SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
COMMISSION FILE NUMBER: 0-19580
INDUSTRIAL HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Texas 76-0289495
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
7135 Ardmore, Houston, Texas 77054
(Address of principal executive offices, including zip code)
(713) 747-1025
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
TITLE OF EACH CLASS
-------------------
Common Stock, $.01 par value
Class A Redeemable Warrant
Class B Redeemable Warrant
Class C Redeemable Warrant
Indicate by check mark whether the registrant (i) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (ii) has been subject to such
filing requirements for the past 90 days. Yes [x] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of Common Stock held by non-affiliates of the
registrant was $54,168,528 at March 27, 1997. At that date, there were 5,848,689
shares of Common Stock outstanding.
THE REGISTRANT'S PROXY STATEMENT, TO BE FILED PURSUANT TO REGULATION 14A
OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, WITH RESPECT TO THE 1997
ANNUAL MEETING OF STOCKHOLDERS, IS INCORPORATED BY REFERENCE INTO PART III OF
THIS REPORT.
<PAGE>
TABLE OF CONTENTS
FORM 10-K
Page
----
PART I
ITEM
1. Business................................................... 1
2. Properties................................................. 8
3. Legal Proceedings.......................................... 8
4. Submission of Matters to a Vote of Security Holders.........8
PART II
5. Market for Registrant's Common Stock and Related
Stockholder Matters.........................................9
6. Selected Financial Data....................................10
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................11
8. Financial Statements and Supplementary Data................14
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure...................................14
PART III
10. Directors and Executive Officers of the Registrant.........15
11. Executive Compensation.....................................15
12. Security Ownership of Certain Beneficial Owners and
Management.................................................15
13. Certain Relationships and Related Transactions.............15
PART IV
14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K...................................................16
<PAGE>
PART I
ITEM 1. 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"), Connecticut Rivet ("CRivet"), acquired December 1995, American
Rivet Company, Inc. ("American"), acquired November 1996 and LSS-Lone Star-
Houston, Inc. ("Lone Star") acquired February 1997 (see recent developments) and
the Energy Products and Services Division comprised of the Valve and Supplies
Sales Group which includes Pipeline Valve Specialty ("PVS"), Industrial
Municipal Supply ("IMSCO"), and Manifold Valve Services, Inc. ("MVS") acquired
March 1997 (see recent developments); 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 furniture, home appliance
and automotive industries and to the petrochemical and energy 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
Group sells used machine tools.
For information concerning each of the Company's industry segments, see
Note 13 of Notes to Consolidated Financial Statements.
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. The Company's pro forma revenues for its Fastener Manufacturing and
Sales Division (excluding Lone Star) for the twelve months ended December 31,
1996 are approximately $30,222,000. 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
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the Used Machine Sales Group were acquired as part of The Rex Group, Inc.
("REX") in 1993. In December, 1995, CRivet was acquired; in November 1996,
American was acquired; in February 1997, Lone Star was acquired and, most
recently in March 1997, MVS 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 February 1997, the Company acquired all the capital stock of Lone Star
for a purchase price of $6 million, including estimated transaction expenses.
Lone Star, with revenues of $15.5 million in 1996, is a leading manufacturer and
distributor of fasteners to the petrochemical and energy industries, and is a
specialty provider of custom in-house coating services. Its 53,000 square foot
manufacturing facility is located in Spring, Texas.
The purchase was financed through an $800,000 Term Loan secured by the
machinery and equipment of Lone Star, a $900,000 Mortgage Note secured by the
real estate of Lone Star, a $500,000 Term Note payable to the former shareholder
of Lone Star, 84,211 shares of the Company's Common Stock, a $1.4 million
increase in the Company's line of credit facility with Comerica Bank and $1.8
million cash.
In March 1997, the Company acquired all the outstanding capital stock of.
MVS for 600,000 shares of the Company's Common Stock and a Term Note in the
amount of $442,500, payable to the selling shareholder in six monthly
installments. MVS, operating from a 25,000 square foot leased manufacturing
facility in Jennings, Louisiana, sells and repairs high pressure valves that are
used primarily in oil and gas drilling applications. MVS' revenues in 1996 were
$6.4 million, with one customer comprising 18% of its total 1996 revenues.
FASTENER MANUFACTURING AND SALES DIVISION
PRODUCTS AND SERVICES. Landreth, CRivet and American, (collectively "LEC")
manufacture industrial metal fasteners, including special cold-formed fasteners
and threaded fastener products for sale to national manufacturers primarily in
the 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 that
are primarily targeted to more highly-engineered applications, such as the
automotive original equipment manufacturers ("OEM") and electronic industries.
These special cold-formed fasteners can in many cases replace more expensive
machined parts. Industrial metal fasteners, or rivets, are typically constructed
of low-carbon steel and can be plated with a variety of protective coatings
through LEC's automatic plating process. LEC also uses plating services from
third party providers. These fasteners can also be made from aluminum, copper,
monel, 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 1/2".
CUSTOMERS AND MARKETING. LEC's customers are primarily national
manufacturing companies in the furniture, construction, home appliance and
automotive industries. LEC sells its products to over 3,000 different
manufacturing customers, with the 10 largest customers accounting for, in the
aggregate, 38% of LEC's sales for the year ended December 31, 1996. During 1996,
no single customer accounted for over 10% of LEC's sales.
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LEC manufactures and distributes its products from its facilities in
Houston, Texas, Waterbury, Connecticut and Franklin Park, Illinois. 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
72 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. All three locations are pursuing QS 9000 certification by December,
1997.
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 from approximately
ten rivet manufacturing companies, any 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 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.
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
petrochemical, 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 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.
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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 300 different
customers, with its 10 largest customers accounting for, in the aggregate, 39%
of this segment's sales during the fiscal year ended December 31, 1996. 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 200 different customers primarily in the
pipeline transportation or product storage business with the 10 largest
customers accounting for, in the aggregate, 16% of this segment's sales in the
fiscal year ended December 31, 1996.
Distribution operations are conducted from the Baytown, Texas headquarters
and one branch location. All 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, 1996, this
segment maintained a sales force of 10 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 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 two office warehouse facilities.
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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, approximately 300 vendors supplied
substantially all of IMSCO's purchases of pipe, valves and fittings.
PVS acquires its pipeline valves from bid lists from approximately 290
suppliers including pipeline transportation companies, individual brokers and
from other remanufacturing companies or OEMs. 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., Hughes, Inc., Wallace/Tyler Dawson, Redman Supply
Co. and R.J. Gallagher. 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.
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.
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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, 1996, the sale of new machine tools
accounted for 96% of Regal's revenues. Machine tool moving services accounted
for 4% of its revenues.
CUSTOMERS AND MARKETING. Regal sells its products and services to over 800
customers, with no single customer accounting for more than 10% of Regal's sales
in the year ended December 31, 1996. Regal conducts its sales efforts from its
Houston, Texas location. At December 31, 1996, 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 line.
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.
CUSTOMERS AND MARKETING. USC sells its services to over 400 customers,
with its four largest customers accounting for 78% of its revenues for the year
ended December 31, 1996. At December 31, 1996, USC employed two sales people who
conduct the Company's sales efforts from its Houston, Texas location.
COMPETITION. USC typically competes with three 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.
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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 customers. No
single customer accounted for over 10% of RPMS sales in the year ended December
31, 1996. At December 31, 1996, 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 December 31, 1996, the Company employed a total of 387 people, four of
whom are corporate officers, 23 are employed by IMSCO, 26 are employed by PVS,
89 are employed by Landreth, 84 are employed by CRivet, 91 are employed by
American and 70 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 December 31, 1996, LEC's backlog was approximately $6,440,000
compared to $5,845,000 at December 31, 1995. 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.
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.
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ITEM 2. 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 one leased branch
office, including an approximately 7,000 square foot facility in Freeport,
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.
Landreth subleases from REX approximately 120,000 square feet of
manufacturing facilities, including a tooling shop, an automatic plating
facility and an automatic packaging and inspection area located in Houston,
Texas. CRivet leases approximately 66,000 square feet of manufacturing
facilities in Waterbury, Connecticut. American owns an 81,000 square foot
manufacturing facility on approximately four acres of land in Franklin Park,
Illinois (a suburb of Chicago).
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.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in litigation arising in the ordinary course of
its business. In the opinion of management, the ultimate liability, if any, as a
result of these matters will not have a material adverse effect on the Company's
consolidated financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders in
the fourth quarter of 1996.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Common Stock trades on The Nasdaq Stock Market ("Nasdaq") under the
symbol "IHII." The following table sets forth the high and low closing sales
prices of the Common Stock, for the periods indicated below:
PRICE RANGE
-----------
HIGH LOW
---- ---
1995
First Quarter $ 4.00 $ 3.25
Second Quarter $ 3.63 $ 2.88
Third Quarter $ 4.75 $ 3.00
Fourth Quarter $ 4.38 $ 3.31
1996
First Quarter $ 6.75 $ 3.75
Second Quarter $10.50 $ 6.50
Third Quarter $10.13 $ 7.00
Fourth Quarter $11.25 $ 9.25
1997
First Quarter through March 27, 1997 $14.00 $10.75
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.
On March 27, 1997, the last reported sales price of the Common Stock, as
quoted by Nasdaq, was $10.88 per share. On March 27, 1997, there were
approximately 237 record holders of the common stock.
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.
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ITEM 6. SELECTED FINANCIAL 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. This information should also be read in conjunction with Item 7 -
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------
(in thousands except for per share amounts)
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Sales ................................. $ 51,423 $ 38,983 $ 34,730 $ 35,113 $ 20,769
Cost of sales ......................... 40,849 31,111 27,485 27,377 15,882
Gross profit .......................... 10,574 7,872 7,245 7,736 4,887
Selling, general & administrative ..... 8,002 6,401 6,569 6,198 4,523
Operating income ...................... 2,572 1,471 676 1,538 364
Other income (expense) ................ (1,037) (824) (575) (666) (261)
Income before income taxes ............ 1,535 647 101 872 103
Income taxes expense (benefit) ........ 408 102 69 109 (279)
Net income ............................ 1,127 545 32 763 382
Earnings per share(1) ................. .26 .17 .01 .27 .17
Weighted average
Common and common - equivalent
shares outstanding ................. 4,379 3,150 3,030 2,829 2,102
</TABLE>
DECEMBER 31, (IN THOUSANDS)
-------------------------------------------------
1996 1995 1994 1993 1992
-------- --------- -------- --------- -------
BALANCE SHEET DATA:
Working capital........... $ 3,101 $ 1,459 $ 2,254 $ 1,164 $ 1,551
Total assets.............. 43,690 27,494 20,848 20,819 13,972
Long-term obligations(2).. 7,326 5,891 3,568 3,229 3,242
Total liabilities......... 27,135 19,891 13,965 14,386 9,312
Shareholders' equity...... 16,554 7,603 6,883 6,433 4,660
(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.
10
<PAGE>
ITEM 7. 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, CRivet in
December 1995, American in November 1996, Lone Star in February 1997, and MVS in
March 1997.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996 COMPARED WITH YEAR ENDED DECEMBER 31, 1995.
SALES. On a consolidated basis, sales increased $12,439,880 or 32% in 1996
compared to 1995. This increase was primarily the result of a $3,295,000
increase in new machine tool sales and the inclusion of a full year of
operations of CRivet and two months of operations of American.
COST OF SALES. Cost of sales increased $9,737,795 or 31% in 1996 compared
to 1995. Cost of sales as a percentage of sales was 79.4% in 1996 compared to
79.8% in 1995. The 31% increase in cost of sales was attributable to the 32%
increase in sales in 1996 in comparison to 1995. Cost of sales as a percentage
of sales was unusually high in 1995 as a result of a $3,295,000 increase in the
sale of new machine tools and the inclusion of $1,036,580 in wire sales at a
4.8% gross margin.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $1,600,707 or 25% in 1996 compared to 1995.
This increase was primarily the result of the inclusion of a full year of
operations of CRivet and two months of operations of American.
INTEREST EXPENSE. Interest expense increased $353,650 or 36% in 1996
compared to 1995 due to increases in debt as a result of the acquisition of
CRivet and American which was partially offset by a reduction in interest rates
in 1996 compared to 1995.
OTHER INCOME. Other income increased $121,030 in 1996 compared to 1995.
This increase was primarily the result of $100,000 in non-recurring fee income
earned for consulting services performed in 1996.
FEDERAL INCOME TAXES. The Company's effective tax rate was 27% in 1996
compared to 16% in 1995. During 1996, the Company reduced its deferred tax asset
valuation allowance by $239,000. A portion of the reduction, approximately
$101,000, was to reflect deferred tax assets used in 1996, the remainder was to
recognize a deferred tax asset of $138,000. Based on management's assessment of
earnings trends, expected revenues and cost reductions and the expiration dates
of carryforwards, management determined that it 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 $1,126,712 in 1996 compared to net income of $545,147 in 1995.
11
<PAGE>
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 $3,626,022 or 13% in 1995 compared
to 1994. Cost of sales as a percentage of sales was 79.8% in 1995 compared to
79.1% 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 4.8% 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 $168,170 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
substantial additional overhead.
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 90% 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 16% in 1995
compared to 69% in 1994. The decrease in the effective tax rate occurred because
of a reduction in state income tax expense from 1994 to 1995. Additionally,
during 1995, the Company reduced its deferred tax asset valuation allowance by
$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.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996, the Company had cash of $3,087,925 and additional
borrowing capacity under its line of credit of $670,547. The Company's
operations provided cash of $971,918 during 1996 compared to $1,233,412 and
$353,914 during 1995 and 1994. These cash flows were primarily attributable to
increased net income over the three year period and increased depreciation and
amortization in 1996 as a result of the acquisitions of CRivet and American
which was offset by increases in inventory and the payment of deferred
compensation.
Capital expenditures for property and equipment increased 298% for 1996
compared to 1995, primarily as a result of the purchase of new equipment and
leasehold improvements for the Company's fastener
12
<PAGE>
manufacturing operations. In 1996, the Company acquired net cash of $1,244,666
in the acquisition of American. In 1995, the Company used cash of $826,003 to
purchase CRivet.
Financing activities provided cash of $2,866,955 for 1996. The Company
raised $6,248,281 from the issuance of common stock and used approximately
$4,271,224 to repay debt associated with the acquisition of American as well as
other financing and to purchase property and equipment for its fastener
division. Net borrowing under the revolving line of credit increased in 1995 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.
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 in the principal amount of $2,500,000
(the "Renaissance Debenture"). At December 31, 1996, the outstanding principal
balance was $1,060,000. In January and February 1997, Renaissance converted
$360,000 of the outstanding principal balance to 110,430 shares of Common Stock.
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 and Line of
Credit dated November 1, 1996 ("Demand Note") among the Company and Comerica
Bank-Texas ("Comerica"). The Demand Note is in the principal amount of
$12,000,000 ($14,000,000 at February 1997) or the lesser of a borrowing base as
defined, bearing interest at the prime rate of Comerica and is payable on
demand. This Demand Note allows IMSCO, Landreth, PVS, REX and American 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
December 31, 1996, the borrowing capacity under the Demand Note was $10,016,464
of which $9,345,917 was outstanding at that date. The Demand Note is secured by
all of the assets of the Company, LEC, IMSCO, REX and American 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
December 1, 2001. The Term Loan is secured by the machinery and equipment of
CRivet.
In March 1996, the Company completed a private placement of 300,000 shares
of Common Stock. Of the $1,010,000 in proceeds, the Company used $600,000 to
repay a portion of the Renaissance Debenture. The remaining proceeds were used
for the relocation of the Landreth plant to the Company's REX facility and the
CRivet plant to a new location in Connecticut.
In December 1996, the Company completed a tender offer to holders of its
Class A Redeemable Common Stock Purchase Warrants (Class A Warrants) whereby
each Class A Warrantholder received 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
13
<PAGE>
tendered along with the exercise price of $6 per warrant exercised. As a result
of the tender offer the Company received net proceeds of approximately
$3,556,000 and issued 621,914 shares of Common Stock, 621,914 Class B Warrants
and 621,914 Class C Warrants. The net proceeds were used to repay debt incurred
in the acquisition of American.
At December 31, 1996, the Company had working capital of $3,100,756,
long-term debt of $7,326,444 and shareholders' equity of $16,554,447. The
Company anticipates that its operating cash needs for fiscal 1997 can be met
with cash generated from operations, borrowings under its credit facilities with
Comerica and private placements of debt securities. 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.
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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by this item begin at page F-1
hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
14
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this item is incorporated by reference to
the material appearing under the heading "Election of Directors" in the Proxy
Statement for the 1997 Annual Meeting of Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item is incorporated by reference to
the material appearing under the heading "Executive Compensation" in the Proxy
Statement for the 1997 Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item is incorporated by reference to
the material appearing under the heading "Principal Stockholders" and "Certain
Transactions" in the Proxy Statement for the 1997 Annual Meeting of
Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is incorporated by reference to
the material appearing under the heading "Certain Transactions" in the Proxy
Statement for the 1997 Annual Meeting of Stockholders.
15
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
A. FINANCIAL STATEMENTS
See index to consolidated financial statements on F-1.
B. REPORTS ON FORM 8-K
The Company filed a Current Report on Form 8-K dated October
3, 1996, disclosing the execution of a stock purchase
agreement by among the Company and the shareholders of
American.
The Company filed a Current Report on Form 8-K dated November
18, 1996 disclosing the acquisition of the capital stock of
American and the related financing.
The Company filed a Current Report on Form 8-K dated December
13, 1996 disclosing the completion of its offer to its Class A
Warrantholders. Proceeds to the Company were $3,556,000. The
Company issued 621,914 shares of Common Stock, 621,914 Class B
Warrants and 621,914 Class C Warrants.
C. EXHIBITS
See the Exhibit Index appearing on page EX-1.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 27th day of
March 1997.
INDUSTRIAL HOLDINGS, INC.
By:/s/ CHRISTINE A. SMITH
Christine A. Smith
(Chief Financial Officer and Vice President)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons and in the capacities
indicated on the 27th day of March 1997.
SIGNATURE TITLE
By:/s/ ROBERT E. CONE Chairman of the Board of Directors, President and
Robert E. Cone Chief Executive Officer (Principal Executive
Officer)
By:/s/ JAMES H. BROCK, JR. Executive Vice President and Director
James H. Brock, Jr.
By:/s/ CHRISTINE A. SMITH Vice President and Chief Financial Officer
Christine A. Smith (Principal Financial Officer and Chief Accounting
Officer)
By:______________________
Barbara S. Shuler Director
By:/s/ JOHN P. MADDEN
John P. Madden Director
By:/s/ JAMES W. KENNEY
James W. Kenney Director
By:/s/ CHARLES J. ANDERSON
Charles J. Anderson Director
By:/s/ JOHN L. THOMPSON
John L. Thompson Director
<PAGE>
INDEX TO EXHIBITS
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER IDENTIFICATION OF EXHIBIT PAGE
------ ------------------------- ----
3.1 -- Amended and Restated Articles of Incorporation of the Company.
Exhibit 3.1 from Amendment No. 1 to the Company's Registration
Statement on Form S-1 (No. 333-13323) is incorporated herein by
this reference.
3.2 -- Amended and Restated Bylaws of the Company. Exhibit 3.2 from the
Company's Registration Statement on Form S-1 (No. 333-13323) is
incorporated herein by this reference.
4.1 -- Specimen Certificate of Common Stock, $.01 par value, of the
Company. Exhibit 4.1 to the Company's Registration Statement on
Form S-1 (No. 33- 43169) dated October 7, 1991 (the "Registration
Statement"), as amended, is incorporated herein by reference.
4.2 -- Class A Redeemable Warrant Agreement and specimen of Class A
Redeemable Warrant Certificate. Exhibit 4.2 to the Company's
Registration Statement is incorporated herein by this reference.
4.3 -- Designation of Warrant Agent (Class A Redeemable Warrant), dated
as of November 1, 1996. Exhibit 4.3 from Amendment No. 1 to the
Company's Registration Statement on Form S-1 (No. 333-13323) is
incorporated herein by this reference.
4.4 -- Class B Redeemable Warrant Agreement and specimen of Class B
Redeemable Warrant Certificate. Exhibit 4.3 to the Company's
Registration Statement is incorporated herein by this reference.
4.5 -- Designation of Warrant Agent (Class B Redeemable Warrant), dated
as of November 1, 1996. Exhibit 4.5 from Amendment No. 1 to the
Company's Registration Statement on Form S-1 (No. 333-13323) is
incorporated herein by this reference.
4.6 -- Class C Redeemable Warrant Agreement and specimen of Class C
Redeemable Warrant Certificate. Exhibit 4.6 from the Company's
Registration Statement on Form S-1 (No. 333-13323) is
incorporated herein by this reference.
10.1 -- Second Amendment to Employment Agreement of Robert E. Cone.
Exhibit 10.1 to the Company's Registration Statement on Form S-1
(No. 333-13323) is incorporated herein by this reference.
10.2 -- Third Amendment to Employment Agreement of James H. Brock, Jr.
Exhibit 4.6 from the Company's Registration Statement on Form S-1
(No. 333-13323) is incorporated herein by this reference.
10.3 -- Employment Agreement of Thomas C. Landreth, dated October 26,
1992. Exhibit 10.3 to the Company's Registration Statement on
Form S-1 (No. 333- 13323) is incorporated herein by this
reference.
10.4 -- 1995 Non-Employee Director Stock Option Plan incorporated herein
by reference to the Proxy Statement dated May 26, 1995.
10.5 -- 1994 Amended and Restated Incentive Stock Plan. Incorporated
herein by this reference to the Proxy Statement dated May 25,
1994.
10.6 -- Stock Purchase Warrant Agreement dated September 27, 1991, from
the Company in favor of James H. Brock, Jr. Exhibit 10.6 to the
Company's Registration Statement is incorporated herein by this
reference.
10.7 -- Promissory Note dated December 6, 1995, by and among the Company,
Landreth Engineering Company and General Electric Corporation.
Exhibit 10.1 to the Company's Current Report on Form 8-K dated
December 7, 1995 is incorporated herein by this reference.
EX-1
<PAGE>
10.8 -- 12% Convertible Promissory Note dated December 8, 1995, by and
among the Company and St. James Capital Partners, L.P. ("St.
James"). Exhibit 10.1 to the Company's Amendment A2 to its
Current Report on Form 8-K dated December 7, 1995 is incorporated
herein by this reference.
10.9 -- Stock Purchase Warrant Agreement dated December 7, 1995, from the
Company in favor of St. James. Exhibit 10.4 to the Company's
Current Report on Form 8-K dated December 7, 1995 is incorporated
herein by this reference.
10.10 -- Registration Rights Agreement dated December 7, 1995, between the
Company and St. James. Exhibit 10.5 to the Company's Current
Report on Form 8-K dated December 7, 1995 is incorporated herein
by reference.
10.11 -- Purchase Agreement dated December 7, 1995 by and between the
Company, MRMC, Inc. and David Melina. Exhibit 2.1 to the
Company's Current Report on Form 8-K dated December 7, 1995 is
incorporated herein by this reference.
10.12 -- Stock Purchase Agreement dated October 3, 1996, by and among the
Company, Trust "B" Under the Will of Bernard J. Bauer, Sr. and
The Gertrude Bauer Trust dated December 24, 1993. Exhibit 2.1 to
the Company's Current Report on Form 8-K dated October 3, 1996 is
incorporated herein by this reference.
10.13 -- Convertible Debenture Loan Agreement date October 8, 1992, by and
among the Company, Pipeline Valve Specialty, Inc. ("PVS") and
Renaissance Capital Partners II, Ltd. Exhibit 2.2 to the
Company's Current Report on Form 8-K dated October 26, 1992 is
incorporated herein by this reference.
10.14 -- Line of Credit Facility and Demand Note dated November 1, 1996,
by and among the Company, PVS, Landreth, Imsco, REX, American and
Comerica. Exhibit 10.1 to the Company's Current Report on Form
8-K dated November 18, 1996 is incorporated herein by this
reference.
10.15 -- Term Loan dated November 1, 1996 by and among the Company, PVS,
Landreth, Imsco, REX, American and Comerica. Exhibit 10.2 to the
Company's Current Report on Form 8-K dated November 18, 1996 is
incorporated herein by this reference.
10.16 -- 12% Promissory Note dated November 18, 1996 by and among the
Company and St. James. Exhibit 10.3 to the Company's Current
Report on Form 8-K dated November 18, 1996 is incorporated herein
by this reference.
10.17 -- 12% Promissory Note dated November 18, 1996 by and among the
Company and St. James. Exhibit 10.4 to the Company's Current
Report on Form 8-K dated November 18, 1996 is incorporated herein
by this reference.
10.18 -- Stock Purchase Warrant Agreement dated November 18, 1996, from
the Company in favor of St. James. Exhibit 10.5 to the Company's
Current Report on Form 8-K dated November 18, 1996 is
incorporated herein by this reference.
10.19 -- Stock Purchase Warrant Agreement dated November 18, 1996, from
the Company in favor of St. James. Exhibit 10.6 to the Company's
Current Report on Form 8-K dated November 18, 1996 is
incorporated herein by this reference.
10.20 -- Registration Rights Agreement dated November 18, 1996, between
the Company and St. James. Exhibit 10.7 to the Company's Current
Report on Form 8-K dated November 18, 1996 is incorporated herein
by this reference.
11* -- Statement regarding computation of per share earnings. Ex-1
21* -- Subsidiaries of the Company. Ex-2
23.1* -- Consent of Price Waterhouse LLP Ex-3
- ------------------------
* Filed Herewith.
EX-2
<PAGE>
INDUSTRIAL HOLDINGS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Accountants F-2
Consolidated Balance Sheet at December 31, 1996 and 1995 F-3
Consolidated Statement of Income For the Years Ended
December 31, 1996, 1995 and 1994 F-4
Consolidated Statement of Cash Flows For the Years Ended
December 31, 1996, 1995 and 1994 F-5
Consolidated Statement of Shareholders' Equity For the
Years Ended December 31, 1996, 1995 and 1994 F-7
Notes to Consolidated Financial Statements F-8
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Industrial Holdings, Inc.
In our opinion, the consolidated financial statements listed in the Index
appearing on page F-1 present fairly, in all material respects, the financial
position of Industrial Holdings, Inc. and its subsidiaries at December 31, 1996
and 1995, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1996, 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
March 5, 1997
F-2
<PAGE>
INDUSTRIAL HOLDINGS, INC.
CONSOLIDATED BALANCE SHEET
December 31,
-------------------------
1996 1995
----------- -----------
ASSETS
Current assets:
Cash and equivalents ............................. $ 3,087,925 $ 428,430
Accounts receivable - trade, net ................. 6,756,218 5,640,253
Inventories ...................................... 9,970,337 7,945,871
Equipment held for sale .......................... 275,000
Advances to shareholders ......................... 77,086 65,210
Notes receivable, current portion ................ 207,549 259,452
Other current assets ............................. 333,839 267,330
----------- -----------
Total current assets ......................... 20,432,954 14,881,546
Property and equipment, net ........................ 15,579,410 9,125,422
Notes receivable, less current portion ............. 1,464,393 1,475,956
Other assets ....................................... 714,495 127,658
Goodwill and other, net ............................ 5,498,271 1,882,974
----------- -----------
Total assets ................................... $43,689,523 $27,493,556
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable .................................... $ 9,615,917 $ 6,688,570
Accounts payable - trade ......................... 4,601,082 4,748,339
Accrued expenses and other ....................... 1,721,487 1,213,176
Current portion of long-term debt ................ 1,393,712 772,858
----------- -----------
Total current liabilities ................... 17,332,198 13,422,943
Long-term debt, less current portion ............. 7,326,444 5,890,849
Deferred compensation payable, less
current portion ............................... 285,532
Deferred income taxes payable .................... 2,190,902 576,771
----------- -----------
Total liabilities .......................... 27,135,076 19,890,563
----------- -----------
Commitments and contingencies (Notes 3 and 9)
Shareholders' equity:
Common stock $.01 par value, 20,000,000
shares authorized, 4,851,494 and 3,091,162
shares issued and outstanding ................. 48,515 30,912
Additional paid-in capital ...................... 15,360,801 7,553,662
Retained earnings ............................... 1,145,131 18,419
----------- -----------
Total shareholders' equity ............... 16,554,447 7,602,993
----------- -----------
Total liabilities and shareholders'
equity ................................... $43,689,523 $27,493,556
=========== ===========
The accompanying notes are an integral part of this statement.
F-3
<PAGE>
INDUSTRIAL HOLDINGS, INC.
CONSOLIDATED STATEMENT OF INCOME
Year Ended December 31,
--------------------------------------------
1996 1995 1994
------------ ------------ ------------
Sales .......................... $ 51,422,950 $ 38,983,070 $ 34,730,339
Cost of sales .................. 40,849,023 31,111,228 27,485,206
------------ ------------ ------------
Gross profit ................... 10,573,927 7,871,842 7,245,133
Selling, general and
administrative ............ 8,001,739 6,401,032 6,569,202
------------ ------------ ------------
Income from operations ......... 2,572,188 1,470,810 675,931
------------ ------------ ------------
Other income (expense):
Interest expense ........... (1,335,904) (982,254) (888,506)
Interest income ............ 160,078 140,173 130,143
Other income ............... 138,912 17,882 183,537
------------ ------------ ------------
Total other income
(expense) .......... (1,036,914) (824,199) (574,826)
------------ ------------ ------------
Income before income taxes ..... 1,535,274 646,611 101,105
Income tax expense ............. 408,562 101,464 69,403
------------ ------------ ------------
Net income ..................... $ 1,126,712 $ 545,147 $ 31,702
============ ============ ============
Earnings per share ............. $ .26 $ .17 $ .01
============ ============ ============
The accompanying notes are an integral part of this statement.
F-4
<PAGE>
INDUSTRIAL HOLDINGS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income .............................................. $ 1,126,712 $ 545,147 $ 31,702
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization ........................ 1,291,451 865,241 840,234
Deferred income tax provision (benefit) .............. 363,397 (67,422) 20,430
Deferred compensation paid ........................... (109,203)
Other ................................................ 7,500 (12,289) 11,072
Changes in assets and liabilities,
net of acquisitions:
Accounts receivable and advances to
shareholders .................................... 212,814 (1,234,064) 196,698
Inventories ........................................ (803,949) 178,460 (454,923)
Notes receivable ................................... 53,466 208,687 (27,600)
Other assets ....................................... (473,134) 18,148 (61,209)
Accounts payable ................................... (342,282) 640,139 96,333
Accrued expenses ................................... (354,854) 91,365 (298,823)
----------- ----------- -----------
Net cash provided by operating activities ....... 971,918 1,233,412 353,914
----------- ----------- -----------
Cash flows from investing activities:
Purchase of property and equipment ...................... (2,408,476) (605,878) (517,896)
Proceeds from disposals of property and
equipment, net ....................................... 13,923 8,036 7,395
Purchase of CRivet ...................................... (826,003)
Cash obtained in purchase of American .................. 1,244,666 -- --
Additional consideration paid to former
shareholders of Landreth and PVS ..................... (29,491) (307,900) (64,859)
----------- ----------- -----------
Net cash used by investing activities ........... (1,179,378) (1,731,745) (575,360)
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of this statement.
F-5
<PAGE>
INDUSTRIAL HOLDINGS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------ ------------ ------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from financing activities:
Net borrowings under revolving
line of credit .................................................. $ 112,490 $ 442,065 $ 176,473
Proceeds from notes payable and long-term debt ..................... 777,408 614,745 909,209
Principal payments on notes payable and
long-term debt .................................................. (4,271,224) (593,790) (1,324,346)
Proceeds from issuance of common stock ............................. 6,248,281 275,116 418,278
------------ ------------ ------------
Net cash provided by financing
activities .................................................... 2,866,955 738,136 179,614
------------ ------------ ------------
Net increase (decrease) in cash and equivalents ...................... 2,659,495 239,803 (41,832)
Cash and equivalents, beginning of year .............................. 428,430 188,627 230,459
------------ ------------ ------------
Cash and equivalents, end of year .................................... $ 3,087,925 $ 428,430 $ 188,627
============ ============ ============
Supplemental disclosure of noncash investing and financing activities:
Accounts receivable reclassified to notes receivable ............... $ 140,614
Conversion of debt to equity ....................................... $ 1,619,100
Acquisition of businesses:
Assets acquired ................................................. 11,443,214 5,624,319
Liabilities assumed ............................................. 12,687,881 4,798,316
Supplemental disclosures of cash flow information: Cash paid for:
Interest ........................................................ $ 1,269,380 $ 1,012,880 $ 891,211
Income taxes .................................................... 5,856 786 2,014
</TABLE>
The accompanying notes are an integral part of this statement.
F-6
<PAGE>
INDUSTRIAL HOLDINGS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
Common Stock
--------------------------- Additional Retained
Par paid-in earnings
Shares Value Capital (Deficit) Total
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1994 ... 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 9 ................... -- -- (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:
Private placement ....... 300,000 3,000 1,007,000 -- 1,010,000
Tender offer to Class A
warrantholders, net .. 621,914 6,219 3,562,681 -- 3,555,900
Exercise of warrants
and options .......... 373,418 3,734 1,665,647 -- 1,682,381
Conversion of debt to equity 465,000 4,650 1,614,450 -- 1,619,100
Shortfall on sale of stock
by former PVS shareholders-
Note 9 .................... -- -- (42,639) -- (42,639)
Net income ................. -- -- -- 1,126,712 1,126,712
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1996 . 4,851,494 $ 48,515 $ 15,360,801 $ 1,145,131 $ 16,554,447
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of this statement.
F-7
<PAGE>
INDUSTRIAL HOLDINGS, INC.
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"),
American Rivet Company, Inc. ("American") acquired in November 1996, Connecticut
Rivet ("CRivet"), acquired in December 1995, which manufacture industrial metal
fasteners for sale primarily to manufacturers in the 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 ("IMSCO") and Pipeline Valve Specialty, Inc. ("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). Significant
intercompany balances and transactions have been eliminated upon consolidation.
The financial statements include the results of operations of CRivet and
American as of December 7, 1995 and November 1, 1996, respectively (see Note 3).
REVENUE RECOGNITION
Revenues are recognized upon shipment of the product or as the services are
performed.
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 $179,965 and $80,072 at December 31, 1996 and 1995, respectively.
F-8
<PAGE>
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, buildings and equipment.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Management has determined that the fair value of the Company's financial
instruments approximates the carrying amount of such instruments as presented or
disclosed in the financial statements.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost includes, where
applicable, manufacturing labor and overhead. At December 31, 1996, the last-in,
first-out (LIFO) method was used to determine the cost of American's raw
material and rivet inventories totaling $1,225,257. At that date, there was no
LIFO reserve. The first-in, first-out method ("FIFO") was used to determine the
cost of the remaining inventories at December 31, 1996 and all inventories at
December 31, 1995.
PROPERTY AND EQUIPMENT
Property and equipment are stated on the basis of cost. Depreciation is computed
using the straight-line method over the estimated useful lives of the related
assets (3 to 15 years for automobiles, furniture and equipment and 31 years for
buildings). Maintenance and repairs are charged to expense as incurred; major
renewals and betterments are capitalized.
LONG-LIVED ASSETS
In accordance with Statement of Financial Accounting Standards No. 121 ("FAS
121"), Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of, the Company reviews for the impairment of long-lived
assets and certain identifiable intangibles whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Under FAS 121, an impairment loss will be recognized when estimated
future cash flows expected to result from the use of the asset and its eventual
disposition are less than its carrying amount. No such impairment losses have
been identified by the Company.
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, 1996, goodwill was $5,973,963, net of amortization of $590,550.
Other intangible assets consist primarily of loan origination fees and are
amortized over periods not exceeding seven years.
F-9
<PAGE>
STOCK-BASED COMPENSATION.
The Company adopted Statement of Financial Accounting Standard No. 123 ("FAS
123"), Accounting for Stock-Based Compensation beginning with the Company's
first quarter of 1996. Upon adoption of FAS 123, the Company continued to
measure compensation expense for its stock- based employee compensation plans
using the intrinsic value method prescribed by APB No. 25, Accounting for Stock
Issued to Employees, and has provided in Note 11 pro forma disclosures of the
effect on net income and earnings per share as if the fair value-based method
prescribed by FAS 123 had been applied in measuring compensation expense.
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. At December 31, 1995, a valuation
allowance was provided for deferred tax assets which the Company had determined
may not be fully realizable.
EARNINGS PER SHARE
Earnings per share have been computed based on the weighted average number of
common and common equivalent shares outstanding. For 1996, 1995 and 1994, the
weighted average common and common equivalent shares were 4,378,684, 3,149,579
and 3,029,574 for the purpose of computing primary earnings per share. Fully
diluted earnings per share for 1996, 1995 and 1994 were the same as primary
earnings per share, since the effects of the conversion of the debentures 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 American in 1996 and CRivet in 1995.
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.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior-year amounts to conform to
the current-year classification.
F-10
<PAGE>
NOTE 3 - BUSINESS ACQUISITIONS:
Effective November 1, 1996, the Company acquired all the capital stock of
American for a purchase price of $11,758,737 including transaction costs.
Effective December 7, 1995, the Company acquired substantially all of the assets
for a purchase price of $3,744,229 and assumed certain liabilities of CRivet
from MRMC, Inc. The following is a pro forma summary (unaudited) of the combined
results of operations for the years ended December 31, 1996 and 1995, assuming
the American and CRivet acquisitions had occurred on January 1, 1995 (in 000's):
1996 1995
--------- -------
Sales ................... $ 59,122 $56,565
========= =======
Net income .............. $ 1,396 $ 1,312
========= =======
Earnings per share ...... $ .28 $ .34
========= =======
The pro forma financial information combines the historical operating results of
IHI for 1996 and 1995 with the results of operations for American for the ten
months ended October 31, 1996 and the twelve months ended December 31, 1995 and
CRivet for 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 purchases been made at January 1,
1995 or future results of operations of the combined companies.
These acquisitions have been accounted for by the purchase method of accounting
(determined on a preliminary basis for American) and, accordingly, the acquired
assets and liabilities have been recorded at their estimated fair values at the
date of acquisition as follows:
American CRivet
November 1, December 7,
1996 1995
---------- ----------
Fair value of assets acquired:
Net cash acquired ................. $1,244,667
Accounts receivable .............. 1,383,294
Inventory ......................... 1,220,517 $1,465,436
Property and equipment ............ 4,861,935 4,101,329
Other assets ...................... 234,912 57,554
Goodwill .......................... 3,742,556
Liabilities assumed or incurred:
Accounts payable .................. 195,025 500,000
Accrued expenses .................. 1,257,900 646,675
Notes payable and long-term debt .. 9,984,222 3,891,641
CRivet accounts payable to Landreth 586,003
Deferred income tax liability ..... 1,250,734
F-11
<PAGE>
Effective February 1, 1997, the Company acquired all the capital stock of Lone
Star for $6 million. The purchase was financed through an $800,000 Term Loan
secured by the machinery and equipment of Lone Star, a $900,000 Mortgage Note
secured by the real estate of Lone Star, a $500,000 Term Note payable to the
former shareholder of Lone Star, 84,211 shares of the Company's Common Stock, a
$1.4 million increase in the Company's line of credit facility with Comerica
Bank and $1.8 million cash.
Lone Star, with revenues of $15.5 million in 1996, is a leading
manufacturer and distributor of fasteners to the petrochemical and energy
industries and a speciality provider of custom-in-house coating services.
NOTE 4 - INVENTORIES:
Inventories at December 31 consist of:
1996 1995
---------- ----------
Raw materials .............. $1,477,051 $ 593,396
Finished goods ............. 7,130,702 6,246,340
Other ...................... 1,362,584 1,106,135
---------- ----------
$9,970,337 $7,945,871
========== ==========
NOTE 5 - NOTES RECEIVABLE:
Notes receivable at December 31 consist of the following:
1996 1995
---------- ----------
Mortgage note receivable with interest at 9.53%
due in monthly installments of $15,166
through February 2007 secured by land and
building ................................... $1,182,244 $1,248,138
Note receivable from asset sale due in monthly
installments of $3,790 through July 1999,
unsecured .................................. 105,786 139,624
Various installment notes and leases receivable
from equipment inventory sales due through
2000, secured by equipment ................. 334,624 239,565
Other notes receivable ........................ 49,288 108,081
---------- ----------
1,671,942 1,735,408
Less current portion .......................... 207,549 259,452
---------- ----------
$1,464,393 $1,475,956
========== ==========
F-12
<PAGE>
NOTE 6 - PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment at December 31 consist of:
1996 1995
------------ ------------
Land ........................................ $ 1,193,892 $ 243,892
Leasehold improvements ...................... 973,054 451,869
Buildings ................................... 2,032,126 882,127
Machinery and equipment ..................... 12,142,238 8,309,897
Office equipment, furniture and fixtures .... 1,133,483 579,726
Transportation equipment .................... 614,368 545,633
Construction in progress .................... 592,622 158,091
Property under capital leases ............... 46,732 121,068
------------ ------------
18,728,515 11,292,303
Less - accumulated depreciation
and amortization ......................... (3,149,105) (2,166,881)
------------ ------------
$ 15,579,410 $ 9,125,422
============ ============
NOTE 7 - NOTES PAYABLE:
Notes payable at December 31 consists of the following:
1996 1995
---------- ----------
Revolving line of credit with a bank which provides
for borrowings up to the lesser of a defined
borrowing base or $12,000,000 at December 31, 1996,
$670,547 available at December 31, 1996, principal
due on demand, interest payable monthly at prime
(8.25% at December 31, 1996), secured by substantially
all assets of the Companies .......................... $7,665,917 $5,520,999
12% promissory notes with principal and interest
due October 31, 1997, secured by substantially all
the assets of the Companies .......................... 1,900,000 --
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 common stock at $3.74
per share in 1996 .................................... -- 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 .......................... 50,000 75,000
---------- ----------
$9,615,917 $6,688,570
========== ==========
F-13
<PAGE>
NOTE 8 - LONG-TERM DEBT:
Long-term debt at December 31, consists of the following:
1996 1995
---------- ----------
9.85% term loan payable in monthly installments
of $53,620 including interest, maturing December 1,
2001 and secured by the machinery and equipment
acquired from MRMC, Inc. ............................. $2,523,218 $2,800,000
12% convertible debentures due October 1, 1999,
with principal of $25,000 and interest payable
monthly. Guaranteed by PVS and secured by the common
stock of IMSCO and LEC. Debentures are convertible
into common stock at $3.26 per share. Principal of
$815,00 was converted into 250,000 shares of common
stock in 1996 ........................................ 1,060,000 2,475,000
Note payable to bank with monthly principal payments
of $6,240 plus interest at prime, maturing on
December 1, 2004, secured by real estate property .... 814,306 653,548
Revolving line of credit with a bank expected to be
refinanced with 180 monthly principal payments of
$9,333 plus interest at prime, secured by the real
estate of American ................................... 1,680,000 --
Notes payable to a bank with monthly principal
payments of $56,243 plus interest at prime to 10.5%,
maturing on November 1, 1997 through 2002, secured by
substantially all assets of the Companies ............ 2,538,799 454,020
Non-interest bearing notes payable to certain former
vendors of MRMC, Inc., principal due in monthly
installments of $5,475 through December 1997 ......... 76,230 141,936
Various installment notes, payable in monthly
installments through 1999, including interest
ranging from 9% to 11.7%, secured by
transportation and other equipment ................... 27,603 139,203
---------- ----------
8,720,156 6,663,707
Less - current portion ............................... 1,393,712 772,858
---------- ----------
$7,326,444 $5,890,849
========== ==========
F-14
<PAGE>
The aggregate maturities of long-term debt at December 31, 1996 (excluding
$360,000 of convertible debenture converted to common stock subsequent to year
end) are as follows:
Year ended December 31:
1997 ....................... $1,393,712
1998 ....................... 1,358,021
1999 ....................... 1,888,049
2000 ....................... 1,142,824
2001 ....................... 1,157,544
Thereafter ................... 1,420,006
----------
$8,360,156
==========
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. At December 31, 1996, due to significant
capital expenditures, the Company was not in compliance with certain restrictive
covenants. The Company has obtained waivers for such non-compliance.
The 12% convertible debentures are subject to redemption at the Company's option
at a rate of 110 percent and 105 percent of the notes in the 12 months ending
October 1, 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. The Company issued to the holder, warrants to purchase 50,000
shares of common stock at $4.00 per share. Additionally, at December 31, 1996,
the Company has classified $360,000 of the convertible debenture due within one
year as long-term debt since subsequent to year end, the holder converted this
amount to common stock (See Note 11).
NOTE 9 - COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS:
The Companies have entered into noncancellable 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 1996, 1995 and 1994. Operating leases
relate to offices, buildings and certain equipment. Aggregate rent expense on
such leases amounted to $935,845, $657,328 and $592,589 for the years 1996, 1995
and 1994. Future minimum lease payments are as follows:
F-15
<PAGE>
Year ended December 31:
1997 .................. $ 815,089
1998 .................. 773,789
1999 .................. 712,180
2000 .................. 310,646
2001 .................. 197,706
Thereafter .............. 70,000
----------
$2,879,410
==========
The lease with the former shareholders of Landreth is for a period of ten years
through 2002 with an option to renew for an additional 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 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 received upon sale of their common
stock. 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. At December 31, 1996, the Company had no advances to these
shareholders and there was no further obligation under this agreement.
During 1996, the Company and a partnership providing a portion of the financing
for the American acquisition, entered into a consulting agreement whereby the
Company provided consulting services to the partnership relating to the
acquisition and operation of one of the partnership's investee companies. Fees
for these consulting services were $100,000 and are included in other income in
1996.
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 1997, not to exceed $500,000 in the aggregate. For fiscal
1996, 1995 and 1994, the Company paid these shareholders $29,491, $207,863 and
$64,859 as additional consideration. As of December 31, 1996, the maximum
remaining commitment is $112,934.
The Company had an employment agreement with a former REX shareholder that
expired in 1995. Under the agreement, the former shareholder earned 11,667
shares of common stock in 1994 and 2,333 shares of common stock in 1995.
The Company is involved in litigation arising in the ordinary course of its
business. In the opinion of management, the ultimate liability, if any, as a
result of these matters will not have a material adverse effect on the
Companies' consolidated financial position or results of operations.
F-16
<PAGE>
NOTE 10 - INCOME TAXES:
The provision for income taxes for the years ended December 31 is as follows:
1996 1995 1994
--------- --------- ---------
Current:
Federal ....................... $ (31,635) $ 142,886 $ (3,986)
State ......................... 76,800 26,000 52,959
--------- --------- ---------
45,165 168,886 48,973
Deferred , primarily federal ...... 363,397 (67,422) 20,430
--------- --------- ---------
Income tax expense ................ $ 408,562 $ 101,464 $ 69,403
========= ========= =========
The Company and its subsidiaries file a consolidated federal income tax return.
At December 31, 1996, the Company has net operating loss (NOL) carryforwards of
approximately $936,000 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. Of the carryforward amount, $134,000 may be used at
any time prior to its expiration. The remaining net operating loss carryforwards
are subject to annual limitations.
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 the Company's subsidiaries. During 1996, 1995 and 1994,
the Company reduced the deferred tax asset valuation allowance by $238,873,
$223,110 and $2,500, respectively, to reflect $101,000, $26,000 and $2,500,
respectively in deferred tax assets used and to recognize deferred tax assets of
$138,873 in 1996 and $197,110 in 1995. The recognized deferred tax assets are
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 major components of deferred income tax assets and liabilities at December
31 are as follows:
1996 1995
----------- -----------
Deferred income tax liabilities:
Depreciation ................................... $(2,747,473) $(1,125,378)
Other .......................................... (443,590) (194,789)
----------- -----------
Total deferred income tax liabilities .. (3,191,063) (1,320,167)
Deferred income tax assets:
Net operating loss carryforwards ............... 318,216 582,613
Inventory ...................................... 356,258 323,866
Other .......................................... 325,687 75,790
----------- -----------
Total deferred income tax assets ....... 1,000,161 982,269
Deferred income tax assets valuation allowance ... -- (238,873)
----------- -----------
Deferred income taxes ............................ $(2,190,902) $ (576,771)
=========== ===========
F-17
<PAGE>
A reconciliation of income tax expense computed at statutory rates to income tax
expense for the years ended December 31 is as follows:
1996 1995 1994
--------- --------- ---------
Tax at statutory rate ................ $ 521,993 $ 219,848 $ 34,376
Effect of permanent differences ...... 68,897 58,249 47,587
Reduction in deferred tax asset
valuation allowance ............. (238,873) (223,110) (2,500)
Other ................................ 5,857 29,317 (45,013)
State income taxes, net of
federal benefit ................. 50,688 17,160 34,954
$ 408,562 $ 101,464 $ 69,403
========= ========= =========
NOTE 11 - SHAREHOLDERS' EQUITY:
The Company has authorized 20,000,000 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 2,844,296
shares of common stock as of December 31, 1996:
Number of
Security Common Shares
-------- -------------
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 14, 1997,
redeemable upon 30 days notice .................................... 8,786
Class B redeemable warrants to acquire common stock at $10.00
per share issued in connection with initial public offering
and with tender offer to Class A warrantholders, currently
exercisable, expiring on January 14, 1999, redeemable upon 30
days notice ....................................................... 1,256,214
Class C redeemable warrants to acquire common stock at $15.00
per share issued in connection with tender offer to Class A
warrantholders, currently exercisable, expiring on January 14,
1999, redeemable if closing bid price of common stock equals
or exceeds $20.00 for 20 consecutive days ......................... 623,714
Warrant to acquire common stock at $4.00 per share, currently
exercisable, expiring on March 31, 1998 ........................... 50,000
Warrant to acquire common stock at $3.27 per share issued in
connection with private financing, currently exercisable,
expiring on December 8, 2000 ...................................... 325,582
F-18
<PAGE>
Warrant to acquire common stock at $3.80 per share, currently
exercisable, expiring on December 20, 1998 ........................ 25,000
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 $7.00 per share issued in
connection with acquisition financing, currently exercisable,
expiring on November 18, 2001 .................................... 540,000
EQUITY INCENTIVE PLANS.
At December 31, 1996, there were 186,080 shares of common stock reserved by the
Board of Directors for issuance under the Company's employee stock option plans.
Options are generally granted at the fair market value of the common stock at
the date of grant and generally immediately or up to seven years after date of
grant. Options granted under the plans must be exercised not later than ten
years from the date of grant.
The following table summarizes activity under the employee stock option plans
for each of the three years in the period ended December 31, 1996:
Weighted average
Shares Price per share price per share
- -------------------------------------- ------- --------------- ---------------
Options outstanding, January 1, 1994 175,500 $3.08
Options granted 75,000 $2.38 2.38
Options canceled (5,000) 3.13 3.13
Options exercised (7,500) 1.00 1.00
-------
Options outstanding, December 31, 1994 238,000 2.93
Options granted 25,000 3.31 3.31
Options exercised (10,000) 3.13 3.13
-------
Options outstanding, December 31, 1995 253,000 2.97
Options granted 233,000 4.06 - 9.25 5.09
Options canceled (3,000) 3.13 3.13
Options exercised (45,000) 2.38 - 4.06 3.00
-------
Options outstanding, December 31, 1996 438,000 4.09
=======
The Company has a stock option plan for Non-Employee Directors (the Director
Plan). At December 31, 1996, there were 125,000 shares of common stock reserved
for issuance under the Director Plan. Pursuant to the terms of the plan, each
non-employee director is entitled to receive options to purchase common stock of
the Company upon initial appointment to the Board (initial grants) and annually
thereafter. Grants vest over nine months and are exercisable until the tenth
anniversary of the date of grant. Grants have an exercise price equal to the
fair market value of the Company's stock on the date of grant.
F-19
<PAGE>
Activity under the plan for each of the three years in the period ended December
31, 1996 was as follows:
Weighted average
Shares Price per share price per share
- -------------------------------------- ------- --------------- ---------------
Options outstanding, January 1, 1994 0
Options granted 60,000 $2.38 $2.38
-------
Options outstanding, December 31, 1994 60,000 2.38
Options granted 0
-------
Options outstanding, December 31, 1995 60,000 2.38
Options granted 25,000 4.06 4.06
Options exercised (5,000) 2.38 2.38
--------
Options outstanding, December 31, 1996 80,000 2.90
=======
The following table summarizes significant ranges of outstanding and exercisable
options at December 31, 1996.
Options Outstanding Options Exercisable
---------------------------------- -------------------------
Weighted Weighted Weighted
Average Average Average
Ranges of Remaining Exercise Shares Exercise
Exercise Prices Shares Life in Years Price In Thousands Price
- --------------- ---------- ------------- --------- ------------ ------------
$2.38 105,000 8.8 $2.38 105,000 $2.38
3.13 130,000 7.8 3.13 130,000 3.13
3.31 25,000 8.0 3.31 25,000 3.31
4.00 10,000 5.8 4.00 10,000 4.00
4.06 76,000 9.1 4.06 56,000 4.06
4.25 50,000 9.1 4.25 50,000 4.25
5.00 - 5.50 100,000 9.1 5.25
8.13 2,500 9.7 8.13
9.25 19,500 9.9 9.25
F-20
<PAGE>
The weighted average fair value at date of grant for options granted during 1996
and 1995 was $4.04 and $2.94 per option, respectively. The fair value of options
at date of grant was estimated using the Black-Scholes model with the following
weighted average assumptions:
1996 1995
- --------------------------- ------------- -------------
Expected life 3-7 3
Interest rate 5.14-6.41% 7.66%
Volatility 142.9-153.2% 176.3%
Dividend yield 0% 0%
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows:
1996 1995
----------------------------------- ----------- -----------
Pro forma net income .............. $ 900,160 $ 496,637
Pro forma earnings per share ...... $ .21 $ .16
NOTE 12 - SAVINGS PLAN:
The Company has 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 $70,300, $31,500 and $30,500 for 1996, 1995 and
1994.
F-21
<PAGE>
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 1996, 1995 and 1994 is presented below.
<TABLE>
<CAPTION>
Energy Products And Services Division
------------------------------------------------------
New
Valve and machine sales Export Used
Fasteners Supplies And Services Crating Machine Sales
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
1996
Operating revenues .................. $22,523,401 $12,472,456 $13,163,876 $ 2,798,272 $ 464,942
Operating profit (loss) ............. 2,064,996 773,204 425,828 335,640 (228,833)
Identifiable assets ................. 17,886,711 6,071,785 2,879,621 915,869 2,074,886
Depreciation and amortization ....... 829,408 227,996 73,611 116,101 5,617
Capital expenditures ................ 2,147,064 24,143 153,204 73,631 741
1995
Operating revenues .................. $13,204,532 $13,449,344 $ 9,868,209 $ 1,817,877 $ 643,108
Operating profit (loss) ............. 1,246,595 702,147 280,274 (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) ............. 1,111,089 503,339 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
</TABLE>
Operating profit (loss) is operating 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-22
<PAGE>
NOTE 14 - QUARTERLY FINANCIAL DATA (UNAUDITED):
Summarized quarterly financial data for 1996, 1995 and 1994 are as follows (in
thousands, except per share data):
<TABLE>
<CAPTION>
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
------- -------- -------- -------
<S> <C> <C> <C> <C>
1996
Sales ..................................... $12,015 $ 13,612 $ 12,870 $12,925
Gross profit .............................. 2,559 2,811 2,693 2,511
Net income ................................ 237 319 206 365
Earnings per share ........................ 0.07 0.07 .05 .07
1995
Sales ..................................... $10,406 $ 9,317 $ 9,072 $10,188
Gross profit .............................. 1,919 2,014 1,978 1,960
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 .............................. 2,099 1,978 1,663 1,505
Net income (loss) ......................... 167 (142) (163) 170
Earnings (loss) per share ................. 0.06 (0.05) (0.05) 0.05
</TABLE>
NOTE 15 - SUBSEQUENT EVENT (UNAUDITED):
In March 1997, the Company acquired all the outstanding capital stock of
Manifold Valve Services, Inc. ("MVS") for 600,000 shares of the Company's Common
Stock and a Term Note in the amount of $442,500, payable to the selling
shareholder in six monthly installments. MVS, operating from a 25,000 square
foot leased manufacturing facility in Jennings, Louisiana, sells and repairs
high pressure valves that are used primarily in oil and gas drilling
applications. MVS' revenues in 1996 were $6.4 million with one customer
comprising 18% of its total 1996 revenues.
F-23
EXHIBIT 11
INDUSTRIAL HOLDINGS, INC.
EARNINGS PER SHARE
(thousands of dollars, except per share data)
Year Ended December 31
------------------------------------------
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
Weighted average
common shares outstanding ..... 3,688 3,037 2,941 2,624 2,102
Common stock equivalents(1) ....... 691 113 89 205
------ ------ ------ ------ ------
Total common shares and
common equivalent
shares deemed to have a
dilutive effect ................ 4,379 3,150 3,030 2,829 2,102
====== ====== ====== ====== ======
Net earnings
available for common
shareholders ................... $1,127 $ 545 $ 32 $ 763 $ 382
====== ====== ====== ====== ======
Earnings per share ................ $ .26 $ .17 $ .01 $ .27 $ .17
====== ====== ====== ====== ======
- ------------------------
(1) Net effect of dilutive stock options and warrants, calculated using the
treasury stock method using average market price. Fully diluted earnings
per share is not presented since it is the same as primary earnings per
share. The effect of convertible debt is anti-dilutive for all years
presented.
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
Pipeline Valve Specialty Company, Inc.
Landreth Engineering Company
The Rex Group, Inc.
Rex Supply Corporation
Regal Machine Tool, Inc.
Rex Machinery Sales, Inc.
Rex International Corporation
U.S. Crating, Inc.
First Texas Credit Corporation
XTEL Corporation
Rex Machinery Movers, Inc.
Losco, Inc.
LSS-Lone Star - Houston, Inc.
American Rivet Company, Inc.
EXHIBIT 23.1
Item 14.c Exhibit 23.1 Consent of Price Waterhouse LLP
We hereby consent to the incorporation by reference in the Prospectuses
constituting part of the Registration Statements on Form S-3 (Nos. 33-68376,
33-99852 and 333-4160) and in the Registration Statement on Form S-8 (No.
33-68354) of Industrial Holdings, Inc. of our report dated March 5, 1997
appearing on Page F-2 of this Form 10-K.
PRICE WATERHOUSE LLP
Houston, Texas
March 27, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE PERIOD ENDED DECEMBER 31,
1996. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 3,087,925
<SECURITIES> 0
<RECEIVABLES> 6,756,218
<ALLOWANCES> 0
<INVENTORY> 9,970,337
<CURRENT-ASSETS> 20,432,954
<PP&E> 15,579,410
<DEPRECIATION> 0
<TOTAL-ASSETS> 43,689,523
<CURRENT-LIABILITIES> 17,332,198
<BONDS> 0
0
0
<COMMON> 48,515
<OTHER-SE> 16,505,932
<TOTAL-LIABILITY-AND-EQUITY> 43,689,523
<SALES> 51,422,950
<TOTAL-REVENUES> 51,422,950
<CGS> 40,849,023
<TOTAL-COSTS> 48,850,762
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,335,904
<INCOME-PRETAX> 1,535,274
<INCOME-TAX> 408,562
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,126,712
<EPS-PRIMARY> .26
<EPS-DILUTED> 0
</TABLE>
