares
outstanding(1)....................... 3,868,158 3,080,010 3,149,579 3,029,574 2,828,635 2,101,503 716,239
</TABLE>
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31
----------------------- ------------------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
---------- ----------- ---------- ----------- ------------ ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)..............$ 2,819 $ 2,403 $ 1,459 $ 2,254 $ 1,164 $ 1,551 $(2,367)
Total assets........................... 30,126 21,654 27,494 20,848 20,819 13,972 5,139
Long-term obligations(2)............... 5,002 3,236 5,891 3,568 3,229 3,242 218
Total liabilities...................... 20,125 14,408 19,891 13,965 14,386 9,312 6,367
Shareholders' equity (deficit)......... 10,001 7,246 7,603 6,883 6,433 4,660 (1,228)
</TABLE>
- ---------------
(1) Calculated on the basis of the weighted average number of common and
common equivalent shares outstanding pursuant to Securities and
Exchange Commission Staff Accounting Bulletin No. 83.
(2) Excludes deferred income taxes and deferred compensation.
33
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company was formed in August 1989 and acquired IMSCO in December
1989, PVS in January 1992, Landreth in October 1992, REX in April 1993 and
CRivet in December 1995.
RECENT DEVELOPMENTS
In October 1996, the Company signed a Stock Purchase Agreement to
purchase all of the outstanding stock of American Rivet Company, Inc.
("American"), a primary competitor of LEC, for a purchase price of $11,125,000,
subject to closing adjustments (the "American Acquisition"). The Company
anticipates that the closing will occur on or before November 15, 1996. While
there is no assurance that the American Acquisition will occur, the Company
presently anticipates that it will obtain approximately $2,075,000 of the
purchase price with bridge financing from a private source ("Bridge Financing").
The remainder of the purchase price will be funded with cash and marketable
securities of American, an increase in the Company's Demand Note secured by the
inventory and receivables of American and a term note secured by the real estate
and equipment of American. The Bridge Financing will be repaid through future
debt or equity financing. The Company anticipates that it will use the majority
of the estimated $3,695,000 net proceeds from the exercise of the Class A
Warrants to repay the Company's Demand Note to be incurred in connection with
the American Acquisition.
RESULTS OF OPERATIONS
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 CRivet
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 Landreth to CRivet
prior to its acquisition by Landreth.
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 CRivet and the inclusion of a full
six months of its operating results.
DEPRECIATION AND AMORTIZATION. There was no significant change in
depreciation and amortization included in operating expenses for the six months
ended June 30, 1996 compared to the six months ended June 30, 1995.
34
<PAGE>
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 CRivet.
INCOME TAXES. The Company's effective tax rate was 34% for the six
months ended June 30, 1996 compared to 9% for the six months ended June 30,
1995. For the six months ended June 30, 1996, there was a $40,000 reduction to
the deferred tax asset valuation allowance to reflect estimated deferred tax
assets used in that period compared to a $126,849 reduction in the valuation
allowance for the six months ended June 30, 1995, $16,250 of which reflected the
estimated deferred tax assets used in that period and $110,599 of which
reflected the recognition of a deferred tax asset based upon the expected
utilization of net operating loss carryforwards at REX.
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 CRivet 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 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 June 30, 1996, as well as an
increase in inventory at Regal as a result of increased sales.
TOTAL LIABILITIES. Total liabilities were $20,124,480 at June 30, 1996,
compared to $19,890,563 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
June 30, 1996.
YEAR ENDED DECEMBER 31, 1995 COMPARED WITH YEAR ENDED DECEMBER 31, 1994.
SALES. On a consolidated basis, sales increased $4,252,731 or 12% in
1995 compared to 1994. This increase was primarily the result of increased sales
in the Company's New Machine Sales segment as a result of increased market
demand for machine tools.
COST OF SALES. Cost of sales increased $3,680,389 or 14% in 1995
compared to 1994. Cost of sales as a percentage of sales was 78.5% in 1995
compared to 77.6% in 1994. The increase in cost of sales was attributable to the
12% increase in sales in 1995 in comparison to 1994 and $1,036,580 in wire sales
by Landreth to CRivet in the first and second quarters of 1995. These sales to
CRivet were made at a lower than normal gross margin resulting in the increase
in cost of sales as a percentage of sales in 1995 compared to 1994.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased $177,205 or 3% in 1995 compared to 1994.
Selling, general and administrative expenses were comparable between 1995 and
1994 as a result of the company's ability to add additional revenues without
additional overhead.
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization
expense included in operating expenses decreased $72,291 or 15% in 1995 compared
to 1994 because certain assets became fully depreciated at IMSCO.
35
<PAGE>
INTEREST EXPENSE. Interest expense increased $93,748 or 11% in 1995
compared to 1994 due to increases in debt at Landreth as a result of sales of
wire to CRivet on open credit which were not repaid and financing of new
equipment purchases.
OTHER INCOME. Other income decreased $165,655 or 14% in 1995 compared
to 1994. This decrease was a result of a one time recognition of miscellaneous
income at REX in 1994 that did not recur in 1995.
FEDERAL INCOME TAXES. The Company's effective tax rate was 12% in 1995
compared to 34% in 1994. During 1995, the Company reduced its deferred tax asset
valuation allowance $223,000. A portion of the reduction, approximately $26,000,
was to reflect deferred tax assets used in 1995, the remainder was to recognize
a deferred tax asset of $197,000. Based on management's assessment of earnings
trends, expected revenues and cost reductions and the expiration dates of
carryforwards, management determined that is was more likely than not that these
assets would be realized.
NET INCOME. As a result of the foregoing factors, the Company had net
income of $545,147 in 1995 compared to net income of $31,702 in 1994.
YEAR ENDED DECEMBER 31, 1994 COMPARED WITH YEAR ENDED DECEMBER 31, 1993.
SALES. On a consolidated basis, sales decreased $382,517 or 1 % in 1994
compared to 1993. However, for 1994 in comparison to 1993, sales for the
Company's fastener manufacturing segment increased $1,516,364 or 14%, as a
result of an intensified marketing effort which added in excess of $1,050,000 in
sales to new customers in 1994. This increase was offset by decreases in sales
in the Company's other segments.
IMSCO's sales decreased $874,287 or 7% in 1994 compared to 1993,
primarily as a result of a general industry slowdown as petrochemical plants
postponed planned plant construction from 1994 to 1995. PVS' sales decreased
$465,847 or 17% in 1994 compared to 1993. Although valve repair revenues
remained constant from 1993 to 1994, sales of used and surplus valves decreased
due to an industry slowdown, particularly in the first quarter of 1994.
Within REX, sales in the Company's export crating segment decreased by
$557,506 or 18% in 1994 compared to 1993 as the result of the loss of a major
customer. Sales in the used machinery segment decreased by $809,321 as a result
of completion of substantially all of a major contract which was not replaced in
1994. Sales in the new machinery and related services segment increased $738,263
or 14% in 1994 compared to 1993. However, if 1993 were annualized, 1994
represented a decrease in sales over 1993, primarily because a major machine
tool supplier was unable to deliver product to its distributors in the second
and third quarters of 1994.
COST OF SALES. There was no significant change in cost of sales in 1994
compared to 1993. However, cost of sales as a percentage of sales increased from
76.7% in 1993 to 77.5% in 1994. This increase in cost of sales as a percentage
of sales was primarily attributable to decreases in gross margin in the export
crating segment from 1993 to 1994 as a result of increased transportation costs
and salary expense which the Company was unable to pass on to its customers and
a decrease in margin in the used machine segment between 1993 and 1994 because
of overruns on cost estimates on contracts.
36
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $485,386 or 8% in 1994 compared to 1993. This
is primarily attributable to the inclusion of REX operations for twelve months
in 1994 as compared to nine months in 1993.
DEPRECIATION AND AMORTIZATION EXPENSE. There was no significant change
in depreciation and amortization included in operating expenses in 1994 as
compared to 1993.
INTEREST EXPENSE. Interest expense increased $31,913 or 4% in 1994 as
compared to 1993, primarily due to increases in interest rates which were not
completely offset by reductions in interest-bearing debt.
FEDERAL INCOME TAXES. The Company's effective tax rate was 34% in 1994
as compared to 9.3% in 1993. The Company's 9.3% effective tax rate in 1993 was
as result of a reduction of $167,724 in its valuation allowance against deferred
tax assets of REX as those tax assets were realized. No material change in the
valuation allowance was recorded in 1994.
NET INCOME. As a result of the foregoing factors, the Company had net
income of $31,702 in 1994 as compared to $762,802 in 1993. This decrease in net
income was the result of a 1% decline in sales, a 1% decrease in gross margin as
a percentage of sales and an 8% increase in selling, general and administrative
expenses.
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 $1,536,352. The Company's
operations used cash of $322,578 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 CRivet and
an increase in inventory at Regal as a result of increased sales. The Company's
operations provided cash of $1,233,412 for 1995 compared to $353,914 for 1994
and $740,804 for 1993 primarily because of changes in net income between the
respective periods.
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,
and increased 17% for 1995 compared to 1994 primarily as a result of the
purchase of new equipment and leasehold improvements for the Company's fastener
manufacturing operations. In 1995, the Company used cash of $826,003 to purchase
CRivet.
Financing activities provided cash of $1,190,009 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 $1,080,371 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 CRivet
to fund increases in working capital. Financing activities provided cash of
$738,136 and $179,614 in 1995 and 1994 as the Company generated net proceeds
from the issuance of common stock of $275,116 and $418,278 in 1995 and 1994,
respectively. Financing activities used cash of $396,419 in 1993 as notes
payable and long-term debt were repaid.
In connection with the acquisition of Landreth, on October 7, 1992 the
Company issued to Renaissance Capital Partners II, Ltd. ("Renaissance"), a 12%
Convertible Debenture due October 1, 1999
37
<PAGE>
in the principal amount of $2,500,000 (the "Renaissance Debenture") , which was
secured by the capital stock of Landreth and the capital stock of IMSCO. At June
30, 1996, the outstanding principal balance was $1,875,000. The Renaissance
Debenture is convertible at a conversion price of $3.26 per share of common
stock, subject to adjustment in certain circumstances. The Renaissance Debenture
requires monthly interest payments and commencing on November 1, 1997, monthly
principal payments of $25,000. The terms of the Renaissance Debenture restrict
the ability of the Company and its subsidiaries to incur, assume or guarantee
any additional indebtedness, to enter into new lines of business, develop new
products or acquire companies other than in compliance with certain acquisition
guidelines promulgated by Renaissance, to consolidate or merge with another
corporation or to sell any of its properties.
Additionally, the Company has entered into a Demand Note dated November
30, 1995 among the Company, LEC, PVS and Comerica Bank-Texas ("Comerica"). The
Demand Note is in the principal amount of $8,000,000 or the lesser of a
borrowing base as defined, bearing interest at the prime rate of Comerica plus
3/4% and is payable on demand. This line of credit allows IMSCO, LEC, PVS and
REX to borrow funds based on 80% of eligible accounts receivable and 40% to 50%
of eligible inventory with various specified sublimits for each individual
subsidiary. At June 30, 1996, the borrowing capacity under the Demand Note was
$7,933,482 of which $6,397,130 was outstanding at that date. The Demand Note is
secured by all of the assets of the Company, LEC, IMSCO and REX and the
accounts, chattel paper, general intangibles and contract rights of PVS.
In connection with its acquisition of CRivet, in December 1995, the
Company entered into a 9.85% $2.8 million Term Loan with General Electric
Capital Corporation payable in seventy monthly installments of $53,620 through
November 1, 2001. The Term Loan is secured by the machinery and equipment of
CRivet. Additionally, the Company issued a 12% Promissory Note to St. James
Capital Partners, L.P. ("St. James"), $195,900 of which is currently outstanding
and payable December 1, 1996.
In March 1996, the Company completed a private placement of 300,000
shares of Common Stock. Of the $1,020,000 in proceeds, the Company used $600,000
to repay a portion of the Renaissance Debenture. In connection with this
principal payment, the Company issued to Renaissance warrants to purchase 50,000
shares of common stock at $4 per share. Renaissance waived any prepayment
penalties on the repayment. The remaining proceeds will be used for the
relocation of the Landreth plant to the Company's REX facility and the CRivet
plant to a new location in Connecticut.
At June 30, 1996, the Company had working capital of $2,819,101,
long-term debt of $5,001,834 and shareholders' equity of $10,000,888. 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 and private placements of debt securities. In order to consummate the
American Acquisition, the Company intends to obtain Bridge Financing from a
private source for approximately $2,075,000 of the $11,125,000 purchase price.
The remainder of the purchase price will be funded with cash and marketable
securities of American, an increase in the Company's Demand Note secured by the
inventory and receivables of American and a term note secured by the real estate
and equipment of American. The Bridge Financing will be repaid through future
debt or equity financing. The Company anticipates that it will use the majority
of the estimated $3,695,000 net proceeds from the exercise of the Class A
Warrants to repay the Company's Demand Note to be incurred in connection with
the American Acquisition. Any acquisition of additional companies in connection
with the Company's acquisition strategy will require additional financing, which
likely would include a combination of debt and equity financing.
38
<PAGE>
INFLATION
Although the Company believes that inflation has not had any material
effect on operating results, there can be no assurance that the Company's
business will not be affected by inflation in the future.
SEASONALITY
The Company believes that its business is not subject to any
significant seasonal factors, and the Company does not anticipate significant
seasonality in the future. However, the business and operating results of the
Company are dependent on numerous economic and other factors affecting the
industries to which the Company provides products and services. An economic
slowdown in these industries could result in decrease in demand for the
Company's products and services, which could adversely affect the Company's
operating results.
39
<PAGE>
BUSINESS
INTRODUCTION
Industrial Holdings, Inc. (including its subsidiaries, the "Company")
was incorporated in August 1989. The Company's principal executive offices are
located at 7135 Ardmore, Houston, Texas 77054, and its telephone number is (713)
747-1025.
The Company's business is organized into two divisions: the Fastener
Manufacturing and Sales Division, comprised of Landreth Engineering Company
("Landreth") 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").
The Fastener Manufacturing and Sales Division manufactures industrial
metal fasteners, including special cold-formed fasteners and threaded fastener
products for sale primarily to manufacturers in the home furniture, home
appliance and automotive industries. The Valve and Supplies Sales Group
remanufactures pipeline valves and distributes pipe, valves, fittings and other
products primarily to the petrochemical, chemical and petroleum refining
industries and to the pipeline transportation and product storage industries.
The New Machine Sales and Services Group sells new machine tools and conducts a
machine moving operation. The Export Crating Group provides international export
crating services. The Used Machine Sales Groups sells used machine tools.
STRATEGY
The Company's strategy is to identify and pursue acquisitions within
the lines of business in which the Company currently operates. The Company
believes that it is a leading manufacturer of semi-tubular rivets and
cold-headed specials with pro forma revenues for that segment for the twelve
months ended December 31, 1995 of approximately $22,068,000. The Company's
growth strategy includes an emphasis on the continued acquisition of fastener
manufacturing companies with a particular emphasis on expansion into new
customer bases and geographical markets.
Since its inception, the Company has expanded its business through
acquisition. PVS was acquired in connection with the Company's initial public
offering in January 1992. Landreth was acquired in October 1992. The companies
comprising the New Machine Sales and Services Group, the Export Crating Group
and the Used Machine Sales Group were acquired as part of The Rex Group, Inc.
("REX") in 1993. Most recently, in December, 1995, CRivet was acquired. The
Company has financed these acquisitions with cash provided by operations,
borrowings under its credit agreements and public and private financings. The
Company anticipates that future acquisitions, if any, will be similarly
financed.
RECENT DEVELOPMENTS
In October 1996, the Company signed a Stock Purchase Agreement to
purchase all the outstanding common stock of American for $11.125 million,
subject to certain closing adjustments. The Company anticipate that the closing
will occur on or before November 15, 1996.
40
<PAGE>
For information concerning each of the Company's industry segments, see
Note 13 of Notes to Consolidated Financial Statements.
FASTENER MANUFACTURING AND SALES DIVISION
PRODUCTS AND SERVICES. Landreth Engineering Company and CRivet,
(collectively "LEC") manufacture industrial metal fasteners, including special
cold-formed fasteners and threaded fastener products for sale to national
manufacturers primarily in the home furniture, home appliance and automotive
industries. LEC manufactures these fasteners in solid, semi-tubular, tubular or
multi-dimensional form. LEC has increasingly emphasized the manufacture of
special cold-formed fasteners (custom-produced rivets produced by header
machines) that are primarily targeted to more highly- engineered applications,
such as the automotive original equipment manufacturers ("OEM") and electronic
industries. Industrial metal fasteners, or rivets, are typically constructed of
low-carbon steel and can be plated with nickel, zinc or phosphate through LEC's
automatic plating process. LEC also uses plating services from third party
providers. These fasteners can also be made from aluminum, brass or stainless
steel. LEC manufactures these industrial fasteners in a variety of sizes, with
diameters ranging up to 5/8" and lengths up to 4".
CUSTOMERS AND MARKETING. LEC's customers are primarily national
manufacturing companies in the home furniture, home appliance and automotive
industries. LEC sells its products to over 1,250 different manufacturing
customers, with the 10 largest customers accounting for, in the aggregate, 46%
of LEC's sales for the year ended December 31, 1995. During 1995, sales to
Leggett & Platt, Inc.
accounted for approximately 12% of LEC's sales.
LEC manufactures and distributes its products from its facilities in
Houston, Texas and Milford, Connecticut. LEC conducts sales efforts and serves
its customers by using a combination of its employees and a national network of
manufacturer's sales representatives. LEC has engaged 12 manufacturer sales
representatives that work on a commission basis. These representatives are under
the supervision of LEC's direct regional sales manager and national sales
manager. The majority of LEC's products are sold pursuant to per-job orders. LEC
manufactures its products according to customer specifications, and accordingly,
does not maintain an extensive inventory of industrial fasteners. LEC inspects
all of its products at the time of production and mechanically inspects such
products prior to shipment to its customers. LEC also conducts, at the request
of its customers, statistical process control procedures.
SUPPLIERS. LEC purchases raw materials from both domestic and foreign
sources. LEC currently purchases steel wire from three principal suppliers, and
the Company believes that other acceptable sources are available. LEC has
encountered no difficulty in meeting its supply requirements of any raw
materials necessary for the manufacture of its products and maintains raw
materials inventory levels for approximately 30 days of operations.
COMPETITION. LEC generally is subject to competition primarily from
Chicago Rivet and American Rivet Company, Inc., either of which may have greater
financial resources than the Company. In the special cold-formed fastener market
that is concentrated primarily in the automotive and electronic markets, LEC
also faces competition from larger public companies and foreign manufacturers,
many of whom have greater financial resources than the Company. LEC believes
that its competitive advantages include its range of production capabilities,
its emphasis on high volume and low overhead production processes, its in-house
tooling operations and its national marketing strategy. The Company believes
that
41
<PAGE>
LEC's ability to compete effectively in the future will be primarily dependent
on maintaining trained and skilled production personnel and the highest possible
level of product quality.
AMERICAN ACQUISITION
PRODUCTS AND SERVICES. American manufactures industrial metal fasteners
of the same type and using the same manufacturing process as LEC.
CUSTOMERS AND MARKETING. American's customers are primarily national
manufacturers in the office furniture, automotive and appliance industries.
American sells its products to a diversified customer base, with the 15 largest
customers accounting for, in the aggregate, 38% of American's sales for the
fiscal year ended August 31, 1995. During fiscal 1995, one automotive customer
accounted for 14% of American's sales.
American markets its products in the same manner as LEC through a
network of 17 manufacturer's sales representatives that work on a commission
basis. American maintains an inside sales staff to handle orders from repeat
customers and regularly advertises in trade journals.
SUPPLIERS. American purchases raw materials, primarily wire, from two
principal sources. American has had no difficulty in meeting its supply
requirements for raw materials.
COMPETITION. American competes with the same fastener manufacturers as
LEC.
EMPLOYEES. At June 30, 1996, American employed 95 people, none of whom
are covered by collective bargaining agreements.
PROPERTIES. American owns an 81,000 square foot manufacturing facility
on approximately four acres of land in Franklin Park, Illinois (a suburb of
Chicago), which is adequate to meet American's needs for the foreseeable future.
ENERGY PRODUCTS AND SERVICES DIVISION
VALVE AND SUPPLIES SALES
PRODUCTS AND SERVICES. IMSCO and PVS distribute pipe, valves and
fittings, as well as remanufacture or recondition used or malfunctioning
pipeline valves for subsequent sale in a remanufactured condition to companies
in the petro-chemical, chemical and petroleum refining industries for use in the
refining process and pipeline transportation and storage companies. The valve
and supplies market is primarily in the Gulf Coast area between Mobile, Alabama
and Brownsville, Texas.
PIPE is typically sold in 20-foot or 40-foot lengths, in sizes
ranging from 1/2" to 72" in diameter, for use in the refining process by
chemical plants and refineries. Pipe is sold in a variety of sizes and wall
thicknesses, depending on the nature (liquid or gas) and quantity of the product
to be transported or processed through the pipe as well as the desired pressure
levels for transporting and processing the product through the pipe.
INDUSTRIAL VALVES are flow inhibitors used with pipe that are
typically constructed of either carbon or alloy steel and are manufactured and
sold in a variety of forms, including gate valves, globe
42
<PAGE>
valves, check valves, ball valves, plug valves and butterfly valves. Valves sold
by IMSCO range from 1/2" to 36" in diameter and are available threaded or with a
socket-weld, flanged or butt-weld end.
PIPELINE VALVES are manufactured to withstand greater pressure
than industrial valves. Pipeline valves also bear serial numbers that are
traceable to the OEM and permit each end-user to determine the OEM, the original
purchaser and the specifications of the valve, thereby allowing the end-users to
verify the specifications and quality of the valves. These valves are used to
regulate the flow and storage of natural gas and refined petroleum products.
They range in size from 2" to 60" in diameter, depending on the nature (liquid
or gas), quantity and desired speed of the flow of natural gas or refined
petroleum products regulated by the pipeline valve and are typically made of
carbon steel.
CONTRACT REMANUFACTURING services are performed for certain
customers. These contract services typically consist of remanufacturing or
modifying the customer's existing pipeline valves by installing stem extensions
and/or mounting actuators on the valves, preparing such valves for underground
or underwater use and conducting performance testing of such valves.
ADDITIONAL PRODUCTS include gaskets, pipe hangers, steel,
strainers, swages, fasteners, tools, tubing and mill supplies. Mill supplies
typically consist of incidental construction-related items such as gloves,
boots, ladders, rope, blades, lubricants and other hardware items. These
additional products are typically used by IMSCO's customers who are also
purchasing pipe, valves and fittings.
CUSTOMERS AND MARKETING. IMSCO sells its products to over 400 different
customers, with the 10 largest customers accounting for, in the aggregate, 36%
of this segment's sales during the fiscal year ended December 31, 1995. These
customers consist primarily of chemical and petroleum refining plants and
construction companies performing services at the plant locations.
PVS sells its products to over 150 different customers primarily in the
pipeline transportation or product storage business with the 10 largest
customers accounting for, in the aggregate, 11% of this segment's sales in the
fiscal year ended December 31, 1995.
Distribution operations are conducted from Baytown, Texas headquarters
and two branch locations. All three locations have inventories for distribution
of products directly to customers. Remanufacturing and distribution of pipeline
valves are conducted from South Houston, Texas. At December 31, 1995, this
segment maintained a sales force of 13 employees. No customer amounted to over
10% of the segment's sales.
PVS sells new, used and remanufactured pipeline valves from its
existing inventory and pursuant to special customer orders. By maintaining a
broad inventory of types of pipeline valves, the Company believes that PVS is
able to timely respond to its customers' needs. Per-job orders account for
substantially all of the remanufacturing work performed and pipeline valves sold
by PVS. In the past, PVS has not entered into exclusive supply contracts with
any particular customer. PVS maintains an internal quality control program to
help ensure the quality of its remanufacturing process. Many of PVS' customers
monitor and approve its quality standards by sending quality assurance personnel
to PVS' facilities to ensure that the reconditioned valves meet their standards.
PVS also conducts seminars, often at the request of its customers, for training
field personnel in pipeline valve preventive maintenance.
The majority of IMSCO's orders for products are filled with its
purchases from wholesale distributors or manufacturers rather than from IMSCO's
existing inventory. While IMSCO enters into
43
<PAGE>
blanket distribution contracts that provide for the distribution of certain
products at set prices with particular customers, such contracts do not
represent a material portion of IMSCO's business. IMSCO primarily distributes
products to customers located within 50 miles of its three office warehouse
facilities.
SUPPLIERS. Most of the products distributed by IMSCO may be obtained
from numerous alternative sources of supply. Because the demand for pipe, valves
and fittings is particularly price and time sensitive, IMSCO has historically
elected to concentrate its efforts in establishing and maintaining relationships
with manufacturers or suppliers who can provide the lowest prices and quickest
delivery time. During the last fiscal year, an average of approximately 600
vendors supplied substantially all of IMSCO's purchases of pipe, valves and
fittings.
PVS acquires its pipeline valves from bid lists from approximately 75
suppliers including pipeline transportation companies, individual brokers and
from other remanufacturing companies or OEMs. PVS purchases the majority of its
pipeline valves from bid lists. Pipeline transportation companies construct new
pipelines and repair segments of existing pipelines. After completion of
original construction or repair, the new valves (consisting of excess pipeline
valves not utilized or used pipeline valves that require remanufacturing) are
sold to dealers through bid lists. PVS continuously receives and bids on these
bid lists, as do all other remanufacturers of pipeline valves. PVS also acquires
some of its products from individual brokers that buy and resell excess pipeline
valves. Typically, PVS places pipeline valves purchased from individual brokers
in its inventory because of favorable pricing. When PVS receives an order and
the products are not available in its inventory, it may also purchase the
ordered products from other remanufacturing companies or OEMs. Typically, a
majority of the valves purchased from brokers or other remanufacturing companies
were originally purchased from bid lists.
IMSCO and PVS warehouse certain products but purchase the majority of
their products on an as-needed basis, depending on demand or the availability of
inventory that can be acquired at favorable prices. IMSCO and PVS do not have
written contracts with any of their suppliers. Purchases from suppliers,
including credit arrangements, are negotiated on an order-per-order basis.
Accordingly, all arrangements are terminable by either party immediately or on
short notice. Relationships with suppliers are believed to be satisfactory and
no single vendor supplies 10% or more of the products purchased during the year.
The Company has implemented computerized inventory control procedures
at IMSCO, which the Company believes provide improved inventory controls and
allow IMSCO to more effectively manage inventory purchases and maintain
appropriate levels of inventory to maximize operating results. These inventory
control procedures also have improved IMSCO's inventory turn-over ratio and
reduced its quantity of slow-moving items in inventory.
COMPETITION. IMSCO faces competition based on pricing and the ability
to service customers and timely respond to their needs. IMSCO competes with
numerous larger and smaller distributors of pipe, valves and fittings, many of
whom have greater financial resources than the Company. Major competitors with
IMSCO include McJunkin Corp., Van Leeuwen, Wallace/Tyler Dawson, Vinson Supply
Co. and Piping & Equipment Inc. The Company believes that the level of customer
service provided by IMSCO is its primary competitive advantage. The Company
believes that for IMSCO to compete effectively, it must adhere to the "overall
quality program" instituted by the Company, maintain existing business
relationships, respond to the needs of its customers through quality service and
provide price-competitive products to its customers.
44
<PAGE>
PVS is subject to competition based primarily on pricing and customer
service. The Company believes that Oilfield Fabricating and Machine, Inc. is its
major competitor in the industry and that PVS is subject to competition from
less than ten similarly-sized remanufacturing businesses. PVS' management
believes that its broad inventory of pipeline valves and its remanufacturing
facility are its primary competitive advantages and that its ability to compete
effectively is dependent on maintaining its inventory levels, retaining existing
business relationships and responding to its customers' needs through timely
service and providing quality products.
NEW MACHINE SALES AND SERVICES
PRODUCTS AND SERVICES. Regal distributes new machine tools in South
Texas and Louisiana for certain manufacturers including Okuma Machinery, Inc.
("Okuma") on an exclusive basis, and other manufacturers on a non-exclusive
basis. Machine tools are used in various industries in the manufacturing process
to cut metal and are sold in a variety of sizes depending upon the task they are
designed to perform. In addition, Regal sells parts and services for machine
tools and contracts on a job-by-job basis to move machine tools, predominantly
in the South Texas region.
For the year ended December 31, 1995, the sale of new machine tools
accounted for 91% of Regal's revenues. Machine tool moving services accounted
for 9% of its revenues.
CUSTOMERS AND MARKETING. Regal sells its products and services to over
1,650 different customers, with its largest customer accounting for 7% of
Regal's sales in the year ended December 31, 1995. Regal conducts its sales
efforts from its Houston, Texas location. At December 31, 1995, Regal employed a
sales force of seven employees.
Per-job orders account for substantially all of the new machine sales.
SUPPLIERS. Regal has several exclusive distribution agreements,
including agreements with Okuma, for South Texas and Louisiana. All machines are
purchased on an order-by-order basis.
COMPETITION. New machine tool sales are subject to competition from
machine tool distributors of competitive machine tools manufacturers. Depending
upon the size and use of the product manufactured, the competitor will vary. The
Company believes Regal has a competitive advantage in its range of product
offerings. The Company believes Regal's ability to compete effectively in the
future is primarily dependent upon maintaining trained and skilled machine tool
personnel and the retention of its Okuma distribution lines.
Regal typically competes with four moving companies in its market. The
Company believes it has a competitive advantage in the size of its capacity and
the level of training of its personnel.
EXPORT CRATING
PRODUCTS AND SERVICES. USC provides crating services for a variety of
products for export. Typically, a freight forwarder or company exporting its own
product will contract with USC for a specified product to be crated. The
products are forwarded to the USC facility, where the crating services are
performed. USC then forwards the crates to the shipping source, which is
typically an ocean-going vessel.
45
<PAGE>
CUSTOMERS AND MARKETING. USC sells its services to over 250 different
customers, with its largest customer accounting for 9.5% of its revenues for the
year ended December 31, 1995. At December 31, 1995, USC employed two sales
people who conduct the Company's sales efforts from its Houston, Texas location.
COMPETITION. USC typically competes with five crating companies in the
Houston area and generally does not compete outside this region. The Company
believes it has a competitive advantage in this market because of its
facilities, personnel and experience and its proximity to Houston ports.
USED MACHINE SALES
PRODUCTS AND SERVICES. RPMS sells used machine tools primarily to large
corporations and machine shops in the Gulf Coast region. RPMS maintains an
inventory of used machine tools for sales to third parties and purchases used
machines for resale on an as-needed basis, depending upon demand.
Used machine tools are sold in a variety of sizes.
CUSTOMERS AND MARKETING. RPMS sells its products to over 250 different
customers. Weatherford Enterra and ESCO Incorporated accounted for 43% and 37%,
respectively of RPMS sales in the year ended December 31, 1995. At December 31,
1995, the Company employed one sales person.
Per-job orders account for substantially all of used machine sales. By
maintaining distribution relationships and inventories of used machine tools and
parts, the Company believes it is able to timely respond to customers that use
the products and services offered by RPMS.
SUPPLIERS. RPMS maintains an inventory of used machine tools.
Typically, these machine tools are purchased at auction or from used machine
brokers. The Company believes it has adequate inventory and sufficient access to
auction markets and brokers to satisfy its inventory requirements for used
machine tools.
COMPETITION. RPMS typically competes with other used machine tool
dealers on a national basis. The Company believes its inventory of used machines
is a competitive advantage and that its ability to compete effectively is
dependent on maintaining an adequate inventory level and continued access to
purchasing opportunities through brokers and auctions.
EMPLOYEES
At June 30, 1996, the Company employed a total of 263 people, four of
whom are corporate officers, 28 are employed by IMSCO, 24 are employed by PVS,
70 are employed by Landreth, 78 are employed by CRivet and 60 are employed by
REX. None of the Company's employees are covered by collective bargaining
agreements. The Company believes its relationship with its employees is
satisfactory.
BACKLOG
As of June 30, 1996, LEC's backlog was approximately $5,347,000
compared to $5,845,000 at December 31, 1995 and $2,200,000 at December 31, 1994.
IMSCO, PVS and REX have historically operated without backlog, which, because of
the nature of their business operations, is believed to be customary for their
industries.
46
<PAGE>
REGULATION
The Company's business is affected by governmental regulations relating
to its industry segments in general, as well as environmental and safety
regulations that have specific application to the Company's business. The
Company does not believe that compliance with federal, state or local
environmental laws adversely affects its business, earnings or competitive
position. The Company cannot predict whether future legislation will have any
effect on its operations. The Company does not believe that environmental laws
have had a material impact on industry standards and/or quality control
procedures.
PROPERTIES
IMSCO's main facilities are located in Baytown, Texas, and include
approximately 2,000 square feet of office and approximately 18,000 square feet
of warehouse space, all of which is leased. IMSCO maintains two leased branch
offices, including an approximately 7,000 square foot facility in Freeport,
Texas, and an approximately 5,000 square foot facility in Mt. Belvieu, Texas.
PVS owns approximately 1.2 acres of real property in South Houston,
Texas, which includes approximately 4,500 square feet of warehouse facilities,
approximately 4,000 square feet of office facilities, approximately 9,000 square
feet of machine shop facilities, and approximately 22,500 square feet of open
outside storage.
LEC leases approximately four acres of real property in Houston, Texas,
including approximately 50,000 square feet of manufacturing facilities,
including a tooling shop, an automatic plating facility and an automatic
packaging and inspection area. LEC leases approximately 66,000 square feet of
manufacturing facilities in Waterbury, Connecticut.
REX leases approximately 13.32 acres of real property in Houston, Texas
which includes approximately 275,000 square feet of warehouse and office
facilities.
The Company maintains its principal executive offices at 7135 Ardmore,
Houston, Texas 77054 in the 275,000 square feet of warehouse and office
facilities leased by REX. The office facility portion of this property consists
of conventional office space and is, in the opinion of management, adequate to
meet the Company's needs for the foreseeable future. The Company believes that
all existing office and warehouse facilities leased or owned by its subsidiaries
are adequate to meet the needs of the Company for the foreseeable future and are
suitable for the business conducted therein.
47
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth certain information with respect to the
directors and executive officers of the Company:
NAME AGE POSITION(S) WITH THE COMPANY
Robert E. Cone 44 Chairman of the Board of Directors, President
and Chief Executive Officer
James H. Brock, Jr. 58 Executive Vice-President, President - Energy
Products and Services Division and Director
Thomas C. Landreth 47 Executive Vice-President, President - Fastener
Manufacturing and Sales Division
Christine A. Smith 43 Vice-President and Chief Financial Officer
Barbara S. Shuler 51 Secretary and Director
Charles J. Anderson 74 Director
James W. Kenney 55 Director
John P. Madden 54 Director
ROBERT E. CONE has served as President, Chief Executive Officer and
Director of the Company since August 1989. From August 1987 to August 1989, Mr.
Cone served as Vice President of Broadcast Ventures, Inc ("BVI"), a partnership
formed to acquire radio stations through syndication. Mr. Cone's
responsibilities at BVI included the formation of business plans, corporate
development, financing and analysis of acquisition candidates. Mr. Cone received
a B.S. degree in accounting from the University of Houston - Downtown.
JAMES H. BROCK, JR. has served as Executive Vice President, since July
1991, President of the Energy Products and Services Division since June 1996, as
a Director of the Company since September 1991, as Chief Operating Officer from
July 1991 to June 1996 and as Chief Financial Officer from July 1991 through
December 1994. Mr. Brock served as Executive Vice President and Chief Financial
Officer of DRCA Medical Corporation ("DRCA") from August 1988 to October 1990.
DRCA, a public corporation listed on the American Stock Exchange, is a health
care company specializing in the rehabilitation of injured workers. From
December 1987 to July 1988, Mr. Brock acted as a consultant to DRCA and assisted
in formulating its business and financial plans. Mr. Brock served as Vice
President-Finance of National Healthcare Alliance, a full-service managed health
care service company, from November 1987 to May 1991. From 1977 to 1990, Mr.
Brock was Chairman of the Board of Directors of Quality Fasteners, Inc., a
distributor of construction supplies, and of Olde Time Ice, Inc., a manufacturer
and distributor of packaged ice. Mr. Brock has been engaged in the private
practice of public accounting since April 1972 and is a Certified Public
Accountant in Texas and Georgia.
THOMAS C. LANDRETH has served as Executive Vice President since
September 1996. Mr. Landreth has served as President of Landreth Engineering
Company since 1977 and as President of the Fastener Manufacturing and Sales
Division since the Company's divisional reorganization in June 1996. Mr.
Landreth has worked in all technical areas of LEC since 1967 and is responsible
for numerous cold heading machine designs and improvements as well as numerous
innovative tool and die designs. He attended the University of Texas in Austin.
48
<PAGE>
CHRISTINE A. SMITH has served as Chief Financial Officer of the Company
since January 1995. From April 1989 through December 1994, Ms. Smith was a
Principal at The Spinnaker Group, an investment banking firm providing services
primarily to manufacturing and distribution companies. Prior to joining The
Spinnaker Group, Ms. Smith, a certified public accountant, was a Senior Manager
with Ernst & Young.
BARBARA S. SHULER has served as Secretary of the Company since February
1992 and as a Director of the Company since September 1991. Since 1974, Ms.
Shuler has been self-employed in auction management, marketing, advertising and
promotional aspects of the equine industry, serving as President of Shuler, Inc.
Ms. Shuler received a degree in journalism from Northwestern University.
CHARLES J. ANDERSON has served as a Director of the Company since
September 1991. For the last six years, Mr. Anderson has been engaged in private
business investments. From 1955 to 1985, Mr. Anderson served as Senior Sales
Vice President and Director of Sales and was a partner of the Delaware
Management Company, the manager of the Delaware Group of Mutual Funds and
certain other private pension funds. Mr. Anderson received an economics degree
from the University of Pennsylvania.
JAMES W. KENNEY has served as a Director of the Company since October
1992. Since October 1993, Mr. Kenney has served as Executive Vice President of
San Jacinto Securities, Inc. From February 1992 to September 1993, he served as
the Vice President of Renaissance Capital Group, Inc. Prior to that time, Mr.
Kenney served as Senior Vice President for Capital Institutional Services, Inc.
and in various executive positions with major southwest regional brokerage
firms, including Rauscher Pierce Refsnes Inc. and Weber, Hall, Sale and
Associates, Inc. Mr. Kenney is a director of AmeriShop Corporation, a company in
the incentive and membership merchandising industry; Consolidated Health Care
Associates, Inc., a company that operates physical rehabilitation centers; Prism
Group, Inc., a company that duplicates disks and packages software; Tecnol
Medical Products, a provider of disposable medical products, Appoint
Technologies, Inc., a company that develops input devices for personal
computers; and Tricom Corporation, a company that develops products and services
for the telecommunication industry.
JOHN P. MADDEN has served as a Director of the Company since October
1992. From January 1992 to April 1993, Mr. Madden served as Chairman of the
Board of The Rex Group, Inc. ("REX") and as its President and Chief Executive
Officer from June 1963 to January 1992 and from December 1992 to April 1993.
REX, a private company based in Houston, Texas, which was acquired by the
Company in March 1993, is a distributor of new and used machine tool equipment
and used machines, conducts a machine moving operation and is engaged in the
international export crating business. Mr. Madden received a degree in finance
from the University of Notre Dame.
BOARD AND COMMITTEE ACTIVITY: STRUCTURE AND COMPENSATION
The Company's operations are managed under the broad supervision of the
Board of Directors, which has ultimate responsibility for the establishment and
implementation of the Company's general operating philosophy, objectives, goals
and policies. During 1995, the Board of Directors convened on two regular
occasions. Each director attended all of the meetings held by the Board or
meetings of Board committees of which he was a member during his tenure in 1995,
except for Charles J. Anderson who attended no Board of Directors meetings and
all Committee meetings of which he was a member and Barbara Shuler who attended
one meeting of the Board of Directors and all Committee meetings of which she
was a member. During 1995, directors received no compensation for attendance at
Board or Committee meetings, but were entitled to reimbursement for reasonable
travel expenses incurred in
49
<PAGE>
attending such meetings. As of June 1996, the Board approved the payment of a
fee of $500 to each non-employee director for each meeting attended. Employee
directors are eligible to participate in the Company's 1994 Amended and Restated
Incentive Stock Plan (the "Incentive Plan"). Non-employee directors are entitled
to participate in the Company's 1995 Non-Employee Director Stock Option Plan
(the "Director Plan").
Pursuant to delegated authority, various Board functions are discharged
by the standing committees of the Board. The Audit Committee of the Board of
Directors, currently composed of Messrs. Brock and Anderson and Ms. Shuler,
makes recommendations to the Board of Directors concerning the selection and
engagement of the Company's independent public accountants and reviews the scope
of the annual audit, audit fees and results of the audit. The Audit Committee
also reviews and discusses with management and the Board of Directors such
matters as accounting policies, internal accounting controls and procedures for
preparation of financial statements. The Audit Committee convened on one
occasion in 1995. The Compensation Committee sets the compensation for
executive, managerial and technical personnel of the Company and administers the
Company's stock option and other compensation plans. The Compensation Committee
is currently composed of Mr. Madden, Mr. Anderson and Ms. Shuler and met on one
occasion in 1995.
50
<PAGE>
EXECUTIVE COMPENSATION
The following table provides certain summary information covering
compensation paid or accrued during the fiscal years ended December 31, 1995,
1994 and 1993 to the Company's Chief Executive Officer and the other executive
officers, whose annual compensation, determined as of the end of the last fiscal
year, exceeds $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
-------------------------------------------- -------------------------
SECURITIES UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OTHER OPTIONS
- ----------------------------------- ----------- ------------ ------------- ------------- -------------------------
<S> <C> <C> <C> <C> <C>
Robert E. Cone.................... 1995 $160,000 -- -- --
President and 1994 $146,250 -- -- 50,000
Chief Executive Officer 1993 $126,749 $10,000 -- 65,000
James H. Brock, Jr................ 1995 $150,000 -- -- --
Executive Vice President 1994 $135,000 -- -- 20,000
1993 $110,433 $7,500 -- 65,000
</TABLE>
The following table provides certain information with respect to
options granted to the executive officers during the fiscal year ended December
31, 1995, under the Company's stock option plans:
OPTION/SAR GRANTS TABLE
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------------------------
NUMBER OF POTENTIAL REALIZABLE
SHARES OF VALUE AT ASSUMED
COMMON PERCENT OF TOTAL ANNUAL RATES OF STOCK
STOCK OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO OPTION TERMS(2)
OPTIONS EMPLOYEES IN EXERCISE EXPIRATION
NAME GRANTED(1) FISCAL YEAR PRICE DATE 5% 10%
---- ---------- ----------- ----- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Christine A. Smith 25,000 10.0% $3.31 01/01/05 $52,041 $131,882
Vice President and
Chief Financial
Officer
</TABLE>
(1) The options are fully vested at December 31, 1995.
(2) These calculations are based on the market value of the Common Stock on
the date of grant. The market value is calculated by averaging the
closing bid and ask price for the stock as quoted by Nasdaq National
Market System on the date of grant. The exercise price is determined by
the same method, which is equal to the market value on the date of
grant.
51
<PAGE>
The following table sets forth information with respect to the
unexercised options to purchase shares of Common Stock which were granted to the
executive officers in 1995 or prior years under the Company's stock option
plans. The executive officers did not exercise any options outstanding under the
Company's stock option plans during the fiscal year ended December 31, 1995.
OPTION EXERCISES AND YEAR-END VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS AT
HELD AT FISCAL YEAR END YEAR END(1)
------------------------------------- -------------------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
<S> <C> <C> <C> <C>
Robert E. Cone 115,000 -- $152,500 --
James H. Brock, Jr. 85,000 -- $100,000 --
Christine A. Smith 25,000 -- $ 20,375 --
</TABLE>
(1) Represents the difference between the average of the closing bid and
ask price for the Common Stock as quoted by NMS on December 31, 1995
and any lesser exercise price.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION.
For the fiscal year ended December 31, 1995, Mr. Madden, Mr. Anderson
and Ms. Shuler served on the Compensation Committee of the Board of Directors
(the "Committee"). Ms. Shuler has served as the Company's Secretary since
February 1992.
52
<PAGE>
PERFORMANCE GRAPH
The following performance graph compares the performance of the
Company's Common Stock to the National Association of Securities Dealers
Automated Quotation System Composite Index and to the Index of Non-Financial
Companies. The graph covers the period from January 16, 1992 (the date on which
the Company's Common Stock was registered under Section 12(g) of the Exchange
Act) to December 31, 1995.
[LINEAR GRAPH PLOTTED FROM POINTS IN TABLE BELOW]
Nasdaq Nasdaq
STOCK MKT. NON-FINANCIAL IHII
---------- ------------- ----
Jan. 16, 1992 100.000 100.000 100.000
Jan. 31, 1992 99.602 99.483 89.189
Dec. 31, 1992 110.567 103.898 86.486
Dec. 31, 1993 126.925 119.966 89.189
Dec. 31, 1994 124.070 114.970 77.038
Dec. 31, 1995 175.321 158.082 89.189
53
<PAGE>
EMPLOYMENT AGREEMENTS
Effective July 1, 1991, the Company entered into employment agreements
with Messrs. Cone and Brock, which agreements were subsequently amended and
extended. Mr. Cone's amended employment agreement provides for an extended term
through December 31, 1998, as well as an automatic 12-month renewal for each
year beginning January 1, 1995, through January 1, 1998, unless sooner
terminated on Mr. Cone's (i) death, or (ii) inability to perform his duties by
reason of illness, injury or disability. The amended employment agreement also
provides for a 1996 base salary of $175,000, a 1997 base salary of $185,000, and
a base salary of $200,000 for 1998 through 2000, with guaranteed 7% increases in
base salary thereafter. Mr. Brock's amended employment agreement provides for an
extended term through December 31, 2000, with a 1996 base salary of $160,000, a
1997 base salary of $170,000, a 1998 base salary of $180,000 and a base salary
of $150,000 thereafter. Effective October 1992, the Company entered into an
employment agreement with Mr. Landreth renewable annually and providing for a
yearly salary of $110,000 and a bonus based on pretax profits of LEC.
STOCK OPTION PLANS
1994 AMENDED AND RESTATED INCENTIVE STOCK PLAN
The Company has adopted the Industrial Holdings, Inc. 1994 Amended and
Restated Incentive Stock Plan (the "Incentive Plan"). Under the Incentive Plan,
the Company may issue Incentive Awards (as defined below) covering 500,000
shares of Common Stock. The Compensation Committee designated by the Board of
Directors may grant (i) incentive stock options as defined in Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), (ii) "non-qualified"
stock options, (iii) shares of restricted stock, (iv) shares of phantom stock,
(v) stock bonuses and (vi) cash bonuses (collectively, "Incentive Awards"). Key
employees, including officers (whether or not they are directors), of the
Company and its subsidiaries are eligible to participate in the Incentive Plan.
The Incentive Plan is intended to provide such persons with a continuing
proprietary interest in the Company and enable the Company to attract and retain
qualified personnel. At November 6, 1996, there were options covering 428,500
shares of Common Stock outstanding under the Incentive Plan.
The Incentive Plan is administered by the Compensation Committee of the
Board of Directors, which is currently composed of Mr. Madden, Mr. Kenney and
Ms. Shuler. The Compensation Committee will determine which key employees
receive grants of Incentive Awards, the type of Incentive Award granted and the
number of shares subject to each Incentive Award. The Incentive Plan does not
prescribe any factors to be considered by the Compensation Committee in
determining the recipients and nature of Incentive Awards granted under the
Incentive Plan.
The Compensation Committee has the authority to interpret and construe
any provision of the Incentive Plan and to adopt such rules and regulations for
administering the Incentive Plan as it deems necessary. All decisions and
determinations of the Compensation Committee are final and binding on all
parties. Under the terms of the Incentive Plan, the Company will indemnify
members of the Compensation Committee against any cost, expenses or liability
arising out of any action, omission or determination relating to the Incentive
Plan, unless such action, omission or determination was taken or made in bad
faith and without reasonable belief that it was in the best interest of the
Company.
54
<PAGE>
Subject to the terms of the Incentive Plan, the Compensation Committee
also determines prices, expiration dates and other material features of the
Incentive Awards granted under the Incentive Plan. The Compensation Committee
may, in its absolute discretion, (i) accelerate the date on which an option
granted under the Incentive Plan becomes exercisable, (ii) extend the date on
which any option granted under the Incentive Plan ceases to be exercisable,
(iii) accelerate the date on which a share of restricted stock or phantom stock
vests and waive any conditions imposed by the Compensation Committee on the
vesting of a share of restricted stock or phantom stock, and (iv) grant
Incentive Awards to a participant on the condition that the participant
surrender to the Company for cancellation such other Incentive Awards
(including, without limitation, Incentive Awards with higher exercise prices) as
the Compensation Committee specifies.
The Company's Board of Directors may amend or terminate the Incentive
Plan at any time, except that the Incentive Plan may not be modified or amended,
without shareholder approval, if such amendment would materially increase the
benefits accruing to participants, increase the number of shares of Common Stock
which may be issued thereunder, except in connection with a recapitalization or
reclassification of the Common Stock, or materially modify eligibility
requirements for participation in the Incentive Plan.
A summary of the most significant features of the Incentive Plan and
the tax consequences to recipients thereof follows:
INCENTIVE AND NON-QUALIFIED STOCK OPTIONS. Except in limited cases
involving certain 10% shareholders or where the terms of the grant specify
otherwise, incentive stock options ("ISOs") and non-qualified stock options
("NQOs") must be exercised within ten years of the grant date (ISOs and NQOs are
sometimes referred to collectively herein as "Options"). The exercise price of
each ISO granted under the Incentive Plan may not be less than 100% (110% in the
case of certain 10% shareholders) of the fair market value of a share of Common
Stock on the date of grant. The Compensation Committee will have the discretion
to determine the exercise price of each NQO granted under the Incentive Plan. To
the extent that the aggregate fair market value of shares of Common Stock with
respect to which ISOs are exercisable for the first time by any individual
during any calendar year exceeds $100,000, such options must be treated as NQOs.
The purchase price for shares subject to an Option must be paid in full
at the time of exercise in cash or, subject to the approval of the Committee, in
any combination of cash or shares of Common Stock having a fair market value
equal to the amount due, subject to any limitations imposed by the federal
securities laws. No Option may be exercised for a fractional share of Common
Stock.
If an employee's employment with the Company is terminated other than
for cause (as defined in the Incentive Plan), or by reason of disability (as
defined in the Incentive Plan) or death, his vested Options, whether ISOs or
NQOs, shall remain exercisable for one month after such termination. If an
employee's employment with the Company is terminated by reason of disability or
death, his vested Options, whether ISOs or NQOs, shall remain exercisable for
one year following such termination. Provided, however, that no option shall be
exercisable after the expiration of its term, in any case. If an employees'
employment with the Company is terminated for cause, all outstanding Options,
whether vested or otherwise, shall expire at the commencement of business on the
date of such termination. Options are not transferable other than by will or by
the laws of descent and distribution.
Upon a change in control of the Company (a "Change in Control"), all
Options become immediately exercisable. The Incentive Plan defines Change in
Control to mean (i) a change in control
55
<PAGE>
as contemplated in the federal securities laws, (ii) the acquisition by any
Person, after the effective date of the Incentive Plan, of 20% or more of the
shares of voting securities of the Company (20% owners at the effective date
excluded), (iii) certain changes in the composition of the Board of Directors
(existing as of the effective date of the Incentive Plan) as a result of a
contested election for positions on the Board of Directors or (iv) an other
event which the Board of Directors determines to constitute a change in control
of the Company.
A participant in the Incentive Plan will not recognize any income at
the time an ISO is granted, nor on the qualified exercise of an ISO. If a
participant does not dispose of the shares acquired by exercise of an ISO within
two years after the grant of the ISO and one year after the exercise of the ISO,
the exercise is qualified and the gain or loss (if any) on a subsequent sale
will be a long-term capital gain or loss. Such gain or loss equals the
difference between the sum of the sales proceeds and the exercise price of the
Common Stock sold. The Company is not entitled to a tax deduction as a result of
the grant or qualified exercise of an ISO. However, if the shares acquired upon
the exercise of an ISO are disposed of at a gain prior to the above one-year and
two-year holding periods and the fair market value of the shares at the time of
exercise exceeds the exercise price, the exercise is not qualified and special
rules apply that require the participant to recognize ordinary income (at least
in part) at the time of such disposition. The Company is generally entitled to a
tax deduction at the same time and in the same amount as the ordinary income
recognized by the participant from such disposition.
Although the qualified exercise of an ISO will not produce ordinary
taxable income to the participant, it will produce an increase in the
participant's alternative minimum taxable income and may result in an
alternative minimum tax liability.
An optionee will not recognize any income for federal income tax
purposes at the time a NQO is granted, nor will the Company be entitled to a
deduction at that time. However, when any part of a NQO is exercised, the
optionee will recognize ordinary income in an amount equal to the difference
between the fair market value of the shares received and the exercise price of
the NQO, and the Company will generally recognize a tax deduction in the same
amount.
RESTRICTED STOCK. A grant of shares of restricted stock represents the
promise of the Company to issue shares of Common Stock on a predetermined date
(the "Issue Date") to a participant, provided the participant is continuously
employed by the Company until the Issue Date. Vesting of the shares occurs on a
second predetermined date (the "Vesting Date") if the participant has been
continuously employed by the Company until that date. Prior to the Vesting Date,
the shares are not transferable by the participant and are subject to a
substantial risk of forfeiture. The Committee may, at the time shares of
restricted stock are granted, impose additional conditions to the vesting of the
shares, such as, for example, the achievement of specified performance goals.
Vesting of some portion, or all, of the shares or restricted stock may occur on
the termination of the employment of a participant other than for cause prior to
the Vesting Date. If vesting does not occur, shares of restricted stock are
forfeited. Immediately following a Change in Control, all shares of restricted
stock which have not vested or been forfeited will vest automatically.
A participant will not recognize any income for federal tax purposes at
the time shares of restricted stock are granted or issued, nor will the Company
be entitled to a tax deduction at that time. However, when either the transfer
restriction or the forfeiture risk lapses, such as on vesting, the participant
will recognize ordinary income in an amount equal to the fair market value of
the shares of restricted stock on the date on which they vest. A participant may
file an appropriate election under Section 83(b) of the
56
<PAGE>
Code with the Internal Revenue Service within 30 days of the Issue Date of the
restricted stock (the "Election"), which results in the participant's receipt of
deemed ordinary income in an amount equal to the fair market value of the shares
of restricted stock on the date on which they are issued. However, if a
participant files the Election and the restricted stock is subsequently
forfeited, such participant is not allowed a tax deduction for the amount
previously reported as ordinary income due to the Election. Gain or loss (if
any) from a disposition of restricted stock after the participant recognizes any
ordinary income (whether by vesting or an Election) will generally constitute
short- or long-term capital gain or loss. The Company will be entitled to a tax
deduction at the time the participant recognizes ordinary income on the
restricted stock, whether by vesting or an Election.
PHANTOM STOCK. A share of phantom stock represents the right to receive
the economic equivalent of a grant of restricted stock. Shares of phantom stock
are subject to the same vesting requirements as shares of restricted stock. On
vesting of a share of phantom stock, the holder is entitled to receive cash in
an amount equal to the sum of (i) the fair market value of a share of Common
Stock as determined on the vesting date and (ii) the aggregate amount of cash
dividends paid with respect to a share of Common Stock during the period
commencing on the date of grant and ending on the vesting date. The cash payment
for phantom stock is treated the same as a cash bonus for federal income tax
purposes and generally creates a tax deduction to the Company when paid. In
addition, the value of a share of phantom stock (whether or not vested) is paid
immediately on the occurrence of a Change in Control of the Company. The
Committee may not grant any cash bonus in connection with the grant of shares of
Phantom Stock.
STOCK AND CASH BONUSES. Bonuses payable in stock may be granted by the
Compensation Committee and may be payable at such times and subject to such
conditions as the Compensation Committee determines. On the receipt of a stock
bonus, a participant will recognize ordinary income for federal tax purposes in
an amount equal to the fair market value of the stock at the time it is
received. The Compensation Committee may grant, in connection with a grant of
shares of restricted stock, a cash "tax" bonus, payable when an employee is
required to recognize income for federal income tax purposes with respect to
such shares. The tax bonus may not be greater than the value of the shares of
restricted stock at the time the income is required to be recognized. Any such
bonus will result in ordinary income to the employee and generally a tax
deduction to the Company. The grant of a cash bonus shall not reduce the number
of shares of Common Stock with respect to which Options, shares of restricted
stock, shares of phantom stock or stock bonuses may be granted pursuant to the
Incentive Plan.
IN GENERAL. If any outstanding Option expires, terminates or is
canceled for any reason, the shares of Common Stock subject to the unexercised
portion of such Option shall again be available for grants under the Incentive
Plan. If any shares of restricted stock or phantom stock, or any shares of
Common Stock granted as a stock bonus, are forfeited or canceled for any reason,
such shares shall again be available for grants under the Incentive Plan. Shares
of Common Stock issued as a stock bonus or on the exercise of Options or on the
vesting of a grant of restricted stock are not available for future issuance
under the Incentive Plan.
The Incentive Plan provides for an adjustment in the number of shares
of Common Stock available to be issued under the Incentive Plan, the number of
shares subject to Incentive Awards, and the exercise prices of Options on a
change in the capitalization of the Company, a stock dividend or split, a merger
or combination of shares and certain other similar events. The Incentive Plan
also provides for the termination of Incentive Awards on the occurrence of
certain corporate events.
57
<PAGE>
The Incentive Plan provides that participants may elect to satisfy
certain federal income tax withholding requirements by remitting cash to the
Company. In addition, the Incentive Plan provides that, at the election of a
participant, an unrelated broker-dealer acting on behalf of the participant, may
exercise Options granted to the participant and immediately sell the shares so
acquired by such exercise to raise the funds to pay the exercise price of the
Options and the amount of any withholding tax that may be due on exercise.
1995 NON EMPLOYEE DIRECTOR STOCK OPTION PLAN
The Company has also adopted the Industrial Holdings, Inc. 1995
Non-Employee Director Stock Option Plan (the "Director Plan"). Options to
purchase a maximum of 105,000 shares of Common Stock may be issued under the
Director Plan to non-employee directors of the Company. The Director Plan
provides for the grant of non-qualified options. Pursuant to the Director Plan,
options to purchase 15,000 shares of Common Stock are granted to each person who
is not an employee of the Company upon his election for the first time as a
director of the Company. Options granted under the Director Plan expire 10 years
after the date of grant. As of November 6, 1996, options to purchase an
aggregate of 80,000 shares of Common Stock are issued and outstanding under the
Director Plan.
To the extent that any options are granted under the Incentive Plan or
the Director Plan, vest and are exercised by the holders thereof, exercising
Warrantholders could experience dilution.
58
<PAGE>
CERTAIN TRANSACTIONS
The Company enters into transactions with related parties only with the
approval of a majority of the independent and disinterested directors and only
on terms the Company believes to be comparable to or better than those that
would be available from unaffiliated parties. In the Company's view, all of the
transactions described below meet that standard.
In April 1993, the Company acquired The Rex Group, Inc. ("REX") for a
purchase price consisting of an aggregate of 450,606 shares of Common Stock.
John Madden, a member of the Company's Board of Directors since October 1992,
served as the President and Chief Executive Officer of REX from June 1963 to
January 1992 and from December 1992 to April 1993 and as Chairman of REX's Board
of Directors from January 1992 to April 1993. Of the aggregate consideration
paid by the Company to the former shareholders of REX, Mr. Madden received
99,868 shares of Common Stock, and members of Mr. Madden's family received
350,738 shares of Common Stock, as to which Mr. Madden disclaims beneficial
ownership. In addition to the aggregate consideration paid by the Company for
REX, an "earn-out" provision allowed the prior owners of REX in the aggregate to
earn additional shares of Common Stock of the Company based on the performance
of REX through 1995. The number of shares earned was also dependent upon the
Company's share price during such period. During 1993, the prior owners of REX
earned an additional 55,276 shares of Common Stock. No shares were earned for
fiscal 1994 and 1995. The Company also entered into a two-year employment
agreement with Mr. Madden which expired April 1995, pursuant to which the
Company paid Mr. Madden compensation in the amount of $16,154 in 1995. Under the
terms of his employment agreement with the Company, Mr. Madden received an
additional 10,000 shares of Common Stock in March 1994 and 14,000 shares of
Common Stock in March 1995.
In connection with the acquisition of PVS in January 1992, Mr. Jimmy W.
Ray acquired 115,650 shares of Common Stock and Mr. Rex W. Terry acquired
115,650 shares of Common Stock. In connection with their acquisition of these
shares at the time the Company completed its initial public offering, Messrs.
Terry and Ray contractually agreed (i) not to sell any shares of Common Stock
until January 1993 and (ii) not to sell more than an aggregate of 6,425 shares
in any 90-day period beginning January 1993. If either of Mr. Terry or Mr. Ray
gave the Company written notice of his intention to sell shares of Common Stock
no less than 10 days prior to the beginning of each 90-day period and in the
event that the closing bid price of the Common Stock on the trading day
preceding notice was less than or equal to $5.00 per share, the Company was
obligated to pay such holder the difference between $5.00 and the sale price of
the shares of Common Stock actually sold during each particular 90-day period.
In February 1996, Mr. Ray and Mr. Terry sold all remaining shares of Common
Stock under this agreement. There is no further obligation on the part of the
Company to make any payments under the agreement.
In October 1992, the Company entered into a noncancelable lease with
the former shareholders of Landreth . The lease expires in 2002, with an option
by the Company to renew for another five years. Rent payments to the former
shareholders of Landreth were $106,800 annually for the years 1995, 1994 and
1993. The Company has an option to purchase the leased premises at a price equal
to the outstanding indebtedness related to the leased premises at the time the
option is exercised. The Company may be obligated to purchase the leased
premises under certain conditions specified in the lease agreement.
In connection with the purchase of Landreth in October 1992, the former
Landreth shareholders are entitled to additional consideration based upon the
level of Landreth's pretax profits through September 1997, not to exceed
$500,000 in the aggregate. For the six months ended June 30, 1996 and for fiscal
1995, 1994 and 1993, the Company paid these shareholders $99,320, $207,863,
$64,859 and $79,800 as additional consideration.
59
<PAGE>
PRINCIPAL SHAREHOLDERS
The table below sets forth certain information regarding the beneficial
ownership of Common Stock at November 6, 1996 by (i) each person known to the
Company to beneficially own more than 5% of its Common Stock, (ii) each
director, (iii) each executive officer and (iv) all directors and executive
officers as a group.
NAME AND ADDRESS OF NUMBER OF SHARES PERCENTAGE OF
BENEFICIAL OWNER BENEFICIALLY OWNED(1) CLASS
---------------- --------------------- -----
Renaissance Capital Partners II, Ltd.
8080 North Capital Expressway
Suite 210, LB 59
Dallas, Texas 75206-1857................ 375,153(2) 8.8%
St. James Capital Partners, L.P.
5599 San Felipe Suite 300
Houston, Texas 77056................... 295,000(3) 6.9%
Directors and Executive Officers:
Robert E. Cone.......................... 337,548(4) 7.8%
James H. Brock, Jr...................... 115,000(5) 2.7%
Thomas C. Landreth...................... 90,445(6) 2.1%
Christine A. Smith...................... 55,081(7) 1.3%
Charles J. Anderson..................... 77,000(6) 1.8%
Barbara S. Shuler....................... 77,393(8) 1.8%
John P. Madden.......................... 197,497(9) 4.7%
James W. Kenney......................... 20,000(6) *
All officers and directors
as a group (8 persons) (4) - (9)...... 969,964 21.4%
- ------------------------------------
* Less than one percent.
(1) Subject to community property laws where applicable, each person has
sole voting and investment power with respect to the shares listed,
except as otherwise specified. Each person is a United States citizen.
This table is based upon information supplied by officers, directors
and principal shareholders and Schedules 13D and 13G, if any, filed
with the Securities and Exchange Commission.
(2) Includes 325,153 shares that may be acquired on the conversion of a
currently exercisable $1.060 million convertible debenture at $3.26 per
share and the exercise of 50,000 warrants at $4.00 per share.
(3) Includes 80,000 shares that may be acquired upon the exercise of
currently exercisable warrants.
(4) Includes 115,000 shares that may be acquired upon the exercise of
currently exercisable stock options.
(5) Includes 65,000 shares that may be acquired upon the exercise of
currently exercisable stock options.
(6) Includes 20,000 shares that may be acquired upon the exercise of
currently exercisable stock options.
(7) Includes 45,000 shares that may be acquired upon the exercise of
currently exercisable stock options.
(8) Includes 15,000 shares that may be acquired upon the exercise of
currently exercisable stock options.
(9) Includes 15,000 shares that may be acquired upon the exercise of
currently exercisable stock options. Excludes 232,400 shares owned by
persons related to Mr. Madden, but as to which Mr. Madden disclaims
beneficial ownership.
60
<PAGE>
DESCRIPTION OF SECURITIES
Pursuant to the Company's Amended and Restated Articles of
Incorporation ("Amended Articles"), the authorized capital stock of the Company
consists of 20,000,000 shares of Common Stock, par value $.01 per share, and
7,500,000 shares of preferred stock, par value $.01 per share (the "Preferred
Stock"). The following description of certain of the Company's securities is a
summary, does not purport to be complete or to give effect to applicable
statutory or common law and is subject in all respects to the applicable
provisions of the Company's Amended Articles.
COMMON STOCK
At November 6, 1996, 4,219,580 shares of Common Stock were issued and
outstanding. Holders of Common Stock are entitled, among other things, to one
vote per share on each matter submitted to a vote of shareholders and, in the
event of liquidation, to share ratably in the distribution of assets remaining
after payment of liabilities. Holders of Common Stock have no cumulative voting
rights, and, accordingly, the holders of a majority of the outstanding shares
have the ability to elect all of the directors. Holders of Common Stock have no
preemptive or other rights to subscribe for shares and are entitled to such
dividends as may be declared by the Board of Directors out of funds legally
available therefor.
PREFERRED STOCK
None of the authorized shares of Preferred Stock have been issued or
are outstanding. The Board of Directors has the authority to cause the Company
to issue up to the authorized number of shares of Preferred Stock in one or more
series, to designate the number of shares constituting any series, and to fix
the rights, preferences, privileges and restrictions thereof, including dividend
rights, voting rights, redemption and conversion rights and liquidation
preferences of such series, without further action by the shareholders. Because
the Board is authorized to issue Preferred Stock with such preferences and
rights as it determines, it may afford the holders of any series of Preferred
Stock preferences, rights or voting powers superior to those of holders of
Common Stock. The Company has no present plan to issue any shares of Preferred
Stock.
WARRANTS
On January 15, 1992, the Company consummated its initial public
offering of units ("Units"), each unit consisting of one share of Common Stock,
one Class A Warrant and one Class B Warrant. At November 6, 1996 there were
632,500 Class A Warrants and 632,500 Class B Warrants outstanding.
Each currently outstanding Class A Warrant and Class B Warrant entitles
the registered holder thereof to purchase from the Company one share of Common
Stock at an exercise price of $6.00 and $10.00 per share, respectively. The
Class A and Class B Warrants may be exercised through and including January 14,
1997. The Class A and Class B Warrants may be redeemed by the Company at $.05
per warrant, on not less than 30 days' written notice, if the closing price of
the Common Stock for a period of 20 consecutive trading days equals or exceeds
$8.00 and $12.00 per share, respectively.
The Class B Warrants and Class C Warrants to be issued in connection
with the Offer (together with the currently outstanding Class A and Class B
Warrants, (the "Warrants")), will entitle the registered holder thereof to
purchase one share of Common Stock at an exercise price of $10.00 and $15.00 per
61
<PAGE>
share, respectively, and may be exercised through and including January 14,
1999. The term of currently outstanding Class B Warrants, which are exercisable
through and including January 14, 1997, will, after the Expiration Date,
automatically be extended to January 14, 1999. The Company may redeem each of
the Class B Warrants and the Class C Warrants to be issued in the Offer at $.05
per Warrant if the closing bid price of the Common Stock shall have equaled or
exceeded at least $12.00 and $20.00 per share, respectively, for a period of 20
consecutive trading days. Notice of any redemption must be mailed to all holders
of Warrants at least 30 days but no more than 60 days before the date on which
the Warrants have been called for redemption.
The holders of Warrants do not have any voting or any other rights of
shareholders of the Company and are not entitled to receive dividends. In the
event of an adjustment in the number of shares issuable on exercise of the
Warrants, the Company will not issue fractional shares, but will, instead, pay
to the holder of the Warrants at the time of such exercise an amount in cash
equal to the same fraction of the current market value of a share of Common
Stock.
The exercise price and the number and kind of shares or other
securities purchasable on exercise of any Warrants and the number of Warrants
are subject to adjustment on the occurrence of certain events, including stock
dividends, reclassifications, reorganizations, consolidations and mergers. No
adjustment in the exercise price is required until cumulative adjustments amount
to one percent or more of the exercise price. If the Company effects any capital
reorganization, certain reclassifications of the Common Stock, any consolidation
or merger (other than a consolidation or merger which does not result in any
reclassification or change in the outstanding shares), or sells all or
substantially all its properties and assets, the Warrants become exercisable
only for the number of shares of stock or other securities, assets, or cash to
which a holder of the number of shares of the Company purchasable (at the time
of such reorganization, reclassification, consolidation, merger or sale) on
exercise of such Warrants would have been entitled on such reorganization,
reclassification, consolidation, merger, or sale.
The Warrants are not exercisable by a holder if (i) the shares issuable
on exercise of such Warrants have not been registered under the securities or
blue sky laws of the state of residence of such holder or (ii) a current
prospectus meeting the requirements of the laws of such state cannot be lawfully
delivered by or on behalf of the Company. Pursuant to the terms of the
respective Warrant agreements, the Company has agreed to use reasonable efforts
to register such shares in states in which holders of Warrants are known to
reside and to maintain a current prospectus relating thereto.
SPECIAL PROVISIONS OF THE ARTICLES OF INCORPORATION AND TEXAS LAW
ANTI-TAKEOVER EFFECT. The provisions of the Amended Articles summarized
in the succeeding paragraphs, may be deemed to have an anti-takeover effect or
may delay, defer or prevent a tender offer or takeover attempt that a
shareholder might consider in such shareholder's best interest, including those
attempts that might result in a premium over the market price for the shares
held by a shareholder.
Pursuant to the Amended Articles, the Board of Directors may, by
resolution, establish one or more series of preferred stock, having such number
of shares, designation, relative voting rights, dividend rates, liquidation or
other rights, preferences and limitations as may be fixed by the Board of
Directors without any further shareholder approval. Such rights, preferences,
privileges and limitations as may be established could have the effect of
impeding or discouraging the acquisition of control of the Company.
62
<PAGE>
LIMITATION OF DIRECTOR LIABILITY. Texas law authorizes a Texas
corporation to eliminate or limit the personal liability of a director to the
Company and its shareholders for monetary damages for breach of certain
fiduciary duties as a director. The Company believes that such a provision is
beneficial in attracting and retaining qualified directors, and accordingly, its
Amended Articles include a provision eliminating a director's liability for
monetary damages for any breach of fiduciary duty as a director, except: (i) for
any breach of the duty of loyalty to the Company or its shareholders; (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law; (iii) for any transaction from which the director
derived an improper personal benefit; or (iv) for certain other actions. Thus,
pursuant to Texas law, the Company's directors are not insulated from liability
for breach of their duty of loyalty (requiring that, in making a business
decision, directors act in good faith and in the honest belief that the action
was taken in the best interest of the Company), or for claims arising under the
federal securities laws. The foregoing provision of the Company's Amended
Articles may reduce the likelihood of derivative litigation against directors
and may discourage or deter shareholders or management from bringing a lawsuit
against directors for breaches of their fiduciary duties, even though such an
action, if successful, might otherwise have benefited the Company and its
shareholders.
INDEMNIFICATION OF OFFICERS AND DIRECTORS. To the maximum extent
permitted by law, the Amended Articles and the Bylaws provide for mandatory
indemnification of directors, officers, employees and agents of the Company
against all expense, liability and loss to which they may become subject or
which they may incur as a result of being or having been a director, officer,
employee or agent of the Company. In addition, the Company must advance or
reimburse directors and officers and may advance or reimburse employees and
agents for expenses incurred by them in connection with indemnifiable claims.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock and Warrants and
the Warrant Agent for the Warrants is ChaseMellon Shareholder Services, Stock
Transfer Department, 85 Challenger Road, Overpeck Centre, Ridgefield Park, NJ
07660.
63
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
As of November 6, 1996, the Company had 4,219,580 shares of Common
Stock outstanding. Of those shares, 3,332,216 are freely tradeable in the public
market except for any shares owned at the time by an "affiliate" of the Company
within the meaning of Rule 144 under the Securities Act, which shares would be
subject to the resale volume limitations discussed below. The 1,265,000 shares
of Common Stock underlying the currently outstanding Class A and Class B
Warrants and up to the 1,265,000 shares of Common Stock underlying the Class B
and Class C Warrants to be issued in the Offer will be similarly freely
tradeable without restriction or further registration under the Securities Act,
except for any such shares owned at the time by an "affiliate" of the Company
within the meaning of Rule 144. The remaining 887,364 shares of Common Stock
outstanding are "restricted securities" which were issued and sold by the
Company in private transactions in reliance upon one or more exemptions
contained in the Securities Act ("Restricted Shares") and may be publicly sold
only if registered under the Securities Act or sold pursuant to Rule 144. All of
such Restricted Shares are currently eligible for sale under Rule 144.
In addition, as of November 6, 1996, there are an aggregate of 508,500
shares subject to options that have been or may be granted under the Incentive
Plan and the Director Plan, 421,582 shares issuable upon the exercise of Other
Warrants, and 325,153 shares issuable upon the conversion of the Renaissance
Debenture. The sale or resale of the shares of Common Stock underlying the
Shareholders' Options, Other Warrants and Renaissance Debenture have been
registered on Registration Statements on Forms S-8 and S-3. The resale of the
foregoing shares of Common Stock in the public market could adversely affect
prevailing market prices.
In general, under Rule 144 as currently in effect, any person,
including persons who may be deemed "affiliates" of the Company, whose
Restricted Shares have been fully paid for and held for at least two years from
the later of the date of issuance by the Company or acquisition from an
affiliate, is entitled to sell within any three-month period a number of shares
that does not exceed the greater of 1% of the then-outstanding shares of Common
Stock or the average weekly trading volume of such shares during the four
calendar weeks preceding the date on which notice of the proposed sale is sent
to the Securities and Exchange Commission. After three years from the later of
the date of issuance by the Company or acquisition from an affiliate, a person
who is not deemed an "affiliate" of the Company may sell such shares under Rule
144 without regard to the volume limitations described above. Sales under Rule
144 are also subject to certain sale provisions, notice requirements and the
availability of current public information about the Company.
No predictions can be made of the effect, if any, of future public
sales of restricted shares of Common Stock or the availability of restricted
shares of Common Stock for sale in the public market. Sales of substantial
amounts of restricted Common Stock under Rule 144 could adversely affect
prevailing market prices.
LEGAL MATTERS
Certain legal matters with respect to the issuance of the securities
offered hereby will be passed upon for the Company by Norton, Jacobs, Kuhn &
McTopy, L.L.P., Houston, Texas.
64
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Commission (the "SEC") a Registration
Statement on Form S-1 under the Securities Act with respect to the securities
offered hereby, as well as a Schedule 13E-4 (the "Schedule 13E-4") under the
Exchange Act. This Offering Circular-Prospectus does not contain all of the
information set forth in such Registration Statement, the Schedule 13E-4 and
exhibits thereto, certain parts of which were omitted in accordance with the
rules and regulations of the SEC. For further information with respect to the
Company and to the securities offered hereby, reference is made to such
Registration Statement, including the exhibits thereto. Statements contained in
this Offering Circular-Prospectus as to the contents of any contract or other
document are not necessarily complete, and in each instance reference is made to
the copy of such contract or other document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference. The Registration Statement and such exhibits and any schedules
attached to the Registration Statement may be inspected free of charge at the
Commission's public reference facilities at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. Any interested party may obtain copies of
all or any part of the Registration Statement and its exhibits at prescribed
rates from the Public Reference Section of the SEC at its principal office at
Judiciary Plaza, Room 1024, Washington, D.C. 20549.
65
<PAGE>
INDEX TO FINANCIAL STATEMENTS
INDUSTRIAL HOLDINGS, INC. AND SUBSIDIARIES PAGE
Report of Independent Accountants ........................................ F-2
Report of Independent Public Accountants ................................. F-3
Consolidated Balance Sheet at June 30, 1996 (unaudited) and
December 31, 1995 and 1994 ............................................ F-4
Consolidated Statement of Income For the Six Months Ended
June 30, 1996 and 1995 (unaudited) and the Years Ended
December 31, 1995, 1994 and 1993 ...................................... F-5
Consolidated Statement of Cash Flows For the Six Months Ended
June 30, 1996 and 1995 (unaudited) and the Years Ended December 31,
1995, 1994 and 1993 ................................................... F-6
Consolidated Statement of Shareholders' Equity For the Six Months
Ended June 30, 1996 (unaudited) and the Years Ended December 31,
1995, 1994 and 1993 ................................................... F-7
Notes to Consolidated Financial Statements ............................... F-8
MRMC, INC. FASTENER DIVISION (CRIVET)
Accountant's Letter ................................................... F-21
Statement of Assets Sold and Liabilities Assumed at June 30, 1995 ..... F-22
Statement of Direct Revenues and Direct Expenses for the Years
Ended June 30, 1995, 1994 and 1993 ................................. F-23
Notes to Statement of Assets Sold and Liabilities Assumed and
Statement of Direct Revenues and Direct Expenses ................... F-24
Statement of Assets Sold and Liabilities Assumed at December 7,
1995 (unaudited) ................................................... F-26
Statements of Direct Revenues and Direct Expenses for the Period
from July 1, 1995 through December 7, 1995 (unaudited) ............. F-27
Notes to Statements (unaudited) ....................................... F-38
AMERICAN RIVET COMPANY, INC.
Independent Auditors' Report F-29 Balance Sheets
at June 30, 1996 (unaudited) and August 31, 1995
and 1994 F-30 Statements of Operations and Retained Earnings
for the Ten Months Ended
June 30, 1996 and 1995 (unaudited) and for the Years Ended August 31,
1995, 1994 and 1993 .................................................. F-32
Statements of Cash Flows for the Ten Month Ended June 30, 1996 and
1995 (unaudited) and for the Years Ended August 31, 1995,
1994 and 1993 ....................................................... F-33
Notes to Financial Statements ........................................... F-34
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Industrial Holdings, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of income, of cash flows and of shareholders' equity
present fairly, in all material respects, the financial position of Industrial
Holdings, Inc. and its subsidiaries at December 31, 1995 and 1994, and the
results of their operations and their cash flows for the years then ended in
conformity with generally accepted accounting principles. 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 of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Houston, Texas
February 29, 1996, except as to the last paragraph of Note 11, which is as of
March 19, 1996
F-2
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Industrial Holdings, Inc.
We have audited the accompanying consolidated statement of income, shareholders'
equity and cash flows of Industrial Holdings, Inc. (a Texas corporation), and
subsidiaries for the year ended December 31, 1993. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of Industrial
Holdings, Inc., and subsidiaries for the year December 31, 1993, in conformity
with generally accepted accounting principles.
Arthur Andersen LLP
Houston, Texas
March 23, 1994
F-3
<PAGE>
INDUSTRIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
------------ ----------------------------------
1996 1995 1994
------------ ------------ ------------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and equivalents ......................................... $ 244,793 $ 428,430 $ 188,627
Accounts receivable - trade, net ............................. 6,729,562 5,640,253 4,419,263
Inventories .................................................. 9,345,904 7,945,871 6,658,895
Equipment held for sale ...................................... 100,000 275,000
Advances to shareholders ..................................... 17,436 65,210 192,750
Notes receivable, current portion ............................ 306,627 259,452 180,158
Other current assets ......................................... 425,055 267,330 367,548
------------ ------------ ------------
Total current assets ..................................... 17,169,377 14,881,546 12,007,241
Property and equipment, net ..................................... 9,683,180 9,125,422 5,400,497
Notes receivable, less current portion .......................... 1,277,748 1,475,956 1,623,323
Other assets .................................................... 119,458 127,658 115,369
Goodwill and other, net ......................................... 1,875,605 1,882,974 1,701,482
------------ ------------ ------------
Total assets ............................................... $ 30,125,368 $ 27,493,556 $ 20,847,912
============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable ................................................ $ 6,668,030 $ 6,688,570 $ 4,908,933
Accounts payable - trade ..................................... 5,688,523 4,748,339 3,608,200
Accrued expenses and other ................................... 1,004,872 1,213,176 715,136
Current portion of long-term debt ............................ 988,851 772,858 520,729
------------ ------------ ------------
Total current liabilities ............................... 14,350,276 13,422,943 9,752,998
Long-term debt, less current
portion ................................................. 5,001,834 5,890,849 3,567,954
Deferred income taxes payable ................................ 772,370 576,771 644,193
------------ ------------ ------------
Total liabilities ...................................... 20,124,480 19,890,563 13,965,145
------------ ------------ ------------
Commitments and contingencies (Notes 3 and 9)
Shareholders' equity:
Common stock $.01 par value, 7,500,000
shares authorized, 3,641,162,
3,091,162 and 2,997,750 shares
issued and outstanding .................................... 36,412 30,912 29,978
Additional paid-in capital ................................... 9,389,994 7,553,662 7,379,517
Retained earnings (deficit) .................................. 574,482 18,419 (526,728)
------------ ------------ ------------
Total shareholders' equity ........................... 10,000,888 7,602,993 6,882,767
------------ ------------ ------------
Total liabilities and
shareholders' equity ............................... $ 30,125,368 $ 27,493,556 $ 20,847,912
============ ============ ============
</TABLE>
The accompanying notes are an integral part of this statement.
F-4
<PAGE>
INDUSTRIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31,
---------------------------- ----------------------------------------------
(unaudited)
1996 1995 1995 1994 1993
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Sales ......................................... $ 25,627,328 $ 19,722,795 $ 38,983,070 $ 34,730,339 $ 35,112,856
Cost of sales ................................. 19,936,905 15,530,349 30,613,569 26,933,180 26,924,068
------------ ------------ ------------ ------------ ------------
Gross profit .................................. 5,690,423 4,192,446 8,369,501 7,797,159 8,188,788
------------ ------------ ------------ ------------ ------------
Operating expenses:
Selling, general and administrative ........ 4,032,846 3,226,207 6,511,969 6,689,174 6,203,788
Depreciation and amortization .............. 186,868 200,287 412,722 485,013 477,739
------------ ------------ ------------ ------------ ------------
Total operating expenses ................ 4,219,714 3,426,494 6,924,691 7,174,187 6,681,527
------------ ------------ ------------ ------------ ------------
Income from operations ........................ 1,470,709 765,952 1,444,810 622,972 1,507,261
------------ ------------ ------------ ------------ ------------
Other income (expense):
Interest expense ........................... (678,221) (486,175) (982,254) (888,506) (856,593)
Interest income ............................ 60,391 70,698 140,173 130,143 113,478
Other income (expense) ..................... (10,360) 37,952 17,882 183,537 76,419
------------ ------------ ------------ ------------ ------------
Total other income (expense) ............ (628,190) (377,525) (824,199) (574,826) (666,696)
------------ ------------ ------------ ------------ ------------
Income before income taxes .................... 842,519 388,427 620,611 48,146 840,565
Income tax expense ............................ 286,456 34,341 75,464 16,444 77,763
------------ ------------ ------------ ------------ ------------
Net income .................................... $ 556,063 $ 354,086 $ 545,147 $ 31,702 $ 762,802
============ ============ ============ ============ ============
Earnings per share ............................ $ .14 $ .12 $ .17 $ .01 $ .27
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of this statement.
F-5
<PAGE>
INDUSTRIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEAR ENDED DECEMBER 31,
---------------------- -----------------------------------
1996 1995 1995 1994 1993
----------- --------- ----------- ----------- ---------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income ..................................................... $ 556,063 $ 354,086 $ 545,147 $ 31,702 $ 762,802
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization ................................. 642,763 406,776 865,241 840,234 741,081
Deferred income tax provision (benefit) ....................... 195,599 34,341 (67,422) 20,430 71,763
Loss on sales of equipment .................................... -- 7,120 -- -- 12,998
Other ......................................................... -- -- (12,289) 11,072 (84,343)
Changes in current assets and liabilities, net of acquisitions:
Accounts receivable and advances to
shareholders ............................................ (1,050,358) (881,562) (1,234,064) 196,698 (593,496)
Inventories .............................................. (1,400,033) 81,575 178,460 (454,923) (1,933)
Notes receivable ......................................... 151,033 51,541 208,687 (27,600) 81,711
Other assets ............................................. (149,525) (178,159) 18,148 (61,209) 86,015
Accounts payable ......................................... 940,184 528,730 640,139 96,333 7,545
Accrued expenses ......................................... (208,304) (228,458) 91,365 (37,620) (357,927)
Other liabilities ........................................ -- -- -- (261,203) 14,588
----------- --------- ----------- ----------- ---------
Net cash provided (used) by operating
activities ............................................ (322,578) 175,990 1,233,412 353,914 740,804
Cash flows from investing activities:
Purchase of property and equipment ............................. (951,743) (349,704) (605,878) (517,896) (584,795)
Proceeds from disposal of property
and equipment .............................................. -- -- 8,036 7,395 19,250
Purchase of CRivet ............................................. -- -- (826,003)
Cash obtained in purchase of REX ............................... 322,572
Additional consideration paid to
former shareholders of LEC and PVS .......................... (99,325) (88,515) (307,900) (64,859) (128,312)
----------- --------- ----------- ----------- ---------
Net cash used by investing activities .................... (1,051,068) (438,219) (1,731,745) (575,360) (371,285)
----------- --------- ----------- ----------- ---------
Cash flows from financing activities:
Net borrowings (repayments) under
revolving line of credit ................................... 876,131 285,086 442,065 176,473 (414,557)
Proceeds from notes payable and
long-term debt ............................................... 184,422 614,745 909,209 414,156
Principal payments on notes payable
and long-term debt ............................................ (950,015) (145,886) (593,790) (1,324,346) (392,005)
Proceeds from issuance of common stock ......................... 1,080,371 275,116 418,278 37,500
Cash paid for offering costs ................................... (41,513)
----------- --------- ----------- ----------- ---------
Net cash provided (used) by
financing activities .......................................... 1,190,009 139,200 738,136 179,614 (396,419)
----------- --------- ----------- ----------- ---------
Net increase (decrease) in cash and
equivalents .................................................... (183,637) (123,029) 239,803 (41,832) (26,900)
Cash and equivalents, beginning of period ......................... 428,430 188,627 188,627 230,459 257,359
----------- --------- ----------- ----------- ---------
Cash and equivalents, end of period ............................... $ 244,793 $ 65,598 $ 428,430 $ 188,627 $ 230,459
=========== ========= =========== =========== =========
Supplemental disclosure of noncash
investing and financing activities:
Common stock issued in exchange for
REX shares and cancellation of debt ........................... $ 1,013,863
Contingent consideration payable to
shareholders .................................................. 131,833
Accounts receivable reclassified to
notes receivable .............................................. -- -- 140,614 -- --
Purchase of CRivet ............................................. -- -- 4,798,316
Debt converted to equity ....................................... $ 804,100 -- -- -- --
Supplemental disclosures of cash flow information: Cash paid for:
Interest ...................................................... $ 267,020 $ 259,856 $ 1,012,880 $ 891,211 $ 820,341
Income taxes .................................................. 145,000 -- 786 2,014 --
</TABLE>
The accompanying notes are an integral part of this statement.
F-6
<PAGE>
INDUSTRIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED
PAR PAID-IN EARNINGS
SHARES VALUE CAPITAL (DEFICIT) TOTAL
---------- ------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1993 ....................... 2,262,664 $22,627 $ 5,958,740 $(1,321,232) $ 4,660,135
Issuance of common stock ....................... 473,105 4,731 1,005,119 -- 1,009,850
Net income ..................................... -- -- -- 762,802 762,802
---------- ------- ----------- ----------- ------------
Balance, December 31, 1993 ..................... 2,735,769 27,358 6,963,859 (558,430) 6,432,787
Issuance of common stock ....................... 261,981 2,620 415,658 -- 418,278
Net income ..................................... -- -- -- 31,702 31,702
---------- ------- ----------- ----------- ------------
Balance, December 31, 1994 ..................... 2,997,750 29,978 7,379,517 (526,728) 6,882,767
Issuance of common stock ....................... 93,412 934 274,182 -- 275,116
Shortfall on sale of stock
by former PVS shareholders-
Note 8 ......................................... -- -- (100,037) -- (100,037)
Net income ..................................... -- -- -- 545,147 545,147
---------- ------- ----------- ----------- ------------
Balance, December 31, 1995 ..................... 3,091,162 30,912 7,553,662 18,419 7,602,993
Issuance of common stock ....................... 335,000 3,350 1,077,021 -- 1,080,371
(unaudited)
Conversion of debt to equity ................... 215,000 2,150 801,950 -- 804,100
(unaudited)
Shortfall on sale of stock by
former PVS shareholders-
Note 8 (unaudited) ............................. -- -- (42,639) -- (42,639)
Net income (unaudited) ......................... -- -- -- 556,063 556,063
---------- ------- ----------- ----------- ------------
Balance, June 30, 1996 (unaudited) ............. $3,641,162 $36,412 $ 9,389,994 $ 574,482 $ 10,000,888
========== ======= =========== =========== ============
</TABLE>
The accompanying notes are an integral part of this statement.
F-7
<PAGE>
INDUSTRIAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION:
Industrial Holdings, Inc. (the Company), incorporated in August 1989, operates
five primary segments organized into two divisions: the Fastener Manufacturing
and Sales Division comprised of Landreth Engineering Company ("Landreth") and
Connecticut Rivet ("CRivet"), acquired in December 1995, (collectively "LEC")
which manufacture industrial metal fasteners for sale primarily to manufacturers
in the home furniture, home appliance and automotive industries and the Energy
Products and Services Division comprised of the Valve Supplies and Sales Group
which includes Industrial Municipal Supply Company, Inc. ("IMSCO") and Pipeline
Valve Specialty ("PVS") which remanufacture pipeline valves and distribute pipe,
valves, fittings and other products primarily to the petrochemical, chemical and
petroleum refining industries and to pipeline transportation and storage
industries; the New Machine Sales and Service Group which sells new machine
tools and provides machine moving services; the Export Crating Group which
provides international export crating services; and the Used Machine Sales Group
which sells used machine tools. The New Machine Sales and Service, Export
Crating and Used Machine Sales Groups comprise The Rex Group ("REX").
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Industrial
Holdings, Inc. and its wholly-owned subsidiaries (the Companies), LEC, IMSCO,
PVS and REX. Significant intercompany balances and transactions have been
eliminated upon consolidation. The financial statements include the results of
operations of REX and CRivet as of April 1, 1993 and December 7, 1995,
respectively (see Note 3).
PROPERTY AND EQUIPMENT
Property and equipment are stated on the basis of cost. Depreciation is computed
on straight-line and accelerated methods over the estimated useful lives of the
related assets (3 to 15 years for automobiles, furniture and equipment and 31
years for buildings and certain leasehold improvements). Maintenance and repairs
are charged to expense as incurred; major renewals and betterments are
capitalized.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Earnings are charged with a provision for doubtful accounts based on a current
review of the collectibility of the accounts. Accounts deemed uncollectible are
applied against the allowance for doubtful accounts. The allowance for doubtful
accounts was $80,072 and $62,476 at December 31, 1995 and 1994, respectively.
CREDIT RISK
The Company extends credit to its customers in the normal course of business and
generally does not require collateral or other security. The Company performs
ongoing credit evaluations of its customers' financial condition and
historically has not incurred significant credit losses. Notes receivable are
collateralized by land and equipment.
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out basis) or
market. Cost includes, where applicable, manufacturing labor and overhead.
F-8
<PAGE>
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill represents the excess of the purchase price over the fair market value
of net tangible assets acquired. Goodwill is amortized over 20 years. At
December 31, 1995, goodwill was $2,201,916, net of amortization of $423,424. At
each balance sheet date, the Company evaluates the realizability of goodwill
based on undiscounted cash flows from operations and operating income for
subsidiaries having material goodwill balances. Other intangible assets consist
primarily of loan origination fees and are amortized over periods not exceeding
seven years.
INCOME TAXES
The Company utilizes the liability method in accounting for income taxes. Under
this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse. A valuation allowance is provided
for deferred tax assets which the Company has determined may not be fully
realizable.
REVENUE RECOGNITION
Revenues are recognized upon shipment of the product or as the services are
performed.
EARNINGS PER SHARE
Earnings per share have been computed based on the weighted average number of
common and common equivalent shares outstanding. For the six months ended June
30, 1996 and 1995 and for fiscal 1995, 1994 and 1993, the weighted average
common and common equivalent shares were 3,868,158, 3,080,010, 3,149,579,
3,029,574 and 2,828,635 for the purpose of computing primary earnings per share.
Fully diluted earnings per share for these periods were the same as primary
earnings per share, since the effects of the conversion of the debentures and,
in 1993, contingently issuable shares was anti-dilutive.
STATEMENT OF CASH FLOWS
For purposes of the consolidated statement of cash flows, cash equivalents
include all highly liquid investments with original maturities of three months
or less. Changes in assets and liabilities are presented net of the effect of
the purchase of the CRivet in 1995 and of REX in 1993.
ESTIMATES
The preparation of the Company's 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
disclosures 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. Management
believes that the estimates made in connection with these financial statements
are reasonable.
RECENT ACCOUNTING PRONOUNCEMENTS
In 1995 Financial Accounting Standards No. 121 (FAS 121), Accounting for the
Impairment of Long-Lived Assets to Be Disposed Of, was issued and is effective
for fiscal years commencing after December 15, 1995. The future adoption of FAS
121 is not expected to have a material effect on the Company's consolidated
financial position or operating results.
Financial Accounting Standards No. 123 (FAS 123), Accounting for Stock-Based
Compensation was also issued in 1995. FAS 123 becomes effective beginning with
the Company's first quarter of 1996, and will not have a material effect on the
Company's financial position or results of operations. Upon adoption of FAS 123,
the Company will continue to measure compensation expense for its stock-based
employee compensation plans using the intrinsic value
F-9
<PAGE>
method prescribed by APB Opinion No. 25, Accounting for Stock Issued to
Employees and will provide pro forma disclosures of net income and earnings per
share as if the fair value-based method prescribed by FAS 123 has been applied
in measuring compensation expense.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Management has determined that the fair value of the Company's financial
instruments is equivalent to the carrying amount of such instruments as
presented or disclosed in the financial statements.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior-year amounts to conform to
the current-year classification.
INTERIM FINANCIAL DATA
The financial data as of June 30, 1996 and for the six months ended June 30,
1996 and 1995 is unaudited; however, in the opinion of Management, the interim
data includes all adjustments consisting only of normal recurring adjustments,
necessary for a fair presentation of financial position and operating results
for the interim periods.
NOTE 3 - BUSINESS ACQUISITIONS:
In December 1995, the Company acquired substantially all the fastener
manufacturing assets and assumed certain liabilities of the fastener
manufacturing division of MRMC, Inc. ("CRivet"). In April 1993, the Company
acquired all of the outstanding common stock of REX. The total purchase prices
at acquisition were $3,744,229 and $1,013,863, respectively, plus the assumption
of certain liabilities. The REX purchase agreement included certain
contingencies which can result in adjustments to the purchase prices.
Concurrently, the Company entered into employment agreements and noncompetition
agreements with certain former shareholders of REX (see Note 9).
These acquisitions have been accounted for by the purchase method of accounting
and, accordingly, the acquired assets and liabilities have been recorded at
their estimated fair values at the date of acquisition as follows:
REX
APRIL 1, 1993
Fair value of assets acquired ................................. $7,008,205
Liabilities assumed ........................................... 2,027,095
Notes assumed ................................................. 3,967,247
Common stock issued to sellers at acquisition ................. 1,013,863
CRivet
DECEMBER 7, 1995
Fair value of assets acquired:
Inventory ............................................. $1,465,436
Equipment ............................................. 4,101,329
Other current assets .................................. 57,554
Liabilities assumed or incurred:
Accounts payable ....................................... 500,000
Accrued expenses ....................................... 406,675
Notes payable or long-term debt ........................ 3,891,641
MRMC accounts payable to LEC ........................... 586,003
Out of pocket expenses ................................. 240,000
F-10
<PAGE>
The following is a pro forma summary (unaudited) of the combined results of
operations for the years ended December 31, 1995 and 1994, assuming the CRivet
acquisition had occurred on January 1, 1994 (in 000's):
1995 1994
----------- -------
Sales .................................... $ 47,847 $46,546
=========== =======
Net income ............................... $ 1,059 $ 522
=========== =======
Earnings per share ....................... $ .33 $ .17
=========== =======
The pro forma financial information combine the operating results of IHI for
1994 and 1995 with the results of operations for CRivet for the twelve months
ended December 31, 1994 and the period from January 1, 1995 through December 6,
1995. The pro forma financial information does not purport to be indicative
either of results of operations that would have occurred had the purchase been
made at January 1, 1994 or future results of operations of the combined
companies.
NOTE 4 - INVENTORIES:
Inventories consist of the following:
JUNE 30, DECEMBER 31,
---------- --------------------------
1996 1995 1994
---------- ---------- ----------
(unaudited)
Raw materials ............... $1,220,205 $ 593,396 $ 398,102
Finished goods .............. 6,818,586 6,246,340 5,875,807
Other ....................... 1,307,113 1,106,135 384,986
---------- ---------- ----------
$9,345,904 $7,945,871 $6,658,895
========== ========== ==========
NOTE 5 - NOTES RECEIVABLE:
Notes receivable consist of the following:
JUNE 30, DECEMBER 31,
---------- --------------------
1996 1995 1994
---------- ---------- ----------
(unaudited)
Mortgage note receivable with interest at
9.53% due in monthly installments of
$15,166 through February 2007 secured by
land and building ......................... $1,215,972 $1,248,138 $1,308,067
Note receivable from asset sale due in
monthly installments of $3,790 through
July 1999, unsecured ....................... 125,925 139,624 170,645
Various installment notes and leases
receivable from equipment inventory sales
due through 2000, secured by equipment ..... 142,327 239,565 313,697
Other notes receivable ........................ 100,151 108,081 11,072
---------- ---------- ----------
1,584,375 1,735,408 1,803,481
Less current portion .......................... 306,627 259,452 180,158
---------- ---------- ----------
$1,277,748 $1,475,956 $1,623,323
========== ========== ==========
F-11
<PAGE>
NOTE 6 - PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consist of the following:
JUNE 30, DECEMBER 31,
1996 1995 1994
------------ ------------ -----------
(unaudited)
Land ............................... $ 243,892 $ 243,892 $ 243,892
Leasehold improvements ............. 487,677 451,869 394,223
Buildings .......................... 882,127 882,127 882,127
Machinery and equipment ............ 8,708,967 8,309,897 4,105,155
Office equipment, furniture and
fixtures ........................ 593,528 579,726 513,821
Transportation equipment ........... 526,271 545,633 570,486
Construction in progress ........... 817,043 158,091 105,430
Property under capital leases ...... 121,068 121,068 121,068
------------ ------------ -----------
12,380,573 11,292,303 6,936,202
Less - accumulated depreciation
and amortization ................ (2,697,393) (2,166,881) (1,535,705)
------------ ------------ -----------
$ 9,683,180 $ 9,125,422 $ 5,400,497
============ ============ ===========
NOTE 7 - NOTES PAYABLE:
Notes payable consists of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31
1996 1995 1994
---------- ---------- ----------
(unaudited)
<S> <C> <C> <C>
Revolving line of credit to a bank which provides for
borrowings up to the lesser of a defined borrowing base or
$8,000,000 at December 31, 1995, $1,536,352, $1,236,304
available at June 30, 1996 and December 31, 1995, principal
due on demand, interest payable monthly at prime plus 1%,
secured by substantially all assets of the Companies ......................... $6,397,130 $5,520,999 $4,778,933
12% convertible promissory note with principal and interest
due December 1, 1996, secured by substantially all assets of
the Companies. Principal of $804,100 was converted into IHI
common stock at $3.74 per share in May 1996. The remaining
principal and accrued interest is not convertible ............................ 195,900 1,000,000
Non-interest bearing note payable to MRMC, Inc., principal due
in weekly installments of $5,143 through May 1996 ..................... 92,571
Notes payable to individuals, principal due on demand, interest
payable monthly at 12%, secured by certain notes receivable .................. 75,000 75,000 130,000
---------- ---------- ----------
$6,668,030 $6,688,570 $4,908,933
========== ========== ==========
</TABLE>
F-12
<PAGE>
NOTE 8 - LONG-TERM DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31
1996 1995 1994
---------- ---------- ----------
(unaudited)
<S> <C> <C>
9.85% term loan payable in monthly installments of $53,620
including interest, maturing December 1, 2001 and secured by
CRivet machinery and equipment acquired ...................................... $2,670,090 $2,800,000 --
12% convertible debenture due October 1, 1999, with
principal of $25,000 commencing November 1, 1997 and
interest payable monthly. Guaranteed by PVS and secured by
the common stock of IMSCO and LEC. Debenture is convertible
into IHI common stock at $3.26 per share ..................................... 1,875,000 2,475,000 $2,500,000
Note payable to bank with monthly principal payments of
$6,240 plus interest at prime (8.5% at December 31, 1995)
plus 1/2%, maturing on December 1, 2004, secured by real
estate property .............................................................. 616,108 653,548 734,668
Note payable to a bank with monthly principal payments of
$13,333 plus interest at prime (8.5% at December 31, 1995)
plus 2%, maturing on November 1, 1997, secured by
substantially all assets of LEC, IMSCO and PVS ............................... 186,784 266,783 440,117
Notes payable to a bank, payable in monthly installments of
$6,351 plus interest at 9% to 10.5%, maturing through
Novem-ber 1, 1999, secured by certain equipment .............................. 451,659 187,237 99,245
Non-interest bearing notes payable to certain former vendors
of CRivet, principal due in monthly installments of $5,475
through December 1997 ........................................................ 109,084 141,936 --
Various installment notes, payable in monthly installments
through 1999, including interest ranging from 9% to 11.7%,
secured by transportation and other equipment ................................ 81,960 139,203 314,653
---------- ---------- ----------
5,990,685 6,663,707 4,088,683
Less - current portion ..................... 988,851 772,858 520,729
---------- ---------- ----------
$5,001,834 $5,890,849 $3,567,954
========== ========== ==========
</TABLE>
F-13
<PAGE>
The aggregate maturities of long-term debt at December 31, 1995 are as follows:
Year ended December 31:
1996, including prepayment
(see below) .......................................... $1,372,858
1997 ................................................. 812,682
1998 ................................................. 862,141
1999 ................................................. 2,117,379
2000 ................................................. 619,208
Thereafter ........................................... 879,439
----------
$6,663,707
==========
The convertible debenture agreement contains restrictive covenants which, among
other things, requires the Company and its subsidiaries to maintain minimum
amounts of net worth, debt-to-equity ratios, working capital, interest coverage
and fixed charge coverage. The Company is also required to notify the holder if
a material adverse change occurs, and the ability of subsidiaries to declare
dividends to the Company is restricted.
The 12% convertible debentures are subject to redemption at the Company's option
at a rate of 115 percent, 110 percent and 105 percent of the notes in the 12
months ending October 1, 1996, 1997 and 1998. If common stock is issued for
consideration per share less than the $3.26 conversion price of the debentures,
then the conversion price of the debentures is reduced to the consideration per
share received by the Company. In March 1996, the Company paid $600,000 to the
holder of the 12% convertible debentures in payment of current and future
principal payments totaling that amount. The holder waived any prepayment
penalty associated with this prepayment. Additionally, the holder agreed not to
convert any debentures into common stock in 1996. The Company issued to the
holder warrants to purchase 50,000 shares of common stock at $4.00 per share.
Additionally, at December 31, 1995 the Company has classified $350,000 of the
convertible debenture due within one year as long-term debt since in March 1996
the Company had repaid all current amounts through monies raised through the
sale of common stock (See Note 11). For the majority of the Company's debt,
certain events of default occur if the Company defaults on any other
indebtedness.
F-14
<PAGE>
NOTE 9- COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS:
The Companies have entered into noncancelable operating leases with related
parties (former shareholders of Landreth) and other third parties expiring in
various years through 2002. Rent payments to the former shareholders of Landreth
were $106,800 annually for the years 1995, 1994 and 1993. Operating leases
relate to offices, buildings and certain equipment. Aggregate rent expense on
such leases amounted to $657,328, $592,589 and $486,431 for the years 1995, 1994
and 1993. Future minimum lease payments at June 30, 1996 are as follows:
Year ended December 31:
1996 (from July 1 to Dec. 31) ............................. $ 408,277
1997 ...................................................... 691,461
1998 ...................................................... 666,565
1999 ...................................................... 648,311
2000 ...................................................... 271,346
Thereafter ................................................ 242,800
----------
$2,928,760
==========
The lease with the former shareholders of Landreth is for a period of ten years
through 2002 with an option to renew for a further five years. The Company has
an option to purchase the leased premises at a price equal to the outstanding
indebtedness at the time the option is exercised. In addition, the Company may
be obligated to purchase the leased premises under certain conditions specified
in the lease agreement.
In connection with the purchase of PVS, the former PVS shareholders agreed not
to sell their shares except in accordance with an agreement with the Company.
The Company was obligated to pay two of the former PVS shareholders the
difference between $5 and the proceeds they receive upon sale of their common
stock. During 1993, the Company paid the former PVS shareholders $48,512 for
shares sold pursuant to this agreement. At December 31, 1995 and 1994, the
Company had advances to these shareholders of $48,750 and $192,750, which were
secured by 9,750 and 38,550 shares, respectively. The number of shares remaining
under this obligation is 89,950 at December 31, 1995. At June 30, 1996, the
Company had no advances to these shareholders and there was no further
obligation under this agreement.
In connection with the purchase of Landreth, the former Landreth shareholders
are entitled to additional consideration based upon the level of Landreth's
pretax profits through September 1997, not to exceed $500,000 in the aggregate.
For the six months ended June 30, 1996 and 1995 and for fiscal 1995, 1994 and
1993, the Company paid these shareholders $99,320, $88,515, $207,863, $64,859
and $79,800 as additional consideration.
In connection with the purchase of REX, the Company granted the former
shareholders of REX the right to receive additional shares of common stock based
on target levels of after-tax earnings, as defined in the purchase agreement,
for 1995, 1994 and 1993. For 1993, REX met this target level of after-tax
earnings, and included in payable to shareholders at December 31, 1993 is
$131,833 related to 55,276 shares which were distributed to these shareholders
in 1994. The target level was not met for 1994 or 1995.
In addition, the Company had an employment agreement with a former REX
shareholder that expired in 1995. Under the agreement, the former shareholder
earned 10,000 shares of common stock in 1993, 11,667 shares of common stock in
1994 and 2,333 shares of common stock in 1995.
In 1993, the Company sold approximately $396,000 of land, buildings and accounts
receivable in partial settlement of liabilities totaling approximately $487,000
to a shareholder of the Company. The Company issued 33,205 shares of common
stock in 1994 to settle the remaining $91,000 liability to this shareholder.
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 the above matters will not have a material adverse effect on the
Company's consolidated financial position or results of operations.
F-15
<PAGE>
NOTE 10 - INCOME TAXES:
The provision for income taxes is as follows:
SIX MONTHS ENDED YEAR ENDED
JUNE 30, DECEMBER 31,
----------------- ------------------------------
1996 1995 1995 1994 1993
-------- ------- --------- -------- -------
(unaudited)
Current ..................... $ 90,857 -- $ 142,886 $ (3,986) $ 6,000
Deferred .................... 195,599 $34,341 (67,422) 20,430 71,763
-------- ------- --------- -------- -------
Income tax expense .......... $286,456 $34,341 $ 75,464 $ 16,444 $77,763
======== ======= ========= ======== =======
The Company and its subsidiaries file a consolidated federal income tax return.
At December 31, 1995, the Company has net operating loss (NOL) carryforwards of
approximately $1,715,000 for income tax purposes which expire in 2005 through
2007. These losses may presently be offset against the future income of the
applicable subsidiary only. Due to the significant change in ownership as a
result of the initial public offering, the Company is restricted in the amount
of net operating losses that can be utilized annually in reducing future taxable
income, such amount being approximately $401,000 per year.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the carrying amounts for income tax purposes, primarily resulting
from the acquisitions of PVS, LEC and REX. During 1995, the Company reduced the
deferred tax asset valuation allowance to reflect the deferred tax assets used
in 1995 (approximately $26,000) and to recognize a deferred tax asset of
$197,000. The recognized deferred tax asset is based upon expected utilization
of net operating loss carryforwards and reversal of certain temporary
differences. The Company has assessed its past earnings history and trends and
that of its subsidiary, REX, as well as expected revenues, cost reductions and
expiration dates of carryforwards and has determined that it is more likely than
not these deferred tax assets will be realized. The remaining valuation
allowance is maintained on deferred tax assets which the Company has not
determined to be more likely than not realizable at this time. The Company will
continue to review this valuation allowance on a quarterly basis and make
adjustments as appropriate.
The major components of deferred income tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995 1994
----------- ----------- -----------
(unaudited)
<S> <C> <C> <C>
Deferred income tax liabilities:
Depreciation ........................... $(1,180,718) $(1,125,378) $(1,103,576)
Other .................................. (194,789) (194,789) (197,495)
----------- ----------- -----------
Total deferred income tax liabilities (1,375,507) (1,320,167) (1,301,071)
Deferred income tax assets:
Net operating loss carryforwards ........ 406,054 582,613 677,554
Other ................................... 395,956 399,656 441,307
----------- ----------- -----------
Total deferred income tax assets ..... 802,010 982,269 1,118,861
----------- ----------- -----------
Deferred income tax assets valuation allowance (198,873) (238,873) (461,983)
----------- ----------- -----------
Deferred income taxes payable ................ $ (772,370) $ (576,771) $ (644,193)
=========== =========== ===========
</TABLE>
F-16
<PAGE>
A reconciliation of income tax computed at statutory rates to income tax expense
is as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
--------------------- --------------------------------
1996 1995 1995 1994 1993
--------- --------- --------- -------- ---------
(unaudited)
<S> <C> <C> <C> <C> <C>
Tax at statutory rate ......... $ 286,456 $ 132,065 $ 211,008 $ 16,370 $ 285,792
Effect of permanent differences 40,000 29,125 58,249 47,587 28,090
Reduction in valuation
allowance .................. (40,000) (126,849) (223,110) (2,500) (167,724)
Other ......................... -- -- 29,317 (45,013) (68,395)
--------- --------- --------- -------- ---------
$ 286,456 $ 34,341 $ 75,464 $ 16,444 $ 77,763
========= ========= ========= ======== =========
</TABLE>
NOTE 11 - SHAREHOLDERS' EQUITY:
The Company has authorized 7,500,000 shares of $.01 par value preferred stock.
No shares are issued or outstanding.
WARRANTS TO ACQUIRE COMMON STOCK
The following table sets forth the outstanding warrants to acquire 1,895,000 and
1,830,000 shares of common stock as of June 30, 1996 and December 31, 1995:
<TABLE>
<CAPTION>
NUMBER OF
COMMON SHARES
June 30, December 31,
SECURITY 1996 1995
-------- ----------- -------
(unaudited)
<S> <C> <C>
Class A redeemable warrants to acquire common stock at $6.00
per share issued in connection with initial public offering,
currently exercisable, expiring on January 15, 1997,
redeemable if closing bid equals or exceeds $8.00 for 20
consecutive days ........................................................................... 575,000 575,000
Class B redeemable warrants to acquire common stock at
$10.00 per share issued in connection with initial public
offering, currently exercisable, expiring on January 15,
1997, redeemable if closing bid price equals or exceeds
$12.00 for 20 consecutive days ............................................................. 575,000 575,000
Warrant to purchase 115,000 shares of common stock at $6.15
per share issued in connection with initial public offering,
currently exercisable, expiring on January 15, 1997 ........................................ 115,000 115,000
Warrant to acquire common stock at $2.50 per share issued to
officer, currently exercisable, expiring on December 31, 1998 .............................. 25,000 25,000
Warrants to acquire common stock $4.00 per share, currently
exercisable, expiring on January 15, 1997 .................................................. 30,000 30,000
Warrant to acquire common stock at $5.00 per share issued in
connection with private financing, currently exercisable,
expiring on January 23, 1997 ............................................................... 30,000 30,000
F-17
<PAGE>
Warrant to acquire common stock at $7.50 per share issued in connection
with private financing, currently exercisable, expiring on January 23, 1997 ...................... 30,000 30,000
Warrant to acquire common stock at $3.27 per share issued in connection
with private financing, currently exercisable, expiring on December 8, 2000 ...................... 400,000 400,000
Warrant to acquire common stock at $3.80 per share, currently exercisable,
expiring on December 20, 1998 .................................................................... 50,000 50,000
Warrant to acquire common stock at $5.00 per share currently exercisable,
expiring on January 10, 1999 ..................................................................... 15,000 --
Warrant to acquire common stock at $4.00 per share issued in connection with
early payment of debt, currently excisable expiring on March 31, 1998 ............................ 50,000 --
</TABLE>
No value was assigned to any of the above warrants as management deemed the
values to be immaterial at the respective dates issued.
STOCK OPTIONS ISSUED TO EMPLOYEES AND DIRECTORS.
Under various stock option plans, the Company may issue incentive and
nonqualified stock options covering 605,000 shares of common stock to employees
and directors. Awards under the plans are made at no less than fair market value
and are generally exercisable immediately to periods of up to six years. At
December 31, 1995, there were 211,080 shares of common stock available for
issuance of options under the plans. At June 30, 1996, there were no shares of
common stock available for issuance of options under the employee plan and
20,000 available under the directors plan.
Transactions of the plans are summarized as follows:
<TABLE>
<CAPTION>
STOCK OPTIONS
---------------------------------------- EXERCISE
INCENTIVE NONQUALIFIED TOTAL PRICE
-------- ------- -------- -------------
<S> <C> <C> <C> <C>
Outstanding at January 1, 1993 ......................... 20,000 -- 20,000 $1.00-$4.00
Granted in 1993 ..................................... 158,000 -- 158,000 $ 3.125
Exercised in 1993 ................................... (2,500) -- (2,500) $ 1.00
-------- ------- -------- -------------
Outstanding at December 31, 1993 ....................... 175,500 -- 175,500 $1.00-$4.00
Granted in 1994 ..................................... 75,000 60,000 135,000 $ 2.375
Expired in 1994 ..................................... (5,000) -- (5,000) $ 3.125
Exercised in 1994 ................................... (7,500) -- (7,500) $ 1.00
-------- ------- -------- -------------
Outstanding at December 31, 1994 ....................... 238,000 60,000 298,000 $2.375-$4.00
Granted in 1995 ..................................... 25,000 -- 25,000 $ 3.31
Exercised in 1995 ................................... (10,000) -- (10,000) $2.375-$3.125
-------- ------- -------- -------------
Outstanding at December 31, 1995 ....................... 253,000 60,000 313,000 $2.375-$4.00
Granted in 1996 (unaudited) ......................... 211,000 25,000 236,000 $ 4.06
Expired in 1996 (unaudited) ......................... (3,000) -- (3,000) 3.125
Exercised in 1996 (unaudited) ....................... (30,000) (5,000) (35,000) $2.375-$3.125
-------- ------- -------- -------------
Outstanding at June 30, 1996 ........................... 431,000 80,000 511,000 $2.375-$4.06
(unaudited) ....................................... ======== ====== ======= ==============
</TABLE>
F-18
<PAGE>
In May 1996, the holder of the 12% convertible promissory note converted
$804,100 of outstanding principal at $3.74 per share to 215,000 shares of common
stock (See Note 7).
In March 1996, the Company sold 300,000 shares of common stock in a private
placement. The proceeds from this sale were approximately $1,020,000. Of this
amount, $600,000 was used to prepay a portion of the 12% convertible debenture
(see Note 8).
NOTE 12 - SAVINGS PLAN:
On October 1, 1993, the Company implemented a 401(k) savings plan which permits
participants to contribute up to 18 percent of their compensation each year. The
Company will match at least 50 percent of a participant's contributions, up to a
maximum of 3 percent of gross pay. The Company's results of operations reflect
expenses associated with the plan of approximately $31,500, $30,500 and $11,500
for 1995, 1994 and 1993.
NOTE 13 - SEGMENT INFORMATION:
The Company has five operating business groups: manufacture and sale of
fasteners; valve and industrial supplies sales; new machine sales and related
services; export crating; and used machine sales. Summarized financial
information by business segment for 1995, 1994 and 1993 is presented below.
<TABLE>
<CAPTION>
ENERGY PRODUCTS AND SERVICES DIVISION
---------------------------------------------------------------------------
NEW USED
VALVE AND MACHINE SALES EXPORT MACHINE
FASTENERS SUPPLIES AND SERVICES CRATING SALES
---------- ----------- -------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
1995
Operating revenues............ $13,204,532 $13,449,344 $9,868,209 $1,817,877 $ 643,108
Operating profit (loss)....... 1,235,367 687,475 280,274 (31,467) (88,958)
Identifiable assets........... 14,700,531 6,856,931 2,336,904 841,555 2,273,781
Depreciation and amortization. 330,462 189,462 59,997 106,318 6,071
Capital expenditures.......... 478,908 35,891 34,966 42,604 1,549
1994
Operating revenues............ $12,261,602 13,672,512 $5,918,642 $2,530,879 $ 346,704
Operating profit (loss)....... 1,080,619 480,849 20,364 (107,957) (299,357)
Identifiable assets........... 8,199,794 7,066,646 2,274,256 722,887 2,265,664
Depreciation and amortization. 328,120 318,535 49,747 69,206 5,620
Capital expenditures.......... 248,102 66,968 22,279 157,395 1,194
1993
Operating revenues............ $10,745,238 $15,012,648 $5,142,004 $3,065,507 $1,147,459
Operating profit.............. 414,819 450,651 47,960 374,499 30,360
Identifiable assets........... 7,733,334 7,601,787 2,426,918 1,239,091 2,597,135
Depreciation and amortization. 288,263 316,999 33,147 42,310 3,809
Capital expenditures.......... 531,765 24,359 3,517 9,395 15,760
</TABLE>
Operating profit (loss) is total revenues less cost of sales and operating
expenses. Corporate expenses and income taxes have not been included in the
computation of operating profit (loss) of individual segments.
F-19
<PAGE>
NOTE 14 - QUARTERLY FINANCIAL DATA (UNAUDITED):
Summarized quarterly financial data for the quarters ended March 31, 1996 and
June 30, 1996 and for fiscal 1995 and 1994 are as follows (in thousands, except
per share data):
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
1996
Sales ........................... $12,015 $ 13,612
Gross profit .................... 2,718 2,973
Net income ...................... 237 319
Earnings per share .............. 0.07 0.07
1995
Sales ........................... $10,406 $ 9,317 $ 9,072 $10,188
Gross profit .................... 2,043 2,149 2,094 2,084
Net income ...................... 202 152 130 61
Earnings per share .............. 0.07 0.05 0.04 0.01
1994
Sales ........................... $ 9,148 $ 9,066 $ 7,575 $ 8,941
Gross profit .................... 2,200 2,113 1,857 1,627
Net income (loss) ............... 167 (142) (163) 170
Earnings (loss) per share ....... 0.06 (0.05) (0.05) 0.05
Reclassifications of amounts have been made from selling, general and
administrative expenses to cost of sales for the quarters ended March 31, June
30 and September 30, 1995 to conform to the classification in the quarter ended
December 31, 1995.
F-20
<PAGE>
December 27, 1995
MRMC, Inc.
857 Bridgeport Ave.
Milford, CT 06460
Gentlemen:
We have audited the accompanying statement of assets sold and liabilities
assumed of MRMC, Inc.'s Fastener Division as of June 30, 1995, and the related
statements of direct revenues and direct expenses for the three years then
ended. These statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
These standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement of assets sold and liabilities assumed and
the related statement of direct revenues and direct expenses are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in these statements. An audit also
includes assessing the accounting principles used and significant estimates made
by management as well as evaluating the overall presentation of these
statements. We believe that our audit provides a reasonable basis for our
opinion.
The accompanying statements were prepared for inclusion in the Securities and
Exchange Commission Current Report on Form 8-K of Industrial Holdings, Inc.
(IHI) as described in Note 2 and are not intended to be a complete presentation
of MRMC, Inc.'s financial position or results of operations.
In our opinion, the statements referred to above present fairly, in all material
respects the assets sold and liabilities assumed as of June 30, 1995 and the
direct revenues and direct expenses of MRMC, Inc.'s Fastener Division for the
three years then ended in conformity with generally accepted accounting
principles.
Respectfully submitted,
GOLDBERG and ZUFFELATO, P.C.
F-21
<PAGE>
MRMC, INC.'S FASTENER DIVISION
STATEMENT OF ASSETS SOLD AND LIABILITIES ASSUMED
JUNE 30, 1995
(000'S OMITTED)
Assets sold:
Inventory (Note 5) .............................. $1,537
Machinery and equipment ......................... 4,138
Less: Accumulated depreciation................... (1,542)
2,596
Total assets sold ......................... $4,133
======
Liabilities assumed:
Accounts payable ................................ $1,217
Vacation accrual ................................ 107
------
Total liabilities assumed ................... $1,324
======
See Accountant's Letter and Notes to Statement
of Assets Sold and Liabilities Assumed and
Statement of Direct Revenues and Direct Expenses
F-22
<PAGE>
MRMC, INC.'S FASTENER DIVISION
STATEMENT OF DIRECT REVENUES AND DIRECT EXPENSES
(000'S OMITTED)
FOR THE YEAR ENDED
JUNE 30
1995 1994 1993
------- ------- -------
Sales ...................................... $12,530 $10,550 $10,665
Direct expenses:
Cost of products sold-(Note 3) ........... 10,244 9,000 7,893
Engineering costs ........................ 177 216 207
Selling expenses ......................... 896 1,051 954
------- ------- -------
Total direct expenses ................... 11,317 10,267 9,054
------- ------- -------
Excess of direct revenues
over direct expenses ..................... $ 1,213 $ 283 $ 1,611
======= ======= =======
See Accountant's Letter and Notes to Statement
of Assets Sold and Liabilities Assumed and
Statement of Direct Revenues and Direct Expenses
F-23
<PAGE>
MRMC, INC.'S FASTENER DIVISION
NOTES TO STATEMENT OF ASSETS SOLD AND LIABILITIES ASSUMED
AND STATEMENT OF DIRECT REVENUES AND DIRECT EXPENSES
NOTE 1 DESCRIPTION OF BUSINESS AND ASSET PURCHASE
The MRMC, Inc. Connecticut Fastener Division (the "Division")
manufactures, sells and distributes cold formed rivets and other
fastening devices. On December 7, 1995, Landreth Engineering
Company, Inc. ("LEC"), a wholly owned subsidiary of IHI, acquired
certain assets and assumed certain liabilities of the Division.
The assets acquired included inventory and machinery and
equipment.
NOTE 2 BASIS OF PRESENTATION
The accompanying statements of assets sold and liabilities
assumed as of June 30, 1995 and direct revenues and direct
expenses for the three years then ended have been prepared for
the purpose of complying with the rules and regulations of the
Securities and Exchange Commission for inclusion in the Current
Report on Form 8-K of IHI.
The statement of assets sold and liabilities assumed includes the
amounts of certain assets and certain liabilities of the Division
at June 30, 1995. Assets sold and liabilities assumed are
specifically identified in Schedules of the Purchase Agreement by
and among IHI, LEC and MRMC, Inc. dated November 9, 1995.
The statement of direct revenues and direct expenses includes
only those revenues and expenses directly related to the
manufacture and sale of fasteners by the Division as well as an
allocation of certain expenses directly related to the
manufacture of fasteners (See Note 3). This statement does not
include depreciation and amortization, general and administrative
costs, interest expense or any other indirect expense.
NOTE 3 ALLOCATION OF EXPENSES
MRMC, Inc.'s Connecticut facility was shared by two divisions,
the Fastener Division and the Assembly Systems Division.
Historically, MRMC, Inc. has allocated certain shared expenses
relating to the facility to each of the divisions. These
allocated expenses which are included in the cost of products
sold are as follows for the year ended June 30.
1995 1994 1993
---- ---- ----
Utilities $ 328 $ 307 $ 270
Plant insurance 54 32 96
Property taxes 72 108 92
----- ---- ----
$ 454 $447 $ 458
====== ==== =====
NOTE 4 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Inventories are valued at the lower of cost or market determined
by the first-in, first-out method.
Machinery and Equipment are recorded at cost. Depreciation is
provided using the straight-line method over the estimated useful
lives of the assets or five to twelve years.
F-24
<PAGE>
NOTE 5 INVENTORIES
Inventories consist of the following at June 30, 1995:
Raw Materials $ 792
Work in Process 133
Finished Goods 612
-------
$1,537
F-25
<PAGE>
MRMC, INC.'S FASTENER DIVISION
STATEMENT OF ASSETS SOLD AND LIABILITIES ASSUMED (UNAUDITED)
DECEMBER 7, 1995
(000'S OMITTED)
DECEMBER 7,
1995
-----------
Assets sold:
Inventory, net (Note B) ....................................... $ 948
Prepaid expenses .............................................. 28
Machinery and equipment ....................................... 4,138
Less: Accumulated depreciation ............................... (1,691)
--------
2,447
--------
Total assets sold .............................. $ 3,423
=======
Liabilities assumed:
Accounts payable .............................................. $ 1,217
Vacation accrual .............................................. 107
Total liabilities assumed ...................... $ 1,324
=======
See notes to statements.
F-26
<PAGE>
MRMC, INC. FASTENER DIVISION
STATEMENT OF DIRECT REVENUES AND DIRECT EXPENSES (UNAUDITED)
FOR THE PERIOD FROM JULY 1, 1995 THROUGH DECEMBER 7, 1995
(000'S OMITTED)
Sales ........................................................... $4,259
Direct expenses:
Cost of products sold - (Notes B and C) .................... 3,752
Engineering costs .......................................... 44
Selling expenses ........................................... 298
------
Total direct expenses .................................. 4,094
Excess of direct revenues
over direct expenses ....................................... $ 165
======
See notes to statements.
F-27
<PAGE>
MRMC, INC. FASTENER DIVISION
NOTES TO STATEMENTS (UNAUDITED)
DECEMBER 7, 1995
NOTE A BASIS OF PRESENTATION
The MRMC, Inc. Connecticut Fastener Division (the "Division") manufactures,
sells and distributes cold formed rivets and other fastening devices. On
December 7, 1995, Landreth Engineering Company, Inc. ("LEC"), a wholly
owned subsidiary of Industrial Holdings, Inc. ("IHI"), acquired certain
assets and assumed certain liabilities of the Division. The assets acquired
included inventory and machinery and equipment.
The accompanying statements of assets sold and liabilities assumed and
direct revenues and direct expenses have been prepared for the purpose of
complying with the rules and regulations of the Securities and Exchange
Commission. 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. Results for the three month period from
July 1, 1995 through December 7, 1995 are not necessarily indicative of the
results that may be expected for the twelve months ended December 31, 1995.
For further information, refer to the financial statements and footnotes
thereto included in MRMC, Inc.'s Fastener Division Statements for the year
ended June 30, 1995.
The statement of direct revenues and direct expenses includes only those
revenues and expenses directly related to the manufacture and sale of
fasteners by the Division as well as an allocation of certain expenses
directly related to the manufacture of fasteners. This statement does not
include depreciation and amortization, general and administrative costs,
interest expense or any other indirect expense.
NOTE B INVENTORY
Inventory consists of the following:
December 7,
1995
Raw materials ............................................. $260
Finished goods ............................................. 465
Work in process ............................................ 223
----
$948
The December 7, 1995 inventory amounts include a $389,000 reserve for
nonmerchantible inventory. Accordingly, a $389,000 charge is included in
cost of products sold for the period ended December 7, 1995.
NOTE C ALLOCATION OF EXPENSES
MRMC, Inc.'s Connecticut facility was shared by two divisions, the Fastener
Division and the Assembly Systems Division. Historically, MRMC, Inc. has
allocated certain shared expenses relating to the facility to each of the
divisions. These allocated expenses which are included in the cost of
products sold are as follows for the period presented. 1994
Utilities .................................................. $145
Plant insurance ............................................ 25
Property taxes ............................................. 25
----
$195
F-28
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
American Rivet Company, Inc:
We have audited the accompanying balance sheets of American Rivet Company, Inc.
as of August 31, 1995 and 1994, and the related statements of operations and
retained earnings and cash flows for each of the years in the three-year period
ended August 31, 1995. 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 financial position of American Rivet Company, Inc. as
of August 31, 1995 and 1994 and the results of its operations and its cash flows
for the years in the three-year period ended August 31, 1995.
As discussed in notes 1 and 2 to the financial statements, the Company changed
its method of accounting for investments classified as available-for-sale, as of
September 1, 1994.
KPMG Peat Marwick LLP
October 13, 1995, except as to note 8, which is as of November 6, 1996
F-29
<PAGE>
AMERICAN RIVET COMPANY, INC.
Balance Sheets
June 30, 1996, August 31, 1995 and 1994
<TABLE>
<CAPTION>
=====================================================================================
(Unaudited)
ASSETS 1996 1995 1994
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents ...................... $ 798,380 1,105,816 596,353
Marketable securities .......................... 1,647,598 1,706,113 1,634,497
Accounts and notes receivable:
Trade, net of allowance of $20,000 in 1996,
1995 and 1994 .............................. 1,315,473 1,155,708 1,122,315
Officer and employee receivables ............. -- 16,163 25,299
Other ........................................ 1,104 2,514 432
Income taxes receivable ........................ -- -- 2,594
Inventories .................................... 584,125 669,280 616,788
Prepaid expenses ............................... 608 18,214 27,264
Deferred income taxes .......................... 64,164 64,164 48,642
- -------------------------------------------------------------------------------------
Total current assets .............................. 4,411,452 4,737,972 4,074,184
- -------------------------------------------------------------------------------------
Other assets:
Deferred income taxes .......................... 26,793 26,793 15,915
Deposits ....................................... 148,443 152,113 541
Cash surrender value of officers' life insurance 121,715 107,405 90,235
- -------------------------------------------------------------------------------------
296,951 286,311 106,691
- -------------------------------------------------------------------------------------
Property, plant and equipment, net of accumulated
depreciation .................................. 1,900,960 1,487,915 1,388,268
Intangible assets:
Goodwill ....................................... 117,254 117,254 117,254
Organizational expense ......................... 958 958 958
- -------------------------------------------------------------------------------------
118,212 118,212 118,212
- -------------------------------------------------------------------------------------
Deferred charges .................................. 173,225 155,237 165,500
- -------------------------------------------------------------------------------------
$6,900,800 6,785,647 5,852,855
=====================================================================================
</TABLE>
See accompanying notes to financial statements.
F-30
<PAGE>
AMERICAN RIVET COMPANY, INC.
Balance Sheets
June 30, 1996, August 31, 1995 and 1994
<TABLE>
<CAPTION>
=========================================================================================
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995 1994
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current liabilities:
Accounts payable - trade ........................... $ 236,767 196,332 71,158
Accrued liabilities:
Salaries, wages, and commissions ................ 53,071 90,099 78,698
Property taxes .................................. 132,140 150,519 81,895
Profit-sharing trust ............................ 51,167 106,554 96,725
Payroll taxes ................................... 6,241 23,626 12,219
Deferred compensation ........................... 22,928 21,597 19,942
Dividends ....................................... -- 78,000 39,000
Insurance ....................................... 70,674 70,674 71,047
Income taxes .................................... 39,206 87,706 --
Waste removal ................................... 42,000 42,000 6,000
Other ........................................... 6,045 924 654
- -----------------------------------------------------------------------------------------
Total current liabilities ............................. 660,239 868,031 477,338
- -----------------------------------------------------------------------------------------
Deferred compensation ................................. 427,301 418,616 405,161
- -----------------------------------------------------------------------------------------
Total liabilities ..................................... 1,087,540 1,286,647 882,499
- -----------------------------------------------------------------------------------------
Stockholders' equity:
Net unrealized gain on marketable securities ....... 176,743 122,846 --
Common stock, par value $10 per share. Authorized
1,000,000 shares; issued 100,000 shares ......... 1,000,000 1,000,000 1,000,000
Retained earnings .................................. 5,144,637 4,884,274 4,478,476
- -----------------------------------------------------------------------------------------
6,321,380 6,007,120 5,478,476
Less common stock held in treasury, at cost, 22,000
shares .......................................... 508,120 508,120 508,120
- -----------------------------------------------------------------------------------------
Total stockholders' equity ............................ 5,813,260 5,499,000 4,970,356
- -----------------------------------------------------------------------------------------
$6,900,800 6,785,647 5,852,855
=========================================================================================
</TABLE>
F-31
<PAGE>
AMERICAN RIVET COMPANY, INC.
Statement of Operations and Retained Earnings
Ten months ended June 30, 1996 and 1995, and years ended August 31, 1995, 1994
and 1993
<TABLE>
<CAPTION>
============================================================================================================
(UNAUDITED)
June June
1996 1995 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Gross sales ............................... $ 7,431,141 7,910,731 9,188,341 8,666,053 7,948,070
Returns and allowances .................... 51,961 22,103 37,911 30,075 29,475
- ------------------------------------------------------------------------------------------------------------
Net sales ................................. 7,379,180 7,888,628 9,150,430 8,635,978 7,918,595
Cost of sales ............................. 5,735,347 5,885,455 6,880,036 6,590,781 6,052,038
- ------------------------------------------------------------------------------------------------------------
Gross profit .............................. 1,643,833 2,003,173 2,270,394 2,045,197 1,866,557
Selling and administrative expenses ....... 1,252,994 1,274,924 1,520,403 1,445,371 1,367,909
- ------------------------------------------------------------------------------------------------------------
Income from operations .................... 390,839 728,249 749,991 599,826 498,648
- ------------------------------------------------------------------------------------------------------------
Other income (expense);
Investment income, net ................. 86,962 93,950 113,514 88,634 77,926
Deferred compensation expense .......... (7,242) (7,694) (9,281) (7,590) (14,141)
Realized gain (loss) on securities
transactions, net .................... 21,129 (4,678) 7,871 105 11,196
Gain on sale of property, plant, and
equipment .......................... 5,000 54,093 54,093 500 --
Unclassified ........................... (825) 1,722 1,510 638 13,261
- ------------------------------------------------------------------------------------------------------------
105,024 137,393 167,707 82,287 88,242
- ------------------------------------------------------------------------------------------------------------
Income before income taxes ................ 495,863 865,642 917,698 682,113 586,890
Income tax expense ........................ 196,500 329,800 355,900 253,200 219,700
- ------------------------------------------------------------------------------------------------------------
Net income ................................ 299,363 535,842 561,798 428,913 367,190
Retained earnings at beginning of year .... 4,884,274 4,478,476 4,478,476 4,166,563 4,002,173
Cash dividends paid or accrued per share of
$.50, $2.00, $1.50 and $2.60 in 1996,
1995, 1994 and 1993 respectively ....... (39,000) (78,000) (156,000) (117,000) (202,800)
- ------------------------------------------------------------------------------------------------------------
Retained earnings at end of year .......... $ 5,144,637 4,936,318 4,884,274 4,478,476 4,166,563
============================================================================================================
</TABLE>
See accompanying notes to financial statements.
F-32
<PAGE>
AMERICAN RIVET COMPANY, INC.
Statements of Cash Flows
Ten months ended June 30, 1996 and 1995, and years ended August 31, 1995,
1994 and 1993
<TABLE>
<CAPTION>
====================================================================================================================================
(Unaudited)
----------------
June June
1996 1995 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income .......................................................... $ 299,363 535,842 561,798 428,913 367,190
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation ...................................................... 196,871 169,442 217,700 214,860 227,909
Deferred income taxes ............................................. -- -- (26,400) (38,800) (17,700)
Deferred compensation ............................................. 27,774 27,771 15,110 14,918 18,971
Gain on sale of property, plant, and equipment .................... (5,000) (54,093) (54,093) (500) (17,514)
Gain on sale of marketable securities ............................. (21,129) 4,678 (7,871) (105) (11,196)
Changes in assets and liabilities:
Increase in accounts and notes receivable ....................... (142,192) (64,153) (26,339) (75,958) (72,377)
Decrease (increase) in inventories and prepaid
expenses ...................................................... 102,761 (94,675) (43,442) 132,424 (174,605)
Increase (decrease) in income taxes ............................. (48,500) 102,206 90,300 (2,594) 19,293
Decrease (increase) in other noncurrent assets .................. (32,298) (21,884) (6,907) (16,749) 7,306
Increase (decrease) in accounts payable and
accrued liabilities other than deferred
compensation and income taxes ............................... (160,623) 122,445 301,332 (20,183) 96,685
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities ............................ 217,027 727,579 1,021,188 636,226 443,962
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Additions to property, plant, and equipment ......................... (609,916) (285,801) (324,259) (109,336) (96,775)
Proceeds from sale of property, plant, and
equipment .................................................... 5,000 61,005 61,005 12,810 17,909
Proceeds from sale of marketable securities ......................... 571,665 148,461 358,863 74,151 325,861
Purchase of marketable securities ................................... (438,124) (416,277) (299,762) (675,211) (443,820)
Decrease (increase) in deposits ..................................... 3,670 (148,116) (151,572) 4,661 (4,777)
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities ................................ (467,705) (640,728) (355,725) (692,925) (201,602)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Dividends paid to stockholders ...................................... (39,000) (78,000) (156,000) (117,000) (202,800)
Principal payments on long-term deferred
compensation .................................................. (17,758) (14,803) -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities ................................ (56,758) (92,803) (156,000) (117,000) (202,800)
- ------------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents ................. (307,436) (5,952) 509,463 (173,699) 39,560
Cash and cash equivalents at beginning of year ....................... 1,105,816 596,353 596,353 770,052 730,492
- ------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year ............................. $ 798,380 590,401 1,105,816 596,353 770,052
====================================================================================================================================
Supplemental disclosures of cash flow information cash paid during the year for
income taxes, net of refunds received ............................. $ 245,000 208,000 292,000 373,000 139,701
====================================================================================================================================
</TABLE>
See accompanying notes to financial statements.
F-33
<PAGE>
AMERICAN RIVET COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
August 31, 1995, 1994, and 1993
- --------------------------------------------------------------------------------
(1) Significant Accounting Policies
DESCRIPTION OF BUSINESS
American Rivet Company (Company) is a national manufacturer of rivets with
approximately 35% of its annual net sales derived from the automotive
industry. Approximately 14% of the Company's net sales were provided by one
customer for the years ended August 31, 1995 and 1994.
INTERIM UNAUDITED FINANCIAL STATEMENTS
The unaudited interim financial data as of June 30, 1996 and for the ten
months ended June 30, 1996 and 1995 reflects all normal recurring
adjustments, consisting only of normal recurring adjustments which are, in
the opinion of management, necessary for a fair presentation of financial
position and operating results for the interim periods.
MARKETABLE SECURITIES
The Company adopted Statement of Financial Accounting Standards No. 115 (SFAS
115), "Accounting for Certain Investments in Debt and Equity Securities,"
effective September 1, 1994. The cumulative effect of the adoption of SFAS
115 resulted in an increase in stockholders' equity of $63,451. In accordance
with SFAS 115, prior years' financial statements have not been restated to
reflect the change in accounting method. At August 31, 1995 marketable
securities were classified as available-for-sale and were reported at the
lower of aggregate amortized cost or fair value.
Management determines the appropriate classification of its investments in
debt and equity securities at the time of purchase and reevaluates such
determination at each balance sheet date. Debt securities for which the
Company does not have the intent or ability to hold to maturity are
classified as available-for-sale, along with the Company's investment in
equity securities. Securities available for sale are carried at fair value,
with unrealized gains and losses reported in a separate component of
shareholders' equity. At August 31, 1995, the Company had no investments that
qualified as trading or held to maturity.
The amortized cost of debt securities classified as
available-for-sale is adjusted for amortization of premiums and
accretion of discounts to maturity. Such amortization and interest
are included in interest income. Realized gains and losses are
shown separately. The cost of securities sold is based on the
specific identification method.
At August 31, 1995, the Company's investments in debt and equity securities
were classified as marketable securities. These investments are diversified
among high credit quality securities in accordance with the Company's
investment policy.
F-34
<PAGE>
AMERICAN RIVET COMPANY, INC.
Notes to Financial Statements
- --------------------------------------------------------------------------------
INVENTORIES
Inventories are valued at the lower of cost or market. The last-in, first-out
(LIFO) method is used to determine cost for the rivet business inventories,
and the first-in, first-out (FIFO) method is used to determine cost for the
automatic rivet setting machine parts inventories.
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are carried at cost less accumulated
depreciation. Depreciation is generally calculated using accelerated methods
over the estimated useful lives of the respective assets. When assets are
retired or otherwise disposed of, the cost and related depreciation are
removed from the accounts, and any gain or loss is recognized in income for
the period. The cost of maintenance is charged to income as incurred;
significant renewals and betterments are capitalized.
INCOME TAXES
The Company utilizes the asset and liability method of accounting for income
taxes. Under this method, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
GOODWILL AND ORGANIZATIONAL EXPENSE
The goodwill and organizational expense which arose in 1953 is not being
amortized, as it has no determinable life.
DEFERRED CHARGES
Deferred charges consist of certain tools and factory supplies which are
charged to operations as they are used in production.
DEFERRED COMPENSATION
The Company has deferred compensation contracts with certain past and present
key executives. Periodic accrual is being made, over the projected active
term of employment of present executives, of an amount equivalent to the
present value of the benefits at the date of retirement.
LEASING OPERATIONS
Revenues from rentals of rivet setting machines are reported on the operating
method. Rents are billed annually and income is recognized on a monthly basis
over the rental period.
F-35
<PAGE>
AMERICAN RIVET COMPANY, INC.
Notes to Financial Statements
- --------------------------------------------------------------------------------
PROFIT-SHARING PLAN
The Company maintains a qualified noncontributory profit-sharing plan for
full-time employees who satisfy minimum age and service requirements.
Contributions to the plan are at the discretion of the Board of Directors.
The Board of Directors authorized contributions of $88,000, $90,000, and
$40,000 for 1995, 1994, and 1993 respectively.
The Company amended the plan, effective September 1, 1993, to add a 401(k)
provision in addition to the existing plan. The 401(k) offers two investment
options: the Balanced Fund and Fixed Income Fund. In 1994 the Company matched
$0.50 on the dollar for employee contributions of up to $400. In 1995 and
1996 the Company will match $0.75 on the dollar for employee contributions of
up to $500. The Company matched contributions at a cost of $15,277 and $6,725
for the years ended August 31, 1995 and 1994, respectively.
CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three months or
less to be cash equivalents.
(2) MARKETABLE SECURITIES AND CASH EQUIVALENTS
In accordance with SFAS 115, the Company's marketable securities have been
classified as available-for-sale securities and are reported at their fair
value of $2,037,282 compared to a historical cost of $1,914,436 for August
31, 1995 with the net unrealized gains of $122,846 reported as a separate
component of stockholders' equity.
A summary of the Company's investment securities follows:
================================================================================
1996 (Unaudited)
----------------------------------------------
Gross Gross
Estimated unrealized unrealized
Cost fair value gains losses
- --------------------------------------------------------------------------------
Equity securities ........... $ 975,731 1,137,784 167,407 5,354
Corporate bonds ............. 86,919 95,744 10,825 2,000
U.S. Treasury notes ......... 405,219 414,070 8,851 --
- --------------------------------------------------------------------------------
1,467,869 1,647,598 187,083 7,354
Cash equivalents ............ 56,983 56,983 -- --
- --------------------------------------------------------------------------------
$1,524,852 1,704,581 187,083 7,354
================================================================================
F-36
<PAGE>
AMERICAN RIVET COMPANY, INC.
Notes to Financial Statements
================================================================================
1995
----------------------------------------------
Gross Gross
Estimated unrealized unrealized
Cost fair value gains losses
- --------------------------------------------------------------------------------
Equity securities ........... $1,104,544 1,205,200 104,981 4,325
Corporate bonds ............. 74,517 76,163 2,371 725
U.S. Treasury notes ......... 404,206 424,750 20,544 --
---------- --------- ------- -----
1,583,267 1,706,113 127,896 5,050
Cash equivalents ............ 331,169 331,169 -- --
---------- --------- ------- -----
$1,914,436 2,037,282 127,896 5,050
-----
1994
----------------------------------------------
Gross Gross
Estimated unrealized unrealized
Cost fair value gains losses
- --------------------------------------------------------------------------------
Equity securities ........... $ 709,925 759,316 78,262 21,871
Corporate bonds ............. 67,167 66,876 1,931 2,222
U.S. Treasury notes ......... 864,405 871,756 7,351 --
- --------------------------------------------------------------------------------
1,634,497 1,697,948 87,544 24,093
Cash equivalents ............ 186,003 186,003 -- --
- --------------------------------------------------------------------------------
$1,820,500 1,883,951 87,544 24,093
================================================================================
Contractual maturities of debt securities (Corporate bonds and U.S.Treasury
notes) at August 31, 1995 are shown below:
================================================================================
Amortized Estimated
cost fair value
- --------------------------------------------------------------------------------
Due in:
1996 ................................... $ -- --
1997 - 2000 ............................ 199,956 211,282
2001 - 2005 ............................ 231,225 239,718
2006 and later ......................... 47,542 49,913
================================================================================
F-37
<PAGE>
AMERICAN RIVET COMPANY, INC.
Notes to Financial Statements
- --------------------------------------------------------------------------------
Proceeds, gross realized gains, and gross realized losses during the years ended
August 31, 1995 and 1994 were as follows:
- --------------------------------------------------------------------------------
1995 1994
- --------------------------------------------------------------------------------
Proceeds from sales ......................... 358,863 74,151
Gross realized gains ........................ 22,074 11,610
Gross realized losses ....................... 14,203 11,505
- --------------------------------------------------------------------------------
For the purposes of determining gross realized gains and losses, the cost of
securities sold is based upon specific identification.
For those securities that have been included in the separate component of
stockholders' equity during the period, the net change has been a $33,094
increase in net unrealized holding gains for the year ended August 31, 1995.
================================================================================
(3) INVENTORIES
Inventories at June 30, 1996, and August 31, 1995 and 1994 consist of the
following:
================================================================================
(Unaudited)
1996 1995 1994
- --------------------------------------------------------------------------------
Rivet business:
Raw materials ......................... $ 638,160 704,109 626,603
Work in process and finished goods .... 488,903 548,770 527,751
- --------------------------------------------------------------------------------
1,127,063 1,252,879 1,154,354
Less LIFO reserve ..................... 570,331 616,000 583,000
- --------------------------------------------------------------------------------
556,732 636,879 571,354
Automatic rivet setting machine parts ..... 27,393 32,401 45,434
- --------------------------------------------------------------------------------
$ 584,125 669,280 616,788
================================================================================
If the Company had valued rivet business inventories under the FIFO method,
net income would have increased by approximately $6,000, $19,000 and $9,000
for 1996, 1995, and 1994, respectively, and decreased by $21,000 for 1993 and
retained earnings would have been higher by $369,000, $363,000, $344,000 and
$335,000 in 1996, 1995, 1994 and 1993, respectively.
F-38
<PAGE>
AMERICAN RIVET COMPANY, INC.
Notes to Financial Statements
- --------------------------------------------------------------------------------
(4) PROPERTY, PLANT, AND EQUIPMENT
Major categories of property, plant, and equipment at August 31, 1995 and
1994 are summarized as follows:
================================================================================
1995 1994
- --------------------------------------------------------------------------------
Land and land improvements ...................... $ 229,631 227,371
Building and building improvements .............. 1,653,817 1,653,817
Machinery and equipment ......................... 7,617,114 7,560,977
Automatic rivet setting machines - leased ....... 42,482 42,482
Office furniture, fixtures, and equipment ....... 337,925 326,526
Automobiles ..................................... 147,312 104,497
Condominium, including furnishings .............. 211,647 38,267
- --------------------------------------------------------------------------------
10,239,928 9,953,937
Less accumulated depreciation ................... 8,752,013 8,565,669
- --------------------------------------------------------------------------------
$ 1,487,915 1,388,268
================================================================================
Depreciation expense for 1995, 1994, and 1993 amounted to $217,700, $214,860
and $227,909, respectively.
(5) INCOME TAX EXPENSE
The Company adopted Statement 109, "Accounting for Income Taxes," as of
September 1, 1993. The Cumulative effect of this change on pretax income and
net income during the year ended August 31, 1994 was not material.
================================================================================
Income tax expense (benefit) is summarized as follows:
- --------------------------------------------------------------------------------
1995 1995 1993
- --------------------------------------------------------------------------------
Current:
Federal ................. $ 313,000 243,700 198,600
State ................... 69,300 48,300 38,800
- --------------------------------------------------------------------------------
382,300 292,000 237,400
Deferred .................. (26,400) (38,800) (17,700)
- --------------------------------------------------------------------------------
$ 355,900 253,200 219,700
================================================================================
F-39
<PAGE>
AMERICAN RIVET COMPANY, INC.
Notes to Financial Statements
================================================================================
A reconciliation of the statutory U.S. Federal income tax rate of 34% in 1995
and 1994 to the Company's effective tax rate for the corresponding periods is
as follows:
================================================================================
1995 1994 1993
- --------------------------------------------------------------------------------
Federal tax at 34% .......................... $ 312,000 231,900 199,543
Add (deduct) tax effect of:
State taxes, net of federal tax effect .... 45,700 31,900 23,545
Dividend exclusion ........................ (4,300) (3,200) (3,030)
Tax-exempt interest ....................... (6,800) (4,600) (4,077)
Officers' life insurance premiums ......... 2,500 2,600 5,789
Travel and entertainment .................. 9,500 6,800 --
Other, net ................................ (2,700) (12,200) (2,070)
- --------------------------------------------------------------------------------
Provision for income taxes ................... $ 355,900 253,200 219,700
================================================================================
================================================================================
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at August 31, 1995 and
1994 are presented as follows:
================================================================================
1995 1994
- --------------------------------------------------------------------------------
Deferred tax assets:
Deferred compensation ...................... $170,010 164,175
Health insurance accrual ................... 27,294 27,438
Accounts receivable ........................ 7,724 7,724
Waste removal accrual ...................... 16,220 2,317
Other ...................................... 4,585 3,445
- --------------------------------------------------------------------------------
Total gross deferred tax assets ................ 225,883 205,099
Deferred tax liability - property,
plant, and equipment ....................... (134,876) (140,542)
- --------------------------------------------------------------------------------
Net deferred tax asset ......................... $ 90,957 64,557
- --------------------------------------------------------------------------------
A valuation allowance has not been provided for deferred tax assets at August
31, 1995 or 1994 as management believes it is more likely than not that the
results of future operations will generate sufficient taxable income to realize
the deferred tax assets.
F-40
<PAGE>
AMERICAN RIVET COMPANY, INC.
Notes to Financial Statements
- --------------------------------------------------------------------------------
(6) RELATED PARTIES
Deferred compensation relates to agreements with certain key past and present
officers of the Company. These agreements are in the form of annuities
beginning at age 65 and continuing over a ten year period. Amounts accrue
straight-line to the date of retirement and all agreements are fully funded.
The current portion of the accrual at August 31, 1995 and 1994 represents
payments due within the next twelve months for a past officer's beneficiary.
Deferred compensation expense was approximately $28,000 in 1996, $33,000 in
1995 and 1994, and $36,000 in 1993.
(7) COMMITMENTS AND CONTINGENCIES
At August 31, 1995, the Company has an outstanding agreement to purchase a
header machine at a cost of $682,000. The initial deposit of $145,935 was
paid during fiscal 1995 and is included in deposits on the balance sheet at
August 31, 1995. The delivery date and balance due on the machinery is
expected to occur in January, 1996.
(8) SUBSEQUENT EVENT - ENVIRONMENTAL CONTINGENCY
Some aspects of the Company's business are regulated by environmental laws,
and the Company regularly takes steps to comply with applicable requirements.
The Company believes it is in compliance with the environmental laws. In
October, 1996, the Company engaged environmental engineering consultants to
review the Company's facility. The tests and findings have not been
completed, but do indicate that some expenditures related to environmental
matters may be necessary. Since the extent or range of the cost is not yet
known, no accrual has been made in the financial statements for costs related
to the environmental matters. Based upon information presently available,
such costs are not expected to have a material adverse effect on the
Company's financial position or its results of operations.
F-41
<PAGE>
================================================================================
INDUSTRIAL HOLDINGS, INC.
----------------------------------
OFFERING CIRCULAR-PROSPECTUS
----------------------------------
November __, 1996
TABLE OF CONTENTS
PAGE
Available Information ...................................................... 3
Summary .................................................................... 4
Summary Consolidated Financial Data ........................................ 8
Risk Factors ............................................................... 9
The Offer .................................................................. 12
Use of Proceeds ............................................................ 21
Price Range of Common Stock and Warrants ................................... 21
Dividend Policy ............................................................ 22
Capitalization ............................................................. 23
Dilution ................................................................... 24
Pro Forma Condensed Consolidated Financial
Statements ............................................................. 25
Selected Consolidated Financial Data ....................................... 33
Management's Discussion and Analysis of
Financial Condition and Results of
Operations ............................................................. 34
Business .................................................................. 40
Management ................................................................ 48
Certain Transactions ...................................................... 59
Principal Shareholders .................................................... 60
Description of Securities ................................................. 61
Shares Eligible for Future Sale ........................................... 64
Legal Matters ............................................................. 64
Additional Information .................................................... 65
Index to Financial Statements ............................................. F-1
NO DEALER, SALESPERSON, REPRESENTATIVE OR OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
OFFERING CIRCULAR-PROSPECTUS AND THE LETTER OF TRANSMITTAL AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY. THIS OFFERING CIRCULAR-PROSPECTUS DOES NOT CONSTITUTE
AN OFFER TO SELL OR SOLICITATION OF ANY OFFER TO BUY ANY OF THE SECURITIES
OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE
SUCH OFFER IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS OFFERING
CIRCULAR-PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF
THE COMPANY SINCE SUCH DATE.
================================================================================
<PAGE>
Facsimile copies of the Letter of Transmittal will be accepted. The Letter
of Transmittal, certificates for Class A Warrants, the aggregate Warrant
Exercise Price and any other required documents should be sent or delivered by
each Warrantholder or his broker, dealer, bank or trust company to the Exchange
Agent at one of its addresses set forth below.
THE EXCHANGE AGENT
CHASEMELLON SHAREHOLDER SERVICES
<TABLE>
<CAPTION>
BY MAIL: FACSIMILE TRANSMISSION: BY HAND OR OVERNIGHT COURIER:
<S> <C> <C>
Reorganization Department (201) 329-8936 Reorganization Department
Midtown Station (for Eligible Institutions Only) 120 Broadway - 13th Floor
P.O. Box 798 Confirm by Telephone: New York, NY 10271
New York, NY 10018 (201) 296-4983
</TABLE>
Any questions or requests for assistance, additional copies of this
Offering Circular-Prospectus, the Letter of Transmittal or other tender offer
materials may be made by calling Christine A. Smith, Vice-President of the
Company, at (713) 747-1025, or by mail to the Company at the address listed
below. Warrantholders may also contact their local broker, dealer, commercial
bank or trust company for assistance concerning the Offer.
THE COMPANY:
Industrial Holdings, Inc.
7135 Ardmore
Houston, Texas 77054
(713) 747-1025
<PAGE>
ITEM 9(A)(3)
NOTICE OF GUARANTEED DELIVERY
FOR
EXERCISE OF CLASS A REDEEMABLE COMMON STOCK PURCHASE WARRANTS
OF
INDUSTRIAL HOLDINGS, INC.
As set forth in the Offering Circular-Prospectus dated November 12, 1996
(the "Offering CircularProspectus") under "The Offer--Guaranteed Delivery
Procedure," this form or one substantially equivalent hereto must be used to
exercise Class A Redeemable Common Stock Purchase Warrants (the "Class A
Warrants") of Industrial Holdings, Inc., a Texas corporation, pursuant to the
Offer (as defined in the Offering Circular-Prospectus) if the procedure for
book-entry transfer cannot be completed on a timely basis or a Class A
warrantholder cannot deliver the certificate(s) for Class A Warrants, the
certified or official bank check or the wire transfer and all other required
documents to the Exchange Agent at one of the addresses listed below on or
before the Expiration Date (as defined in the Offering CircularProspectus). This
form may be delivered by hand or sent by facsimile transmission or mailed to the
Exchange Agent and must be received by the Exchange Agent on or before the
Expiration Date.
To: CHASEMELLON SHAREHOLDER SERVICES, Exchange Agent
<TABLE>
<CAPTION>
BY MAIL: FACSIMILE TRANSMISSION: BY HAND OR OVERNIGHT COURIER:
<S> <C> <C>
ChaseMellon Shareholder Services (201) 329-8936 ChaseMellon Shareholder Services
Reorganization Department (for Eligible Institutions Only) Reorganization Department
Midtown Station 120 Broadway - 13th Floor
P.O. Box 798 Confirm by Telephone: New York, NY 10271
New York, NY 10018 (201) 296-4983
</TABLE>
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OR TRANSMISSION OF INSTRUCTIONS VIA A
FACSIMILE NUMBER OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID
DELIVERY. THIS FORM IS NOT TO BE USED TO GUARANTEE SIGNATURES. IF A SIGNATURE ON
A LETTER OF TRANSMITTAL IS REQUIRED TO BE GUARANTEED BY AN ELIGIBLE INSTITUTION
UNDER THE INSTRUCTIONS THERETO, SUCH SIGNATURE GUARANTEE MUST APPEAR IN THE
APPLICABLE SPACE PROVIDED IN SIGNATURE BOX ON THE LETTER OF TRANSMITTAL.
<PAGE>
Gentlemen:
The undersigned hereby exercises the number of Class A Warrants of
Industrial Holdings, Inc., a Texas corporation, set forth below upon the terms
and subject to the conditions set forth in the Offering CircularProspectus dated
November 12, 1996, receipt of which is hereby acknowledged, together with a
certified or official bank check made payable to Industrial Holdings, Inc. or a
wire transfer to the Exchange Agent for the benefit of Industrial Holdings, Inc.
(pursuant to the wire transfer instructions contained in Instruction 6 to the
Letter of Transmittal) in the amount of the aggregate Warrant Exercise Price,
pursuant to the guaranteed delivery procedures set forth in the Offering
Circular-Prospectus under the caption "The Offer--Guaranteed Delivery
Procedure."
Number of Class A Warrants to be Exercised Name(s) of Record Holder(s):
- ------------------------------------------ ------------------------------------
Payment to be Made ------------------------------------
Please Print Address(es) Here:
- ------------------------------------------ ------------------------------------
Certificate Nos. (if available)
- ------------------------------------------ ------------------------------------
- ------------------------------------------ ------------------------------------
Area Code and Telephone Number:
Check ONE box if Class A Warrants will be
exercised by book-entry transfer.
[ ] The Depository Trust Company Signature(s)
[ ] Philadelphia Depository Trust Company ------------------------------
Account Number Dated:
------------------------- ---------------------------------
GUARANTEE
The undersigned, a firm or entity that is a member in good standing of the
Security Transfer Agent's Medallion Program, the New York Stock Exchange
Medallion Program or the Stock Exchange Medallion Program, guarantees that (a)
the above named person(s) owns the Class A Warrants exercised hereby, and (b)
the undersigned will deliver to the Exchange Agent the certificates representing
the Class A Warrants exercised hereby in proper form for exercise with required
signature guarantees (or written confirmation of book-entry transfer of such
Class A Warrants into the Exchange Agent's account at The Depository Trust
Company or the Philadelphia Depositary Trust Company), together, in each case,
with a certified or official bank check made payable to Industrial Holdings,
Inc. or a wire transfer to the Exchange Agent for the benefit of Industrial
Holdings, Inc. (pursuant to the wire transfer instructions contained in
Instruction 6 of the Letter of Transmittal) in the amount of the aggregate
Warrant Exercise Price, and any other required documents, all within three New
York Stock Exchange trading days after the Expiration Date.
- ------------------------------------------ ------------------------------------
(Address) (Name of Firm)
- ------------------------------------------
(City, State, Zip Code)
- ------------------------------------------ ------------------------------------
(Area Code and Telephone Number) (Authorized Signature)
Dated:
------------------------------------ ------------------------------------
(Title)
DO NOT SEND WARRANT CERTIFICATES AND/OR PAYMENT FOR THE CLASS A
WARRANTS WITH THIS FORM. WARRANT CERTIFICATES AND/OR PAYMENT FOR
THE
CLASS A WARRANTS MUST BE SENT WITH THE LETTER OF TRANSMITTAL.
<PAGE>
ITEM 9(A)(4)
FOR IMMEDIATE RELEASE FOR INFORMATION CONTACT
ALL NAMES VERIFIED ROBERT E. CONE, CEO
(713) 747-1025
INDUSTRIAL HOLDINGS, INC.
COMMENCES OFFER TO
CLASS A REDEEMABLE WARRANTHOLDERS
HOUSTON, TX (NOVEMBER 12, 1996) - Industrial Holdings, Inc. (NASDAQ/NMS-IHII)
announces today that it has commenced its offer (the "Offer")to the holders of
its Class A Redeemable Warrants to exchange each Class A Warrant and $6.00 for
one share of IHI Common Stock and, as an incentive, one new Class B Redeemable
Warrant and one newly created Class C Redeemable Warrant. Each Class B
Redeemable Warrant and each Class C Redeemable Warrant will be exercisable and
entitle the holder to purchase one share of Common Stock at an exercise price of
$10.00 and $15.00, respectively. The Class A and Class B Redeemable Warrants
will expire January 14, 1999. However, each Class B Redeemable Warrant and Class
C Redeemable Warrant may be sooner redeemed by the Company, if for a period of
20 consecutive trading days the closing bid price of the Common Stock equals or
exceeds $12.00 per share and $20.00 per share, respectively. In addition, the
expiration date of the currently outstanding Class B Redeemable Warrants has
been extended to January 14, 1999.
The Offer and withdrawal rights will expire on December 13, 1996 at 5:00 p.m.,
New York City time, unless extended.
Industrial Holdings is a holding company organized to operate light-niche
manufacturing and distribution companies, with growth potential internally and
by acquisition.
<PAGE>
ITEM 9(A)(5)
November 12, 1996
Dear Class A Warrantholder:
Industrial Holdings, Inc. (the "Company") is offering to the holders of
its outstanding Class A Redeemable Common Stock Purchase Warrants ("Class A
Warrants") a temporary incentive to exercise the Class A Warrants (the "Offer")
until December 13, 1996 (the "Expiration Date"), unless extended. A Class A
Warrantholder who tenders Class A Warrants and pays $6.00 per Class A Warrant
(the "Warrant Exercise Price") will receive one share of Common Stock, one Class
B Redeemable Common Stock Purchase Warrant ("Class B Warrant") and one Class C
Redeemable Common Stock Purchase Warrant ("Class C Warrant") for each Class A
Warrant tendered. The Offer is not conditioned upon exercise of a minimum number
of Class A Warrants.
Each Class B Warrant entitles the holder to purchase one share of the
Company's Common Stock at an exercise price of $10.00 per share. Each Class C
Warrant entitles the holder to purchase one share of the Company's Common Stock
at $15.00 per share. The Class B and Class C Warrants are exercisable through
and including January 14, 1999. Each Class A Warrants entitles the registered
holder to purchase one share of Common Stock at an Exercise Price of $6.00 per
share through and including January 14, 1997.
The accompanying Offering Circular-Prospectus provides important
information about the Company and the detailed terms of the Offer. Please read
and consider it carefully. Any Class A Warrantholder electing to exercise Class
A Warrants pursuant to the Offer should follow the instructions in the enclosed
materials.
Questions and requests for assistance or for additional copies of the
Offering Circular should be made by calling Christine A. Smith, Vice-President
of the Company, at (713) 747-1025 or by mail to the Company at 7135 Ardmore,
Houston, Texas 77054.
Sincerely yours,
Robert E. Cone
President and Chief Executive Officer
<PAGE>
ITEM 9(A)(6)
INDUSTRIAL HOLDINGS, INC.
OFFER TO EXCHANGE ONE CLASS A REDEEMABLE WARRANT FOR
ONE SHARE OF COMMON STOCK, ONE CLASS B REDEEMABLE WARRANT AND
ONE CLASS C REDEEMABLE WARRANT
- --------------------------------------------------------------------------------
THIS OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE ON DECEMBER 13,
1996 AT 5:00 P.M., NEW YORK CITY TIME, UNLESS EXTENDED.
- --------------------------------------------------------------------------------
NOVEMBER 12, 1996
TO BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES AND OTHER NOMINEES:
WE ARE ASKING YOU, AS THE RECORD HOLDER OF CLASS A REDEEMABLE COMMON
STOCK PURCHASE WARRANTS (THE "CLASS A WARRANTS") OF INDUSTRIAL HOLDINGS, INC.
(THE "COMPANY"), TO BRING TO THE ATTENTION OF CLIENTS FOR WHOM YOU HOLD CLASS A
WARRANTS THE COMPANY'S OFFER (THE "OFFER") TO THE HOLDERS OF CLASS A WARRANTS TO
EXCHANGE EACH CLASS A WARRANT AND SIX DOLLARS ($6.00) (THE "WARRANT EXERCISE
PRICE") FOR ONE SHARE OF THE COMPANY'S COMMON STOCK, $.01 PAR VALUE, ONE CLASS B
REDEEMABLE COMMON STOCK PURCHASE WARRANT ("CLASS B WARRANT") AND ONE CLASS C
REDEEMABLE COMMON STOCK PURCHASE WARRANT ("CLASS C WARRANT") BEGINNING ON THE
DATE HEREOF AND ENDING DECEMBER 13, 1996 (THE "EXPIRATION DATE"), UNLESS
EXTENDED. AFTER THE EXPIRATION DATE, EACH CLASS A WARRANT ENTITLES THE
REGISTERED HOLDER TO PURCHASE ONE SHARE OF COMMON STOCK AT AN EXERCISE PRICE OF
$6.00 PER SHARE THROUGH AND INCLUDING JANUARY 14, 1997.
FOR YOUR INFORMATION, WE ARE ENCLOSING HEREWITH THE FOLLOWING
MATERIALS:
1. OFFERING CIRCULAR-PROSPECTUS DATED NOVEMBER 12, 1996.
2. THE LETTER OF TRANSMITTAL TO TENDER CLASS A WARRANTS FOR YOUR USE
AND THE USE OF YOUR CLIENTS. FACSIMILE COPIES OF THE LETTER OF TRANSMITTAL MAY
BE USED TO TENDER CLASS A WARRANTS.
3. NOTICE OF GUARANTEED DELIVERY TO BE USED TO ACCEPT THE OFFER BY
HOLDERS OF CLASS A WARRANTS UNABLE TO DELIVER THEIR CERTIFICATES, THE CERTIFIED
OR OFFICIAL BANK CHECK OR THE WIRE TRANSFER IN PAYMENT OF THE AGGREGATE WARRANT
EXERCISE PRICE AND ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT BY THE
EXPIRATION DATE OR IF THE PROCEDURE FOR BOOK-ENTRY TRANSFER CANNOT BE COMPLETED
BY THE EXPIRATION DATE.
4. A PRINTED FORM OF LETTER WHICH MAY BE SENT TO CUSTOMERS FOR WHOSE
ACCOUNT YOU HOLD CLASS A WARRANTS REGISTERED IN YOUR NAME OR IN THE NAME OF YOUR
NOMINEE, WITH SPACE PROVIDED FOR OBTAINING SUCH CUSTOMERS' INSTRUCTIONS WITH
REGARD TO THE OFFER.
5. ENVELOPES ADDRESSED TO CHASEMELLON SHAREHOLDER SERVICES, THE
EXCHANGE AGENT, TO BE USED BY YOU TO RETURN THE CLASS A WARRANTS.
<PAGE>
IN ALL CASES, THE DELIVERY OF COMMON STOCK, CLASS B WARRANTS AND CLASS
C WARRANTS FOR CLASS A WARRANTS ACCEPTED FOR EXERCISE PURSUANT TO THE OFFER WILL
BE MADE ONLY AFTER TIMELY RECEIPT BY THE EXCHANGE AGENT OF CERTIFICATES
EVIDENCING SUCH CLASS A WARRANTS (OR A CONFIRMATION OF A BOOK-ENTRY TRANSFER OF
SUCH CLASS A WARRANTS INTO THE EXCHANGE AGENT'S ACCOUNT AT ONE OF THE BOOK-ENTRY
TRANSFER FACILITIES (AS DEFINED IN THE OFFERING CIRCULAR-PROSPECTUS)), PAYMENT
OF THE AGGREGATE WARRANT EXERCISE PRICE WITH THE LETTER OF TRANSMITTAL PROPERLY
COMPLETED AND DULY EXECUTED AND ANY OTHER REQUIRED DOCUMENTS.
PAYMENT OF THE AGGREGATE WARRANT EXERCISE PRICE MAY BE MADE, AT THE
CLASS A WARRANTHOLDER'S OPTION, IN THE FORM OF A CERTIFIED OR OFFICIAL BANK
CHECK MADE PAYABLE TO INDUSTRIAL HOLDINGS, INC. OR BY WIRE TRANSFER TO
CHASEMELLON SHAREHOLDER SERVICES FOR THE BENEFIT OF INDUSTRIAL HOLDINGS, INC.
CLASS A WARRANTHOLDERS WHO WISH TO EXERCISE THEIR CLASS A WARRANTS SHOULD
COMPLETE THE ENCLOSED LETTER OF TRANSMITTAL AND DELIVER THE SAME, TOGETHER WITH
CERTIFICATES REPRESENTING TENDERED CLASS A WARRANTS (OR SUCH WARRANTS SHOULD BE
TENDERED BY BOOK-ENTRY TRANSFER), AND PAYMENT OF THE AGGREGATE WARRANT EXERCISE
PRICE, ALL IN ACCORDANCE WITH THE INSTRUCTIONS SET FORTH IN THE LETTER OF
TRANSMITTAL AND THE OFFERING CIRCULAR-PROSPECTUS.
IF THE CLASS A WARRANTHOLDERS WISH TO TENDER THEIR CLASS A WARRANTS,
BUT IT IS IMPRACTICABLE FOR THEM TO FORWARD THEIR CLASS A WARRANTS AND ALL OTHER
REQUIRED DOCUMENTS BY THE EXPIRATION DATE, TENDER MAY BE MADE BY FOLLOWING THE
GUARANTEED DELIVERY PROCEDURE DESCRIBED IN THE OFFERING CIRCULARPROSPECTUS UNDER
THE CAPTION "THE OFFER--GUARANTEED DELIVERY PROCEDURE."
THE COMPANY WILL PROMPTLY REIMBURSE BROKERS AND OTHER NOMINEES FOR THE
REASONABLE EXPENSES INCURRED BY THEM IN FORWARDING MATERIALS RELATING TO THE
OFFER TO THE BENEFICIAL HOLDERS OF THE CLASS A WARRANTS.
QUESTIONS OR REQUESTS FOR ADDITIONAL COPIES OF THE ENCLOSED MATERIALS
SHOULD BE MADE BY CALLING CHRISTINE A. SMITH, VICE-PRESIDENT OF THE COMPANY, AT
(713) 747-1025, OR BY WRITING TO INDUSTRIAL HOLDINGS, INC., 7135 ARDMORE,
HOUSTON, TEXAS 77054.
INDUSTRIAL HOLDINGS, INC.
NOTHING CONTAINED HEREIN OR IN THE DOCUMENTS ENCLOSED HEREWITH SHALL
CONSTITUTE YOU OR ANY OTHER PERSON THE AGENT FOR THE COMPANY, THE EXCHANGE
AGENT, OR ANY AFFILIATE OF EITHER OF THEM, OR AUTHORIZE YOU OR ANY OTHER PERSON
TO USE ANY DOCUMENT OR MAKE ANY STATEMENT ON BEHALF OF ANY OF THEM WITH RESPECT
TO THE OFFER OTHER THAN THE ENCLOSED DOCUMENTS AND THE STATEMENTS SPECIFICALLY
SET FORTH THEREIN.
<PAGE>
ITEM 9(A)(7)
INDUSTRIAL HOLDINGS, INC.
OFFER TO EXCHANGE ONE CLASS A REDEEMABLE WARRANT FOR
ONE SHARE OF COMMON STOCK, ONE CLASS B REDEEMABLE WARRANT AND
ONE CLASS C REDEEMABLE WARRANT
- --------------------------------------------------------------------------------
THIS OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE ON DECEMBER 13,
1996 AT 5:00 P.M., NEW YORK CITY TIME, UNLESS EXTENDED.
- --------------------------------------------------------------------------------
NOVEMBER 12, 1996
TO OUR CLIENTS:
ENCLOSED FOR YOUR CONSIDERATION IS THE OFFERING CIRCULAR-PROSPECTUS,
DATED NOVEMBER 12, 1996, OF INDUSTRIAL HOLDINGS, INC. (THE "COMPANY"), RELATING
TO THE OFFER DESCRIBED THEREIN, TOGETHER WITH A LETTER TO CLASS A WARRANTHOLDERS
FROM THE COMPANY. THIS MATERIAL IS BEING FORWARDED TO YOU AS THE BENEFICIAL
OWNER OF CLASS A REDEEMABLE COMMON STOCK PURCHASE WARRANTS (THE "CLASS A
WARRANTS") OF THE COMPANY CARRIED BY US IN YOUR ACCOUNT BUT NOT REGISTERED IN
YOUR NAME. AN EXERCISE OF SUCH CLASS A WARRANTS MAY BE MADE ONLY BY US AS THE
HOLDER OF RECORD AND PURSUANT TO YOUR INSTRUCTIONS. THE LETTER TO CLASS A
WARRANTHOLDERS IS FURNISHED TO YOU FOR YOUR INFORMATION ONLY AND CANNOT BE USED
BY YOU TO EXERCISE CLASS A WARRANTS HELD BY US FOR YOUR ACCOUNT.
ACCORDINGLY, WE REQUEST INSTRUCTIONS AS TO WHETHER YOU WISH US TO
EXERCISE ANY OR ALL OF THE CLASS A WARRANTS HELD BY US FOR YOUR ACCOUNT,
PURSUANT TO THE TERMS AND CONDITIONS SET FORTH IN THE OFFERING
CIRCULAR-PROSPECTUS.
YOUR INSTRUCTIONS TO US SHOULD BE FORWARDED AS PROMPTLY AS POSSIBLE IN
ORDER TO PERMIT US TO EXERCISE ON YOUR BEHALF IN ACCORDANCE WITH THE PROVISIONS
OF THE OFFER, WHICH TERMINATES AT 5:00 P.M., NEW YORK CITY TIME, ON DECEMBER 13,
1996, (THE "EXPIRATION DATE"), UNLESS EXTENDED. THE OFFER IS NOT CONDITIONED
UPON THE EXERCISE OF A MINIMUM NUMBER OF CLASS A WARRANTS.
ALL CLASS A WARRANTS PROPERLY EXERCISED AND NOT WITHDRAWN ON OR BEFORE
THE EXPIRATION DATE WILL BE DEEMED TO HAVE BEEN ACCEPTED BY THE COMPANY WHEN, AS
AND IF THE COMPANY HAS GIVEN ORAL OR WRITTEN NOTICE THEREOF TO THE EXCHANGE
AGENT.
THE OFFER IS MADE SOLELY BY THE OFFERING CIRCULAR-PROSPECTUS AND IS
BEING MADE TO ALL CLASS A WARRANTHOLDERS. IF YOU WISH TO HAVE US EXERCISE ANY OR
ALL OF THE CLASS A WARRANTS HELD BY US FOR YOUR ACCOUNT, WILL YOU KINDLY SO
INSTRUCT US BY COMPLETING, EXECUTING, DETACHING AND RETURNING TO US THE
INSTRUCTION FORM SET FORTH BELOW. AN ENVELOPE IN WHICH TO RETURN YOUR
INSTRUCTIONS TO US IS ENCLOSED. IF YOU AUTHORIZE THE EXERCISE OF YOUR CLASS A
WARRANTS, ALL SUCH CLASS A WARRANTS WILL BE EXERCISED UNLESS OTHERWISE SPECIFIED
IN YOUR INSTRUCTIONS. YOUR INSTRUCTIONS SHOULD BE FORWARDED TO US IN AMPLE TIME
TO PERMIT US TO SUBMIT AN EXERCISE OF CLASS A WARRANTS ON YOUR BEHALF ON OR
BEFORE THE EXPIRATION DATE.
<PAGE>
INSTRUCTIONS WITH RESPECT TO THE OFFER
OF
INDUSTRIAL HOLDINGS, INC.
THE UNDERSIGNED ACKNOWLEDGE(S) RECEIPT OF YOUR LETTER ENCLOSING THE
OFFERING CIRCULAR-PROSPECTUS, DATED NOVEMBER 12, 1996, OF INDUSTRIAL HOLDINGS,
INC. AND THE OTHER DOCUMENTS REFERRED TO IN YOUR LETTER.
THIS WILL INSTRUCT YOU TO EXERCISE THE NUMBER OF CLASS A REDEEMABLE
COMMON STOCK PURCHASE WARRANTS OF INDUSTRIAL HOLDINGS, INC. INDICATED BELOW HELD
BY YOU FOR THE ACCOUNT OF THE UNDERSIGNED, PURSUANT TO THE TERMS AND CONDITIONS
SET FORTH IN THE OFFERING CIRCULAR-PROSPECTUS.
NUMBER OF CLASS A WARRANTS TO BE EXERCISED: SIGN HERE
__________________________________________ ________________________________
DATED:_____________________________________ ________________________________
(SIGNATURE(S))
___________________________________
(PLEASE TYPE OR PRINT NAME(S) HERE)
___________________________________
(PLEASE TYPE OR PRINT ADDRESS)
___________________________________
(PLEASE TYPE OR PRINT AREA CODE
AND TELEPHONE NUMBER)
