SCHEDULE 13E-4
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 30549
ISSUER TENDER OFFER STATEMENT
(Pursuant to Section 13(e)(1) of the Securities Exchange Act of 1934)
INDUSTRIAL HOLDINGS, INC.
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(Name of Issuer)
INDUSTRIAL HOLDINGS, INC.
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(Name of Person(s) Filing Statement)
Class B Redeemable Common Stock Purchase Warrants
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(Title of Class of Securities)
456160126
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(CUSIP Number of Class of Securities)
Robert E. Cone, 7135 Ardmore, Houston, Texas 77054, (713) 747-1025
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(Name, Address and Telephone Number of Person Authorized to
Receive Notices and Communications on Behalf of the Person(s)
Filing Statement)
December 18, 1997
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(Date Tender Offer First Published,
Sent or Given to Security Holders)
Calculation of Filing Fee
Transaction Valuation(1) Amount of Filing Fee
$12,544,140 $4,325.60
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(1) Calculated in accordance with Rule 0-11(b), on the basis of 1,254,414
Class B Redeemable Common Stock Purchase Warrants outstanding as of
December 18, 1997, which were valued at the exercise price of $10.00
per warrant.
[X] Check box if any part of the fee is offset as provided by Rule
0-11 (a)(2) and identify the filing with which the offsetting
fee was previously paid. Identify the previous filing by
registration statement number, or the Form or Schedule and the
date of its filing.
Amount Previously Paid: $4,325.60
Form or Registration No.: 333-13323
Filing Party: Industrial Holdings, Inc.
Date Filed: October 2, 1996
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This Schedule 13E-4 relates to an offer (the "Offer") by
Industrial Holdings, Inc. (the "Company"), upon the terms and conditions set
forth in the Offering Circular-Prospectus, dated December 18, 1997, (the
"Offering Circular-Prospectus"), a copy of which is filed as Exhibit 9(a) (2)
hereto, to the holders ("Warrantholders") of its issued and outstanding Class B
Redeemable Common Stock Purchase Warrants ("Class B Warrants") to exchange each
Class B Warrant and $10.00 cash for one share of the Company's Common Stock,
$.01 par value, one Class C Redeemable Common Stock Purchase Warrant ("Class C
Warrant"), and one Class D Redeemable Common Stock Purchase Warrant ("Class D
Warrant"), commencing on December 18, 1997 and ending on January 19, 1998, (the
"Expiration Date") unless extended.
The Offering-Circular Prospectus contains certain information
relating to the Company's business, management and financial condition and is
incorporated herein by this reference. The Offering Circular-Prospectus is part
of the Company's Amendment No. 1 to its Registration Statement on Form S-2,
which was declared effective by the Securities and Exchange Commission on
December 18, 1997. The Offering Circular-Prospectus relates to up to an
aggregate of 2,508,828 Class C and Class D Warrants to be issued in the Offer
and to the issuance of up to 4,385,156 shares of the Company's Common Stock upon
exercise of the Class B Warrants (1,254,414 shares), currently outstanding Class
C Warrants (621,914 shares), and Class C and Class D Warrants to be issued in
the Offer (2,508,828 shares).
Warrantholders electing to accept the Offer prior to the
Expiration Date may withdraw such acceptance, so long as a notice of such
withdrawal is received by the Company on or prior to the Expiration Date.
Thereafter, such exercises are irrevocable, except that they may be withdrawn
after January 19, 1998, unless theretofore accepted for exercise. All Class B
Warrants tendered and not withdrawn on the Expiration Date will be accepted by
the Company, and the Common Stock, Class C and Class D Warrants issuable upon
the exercise of such warrants will be delivered to the respective Warrantholders
as soon as practicable after the Expiration Date.
ITEM 1. SECURITY AND ISSUER.
(a) The Company has its principal executive offices at 7135
Ardmore, Houston, Texas 77054.
(b) The Company is seeking the Class B Warrants, which
represent all the issued and outstanding securities of
such class of securities. Information with respect to the
securities being sought and consideration offered therefor
is incorporated by reference herein to the section of the
Offering Circular-Prospectus titled "The Offer--Terms of
the Offer." With the exception of 2000 Class B Warrants to
be purchased from Thomas C. Landreth, Executive Vice
President, no Class B Warrants are being purchased from an
officer, director or affiliate of the Company.
(c) Information concerning the principal market in which the
Class B Warrants are traded is incorporated by reference
herein to the section titled "Price Range of Common Stock
and Warrants" in the Offering Circular-Prospectus.
(d) Not applicable.
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ITEM 2. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION
(a) The Company will issue the consideration (I.E., Common
Stock, Class C Warrants and Class D Warrants) it is
offering to acquire the Class B Warrants out of its
authorized but unissued shares of Common Stock and Board
of Directors approved Class C Warrants and Class D
Warrants.
(b) Not applicable.
ITEM 3. PURPOSE OF THE TENDER OFFER AND PLANS OR PROPOSALS OF THE ISSUER
OR AFFILIATE.
The purpose of the Offer is to induce persons holding Class B
Warrants to exercise such Class B Warrants. If all Class B
Warrants being sought are exercised, the Company will obtain net
proceeds of $12,400,000. The securities being sought by the
Company will be cancelled upon receipt and acceptance, subject to
the withdrawal rights discussed in the section of the Offering
Circular-Prospectus titled "The Offer--Withdrawal Rights" which is
incorporated by reference.
The Company has no plans or proposals which relate to or would
result in the matters referred to in paragraphs (a) through (j) of
this Item 3, except that the Company intends to utilize the
proceeds received from the Offer for the reduction of debt as
described in the section of the Offering Circular-Prospectus
titled "Use of Proceeds," which is hereby incorporated by
reference.
ITEM 4. INTEREST IN SECURITIES OF THE ISSUER.
Neither the Company, nor, to the best knowledge of the Company,
any of the executive officers or directors of the Company or any
associate of any of the foregoing, has engaged in any transactions
involving the Class B Warrants during the 40 business days prior
to the date hereof.
ITEM 5. CONTRACTS, ARRANGEMENTS, UNDERSTANDINGS OR RELATIONSHIPS WITH
RESPECT TO THE ISSUER'S SECURITIES.
Neither the Company nor, to the best knowledge of the Company, any
of the executive officers or directors or affiliates of the
Company, is a party to any contract, arrangement, understanding or
relationship relating directly or indirectly to the Offer with
respect to the securities of the Company which would require
disclosure under applicable rules and regulations of the
Securities Exchange Act of 1934, as amended.
ITEM 6. PERSONS RETAINED, EMPLOYED OR TO BE COMPENSATED.
Incorporated herein by reference to the section titled "The
Offer--Payment of Fees and Expenses" in the Offering
Circular-Prospectus.
ITEM 7. FINANCIAL INFORMATION.
Except for the ratio of earnings to fixed charges which is not
material to the Company's tender Offer, the matters referred to in
(a) and (b) of this Item can be found under the sections titled
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"Selected Consolidated Financial Data" included in the Offering
Circular-Prospectus and in the Consolidated Financial Statements,
which are hereby incorporated by reference.
ITEM 8. ADDITIONAL INFORMATION.
(a) Neither the Company nor, to the best knowledge of the
Company, any of its executive officers, directors or
affiliates, is a party to any present or proposed
contract, arrangement, understanding or relationship
between them and the Company that is material to a
decision by a Warrantholder whether to sell, exercise, or
hold the Class B Warrants.
(b) The regulatory requirement that has been complied with or
approval that has been obtained in connection with the
Offer is the effectiveness of the Offering-Circular
Prospectus in accordance with the Securities Act of 1933,
as amended.
(c) Not applicable.
(d) There are no pending legal proceedings relating to the
Offer which would be material to a Warrantholder's
decision to sell, exercise or hold the Class B Warrants.
(e) Other than the information contained in the
Offering-Circular Prospectus, there is no additional
material information which is necessary to make the above
required statements, in light of the circumstances under
which they are made, not materially misleading.
ITEM 9. MATERIAL TO BE FILED AS EXHIBITS.
(a) (1) Letter of Transmittal.
(2) Offering Circular-Prospectus dated December 18,
1997.
(3) Annual Report on Form 10-K for the fiscal year
ended December 31, 1996
(4) Annual Report on Form 10-K/A for the fiscal year
ended December 31, 1996
(5) Quarterly Report on Form 10-Q for the three
months ended September 30, 1997
(6) Notice of Guaranteed Delivery.
(7) Form of press release issued by the Company.
(8) President's letter to Warrantholders.
(9) Form of letter to brokers, dealers, banks, trust
companies and other nominees (collectively,
"Brokers").
(10) Form of letter from Brokers to customers.
(b) Not applicable.
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(c) Not applicable.
(d) Not applicable.
(e) See (a)(2) of this Item 9.
(f) None other than material in (a) of this Item 9.
SIGNATURE
After due inquiry and to the best of my knowledge and belief, I
certify that the information set forth in this statement is true, complete and
correct.
DATED: December 18, 1997
INDUSTRIAL HOLDINGS, INC.
By: /s/CHRISTINE A. SMITH
Christine A. Smith,
Vice President & Chief
Financial Officer
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ITEM 9(A)(1)
LETTER OF TRANSMITTAL
TO ACCOMPANY CLASS B REDEEMABLE COMMON
STOCK PURCHASE WARRANTS ("CLASS B WARRANTS") OF AND CASH TENDERED TO
INDUSTRIAL HOLDINGS, INC.
PURSUANT TO THE OFFER DATED DECEMBER 18, 1997
THIS OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE ON JANUARY 19,
1998 AT 5:00 P.M., NEW YORK CITY TIME, UNLESS EXTENDED
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To: CHASEMELLON SHAREHOLDER SERVICES, Exchange Agent
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<CAPTION>
<S> <C> <C>
BY MAIL: FACSIMILE TRANSMISSION: BY HAND OR OVERNIGHT COURIER:
ChaseMellon Shareholder Services (201) 329-8936 ChaseMellon Shareholder Services
Reorganization Department (for Eligible Institutions Only) Reorganization Department
P.O. Box 3301 120 Broadway - 13th Floor
South Hackensack, NJ 07606 Confirm by Telephone: New York, NY 10271
(201) 296-4860
</TABLE>
<TABLE>
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DESCRIPTION OF CLASS B WARRANTS TENDERED
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NAME(S) AND ADDRESS(ES) OF REGISTERED CLASS B WARRANTS TENDERED
HOLDER(S) (PLEASE FILL IN EXACTLY AS
NAME(S) ON CERTIFICATE(S)
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<S> <C> <C> <C>
NUMBER OF NUMBER OF
CLASS B CLASS B CLASS B
Print Name and Address WARRANT WARRANTS WARRANTS
of Registered Owner(s) CERTIFICATE REPRESENTED BY TENDERED**
NUMBER* CERTIFICATE
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Total Class B
Warrants Tendered
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</TABLE>
*Need not be completed by warrantholders tendering by book-entry transfer.
**The number of Class B Warrants evidenced by certificates delivered to the
Exchange Agent and accompanied by the aggregate Warrant Exercise Price are
deemed tendered. See Instruction 3.
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Each Class B Warrant tendered must be accompanied by Ten Dollars and
no/cents ($10.00) (the "Warrant Exercise Price") in the form of certified or
official bank check made payable to Industrial Holdings, Inc. or by wire
transfer to the Exchange Agent for the benefit of the Company.
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DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE
OR TRANSMISSION OF INSTRUCTIONS VIA A FACSIMILE NUMBER OTHER THAN ONE LISTED
ABOVE WILL NOT CONSTITUTE A VALID DELIVERY.
THE INSTRUCTIONS ACCOMPANYING THIS LETTER OF TRANSMITTAL SHOULD BE READ
CAREFULLY BEFORE THE LETTER OF TRANSMITTAL IS COMPLETED.
This Letter of Transmittal is to be used if certificates for Class B
Warrants and the certified or official bank check or the wire transfer in
payment of the aggregate Warrant Exercise Price are to be forwarded herewith or
if delivery of Class B Warrant certificates is to be made by book-entry transfer
to the Exchange Agent's account at The Depository Trust Company ("DTC") or the
Philadelphia Depositary Trust Company ("PDTC") (hereinafter collectively
referred to as the "Book-Entry Transfer Facilities") pursuant to the procedures
set forth in the section of the accompanying Offering Circular-Prospectus of the
Company dated December 18, 1997 (the "Offering Circular-Prospectus") titled "The
Offer--Procedure for Tendering Class B Warrants." All capitalized terms herein
shall have the same meanings ascribed to them in the Offering
Circular-Prospectus.
Warrantholders who are unable to deliver their certificates for Class B
Warrants, the certified or official bank check or the wire transfer in payment
of the aggregate Warrant Exercise Price and all other documents required hereby
to the Exchange Agent by the Expiration Date (or who cannot comply with the
book-entry transfer procedures on a timely basis), may tender their Class B
Warrants pursuant to the guaranteed delivery procedure set forth in the section
of the Offering Circular-Prospectus titled "The Offer--Guaranteed Delivery
Procedure". See Instruction 1. Delivery of documents to the Company or to a
Book-Entry Transfer Facility does not constitute a valid delivery.
(BOXES BELOW FOR USE BY ELIGIBLE INSTITUTIONS ONLY)
[ ] CHECK HERE IF TENDERED CLASS B WARRANTS ARE BEING DELIVERED BY BOOK-ENTRY
TRANSFER TO THE EXCHANGE AGENT'S ACCOUNT AT ONE OF THE BOOK-ENTRY TRANSFER
FACILITIES AND COMPLETE THE FOLLOWING:
Name of Tendering Institution_____________________________________________
Check Applicable Box: [ ] DTC [ ] PDTC
Account No._______________________________________________________________
Transaction Code No.______________________________________________________
[ ] CHECK HERE IF TENDERED CLASS B WARRANTS ARE BEING DELIVERED
PURSUANT TO A NOTICE OF GUARANTEED DELIVERY PREVIOUSLY SENT TO THE
EXCHANGE AGENT AND COMPLETE THE FOLLOWING:
Name(s) of Tendering Warrantholder(s)_____________________________________
Date of Execution of Notice of Guaranteed Delivery________________________
Name of Institution that Guaranteed Delivery______________________________
If delivery is by book-entry transfer:____________________________________
Name of Tendering Institution_____________________________________________
Account No. _________________________ at o DTC o PDTC
Transaction Code No.______________________________________________________
NOTE: SIGNATURES MUST BE PROVIDED BELOW.
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY.
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Ladies and Gentlemen:
The undersigned hereby tenders to Industrial Holdings, Inc., a Texas
corporation (the "Company"), the above-described Class B Redeemable Common Stock
Purchase Warrants (the "Class B Warrants") to purchase shares of Common Stock of
the Company, together with a certified or official bank check made payable to
Industrial Holdings, Inc. or by wire transfer to the account of the Exchange
Agent specified in Instruction 6 hereof, in the amount of Ten Dollars and
no/cents ($10.00) (the "Warrant Exercise Price") for every Class B Warrant
tendered. Such amounts must be tendered in accordance with the terms and
conditions of the Offer as set forth in the accompanying Offering
Circular-Prospectus of the Company dated December 18, 1997 ("Offering
Circular-Prospectus") and this Letter of Transmittal, receipt of which is hereby
acknowledged. The Class B Warrants (cusip #456160126) are referred to in the
accompanying Offering Circular-Prospectus as the Class B Warrants solely for
clarity and to avoid confusion with the Class C Redeemable Common Stock Purchase
Warrants ("Class C Warrants") and Class D Redeemable Common Stock Purchase
Warrants ("Class D Warrants") being delivered pursuant to the Offer.
Subject to, and effective upon, acceptance of the Class B Warrants
tendered herewith in accordance with the terms and conditions of the Offer
(including, if the Offer is extended or amended, the terms and conditions of any
such extension or amendment), the undersigned hereby sells, assigns and
transfers to, or upon the order of, the Company all right, title and interest in
and to the Class B Warrants being tendered hereby and constitutes and appoints
the Exchange Agent its true and lawful attorney-in-fact with respect to such
Class B Warrants with full power of substitution to (i) deliver certificates for
such Class B Warrants or transfer the ownership of such Class B Warrants on the
account books maintained by a Book-Entry Transfer Facility and the required
payment of the aggregate Warrant Exercise Price together with all accompanying
evidences of authority, to or upon the order of the Company and (ii) tender such
Class B Warrants for registration and transfer on the books of the Company.
The undersigned represents and warrants that he or she has full authority
to sell and to transfer the tendered Class B Warrants and that the Company will
acquire good, marketable and unencumbered title thereto, free and clear of all
liens, claims, restrictions, charges and encumbrances, and the same will not be
subject to any adverse claims. The undersigned will, upon request, execute any
additional documents necessary to complete the sale and transfer of the tendered
Class B Warrants. All authority conferred or agreed to be conferred in this
Letter of Transmittal shall be binding upon the successors, assigns, heirs,
executors, administrators and legal representatives of the undersigned and shall
not be affected by and shall survive the death or incapacity of the undersigned.
Except as stated in the section of the Offering Circular-Prospectus titled "The
Offer--Withdrawal Rights," this tender is irrevocable.
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The undersigned understands that the tender of Class B Warrants pursuant
to any one of the procedures described in the section of the Offering
Circular-Prospectus titled "The Offer--Procedure for Exercising Class B
Warrants" will constitute the undersigned's acceptance of the terms and
conditions of the Offer. The Company's acceptance of Class B Warrants tendered
pursuant to the Offer will constitute a binding agreement between the
undersigned and the Company upon the terms and subject to the conditions of the
Offer.
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SPECIAL ISSUANCE INSTRUCTIONS SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 4 AND 5) (SEE INSTRUCTIONS 4 AND 5)
To be completed ONLY if the
certificates for Common Stock, To be completed ONLY if the
Class C Warrants and Class D certificates for Common Stock,
Warrants and/or the certificates Class C Warrants and Class D
for Class B Warrants not tendered Warrants and/or the certificates
or not accepted for exercise are to for Class B Warrants tendered or
be issued in the name of someone not accepted for exercise are to be
other than the undersigned. mailed to someone other than the
undersigned or to the undersigned
Issue certificates to: at an address other than that shown
Name______________________________ below the undersigned's
(Please Print) signature(s).
Address___________________________
__________________________________ Mail certificates to:
(Include Zip Code)
Name______________________________
__________________________________ (Please Print)
(Taxpayer Identification or Social
Security No.) Address___________________________
__________________________________
[ ] Credit Class B Warrants not (Include Zip Code)
tendered or not accepted by
book-entry transfer to the
Book-Entry Transfer Facility
account set forth below:
[ ] DTC [ ] PDTC
__________________________________
Book Entry Transfer Facility
Account Number, if applicable
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SIGN HERE
X_______________________________________________________________________________
X_______________________________________________________________________________
Signature(s) of Warrantholder(s)
(Must be signed by registered holder(s) as name(s) appear(s) on warrant
certificate(s) or by person authorized to become registered holder(s) by
certificates and documents transmitted. If signing is by executor,
administrator, trustee, guardian, attorney, agent or other person acting in a
fiduciary or representative capacity, please set forth full title. (See
Instruction 1.)
Dated ______________________
Name(s)_________________________________________________________________________
_________________________________________________________________________
(Please print)
Capacity (full title)___________________________________________________________
Address_________________________________________________________________________
Area Code and Telephone No._____________________________________________________
Tax I.D. No. or Soc. Sec. No.___________________________________________________
GUARANTEE OF SIGNATURE(S)
(SEE INSTRUCTIONS 1 AND 4)
Name of Firm____________________________________________________________________
Authorized Signature____________________________________________________________
Dated _____________________
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INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE OFFER
1. GUARANTEE OF SIGNATURES. Except as otherwise provided below, all
signatures on this Letter of Transmittal must be guaranteed by a firm or other
entity that is a member in good standing of the Security Transfer Agent's
Medallion Program, the New York Stock Exchange Medallion Program or the Stock
Exchange Medallion Program (an "Eligible Institution"). Signatures on this
Letter of Transmittal need not be guaranteed (a) if this Letter of Transmittal
is signed by the registered holder(s) of the Class B Warrants (which term, for
purposes of this document, shall include any participant in one of the
Book-Entry Transfer Facilities whose name appears on a security position listing
as the owner of Class B Warrants) tendered herewith and such holder(s) have not
completed the box entitled "Special Issuance Instructions" or the box entitled
"Special Delivery Instructions" on this Letter of Transmittal or (b) if such
Class B Warrants are tendered for the account of an Eligible Institution. See
Instruction 4.
2. DELIVERY OF LETTER OF TRANSMITTAL, AGGREGATE WARRANT EXERCISE
PRICE AND CLASS B WARRANT CERTIFICATES; GUARANTEED DELIVERY PROCEDURES. This
Letter of Transmittal is to be used either if certificates for Class B Warrants
and the certified or official bank check or the wire transfer in payment of the
aggregate Warrant Exercise Price are to be forwarded herewith or if delivery of
Class B Warrant certificates is to be made by book-entry transfer pursuant to
the procedures set forth in the section of the Offering Circular-Prospectus
titled "The Offer--Procedure for Tendering Class B Warrants." Certificates for
all physically delivered Class B Warrants, or a confirmation of a book-entry
transfer into the Exchange Agent's account at one of the Book-Entry Transfer
Facilities of all Class B Warrants delivered electronically, as well as a
properly completed and duly executed Letter of Transmittal (or facsimile
thereof), and the certified or official bank check or the wire transfer and any
other documents required by this Letter of Transmittal, must be received by the
Exchange Agent at one of its addresses set forth on the front page of this
Letter of Transmittal on or prior to the Expiration Date.
Warrantholders who cannot deliver their certificates and the
certified or official bank check or the wire transfer and all other required
documents to the Exchange Agent on or prior to the Expiration Date (or who
cannot comply with the book-entry transfer procedures on a timely basis) may
tender their Class B Warrants pursuant to the guaranteed delivery procedure set
forth in the section of the Offering Circular-Prospectus titled "The
Offer--Guaranteed Delivery Procedure." Pursuant to such procedure: (a) such
tender must be made by or through an Eligible Institution, (b) on or prior to
the Expiration Date, a properly completed and duly executed Notice of Guaranteed
Delivery substantially in the form provided by the Company (with any required
signature guarantees) must be received by the Exchange Agent and (c) the
certificates for all physically delivered Class B Warrants, or a confirmation of
a book-entry transfer into the Exchange Agent's account at one of the Book-Entry
Transfer Facilities of all Class B Warrants delivered electronically, as well as
a properly completed and duly executed Letter of Transmittal (or facsimile
thereof) and the certified or official bank check or the wire transfer and any
other documents required by this Letter of Transmittal, must be received by the
Exchange Agent within three New York Stock Exchange, Inc. trading days after the
Expiration Date, all as provided in the section of the Offering
Circular-Prospectus titled "The Offer--Guaranteed Delivery Procedure."
THE METHOD OF DELIVERY OF CLASS B WARRANTS, THE AGGREGATE WARRANT
EXERCISE PRICE AND ALL OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF
THE TENDERING WARRANTHOLDER. IF DELIVERY IS SENT
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BY MAIL, IT IS RECOMMENDED THAT THE WARRANTHOLDER USE REGISTERED MAIL WITH
RETURN RECEIPT REQUESTED, PROPERLY INSURED, AND THAT THE MAILING BE MADE
SUFFICIENTLY IN ADVANCE OF THE EXPIRATION DATE TO PERMIT DELIVERY TO THE
EXCHANGE AGENT ON OR PRIOR TO THE EXPIRATION DATE.
By executing this Letter of Transmittal (or facsimile thereof), the
tendering Warrantholder waives any right to receive any notice of the acceptance
for exercise of the Class B Warrants.
3. PARTIAL TENDERS (NOT APPLICABLE TO WARRANTHOLDERS WHO TENDER BY
BOOK-ENTRY TRANSFER). If fewer than all the Class B Warrants evidenced by any
certificates submitted are to be tendered, write in the number of Class B
Warrants which are to be tendered in the box which is entitled "Class B Warrants
Tendered." In such case, a new certificate for the remainder of the Class B
Warrants which were evidenced by your old certificate(s) will be sent to you
unless otherwise provided in the "Special Issuance Instructions" or "Special
Delivery Instructions" boxes on this Letter of Transmittal as soon as
practicable after the Expiration Date. The number of Class B Warrants
represented by the certificates for Class B Warrants listed and accompanied by
the aggregate Warrant Exercise Price are deemed to have been tendered.
4. SIGNATURES ON LETTER OF TRANSMITTAL; ASSIGNMENTS AND
ENDORSEMENTS. If this Letter of Transmittal is signed by the registered
holder(s) of the Class B Warrants tendered hereby, the signature(s) must
correspond with the name(s) as written on the face of the certificates without
alteration, enlargement or any change whatsoever.
If any of the Class B Warrants tendered hereby are held of record by
two or more persons, all such persons must sign this Letter of Transmittal.
If any of the Class B Warrants tendered hereby are registered in
different names on different certificates, it will be necessary to complete,
sign and submit as many separate Letters of Transmittal as there are different
registrations of certificates.
If this Letter of Transmittal is signed by the registered holder(s)
of the Class B Warrants tendered hereby, no endorsements or instruments of
transfer are required unless Class B Warrants not tendered or not accepted for
exercise are to be registered in the name of any person other than the
registered holder(s). Signatures on any such certificates or instruments of
transfer must be guaranteed by an Eligible Institution.
See Instruction 1.
If this Letter of Transmittal is signed by a person other than the
registered holder(s) of the Class B Warrants tendered hereby, certificates must
be endorsed on the reverse side thereof or accompanied by appropriate evidence
of assignment, in either case, signed exactly as the name(s) of the registered
holder(s) appear(s) on the certificates for such Class B Warrants. Signature(s)
on any such certificates or assignments must be guaranteed by an Eligible
Institution. See Instruction 1.
If this Letter of Transmittal or any certificate or instrument of
transfer is signed by a trustee, executor, administrator, guardian,
attorney-in-fact, officer of a corporation or other person acting in a fiduciary
or representative capacity, such person should so indicate when signing, and
proper evidence satisfactory to the Company of the authority of such person so
to act must be submitted.
5. SPECIAL ISSUANCE AND DELIVERY INSTRUCTIONS. If any certificates
for shares of Common Stock, Class C Warrants and Class D Warrants or for Class B
Warrants not tendered or not accepted for exercise
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are to be returned to a person other than the person(s) signing this Letter of
Transmittal or if the certificates for shares of Common Stock, Class C Warrants
and Class D Warrants or for Class B Warrants not tendered or not accepted are to
be mailed to someone other than the person(s) signing this Letter of Transmittal
or to an address other than that shown above in the box captioned "Description
of Class B Warrants Tendered," then the boxes captioned "Special Issuance
Instructions" and/or "Special Delivery Instructions" on this Letter of
Transmittal should be completed. Warrantholders tendering Class B Warrants by
book-entry transfer will have any Class B Warrants not accepted for exercise
returned by crediting the account maintained by such Warrantholder at the
Book-Entry Transfer Facility from which such transfer was made.
6. PAYMENTS OF THE AGGREGATE WARRANT EXERCISE PRICE. The applicable
payments representing the aggregate Warrant Exercise Price to accompany the
Class B Warrants tendered must be made by certified or official bank check,
payable in United States dollars to the order of Industrial Holdings, Inc., or
by wire transfer to the Exchange Agent for the benefit of the Company. Wire
transfers must be made to the following account according to the following
instructions:
The Chase Manhattan Bank, New York, NY
ABA# 021 000 021
Attn: ChaseMellon Shareholder Services, L.L.C.
Reorg Acct 323-213057
Re: Industrial Holdings Class B Warrants
Attn: Evelyn O'Connor
Tel: #(201) 296-4515
7. NO CONDITIONAL TENDERS. No alternative, conditional, irregular or
contingent tenders will be accepted.
8. INADEQUATE SPACE. If the space provided herein is inadequate, the
certificate numbers and number of Class B Warrants should be listed on a
separate signed schedule to be affixed hereto.
9. WAIVER OF CONDITIONS. The Company reserves the absolute right to
waive any of the specified conditions in the Offer in the case of any Class B
Warrants tendered.
10. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Questions and
requests for assistance or additional copies of the Offering Circular-Prospectus
and the Letter of Transmittal may be directed to the Company as set forth below:
Industrial Holdings, Inc.
7135 Ardmore
Houston, Texas 77054
Attention: Christine A. Smith
(713) 747-1025
13
<PAGE>
ITEM 9(A)(2)
FILED PURSUANT TO RULE 424(b)(5)
REGISTRATION NO. 333-37915
OFFERING CIRCULAR - PROSPECTUS
INDUSTRIAL HOLDINGS, INC.
OFFER TO EXCHANGE ONE CLASS B REDEEMABLE WARRANT AND $10.00
CASH FOR ONE SHARE OF COMMON STOCK, ONE CLASS C REDEEMABLE
WARRANT AND ONE CLASS D REDEEMABLE WARRANT
- --------------------------------------------------------------------------------
THIS OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE ON
JANUARY 19,1998 AT 5:00 P.M., NEW YORK CITY
TIME, UNLESS EXTENDED.
- --------------------------------------------------------------------------------
Industrial Holdings, Inc. (the "Company") hereby offers to the holders
of its 1,254,414 issued and outstanding Class B Redeemable Common Stock Purchase
Warrants ("Class B Warrants") the opportunity to exchange each Class B Warrant
and cash for one share of the Company's Common Stock, $.01 par value ("Common
Stock"), one Class C Redeemable Common Stock Purchase Warrant ("Class C
Warrant") and one Class D Redeemable Common Stock Purchase Warrant ("Class D
Warrant") beginning on the date hereof and ending on January 19, 1998, unless
extended on the terms hereinafter described.
This offer is being made on the following terms (SEE "The Offer" for a
more complete description of the terms of this Offer):
THE SHARES OF COMMON STOCK, CLASS C WARRANTS AND CLASS D WARRANTS
OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON
PAGE 13.
AN EXCHANGING CLASS B WARRANTHOLDER ("WARRANTHOLDER") WHO TENDERS CLASS
B WARRANTS AND PAYS TEN DOLLARS ($10.00) PER CLASS B WARRANT (THE "WARRANT
EXERCISE PRICE") WILL RECEIVE FOR EACH CLASS B WARRANT TENDERED ONE SHARE OF
COMMON STOCK, ONE CLASS C WARRANT AND ONE CLASS D WARRANT.
(CONTINUED ON NEXT PAGE)
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS OFFERING CIRCULAR-PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
---------------------
The date of this Offering Circular-Prospectus is December 18, 1997.
1
<PAGE>
EACH CLASS C WARRANT TO BE ISSUED WILL ENTITLE THE HOLDER THEREOF TO
PURCHASE ONE SHARE OF THE COMPANY'S COMMON STOCK AT AN EXERCISE PRICE OF $15.00
PER SHARE THROUGH AND INCLUDING JANUARY 14, 2000. THE TERMS OF CURRENTLY
OUTSTANDING CLASS C WARRANTS, WHICH ARE EXERCISABLE THROUGH AND INCLUDING
JANUARY 14, 1999, WILL AFTER THE EXPIRATION DATE, AUTOMATICALLY BE EXTENDED TO
JANUARY 14, 2000. EACH CLASS D WARRANT TO BE ISSUED WILL ENTITLE THE HOLDER TO
PURCHASE ONE SHARE OF THE COMPANY'S COMMON STOCK AT AN EXERCISE PRICE OF $22.50
PER SHARE THROUGH AND INCLUDING JANUARY 14, 2000. THE COMPANY MAY REDEEM THE
CLASS C AND CLASS D WARRANTS AT $.05 PER WARRANT UPON 30 DAYS PRIOR WRITTEN
NOTICE IF THE CLOSING BID PRICE OF THE COMPANY'S COMMON STOCK EQUALS OR EXCEEDS
$20.00 AND $25.00, RESPECTIVELY, FOR 20 CONSECUTIVE TRADING DAYS. THE EXERCISE
PRICES OF THE CLASS C AND CLASS D WARRANTS WERE ARBITRARILY DETERMINED BY THE
COMPANY'S BOARD OF DIRECTORS AND ARE NOT NECESSARILY RELATED TO THE COMPANY'S
ASSETS, EARNINGS, BOOK VALUE OR OTHER GENERALLY ACCEPTED CRITERIA OF VALUE.
The exercise of the Class B Warrants pursuant to this Offer may be
withdrawn prior to 5:00 p.m., New York City time, on January 19, 1998 (the
"Expiration Date") (or the latest time and date at which this Offer, as extended
by the Company, shall expire). Thereafter, such exercises are irrevocable,
except that they may be withdrawn after January 19, 1998 unless theretofore
accepted for exercise as provided in this Offering Circular-Prospectus. This
Offer is subject to a number of customary conditions, any or all of which may be
waived by the Company, but is not conditioned upon the exercise of a minimum
number of Class B Warrants. The Company also reserves the right to extend this
Offer. SEE "The Offer--Expiration Date; Extensions" and "--Conditions of the
Offer."
Warrantholders who desire to exercise their Class B Warrants should (a)
complete and submit the accompanying Letter of Transmittal and their Class B
Warrant Certificate, together with (i) a certified or official bank check in the
amount of the aggregate Warrant Exercise Price made payable to Industrial
Holdings, Inc.; or (ii) a wire transfer to ChaseMellon Shareholder Services (the
"Exchange Agent") in the amount of the aggregate Warrant Exercise Price for the
benefit of the Company, and any other required documents to the Exchange Agent,
or (b) request a broker or bank to effect the transaction for him or her.
Holders of Class B Warrants registered in the name of a broker, dealer, bank,
trust or nominee should instruct such institutions to exercise their Class B
Warrants. The Company does not intend to pay broker-dealers solicitation fees
for the exercise of its Class B Warrants. SEE "The Offer--Procedure for
Tendering Class B Warrants."
If a holder of Class B Warrants does not want to tender his Class B
Warrants pursuant to the terms of this Offer, he may exercise such Class B
Warrants under the present terms of the Class B Warrants. Each Class B Warrant
entitles the registered holder to purchase one share of Common Stock at an
exercise price of $10.00 per share through and including January 14, 1999, after
which date unexercised Class B Warrants will expire.
2
<PAGE>
The Common Stock, Class B Warrants and Class C Warrants are currently
traded on the Nasdaq National Market under the symbols "IHII," "IHIIZ," and
"IHIIL," respectively. On December 10, 1997, the closing sale prices of the
Common Stock, Class B and Class C Warrants were $13.94, $7.00 and $2.19,
respectively. The Company has applied for listing of the Class D Warrants on the
Nasdaq National Market.
Questions and requests for assistance or for additional copies of this
Offering Circular-Prospectus may be made by calling Christine A. Smith, Vice
President of the Company, at (713) 747-1025, or by writing to Industrial
Holdings, Inc., 7135 Ardmore, Houston, Texas 77054.
3
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934 as amended (the "Exchange Act"), and in
accordance therewith, files reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). Such reports and
other information may be inspected or copies obtained by mail upon payment of
the Commission's prescribed rates at the public reference facilities maintained
by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the following Regional Offices of the Commission:
CitiCorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661,
and Seven World Trade Center, New York, New York 10048. Copies of such material
may also be obtained at the prescribed rates from the Public Reference Section
of the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549. In addition, the Company is required to file electronic versions of these
documents with the Commission through the Commission's Electronic Data
Gathering, Analysis and Retrieval (EDGAR) system. The Commission maintains a
World Wide Web site at http://www.sec.gov that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission. The Common Stock, the Class B Warrants and
the Class C Warrants are listed on the Nasdaq National Market, and reports,
proxy statements and other information filed by the Company can be inspected at
the offices of the National Association of Securities Dealers, Inc., 1735 K
Street, Washington, D.C.
The Company has filed with the Commission a Registration Statement on
Form S-2 (together with all amendments, supplements and exhibits thereto, the
"Registration Statement") under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to the shares of Common Stock, Class C Warrants
and Class D Warrants to be offered hereby, as well as a Schedule 13E-4 Issuer
Tender Offer Statement (the "Schedule 13E-4") under the Exchange Act. This
Offering Circular-Prospectus does not contain all information set forth in the
Registration Statement, certain parts of which are omitted in accordance with
the rules and regulations of the Commission, or the Schedule 13E-4 and the
exhibits thereto, to which reference is made. The Registration Statement, the
Schedule 13E-4 and any amendments thereto, including exhibits filed as a part
thereof, are available for inspection and copying as set forth above. Statements
contained in this Offering Circular-Prospectus as to the contents of any
contract or other document referred to herein are not necessarily complete, and
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement, such statement being qualified in all
respects by such reference.
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The following documents filed by the Company with the Commissioner
pursuant to the Exchange Act are incorporated by reference into this Offering
Circular-Prospectus:
(1) the Company's Annual Report on Form 10-K for the year ended
December 31, 1996;
(2) the Company's Annual Report on Form 10-K/A for the year ended
December 31, 1996;
(3) the Company's Quarterly Reports on Form 10-Q for the Quarter ended
March 31, 1997, June 30, 1997 and September 30, 1997;
4
<PAGE>
(4) the Company's Current Report on Form 8-K/A dated January 27, 1997
amending its Current Report on Form 8-K dated November 27, 1996;
(5) the Company's Current Report on Form 8-K/A dated April 18, 1997
amending its Current Report on Form 8-K dated February 18, 1997;
(6) the Company's Current Report on Form 8-K dated May 14, 1997;
(7) the Company's Current Report on Form 8-K/A dated June 12, 1997
amending its Current Report on Form 8-K dated April 14, 1997;
(8) the Company's Current Report on Form 8-K dated September 5, 1997;
and
(9) the Company's Current Report on Form 8-K dated December 2, 1997.
Any statement contained herein or in a document incorporated or deemed
to be incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Offering Circular-Prospectus to the extent that
a statement contained herein or in any other subsequently filed document which
is also incorporated by reference herein modifies or supercedes such statement.
Any such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Offering Circular-
Prospectus.
The Company shall provide without charge, to each person to whom a copy
of this Offering Circular-Prospectus is delivered, upon oral or written request,
a copy (without exhibits, unless such exhibits are specifically incorporated by
reference into the information that this Offering Circular-Prospectus
incorporates) of any and all information that has been incorporated by reference
in this Offering Circular-Prospectus. Requests should be directed to Christine
A. Smith, Vice President and Chief Financial Officer, 7135 Ardmore, Houston,
Texas 77054, telephone number (713) 747-1025.
This Offering Circular-Prospectus is accompanied by a copy of the
Company's 1996 Annual Report on Form 10-K, the Annual Report on Form 10/K-A for
the year ended December 31, 1996 and the Quarterly Report on Form 10-Q for the
Quarter ended September 30, 1997.
5
<PAGE>
SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS AND NOTES THERETO CONTAINED ELSEWHERE AND
INCORPORATED BY REFERENCE IN THIS OFFERING CIRCULAR-PROSPECTUS.
THE COMPANY
Industrial Holdings, Inc. (including its subsidiaries, the "Company")
was incorporated in Texas in August 1989. The Company's principal executive
offices are located at 7135 Ardmore, Houston, Texas 77054, and its telephone
number is (713) 747-1025.
The Company's business is organized into two divisions: the Fastener
Manufacturing and Sales Division, comprised of Landreth Engineering Company
("Landreth"), Connecticut Rivet ("CRivet"), American Rivet Company, Inc.
("American") (collectively, "LEC"), LSS-Lone Star-Houston, Inc. ("Lone Star")
and Bolt Manufacturing Co., Inc. ("WALKER") and the Energy Products and Services
Division, comprised of (i) the Valve and Supplies Sales Group which includes
Pipeline Valve Specialty ("PVS"), Manifold Valve Services, Inc. ("MVS") and
Industrial Municipal Supply Company ("IMSCO"); (ii) the New Machine Sales and
Services Group which includes Regal Machine Tools ("Regal") and Rex Machinery
Movers ("RMM"); (iii) the Export Crating Group which includes U.S. Crating
("USC"); and (iv) the Used Machine Sales Group which includes Rex/Paul's Machine
Sales ("RPMS"). Regal, RMM, USC and RPMS comprise the Rex Group, Inc. ("REX").
The Fastener Manufacturing and Sales Division manufactures industrial
metal fasteners, including special cold-formed fasteners and threaded fastener
products, for sale primarily to manufacturers in the home furniture, home
appliance and automotive industries and to the petrochemical and energy
industries. In the Energy Products and Services Division, the Valve and Supplies
Sales Group remanufactures pipeline valves and high pressure valves that are
used primarily in oil and gas drilling applications 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.
The Company's strategy is to identify and pursue acquisitions within
the lines of business in which the Company currently operates. The Company
believes that it is a leading manufacturer of semi-tubular rivets and
cold-headed specials with pro forma revenues for that segment (excluding Lone
Star and WALKER) for the twelve months ended December 31, 1996 of approximately
$30,222,000. The Company's growth strategy includes an emphasis on the continued
acquisition of fastener manufacturing companies and valve remanufacturing
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.
YEAR
NAME LOCATION ACQUIRED DESCRIPTION
---- -------- -------- -----------
IMSCO Baytown, Texas 1989 pipe, valves and fittings
distributor
PVS Houston, Texas 1992 valve remanufacturing
6
<PAGE>
Landreth Houston, Texas 1992 rivet manufacturing
REX Houston, Texas 1993 machine tool distributor
CRivet Waterbury, Connecticut 1995 rivet manufacturing
American Chicago, Illinois 1996 rivet manufacturing
Lone Star Houston, Texas 1997 stud bolt manufacturing
MVS Jennings, Louisiana 1997 valve remanufacturing
WALKER Houston, Texas 1997 stud bolt manufacturing
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.
7
<PAGE>
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 Common Stock, a $1.4 million increase in the
Company's demand note and line of credit facility payable to Comerica Bank -
Texas ("Demand Note") and $1.8 million cash.
In March 1997, the Company acquired all the outstanding capital stock
of MVS for 600,000 shares of 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.
In November 1997, the Company acquired all of the outstanding capital
stock of Bolt Manufacturing Co., Inc. doing business as WALKER BOLT
Manufacturing Co. ("WALKER") for a purchase price of $5 million plus the
repayment at closing of $1 million in shareholder notes payable by Walker. The
purchase price was funded through an increase in the Company's Demand Note
secured by the inventory and receivables of the Company and a term note ("Term
Note") secured by certain equipment of the Company. The Company anticipates that
it will use the estimated $12,400,000 net proceeds from the exercise of the
Class B Warrants to repay a portion of the Company's Demand Note and Term Note.
SEE "Use of Proceeds."
WALKER, located in Houston, Texas, manufactures and distributes
specialty bolts and nuts to the petrochemical and energy industries through the
United States and Canada. Net sales of WALKER were $6,452,216 for its fiscal
year ended December 31, 1996 and $5,419,698 for the nine months ended September
30, 1997. WALKER will operate within the Fastener Manufacturing and Sales
Division. SEE "Pro Forma Condensed Consolidated Financial Statements
(unaudited)."
The Company has entered into a preliminary agreement to purchase
Belleli Energy srl, an Italian company which manufactures high pressure vessels
and heat exchangers for the petrochemical industry worldwide. The agreement is
subject to significant conditions. Given these conditions, there can be no
assurance that the acquisition will be consummated. If and when it is
consummated, the acquisition is expected to be financed through an increase in
the Company's existing credit facilities and seller financing.
THE OFFER
The Offer.............. Each holder of Class B Warrants may exchange one Class B
Warrant and $10.00 cash (the "Warrant Exercise Price")
for one share of the Company's Common Stock, one Class C
Redeemable Common Stock Purchase Warrant ("Class C
Warrant") and one Class D Redeemable Common Stock
Purchase Warrant ("Class D Warrant").
Expiration Date........ 5:00 p.m., New York City time, on January 19, 1998,
unless extended (the "Expiration Date"). SEE "The
Offer-- Expiration Date; Extensions."
8
<PAGE>
Withdrawal Rights...... Acceptance of the Offer may be withdrawn at any time
prior to 5:00 p.m., New York City time, on the
Expiration Date. Thereafter, such exercises are
irrevocable, except that they may be withdrawn after
January __, 1998 unless theretofore accepted for
exercise as provided in this Offering Circular-
Prospectus.
Risk Factors........... Class B Warrantholders (the "Warrantholders") who
elect to exercise their Class B Warrants and receive
Common Stock, Class C and Class D Warrants should
consider certain factors regarding the Company. SEE
"Risk Factors."
Warrant Terms.......... Each Class C and Class D Warrant will entitle the holder
to purchase one share of Common Stock at $15.00 per
share and $22.50 per share, respectively, through and
including January 14, 2000.
Effect of the Offer
on Non-Exercising
Warrantholders...... THE CLASS B WARRANTS ARE EXERCISABLE THROUGH AND
INCLUDING JANUARY 14, 1999, AFTER WHICH DATE THEY WILL
EXPIRE. IN ADDITION, PRIOR TO THEIR EXPIRATION, THE
REDUCED NUMBER OF OUTSTANDING CLASS B WARRANTS AS A
RESULT OF THE ACCEPTANCE OF THE OFFER MAY LIMIT THE
TRADING MARKET FOR THE CLASS B WARRANTS AND MAY
ADVERSELY AFFECT THEIR LIQUIDITY AND MARKET PRICE. THE
CLASS B WARRANTS MAY BE REDEEMED BY THE COMPANY AT $.05
PER WARRANT, ON NOT LESS THAN 30 DAYS' WRITTEN NOTICE,
IF THE CLOSING PRICE OF THE COMMON STOCK FOR A PERIOD OF
20 CONSECUTIVE TRADING DAYS EQUALS OR EXCEEDS $12.00 PER
SHARE. AS OF DECEMBER 18, 1997, THE CLOSING PRICE OF
COMMON STOCK HAD EQUALED OR EXCEED $12.00 PER SHARE FOR
20 CONSECUTIVE TRADING DAYS. THEREFORE, THE CLASS B
WARRANTS MAY BE REDEEMED BY THE COMPANY AT ANY TIME UPON
NOT LESS THAN 30 DAYS WRITTEN NOTICE. THE COMPANY HAS NO
PRESENT PLANS TO REDEEM THOSE CLASS B WARRANTS NOT
EXERCISED IN CONNECTION WITH THIS OFFER, BUT RESERVES
THE RIGHT TO DO SO IN THE FUTURE.
9
<PAGE>
Use of Proceeds....... It is anticipated that the net proceeds of the Offer of
up to $12,400,000 will be used by the Company to repay a
portion of the Demand Note and the Term Note. SEE "Use
of Proceeds."
Acceptance of the
Class B Warrants... The Company will accept all Class B Warrants duly
exercised and not properly withdrawn on the Expiration
Date, subject to certain conditions. SEE "The
Offer--Conditions of the Offer."
Conditions of the
Offer.............. The Offer is subject to a number of customary
conditions, any or all of which may be waived by the
Company. SEE "The Offer--Acceptance of the Class B
Warrants; Delivery of Common Stock, Class C Warrants and
Class D Warrants" and "--Conditions of the Offer."
How to Tender the
Class B Warrants... Any holder of Class B Warrants desiring to accept the
Offer should either (a) complete and submit the
accompanying Letter of Transmittal and his Class B
Warrant certificate and forward same together with (i) a
certified or official bank check in the amount of the
aggregate Warrant Exercise Price made payable to
Industrial Holdings, Inc.; or (ii) a wire transfer to
ChaseMellon Shareholder Services (the "Exchange Agent")
in the amount of the Warrant Exercise Price and any
other required documents to the Exchange Agent; or (b)
request a broker or bank to effect the transaction for
him or her. Holders of Class B Warrants registered in
the name of a broker, dealer, bank or nominee should
instruct such institutions to accept the Offer. SEE "The
Offer--Procedure for Tendering Class B Warrants."
Certain Income Tax
Consequences....... The tax consequences of the Offer are uncertain under
federal income tax law, and Warrantholders are urged to
consult their own tax advisors regarding this matter.
The recognition of income or gain characterized as
capital gain or ordinary income could result from the
acceptance of the Offer by a Warrantholder. SEE "The
Offer--Certain Federal Income Tax Consequences."
Delivery of
Securities......... The Exchange Agent will deliver the certificates for
shares of Common Stock, Class C and Class D Warrants as
soon as practicable after the Expiration Date. SEE "The
Offer--Acceptance of the Class B Warrants; Delivery of
Common Stock, Class C Warrants and Class D Warrants."
10
<PAGE>
Common Stock
Outstanding........ There are presently 50,000,000 authorized shares of
Common Stock, and as of December 10, 1997, there were
6,489,368 shares of Common Stock, 1,254,414 Class B
Warrants and 621,914 Class C Warrants outstanding.
Assuming the acceptance of the Offer by all
Warrantholders, there will be 7,743,782 shares of Common
Stock outstanding.
Market Prices......... As of December 10, 1997, the last reported sales prices
of the Common Stock, Class B and Class C Warrants on the
Nasdaq National Market were $13.94, $7.00, and $2.19,
respectively. The Company has applied for listing of the
Class D Warrants on the Nasdaq National Market. SEE
"Price Range of Common Stock and Warrants."
11
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT FOR PER SHARE DATA)
The selected financial data presented below are derived from and should
be read in conjunction with the Company's Consolidated Financial Statements and
related notes and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" incorporated by reference in this Offering
Circular-Prospectus. The unaudited pro forma income statement data for the nine
months ended September 30, 1997 are presented as if, at the beginning of the
period, the acquisition of WALKER and MVS had taken place. (Lone Star is not
included in the pro forma results of operations due to the insignificance of the
period from January 1, 1997 to the date of acquisition. However, the pro forma
earnings per share calculation has been calculated as if the issuance of the
shares in conjunction with the acquisition had occurred on January 1, 1997.) The
unaudited pro forma income statement data for the year ended December 31, 1996
assumes that the acquisitions of American, Lone Star, MVS, and WALKER had taken
place at the beginning of the period. The unaudited pro forma balance sheet data
at September 30, 1997 are presented as if, at such date, the WALKER Acquisition
had taken place. The unaudited pro forma data should be read in conjunction with
the unaudited pro forma condensed consolidated financial statements incorporated
by reference in this Offering Circular-Prospectus.
<TABLE>
<CAPTION>
(UNAUDITED) (UNAUDITED) (UNAUDITED)
PRO FORMA HISTORICAL PRO FORMA
NINE MONTHS NINE MONTHS ENDED YEAR ENDED HISTORICAL
ENDED SEPT. 30, SEPTEMBER 30, DECEMBER 31, YEARS ENDED DECEMBER 31,
------------ ------------------ ----------- --------------------------------------------
1997 1997 1996 1996 1996 1995 1994 1993 1992
------ ---- ------ ------ ------ ------ ------ ------ -----
INCOME STATEMENT DATA:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Sales........................ $ 66,658 $ 59,642 $38,498 $ 86,234 $ 51,423 $ 38,983 $34,730 $35,113 $20,769
Cost of sales................ 49,737 44,953 30,435 66,312 40,849 31,111 27,485 27,377 15,882
Gross profit................. 16,921 14,689 8,063 19,922 10,574 7,872 7,245 7,736 4,887
Selling, general &
administrative............. 11,712 10,438 6,019 14,542 8,002 6,401 6,569 6,198 4,523
Operating income............ 5,209 4,251 2,044 5,380 2,572 1,471 676 1,538 364
Other income (expense)....... (1,260) (878) (869) (2,348) (1,037) (824) (575) (666) (261)
Income before income taxes... 3,949 3,373 1,175 3,032 1,535 647 101 872 103
Income tax expense (benefit) 1,535 1,363 413 1,023 408 102 69 109 (279)
Net income................... 2,414 2,010 762 2,009 1,127 545 32 763 382
Earnings per share........... .35 .30 .19 .39 .26 .17 .01 .27 .17
Weighted average common and
common equivalent shares
outstanding(1)............... 6,987 6,783 4,102 5,099 4,379 3,150 3,030 2,829 2,102
(UNAUDITED) (UNAUDITED)
PRO FORMA HISTORICAL HISTORICAL
SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
------------ ---------- --------------------------------------------
1997 1997 1996 1995 1994 1993 1992
------ ---- ------ ------ ------ ------ -----
BALANCE SHEET DATA:
Working capital.............. $ 5,022 $ 5,077 $ 3,101 $ 1,459 $ 2,254 $ 1,164 $ 1,551
Total assets................. 66,591 59,815 43,690 27,494 20,848 20,819 13,972
Long-term obligations(2)..... 11,132 6,045 7,326 5,891 3,568 3,229 3,242
Total liabilities............ 36,722 29,946 27,135 19,891 13,965 14,386 9,312
Common stock with put
redemption option.......... 6,000 6,000
Shareholders' equity......... 23,869 23,869 16,554 7,603 6,883 6,433 4,660
- ------------------------------
</TABLE>
(1) Calculated on the basis of the weighted average number of common and
common equivalent shares outstanding pursuant to Securities and
Exchange Commission Staff Accounting Bulletin No. 83.
(2) Excludes deferred income taxes and deferred compensation.
12
<PAGE>
RISK FACTORS
THE SHARES OF COMMON STOCK, CLASS C AND CLASS D WARRANTS OFFERED HEREBY
INVOLVE MATERIAL RISKS. IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS
OFFERING CIRCULAR-PROSPECTUS, PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER
THE FOLLOWING RISK FACTORS BEFORE MAKING A DECISION TO EXERCISE THEIR CLASS B
WARRANTS AND PURCHASE ANY SHARES OF COMMON STOCK, CLASS C WARRANTS AND CLASS D
WARRANTS.
LIMITED CAPITAL; RISKS RELATED TO BUSINESS STRATEGY AND ACQUISITIONS.
The Company's ability to effect its business plan depends on its ability to
raise funds to consummate acquisitions and provide necessary working capital.
The Company's future growth through acquisitions will require substantial
capital expenditures. While the Company evaluates business opportunities on a
regular basis, there can be no assurance that the Company will be successful in
identifying any additional acquisitions or will have sufficient financial
resources with which to make additional acquisitions. In the event that the
Company is unable to obtain cash in order to effect additional acquisitions, the
Company may issue additional shares, and further dilution to shareholders may
result. In addition, many companies compete with the Company for acquisitions.
Many of these competitors have greater financial resources than the Company. As
the Company effects acquisitions and expands its operations, it will be subject
to all of the risks inherent in an expanding business, including integrating
financial reporting, establishing satisfactory budgetary and other financial
controls, funding increased capital needs and overhead expenses, obtaining
management personnel required for expanded operations, and funding cash flow
shortages that may occur if anticipated sales and revenues are not realized or
are delayed, whether by general economic or market conditions.
At September 30, 1997, the Company had working capital of $5,078,171,
long-term debt of $6,045,388, shareholders' equity of $23,869,406 and
availability of $2,302,957 under its credit facilities with Comerica Bank -
Texas. The credit facilities are secured by substantially all the assets of the
Company. The Company anticipates that its operating cash needs for fiscal 1997
can be met with cash generated from operations and borrowings under its credit
facilities with Comerica Bank-Texas. Any future acquisition of companies in
connection with the Company's acquisition strategy will require additional
financing, which likely would include a combination of debt and equity
financing. There can be no assurance that the Company will be able to obtain
such financing on terms acceptable to it, if at all.
COMPETITION. The industries in which the Company and its subsidiaries
operate are highly competitive. Many of these competitors have greater financial
and other resources than the Company. Competitive factors for the Company's
subsidiaries include price sensitivity and customer service. The industries in
which the Company's subsidiaries operate are highly fragmented and dominated by
privately-owned businesses. Management's marketing strategy is to institute
centralized inventory controls, reduce personnel costs and achieve greater
buying power through expansion. Management believes that these strategies will
allow the Company and its subsidiaries to be more competitive. However, there
can be no assurance that the Company will be able to successfully compete
against presently known or future competitors.
FOREIGN SUPPLIERS. Certain of the Company's subsidiaries purchase
products from United States manufacturing companies operating abroad and from
foreign manufacturers. Accordingly, the Company is subject to the risks of doing
business abroad, including fluctuations in currency exchange rates, changes in
import duties or quotas, transportation costs, labor disputes and strikes. The
occurrence of any one or more of the foregoing events could materially adversely
affect the Company's product supply. The Company does
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not currently hedge nor does it presently plan to hedge its currency risks.
Since all transactions are in U.S. dollars, the Company believes the currency
risks associated with these transactions is not material.
DEPENDENCE ON KEY PERSONNEL. The success of the Company is dependent
on, among other things, the services of Robert E. Cone, President and Chief
Executive Officer, James H. Brock, Jr., President - Energy Products and Services
Division and Thomas C. Landreth, President - Fastener Manufacturing and Sales
Division. The Company has entered into employment agreements with Messrs. Cone,
Brock and Landreth. The loss of the services of any of these officers, for any
reason, may have a material adverse effect on the business and prospects of the
Company.
VOTING CONTROL BY CERTAIN SHAREHOLDERS. Directors, officers and
affiliates of the Company own approximately 25% of the Company's outstanding
shares and are therefore able to influence the election of a majority of the
Company's Board of Directors and to influence the conduct of the business and
affairs of the Company. After the Offer is consummated (assuming the exercise of
all of the Class B Warrants), such officers, directors and affiliates will own
approximately 21% of the Company's then outstanding shares, and will continue to
have the ability to influence the conduct of the business and affairs of the
Company.
LACK OF CONTRACTUAL SUPPLY AGREEMENTS. The Company's subsidiaries
purchase products from various sources of supply. The Company does not maintain
firm contractual agreements with any of its suppliers with respect to the
product purchases. Instead, the Company purchases its products from suppliers on
the most favorable terms that can be negotiated. Since product purchases are
negotiated on a continuing basis, the Company's supply stream may not be as
reliable as if it were negotiated pursuant to a long-term contract. The
Company's inability to obtain sufficient product from its suppliers would have a
material adverse effect on its business and operations.
DIVIDENDS NOT LIKELY. The Company has never paid cash dividends on its
Common Stock and does not anticipate paying cash dividends for the foreseeable
future. It is anticipated that any earnings that may be generated from the
Company's operations will be used to finance the Company's growth. SEE "Dividend
Policy."
FUTURE SALES OF COMMON STOCK. Of the Company's currently outstanding
6,489,368 shares, 1,598,922 are "restricted securities" within the meaning of
Rule 144 promulgated under the Securities Act ("Restricted Shares"). All of the
Restricted Shares are currently eligible for public sale in accordance with the
requirements of Rule 144. The remaining 4,890,446 shares are freely tradeable
without restrictions or further registration under the Securities Act, except
for shares held by "affiliates" of the Company, which will be subject to resale
limitations of Rule 144. In addition, the Company has filed registration
statements on Form S-3 under the Securities Act relating to 722,482 shares of
Common Stock issued or issuable upon the exercise of warrants and offered by
certain selling securityholders. Such shares of Common Stock are (or if not
issued, will be when issued) freely tradeable without restriction or further
registration under the Securities Act, except for shares held by "affiliates" of
the Company, which shares will be subject to the resale limitations of Rule 144.
The Company has also filed a registration statement under the Securities Act to
register the shares of Common Stock issuable under its stock option plans.
Shares issued under such plans, other than shares issued to affiliates of the
Company, will be freely tradeable in the public market.
The Company is unable to predict the effect that sales made under Rule
144 or otherwise may have on the then-prevailing market price of the Common
Stock. The issuance of a significant number of additional securities, or even
the possibility thereof, could depress the market price of such securities.
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POSSIBLE INABILITY TO EXERCISE CLASS C AND CLASS D WARRANTS. The Class
C or Class D Warrants to be issued in the Offer may not be exercised unless at
the time of exercise there is a current prospectus under an effective
registration statement covering shares of Common Stock issuable upon exercise of
such warrants and such shares have been registered or qualified or deemed to be
exempt under the securities laws of the state of residence of the holder. The
Company will use its best efforts to have a current registration statement in
effect and to have all such shares so registered or qualified at any time when
the holders thereof may exercise their warrants. While it is the Company's
intention to do so, there is no assurance that it will be able to do so.
POTENTIAL ADVERSE EFFECT OF REDEMPTION OF CLASS C AND CLASS D WARRANTS.
The Class C and Class D Warrants to be issued in the Offer may be redeemed by
the Company at any time prior to their expiration, at a price of $.05 per
warrant upon at least 30 days notice if the closing bid price of the Common
Stock has equaled or exceeded $20.00 and $25.00 per share, respectively, for a
period of 20 consecutive trading days. Redemption of the warrants could force
the holders to exercise the warrants and pay the exercise price at a time when
it may be disadvantageous for the holders to do so, to sell the warrants at the
then-current market price when they might otherwise wish to hold the warrants,
or to accept the redemption price, which is likely to be substantially less than
the market value of the warrants at the time of redemption.
ADVERSE EFFECT OF OFFER ON NON-EXERCISING CLASS B WARRANTHOLDERS. The
effect of the Offer on non-exercising Class B Warrantholders will be
significant. First, the Class B Warrants are exercisable through and including
January 14, 1999, after which date they expire. In addition, prior to their
expiration, to the extent that the Offer is accepted and Class B Warrants are
exercised, the trading market for unexercised Class B Warrants will become more
limited, and their price is likely to be adversely affected. The Class B
warrants may be redeemed by the Company at $.05 per warrant, on not less than 30
days' written notice, if the closing price of the Common Stock for a period of
20 consecutive trading days equals or exceeds $12.00 per share. As of December
18, 1997, the closing price of Common Stock had equaled or exceed, $12.00 per
share for 20 consecutive trading days. Therefore, the Class B warrants may be
redeemed by the Company at any time upon not less than 30 days written notice.
The Company has no present plans to redeem those Class B Warrants not exercised
in connection with this offer, but reserves the right to do so in the future.
ANTI-TAKEOVER EFFECT. The provisions of the Amended and Restated
Articles of Incorporation ("Amended Articles") may be deemed to have an
anti-takeover effect or may delay, defer or prevent a tender offer or takeover
attempt that a shareholder might consider in such shareholder's best interest,
including those attempts that might result in a premium over the market price
for the shares held by a shareholder. Pursuant to the Amended Articles, the
Board of Directors may, by resolution, establish one or more series of preferred
stock, having such number of shares, designation, relative voting rights,
dividend rates, liquidation or other rights, preferences and limitations as may
be fixed by the Board of Directors without any further shareholder approval.
Such rights, preferences, privileges and limitations as may be established could
have the effect of impeding or discouraging the acquisition of control of the
Company.
LIMITATION OF DIRECTOR LIABILITY. Texas law authorizes a Texas
corporation to eliminate or limit the personal liability of a director to the
Company and its shareholders for monetary damages for breach of certain
fiduciary duties as a director. The Company believes that such a provision is
beneficial in attracting and retaining qualified directors, and accordingly, its
Amended Articles include a provision eliminating a director's liability for
monetary damages for any breach of fiduciary duty as a director, except in
certain specified instances. The foregoing provision of the Amended Articles may
reduce the likelihood of derivative litigation against directors and may
discourage or deter shareholders or management from bringing
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a lawsuit against directors for breaches of their fiduciary duties, even though
such an action, if successful, might otherwise have benefitted the Company and
its shareholders.
GOVERNMENTAL REGULATION. The Company's business is affected by
governmental regulations relating to its industry segments in general, as well
as environmental and safety regulations that have specific application to the
Company's business. While the Company is not aware of any proposed or pending
legislation, there can be no assurance that future legislation will not have an
adverse effect on the Company's business or competitive position. The Company
believes that it disposes of environmentally sensitive materials in accordance
with present rules and regulations. In the event the Company is required to
adopt additional environmental measures, the cost may be substantial.
THE OFFER
TERMS OF THE OFFER
The Company hereby offers to the holders of its issued and outstanding
Class B Warrants the opportunity to exchange each Class B Warrant and $10.00
cash for one share of the Company's Common Stock, $.01 par value, one Class C
Warrant and one Class D Warrant beginning on the date hereof and ending at 5:00
p.m., New York City time, on January 19, 1998 (the "Expiration Date") unless
extended, subject to the terms and conditions set forth herein. The Offer
applies to all of the outstanding Class B Warrants, and the Company's obligation
to consummate the Offer is not subject to the exercise of any minimum number of
Class B Warrants.
In accordance with this Offer, the Company will issue Common Stock,
Class C Warrants and Class D Warrants for Class B Warrants effectively
exercised, and not withdrawn, on the Expiration Date or as soon as practicable
after such Expiration Date, subject to certain conditions set forth herein. SEE
"Conditions of the Offer" below.
AN EXCHANGING WARRANTHOLDER WHO TENDERS CLASS B WARRANTS AND PAYS TEN
DOLLARS ($10.00) PER CLASS B WARRANT WILL RECEIVE FOR EACH CLASS B WARRANT
TENDERED ONE SHARE OF COMMON STOCK, ONE CLASS C WARRANT AND ONE CLASS D WARRANT.
EACH CLASS C WARRANT TO BE ISSUED WILL ENTITLE THE HOLDER THEREOF TO
PURCHASE ONE SHARE OF THE COMPANY'S COMMON STOCK AT A PURCHASE PRICE OF $15.00
THROUGH AND INCLUDING JANUARY 14, 2000. THE TERMS OF CURRENTLY OUTSTANDING CLASS
C WARRANTS, WHICH ARE EXERCISABLE THROUGH AND INCLUDING JANUARY 14, 1999, WILL
AFTER THE EXPIRATION DATE, AUTOMATICALLY BE EXTENDED TO JANUARY 14, 2000. EACH
CLASS D WARRANT TO BE ISSUED WILL ENTITLE THE HOLDER TO PURCHASE ONE SHARE OF
THE COMPANY'S COMMON STOCK AT AN EXERCISE PRICE OF $22.50 PER SHARE THROUGH AND
INCLUDING JANUARY 14, 2000. THE COMPANY MAY REDEEM THE CLASS C AND CLASS D
WARRANTS AT $.05 PER WARRANT UPON 30 DAYS PRIOR WRITTEN NOTICE IF THE CLOSING
BID PRICE OF THE COMPANY'S COMMON STOCK EQUALS OR EXCEEDS $20.00 AND $25.00,
RESPECTIVELY, FOR 20 CONSECUTIVE TRADING DAYS. THE EXERCISE PRICES OF THE CLASS
C AND CLASS D WARRANTS WERE ARBITRARILY DETERMINED BY THE COMPANY'S BOARD OF
DIRECTORS AND ARE NOT
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NECESSARILY RELATED TO THE COMPANY'S ASSETS, EARNINGS, BOOK VALUE OR OTHER
GENERALLY ACCEPTED CRITERIA OF VALUE.
If a holder of Class B Warrants does not want to tender his Class B
Warrants pursuant to the terms of this Offer, he may exercise such Class B
Warrants under the present terms of the Class B Warrants. Each Class B Warrant
entitles the registered holder to purchase one share of Common Stock at an
exercise price of $10.00 per share through and including January 14, 1999.
EXPIRATION DATE; EXTENSIONS
Subject to the terms and conditions as set forth herein, the Company
will accept all Class B Warrants tendered under the terms of this Offer which
are not withdrawn prior to 5:00 p.m., New York City time, on the Expiration
Date. The Company at its sole option may extend this Offer for an additional
period of time by giving written notification of such extension to the Exchange
Agent. In addition, the Company may at its election cause notice of any
extension of the Offer to be published in the "New York Times," the "Wall Street
Journal" or any other newspaper selected by the Company.
The Company has no present intention to extend this Offer beyond the
Expiration Date. If, however, the Company does extend this Offer beyond such
date, the Company intends that such extension will not exceed an additional 10
business days. Any extension or expiration of the Offer will be followed as soon
as practicable, but in no event later than 9:00 a.m., New York City time, on the
next business day after the previously scheduled Expiration Date, by public
announcement thereof, and any amendment of the Offer will be followed as soon as
practicable by public announcement. Without limiting the manner by which the
Company may choose to make such public announcement, the Company shall not,
unless otherwise required by law, have any obligation to publish, advertise or
otherwise communicate any such public announcement other than by making a
release to the Dow Jones News Service.
If the Company decides to waive, modify or amend a material provision
of the Offer, it may do so at any time, provided that it gives notice thereof in
the manner specified above and extends such Offer to the extent required by the
Exchange Act. With respect to an increase or decrease in the percentage of the
class of securities being tendered for or a change in the consideration offered,
Rule 13e-4(f)(1) of the Exchange Act generally requires that a tender offer
remain open for at least 10 business days from the date the notice of such
change is first published or sent or given to security holders. The minimum
period during which an offer must remain open following other material changes
in the terms of the offer will depend on the facts and circumstances, including
the relative materiality of the change in the terms of information concerning
the Offer. Any amendment to the Offer will apply to all Class B Warrants
exercised pursuant thereto, regardless of when or in what order the Class B
Warrants are exercised.
PROCEDURE FOR TENDERING CLASS B WARRANTS
To accept the Offer and tender the Class B Warrants, the accompanying
Letter of Transmittal ("Letter of Transmittal") must be completed and executed
as indicated thereon and the Letter of Transmittal and the Class B Warrants must
be accompanied by payment of the aggregate Warrant Exercise Price by certified
or official bank check made payable to Industrial Holdings, Inc. or by wire
transfer to the Exchange Agent for the benefit of the Company, together with any
other required documents. The foregoing materials must be delivered to and
received by the Exchange Agent at one of its addresses set forth on the back
cover of this Offering Circular-Prospectus on or before the Expiration Date.
However, in lieu of the foregoing, a
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Warrantholder may either (i) exercise the Class B Warrants pursuant to the
procedure for book-entry exercise set forth below (and a confirmation of such
book-entry exercise must be received by the Exchange Agent on or before the
Expiration Date) or (ii) comply with the guaranteed delivery procedure set forth
below. The beneficial holders of Class B Warrants that are held by or registered
in the name of a broker, dealer, commercial bank, trust Company or other nominee
or custodian are urged to contact such entity promptly if they wish to accept
the Offer. LETTERS OF TRANSMITTAL, PAYMENT OF THE AGGREGATE EXERCISE PRICE AND
CLASS B WARRANTS SHOULD NOT BE SENT TO THE COMPANY.
THE METHOD OF DELIVERY OF LETTERS OF TRANSMITTAL, CLASS B WARRANTS, THE
AGGREGATE WARRANT EXERCISE PRICE AND ALL OTHER REQUIRED DOCUMENTS TO THE
EXCHANGE AGENT IS AT THE ELECTION AND RISK OF THE HOLDER, BUT IF SUCH DELIVERY
IS BY MAIL, IT IS SUGGESTED THAT THE HOLDER USE PROPERLY INSURED, REGISTERED
MAIL WITH RETURN RECEIPT REQUESTED, AND THAT THE MAILING BE MADE SUFFICIENTLY IN
ADVANCE OF THE EXPIRATION DATE TO PERMIT DELIVERY TO THE EXCHANGE AGENT ON OR
PRIOR TO THE EXPIRATION DATE.
Within two business days after the date hereof, the Exchange Agent will
establish accounts with respect to the Class B Warrants at each of The
Depository Trust Company and Philadelphia Depository Trust Company (each a
"Book-Entry Transfer Facility" and collectively referred to as "Book-Entry
Transfer Facilities") for purposes of the Offer. Any financial institution that
is a participant in a Book-Entry Transfer Facility's system may make book-entry
delivery of Class B Warrants by causing the Book-Entry Transfer Facility to
transfer the same into the Exchange Agent's account at such Book-Entry Transfer
Facility in accordance with such Book-Entry Transfer Facility's procedure for
such transfer and to confirm such transfer to the Exchange Agent in writing.
Although delivery of the Class B Warrants may be effected through book-entry
transfer, either (i) a properly completed Letter of Transmittal (or facsimile
thereof) executed by the holder of record, together with the proper signature
guarantees, and the certified or official bank check made payable to Industrial
Holdings, Inc. or a wire transfer for the benefit of the Company, together with
all other documents required, must be transmitted to and received by the
Exchange Agent at one of its addresses set forth on the back cover page of this
Offering Circular-Prospectus on or before the Expiration Date or (ii) the
guaranteed delivery procedure set forth below must be complied with. Delivery of
documents to a Book-Entry Transfer Facility in accordance with such Book-Entry
Transfer Facility's procedure does not constitute delivery to the Exchange
Agent.
Except as otherwise provided below, each signature on the Letter of
Transmittal, Class B Warrant certificate or instrument of transfer must be
guaranteed by a firm or other entity that is a member in good standing of the
Security Transfer Agent's Medallion Program, the New York Stock Exchange
Medallion Program or the Stock Exchange Medallion Program (singularly, an
"Eligible Institution"). Signatures on a Letter of Transmittal need not be
guaranteed (i) if the Letter of Transmittal is signed by the registered holder
of the Class B Warrants tendered and the holder has not completed the box titled
"Special Payment Instructions" or "Special Issuance Instructions" on the Letters
of Transmittal; or (ii) if such Class B Warrants are tendered for the account of
an Eligible Institution.
If the certificates for Class B Warrants are registered in the name of
a person other than the person exercising such Class B Warrants, or if Class B
Warrants that are not accepted for exercise pursuant to the Offer are to be
returned to a person other than the registered owner, then the certificates for
such Class B Warrants must be endorsed or accompanied by an appropriate
instrument of transfer, signed exactly as the name of the registered owner
appears on the certificates, with the signatures on the certificates or
instruments of transfer guaranteed by an Eligible Institution.
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The issuance of Common Stock in exchange for Class B Warrants exercised
pursuant to the Offer will be made only after timely receipt by the Exchange
Agent of the Letters of Transmittal and certificates for such Class B Warrants
(or a confirmation of a book-entry transfer of such Class B Warrants into the
Exchange Agent's account at one of the Book-Entry Transfer Facilities as
described above) and the certified or official bank check or the wire transfer,
together with all other documents required. If less than the number of Class B
Warrants evidenced by a submitted certificate are to be exercised, the
exercising Warrantholder should indicate on the Letter of Transmittal the number
of Class B Warrants being exercised. The number of Class B Warrants represented
by the certificates for Class B Warrants delivered to the Exchange Agent and
accompanied by a Letter of Transmittal and the aggregate Warrant Exercise Price
will be deemed to have been exercised.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of the Class B Warrants or payments of the aggregate
Warrant Exercise Price tendered will be determined by the Company, which
determination shall be final and binding. The Company reserves the absolute
right to reject any or all tenders of any particular Class B Warrants and
payments of the aggregate Warrant Exercise Price not properly tendered or the
acceptance of which would, in the opinion of the Company, be unlawful. The
Company also reserves the right to waive any irregularities or conditions of
tender as to any particular Class B Warrants, and the Company's interpretation
of the terms and conditions of this Offer (including the instructions and Letter
of Transmittal) shall be final and binding. Any irregularities in connection
with the tenders, unless waived, must be cured within such time as the Company
shall determine, which time may be extended beyond the Expiration Date. Neither
the Company nor the Exchange Agent shall be under any duty to give notification
of defects in such tenders or incur any liability for failure to give such
notification. Tenders of the Class B Warrants and payments of the aggregate
Warrant Exercise Price received by the Exchange Agent that are not properly
tendered and as to which the irregularities have not been cured or waived will
be returned (without interest on the cash payment or deduction therefrom) by the
Exchange Agent to the appropriate Warrantholder as soon as practicable.
GUARANTEED DELIVERY PROCEDURE
If a holder of Class B Warrants desires to exercise such Class B
Warrants pursuant to the Offer but is unable either to (i) deliver his
certificates, the certified or official bank check or the wire transfer and all
other required documents to the Exchange Agent on or before the Expiration Date
or (ii) comply with the procedure for book-entry exercise on a timely basis,
such Class B Warrants may nevertheless be exercised pursuant to the Offer,
provided that all of the following conditions are satisfied:
(i) such exercises are made by or through an Eligible
Institution;
(ii) prior to the Expiration Date, a properly completed and
duly executed Notice of Guaranteed Delivery (by telegram,
telex, facsimile transmission, mail or hand delivery) setting
forth the name and address of the Warrantholder and the number
of Class B Warrants exercised, stating that the exercise is
being made thereby and guaranteeing that within three trading
days after the Expiration Date, the Class B Warrants and the
certified or official bank check or the wire transfer,
together with all other documents required, will be deposited
by the Eligible Institution with the Exchange Agent; and
(iii) the certificates for all exercised Class B Warrants in
proper form for transfer (or a written confirmation of
book-entry transfer into the Exchange Agent's account at a
Book-
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Entry Transfer Facility as described above), a properly
completed and duly executed Letter of Transmittal and the
certified or official bank check or the wire transfer,
together with all other documents required, are received by
the Exchange Agent within three trading days after the
Expiration Date.
WITHDRAWAL RIGHTS
Any exercise of Class B Warrants pursuant to the Offer may be withdrawn
subject to the procedures described below, at any time prior to the Expiration
Date. Thereafter, such exercises are irrevocable, except that they may be
withdrawn after January 19, 1998 unless theretofore accepted for exercise as
provided in this Offering Circular-Prospectus. If the Company extends the period
of time during which the Offer is open, is delayed in its acceptance of the
Class B Warrants for exercise or is unable to accept the Class B Warrants for
exercise for any reason, then, without prejudice to the Company's rights under
the Offer, the Exchange Agent may, on behalf of the Company, retain all Class B
Warrants exercised, and such Class B Warrants may not be withdrawn except as
provided herein, subject to Rule 13E-4(f)(5) under the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), which provides that the person making
an issuer exchange offer shall either pay the consideration offered or return
tendered securities, promptly after the termination or withdrawal of the Offer.
For a withdrawal to be effective, a written, telegraphic or facsimile
transmission notice of withdrawal must (i) be timely received by the Exchange
Agent at one of its addresses on the back cover of this Offering
Circular-Prospectus before the Exchange Agent receives notice of acceptance by
the Company of the Class B Warrants, (ii) set forth the name of the tendering
Warrantholder, (iii) if the Class B Warrants have been deposited with or
otherwise identified to the Exchange Agent, contain the description of the Class
B Warrants to be withdrawn and indicate the certificate numbers shown on the
certificates evidencing such Class B Warrants (except in the case of book-entry
exercise), and (iv) be executed by the Warrantholder in the same manner as the
original Class B Warrant certificate tendered or be accompanied by evidence
satisfactory to the Company that the person withdrawing the exercise pursuant to
this Offer has succeeded to the beneficial ownership of the Class B Warrants. In
the case of Class B Warrants tendered by book-entry transfer, a notice of
withdrawal must specify, in lieu of certificate numbers, the name and number of
the account at one of the Book-Entry Transfer Facilities to be credited with the
withdrawn Class B Warrants. All questions as to the validity (including the time
of receipt) of notices of withdrawal will be determined by the Company, whose
determination shall be final and binding. Class B Warrants and payments
withdrawn in the manner specified above will not be considered to have been duly
tendered. However, withdrawn Class B Warrants may be re-exercised at any time
prior to the Expiration Date.
No interest shall be paid on any amount returned to a Warrantholder
pursuant to a proper withdrawal or otherwise, regardless of any delay in the
Offer.
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ACCEPTANCE OF CLASS B WARRANTS; DELIVERY OF COMMON STOCK, CLASS C WARRANTS AND
CLASS D WARRANTS
Upon the terms and subject to the conditions of this Offer, Class B
Warrants tendered for exercise and not properly withdrawn will be accepted for
exercise on the Expiration Date. For purposes of this Offer, the Company will be
deemed to have accepted for exercise properly tendered Class B Warrants when, as
and if the Company has given oral or written notice thereof to the Exchange
Agent. All exercising warrantholders will be deemed to have waived any right to
receive notice of the acceptance of their Class B Warrants.
The Exchange Agent will act as agent for the exercising holders of
Class B Warrants for the purposes of receiving from the Company the Common
Stock, Class C Warrants and Class D Warrants and Class B Warrants not accepted
for exercise and transmitting such securities to the holders. Tendered Class B
Warrants not accepted for exercise by the Company will be returned (or, in the
case of Class B Warrants exercised by book-entry transfer through a Book-Entry
Transfer Facility, will be credited to an account maintained with such
Book-Entry Transfer Facility) without expense to the exercising holders as
promptly as practicable following the Expiration Date.
If the Company extends the period during which the Offer is open, is
delayed in its acceptance for exercise or is unable to accept for exercise any
Class B Warrants pursuant to the Offer for any reason, then, without prejudice
to the Company's rights hereunder, the Exchange Agent, at the request of the
Company, may nevertheless retain Class B Warrants exercised together with any
certified or official bank check or wire transfer and any other required
documents subject to the withdrawal rights of holders thereof as set forth
herein and applicable securities laws.
Delivery of the Common Stock, Class C Warrants and Class D Warrants in
exchange for Class B Warrants and payments validly tendered and accepted by the
Company will be made as soon as practicable after the Expiration Date. All
deliveries will be made through the Exchange Agent.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following summary is a general discussion of certain of the
anticipated federal income tax consequences of the acceptance of the Offer. No
discussion is included regarding any applicable state, local or foreign tax
laws.
This summary is limited to Warrantholders who hold the Class B Warrants
as "capital assets" (generally, property held for investment) within the meaning
of Section 1221 of the Internal Revenue Code of 1986, as amended (the "Code").
The tax consequences to any particular Warrantholder may be affected by matters
not discussed below. In addition, the Company has not sought a ruling from the
Internal Revenue Service or an opinion of counsel with respect to such tax
consequences. Accordingly, each Warrantholder is advised to consult with his or
her own tax advisor regarding the tax consequences of holding or exercising the
Class B Warrants.
ACCEPTANCE OF THE OFFER. It is possible that the acceptance of the
Offer would require the recognition of income by a Warrantholder, as the Class C
and Class D Warrants received by any Warrantholder accepting the Offer
constitute new and independent value (in the form of an inducement to exercise
the Class B Warrants), which is in addition to the original rights granted under
the Class B Warrants. Thus, those Warrantholders who accept the Offer may
recognize income to the extent of the extra value received,
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measured by the fair market value of the Class C and D Warrants. The character
of the income will be either capital gain realized from the exchange of a Class
B Warrant for Common Stock and the Class C and Class D Warrant or ordinary
income in the form of a taxable receipt of intangible property. Each
Warrantholder who exercises his Class B Warrants pursuant to this Offer will
have an adjusted basis in the Common Stock received equal to the aggregate
Warrant Exercise Price paid, plus the basis of the Class B Warrant and Class C
and Class D Warrants received equal to the amount of income reported on receipt
thereof.
EXERCISE OF THE CLASS C AND CLASS D WARRANTS. If a Warrantholder who
accepts the Offer reports income upon the receipt of the Class C and Class D
Warrants based upon their fair market value, he will not report income to that
extent when he subsequently exercises the Warrants. The character of the income
will depend upon whether the Class C and Class D Warrants are properly
considered to have been received in a capital transaction (which would result in
capital gain) or are characterized as intangible property (which would result in
ordinary income), as discussed above. The adjusted tax basis of the Common Stock
received in exchange for the Class C and Class D Warrants would be equal to the
amount reported as income (whether upon acceptance of the Offer or later) plus
the amount paid upon exercise of the Class C and Class D Warrants. The holding
period for the Class C and D Warrants will begin on the date this Offer is
consummated.
TAX CONSEQUENCES TO THE COMPANY. No gain or loss will be recognized to
the Company as a result of the Offer or the acceptance of the Offer by the
Warrantholders.
Pursuant to Section 382 of the Code, utilization of net operating loss
("NOL") carryforwards is limited if there has been a change in control of the
Company during a specified time period. The Company's issuance of Common Stock
in its initial public offering in January 1992 has previously resulted in
limitations under Section 382 with respect to the Company's ability to use NOL
carryforwards. In addition, the Company issued Common Stock in private offerings
in 1996 and 1997. However, the Company has determined that the exercise of the
Class B Warrants under this Offer, when added to the 1996 and 1997 Common Stock
issuances, will not create an additional change in control under Section 382 and
an additional limitation on the Company's NOL carryforwards.
EFFECT ON NON-EXERCISING CLASS B WARRANTHOLDERS
THE EFFECT OF THE OFFER ON NON-EXERCISING CLASS B WARRANTHOLDERS WILL
BE SIGNIFICANT. FIRST, THE CLASS B WARRANTS WILL EXPIRE AFTER JANUARY 14, 1999.
IN ADDITION, PRIOR TO THEIR EXPIRATION, TO THE EXTENT THAT THE OFFER IS ACCEPTED
AND CLASS B WARRANTS ARE EXERCISED, THE TRADING MARKET FOR UNEXERCISED CLASS B
WARRANTS WILL BECOME MORE LIMITED, AND THEIR PRICE IS LIKELY TO BE ADVERSELY
AFFECTED. THE CLASS B WARRANTS MAY BE REDEEMED BY THE COMPANY AT $.05 PER
WARRANT, ON NOT LESS THAN 30 DAYS' WRITTEN NOTICE, IF THE CLOSING PRICE OF THE
COMMON STOCK FOR A PERIOD OF 20 CONSECUTIVE TRADING DAYS EQUALS OR EXCEEDS
$12.00 PER SHARE. AS OF DECEMBER 18, 1997, THE CLOSING PRICE OF COMMON STOCK HAD
EQUALED OR EXCEEDED $12.00 PER SHARE FOR 20 CONSECUTIVE TRADING DAYS. THEREFORE,
THE CLASS B WARRANTS MAY BE REDEEMED BY THE COMPANY AT ANY TIME UPON NOT LESS
THAN 30 DAYS WRITTEN NOTICE. THE COMPANY HAS NO PRESENT PLANS TO REDEEM THOSE
CLASS B WARRANTS NOT EXERCISED IN CONNECTION WITH THIS OFFER, BUT RESERVES THE
RIGHT TO DO SO IN THE FUTURE.
22
<PAGE>
CONDITIONS OF THE OFFER
Notwithstanding any other provision of the Offer, the Company may
cancel, modify or terminate the Offer and is not required to accept for exercise
any Class B Warrants pursuant to the Offer if prior to the Expiration Date:
(i) there shall be pending, instituted or threatened any legal
action or administrative proceeding before any court or governmental
agency, by any governmental agency or any other person, prohibiting,
restricting or delaying the Offer;
(ii) any statute, rule or regulation shall have been enacted,
or any action shall have been taken by any governmental authority,
which would prohibit or materially restrict or delay consummation of
the Offer; or
(iii) there shall have occurred (and the adverse effect of
such occurrence will be continuing): (a) any general suspension of, or
limitation on prices for trading on, the Nasdaq National Market or in
the other over-the-counter markets; (b) a declaration of a banking
moratorium by United States or New York authorities; or (c) a
commencement of a war, armed hostilities or other international or
national calamity directly or indirectly involving the United States of
America which would reasonably be expected to affect materially and
adversely (or to delay materially) the consummation of the Offer.
If the Company terminates the Offer pursuant to any of the conditions
set forth above, the Exchange Agent will promptly return the applicable Class B
Warrants and funds for the aggregate Warrant Exercise Price to the holders
thereof.
The Company reserves the absolute right to waive satisfaction of any
conditions and compliance with any terms of the Offer. The Company further
reserves the absolute right to reject any and all exercises not in proper form.
On the Expiration Date, the Company will accept any and all Class B Warrants
which are properly exercised, subject to the conditions stated herein.
LISTING OF THE CLASS D WARRANTS
The Company has applied for listing of the Class D Warrants on the
Nasdaq National Market. However, even if initially listed, there can be no
assurance that the Class D Warrants will meet the requirements for continued
inclusion and continue to be listed on the Nasdaq National Market. Failure to
continue to be listed may adversely affect the market value and liquidity of the
Class D Warrants.
POSITION OF THE BOARD OF DIRECTORS
The Board of Directors of the Company believes the Company will benefit
from the receipt of net cash proceeds of up to $12,400,000 received pursuant to
this Offer and the possible receipt of additional financing in the future from
the exercise of the Class C Warrants and subsequently from the Class D Warrants
of up to $56,369,235 in the aggregate. However, the Board of Directors is not
making any recommendations to the holders of the Class B Warrants as to whether
they should exchange or refrain from exchanging any or all of their Class B
Warrants. Each Warrantholder must make his or her own decision as to whether to
exchange all or any portion of the Class B Warrants owned.
23
<PAGE>
PAYMENT OF FEES AND EXPENSES
The Company has agreed to pay the Exchange Agent a fee of $7,500 to act
in such capacity reasonable and customary fees for its services and will
reimburse it for its reasonable out-of-pocket expenses in connection therewith.
The Company will also pay brokerage houses and other custodians, nominees and
fiduciaries the reasonable out-of-pocket expenses incurred by them in forwarding
copies of this Offering Circular-Prospectus and related documents to the
beneficial owners of the Class B Warrants, and in handling or forwarding tenders
for their customers. However, the Company will not make any other payments to
brokers, dealers or others soliciting tenders of Class B Warrants. Employees of
the Company may solicit tenders of Class B Warrants, for which they will receive
no additional compensation.
MUTILATED, LOST, STOLEN OR DESTROYED CERTIFICATES
Any Warrantholder whose Class B Warrant certificates have been
mutilated, lost, stolen or destroyed should contact the Company at its address
set forth below for further information.
REQUESTS FOR ASSISTANCE
Requests for additional copies of this Offering Circular-Prospectus or
the Letter of Transmittal or assistance in completing an exchange should be made
by calling Christine A Smith, Vice-President of the Company, at (713) 747-1025,
or by mail to the Company as follows:
Industrial Holdings, Inc.
7135 Ardmore
Houston, Texas 77054
24
<PAGE>
USE OF PROCEEDS
The Company estimates that the net proceeds from the exercise of the
Class B Warrants assuming the exercise of all outstanding Class B Warrants
(after deducting the estimated expenses of the Offer payable by the Company)
will be $12,400,000. The Company anticipates that it will use the estimated
$12,400,000 net proceeds from the exercise of the Class B Warrants to repay its
Demand Note and Term Note.
PRICE RANGE OF COMMON STOCK AND WARRANTS
The Common Stock, Class B Warrants and Class C Warrants are traded on
the Nasdaq National Market under the symbols "IHII," "IHIZ" and "IHIIL,"
respectively. The following table sets forth the high and low closing sales
prices of the Common Stock, Class B Warrants and Class C Warrants for the
periods indicated below:
COMMON STOCK CLASS B WARRANT CLASS C WARRANT
PRICE RANGE PRICE RANGE PRICE RANGE
--------------- -------------- --------------
HIGH LOW HIGH LOW HIGH LOW
---- --- ---- --- ---- ---
1995
First Quarter $ 4.00 $ 3.25 $0.22 $0.13
Second Quarter 3.63 2.88 0.34 0.19
Third Quarter 4.75 3.00 0.38 0.19
Fourth Quarter 4.38 3.31 0.38 0.28
1996
First Quarter $ 6.75 $ 3.75 $0.53 $0.31
Second Quarter 10.50 6.50 2.13 0.53
Third Quarter 10.13 7.00 3.25 1.50
Fourth Quarter 11.25 9.25 3.25 2.38 $1.50 $ .75
1997
First Quarter $14.00 $10.63 $4.50 $3.25 $1.88 $1.13
Second Quarter 11.25 9.88 3.94 2.88 1.63 1.06
Third Quarter 15.88 10.88 9.00 3.63 3.50 1.50
All of the foregoing prices reflect interdealer quotations, without
retail mark-up, mark-downs or commissions and may not necessarily represent
actual transactions in the Common Stock, Class B Warrants or Class C Warrants.
On November 25, 1997, the last reported sales prices of the Common
Stock, Class B Warrants and Class C Warrants as quoted by the Nasdaq National
Market, were $13.94, $7.00, and $2.19 per share or warrant, respectively. On
December 10, 1997 there were approximately 472, 97 and 48 record holders of the
Common Stock, Class B Warrants and Class C Warrants, respectively.
25
<PAGE>
CAPITALIZATION
The following table sets forth (i) the capitalization of the Company at
September 30, 1997; (ii) such capitalization as adjusted to reflect the
acquisition of WALKER, the exercise of all 1,254,414 outstanding Class B
Warrants, the issuance of 1,254,414 shares of Common Stock and the application
of the estimated $12,400,000 in net proceeds therefrom. This table should be
read in conjunction with the Company's Consolidated Financial Statements and
notes thereto which are incorporated by reference in this Offering
Circular-Prospectus and "Use of Proceeds."
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
(in thousands)
------------------------
PRO FORMA
ACTUAL AS ADJUSTED(2)
------ --------------
<S> <C> <C>
Short-term debt............................................. $11,727 $ 2,028
======= ========
Long-term debt.............................................. $ 6,045 $ 9,533
Common stock with put redemption option $ 6,000 $ 6,000
Shareholders' equity:
Common stock, $.01 par value; 50,000,000 shares
authorized, 5,829,845 shares issued and
outstanding (1) and 7,084,259 shares issued
and outstanding, pro forma as adjusted (2)....... 58 $ 71
Additional paid-in capital......................... 20,656 33,043
Retained earnings.................................. 3,155 3,155
------- ---------
Total shareholders' equity................ $23,869 $36,269
------- -------
Total capitalization........................................ $47,641 $53,830
======= =======
</TABLE>
- ---------------------
(1) As of September 30, 1997, excludes (i) 1,254,414 shares underlying the
outstanding Class C Warrants; (ii) an aggregate of 711,750 shares of
Common Stock issuable upon the exercise of options granted to directors
or employees under the Company's 1994 Amended and Restated Incentive
Plan and 1995 Non-Employee Director Stock Option Plan (the "Plans") and
exercisable at an average exercise price of $6.06 per share of Common
Stock ("Shareholders' Options"), and an additional 100,000 shares that
may be granted in the future under the Plans; (iii) an aggregate of
756,397 shares of Common Stock issuable upon the exercise of warrants
other than the outstanding Class B and Class C Warrants and exercisable
at an average exercise price of $6.41 per share of Common Stock ("Other
Warrants").
(2) Pro Forma as adjusted gives effect to the acquisition of WALKER and
exercise of all 1,254,414 outstanding Class B Warrants.
26
<PAGE>
DIVIDEND POLICY
The Company has never paid dividends on its Common Stock and does not
anticipate paying any cash dividends in the foreseeable future. The Company
presently intends to retain future earnings to support the Company's operations
and growth. Any payment of cash dividends in the future will be dependent on the
amount of funds legally available therefor, the Company's earnings, financial
condition, capital requirements and other factors that the Board of Directors
may deem relevant.
27
<PAGE>
DESCRIPTION OF SECURITIES
Pursuant to the Company's Amended Articles, the authorized capital
stock of the Company consists of 50,000,000 shares of Common Stock, par value
$.01 per share, and 7,500,000 shares of preferred stock, par value $.01 per
share (the "Preferred Stock"). The following description of certain of the
Company's securities is a summary, does not purport to be complete or to give
effect to applicable statutory or common law and is subject in all respects to
the applicable provisions of the Company's Amended Articles.
COMMON STOCK
At December 10, 1997, 6,489,368 shares of Common Stock were issued and
outstanding. Holders of Common Stock are entitled, among other things, to one
vote per share on each matter submitted to a vote of shareholders and, in the
event of liquidation, to share ratably in the distribution of assets remaining
after payment of liabilities. Holders of Common Stock have no cumulative voting
rights, and, accordingly, the holders of a majority of the outstanding shares
have the ability to elect all of the directors. Holders of Common Stock have no
preemptive or other rights to subscribe for shares and are entitled to such
dividends as may be declared by the Board of Directors out of funds legally
available therefor.
PREFERRED STOCK
None of the authorized shares of Preferred Stock have been issued or
are outstanding. The Board of Directors has the authority to cause the Company
to issue up to the authorized number of shares of Preferred Stock in one or more
series, to designate the number of shares constituting any series, and to fix
the rights, preferences, privileges and restrictions thereof, including dividend
rights, voting rights, redemption and conversion rights and liquidation
preferences of such series, without further action by the shareholders. Because
the Board is authorized to issue Preferred Stock with such preferences and
rights as it determines, it may afford the holders of any series of Preferred
Stock preferences, rights or voting powers superior to those of holders of
Common Stock. The Company has no present plan to issue any shares of Preferred
Stock.
WARRANTS
At December 10, 1997 there were 1,254,414 Class B Warrants and 621,914
Class C Warrants outstanding.
Each currently outstanding Class B Warrant and Class C Warrant entitles
the registered holder thereof to purchase from the Company one share of Common
Stock at an exercise price of $10.00 and $15.00 per share, respectively. The
Class B and Class C Warrants may be exercised through and including January 14,
1999. The Class B and Class C Warrants may be redeemed by the Company at $.05
per warrant, on not less than 30 days' written notice, if the closing price of
the Common Stock for a period of 20 consecutive trading days equals or exceeds
$12.00 and $20.00 per share, respectively. As of November 25, 1997, the closing
price of Common Stock had equaled or exceeded $12.00 per share for 20
consecutive trading days. Therefore, the Class B Warrants may be redeemed by the
Company at any time upon not less than 30 days written notice.
The Class C Warrants and Class D Warrants to be issued in connection
with the Offer (together with the currently outstanding Class B and Class C
Warrants, (the "Warrants")), will entitle the registered holder
28
<PAGE>
thereof to purchase one share of Common Stock at an exercise price of $15.00 and
$22.50 per share, respectively, and may be exercised through and including
January 14, 2000. The term of currently outstanding Class C Warrants, which are
exercisable through and including January 14, 1999, will, after the Expiration
Date, automatically be extended to January 14, 2000. The Company may redeem each
of the Class C Warrants and the Class D Warrants to be issued in the Offer at
$.05 per Warrant if the closing bid price of the Common Stock shall have equaled
or exceeded at least $20.00 and $25.00 per share, respectively, for a period of
20 consecutive trading days. Notice of any redemption must be mailed to all
holders of Warrants at least 30 days but no more than 60 days before the date on
which the Warrants have been called for redemption.
The holders of Warrants do not have any voting or any other rights of
shareholders of the Company and are not entitled to receive dividends. In the
event of an adjustment in the number of shares issuable on exercise of the
Warrants, the Company will not issue fractional shares, but will, instead, pay
to the holder of the Warrants at the time of such exercise an amount in cash
equal to the same fraction of the current market value of a share of Common
Stock.
The exercise price and the number and kind of shares or other
securities purchasable on exercise of any Warrants and the number of Warrants
are subject to adjustment on the occurrence of certain events, including stock
dividends, reclassifications, reorganizations, consolidations and mergers. No
adjustment in the exercise price is required until cumulative adjustments amount
to one percent or more of the exercise price. If the Company effects any capital
reorganization, certain reclassifications of the Common Stock, any consolidation
or merger (other than a consolidation or merger which does not result in any
reclassification or change in the outstanding shares), or sells all or
substantially all its properties and assets, the Warrants become exercisable
only for the number of shares of stock or other securities, assets, or cash to
which a holder of the number of shares of the Company purchasable (at the time
of such reorganization, reclassification, consolidation, merger or sale) on
exercise of such Warrants would have been entitled on such reorganization,
reclassification, consolidation, merger, or sale.
The Warrants are not exercisable by a holder if (i) the shares issuable
on exercise of such Warrants have not been registered under the securities or
blue sky laws of the state of residence of such holder or (ii) a current
prospectus meeting the requirements of the laws of such state cannot be lawfully
delivered by or on behalf of the Company. Pursuant to the terms of the
respective Warrant agreements, the Company has agreed to use reasonable efforts
to register such shares in states in which holders of Warrants are known to
reside and to maintain a current prospectus relating thereto.
SPECIAL PROVISIONS OF THE ARTICLES OF INCORPORATION AND TEXAS LAW
ANTI-TAKEOVER EFFECT. The provisions of the Amended Articles summarized
in the succeeding paragraphs, may be deemed to have an anti-takeover effect or
may delay, defer or prevent a tender offer or takeover attempt that a
shareholder might consider in such shareholder's best interest, including those
attempts that might result in a premium over the market price for the shares
held by a shareholder.
Pursuant to the Amended Articles, the Board of Directors may, by
resolution, establish one or more series of preferred stock, having such number
of shares, designation, relative voting rights, dividend rates, liquidation or
other rights, preferences and limitations as may be fixed by the Board of
Directors without any further shareholder approval. Such rights, preferences,
privileges and limitations as may be established could have the effect of
impeding or discouraging the acquisition of control of the Company.
29
<PAGE>
LIMITATION OF DIRECTOR LIABILITY. Texas law authorizes a Texas
corporation to eliminate or limit the personal liability of a director to the
Company and its shareholders for monetary damages for breach of certain
fiduciary duties as a director. The Company believes that such a provision is
beneficial in attracting and retaining qualified directors, and accordingly, its
Amended Articles include a provision eliminating a director's liability for
monetary damages for any breach of fiduciary duty as a director, except: (i) for
any breach of the duty of loyalty to the Company or its shareholders; (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law; (iii) for any transaction from which the director
derived an improper personal benefit; or (iv) for certain other actions. Thus,
pursuant to Texas law, the Company's directors are not insulated from liability
for breach of their duty of loyalty (requiring that, in making a business
decision, directors act in good faith and in the honest belief that the action
was taken in the best interest of the Company), or for claims arising under the
federal securities laws. The foregoing provision of the Company's Amended
Articles may reduce the likelihood of derivative litigation against directors
and may discourage or deter shareholders or management from bringing a lawsuit
against directors for breaches of their fiduciary duties, even though such an
action, if successful, might otherwise have benefitted the Company and its
shareholders.
INDEMNIFICATION OF OFFICERS AND DIRECTORS. To the maximum extent
permitted by law, the Amended Articles and the Bylaws provide for mandatory
indemnification of directors, officers, employees and agents of the Company
against all expense, liability and loss to which they may become subject or
which they may incur as a result of being or having been a director, officer,
employee or agent of the Company. In addition, the Company must advance or
reimburse directors and officers and may advance or reimburse employees and
agents for expenses incurred by them in connection with indemnifiable claims.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock and Warrants and
the Warrant Agent for the Warrants is ChaseMellon Shareholder Services, Stock
Transfer Department, 85 Challenger Road, Overpeck Centre, Ridgefield Park, New
Jersey 07660.
LEGAL MATTERS
Certain legal matters with respect to the issuance of the securities
offered hereby will be passed upon for the Company by Porter & Hedges, L.L.P.,
Houston, Texas.
30
<PAGE>
- --------------------------------------------------------------------------------
THE EXCHANGE AGENT:
ChaseMellon Shareholder Services
Stock Transfer Department
85 Challenger Road
Overpeck Centre
Ridgefield Park, NJ 07660
TABLE OF CONTENTS
PAGE PAGE
---- ----
Available Information.... 4 Price Range of Common
Incorporation of Stock and Warrants....... 25
Certain Information Capitalization............. 26
By Reference........... 4 Dividend Policy............ 27
Summary.................. 6 Description of
Summary Consolidated Securities............... 28
Financial Data......... 12 Legal Matters.............. 30
Risk Factors............. 13
The Offer................ 16
Use of Proceeds.......... 25
NO DEALER, SALESPERSON, REPRESENTATIVE OR OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
OFFERING CIRCULAR-PROSPECTUS AND THE LETTER OF TRANSMITTAL AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY. THIS OFFERING CIRCULAR-PROSPECTUS DOES NOT CONSTITUTE
AN OFFER TO SELL OR SOLICITATION OF ANY OFFER TO BUY ANY OF THE SECURITIES
OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE
SUCH OFFER IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS OFFERING
CIRCULAR-PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF
THE COMPANY SINCE SUCH DATE.
<PAGE>
ITEM 9(A)(3)
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
1
<PAGE>
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.
2
<PAGE>
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.
3
<PAGE>
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.
4
<PAGE>
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.
5
<PAGE>
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.
6
<PAGE>
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.
7
<PAGE>
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.
8
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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.
9
<PAGE>
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
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<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
<PAGE>
ITEM 9(A)(4) AND ITEM 9(A)(5)
INDUSTRIAL HOLDINGS, INC.
INDEX
Annual Report on Form 10-K/A1 for the fiscal year ended December 31, 1996
Quarterly Report on Form 10-Q for the quarterly period ended September 30, 1997
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
[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 $47,640,528 at March 27, 1997. At that date, there were
5,248,689 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>
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Certain information concerning the directors and executive officers of
the Company is set forth below:
PRINCIPAL POSITION DIRECTOR
NAME WITH THE COMPANY AGE SINCE
---- ---------------- --- -----
CLASS I DIRECTORS WHOSE TERM WILL EXPIRE IN 1998
Charles J. Anderson Director 74 1991
James W. Kenney Director 55 1992
CLASS II DIRECTORS WHOSE TERM WILL EXPIRE IN 1999
John P. Madden Director 55 1992
John L. Thompson Director 37 1997
CLASS III DIRECTORS WHOSE TERM (IF RE-ELECTED) WILL EXPIRE IN 2000
Robert E. Cone Chairman of the Board; 45 1989
President and Chief Executive
Officer; Director
James H. Brock, Jr. Executive Vice President; 58 1991
Director
Barbara S. Shuler Secretary; Director 51 1991
ROBERT E. CONE has served as President, Chief Executive Officer and
Director of the Company since August 1989. From August 1987 to August 1989, Mr.
Cone served as Vice President of Broadcast Ventures, Inc ("BVI"), a partnership
formed to acquire radio stations through syndication. Mr. Cone's
responsibilities at BVI included the formation of business plans, corporate
development, financing and analysis of acquisition candidates.
JAMES H. BROCK, JR. has served as Executive Vice President and Director
of the Company since September 1991. Mr Brock previously served as Chief
Operating Officer and Chief Financial Officer. From 1988 to 1990, Mr. Brock
served as Executive Vice President and Chief Financial Officer of DRCA Medical
Corporation, a health care company specializing in the rehabilitation of injured
workers. Prior to 1988, Mr. Brock served as Vice President-Finance of National
Healthcare Alliance, a full-service managed health care service company and
Chairman of the Board of Directors of Quality Fasteners, Inc., a distributor of
construction supplies, and of Olde Time Ice, Inc., a manufacturer and
distributor of packaged ice. Mr. Brock is a Certified Public Accountant.
BARBARA S. SHULER has served as Secretary of the Company since February
1992 and as a Director of the Company since September 1991. Since 1974, Ms.
Shuler has been self-employed in auction management, marketing, advertising and
promotional aspects of the equine industry, serving as President of Shuler, Inc.
1
<PAGE>
CHARLES J. ANDERSON has served as a Director of the Company since
September 1991. For the last seven years, Mr. Anderson has been engaged in
private business investments. Prior to 1985, Mr. Anderson served as Senior Sales
Vice President and Director of Sales and was a partner of the Delaware
Management Company, the manager of the Delaware Group of Mutual Funds and
certain other private pension funds.
JAMES W. KENNEY has served as a Director of the Company since October
1992. Since October 1993, Mr. Kenney has served as Executive Vice President of
San Jacinto Securities, Inc. From February 1992 to September 1993, he served as
the Vice President of Renaissance Capital Group, Inc. Prior to that time, Mr.
Kenney served as Senior Vice President for Capital Institutional Services, Inc.
and in various executive positions with major southwest regional brokerage
firms, including Rauscher Pierce Refsnes Inc. and Weber, Hall, Sale and
Associates, Inc. Mr. Kenney is a director of AmeriShop Corporation, a company
that provides services to the retail industry; Consolidated Health Care
Associates, Inc., a company that operates physical rehabilitation centers;
Scientific Measurement Systems, Inc., a developer of industrial digital
radiography and computerized tomography; Technol Medical Products, Inc., which
designs, manufactures and markets more than 300 disposable medical products;
and Tricom Corporation, a company that develops products and services for the
telecommunication industry.
JOHN P. MADDEN has served as a Director of the Company since October
1992. From January 1992 to April 1993, Mr. Madden served as Chairman of the
Board of The Rex Group, Inc. ("REX") and as its President and Chief Executive
Officer from June 1963 to January 1992 and from December 1992 to April 1993.
REX, a private company based in Houston, Texas, which was acquired by the
Company in March 1993, is a distributor of new and used machine tool equipment,
conducts a machine moving operation and is engaged in the international export
crating business.
JOHN L. THOMPSON has served as a Director of the Company since February
1997 when he was appointed to fill the unexpired term of a retiring director.
Mr. Thompson is a director and President of St. James Capital Corp., a
Houston-based merchant banking firm. St. James Capital Corp. also serves as the
General Partner of St. James Capital Partners L.P., an investment limited
partnership specializing in merchant banking related investments. Additionally,
he is Chairman of the Board of Herlin Industries, Inc., a publicly- held holding
company engaged in energy services. Prior to co-founding St. James, Mr. Thompson
served as a Managing Director of Corporate Finance at Harris Webb & Garrison, a
regional investment banking firm with a focus on mergers and acquisitions,
financial restructuring and private placements of debt and equity issues.
OTHER EXECUTIVE OFFICERS
THOMAS C. LANDRETH has served as Executive Vice President since
September 1996. Mr. Landreth has served as President of Landreth Engineering
Company ("LEC") since 1977 and as President of the Fastener Manufacturing and
Sales Division since the Company's divisional reorganization in June 1996. Mr.
Landreth has worked in all technical areas of LEC since 1967 and is responsible
for numerous cold heading machine designs and improvements as well as numerous
innovative tool and die designs.
CHRISTINE A. SMITH has served as Chief Financial Officer of the Company
since January 1995. From April 1989 through December 1994, Ms. Smith was a
Principal at The Spinnaker Group, an investment banking firm providing services
primarily to manufacturing and distribution companies. Prior to joining The
Spinnaker Group, Ms. Smith, a Certified Public Accountant, was a Senior Manager
with Ernst & Young.
2
<PAGE>
BOARD AND COMMITTEE ACTIVITY: STRUCTURE AND COMPENSATION
The Company's operations are managed under the broad supervision of the
Board of Directors, which has ultimate responsibility for the establishment and
implementation of the Company's general operating philosophy, objectives, goals
and policies. During 1996, the Board of Directors convened on two regular
occasions. Each director attended all of the meetings held by the Board or
meetings of Board committees of which he was a member during his tenure in 1996,
except for Charles J. Anderson who attended no Board of Directors meetings and
all Committee meetings of which he was a member. During 1996, directors received
no cash compensation for attendance at Board or Committee meetings. Directors
are, however, entitled to reimbursement for reasonable travel expenses incurred
in attending such meetings. In 1996, each non-employee director (Messrs.
Anderson, Kenney and Madden and Ms. Shuler) was awarded under the Company's 1995
Non-Employee Director Stock Option Plan (the "Director Plan") options to
purchase 5,000 shares of the Company's Common Stock at $4.06 per share. Employee
directors are eligible to participate in the Company's 1994 Amended and Restated
Incentive Stock Plan (the "Employee Plan"). Non-employee directors are entitled
to participate in the Director Plan.
Pursuant to delegated authority, various Board functions are discharged
by the standing committees of the Board. The Audit Committee of the Board of
Directors, currently composed of Messrs. Brock and Anderson and Ms. Shuler,
makes recommendations to the Board of Directors concerning the selection and
engagement of the Company's independent public accountants and reviews the scope
of the annual audit, audit fees and results of the audit. The Audit Committee
also reviews and discusses with management and the Board of Directors such
matters as accounting policies, internal accounting controls and procedures for
preparation of financial statements. The Audit Committee convened on one
occasion in 1996. The Compensation Committee sets the compensation for
executive, managerial and technical personnel of the Company and administers the
Company's stock option and other compensation plans. The Compensation Committee
was composed of Mr. Madden, Ms. Shuler and Mr. Anderson and met on one occasion
in 1996.
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's officers and directors, and persons who own more than 10%
of a registered class of the Company's equity securities, to file reports of
ownership and changes of ownership with the Commission. Officers, directors and
greater than 10% shareholders are required to furnish the Company with copies of
all Section 16(a) reports they file. Based solely on its review of the forms
received by it, the Company believes that during the year ended December 31,
1996 Messrs. Cone, Madden, Anderson and Kenney and Ms. Shuler and Ms. Smith were
late in filing a form 4 report of an exempt transaction. The Company believes
that these failures to file reports on a timely basis were inadvertent and has
implemented routine procedures designed to periodically remind its officers and
directors of the filing requirements.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE. The following table provides certain
summary information covering compensation paid or accrued during the fiscal
years ended December 31, 1996, 1995 and 1994 to the Company's Chief Executive
Officer and the other executive officers, whose annual compensation, determined
as of the end of the last fiscal year, exceeds $100,000.
3
<PAGE>
<TABLE>
<CAPTION>
LONG TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------------- ------------
OPTION EXERCISE
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OTHER(1) AWARDS PRICE
- - ------------------------------------------- ---- -------- ------- -------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Robert E. Cone ............................ 1996 $160,000 $10,000 150,000 $4.06-5.50
President and 1995 $160,000 -- -- -- --
Chief Executive Officer 1994 $146,250 -- -- 65,000 $2.375
James H. Brock, Jr. ....................... 1996 $150,000 $10,000 -- -- --
Executive Vice President and 1995 $150,000 -- -- -- --
President - Energy Products and 1994 $135,000 -- -- 20,000 $2.375
Services Division
Thomas C. Landreth ........................ 1996 $120,000 $24,518 $ 4,745 30,000 $ 4.06
Executive Vice President and 1995 $120,000 $54,430 $103,932 -- --
President - Fastener 1994 $120,000 $41,350 $ 32,430 -- --
Manufacturing and Sales Division
Christine A. Smith ........................
Vice President and 1996 $ 95,000 $30,000 -- 30,000 $ 4.06
Chief Financial Officer 1995 $ 85,000 -- -- 25,000 $ 3.31
</TABLE>
- - ----------------------
(1) Additional payments under the terms of the Landreth Engineering Company
purchase agreement.
STOCK COMPENSATION TABLE. The following table provides certain
information with respect to options granted to the executive officers during the
fiscal year ended December 31, 1996 under the Company's stock option plans:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------------------------------
NUMBER OF POTENTIAL REALIZABLE
SHARES OF VALUE AT ASSUMED
COMMON PERCENT OF ANNUAL RATES OF STOCK
STOCK TOTAL OPTIONS PRICE APPRECIATION FOR
UNDERLYING GRANTED TO OPTION TERMS(3)
OPTIONS EMPLOYEES IN EXERCISE EXPIRATION --------------------------
NAME GRANTED FISCAL YEAR PRICE DATE 5% 10%
---- ------- ----------- ----- ---- -- ---
<S> <C> <C> <C> <C> <C> <C>
Robert E. Cone ............ 150,000(2) 64% $4.25-5.50 02/19/06 $457,835 $1,160,245
President and
Chief Executive Officer
Thomas C. Landreth ........ 30,000(1) 13% $4.06 02/19/06 76,599 194,118
Executive Vice President
and President - Fastener
Manufacturing and Sales
Division
Christine A. Smith ........ 30,000(1) 13% $4.06 02/19/06 76,599 194,118
Vice President and
Chief Financial Officer
</TABLE>
- - --------------
4
<PAGE>
(1) 20,000 of these options were fully vested at December 31, 1996.
(2) 50,000 of these options were fully vested at December 31, 1996.
(3) These calculations are based on the market value of the Common Stock on
the date of grant. The market value is calculated by averaging the
closing bid and ask price for the stock as quoted by NMS on the date of
grant. The exercise price is determined by the same method which is
equal to the market value on the date of grant.
OPTION EXERCISES AND YEAR END VALUES
The following table sets forth information with respect to the
unexercised options to purchase shares of Common Stock which were granted to the
executive officers in 1996 or prior years under the Company's stock option
plans. Thomas C. Landreth exercised options for 10,000 shares at $4.06 per share
under the Company's stock option plans during the fiscal year ended December 31,
1996.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS AT
HELD AT FISCAL YEAR END YEAR END(1)
---------------------------- -----------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Robert E. Cone ......... 165,000 100,000 $1,301,250 $584,500
James H. Brock, Jr. .... 65,000 -- $520,000 --
Thomas C. Landreth ..... 10,000 10,000 $70,620 $70,620
Christine A. Smith ..... 45,000 10,000 $ 336,615 $70,620
</TABLE>
- - ---------------------
(1) Represents the difference between the average of the closing bid and
ask price for the Common Stock as quoted by NMS on December 31, 1996
and any lesser exercise price.
PLAN BENEFITS
The following table provides information concerning options granted
under the Company's Employee Plan and Director Plan during 1996:
<TABLE>
<CAPTION>
NAME AND POSITION OPTIONS GRANTED (#) EXERCISE PRICE
----------------- ------------------- --------------
<S> <C> <C>
EMPLOYEE PLAN:
Robert E. Cone, President and Chief Executive Officer ..... 150,000 $4.25-5.50
Thomas C. Landreth, Executive Vice President .............. 30,000 $4.06
Christine A. Smith, Vice President and Chief ..............
Financial Officer 30,000 $4.06
Executive Officers as a group (4 persons) ................. 210,000 $4.06-5.50
All employees who are not officers as a group ............. 23,000 $4.06-9.25
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
NAME AND POSITION OPTIONS GRANTED (#) EXERCISE PRICE
----------------- ------------------- --------------
<S> <C> <C>
DIRECTOR PLAN:
James W. Kenney, Director ................................. 5,000 $4.06
John P. Madden, Director .................................. 5,000 $4.06
Barbara S. Shuler, Secretary and Director ................. 5,000 $4.06
Charles J. Anderson, Director ............................. 5,000 $4.06
All non-employee directors as a group ..................... 20,000 $4.06
</TABLE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION.
For the fiscal year ended December 31, 1996, Mr. Madden, Mr. Anderson
and Ms. Shuler served on the Compensation Committee of the Board of Directors
(the "Committee"). Ms. Shuler has served as the Company's Secretary since
February 1992.
EMPLOYMENT AGREEMENTS
Effective July 1, 1991, the Company entered into employment agreements
with Messrs. Cone and Brock, which agreements were subsequently amended and
extended. Mr. Cone's amended employment agreement provides for a 1996 base
salary of $175,000, a 1997 base salary of $185,000, and a base salary of
$200,000 for 1998 through 2000. Mr. Brock's amended employment agreement
provides for a 1996 base salary of $160,000, a 1997 base salary of $170,000, and
a 1998 base salary of $180,000.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The table below sets forth certain information regarding the beneficial
ownership of Common Stock at April 27, 1997 by (i) each person known to the
Company to beneficially own more than 5% of its Common Stock, (ii) each
director, (iii) each executive officer and (iv) all directors and executive
officers as a group.
NAME AND ADDRESS OF NUMBER OF SHARES PERCENTAGE OF
BENEFICIAL OWNER BENEFICIALLY OWNED(1) CLASS
---------------- --------------------- -----
St. James Capital Partners, L.P.
1980 Post Oak Blvd., Suite 2030
Houston, Texas 77056................. 1,385,000(2) 21.2%
Directors and Executive Officers:
Robert E. Cone........................ 379,548(3) 6.4%
James H. Brock, Jr.................... 115,000(4) 1.9%
Thomas C. Landreth.................... 68,445(5) 1.2%
Christine A. Smith.................... 55,071(6) *
Charles J. Anderson................... 72,000(7) 1.2%
James W. Kenney....................... 25,000(8) *
John P. Madden........................ 149,373(9) 2.5%
Barbara S. Shuler..................... 82,393(10) 1.4%
John L. Thompson...................... 5,000(11) *
All officers and directors
as a group (9 persons) (3) - (11)... 951,830 15.1%
------------------------------------
* Less than one percent.
6
<PAGE>
(1) Subject to community property laws where applicable, each person has
sole voting and investment power with respect to the shares listed,
except as otherwise specified. Each person is a United States citizen.
This table is based upon information supplied by officers, directors
and principal shareholders and Schedules 13D and 13G, if any, filed
with the Securities and Exchange Commission.
(2) Includes 620,000 shares that may be acquired upon the exercise of
currently exercisable warrants.
(3) Includes 165,000 shares that may be acquired upon the exercise of
currently exercisable stock options.
(4) Includes 65,000 shares that may be acquired upon the exercise of
currently exercisable stock options.
(5) Includes 10,000 shares that may be acquired upon the exercise of
currently exercisable stock options.
(6) Includes 45,000 shares that may be acquired upon the exercise of
currently exercisable stock options.
(7) Includes 15,000 shares that may be acquired upon the exercise of
currently exercisable stock options.
(8) Includes 25,000 shares that may be acquired upon the exercise of
currently exercisable stock options.
(9) Includes 20,000 shares that may be acquired upon the exercise of
currently exercisable stock options. Excludes 178,609 shares owned by
persons related to Mr. Madden, but as to which Mr. Madden disclaims
beneficial ownership.
(10) Includes 20,000 shares that may be acquired upon the exercise of
currently exercisable options.
(11) Includes 5,000 shares that may be acquired upon the exercise of
currently exercisable stock options. Excludes 765,000 shares and
620,000 warrants owned by St. James Capital Partners, L.P., of which
Mr. Thompson is a director and president of the General Partner and may
be deemed to share voting and investment power with respect to such
shares.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company enters into transactions with related parties only with the
approval of a majority of the independent and disinterested directors and only
on terms the Company believes to be comparable to or better than those that
would be available from unaffiliated parties. In the Company's view, all of the
transactions described below meet that standard.
In connection with the purchase of Landreth Engineering Co.
("Landreth") in 1992, the Company entered into a lease agreement with Scranton
Acres, a general partnership of which Mr. Tom Landreth is a partner, for the
Landreth facility. The lease expire in 2002. Rental payments are $106,800
annually.
In connection with the purchase of Landreth, the former Landreth
Shareholders, including Mr. Tom Landreth, 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 Mr. Landreth $14,745, $103,932 and $32,430.
Mr. John Thompson, a director of the Company since February 1997, is
also a director and President of St. James Capital Corp. ("St. James Capital"),
a merchant banking firm. St. James Capital serves as General Partner of St.
James Capital Partners, L.P. ("St. James"). During 1995, St. James provided
$1,000,000 in short-term financing to the Company in connection with an
acquisition. In 1996, $804,100 of principal of this note was converted by St.
James into 215,000 shares of the Company's common stock. The remaining principal
and $65,995 in interest was repaid by the Company to St. James. In 1996, St.
James provided $1.9 million in short term financing in connection with an
acquisition and acquired 540,000 warrants to purchase the Company's common stock
at an exercise price of $7.00 per share. Additionally, St. James Capital
received $180,600 in investment banking fees. In 1996, the Company received
$100,000 in fees from St. James in connection with consulting services provided
to certain investee companies of St. James.
7
<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 28th day of
April 1997.
INDUSTRIAL HOLDINGS, INC.
By: /s/ CHRISTINE A. SMITH
Christine A. Smith (Chief
Financial Officer and Vice
President)
8
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended
September 30, 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 November 7, 1997, there were 6,489,368 shares of Common Stock
outstanding.
<PAGE>
INDUSTRIAL HOLDINGS, INC.
INDEX
PAGE NO.
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheets at September 30, 1997 1
and December 31, 1996
Consolidated Statement of Income for the 2
Three Months ended September 30, 1997 and 1996
Consolidated Statement of Income for the 3
Nine Months Ended September 30, 1997 and 1996
Consolidated Statement of Cash Flows for the 4
Nine Months ended September 30, 1997 and 1996
Notes to Consolidated Financial Statements 5
Item 2 Management's Discussion and Analysis of Financial 8
Condition and Results of Operations
PART II OTHER INFORMATION
Item 1. Legal Proceedings 11
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 (no response required)
Item 5. Other Information 11
Item 6. Exhibits and reports on Form 8-K 11
<PAGE>
INDUSTRIAL HOLDING, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
September 30 December 31
1997 1996
------------ -------------
ASSETS
Current assets:
Cash and equivalents $ 216,465 $ 3,087,925
Accounts receivable - trade, net 11,083,933 6,756,218
Inventories 12,556,105 9,970,337
Advances to shareholders 92,280 77,086
Notes receivable, current portion 981,151 207,549
Other current assets 1,152,533 333,839
------------ -------------
Total current assets 26,082,467 20,432,954
Property and equipment, net 18,917,518 15,579,410
Notes receivable, less current portion 1,213,657 1,464,393
Other assets 768,151 714,495
Goodwill and other, net 12,833,286 5,498,271
------------ -----------
Total assets $59,815,079 $43,689,523
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $10,109,716 $ 9,615,917
Accounts payable - trade 6,957,876 4,601,082
Accrued expenses and other 2,319,985 1,721,487
Current portion of long-term debt 1,616,719 1,393,712
------------ ------------
Total current liabilities 21,004,296 17,332,198
Long-term debt, less current portion 6,045,388 7,326,444
Deferred compensation payable,
less current portion 247,882 285,532
Deferred income taxes payable 2,648,107 2,190,902
Common stock with put redemption option
600,000 shares issued and outstanding 6,000,000
Shareholders' equity:
Common stock $.01 par value, 50,000,000
shares authorized, 5,829,845 and 4,851,494
shares issued and outstanding 58,298 48,515
Additional paid-in capital 20,655,849 15,360,801
Retained earnings 3,155,259 1,145,131
------------ -------------
Total shareholders' equity 23,869,406 16,554,447
------------ -------------
Total liabilities and shareholders'
equity $59,815,079 $43,689,523
============ ============
See notes to consolidated financial statements
1
<PAGE>
INDUSTRIAL HOLDINGS, INC.
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------
1997 1996
----------- ------------
Sales $21,054,159 $12,870,367
Cost of sales 16,168,676 10,177,771
----------- ------------
Gross profit 4,885,483 2,692,596
Selling, general and administrative 3,682,107 2,119,196
------------ ------------
Income from operations 1,203,376 573,400
------------ -------------
Other income:
Interest expense (396,472) (282,119)
Interest income 44,356 35,146
Other income (expense) 243,901 5,951
------------ --------------
Total other income (expense) (108,215) (241,022)
------------- -------------
Income before income taxes 1,095,161 332,378
Income tax expense 428,806 126,584
----------- ------------
Net income $ 666,355 $ 205,794
========== ============
Earnings per share $ .09 $ .05
========== ============
See notes to consolidated financial statements
2
<PAGE>
INDUSTRIAL HOLDINGS, INC.
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1997 1996
----------- -----------
Sales $59,642,306 $38,497,695
Cost of sales 44,953,700 30,435,134
----------- -----------
Gross profit 14,688,606 8,062,561
Selling, general and administrative 10,438,071 6,018,452
----------- ------------
Income from operations 4,250,535 2,044,109
------------ ------------
Other income (expense):
Interest expense (1,281,112) (960,340)
Interest income 130,699 95,540
Other income (expense) 273,203 (4,409)
------------ -------------
Total other income (expense) (877,210) (869,209)
------------- -------------
Income before income taxes 3,373,325 1,174,900
Income tax expense 1,363,197 413,040
----------- ------------
Net income $2,010,128 $ 761,860
========== ===========
Earnings per share $ .30 $ .19
========== ===========
See notes to consolidated financial statements
3
<PAGE>
INDUSTRIAL HOLDINGS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
1997 1996
---- ----
Cash flows from operating activities:
Net income $ 2,010,128 $ 761,860
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,781,729 912,348
Deferred income tax provision 10,127 242,349
Deferred compensation paid (37,650)
Changes in assets and liabilities,
net of acquisitions:
Accounts receivable and advances to
shareholders (930,042) (347,643)
Inventories (907,112) (835,770)
Notes receivable (522,866) 202,200
Other assets (773,638) (249,075)
Accounts payable and accrued expenses 52,723 (301,677)
----------- ------------
Net cash provided
by operating activities 683,399 384,592
Cash flows from investing activities:
Purchase of property and equipment (949,603) (1,752,269)
Purchase of subsidiaries, net of cash (2,338,627)
Additional consideration paid to former
shareholders of Landreth (99,396)
------------ ------------
Net cash used by investing activities (3,288,230) (1,851,665)
------------ ------------
Cash flows from financing activities:
Net borrowing under revolving line of credit (1,128,701) 708,396
Proceeds from long-term debt 397,694 468,361
Principal payments on notes payable,
long-term debt and capital lease obligations (1,141,134) (1,021,698)
Proceeds from issuance of common stock 1,605,512 2,014,675
------------ ------------
Net cash provided (used) by financing activities (266,629) 2,169,734
------------ ------------
Net increase (decrease) in cash and equivalents (2,871,460) 702,661
Cash and equivalents, beginning of period 3,087,925 428,430
------------ ------------
Cash and equivalents, end of period $ 216,465 $1,131,091
============ ============
Non-cash financing activities:
Debt converted to equity $3,093,000 $1,619,100
See notes to consolidated financial statements
4
<PAGE>
INDUSTRIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 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. These financial statements include the accounts of
Industrial Holdings, Inc. and its subsidiaries (the "Company"). All
significant intercompany balances have been eliminated in
consolidation. Operating results for the nine months ended September
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:
September 30 December 31
1997 1996
------------ ------------
Raw materials $ 1,932,292 $ 1,477,051
Finished goods 9,106,862 7,130,702
Other 1,516,951 1,362,584
------------ ------------
$12,556,105 $ 9,970,337
=========== ===========
NOTE C RECLASSIFICATION
Certain amounts have been reclassified from previous periods to
conform to the current presentation.
NOTE D ACCOUNTING PRONOUNCEMENTS
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards No. 123 "Accounting of Stock-based Compensation"
("SFAS No. 123"), and elected to continue to follow Accounting
Principles Board Opinion No. 25 to measure employee stock compensation
cost. Had compensation expense been determined using the fair value
method of accounting as set forth in SFAS No. 123, net income and
earnings per share would have been $1,684,853 and $.25 and $624,702
and $.08 for the nine months and three months ended September 30,
1997, respectively.
5
<PAGE>
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings Per
Share" ("SFAS No. 128"). This new standard requires dual presentation
of basic and diluted earnings per share ("EPS") on the face of the
earnings statement and requires a reconciliation of the numerators and
denominators of basic and diluted EPS calculations. This statement
will be effective for both interim and annual periods ending after
December 15, 1997. The Company's current EPS calculation conforms to
basic EPS. Diluted EPS as defined by SFAS No. 128 is not expected to
be materially different from basic EPS.
Recently, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive
Income," and Statement of Financial Accounting Standards No. 131,
"Disclosures About Segments of an Enterprise and Related Information."
These statements, which are effective for the Company's fiscal year
ending December 31, 1998, establish additional disclosure requirements
but do not affect the measurement of results of operation. Management
is evaluating what, if any, additional disclosures may be required
when these statements are implemented.
NOTE E NOTES PAYABLE AND LONG TERM DEBT
In June 1997, St. James Capital Partners, L.P. ("St. James") converted
at a conversion price of $10 per share, a $1,900,000, 12% note payable
(the "St. James Note") together with $133,000 in accrued interest into
203,300 shares of common stock. The St. James Note was entered into in
November 1996 to fund a portion of the purchase price of American
Rivet Company, Inc.
In the second and third quarters of 1997, Renaissance Capital Partners
II Ltd. ("Renaissance") converted the $1,060,000 outstanding principal
balance of its 12% convertible debenture (the "Renaissance Debenture")
into 325,154 shares of common stock at a conversion price of $3.26 per
share. The Renaissance Debenture was entered into in 1992 to fund a
portion of the purchase price of Landreth Engineering Company.
NOTE F ACQUISITIONS
In February 1997, the Company acquired LSS-Lone Star-Houston, Inc.
("Lone Star") and in March 1997, the Company acquired Manifold Valve
Service, Inc. ("MVS"). The aggregate purchase price of the
acquisitions was $10.1 million cash and assumed liabilities plus
684,211 shares of common stock valued at $6.6 million. The final
purchase price allocation is subject to certain adjustments relating
to the appraised value of assets and to certain other accruals. The
acquisitions were accounted for as purchases. The aggregate excess of
cost over net assets acquired of $7.5 million is being amortized over
20 years. The results of operations of the acquired businesses have
been included in the consolidated financial statements from the
respective acquisition dates. Additionally, the 600,000 shares of
common stock issued in connection with the acquisition of MVS include
a put redemption option at $10 per share through August 1999.
6
<PAGE>
Lone Star 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. 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.
On a proforma unaudited basis, as if these acquisitions had occurred
as of January 1, 1997, sales, net income and earnings per share for
the nine months ended September 30, 1997 would have been $61,404,306,
$2,233,128 and $.32.
NOTE G SUBSEQUENT EVENT
In November 1997, the Company acquired all of the outstanding stock of
Bolt Manufacturing Co., Inc. ("Bolt") for $6.2 million cash (the "Bolt
Acquisition"). The purchase price was funded through an increase in
the Company's demand note and line of credit payable to Comerica
Bank-Texas ("Demand Note") to be secured by the inventory and
receivables of the Company and a 8.16% term note ("Term Note") secured
by the equipment of the Company.
Bolt, located in Houston, Texas manufactures and distributes specialty
bolts and nuts to the petrochemical and energy industries through the
United States and Canada. Net sales of Bolt were $6,452,216 for its
fiscal year ended December 31, 1996 and $5,419,698 for the nine months
ended September 30, 1997. Bolt will operate within the Fastener
Manufacturing and Sales Division.
7
<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
THREE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED WITH THREE MONTHS ENDED
SEPTEMBER 30, 1996.
SALES. On a consolidated basis, sales increased $8,183,792 or 63.6%
for the three months ended September 30, 1997 compared to the three
months ended September 30, 1996. This increase was primarily the
result of the acquisitions of MVS, Lone Star and American (the
"Acquisitions").
COST OF SALES. Cost of sales increased $5,990,905 or 58.9% for the
three months ended September 30, 1997 compared to the three months
ended September 30, 1996, primarily as a result of the increase in
sales described in the preceding paragraph. Gross margins increased to
23% for the three months ended September 30, 1997 from 21% for the
three months ended September 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 $1,562,911 or 73.8% for the three
months ended September 30, 1997 compared to the three months ended
September 30, 1996. This increase was primarily attributable to the
Acquisitions. Selling, general and administrative expenses increased a
greater percentage than sales increased primarily as a result of
amortization of goodwill related to the Acquisitions.
INTEREST EXPENSE. Interest expense increased $114,353 or 40.5% for the
three months ended September 30, 1997 compared to the three months
ended September 30, 1996, primarily as a result of debt incurred to
fund the Acquisitions.
8
<PAGE>
OTHER INCOME. Other income for the three months ended September 30,
1997, includes a gain of $230,000 attributable to insurance proceeds
in excess of the net book value of equipment destroyed in a building
fire.
INCOME TAXES. The Company's effective tax rate was 39% for the three
months ended September 30, 1997 compared to 38% for the three months
ended September 30, 1996. The higher effective tax rate is
attributable to the inclusion of non-deductible amortization of
goodwill as a result of the Acquisitions.
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED WITH NINE MONTHS ENDED
SEPTEMBER 30, 1996.
SALES. Sales increased $21,144,611 or 54.9% for the nine months ended
September 30, 1997 compared to the nine months ended September 30,
1996. This increase was primarily attributable to the Acquisitions,
which was partially offset by a $4.4 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 $14,518,566 or 47.7% for the
nine months ended September 30, 1997 compared to the nine months ended
September 30, 1996, primarily as a result of the increase in sales
described in the preceding paragraph. Gross margins increased to 25%
for the nine months ended September 30, 1997 from 21% for the nine
months ended September 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 $4,419,619 or 73.4% for the nine
months ended September 30, 1997 compared to the nine months ended
September 30, 1996. The increase was primarily attributable to the
Acquisitions. Selling, general and administrative expenses increased a
greater percentage than sales increased primarily as a result of
amortization of goodwill related to the Acquisitions.
INTEREST EXPENSE. Interest expense increased $320,772 or 33.4% for the
nine months ended September 30, 1997 compared to the nine months ended
September 30, 1997 primarily as a result of debt incurred to fund the
Acquisitions.
OTHER INCOME. Other income for the nine months ended September 30,
1997, includes a gain of $230,000 attributable to insurance proceeds
in excess of the net book value of equipment destroyed in a building
fire.
INCOME TAXES. The Company's effective tax rate was 40% for the nine
months ended September 30, 1997 compared to 35% for the nine months
ended September 30, 1996. The increase in the effective tax rate for
the nine months ended September 30, 1997 is primarily attributable to
the inclusion of non-deductible amortization of goodwill as a result
of the Acquisitions.
TOTAL ASSETS. Total assets were $59,815,079 at September 30, 1997
compared to $43,689,523 at December 31, 1996. This increase was
primarily attributable to the acquisitions of Lone Star and MVS.
9
<PAGE>
TOTAL LIABILITIES. Total liabilities were $29,945,673 at September 30,
1997 compared to $27,135,076 at December 31, 1996. This increase was
primarily attributable to 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
$3,093,000 of debt to equity.
LIQUIDITY AND CAPITAL RESOURCES. At September 30, 1997, the Company
had cash of $216,465 and additional borrowing capacity under its line
of credit of $2,302,957. The Company's operations provided cash of
$683,399 during the nine months ended September 30, 1997 compared to
$384,592 during the nine months ended September 30, 1996. This 78%
increase was primarily attributable to increased net income and
depreciation and amortization for the nine months ended September 30,
1997 compared to the same period in 1996 which was partially offset by
increases in working capital.
Investing activities used cash of $3,288,230 for the nine months ended
September 30, 1997 compared to $1,851,665 for the nine months ended
September 30, 1996. This increased use of cash was primarily
attributable to the acquisition of Lone Star and MVS.
Financing activities used cash of $266,629 for the nine months ended
September 30, 1997 compared to providing cash of $2,169,734 for the
nine months ended September 30, 1996. This change is due to the
repayment of short term and long term borrowings in the nine month
period ended September 30, 1997.
At September 30, 1997, the Company had working capital of $5,078,171,
long-term debt of $6,045,388 and shareholders' equity of $23,869,406.
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.
10
<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 5. Other Information.
In October 1997, the Company filed a Registration Statement on Form S-2
in which the Company offers to the holders of its 1,254,414 outstanding
Class B Redeemable Common Stock Purchase Warrants ("Class B Warrants")
the opportunity to exchange each Class B Warrant and $10 cash for one
share of Common Stock, one Class C Warrant and one newly created Class D
Warrant with an exercise price of $22.50 per share. The exchange offer
will commence upon effectiveness of the registration statement which is
subject to review by the SEC. The Company anticipates that it will use
the majority of the estimated $12,400,000 net proceeds from the exercise
of the Class B Warrants to repay a portion of the Company's Demand Note
and Term Note.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 11 - Earnings per Share
(b) Reports on Form 8-K
On September 3, 1997, the Company filed a Form 8-K to report a change in
the Company's certifying accountants. The Company has engaged Deloitte &
Touche LLP, to act as independent certified public accountants. Deloitte
& Touche LLP replaces Price Waterhouse LLP who resigned on May 8, 1997.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant, Industrial Holdings, Inc., has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
INDUSTRIAL HOLDINGS, INC.
Date: November 12, 1997 By: /s/ CHRISTINE A. SMITH
Christine A. Smith,
Chief Financial Officer
and Vice President
11
<PAGE>
INDUSTRIAL HOLDINGS, INC.
EARNINGS PER SHARE
SEPTEMBER 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>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30 ENDED SEPTEMBER 30
----------------------- -----------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Average common shares outstanding .... 6,412,450 3,806,843 5,919,945 3,485,934
Net effect of dilutive stock options
and warrants, based on the treasury
stock method using average
market price ...................... 1,003,881 752,368 862,831 616,164
---------- ---------- ---------- ----------
7,416,331 4,559,211 6,782,776 4,102,098
========== ========== ========== ==========
Net income ........................... $ 666,355 $ 205,794 $2,010,128 $ 761,860
========== ========== ========== ==========
Earnings per share ................... $ .09 $ .05 $ .30 $ .19
========== ========== ========== ==========
</TABLE>
The above table represents primary earnings per share. Fully diluted earnings
per share for the three months and nine months ended September 30, 1997 and 1996
were the same as primary earnings per share.
<PAGE>
ITEM 9(A)(6)
NOTICE OF GUARANTEED DELIVERY
FOR
EXERCISE OF CLASS B REDEEMABLE COMMON STOCK PURCHASE WARRANTS
OF
INDUSTRIAL HOLDINGS, INC.
As set forth in the Offering Circular-Prospectus dated December 18,
1997 (the "Offering Circular-Prospectus") under "The Offer--Guaranteed Delivery
Procedure," this form or one substantially equivalent hereto must be used to
exercise Class B Redeemable Common Stock Purchase Warrants (the "Class B
Warrants") of Industrial Holdings, Inc., a Texas corporation, pursuant to the
Offer (as defined in the Offering Circular-Prospectus) if the procedure for
book-entry transfer cannot be completed on a timely basis or a Class B
warrantholder cannot deliver the certificate(s) for Class B Warrants, the
certified or official bank check or the wire transfer and all other required
documents to the Exchange Agent at one of the addresses listed below on or
before the Expiration Date (as defined in the Offering Circular-Prospectus).
This form may be delivered by hand or sent by facsimile transmission or mailed
to the Exchange Agent and must be received by the Exchange Agent on or before
the Expiration Date.
To: CHASEMELLON SHAREHOLDER SERVICES, Exchange Agent
<TABLE>
<CAPTION>
<S> <C> <C>
BY MAIL: FACSIMILE TRANSMISSION: BY HAND OR OVERNIGHT COURIER:
ChaseMellon Shareholder Services (201) 329-8936 ChaseMellon Shareholder Services
Reorganization Department (for Eligible Institutions Only) Reorganization Department
P.O. Box 3301 120 Broadway - 13th Floor
South Hackensack, NJ 07606 Confirm by Telephone: New York, NY 10271
(201) 296-4860
</TABLE>
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OR TRANSMISSION OF INSTRUCTIONS VIA A
FACSIMILE NUMBER OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID
DELIVERY. THIS FORM IS NOT TO BE USED TO GUARANTEE SIGNATURES. IF A SIGNATURE ON
A LETTER OF TRANSMITTAL IS REQUIRED TO BE GUARANTEED BY AN ELIGIBLE INSTITUTION
UNDER THE INSTRUCTIONS THERETO, SUCH SIGNATURE GUARANTEE MUST APPEAR IN THE
APPLICABLE SPACE PROVIDED IN SIGNATURE BOX ON THE LETTER OF TRANSMITTAL.
17
<PAGE>
Gentlemen:
The undersigned hereby exercises the number of Class B Warrants of
Industrial Holdings, Inc., a Texas corporation, set forth below upon the terms
and subject to the conditions set forth in the Offering Circular-Prospectus
dated December 18, 1997, receipt of which is hereby acknowledged, together with
a certified or official bank check made payable to Industrial Holdings, Inc. or
a wire transfer to the Exchange Agent for the benefit of Industrial Holdings,
Inc. (pursuant to the wire transfer instructions contained in Instruction 6 to
the Letter of Transmittal) in the amount of the aggregate Warrant Exercise
Price, pursuant to the guaranteed delivery procedures set forth in the Offering
Circular-Prospectus under the caption "The Offer--Guaranteed Delivery
Procedure."
Number of Class B Warrants to be Name(s) of Record Holder(s):
Exercised _________________________________________
__________________________________ _________________________________________
Payment to be Made
__________________________________ Please Print Address(es) Here:
Certificate Nos. (if available)
_________________________________________
__________________________________ _________________________________________
__________________________________ _________________________________________
Area Code and Telephone Number:
Check ONE box if Class B Warrants _________________________________________
will be exercised by book-entry
transfer.
[ ] The Depository Trust Company Signature(s)_____________________________
[ ] Philadelphia Depository Trust
Company
Account Number____________________ Dated:___________________________________
GUARANTEE
The undersigned, a firm or entity that is a member in good standing of
the Security Transfer Agent's Medallion Program, the New York Stock Exchange
Medallion Program or the Stock Exchange Medallion Program, guarantees that (a)
the above named person(s) owns the Class B Warrants exercised hereby, and (b)
the undersigned will deliver to the Exchange Agent the certificates representing
the Class B Warrants exercised hereby in proper form for exercise with required
signature guarantees (or written confirmation of book-entry transfer of such
Class B Warrants into the Exchange Agent's account at The Depository Trust
Company or the Philadelphia Depositary Trust Company), together, in each case,
with a certified or official bank check made payable to Industrial Holdings,
Inc. or a wire transfer to the Exchange Agent for the benefit of Industrial
Holdings, Inc. (pursuant to the wire transfer instructions contained in
Instruction 6 of the Letter of Transmittal) in the amount of the aggregate
Warrant Exercise Price, and any other required documents, all within three New
York Stock Exchange trading days after the Expiration Date.
__________________________________ ____________________________________
(Address) (Name of Firm)
__________________________________
(City, State, Zip Code)
__________________________________ ____________________________________
(Area Code and Telephone Number) (Authorized Signature)
Dated:____________________________ ____________________________________
(Title)
DO NOT SEND WARRANT CERTIFICATES AND/OR PAYMENT FOR THE CLASS B
WARRANTS WITH THIS FORM. WARRANT CERTIFICATES AND/OR PAYMENT FOR
THE CLASS B WARRANTS MUST BE SENT WITH THE LETTER OF TRANSMITTAL.
18
<PAGE>
ITEM 9(A)(7)
FOR IMMEDIATE RELEASE FOR INFORMATION CONTACT
ALL NAMES VERIFIED ROBERT E. CONE, CEO
(713) 747-1025
INDUSTRIAL HOLDINGS, INC.
COMMENCES OFFER TO
CLASS B REDEEMABLE WARRANTHOLDERS
HOUSTON, TX (DECEMBER 18, 1997) - Industrial Holdings, Inc. (NASDAQ/NMS-IHII)
announces today that it has commenced its offer (the "Offer")to the holders of
its Class B Redeemable Warrants to exchange each Class B Warrant and $10.00 for
one share of IHI Common Stock and, as an incentive, one new Class C Redeemable
Warrant and one newly created Class D Redeemable Warrant. Each Class C
Redeemable Warrant and each Class D Redeemable Warrant will be exercisable and
entitle the holder to purchase one share of Common Stock at an exercise price of
$15.00 and $22.50, respectively. The Class C and Class D Redeemable Warrants
will expire January 14, 2000. However, each Class C Redeemable Warrant and Class
D Redeemable Warrant may be sooner redeemed by the Company, if for a period of
20 consecutive trading days the closing bid price of the Common Stock equals or
exceeds $20.00 per share and $25.00 per share, respectively. In addition, the
expiration date of the currently outstanding Class C Redeemable Warrants has
been extended to January 14, 2000.
The Offer and withdrawal rights will expire on January 19 , 1998 at 5:00 p.m.,
New York City time, unless extended.
Industrial Holdings is a holding company organized to operate light-niche
manufacturing and distribution companies, with growth potential internally and
by acquisition.
19
<PAGE>
ITEM 9(A)(8)
December 18, 1997
Dear Class B Warrantholder:
Industrial Holdings, Inc. (the "Company") is offering to the holders of
its outstanding Class B Redeemable Common Stock Purchase Warrants ("Class B
Warrants") a temporary incentive to exercise the Class B Warrants (the "Offer")
until January 19, 1998 (the "Expiration Date"), unless extended. A Class B
Warrantholder who tenders Class B Warrants and pays $10.00 per Class B Warrant
(the "Warrant Exercise Price") will receive one share of Common Stock, one Class
C Redeemable Common Stock Purchase Warrant ("Class C Warrant") and one Class D
Redeemable Common Stock Purchase Warrant ("Class D Warrant") for each Class B
Warrant tendered. The Offer is not conditioned upon exercise of a minimum number
of Class B Warrants.
Each Class C Warrant entitles the holder to purchase one share of the
Company's Common Stock at an exercise price of $15.00 per share. Each Class D
Warrant entitles the holder to purchase one share of the Company's Common Stock
at $22.50 per share. The Class C and Class D Warrants are exercisable through
and including January 14, 2000. Each Class B Warrants entitles the registered
holder to purchase one share of Common Stock at an Exercise Price of $10.00 per
share through and including January 14, 1999.
The accompanying Offering Circular-Prospectus provides important
information about the Company and the detailed terms of the Offer. Please read
and consider it carefully. Any Class B Warrantholder electing to exercise Class
B Warrants pursuant to the Offer should follow the instructions in the enclosed
materials.
Questions and requests for assistance or for additional copies of the
Offering Circular should be made by calling Christine A. Smith, Vice-President
of the Company, at (713) 747-1025 or by mail to the Company at 7135 Ardmore,
Houston, Texas 77054.
Sincerely yours,
Robert E. Cone
President and Chief Executive Officer
20
<PAGE>
ITEM 9(A)(9)
INDUSTRIAL HOLDINGS, INC.
OFFER TO EXCHANGE ONE CLASS B REDEEMABLE WARRANT FOR
ONE SHARE OF COMMON STOCK, ONE CLASS C REDEEMABLE WARRANT AND
ONE CLASS D REDEEMABLE WARRANT
THIS OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE ON
JANUARY 19, 1998 AT 5:00 P.M., NEW YORK CITY
TIME, UNLESS EXTENDED.
- --------------------------------------------------------------------------------
December 18, 1997
To Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees:
We are asking you, as the record holder of Class B Redeemable Common
Stock Purchase Warrants (The "Class B Warrants") of Industrial Holdings, Inc.
(the "Company"), to bring to the attention of clients for whom you hold Class B
Warrants the Company's offer (the "Offer") to the holders of Class B Warrants to
exchange each Class B Warrant and ten dollars ($10.00) (The "Warrant Exercise
Price") for one share of the Company's Common Stock, $.01 par value, one Class C
Redeemable Common Stock Purchase Warrant ("Class C Warrant") and one Class D
Redeemable Common Stock Purchase Warrant ("Class D Warrant") beginning on the
date hereof and ending January 19, 1998 (the "Expiration Date"), unless
extended. After the Expiration Date, each Class B Warrant entitles the
registered holder to purchase one share of Common Stock at an exercise price of
$10.00 per share through and including January 14, 1999.
For your information, we are enclosing herewith the following
materials:
1. Offering Circular-Prospectus dated December 18, 1997.
2. The Letter of Transmittal to tender Class B Warrants for your use
and the use of your clients. Facsimile copies of the Letter of Transmittal may
be used to tender Class B Warrants.
3. Notice of Guaranteed Delivery to be used to accept the Offer by
holders of Class B Warrants unable to deliver their certificates, the certified
or official bank check or the wire transfer in payment of the aggregate Warrant
Exercise Price and all other required documents to the Exchange Agent by the
Expiration Date or if the procedure for book-entry transfer cannot be completed
by the Expiration Date.
4. A printed form of letter which may be sent to customers for whose
account you hold Class B Warrants registered in your name or in the name of your
nominee, with space provided for obtaining such customers' instructions with
regard to the Offer.
5. Envelopes addressed to Chasemellon Shareholder Services, the
Exchange Agent, to be used by you to return the Class B Warrants.
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In all cases, the delivery of Common Stock, Class C Warrants and
Class D Warrants for Class B Warrants accepted for exercise pursuant to the
Offer will be made only after timely receipt by the Exchange Agent of
certificates evidencing such Class B Warrants (or a confirmation of a book-entry
transfer of such Class B Warrants into the Exchange Agent's account at one of
the Book-Entry Transfer Facilities (as defined in the Offering
Circular-Prospectus)), payment of the aggregate Warrant Exercise Price with the
Letter of Transmittal properly completed and duly executed and any other
required documents.
Payment of the aggregate Warrant Exercise Price may be made, at the
Class B warrantholder's option, in the form of a certified or official bank
check made payable to Industrial Holdings, Inc. or by wire transfer to
Chasemellon Shareholder Services for the benefit of Industrial Holdings, Inc.
Class B warrantholders who wish to exercise their Class B Warrants should
complete the enclosed Letter of Transmittal and deliver the same, together with
certificates representing tendered Class B Warrants (or such warrants should be
tendered by book-entry transfer), and payment of the aggregate Warrant Exercise
Price, all in accordance with the instructions set forth in the Letter of
Transmittal and the Offering Circular-Prospectus.
If the Class B warrantholders wish to tender their Class B Warrants,
but it is impracticable for them to forward their Class B Warrants and all other
required documents by the Expiration Date, tender may be made by following the
guaranteed delivery procedure described in the Offering Circular-Prospectus
under the caption "The Offer--Guaranteed Delivery Procedure."
The company will promptly reimburse brokers and other nominees for
the reasonable expenses incurred by them in forwarding materials relating to the
Offer to the beneficial holders of the Class B Warrants.
Questions or requests for additional copies of the enclosed materials
should be made by calling Christine A. Smith, Vice-President of the Company, at
(713) 747-1025, or by writing to Industrial Holdings, Inc., 7135 Ardmore,
Houston, Texas 77054.
INDUSTRIAL HOLDINGS, INC.
NOTHING CONTAINED HEREIN OR IN THE DOCUMENTS ENCLOSED HEREWITH SHALL
CONSTITUTE YOU OR ANY OTHER PERSON THE AGENT FOR THE COMPANY, THE EXCHANGE
AGENT, OR ANY AFFILIATE OF EITHER OF THEM, OR AUTHORIZE YOU OR ANY OTHER PERSON
TO USE ANY DOCUMENT OR MAKE ANY STATEMENT ON BEHALF OF ANY OF THEM WITH RESPECT
TO THE OFFER OTHER THAN THE ENCLOSED DOCUMENTS AND THE STATEMENTS SPECIFICALLY
SET FORTH THEREIN.
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<PAGE>
ITEM 9(A)(10)
INDUSTRIAL HOLDINGS, INC.
OFFER TO EXCHANGE ONE CLASS B REDEEMABLE WARRANT FOR
ONE SHARE OF COMMON STOCK, ONE CLASS C REDEEMABLE WARRANT AND
ONE CLASS D REDEEMABLE WARRANT
THIS OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE ON
JANUARY 19, 1998 AT 5:00 P.M., NEW YORK CITY
TIME, UNLESS EXTENDED.
- --------------------------------------------------------------------------------
December 18, 1997
To Our Clients:
Enclosed for your consideration is the Offering Circular-Prospectus,
dated December 18, 1997, of Industrial Holdings, Inc. (the "Company"), relating
to the Offer described therein, together with a Letter to Class B Warrantholders
from the Company. This material is being forwarded to you as the beneficial
owner of Class B Redeemable Common Stock Purchase Warrants (the "Class B
Warrants") of the Company carried by us in your account but not registered in
your name. An exercise of such Class B Warrants may be made only by us as the
holder of record and pursuant to your instructions. The Letter to Class B
Warrantholders is furnished to you for your information only and cannot be used
by you to exercise Class B Warrants held by us for your account.
Accordingly, we request instructions as to whether you wish us to
exercise any or all of the Class B Warrants held by us for your account,
pursuant to the terms and conditions set forth in the Offering
Circular-Prospectus.
Your instructions to us should be forwarded as promptly as possible in
order to permit us to exercise on your behalf in accordance with the provisions
of the Offer, which terminates at 5:00 p.m., New York City time, on January 19,
1998, (the "Expiration Date"), unless extended. The Offer is not conditioned
upon the exercise of a minimum number of Class B Warrants.
All Class B Warrants properly exercised and not withdrawn on or before
the Expiration Date will be deemed to have been accepted by the Company when, as
and if the Company has given oral or written notice thereof to the Exchange
Agent.
The Offer is made solely by the Offering Circular-Prospectus and is
being made to all Class B Warrantholders. If you wish to have us exercise any or
all of the Class B Warrants held by us for your account, will you kindly so
instruct us by completing, executing, detaching and returning to us the
instruction form set forth below. An envelope in which to return your
instructions to us is enclosed. If you authorize the exercise of your Class B
Warrants, all such Class B Warrants will be exercised unless otherwise specified
in your instructions. Your instructions should be forwarded to us in ample time
to permit us to submit an exercise of Class B Warrants on your behalf on or
before the Expiration Date.
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<PAGE>
INSTRUCTIONS WITH RESPECT TO THE OFFER
of
INDUSTRIAL HOLDINGS, INC.
The undersigned acknowledge(s) receipt of your letter enclosing the
Offering Circular-Prospectus, dated December 18, 1997, of Industrial Holdings,
Inc. and the other documents referred to in your letter.
This will instruct you to exercise the number of Class B Redeemable
Common Stock Purchase Warrants of Industrial Holdings, Inc. indicated below held
by you for the account of the undersigned, pursuant to the terms and conditions
set forth in the Offering Circular-Prospectus.
Number of Class B Warrants to be exercised: SIGN HERE
___________________________________________ ________________________________
Dated:_____________________________________ ________________________________
(Signature(s))
________________________________
(Please type or print
name(s) here)
________________________________
(Please type or print address)
________________________________
(Please type or print Area Code
and Telephone Number)
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