SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended
June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-19580
INDUSTRIAL HOLDINGS, INC.
(exact name of registrant as specified in its charter)
TEXAS
(STATE OR OTHER JURISDICTION
OF INCORPORATION OR ORGANIZATION)
76-0289495
(IRS EMPLOYER
IDENTIFICATION NO.)
7135 ARDMORE, HOUSTON, TEXAS 77054
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(713) 747-1025
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (i) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (ii) has been subject to such
filing requirements for the past 90 days. Yes [x] No [ ]
At August 14, 1997, there were 6,425,453 shares of Common Stock
outstanding.
<PAGE>
INDUSTRIAL HOLDINGS, INC.
INDEX
PAGE NO.
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheets at June 30, 1997 and
December 31, 1996 .................................................. 1
Consolidated Statement of Income for the Quarters ended
June 30, 1997 and 1996 ............................................. 2
Consolidated Statement of Income for the Six Months
ended June 30, 1997 and 1996 ....................................... 3
Consolidated Statement of Cash Flows for the Six
Months ended June 30, 1997 and 1996 ................................ 4
Notes to Consolidated Financial Statements ......................... 5
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations ................................ 6
PART II OTHER INFORMATION
Item 1. Legal Proceedings .................................................. 9
Item 2. Changes in Securities (no response required)
Item 3. Defaults upon Senior Securities
(no response required)
Item 4. Submission of Matters to a Vote of
Security Holders ................................................... 9
Item 5. Other Information (no response required)
Item 6. Exhibits and reports on Form 8-K ................................... 9
<PAGE>
INDUSTRIAL HOLDING, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
June 30 December 31
1997 1996
----------- -----------
ASSETS
<S> <C> <C>
Current assets:
Cash and equivalents ........................................................ $ 1,005,819 $ 3,087,925
Accounts receivable - trade, net ............................................ 10,951,546 6,756,218
Inventories ................................................................. 12,026,767 9,970,337
Advances to shareholders .................................................... 84,034 77,086
Notes receivable, current portion ........................................... 297,975 207,549
Other current assets ........................................................ 225,745 333,839
----------- -----------
Total current assets .................................................... 24,591,886 20,432,954
Property and equipment, net .......................................................... 18,819,685 15,579,410
Notes receivable, less current portion ............................................... 1,143,229 1,464,393
Other assets ......................................................................... 761,433 714,495
Goodwill and other, net .............................................................. 12,843,332 5,498,271
----------- -----------
Total assets .............................................................. $58,159,565 $43,689,523
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable ............................................................... $ 8,292,609 $ 9,615,917
Accounts payable - trade .................................................... 5,727,955 4,601,082
Accrued expenses and other .................................................. 2,657,852 1,721,487
Current portion of long-term debt ........................................... 1,725,451 1,393,712
----------- -----------
Total current liabilities .............................................. 18,403,867 17,332,198
Long-term debt, less current portion ........................................ 7,852,716 7,326,444
Deferred compensation payable,
less current portion .................................................. 253,865 285,532
Deferred income taxes payable ............................................... 2,657,037 2,190,902
----------- -----------
Total liabilities ..................................................... 29,167,485 27,135,076
----------- -----------
Shareholders' equity:
Common stock $.01 par value, 50,000,000
shares authorized, 6,364,103 and 4,851,494
shares issued and outstanding ............................................ 63,641 48,515
Additional paid-in capital ........................................................ 26,439,533 15,360,801
Retained earnings ................................................................. 2,488,906 1,145,131
----------- -----------
Total shareholders' equity .......................................... 28,999,080 16,554,447
----------- -----------
Total liabilities and shareholders' equity .......................... $58,159,565 $43,689,523
=========== ===========
</TABLE>
See notes to consolidated financial statements
1
<PAGE>
INDUSTRIAL HOLDINGS, INC.
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED JUNE 30,
1997 1996
------------ ------------
<S> <C> <C>
Sales ...................................................................... $ 21,283,801 $ 13,612,320
Cost of sales .............................................................. 16,030,350 10,801,287
------------ ------------
Gross profit ............................................................... 5,253,450 2,811,033
Selling, general and administrative ........................................ 3,428,486 2,023,199
------------ ------------
Income from operations ..................................................... 1,824,965 787,834
------------ ------------
Other income (expense):
Interest expense ..................................................... (450,262) (329,880)
Interest income ...................................................... 32,855 33,651
Other income (expense) ............................................... 19,294 (7,823)
------------ ------------
Total other income (expense) ................................. (398,113) (304,052)
------------ ------------
Income before income taxes ................................................. 1,426,852 483,782
Income tax expense ......................................................... 601,091 164,484
------------ ------------
Net income ................................................................. $ 825,761 $ 319,295
============ ============
Earnings per share ......................................................... $ .12 $ .07
============ ============
</TABLE>
See notes to consolidated financial statements
2
<PAGE>
INDUSTRIAL HOLDINGS, INC.
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1997 1996
------------ ------------
<S> <C> <C>
Sales ...................................................................... $ 38,588,147 $ 25,627,328
Cost of sales .............................................................. 28,785,024 20,257,363
------------ ------------
Gross profit ............................................................... 9,803,123 5,369,965
Selling, general and administrative ........................................ 6,755,963 3,899,253
------------ ------------
Income from operations ..................................................... 3,047,160 1,470,712
------------ ------------
Other income (expense):
Interest expense ..................................................... (884,641) (678,221)
Interest income ...................................................... 86,343 60,391
Other income (expense) ............................................... 29,302 (10,363)
------------ ------------
Total other income (expense) ................................. (768,996) (628,193)
------------ ------------
Income before income taxes ................................................. 2,278,164 842,519
Income tax expense ......................................................... 934,391 286,456
------------ ------------
Net income ................................................................. $ 1,343,773 $ 556,063
============ ============
Earnings per share ......................................................... $ .21 $ .14
============ ============
</TABLE>
See notes to consolidated financial statements
3
<PAGE>
INDUSTRIAL HOLDINGS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30
1997 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income ...................................................................... $ 1,343,773 $ 556,063
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization ............................................... 1,153,439 641,863
Deferred income tax provision ............................................... 19,057 286,456
Deferred compensation paid .................................................. (31,667)
Changes in assets and liabilities,
net of acquisitions:
Accounts receivable and advances to
shareholders .......................................................... (1,131,334) (1,050,358)
Inventories .............................................................. (394,153) (1,400,033)
Notes receivable ......................................................... 230,739 151,033
Other assets ............................................................. 118,918 (149,525)
Accounts payable and accrued expenses .................................... (760,100) 641,020
----------- -----------
Net cash provided (used)
by operating activities ......................................... 548,672 (323,481)
Cash flows from investing activities:
Purchase of property and equipment .............................................. (862,191) (932,743)
Purchase of subsidiaries, net of cash ........................................... (1,768,549) (19,000)
Additional consideration paid to former
shareholders of Landreth ..................................................... (99,320)
----------- -----------
Net cash used by investing activities ................................ (2,630,740) (1,051,063)
----------- -----------
Cash flows from financing activities:
Net borrowing under revolving line of credit .................................... (1,209,076) 876,131
Proceeds from long-term debt .................................................... 226,453 184,422
Principal payments on notes payable,
long-term debt and capital lease obligations ................................ (790,569) (950,015)
Proceeds from issuance of common stock .......................................... 1,773,154 1,080,369
----------- -----------
Net cash provided (used) by financing activities ............................ (38) 1,190,907
----------- -----------
Net decrease in cash and equivalents ............................................... (2,082,106) (183,637)
Cash and equivalents, beginning of period .......................................... 3,087,925 428,430
----------- -----------
Cash and equivalents, end of period ................................................ $ 1,005,819 $ 244,793
=========== ===========
Non-cash financing activities:
Debt converted to equity ................................................. $ 2,847,385 $ 804,100
</TABLE>
See notes to consolidated financial statements
4
<PAGE>
INDUSTRIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1997
NOTE A BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have
been prepared in accordance with generally accepted accounting
principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals)
considered necessary for fair presentation have been included.
Operating results for the six months ended June 30, 1997 are not
necessarily indicative of the results that may be expected for
the year ended December 31, 1997. For further information, refer
to the consolidated financial statements and footnotes thereto
included in the Company's annual report on Form 10-K for the year
ended December 31, 1996.
NOTE B INVENTORY
Inventory consists of the following:
June 30 December 31
1997 1996
----------- -----------
Raw materials $ 1,820,805 $1,477,051
Finished goods 8,719,090 7,130,702
Other 1,486,872 1,362,584
----------- -----------
$12,026,767 $9,970,337
=========== ==========
NOTE C RECLASSIFICATION
Reclassifications of amounts have been made from selling, general
and administrative expenses to cost of sales for the six months
and the quarter ended June 30, 1996 to conform to the
classification in the quarter ended June 30, 1997. Certain
reclassifications have been made to the statement of cash flows
for the six months ended June 30, 1996 to conform to the
classification used for the current quarter.
5
<PAGE>
PART I
FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The financial information in the following discussion of
Industrial Holdings, Inc. (including its subsidiaries, the
"Company"), includes the operating results of Industrial
Holdings, Inc. ("IHI") and its subsidiaries. The Company's
business is organized into two divisions: the Fastener
Manufacturing and Sales Division, comprised of Landreth
Engineering Company ("Landreth"), Connecticut Rivet ("CRivet"),
American Rivet Company ("American"), acquired November 1996, and
LSS-Lone Star - Houston, Inc. ("Lone Star"), acquired February
1997, and the Energy Products and Services Division comprised of
the Valve and Supplies Sales Group which includes Pipeline Valve
Specialty ("PVS"), Industrial Municipal Supply Company ("IMSCO")
and Manifold Valve Service ("MVS"), acquired March 1997; the New
Machine Sales and Services Group which includes Regal Machine
Tools ("Regal") and Rex Machinery Movers ("RMM"); the Export
Crating Group which includes U.S. Crating ("USC"); and the Used
Machine Sales Group which includes Rex/Paul's Machine Sales
("RPMS"). Regal, RMM, USC and RPMS comprise the Rex Group
("Rex").
RESULTS OF OPERATIONS
QUARTER ENDED JUNE 30, 1997 COMPARED WITH QUARTER ENDED JUNE 30,
1996.
SALES. On a consolidated basis, sales increased $7,671,481 or 56%
for the quarter ended June 30, 1997 compared to the quarter ended
June 30, 1996. This increase was primarily the result of the
acquisitions of MVS, Lone Star and American (the "Acquisitions").
The increase attributable to the Acquisitions was partially
offset by a $2.0 million decrease in sales at IMSCO as the result
of the loss of key salesmen at that subsidiary.
COST OF SALES. Cost of sales increased $5,229,063 or 48% for the
quarter ended June 30, 1997 compared to the quarter ended June
30, 1996, primarily as a result of the increase in sales
described in the preceding paragraph. Gross margins increased to
25% for the quarter ended June 30, 1997 from 21% for the quarter
ended June 30, 1996, as the lower margin sales at IMSCO were
replaced by higher margin sales at Lone Star, American and MVS.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general
and administrative expenses increased $1,405,287 or 70% for the
quarter ended June 30, 1997 compared to the quarter ended June
30, 1996. This increase was primarily attributable to the
Acquisitions. Selling, general and administrative expenses
increased a greater percentage than sales primarily as a result
of amortization of goodwill related to the Acquisitions.
INTEREST EXPENSE. Interest expense increased $120,382 or 37% for
the quarter ended June 30, 1997 compared to the quarter ended
June 30, 1996, primarily as a result of debt incurred in the
Acquisitions.
6
<PAGE>
INCOME TAXES. The Company's effective tax rate was 42% for the
quarter ended June 30, 1997 compared to 34% for the quarter ended
June 30, 1996. The higher effective tax rate is attributable to
the inclusion of non-deductible amortization of goodwill as a
result of the Acquisitions.
SIX MONTHS ENDED JUNE 30, 1997 COMPARED WITH SIX MONTHS ENDED
JUNE 30, 1996.
SALES. Sales increased $12,960,819 or 51% for the six months
ended June 30, 1997 compared to the six months ended June 30,
1996. This increase was primarily attributable to the
Acquisitions, which was partially offset by a $3.8 million
decrease in sales at IMSCO as the result of the loss of key
salesmen at that subsidiary.
COST OF SALES. Cost of sales increased $8,527,661 or 42% for the
six months ended June 30, 1997 compared to the six months ended
June 30, 1996, primarily as a result of the increase in sales
described in the preceding paragraph. Gross margins increased to
25% for the six months ended June 30, 1997 from 21% for the six
months ended June 30, 1996 as the lower margin sales at IMSCO
were replaced by higher margin sales at American, Lone Star and
PVS.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general
and administrative expenses increased $2,856,707 or 73% for the
six months ended June 30, 1997 compared to the six months ended
June 30, 1996. Selling, general and administrative expenses
increased a greater percentage than sales primarily as a result
of amortization of goodwill related to the Acquisitions.
INTEREST EXPENSE. Interest expense increased $206,420 or 30% for
the six months ended June 30, 1997 compared to the six months
ended June 30, 1997 primarily as a result of debt incurred in the
Acquisitions.
INCOME TAXES. The Company's effective tax rate was 41% for the
six months ended June 30, 1997 compared to 34% for the six months
ended June 30, 1996. The increase in the effective tax rate for
the six months ended June 30, 1997 is attributable to the
inclusion of non-deductible amortization of goodwill as a result
of the Acquisitions.
TOTAL ASSETS. Total assets were $58,159,565 at June 30, 1997
compared to $43,689,523 at December 31, 1996. This increase was
primarily attributable to the acquisitions of Lone Star and MVS.
TOTAL LIABILITIES. Total liabilities were $29,167,485 at June 30,
1997 compared to $27,135,076 at December 31, 1996. This increase
was primarily attributableto an increase in trade accounts
payable, notes payable, and long term debt as a result of the
acquisitions of Lone Star and MVS which was partially offset by
the conversion of 2,847,385 of debt to equity.
LIQUIDITY AND CAPITAL RESOURCES. At June 30, 1997, the Company
had cash of $1,005,819 and additional borrowing capacity under
its line of credit of $2,020,748. The Company's operations
provided cash of $548,670 during the six months ended June 30,
1997 compared to using cash of $323,481 during the six months
ended June 30, 1996. For the six months ended June 30, 1997, the
Company's operations provided cash because the Company's net
income and
7
<PAGE>
depreciation and amortization were not entirely offset by an
increase in accounts receivable and decrease in accounts payable
and accrued expenses. Accounts receivable increased during that
period primarily because of increases in sales at PVS, MVS and
Lone Star and accounts payable and accrued expenses decreased
primarily because of a reduction in liabilities at IMSCO. For the
six months ended June 30, 1996, the Company's operations used
cash because of an increase in accounts receivable as a result of
the acquisition of CRivet. Accounts receivable were not purchased
by the Company as part of the acquisition. At June 30, 1996,
CRivet's accounts receivables balance was $1,602,009, a $970,152
increase from December 31, 1995.
Investing activities used cash of $2,630,740 for the six months
ended June 30, 1997 compared to $1,051,063 for the six months
ended June 30, 1996. This increased use of cash was attributable
to the acquisition of Lone Star and MVS.
Financing activities used cash of $38 for the six months ended
June 30, 1997 compared to providing cash of $1,190,907 for the
six months ended June 30, 1996. This change is due to the
repayment of short term borrowings in the six month period ended
June 30, 1997.
At June 30, 1997, the Company had working capital of $6,187,999,
long-term debt of $7,852,716 and shareholders' equity of
$28,999,080. 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
Bank-Texas, and private placements of securities. However, any
acquisition of companies in connection with the Company's
acquisition strategy will require additional financing, which
likely would include a combination of debt and equity financing.
8
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is involved in litigation arising in the ordinary course
of its business. In the opinion of management, the ultimate
liability, if any, as a result of these matters will not have a
material adverse effect on the Company's consolidated financial
condition or results of operations.
Item 4 Submission of Matters to a Vote of Security Holders.
(a) The annual meeting of the shareholders of the Company was
held June 30, 1997.
(b) The following persons were elected at that meeting as Class
III Directors to serve until the third annual meeting of
shareholders following their election:
Number of Votes
NAME OF NOMINEE FOR WITHHELD
--------------- --- --------
Robert E. Cone 4,745,307 25,152
James H. Brock, Jr. 4,745,307 25,152
Barbara Shuler 4,744,367 26,902
(c) The number of shares available under the 1994 Amended and
Restated Incentive Option Plan was increased from 250,000 to
500,000.
NUMBER OF VOTES
FOR AGAINST ABSTAIN
2,862,805 176,882 55,598
(d) The number of shares available under the 1995 Non-Employee
Director Option Plan was increased from 105,000 to 210,000.
NUMBER OF VOTES
FOR AGAINST ABSTAIN
2,858,261 181,895 55,229
(e) The Amendment to the Articles of Incorporation of the
Company was adopted to increase the number of authorized
shares of Common Stock from 20,000,000 to 50,000,000.
NUMBER OF VOTES
FOR AGAINST ABSTAIN
4,558,335 169,082 43,042
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 11 - Earnings per Share
(b) Reports on Form 8-K - None
9
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, as amended, the Registrant, Industrial Holdings, Inc., has duly
caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
INDUSTRIAL HOLDINGS, INC.
Date: August 14, 1997 By:/S/CHRISTINE A. SMITH
------------------------
Christine A. Smith
Chief Financial Officer and
Vice President
10
<PAGE>
INDUSTRIAL HOLDINGS, INC.
EARNINGS PER SHARE
JUNE 30, 1997
Earnings per share is based upon the weighted average number of common and
common equivalent shares outstanding during the period as follows:
<TABLE>
<CAPTION>
QUARTER ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
----------------------------- -----------------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Average common shares outstanding ...................... 6,050,114 3,505,393 5,695,210 3,363,239
Net effect of dilutive stock options
and warrants, based on the treasury
stock method using average
market price ........................................ 663,665 750,210 792,307 601,986
---------- ---------- ---------- ----------
6,713,799 4,255,602 6,487,517 3,965,225
========== ========== ========== ==========
Net income ............................................. $ 825,761 $ 319,295 $1,343,773 $ 556,063
========== ========== ========== ==========
Earnings per share ..................................... $ .12 $ .07 $ .21 $ .14
========== ========== ========== ==========
</TABLE>
The above table represents primary earnings per share. Fully diluted earnings
per share for the quarter and six months ended June 30, 1997 and 1996 were the
same as primary earnings per share.
11
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTIANS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM PART 1 OF FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1997 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 1,005,819
<SECURITIES> 0
<RECEIVABLES> 10,951,546
<ALLOWANCES> 0
<INVENTORY> 12,026,767
<CURRENT-ASSETS> 24,591,886
<PP&E> 18,819,685
<DEPRECIATION> 0
<TOTAL-ASSETS> 58,159,565
<CURRENT-LIABILITIES> 18,403,867
<BONDS> 0
0
0
<COMMON> 63,641
<OTHER-SE> 28,928,439
<TOTAL-LIABILITY-AND-EQUITY> 58,159,565
<SALES> 38,588,147
<TOTAL-REVENUES> 38,588,147
<CGS> 28,785,024
<TOTAL-COSTS> 35,540,987
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 884,641
<INCOME-PRETAX> 2,278,164
<INCOME-TAX> 934,391
<INCOME-CONTINUING> 1,343,773
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,343,773
<EPS-PRIMARY> .21
<EPS-DILUTED> .21
</TABLE>
