As filed with the Securities and Exchange Commission on December __, 1997
Registration No. 333-37915
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Under
THE SECURITIES ACT OF 1933
AMENDMENT NO. 1 TO
FORM S-2
REGISTRATION STATEMENT
INDUSTRIAL HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TEXAS 5080 76-0289495
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL CLASSIFICATION IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION) CODE NUMBER)
7135 ARDMORE
HOUSTON, TEXAS 77054
(713) 747-1025
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------------
ROBERT E. CONE
PRESIDENT AND CHIEF EXECUTIVE OFFICER
7135 ARDMORE
HOUSTON, TEXAS 77054
(713) 747-1025
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
---------------------
COPY TO:
ROBERT G. REEDY
PORTER & HEDGES, L.L.P.
700 LOUISIANA, SUITE 3500
HOUSTON, TEXAS 77002
(713) 226-0600
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the Registration Statement becomes effective.
---------------------
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, check the following box. |X|
If the registrant elects to deliver its latest annual report to
security holders, or a complete and legible facsimile thereof, pursuant to Item
II(a)(i) of this form, check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number on the earlier effective registration
statement for the same offering. |_|
If this form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering.
|-|
If delivery of the Offering Circular-Prospectus is expected to be made
pursuant to Rule 434, please check the following box. |_|
---------------------
<PAGE>
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
PROPOSED MAXIMUM
OFFERING PRICE PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE PER SHARE OR AGGREGATE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(2) WARRANT(3) PRICE FEE
--------------------------- ------------- ---------------- ------------------ ------------
Common Stock underlying Class B
Redeemable Warrants(1) 1,254,414 $10.00(1) $12,544,140(1) $4,325.60(1)
Class C Redeemable Warrants(1) 621,914 $ .06(1) $37,315(1) $ 12.87(1)
Common Stock, $.01 par value
("Common Stock"), underlying
Class C Redeemable Warrants(1)...... 621,914 $15.00(1) $9,328,710(1) $3,216.82(1)
Class C Redeemable Warrants......... 1,254,414 $3.25 $4,076,846 $1,235.41
Common Stock underlying Class C
Redeemable Warrants................. 1,254,414 $15.00 $18,816,210 $5,701.88
Class D Redeemable Warrants......... 1,254,414 $ .50 $627,207 $190.06
Common Stock Underlying Class D
Redeemable Warrants................. 1,254,414 $22.50 $28,224,315 $8,552.83
Total............................... $73,654,743 $23,235.47
==================================== ============ ================ ================ =============
</TABLE>
(1) 1,254,414 shares of Common Stock underlying the Class B Warrants were
registered in connection with the Company's exchange offer to its Class
A Warrantholders in November 1996 pursuant to Registration Statement on
Form S-1 (No. 333-13323) (the "Warrant Registration Statement"), and a
filing fee of $4,325.60 was paid. 621,914 Class C Redeemable Warrants
were issued in connection with the Company's exchange offer to its
Class A Redeemable Warrantholders in November 1996. The 621,914 Class C
Redeemable Warrants and the aggregate 621,914 underlying shares of
Common Stock were registered in the Warrant Registration Statement. A
filing fee of $12.87 and $3,216.82, respectively attributable to those
securities was previously paid as part of the Warrant Registration
Statement . The net filing fee due is $15,680.18.
(2) The Registration Statement also covers any additional securities which
may be issuable pursuant to anti-dilution provisions of warrants.
(3) Calculated pursuant to Rule 457(f).
---------------------
PURSUANT TO THE PROVISIONS OF RULE 429 OF THE SECURITIES ACT OF 1933,
AS AMENDED, THE OFFERING CIRCULAR-PROSPECTUS CONTAINED IN THIS REGISTRATION
STATEMENT ALSO RELATES TO AN AGGREGATE OF 1,876,328 SHARES OF COMMON STOCK
UNDERLYING 1,254,414 OF THE COMPANY'S CLASS B REDEEMABLE WARRANTS AND 621,914 OF
THE COMPANY'S CLASS C REDEEMABLE WARRANTS, AND 621,914 OF THE COMPANY'S CLASS C
REDEEMABLE WARRANTS COVERED BY THE REGISTRANT'S REGISTRATION STATEMENT ON FORM
S-1 (REG. NO. 333-13323). THE REGISTRATION FEES WITH RESPECT THERETO WERE
PREVIOUSLY PAID.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
<PAGE>
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
DECEMBER __, 1997 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 December __, 1997, 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 __, 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 December __, 1997 (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 __, 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 November 25, 1997, the closing sale prices of the
Common Stock, Class B and Class C Warrants were $13.88, $7.44 and $2.63,
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 November 26, 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 December __, 1997,
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 NOVEMBER 25, 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 November 25, 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 November 25, 1997, the last reported sales prices
of the Common Stock, Class B and Class C Warrants on the
Nasdaq National Market were $13.88, $7.44, and $2.63,
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.
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<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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<PAGE>
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.
14
<PAGE>
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 November
25, 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
15
<PAGE>
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 December __, 1997 (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
16
<PAGE>
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
17
<PAGE>
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.
18
<PAGE>
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-
19
<PAGE>
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 __, 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.
20
<PAGE>
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,
21
<PAGE>
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 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 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 $13.88, $7.44, and $2.63 per share or warrant, respectively. On
November 25, 1997 there were approximately 160, 80 and 43 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 November 25, 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 November 25, 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
35 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............ 26
Summary.................. 6 Description of
Summary Consolidated Securities............... 34
Financial Data......... 12 Legal Matters.............. 36
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>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Expenses payable in connection with the issuance and distribution of
the securities to be registered, other than underwriting discounts and
commissions, are estimated as follows:
Securities and Exchange Commission filing fee........ $17,843
Nasdaq listing fee................................... 41,272
Transfer Agent, Warrant Agent and Registrar fees..... 15,000*
Printing expenses.................................... 15,000*
Legal fees and expenses.............................. 20,000*
Accounting fees and expenses......................... 25,000*
Miscellaneous........................................ 10,025*
---------
TOTAL....................................... $144,140
========
--------------------------
* Estimated
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article 2.02 of the Texas Business Corporation Act (the "TBCA")
provides that a Texas corporation shall have the power to indemnify directors,
officers, employees and agents and to purchase and maintain liability insurance
for those persons. Article 2.02-1 of the TBCA empowers the Company to indemnify
any director or officer for expenses, including attorneys' fees, judgments,
fines and amounts paid in settlement actually and reasonably incurred in the
defense of any action, suit or proceeding in which such director or officer is a
party by reason of his position. In no event however, shall a director or
officer be entitled to indemnification in any action, suit, or proceeding in
which such director shall have been found not to have acted in good faith and in
the reasonable belief that his conduct as such director was in the Company's
best interests; and, in the case of an officer of the Company, that such officer
did not act in good faith and in the reasonable belief that his conduct was at
least not opposed to the Company's best interests; and in the case of any
criminal proceeding, such director or officer had no reasonable cause to believe
his conduct was unlawful. Moreover, no director shall be indemnified for any
obligations arising from any action, suit, or proceeding in which (i) such
director is found liable on the basis that personal profit was improperly
received by him, whether or not the action resulted from an action taken in his
official capacity, or (ii) such director is found liable to the Company.
The Company's Amended and Restated Bylaws ("Bylaws") provide that the
Company shall indemnify each director or former director and each officer or
former officer of the Company and each person who is or who may have served at
its request as a director or officer of another corporation in which it owned
shares of stock or of which it is a creditor, or as a partner, venturer,
proprietor, trustee, employee, agent or
II-1
<PAGE>
similar functionary of another partnership, joint venture, sole proprietorship,
trust, employee benefit plan, or other enterprise against judgments,
settlements, penalties and reasonable expenses (including court costs and
attorneys' fees) incurred by him in connection with any claim made against him
or any action, suit, or proceeding in which he is or is threatened to be made a
named defendant or respondent by reason of his being or having been such
director or officer.
The Company shall indemnify such director or officer to the greatest
extent permitted by law for reasonable expenses incurred in connection with any
action, suit, or proceeding in which such director or officer has been wholly
successful in the defense of the proceeding, on the merits or otherwise, except
that if such action, suit, or proceeding was brought by or on behalf of the
Company, indemnification shall be limited to reasonable expenses actually
incurred by such director or officer with respect to such proceeding; provided,
however, that such indemnity shall be conditioned on the prior determination by
a majority of the Board of Directors or a committee thereof who are not named
defendants or respondents in such action, suit, or proceeding, or special legal
counsel appointed thereby, or, solely in the event the Board of Directors is not
able to act and unable to select special legal counsel, by vote of those
shareholders who are not also directors named as defendant or respondent in such
action, suit, or proceeding, that such director or officer has acted in good
faith and in the reasonable belief as to the best interests of the Company.
If any pending, threatened, or completed proceeding is settled, amounts
paid as indemnification of the settlement shall not exceed costs, fees and
expenses that would have been reasonably incurred if the action, suit or
proceeding had been litigated to a conclusion. The determination by the Board of
Directors, or by independent counsel, and the payment of amounts by the Company
on the basis thereof, shall not prevent a shareholder from challenging such
indemnification by appropriate legal proceedings. Neither shall a determination
by the Board of Directors, a committee thereof, or special legal counsel
appointed thereby, that indemnification is not permissible, prevent a director
or officer from challenging such determination by appropriate legal proceedings.
Reasonable expenses of a director or officer who was, is, or is threatened to be
made a named defendant or respondent in any proceeding shall be paid in advance
before any final disposition following appropriate written request to the
Company.
The Company may purchase and maintain insurance on behalf of any person
who is or was a director, officer, employee, or agent of the Company as a
director, officer, partner, venturer, proprietor, trustee, employee, agent or
similar functionary of another foreign or domestic corporation, partnership,
joint venture, sole proprietorship, trust, employee benefit plan, or other
enterprise, against any liability asserted against him in such a capacity or
arising out of his status as such a person, whether or not the Company would
have the power to indemnify him against that liability.
The foregoing rights and indemnification shall be construed in
accordance with the laws of the State of Texas presently in force and as
hereinafter amended. In all events, the Company's Bylaws shall be deemed to
grant the Company's directors and officers the maximum protection consistent
with law and shall be deemed amended from time to time to reflect any changes in
such law. The foregoing shall not be exclusive of any private contractual right
of indemnification, nor shall it limit the same; provided, however, such
contractual agreement shall not be inconsistent with the TBCA presently in force
or hereafter enacted.
The Company's Articles of Incorporation, as amended, contain provisions
eliminating or limiting the liability of a director for an act or omission in
his capacity as director; however, those provisions do not eliminate or limit
the liability of a director for: (i) a breach of a director's duty of loyalty to
the Company or its shareholders; (ii) an act or omission not in good faith or
that involves intentional misconduct or a
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<PAGE>
knowing violation of the law; (iii) a transaction from which a director received
an improper benefit, whether or not the benefit resulted from an action taken
within the scope of the director's office; (iv) an act or omission from which
the liability of a director is expressly provided for by statute; or (v) an act
related to an unlawful stock repurchase or payment of a dividend.
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<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
<TABLE>s
<CAPTION>
<S> <C> <C>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER IDENTIFICATION OF EXHIBIT PAGE
- ------ ------------------------- -------------
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.
4.3 -- FORM OF 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.
4.4 -- FORM OF CLASS C REDEEMABLE WARRANT AGREEMENT AND SPECIMEN OF CLASS C
REDEEMABLE WARRANT CERTIFICATE. EXHIBIT 4.4 TO AMENDMENT NO. 1 TO THE
COMPANY REGISTRATION STATEMENT ON FORM S-1 (NO. 333-13323) DATED
NOVEMBER 1, 1996 (THE "1996 REGISTRATION STATEMENT") IS INCORPORATED HEREIN
BY REFERENCE.
4.5* -- FORM OF CLASS D REDEEMABLE WARRANT AGREEMENT AND SPECIMEN OF CLASS D EX-1
REDEEMABLE WARRANT CERTIFICATE.
5** -- OPINION OF PORTER & HEDGES, L.L.P. EX-2
10.1 -- SECOND AMENDMENT TO EMPLOYMENT AGREEMENT OF ROBERT E. CONE. EXHIBIT
10.1 TO THE COMPANY'S 1996 REGISTRATION STATEMENT IS INCORPORATED HEREIN BY
REFERENCE.
10.2 -- SECOND AMENDMENT TO EMPLOYMENT AGREEMENT OF JAMES H. BROCK, JR. 10.2
TO THE COMPANY'S 1996 REGISTRATION STATEMENT IS INCORPORATED HEREIN BY
REFERENCE.
10.3 -- EMPLOYMENT AGREEMENT OF THOMAS C. LANDRETH, DATED OCTOBER 26, 1992.
EXHIBIT 10.3 TO THE COMPANY'S 1996 REGISTRATION STATEMENT IS INCORPORATED
HEREIN BY REFERENCE.
10.4 -- 1995 NON-EMPLOYEE DIRECTOR STOCK OPTION PLAN IS INCORPORATED HEREIN BY THIS
REFERENCE FROM THE COMPANY'S PROXY DATED MAY 27, 1997 AND ITS PROXY DATED
MAY 25, 1994.
10.5 -- 1994 AMENDED AND RESTATED INCENTIVE STOCK PLAN IS INCORPORATED HEREIN BY
THIS REFERENCE FROM THE COMPANY'S PROXY DATED MAY 27, 1997 AND ITS PROXY
DATED MAY 26, 1995.
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.
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.
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<PAGE>
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 26, 1992, BY AND AMONG THE
COMPANY, THOMAS LANDRETH, LINDA LANDRETH, MICHAEL REILAND, PAMELA
REILAND, MICHAEL REILAND AS CUSTODIAN FOR JENNIFER REILAND TUGMA AND
MICHAEL REILAND AS CUSTODIAN FOR NICHOLAS REILAND TUGMA. EXHIBIT 2.1 TO
THE COMPANY'S CURRENT REPORT ON FORM 8-K DATED OCTOBER 26, 1992 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 30, 1995, BY AND
AMONG THE COMPANY, PVS, LANDRETH ENGINEERING COMPANY, IMSCO AND
COMERICA BANK-TEXAS. EXHIBIT 10.2 TO THE COMPANY'S CURRENT REPORT ON FORM
8-K DATED DECEMBER 7, 1995 IS INCORPORATED HEREIN BY THIS REFERENCE.
11* -- STATEMENT REGARDING COMPUTATION OF PER SHARE EARNINGS. EX-3
13.1* -- QUARTERLY REPORT ON FORM 10-Q FOR THE THREE MONTHS ENDED MARCH 31, 1997 EX-4
13.2* -- QUARTERLY REPORT ON FORM 10-Q FOR THE THREE MONTHS ENDED JUNE 30, 1997 EX-5
13.3* -- QUARTERLY REPORT ON FORM 10-Q FOR THE THREE MONTHS ENDED SEPTEMBER 30, EX-6
1997.
13.4* -- ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 EX-7
13.5* -- ANNUAL REPORT ON FORM 10-K/A FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996 EX-8
13.6* -- CURRENT REPORT ON FORM 8-K/A DATED JANUARY 27, 1997 AMENDING CURRENT EX-9
REPORT ON FORM 8-K DATED NOVEMBER 27, 1996.
13.7* -- CURRENT REPORT ON FORM 8-K/A DATED APRIL 18, 1997 AMENDING CURRENT REPORT EX-10
ON FORM 8-K DATED FEBRUARY 18, 1997.
13.8* -- CURRENT REPORT ON FORM 8-K DATED MAY 14, 1997. EX-11
13.9* -- CURRENT REPORT ON FORM 8-K/A DATED JUNE 12, 1997 AMENDING CURRENT REPORT EX-12
ON FORM 8-K DATED APRIL 14, 1997.
13.10* -- CURRENT REPORT ON FORM 8-K DATED SEPTEMBER 5, 1997 EX-13
13.11* -- CURRENT REPORT ON FORM 8-K DATED NOVEMBER 26, 1997 EX-14
23.1* -- CONSENT OF PRICE WATERHOUSE LLP EX-15
23.2* -- CONSENT OF SIMONTON, KUTAC & BARNIDGE, L.L.P. EX-16
23.3* CONSENT OF HEIN + ASSOCIATES LLP EX-17
23.4* -- CONSENT OF KMPG PEAT MARWICK LLP EX-18
23.5* -- CONSENT OF WEINSTEIN SPIRA & COMPANY, P.C. EX-19
23.6* -- OPINION OF PORTER & HEDGES, L.L.P. (INCLUDED IN ITS OPINION FILED AS EXHIBIT 5
HERETO).
24.1 -- POWER OF ATTORNEY (INCLUDED AS PART OF THE SIGNATURE PAGE
OF THIS REGISTRATION STATEMENT).
</TABLE>
- ------------------------
* Filed herewith.
** Filed previously.
(b) Financial Statement Schedules.
II-5
<PAGE>
All schedules are omitted because they are not applicable or because the
required information is contained in the Financial Statements or Notes thereto.
Item 17. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by section 10(a)(3) of
the Securities Act of 1933 (the "1933 Act");
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the Registration Statement (or the most
recent post-effective amendment thereof) which, individually or in
the aggregate, represent a fundamental change in the information set
forth in the Registration Statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the Registration
Statement or any material change to such information in the
Registration Statement;
(2) That, for the purpose of determining any liability under the
1933 Act, each such post-effective amendment shall be deemed to be a new
Registration Statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof; and
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
(b) Insofar as indemnification for liabilities arising under the Act may
be permitted to directors, officers and controlling persons of the Registrant
pursuant to the foregoing provisions, or otherwise, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(c) The undersigned Registrant hereby undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus is sent or
given, the latest annual report, to security holders that is incorporated by
reference in the prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of
1934; and, where interim financial information required to be presented by
Article 3 of Regulation S-X is not set forth in the prospectus, to deliver, or
cause to be delivered to each person to whom the prospectus is sent or given,
the latest quarterly report that is specifically incorporated by reference in
the prospectus to provide such interim financial information.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-2 and has duly caused this Amendment No. 1 to
its Registration Statement on Form S-2 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Houston, State of Texas,
on December 1, 1997.
INDUSTRIAL HOLDINGS, INC.
/s/ CHRISTINE A. SMITH
Christine A. Smith,
Vice President and Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this to
Amendment No. 1 to its Registration Statement on Form S-2 has been signed by the
following persons in the capacities indicated on December 1, 1997.
SIGNATURE TITLE
--------- -----
/s/ROBERT E. CONE Director, Chairman of the Board of Directors, President
Robert E. Cone and Chief Executive Officer (Principal Executive Officer)
* Executive Vice-President, Director and President - Energy
____________________ Products and Services Division
James H. Brock, Jr.
*CHRISTINE A. SMITH Vice President and Chief Financial Officer (Principal
Christine A. Smith Accounting Officer and Principal Financial Officer)
*___________________ Director, Secretary
Barbara S. Shuler
*___________________ Director
Charles J. Anderson
*___________________ Director
James W. Kenney
*___________________ Director
John P. Madden
*___________________ Director
John L. Thompson
*By /s/ CHRISTINE A. SMITH
Christine A. Smith
(Attorney-in-Fact)
II-7
<PAGE>
INDEX TO EXHIBITS
4.5 Form of Class D Redeemable Warrant Agreement and specimen of Class D
Redeemable Warrant Certificate.
11 Statement regarding computation of per share earnings.
13.1 Quarterly Report on Form 10-Q for the three months ended March 31, 1997
13.2 Quarterly Report on Form 10-Q for the three months ended June 30, 1997
13.3 Quarterly Report on Form 10-Q for the three months ended September 30,
1997
13.4 Annual Report on Form 10-K for the fiscal year ended December 31, 1996
13.5 Annual Report on Form 10-K/A for the fiscal year ended December 31, 1996
13.6 Current Report on Form 8-K/A dated January 27, 1997 amending Current
Report on Form 8-K dated November 27, 1996.
13.7 Current Report on Form 8-K/A dated April 18, 1997 amending Current
Report on Form 8-K dated February 18, 1997.
13.8 Current Report on Form 8-K dated May 14, 1997
13.9 Current Report on Form 8-K/A dated June 12, 1997 amending Current Report
on Form 8-K dated April 14, 1997.
13.10 Current Report on Form 8-K dated September 5, 1997
13.11 Current Report on Form 8-K dated November 26, 1997
23.1 Consent of Price Waterhouse LLP
23.2 Consent of Simonton, Kutac & Barnidge, L.L.P.
23.3 Consent of Hein + Associates LLP
23.4 Consent of KMPG Peat Marwick LLP
23.5 Consent of Weinstein Spira & Company, P.C.
II-8
EXHIBIT 4.5
INDUSTRIAL HOLDINGS, INC.
AND
CHASEMELLON SHAREHOLDER SERVICES
AS WARRANT AGENT
WARRANT AGREEMENT
FOR CLASS D COMMON STOCK PURCHASE WARRANTS
DATED AS OF ______________, 1997
2
<PAGE>
TABLE OF CONTENTS
Page
----
PARTIES...................................................................
RECITALS..................................................................
ARTICLE I ISSUANCE AND EXECUTION OF WARRANTS............................ 1
Section 1.01 Appointment of Warrant Agent..................... 1
Section 1.02 Form of Warrant.................................. 1
ARTICLE II EXERCISE PRICE, TERM, AND METHOD OF EXERCISE.................. 2
Section 2.01 Exercise Price................................... 2
Section 2.02 Warrant Rights and Term.......................... 2
Section 2.03 Expiration....................................... 2
Section 2.04 Method of Exercise............................... 2
Section 2.05 Extension of Expiration Date..................... 3
Section 2.06 Method of Call................................... 3
Section 2.07 Reduction of Exercise Price...................... 3
ARTICLE III ADJUSTMENTS TO WARRANTS UPON CERTAIN EVENTS................... 3
Section 3.01 Subdivision or Combination of Common Stock....... 3
Section 3.02 Adjustment to Exercise Price..................... 3
Section 3.03 Proportionate Adjustment in Shares of
Common Stock Per Warrant...................... 4
Section 3.04 Adjustment for De Minimus Changes................ 4
Section 3.05 Election to Increase Warrants Instead of
Shares of Common Stock Per Warrant............ 4
Section 3.06 Effect on Sale, Merger or Consolidation.......... 5
Section 3.07 Notice of Adjustment............................. 5
Section 3.08 Notice of Certain Events......................... 6
Section 3.09 Effect of Adjustment on Warrant Certificates..... 7
Section 3.10 Warrant Agent Not Responsible for Adjustment..... 7
ARTICLE IV RIGHTS OF WARRANT HOLDERS..................................... 7
Section 4.01 No Rights of Stockholders........................ 7
Section 4.02 Lost Warrants.................................... 8
Section 4.03 Maintenance of Sufficient and Proper Shares
of Common Stock............................... 8
Section 4.04 Fractional Shares and Warrants................... 9
Section 4.05 Registered Holder as Owner....................... 10
Section 4.06 Exchange and Transfer of Warrants................ 10
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<PAGE>
ARTICLE V THE WARRANT AGENT............................................. 10
Section 5.01 Resignation, Removal, and Succession............. 10
Section 5.02 Additional Warrant Agents........................ 11
Section 5.03 Compensation..................................... 11
Section 5.04 Responsibility and Indemnity..................... 12
Section 5.05 Dealing for Own Account. ........................ 13
Section 5.06 Accounting to Company............................ 13
ARTICLE VI GENERAL....................................................... 13
Section 6.01 Canceled Warrants................................ 13
Section 6.02 Taxes on Issuance of Shares of Common Stock...... 13
Section 6.03 Dates and Times.................................. 13
Section 6.04 Amendments to Warrant Agreement.................. 14
Section 6.05 Binding Agreement................................ 14
Section 6.06 Copies of Agreement with Warrant Agent........... 14
Section 6.07 Notices.......................................... 14
Section 6.08 Governing Law.................................... 15
Section 6.09 Headings......................................... 15
Section 6.10 Counterparts..................................... 15
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<PAGE>
WARRANT AGREEMENT
THIS AGREEMENT is dated as of ______________, 1997, by and between
INDUSTRIAL HOLDINGS, INC., a Texas corporation ("Company"), and CHASEMELLON
SHAREHOLDER SERVICES (herein with any successor or alternate agent called the
"Warrant Agent"), with reference to the following recitals:
W I T N E S S E T H:
WHEREAS, pursuant to an S-2 Registration Statement, the Company is
making a tender offer to holders of Class B Common Stock purchase warrant
("Class A Warrant"), whereby Class B Warrant holders who exercise such warrants
pursuant to the terms of the tender offer receive one share of Common Stock, one
Class C Common Stock purchase warrant and one Class D Common Stock purchase
warrant.
WHEREAS, Owners of the Class D Warrants (referred to hereafter as
"Warrant") shall have certain rights as specified herein; and
WHEREAS, each Warrant issued under this Agreement entitles the holder
thereof to purchase one share of Common Stock at the price designated as the
"Exercise Price" herein (subject to adjustment hereunder);
NOW THEREFORE, in consideration of the mutual agreements contained
herein and intending to be legally bound hereby, the parties hereto agree as
follows:
ARTICLE I
ISSUANCE AND EXECUTION OF WARRANTS
Section 1.01 APPOINTMENT OF WARRANT AGENT. The Company hereby appoints
the Warrant as Agent to act as its agent in accordance with the instructions
hereinafter set forth in this Agreement, and the Warrant Agent hereby accepts
such appointment.
Section 1.02 FORM OF WARRANT. Each Warrant shall be evidenced by a
certificate ("Warrant Certificate"). The text of each Warrant Certificate (and
the related forms of exercise and assignment) shall be substantially in the form
attached hereto as Exhibit "A" and may have such identification, designation,
and information thereon as the Company may deem appropriate and as are not
inconsistent with the provisions of this Agreement, or as may be required to
comply with any law or with any rule or regulation made pursuant thereto or with
any rule or regulation of the National Association of Securities Dealers, Inc.,
or any stock exchange on which the Warrants may be listed, or to conform to
usage.
Warrant Certificates shall be executed on behalf of the Company by its
President or any Vice President and by its Secretary or an Assistant Secretary
and delivered to the Warrant Agent, and shall be countersigned and delivered by
the Warrant Agent upon the written order of the Company signed by any such
officer of the Company. Each Warrant Certificate shall be dated the date of its
initial issuance. Warrant Certificates shall be executed on behalf of the
Company either manually or by facsimile signature printed thereon and shall have
the Company's seal or a facsimile thereof affixed or imprinted thereon. The
Warrant Agent shall countersign the Warrant Certificate manually, and no Warrant
Certificate shall be valid for any
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<PAGE>
purpose unless so countersigned. In case any officer whose signature has been
placed upon any Warrant Certificate ceases to be such before such Warrant
Certificate is issued, it may be issued with the same effect as if such officer
had not ceased to be such at the date of issuance.
ARTICLE II
EXERCISE PRICE, TERM, AND METHOD OF EXERCISE
Section 2.01 EXERCISE PRICE. Unless adjusted as otherwise provided
herein, the exercise price ("Exercise Price") of each Warrant issued hereunder
shall be $22.50. The Exercise Price may be adjusted by the Company upon any
extension of the Expiration Date (as hereinafter defined) pursuant to Section
2.05 and shall be adjusted upon the occurrence of certain events as set forth in
Article III hereof.
Section 2.02 WARRANT RIGHTS AND TERM. Each Warrant shall entitle the
person in whose name the Warrant Certificate shall then be registered on the
books maintained by the Warrant Agent ("Warrant Holder"), upon exercise thereof
and subject to the provisions thereof and of this Agreement, including
provisions relating to adjustments, to purchase from the Company one fully paid
and non-assessable share of Common Stock at the then Exercise Price, at any time
on and after the date hereof until the expiration of the Warrant at 5:00 p.m.,
New York City time, on January 14, 2000, or such later date as may be
established pursuant to Section 2.05 ("Expiration Date").
Section 2.03 EXPIRATION. Each Warrant not exercised by 5:00 p.m., New
York City time, on the Expiration Date shall become void, and all rights
thereunder and all rights in respect thereof under this Agreement shall
thereupon cease.
Section 2.04 METHOD OF EXERCISE. The Warrant Holder may exercise his
rights with respect to all or any whole number of Warrants evidenced by a
Warrant Certificate, provided that (except as provided in Section 4.04),
Warrants shall not be exercisable for other than a whole number of shares of
Common Stock. Exercise shall be effected by surrender of the Warrant
Certificate, with the exercise form thereon duly executed, to the Warrant Agent
at its offices as designated in Section 6.07 hereof, together with the Exercise
Price for each share of Common Stock to be purchased. Payment of the Exercise
Price shall be made in lawful money of the United States of America by certified
check, payable to the order of the Warrant Agent.
Upon receipt of a Warrant Certificate with the exercise form duly
executed and accompanied by full and proper payment of the Exercise Price for
the shares of Common Stock purchased thereby, the Warrant Agent (after
requisitioning any certificates for shares of Common Stock from the Company's
transfer agent, if necessary) shall deliver to the Warrant Holder certificates
for the total number of whole shares of Common Stock for which the Warrants
evidenced by such Warrant Certificate are being exercised in such names and
denominations as the Warrant Holder has directed; provided, however, that if, on
the date of surrender of such Warrant Certificate and payment of the Exercise
Price, the transfer books for the Common Stock shall be closed, the certificate
for the shares of Common Stock shall be issuable as of the date on which such
books shall next be open (whether before, on, or after the Expiration Date) at
the Exercise Price and upon the other conditions in effect on the date of such
surrender.
Section 2.05 EXTENSION OF EXPIRATION DATE. At any time or from time to
time prior to the Expiration Date then in effect, the Company may, in its sole
discretion, by delivery of notice to the Warrant Agent, extend the Expiration
Date to provide for an additional period or periods during which the Warrants
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<PAGE>
may be exercised as the Company, in its sole discretion, may elect. In
connection with any such extension of the Expiration Date, the Company may, in
its sole discretion, increase or decrease the Exercise Price payable during any
such extension.
Section 2.06 METHOD OF CALL. The Company, may in its sole discretion,
call the Warrants at any time by paying Warrant Holders $.05 per Warrant, if the
shares of Common Stock have traded at $25.00 per share for 20 consecutive
trading days. Notice of the call will be mailed to all Warrant Holders at least
30 days but no more than sixty days before the date in which the Warrants have
been called.
Section 2.07 REDUCTION OF EXERCISE PRICE. The Board of Directors
retains the right, upon giving written notice to the Warrant Agent, to reduce
the Exercise Price or extend the Expiration Date of the Warrants.
ARTICLE III
ADJUSTMENTS TO WARRANTS UPON CERTAIN EVENTS
Section 3.01 SUBDIVISION OR COMBINATION OF COMMON STOCK. Except as
provided in Section 3.04, if at any time after the date of this Agreement and so
long as any Warrant is outstanding, there is a stock split, stock dividend,
subdivision, or similar distribution with respect to the Common Stock, or a
combination of the Common Stock, then, in such event, the Exercise Price shall
be adjusted in accordance with Section 3.02.
Section 3.02 ADJUSTMENT TO EXERCISE PRICE. Immediately upon the
effective date of any event requiring adjustment pursuant to Section 3.01, the
Company shall adjust the Exercise Price then in effect (to the nearest whole
cent) as follows:
(a) in the event such adjustment is caused by a stock split, stock
dividend, subdivision, or other similar distribution of shares of Common Stock,
the Exercise Price in effect immediately prior to the effective date of such
event shall be decreased to an amount which shall bear the same relation to the
Exercise Price in effect immediately prior to such event as the total number of
shares of Common Stock outstanding immediately prior to such event bears to the
total number of shares of Common Stock outstanding immediately after such event;
(b) in the event such adjustment is caused by a combination of shares
of Common Stock, the Exercise Price in effect immediately prior to the close of
business on the effective date of such event shall be increased to an amount
which shall bear the same relation to the Exercise Price in effect immediately
prior to such event as the total number of shares of Common Stock outstanding
immediately prior to such event bears to the total number of shares of Common
Stock outstanding immediately after such event.
Section 3.03 PROPORTIONATE ADJUSTMENT IN SHARES OF COMMON STOCK PER
WARRANT. Unless the Company shall have exercised its election as provided in
Section 3.05, upon each adjustment of the Exercise Price pursuant to Section
3.02, each Warrant outstanding prior to such adjustment in the Exercise Price
shall thereafter evidence the right to purchase, at the adjusted Exercise Price,
that number of shares of Common Stock (calculated to the nearest hundredth)
obtained by (i) multiplying the number of shares of Common Stock issuable upon
exercise of a Warrant prior to adjustment of the number of shares of Common
Stock by
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the Exercise Price in effect prior to adjustment of the Exercise Price and (ii)
dividing the product so obtained by the Exercise Price in effect after such
adjustment of the Exercise Price.
Section 3.04 ADJUSTMENT FOR DE MINIMUS CHANGES. Anything in this
Article III to the contrary notwithstanding, the Company shall not be required,
except as hereinafter provided in this Section 3.04, to make any adjustment of
the Exercise Price in any case in which the amount by which the then Exercise
Price would be reduced or increased would be less than one percent; provided,
however, that an adjustments which by reason of this Section 3.04 are not
required to be made shall be carried forward and taken into account in any
subsequent adjustment.
Section 3.05 ELECTION TO INCREASE WARRANTS INSTEAD OF SHARES OF COMMON
STOCK PER WARRANT. The Company may elect, on or after the date of any adjustment
of the Exercise Price, to adjust the number of Warrants in substitution for any
adjustment in the number of shares of Common Stock pursuant to Section 3.03.
Each Warrant held of record immediately prior to such adjustment of the number
of Warrants shall become that number of Warrants (calculated to the nearest
hundredth) obtained by (i) multiplying the number of Warrants held of record
prior to adjustment of the number of Warrants by the Exercise Price in effect
prior to adjustment of the Exercise Price and (ii) dividing the product so
obtained by the Exercise Price in effect after adjustment of the Exercise Price.
The Company shall make an announcement of its election to adjust the number of
Warrants, indicating the record date for the adjustment, and, if known at the
time, the amount of the adjustment to be made. Such record date may be the date
on which the Exercise Price is adjusted or any date thereafter, but shall be at
least 10 days later than the date of the announcement of the Company's election.
Upon each adjustment of the number of Warrants pursuant to this Section, the
Company shall, as promptly as practicable, distribute to holders of record on
such record date Warrant Certificates evidencing the additional Warrants to
which such holders shall be entitled as a result of such adjustment, or, at the
option of the Company, shall distribute to such holders of record in
substitution and replacement for the Warrant Certificates held by such holders
prior to the date of adjustment, and upon surrender thereof, if required by the
Company, new Warrant Certificates evidencing all the Warrants to which such
holders shall be entitled after such adjustment. Warrant Certificates so
distributed shall be issued, executed, and countersigned in the manner specified
in this Agreement and shall be registered in the name of the holders of record
of the Warrant Certificates on the record date specified in the public
announcement.
Section 3.06 EFFECT ON SALE, MERGER OR CONSOLIDATION. In the event of
any capital reorganization of the Company, or of any reclassification (other
than a change in par value) of the Common Stock, or of any conversion of the
Common Stock into securities of another corporation, or the consolidation of the
Company with, or the merger of the Company into, any other corporation where the
Company is not the surviving corporation or in the event of the sale of all or
substantially all of the properties and assets of the Company to any other
corporation (each such event hereinafter being referred to as a "Capital
Change"), each Warrant shall be exercisable after such Capital Change, upon the
terms and conditions specified in this Agreement, for the amount of shares of
stock or other securities, property, or cash of the Company, or of the
corporation into which shares of Common Stock are converted or resulting from
such consolidation or surviving such merger or to which such sale shall be made,
as the case may be, to which the shares of Common Stock issuable (at the time of
such Capital Change)upon exercise of such Warrant would have been entitled if
such shares had been outstanding at the relevant record date for participating
in such Capital Change. In any such case, if necessary, the provisions set forth
in this Article III with respect to the rights and interests thereafter of the
holders of the Warrants shall be appropriately adjusted so as to be reasonably
applicable to any shares of stock or other securities or property thereafter
deliverable on the exercise of the Warrants.
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The subdivision or combination of shares of Common Stock at any time
outstanding into a greater or lesser number of shares of Common Stock shall not
be deemed to be a reclassification of the Common Stock of the Company for the
purpose of this Section. The Company shall not effect any consolidation, merger
or sale resulting in a Capital Change, unless prior to or simultaneously with
the consummation thereof, any successor corporation or corporation purchasing
such assets shall assume, by written instrument executed and delivered to the
Warrant Agent, the obligation to deliver to the holder of each Warrant any such
shares of stock, securities, or assets as the Warrant Holders may be entitled to
receive upon exercise of the Warrants in accordance with the foregoing
provisions, and the other obligations of the Company under this Warrant
Agreement.
Section 3.07 NOTICE OF ADJUSTMENT. Whenever the Exercise Price is
adjusted as provided in this Warrant Agreement:
(a) the Company shall compute the adjusted Exercise Price and the
number of shares of Common Stock issuable upon exercise of a Warrant and shall
prepare a notice signed by its Treasurer or Secretary setting forth the adjusted
Exercise Price and the adjusted number of shares of Common Stock issuable upon
the exercise of a Warrant or the number of Warrants into which each outstanding
Warrant will be changed, if applicable. Such notice shall show in reasonable
detail the facts (and computations) upon which such adjustments are based and
shall be delivered promptly to the Warrant Agent pursuant to the provisions of
Section 6.07; and
(b) the Company shall cause to be mailed to each Warrant Holder in
accordance with the provisions of Section 6.07 a notice stating that the
Exercise Price has been adjusted and setting forth the adjusted Exercise Price
and the adjusted number of shares of Common Stock issuable upon the exercise of
a Warrant or the number of Warrants into which each outstanding Warrant will be
changed, if applicable.
Section 3.08 NOTICE OF CERTAIN EVENTS. In the event that any time after
the date of this Agreement:
(a) the Company shall adopt a dividend policy, change a previously
adopted dividend policy, or declare a dividend in the absence of, or in conflict
with, a dividend policy or declare any distribution with respect to the Common
Stock; or
(b) the Company shall offer for subscription to the holders of the
Common Stock any additional shares of stock of any class or any other securities
convertible into Common Stock or any rights to subscribe thereto; or
(c) the Company shall declare any stock split, stock dividend,
subdivision, combination, or similar distribution with respect to the Common
Stock, regardless of the effect of any such event on the outstanding number of
shares of Common Stock; or
(d) there shall be any Capital Change in the Company or any merger of
the Company with another corporation (other than a merger with a subsidiary in
which merger the Company is the continuing corporation and which does not result
in any reclassification or change of the shares of Common Stock issuable upon
exercise of the Warrant); or
(e) there shall be a voluntary or involuntary dissolution, liquidation,
or winding up on the Company;
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(each such event hereinafter being referred to as "Notification Event"), the
Company shall cause to be mailed to each Warrant Holder, not later than the
earlier of the date public announcement of the Notification Event is first made
or the date 20 days prior to the record date, if any, in connection with such
Notification Event, written notice specifying the nature of such event and the
effective date of, or the date on which the books of the Company shall close or
a record shall be taken with respect to, such event. Such notice shall also set
forth facts indicating the effect of such action (to the extent such effect may
be known at the date of such notice) on the Exercise Price and the kind and
amount of the shares of stock or other securities or property deliverable upon
exercise of the Warrants. The failure to give the notice required by this
Section 3.08 shall not affect the legality or validity of any such Notification
Event.
Section 3.09 EFFECT OF ADJUSTMENT ON WARRANT CERTIFICATES. Except as
provided in Section 3.05, the form of Warrant Certificate need not be changed
because of any change in the Exercise Price, the number of shares of Common
Stock issuable upon the exercise of a Warrant, or the number of Warrants
outstanding pursuant to this Article, and, subject to Section 3.05, Warrant
Certificates issued before or after such change may state the same Exercise
Price, the same number of Warrants, and the same number of shares of Common
Stock issuable upon exercise of Warrants as are stated in the Warrant
Certificates theretofore issued pursuant to this Agreement. The Company may,
however, at any time, in its sole discretion, make any change in the form of
Warrant Certificate that it may deem appropriate and that does not affect the
substance therefor, and any Warrant Certificates thereafter issued or
countersigned, whether in exchange or substituted for an outstanding Warrant
Certificate or otherwise, may be in the form as so changed.
Section 3.10 WARRANT AGENT NOT RESPONSIBLE FOR ADJUSTMENT. The Warrant
Agent shall have the right, but shall not at any time be under any duty or
responsibility to any Warrant Holder, to determine whether such facts exist
which may require any adjustment in the Exercise Price of, or the shares of
Common Stock issuable upon exercise of, the Warrants or to make inquiry or take
other action with respect to the nature or extent of any such adjustments, when
made, or with respect to the method employed in making the same. The Warrant
Agent shall not be accountable with respect to the validity or value or the kind
or amount of any shares of Common Stock or of any securities or property which
may at any time be issued or delivered upon the exercise of any Warrant, and
makes no representation with respect thereto.
ARTICLE IV
RIGHTS OF WARRANT HOLDERS
Section 4.01 NO RIGHTS OF STOCKHOLDERS. No Warrant Holder, as such,
shall be entitled to vote or to receive dividends or shall otherwise be deemed
to be the holder of shares of Common Stock for any purpose, nor shall anything
contained herein or in any Warrant Certificate be construed to confer upon any
Warrant Holder, as such, any of the rights of a stockholder of the Company or
any right to vote upon or give or withhold consent to any action of the Company
(whether upon any reorganization, issuance of securities, reclassification or
conversion of Common Stock, consolidation, merger, sale, release, conveyance, or
otherwise), receive notice of meetings or other action affecting stockholders
(except for notices expressly provided for in this Agreement) or receive
dividends or subscription rights, until such Warrant Certificate shall have been
surrendered for exercise accompanied by full and proper payment of the Exercise
Price as provided in this Agreement and shares of Common Stock thereunder shall
have become issuable and until such person shall have been deemed to have become
a holder of record of such shares. If, the date of surrender of such Warrant
Certificate and payment of such Exercise Price, the transfer books for the
Common Stock shall be closed, certificates for the shares of Common Stock shall
be issuable on the date on which
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such books shall next be open (whether before, on, or after the Expiration Date)
and until such date, the Company shall be under no duty to deliver any
certificate for such shares of Common Stock. No Warrant Holder shall, upon the
exercise of Warrants, be entitled to any dividends if the record date with
respect to payment of such dividends shall be a date prior to the date such
shares of Common Stock became issuable upon the exercise of such Warrants.
Section 4.02 LOST WARRANTS. If any Warrant Certificate is lost, stolen,
mutilated, or destroyed, the Company and the Warrant Agent may, upon receipt of
evidence satisfactory to the Company and the Warrant Agent of such loss, theft,
mutilation, or destruction and on such terms as to indemnity or otherwise as the
Company and the case of a mutilated Warrant Certificate, include the surrender
thereof), issue a new Warrant Certificate of like denomination and tenor as the
lost, stolen, mutilated, or destroyed Certificate. Applicants for such
substitute Warrant Certificates shall also comply with such other reasonable
regulations and pay any such reasonable charges as the Company or the Warrant
Agent may prescribe. In the event any Warrant Certificate is lost, stolen,
mutilated, or destroyed, and the owner thereof desires to exercise the Warrants
evidenced thereby, the Company may, in lieu of issuing a substitute Warrant
Certificate, exercise or authorize the exercise thereof upon receipt of the
above evidence and on such terms of indemnity as it may require.
Section 4.03 MAINTENANCE OF SUFFICIENT AND PROPER SHARES OF COMMON
STOCK.
(a) The Company shall at all times reserve and keep available a number
of authorized shares of Common Stock sufficient to permit the exercise in full
of all outstanding Warrants and will cause to be available to the Warrant Agent
a sufficient number of certificates therefor.
(b) Prior to the issuance of any shares of Common Stock upon the
exercise of Warrants, the Company shall use its best efforts to secure the
listing of such shares of Common Stock upon any and all such securities
exchanges.
(c) If at any time the taking of any action would cause an adjustment
in the Exercise Price so that the exercise of a Warrant while such Exercise
Price is in effect would cause a share of Common Stock to be issued at a price
below its then par value, the Company shall take such action as may, in the
opinion of its counsel, be necessary in order that it may validly and legally
issue fully paid and non-assessable shares of Common Stock upon the exercise of
the Warrants at such Exercise Price.
(d) Subject to the restrictions on transfer referred to in Section
4.06, if any shares of Common Stock issuable upon the exercise of the Warrants
require registration or approval of any governmental authority, or the taking of
any other action under the laws of the United States or any political
subdivision thereof or any other jurisdiction before such shares of Common Stock
may be legally and validly issued, then the Company shall in good faith and with
reasonable diligence endeavor to secure such registration or approval or to take
such other actions as may be appropriate to allow for the lawful issuance of
shares of Common Stock upon exercise of the Warrants, provided that no shares of
Common Stock shall be issued for the period during which the Company is
endeavoring to obtain such registration or approval or is taking such other
action. Warrant Holders may exercise Warrants during any such period as provided
herein and shall be entitled to the issuance of the shares of Common Stock on
such date as the shares of Common Stock may be legally and validly issued, at
the Exercise Price and upon the other conditions in effect on the date of
surrender of the Warrant Certificates accompanied by full and proper payment for
the shares of Common Stock.
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Section 4.04 FRACTIONAL SHARES AND WARRANTS.
(a) Anything contained herein to the contrary notwithstanding, the
Company shall not be required to issue any fraction of a share of Common Stock
in connection with the exercise of Warrants. Warrants may not be exercised in
such number as would result (except for the provisions of this Section) in the
issuance of a fraction of a share of Common Stock, unless the Warrant Holder is
presenting for exercise Warrant Certificates representing all Warrants then
owned of record by such Warrant Holder. In such event, the Company shall, upon
the exercise of all of such Warrants, issue to such Warrant Holder the largest
aggregate whole number of shares of Common Stock called for thereby upon receipt
of the Exercise Price for all of such Warrants and pay a sum in cash equal to
the remaining fraction of a share of Common Stock, multiplied by its fair market
value as of the first business day preceding the date on which the Warrants are
presented for exercise. Such fair market value shall be (1) the average of the
high and low bid prices of the Common Stock, as reported by the National
Association of Securities Dealers Automated Quotation System on such date, or
(2) if the Common Stock is then listed on a national securities exchange or the
national market system of the over-the-counter market, the closing price of the
Common Stock on such exchange on such date. Every Warrant Holder, by the
acceptance of the Warrant Certificate, expressly waives any right to exercise
Warrants for a fractional share of Common Stock except as provided in this
subsection.
(b) Anything herein to the contrary notwithstanding, the Company shall
not be required to issue fractions of Warrants on any distribution of Warrants
to Warrant Holders or to distribute Warrant Certificates that evidence
fractional Warrants nor shall the Company be required to make any cash
adjustment with respect to a fractional interest in a Warrant. Any person
entitled to a fractional interest in a Warrant may elect, during such period of
time (not in excess of 90 days) from the date such fractional interest is
acquired, as the Company shall determine, to purchase the additional fractional
interest required to make up a full Warrant or to sell the fractional interest
to which such person is entitled. Such election shall be made on the form
provided for such purpose by the Company. If such election is not made in the
time prescribed by the Company, the fractional interest to which such person is
entitled shall be sold. Such purchase or sale shall be effected in the manner
set forth in subsection (c) of this Section by the Warrant Agent, acting as
agent for the person entitled to such fractional interest.
(c) The Warrant Agent shall bill each person entitled to a fractional
interest in Warrants for the cost of any such fractional interest purchased by
it as agent for such person or shall remit to such person the proceeds of the
sale of any such fractional interest sold by it as such agent. In the case of a
purchase, the Warrant Agent may sell the Warrant to which such person is
entitled if payment is not received by the Warrant Agent within 30 days after
the mailing of such bill and, after deducting the amount of such bill and any
other charges, shall remit the balance, if any, to such person. Fractional
interests in Warrants shall be nontransferable except by or to the Warrant Agent
acting as herein authorized. The Warrant Agent may purchase or sell fractional
interests on the basis of market prices of the Warrants, as determined by the
Warrant Agent in its sole discretion, and such Agent is expressly authorized to
value fractional interests without actual purchase or sale on the basis of the
market price of the Warrants as determined by it in its sole discretion.
Purchase and sales of fractional interests by the Warrant Agent may, in its sole
discretion, be set of against each other on the basis of market prices of the
Warrants, as determined by the Warrant Agent in its sole discretion.
Section 4.05 REGISTERED HOLDER AS OWNER. Every holder of a Warrant
Certificate, by accepting the same, consents and agrees with the Company, the
Warrant Agent, and every subsequent holder of such Warrant Certificate that
until the Warrant Certificate is transferred on the books of the Warrant Agent,
the
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Company and the Warrant Agent may treat the registered Warrant Holder as the
absolute owner thereof for all purposes, notwithstanding any notice to the
contrary.
Section 4.06 EXCHANGE AND TRANSFER OF WARRANTS. Warrant Certificates
may be split-up, combined, or exchanged at any time for other Warrant
Certificates evidencing a like aggregate whole number of Warrants and may be
transferred in whole or in part. Any Warrant Holder desiring to split-up,
combine, or exchange Warrant Certificates shall make such request in writing
delivered to the Warrant Agent as provided by Section 6.07 and shall surrender
therewith the Warrant Certificate or Certificates to be so split-up, combined,
or exchanged. Subject to the restrictions on transfer of the Warrants contained
in the Registration Statement, transfers of outstanding Warrant Certificates may
be effected by the Warrant Agent, from time to time, upon the books to be
maintained by the Warrant Agent for that purpose, upon surrender of the Warrant
Certificates to the Warrant Agent as provided by Section 6.07, which
Certificates must be properly endorsed or accompanied by appropriate instruments
of transfer and written instructions for transfer, all in form satisfactory to
the Company and the Warrant Agent. Upon any such surrender for a split-up,
combination, exchange, or transfer, the Warrant Agent shall countersign and
deliver to the person entitled thereto a Warrant Certificate or Warrant
Certificates as so requested. The Warrant Agent shall not be required to effect
any transfer, split-up, or exchange that will result in the issuance of a
Warrant Certificate evidencing other than a whole number of Warrants.
ARTICLE V
THE WARRANT AGENT
Section 5.01 RESIGNATION, REMOVAL, AND SUCCESSION. The Warrant Agent
may resign and be discharged from its duties under this Agreement after giving
60 days prior written notice to the Company and the Warrant Holder as provided
by Section 6.07, except that such shorter notice as the Company shall accept in
writing, may be given. The Warrant Agent may be removed by the Company by like
notice to the Warrant Agent. If the office of the Warrant Agent becomes vacant
by resignation, removal, incapacity to act, or otherwise, the Company shall
appoint in writing a successor Warrant Agent in place of the Warrant Agent. If
the Company shall fail to make such appointment within a period of 60 days after
it has been notified in writing of such resignation or incapacity by the
resigning or incapacitated Warrant Agent or within 60 days after the Warrant
Agent has been removed by the Company, then any Warrant Holder may apply to any
court of a competent jurisdiction for t he appointment of a successor Warrant
Agent. Any successor Warrant Agent, whether appointed by the Company or by such
a court, shall be a corporation organized, in good standing, and doing business
under the laws of the United States of America or of any state, and authorized
under such laws to exercise corporate trust powers and subject to supervision or
examination by Federal or state authority and having a combined capital and
surplus of not less than $1,000,000. After appointment, any successor Warrant
Agent shall be vested with all authority, powers, rights, immunities, duties,
and obligations of its predecessor Warrant Agent with like effect as if
originally named as Warrant Agent hereunder, without any further act or deed;
provided, however, that if for any reason it becomes necessary or appropriate,
the predecessor Warrant Agent shall execute and deliver an instrument
transferring to such successor Warrant Agent with authority, powers, and rights
of such predecessor Warrant Agent hereunder and any property held by it
hereunder; and, provided further, upon request of any successor Warrant Agent,
the Company shall make, execute, acknowledged, and deliver any and all written
instruments in order more fully and effectually to vest in and confirm to such
successor Warrant Agent all such authority, powers, rights, immunities, duties,
and obligations. Failure to give any notice provided for in this Section
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or any defect therein shall not affect the legality or validity of the
resignation or removal of the Warrant Agent or the appointment of the successor
Warrant Agent, as the case may be.
Any corporation into which the Warrant Agent may be merged or with
which it may be consolidated, or any corporation succeeding to substantially all
the business of the Warrant Agent, shall be the successor Warrant Agent under
this Agreement without any further act.
Section 5.02 ADDITIONAL WARRANT AGENTS. The Company may designate one
or more corporations satisfying the qualifications for a successor Warrant Agent
as set forth in Section 5.01 as additional Warrant Agents to perform, either
jointly or in place of the Warrant Agent, such functions as may be specified in
written notice of such designation filed with the Warrant Agent, which notice
shall include acceptance by such additional Warrant Agent(s) of such functions.
Section 5.03 COMPENSATION. The Company agrees (a) that it will pay the
Warrant Agent reasonable remuneration for its services as Warrant Agent
hereunder and will reimburse the Warrant Agent upon demand for all expenditures
(including reasonable counsel fees) that the Warrant Agent may reasonably incur
in the execution of its duties hereunder; and (b) that it will perform or cause
to be performed such further acts and execute, acknowledge, and deliver or cause
to be executed, acknowledged, and delivered all such further instruments and
assurances as may reasonably be required by the Warrant Agent for the execution
or performance of the provisions of this Agreement.
Section 5.04 RESPONSIBILITY AND INDEMNITY.
(a) The Warrant Agent is hereby authorized and directed to accept
instructions with respect to the performance of its duties hereunder from the
President, any Vice President, or the Treasurer of the Company, and to apply to
such officers for advice or instructions in connection with its duties.
(b) Whenever in the performance of its duties under this Agreement the
Warrant Agent shall deem it necessary or desirable that any fact or matter be
proved or established by the Company prior to taking or suffering any action
hereunder, such fact or matter (unless other evidence in respect hereof be
herein specifically prescribed) may be deemed to be conclusively proved and
established by a statement signed by the President, any Vice President, or the
Treasurer of the Company and delivered to the Warrant Agent, and such statement
shall be full warranty to the Warrant Agent for any action taken or suffered in
good faith by it under the provisions of this Agreement in reliance upon such
statement. In its discretion, the Warrant Agent may in lieu thereof accept other
evidence of such fact or matter or may require such further or additional
evidence as it may deem reasonable.
(c) The Warrant Agent shall not be responsible for (i) the validity or
execution of any Warrant Certificate (except its countersignature thereof); (ii)
any breach by the Company of any covenant or condition contained in this
Agreement or in any Warrant Certificate; (iii) any change in the Exercise Price
required under the provisions of Article III, the manner, the method, or amount
of any such change, or ascertaining the existence of facts that would require
any such change. No act of the Warrant Agent hereunder shall be deemed to be a
representation or warranty as to the authorization or reservation of any shares
of Common Stock to be issued pursuant to this Agreement or any Warrant
Certificate or as to whether any shares of Common Stock will, when issued, be
validly issued, fully paid, and nonassessable shares of Common Stock.
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(d) The Warrant Agent shall incur no liability or responsibility to the
Company or to any Warrant Holder for any action taken in reliance on any notice,
resolution, waiver, consent, order, certificate, or other paper, document, or
instrument believed by it to be genuine and to have been signed, sent, or
presented by the proper party or parties.
(e) The Company agrees to indemnify the Warrant Agent and save it
harmless against any and all liabilities, including judgments, costs, and
reasonable attorney fees, for anything done or omitted by the Warrant Agent in
the execution of this Agreement, except as a result of the Warrant Agent's
negligence or willful misconduct.
(f) The Warrant Agent shall be under no obligation to institute any
action, suit, or legal proceeding or to take any other action likely to involve
expense unless the Company or one or more Warrant Holders shall furnish the
Warrant Agent with reasonable security and indemnity for any costs and expenses
that may be so incurred. This provision shall not affect the power of the
Warrant Agent to take such action as the Warrant Agent may consider proper, with
or without any such security or indemnity.
Section 5.05 DEALING FOR OWN ACCOUNT. The Warrant Agent and any
stockholder, director, officer, or employee of the Warrant Agent may buy, sell,
or deal in any of the Warrants or other securities of the Company or acquire a
pecuniary interest in any transaction in which the Company may be involved, or
contract with or lend money to the Company or otherwise act as fully and freely
as though it were not Warrant Agent under this Agreement. Nothing herein shall
preclude the Warrant Agent from acting in any other capacity for the Company
(including acting as the Company's registrar and transfer agent) or for any
other entity.
Section 5.06 ACCOUNTING TO COMPANY. The Warrant Agent shall account
promptly to the Company with respect to Warrants exercised and concurrently pay
to the Company all moneys received by the Warrant Agent for the purchase of
shares of Common Stock upon the exercise of such Warrants. The Warrant Agent
shall, upon request of the Company from time to time, deliver to the Company
such complete reports of registered ownership of the Warrants and such complete
records of transactions with respect to the Warrants and the shares of Common
Stock as the Company may request. The Warrant Agent shall also make available to
the Company for inspection by the Company's agents or employees, from time to
time as the Company may request, such original books of accounts and records
maintained by the Warrant Agent in connection with the issuance and exercise of
Warrants hereunder, such inspections to occur at the Warrant Agent's office as
specified in Section 6.07, during normal business hours.
ARTICLE VI
GENERAL
Section 6.01 CANCELED WARRANTS. The Warrant Agent shall cancel any
Warrant Certificate delivered to it for exercise, in whole or in part, or
delivered to it for transfer, or for split-up, combination, exchange, or
substitution and shall deliver to the Company, in a manner satisfactory to the
Company, such canceled Warrant Certificates.
Section 6.02 TAXES ON ISSUANCE OF SHARES OF COMMON STOCK. The Company
shall from time to time promptly pay all taxes and charges that may be imposed
upon the Company or the Warrant Agent with respect to the issuance or delivery
or shares of Common Stock upon the exercise of Warrants, but the
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Company shall not be obligated to pay any transfer taxes with respect to the
issuance or delivery of the Warrant Certificates or shares of Common Stock in a
name other than that of the Warrant Holder. The Warrant Agent shall be
authorized to charge Warrant Holders a transfer fee of up to $7.50 per
certificate.
Section 6.03 DATES AND TIMES. If any date set forth in this Warrant
Agreement shall fall on a day other than a full business day in New York City,
said date shall be deemed to be the next business day succeeding that date. All
times shall be the legal time then in effect in New York City.
Section 6.04 AMENDMENTS TO WARRANT AGREEMENT. The Company and the
Warrant Agent may jointly, without the consent or concurrence of the Warrant
Holders, by supplemental agreement or otherwise, make any amendments,
alterations, deletions, or corrections in this Agreement that they deem
necessary or desirable: (a) to cure any ambiguity or correct any defect,
inconsistency, clerical omission or mistake, or manifest error contained herein;
(b) to confer additional rights upon the Warrant Holders; or (c) in any other
respect that does not adversely affect the rights of the Warrant Holders
hereunder.
Section 6.05 BINDING AGREEMENT. All the covenants and provisions of
this Agreement by or for the benefit of the Company or the Warrant Agent shall
bind and inure to the benefit of the respective successors and assigns
hereunder. Nothing expressed in this Agreement and nothing that may be implied
from any of the provisions hereof is intended, or shall be construed, to confer
upon or give to any person or corporation, other than the Company, the Warrant
Agent and the Warrant Holders, any legal or equitable right, remedy, or claim
under or by reason of this Agreement or of any covenant, condition, stipulation,
promise, or agreement herein, and all covenants, conditions, stipulations,
promises, and agreements contained in this Agreement shall be for the sole and
exclusive benefit of the Company, the Warrant Agent, the Warrant Holders, and
their respective successors and assigns.
Section 6.06 COPIES OF AGREEMENT WITH WARRANT AGENT. A copy of this
Agreement, as such may be amended from time to time, shall be available for
inspection by any Warrant Holder at the office of the Warrant Agent, as
designated in Section 6.07, during normal business hours. As a condition of such
inspection, the Warrant Agent may require any such Warrant Holder to submit his
or her Warrant Certificate for inspection.
Section 6.07 NOTICES. Any communication, notice, or demand to be given
hereunder shall be duly given if in writing and delivered, or sent by first
class mail, certified or registered, postage prepaid and addressed as follows:
(a) If to the Company:
Robert E. Cone, President
Industrial Holdings, Inc.
7135 Ardmore
Houston, Texas 77054
-12-
<PAGE>
(b) If to the Warrant Agent:
ChaseMellon Shareholder Services
Stock Transfer Department
85 Challenger Road, Overpeck Centre
Ridgefield Park, NJ 07660
(c) If to a Warrant Holder: at such person's last known address as such
shall appear on the registration books maintained by the Warrant Agent.
Any party may change the address to which any communication, notice, or
demand shall be given by giving notice of such change in conformity with the
provisions of this Section.
Section 6.08 GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Texas.
Section 6.09 HEADINGS. The Article and Section headings herein are for
convenience only and are not part of this Agreement and shall not affect the
interpretation thereof.
Section 6.10 COUNTERPARTS. This Agreement may be executed in any number
of counterparts, each of which so executed shall be deemed to be an original and
all such counterparts shall together constitute but one and the same instrument.
IN WITNESS WHEREOF, this Agreement has been duly executed by the
parties hereto as of the day and year first above written.
INDUSTRIAL HOLDINGS, INC.
By ________________________________
ROBERT E. CONE, President
CHASEMELLON SHAREHOLDER SERVICES
As Warrant Agent
By ________________________________
Office: ________________________
-13-
<PAGE>
---------
EXHIBIT A
---------
(Form of Class D Warrant Certificate)
No.
___________ Number of Warrants
____________
VOID AFTER 5:00 P.M., NEW YORK CITY TIME
JANUARY 14, 2000 (UNLESS EXTENDED OR UNLESS
AN EARLIER REDEMPTION DATE IS ESTABLISHED)
INDUSTRIAL HOLDINGS, INC.
WARRANT TO PURCHASE COMMON STOCK
This Warrant Certificate certifies that
_______________________________________________, or, subject to certain
restrictions on transfer described in the Warrant Agreement (as hereinafter
defined), registered assigns, is the registered holder of the number indicated
above of warrants ("Warrants") to purchase shares of common stock, $.01 par
value ("Common Stock"), of Industrial Holdings, Inc., a Texas corporation
("Company"). Each Warrant entitles the holder thereof to purchase from the
Company), on or before January 14, 2000 (subject to extension by the Company,
one fully paid and nonassessable share of Common Stock, upon presentation and
surrender of this Warrant Certificate, with the Form of Election to Purchase
duly executed, at the corporate trust office of the Warrant Agent (as defined
below) and upon proper payment of the Exercise Price. Subject to adjustment as
provided in the warrant agreement between the Company and ChaseMellon
Shareholder Services, dated as of __________, 1997 ("Warrant Agreement"), the
exercise price ("Exercise Price") for each Warrant evidenced hereby shall be
$22.50. Payment of the Exercise Price shall be made in lawful money of the
United States of America by certified check payable to the Warrant Agent. This
Warrant may be called by the Company as provided for in the Warrant Agreement.
As provided in the Warrant Agreement, the Exercise Price and the number of
shares of Common Stock purchasable upon the exercise of the Warrants are, upon
the happening of certain events, subject to modification or adjustment.
References to the Warrant Agent herein shall mean ChaseMellon
Shareholder Services and any successor or additional Warrant Agent designated as
provided in the Warrant Agreement.
This Warrant Certificate is subject to all of the terms, provisions,
and conditions of the Warrant Agreement, including the provisions of such
Agreement relating to the amendment thereof, which Warrant Agreement is hereby
incorporated herein by reference and made a part hereof. Reference is hereby
made to the Warrant Agreement for a full description of the rights, limitations
of rights, obligations, duties, and immunities of the Warrant Agent, the
Company, and the holder of this Warrant Certificate. Copies of the Warrant
Agreement, as such may be amended from time to time, are available for
inspection at the offices of the Warrant Agent.
This Certificate, with or without other Warrant Certificates, upon
surrender to the Warrant Agent or any successor or additional Warrant Agent, may
be exchanged for another Warrant Certificate or Warrant Certificates evidencing
a like aggregate number of Warrants. If this Warrant Certificate shall be
exercised
-1-
<PAGE>
in part, the holder hereof shall be entitled to receive upon surrender hereof
another Warrant Certificate or Warrant Certificates evidencing the number of
Warrants not exercised.
No holder of this Warrant Certificate shall be deemed to be the holder
of Common Stock or any other securities of the Company that may at any time be
issuable on the exercise hereof for any purpose, nor shall anything contained in
the Warrant Agreement or herein be construed to confer upon the holder of this
Warrant Certificate, as such, any of the rights of a stockholder of the Company
or any right to vote for the election of directors or upon any matter submitted
to stockholders at any meeting thereof, or to give or withhold consent to any
corporate action (whether upon any reorganization, issuance or stock,
reclassification or conversion of stock, change of par value, or exchange of
stock to no par value, consolidation, merger, conveyance, or otherwise) or to
receive notice of meetings, or to receive dividends or subscription rights or
otherwise, until this Warrant Certificate shall have been exercised and the
Common Stock purchasable upon the exercise hereof shall have become issuable as
provided in the Warrant Agreement.
Every holder of this Warrant Certificate, by accepting the same,
consents and agrees with the Company, the Warrant Agent, and with every other
holder of a Warrant Certificate that:
(a) subject to the restrictions on transfer described in the Warrant
Agreement, this Warrant Certificate is transferable by the registered holder
hereof in person or by attorney duly authorized in writing, at the principal
corporate trust office of the Warrant Agent, in whole or in part;
(b) anything herein to the contrary notwithstanding, in no event shall
the Company or the Warrant Agent be obliged to issue Warrant Certificates
evidencing other than a whole number of Warrants or issue certificates
evidencing other than a whole number of shares of Common Stock upon the exercise
of this Warrant Certificate; and
(c) the Company and the Warrant Agent may deem and treat the person in
whose name this Warrant Certificate is registered as the absolute, true, and
lawful owner hereof for all purposes whatsoever, and neither the Company nor the
Warrant Agent shall be affected by any notice to the contrary.
This Warrant Certificate shall not be valid or binding for any purpose
until it shall have been countersigned by the Warrant Agent.
WITNESS the signatures or facsimile signatures of the proper officers
of the Company.
Date:__________________________ INDUSTRIAL HOLDINGS, INC.
Attest:________________________ BY: ____________________________
Authorized Officer ROBERT E. CONE, President
Secretary
Countersigned:
CHASEMELLON SHAREHOLDER SERVICES
as Warrant Agent
By_______________________________
Authorized Officer
-2-
<PAGE>
(Form of)
ASSIGNMENT
For value received and subject to the restrictions on transfer
described in the Warrant Agreement under which this Warrant was issued,
__________________________________ hereby sells, assigns, and transfers unto
____________________________________ Warrants represented by the within Warrant
Certificate, together with all right, title, and interest therein, and does
hereby irrevocably constitute and appoint __________________
________________________________ attorney, to transfer such Warrants on the
books of the within named corporation, with full power of substitution.
Dated ______________________, 1997
__________________________________
Signature of Warrant Holder
__________________________________
Printed Name of Warrant Holder
- --------------------------------------------------------------------------------
Note: The above signature must correspond with the name as written upon the face
of this Warrant in every particular, without any change whatsoever.
TRANSFER FEE: $____________ Per Certificate
EXHIBIT 11
INDUSTRIAL HOLDINGS, INC.
EARNINGS PER SHARE
(thousands of dollars, except per share data)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
(UNAUDITED)
PRO FORMA (UNAUDITED) (UNAUDITED)
NINE MONTHS HISTORICAL PRO FORMA
ENDED NINE MONTHS ENDED YEAR ENDED HISTORICAL YEAR ENDED
SEPTEMBER 30 SEPTEMBER 30 DECEMBER 31 DECEMBER 31
------------ ----------------- ------------ ---------------------------------------
1997 1997 1996 1996 1996 1995 1994 1993 1992
---- ---- ---- ---- ---- ---- ---- ---- ----
Weighted average
common shares
outstanding 6,124 5,920 3,486 4,372 3,688 3,037 2,941 2,624 2,102
Common stock equivalents(1) 863 863 616 727 691 113 89 205
------ ------- ------- ------ ------- ------ ------- ------ ------
Total common shares and
common equivalent
shares deemed to have a
dilutive effect 6,987 6,783 4,102 5,099 4,379 3,150 3,030 2,829 2,102
====== ====== ====== ====== ====== ====== ====== ====== ======
Net earnings
available for common
shareholders $2,418 $2,010 $ 762 $2,010 $1,127 $ 545 $ 32 $ 763 $ 382
===== ====== ====== ===== ====== ====== ====== ====== ======
Earnings per share $ .35 $ .30 $ .19 $ .39 $ .26 $ .17 $ .01 $ .27 $ .17
======= ======== ======= ======= ========= ======= ====== ======= =======
</TABLE>
- ---------------------
(1) Net effect of dilutive stock options and warrants, calculated using the
treasury stock method using average market price. Fully diluted earnings
per share is not presented since it is the same as primary earnings per
share. The effect of convertible debt is anti-dilutive for all years
presented.
EXHIBIT 13.1
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
March 31, 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 May 13, 1997, there were 6,009,273 shares of Common Stock
outstanding.
<PAGE>
INDUSTRIAL HOLDINGS, INC.
INDEX
<TABLE>
<CAPTION>
PAGE NO.
<S> <C>
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheets at March 31, 1997 and 1
December 31, 1996
Consolidated Statement of Income for the Quarters ended 2
March 31, 1997 and 1996
Consolidated Statement of Cash Flows for the Quarters 3
ended March 31, 1997 and 1996
Notes to Consolidated Financial Statements 4
Item 2 Management's Discussion and Analysis of Financial 5
Condition and Results of Operations
PART II OTHER INFORMATION
Item 1. Legal Proceedings 7
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 (no response required)
Item 6. Exhibits and reports on Form 8-K 7
</TABLE>
<PAGE>
INDUSTRIAL HOLDING, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
March 31 December 31
1997 1996
------------ -------------
ASSETS
<S> <C> <C>
Current assets:
Cash and equivalents $ 835,009 $3,087,925
Accounts receivable - trade, net 10,128,472 6,756,218
Inventories 11,784,138 9,970,337
Advances to shareholders 77,809 77,086
Notes receivable, current portion 208,493 207,549
Other current assets 598,981 333,839
------------ -------------
Total current assets 23,632,902 20,432,954
Property and equipment, net 19,352,856 15,579,410
Notes receivable, less current portion 1,448,806 1,464,393
Other assets 714,896 714,495
Goodwill and other, net 12,703,235 5,498,271
----------- -----------
Total assets $57,852,695 $43,689,523
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable $10,679,387 $ 9,615,917
Accounts payable - trade 6,749,123 4,601,082
Accrued expenses and other 2,382,884 1,721,487
Current portion of long-term debt 3,176,053 1,393,712
------------ ------------
Total current liabilities 22,987,447 17,332,198
Long-term debt, less current portion 7,210,227 7,326,444
Deferred compensation payable,
less current portion 259,730 285,532
Deferred income taxes payable 2,669,134 2,190,902
----------- ------------
Total liabilities 33,126,538 27,135,076
---------- -----------
Shareholders' equity:
Common stock $.01 par value, 20,000,000
shares authorized, 5,848,689 and 4,851,494
shares issued and outstanding 58,487 48,515
Additional paid-in capital 23,004,527 15,360,801
Retained earnings 1,663,143 1,145,131
------------ -------------
Total shareholders' equity 24,726,157 16,554,447
----------- ------------
Total liabilities and shareholders' equity $57,852,695 $43,689,523
=========== ===========
</TABLE>
See notes to consolidated financial statements
1
<PAGE>
INDUSTRIAL HOLDINGS, INC.
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31,
1997 1996
----------- -----------
<S> <C> <C>
Sales $17,304,348 $12,015,008
Cost of sales 12,754,674 9,456,076
----------- -----------
Gross profit 4,549,674 2,558,932
Selling, general and administrative 3,327,479 1,876,054
------------ -----------
Income from operations 1,222,195 682,878
------------ ------------
Other income (expense):
Interest expense (434,378) (348,341)
Interest income 53,488 26,740
Other income (expense) 10,007 (2,537)
-------------- ---------------
Total other income (expense) 370,883 (324,138)
------------- -------------
Income before income taxes 851,312 358,740
Income tax expense 333,300 121,972
------------ ------------
Net income $ 518,012 $ 236,768
=========== ===========
Earnings per share $ .09 $ .07
=========== ===========
</TABLE>
See notes to consolidated financial statements
2
<PAGE>
INDUSTRIAL HOLDINGS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED MARCH 31
1997 1996
----------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 518,012 $ 236,768
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 527,772 315,994
Deferred income tax provision 31,154 36,972
Deferred compensation paid (25,802)
Changes in assets and liabilities,
net of acquisitions:
Accounts receivable and advances to
shareholders (302,035) (1,505,803)
Inventories (151,524) (688,380)
Notes receivable 14,643 26,735
Other assets (241,489) (216,158)
Accounts payable (14,885) 975,661
Accrued expenses 983 (169,278)
-------------- -------------
Net cash provided (used)
by operating activities 356,829 (987,489)
Cash flows from investing activities:
Purchase of property and equipment (624,287) (170,350)
Purchase of subsidiaries, net of cash (1,734,841)
Additional consideration paid to former
shareholders of Landreth and PVS (55,930)
----------------- ------------
Net cash used by investing activities (2,359,128) (226,280)
----------------- ------------
Cash flows from operating activities:
Net borrowing under revolving line of credit 33,046 845,054
Proceeds from long-term debt 407,115
Principal payments on notes payable,
long-term debt and capital lease obligations (1,418,462) (826,629)
Proceeds from issuance of common stock 727,684 981,472
----------------- ------------
Net cash provided (used) by financing activities (250,617) 999,897
----------------- ------------
Net decrease in cash and equivalents (2,252,916) (213,872)
Cash and equivalents, beginning of period 3,087,925 428,430
----------------- ------------
Cash and equivalents, end of period $ 835,009 $ 214,558
================= ============
Non-cash financing activities:
Debt converted to equity $ 360,000
</TABLE>
See notes to consolidated financial statements
3
<PAGE>
INDUSTRIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 1997
NOTE A BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have
been prepared in accordance with generally accepted accounting
principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered
necessary for fair presentation have been included. Operating
results for the quarter ended March 31, 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:
March 31 December 31
1997 1996
----------- -----------
Raw materials $ 1,827,746 $ 1,477,051
Finished goods 8,574,875 7,130,702
Other 1,381,517 1,362,584
----------- -----------
$11,784,138 $9,970,337
NOTE C RECLASSIFICATION
Reclassifications of amounts have been made from selling, general
and administrative expenses to cost of sales for the quarter ended
March 31, 1996 to conform to the classification in the quarter ended
March 31, 1997. Certain reclassifications have been made to the
statement of cash flows for the quarter ended March 31, 1996 to
conform to the classification used for the current quarter.
4
<PAGE>
PART I
FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The financial information in the following discussion of Industrial
Holdings, Inc. (including its subsidiaries, the "Company"),
includes the operating results of Industrial Holdings, Inc. ("IHI")
and its subsidiaries. The Company's business is organized into two
divisions: the Fastener Manufacturing and Sales Division, comprised
of Landreth Engineering Company ("LEC"), Connecticut Rivet
("CRivet"), American Rivet Company ("American"), acquired November
1996, and LSS-Lone Star - Houston, Inc. ("Lone Star"), acquired
February 1997, and the Energy Products and Services Division
comprised of the Valve and Supplies Sales Group which includes
Pipeline Valve Specialty ("PVS"), Industrial Municipal Supply
Company ("IMSCO") and Manifold Valve Service ("MVS"), acquired March
1997; the New Machine Sales and Services Group which includes Regal
Machine Tools ("Regal") and Rex Machinery Movers ("RMM"); the Export
Crating Group which includes U.S. Crating ("USC"); and the Used
Machine Sales Group which includes Rex/Paul's Machine Sales
("RPMS"). Regal, RMM, USC and RPMS comprise the Rex Group ("Rex").
RESULTS OF OPERATIONS
QUARTER ENDED MARCH 31, 1997 COMPARED WITH QUARTER ENDED MARCH 31,
1996.
SALES. On a consolidated basis, sales increased $5,289,340 or 44%
for the quarter ended March 31, 1997 compared to the quarter ended
March 31, 1996. This increase was primarily the result of the
acquisitions of Lone Star in February 1997 and American in November
1996.
COST OF SALES. Cost of sales increased $3,298,598 or 35% for the
quarter ended March 31, 1997 compared to the quarter ended March 31,
1996, primarily as a result of the increase in sales described in
the preceding paragraph.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $1,451,425 or 77% for the quarter
ended March 31, 1997 compared to the quarter ended March 31, 1996.
This increase was primarily attributable to the acquisitions of Lone
Star and American. Selling, general and administrative expenses
increased a greater percentage than sales primarily as a result of
amortization of goodwill related to the acquisitions of Lone Star
and American.
INTEREST EXPENSE. Interest expense increased $86,037 or 25% for the
quarter ended March 31, 1997 compared to the quarter ended March 31,
1996 primarily as a result of debt incurred in the acquisitions of
Lone Star and American.
INCOME TAXES. The Company's effective tax rate was 39% for the
quarter ended March 31, 1997 compared to 34% for the quarter ended
March 31, 1996.
TOTAL ASSETS. Total assets were $57,852,695 at March 31, 1997
compared to $43,689,523 at December 31, 1996. This increase was
primarily attributable to an increase in goodwill, accounts
receivable, and property and equipment as a result of the
acquisitions of Lone Star and MVS.
5
<PAGE>
TOTAL LIABILITIES. Total liabilities were $33,126,538 at March 31,
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.
LIQUIDITY AND CAPITAL RESOURCES. At March 31, 1997, the Company had
cash of $835,009 and additional borrowing capacity under its line of
credit of $1,538,425. The Company's operations provided cash of
$356,829 during the quarter ended March 31, 1997 compared to using
cash of $987,489 during the quarter ended March 31, 1996. This
change is due to a significant increase in accounts receivable for
the quarter ended March 31, 1996 as a result of the acquisition of
CRivet. CRivet was acquired in December 1995. Accounts receivable
were not purchased by the Company as part of the acquisition. At
March 31, 1996, CRivet's accounts receivables balance was
$1,602,009, a $970,152 increase from December 31, 1995.
Investing activities used cash of $2,359,128 for the quarter ended
March 31, 1997 compared to $226,280 for the quarter ended March 31,
1996. This increased use of cash was attributable to the acquisition
of Lone Star and increased capital expenditures in the first quarter
of 1997 compared to the first quarter of 1996. Capital expenditures
for property and equipment increased 266% for the quarter ended
March 31, 1997 compared to the quarter ended March 31, 1996
primarily as a result of the purchase of new equipment and leasehold
improvements for the Company's fastener manufacturing operations.
Financing activities used cash of $250,617 for the quarter ended
March 31, 1997 compared to providing cash of $999,897 for the
quarter ended March 31, 1996. This change is due to a decrease in
net borrowings in the current quarter.
At March 31, 1997, the Company had working capital of $645,455,
long-term debt of $7,210,227 and shareholders' equity of
$24,726,157. 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 debt securities. However, any acquisition of
companies in connection with the Company's acquisition strategy will
require additional financing, which likely would include a
combination of debt and equity financing.
6
<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 6. Exhibits and Reports on Form 8-K
(a) Exhibit 11 - Earnings per Share
(b) Reports on Form 8-K
On February 18, 1997, the Company filed a Report on Form 8-K
disclosing the execution of a Stock Purchase Agreement by and
among the Company and Judith Jandl to purchase all the
outstanding capital stock of LSS-Lone Star - Houston, Inc. for
approximately $5.9 million including estimated transaction
expenses.
On January 24, 1997, the Company filed a Report on Form 8-K which
included the audited financial statements of American Rivet, Inc.
for the fiscal years ended August 31, 1996 and 1995 and the pro
forma combined financial statements of IHI and American as of and
for the nine months ended September 30, 1996 and the year ended
December 31, 1995.
7
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, as amended, the Registrant, Industrial Holdings, Inc., has duly
caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
INDUSTRIAL HOLDINGS, INC.
Date: May 15, 1997 By: /S/CHRISTINE A. SMITH
Christine A. Smith
Chief Financial Officer and
Vice President
8
<PAGE>
INDUSTRIAL HOLDINGS, INC.
EARNINGS PER SHARE
MARCH 31, 1997
Earnings per share is based upon the weighted average number of common and
common equivalent shares outstanding during the period as follows:
QUARTER ENDED MARCH 31
1997 1996
------------- -------------
Average common shares outstanding 5,135,025 3,137,316
Net effect of dilutive stock options
and warrants, based on the treasury
stock method using average
market price 920,949 453,762
------------- -------------
6,055,974 3,591,077
Net income $ 518,012 $ 236,768
============= =============
Earnings per share $ .09 $ .07
============= =============
The above table represents primary earnings per share. Fully diluted earnings
per share for the quarter ended March 31, 1997 and 1996 were the same as primary
earnings per share.
EXHIBIT 13.2
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended
June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-19580
INDUSTRIAL HOLDINGS, INC.
(exact name of registrant as specified in its charter)
TEXAS
(STATE OR OTHER JURISDICTION
OF INCORPORATION OR ORGANIZATION)
76-0289495
(IRS EMPLOYER
IDENTIFICATION NO.)
7135 ARDMORE, HOUSTON, TEXAS 77054
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(713) 747-1025
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (i) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (ii) has been subject to such
filing requirements for the past 90 days. Yes [x] No [ ]
At August 14, 1997, there were 6,425,453 shares of Common Stock
outstanding.
<PAGE>
INDUSTRIAL HOLDINGS, INC.
INDEX
PAGE NO.
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheets at June 30, 1997 and
December 31, 1996 .................................................. 1
Consolidated Statement of Income for the Quarters ended
June 30, 1997 and 1996 ............................................. 2
Consolidated Statement of Income for the Six Months
ended June 30, 1997 and 1996 ....................................... 3
Consolidated Statement of Cash Flows for the Six
Months ended June 30, 1997 and 1996 ................................ 4
Notes to Consolidated Financial Statements ......................... 5
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations ................................ 6
PART II OTHER INFORMATION
Item 1. Legal Proceedings .................................................. 9
Item 2. Changes in Securities (no response required)
Item 3. Defaults upon Senior Securities
(no response required)
Item 4. Submission of Matters to a Vote of
Security Holders ................................................... 9
Item 5. Other Information (no response required)
Item 6. Exhibits and reports on Form 8-K ................................... 9
<PAGE>
INDUSTRIAL HOLDING, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
June 30 December 31
1997 1996
----------- -----------
ASSETS
<S> <C> <C>
Current assets:
Cash and equivalents ........................................................ $ 1,005,819 $ 3,087,925
Accounts receivable - trade, net ............................................ 10,951,546 6,756,218
Inventories ................................................................. 12,026,767 9,970,337
Advances to shareholders .................................................... 84,034 77,086
Notes receivable, current portion ........................................... 297,975 207,549
Other current assets ........................................................ 225,745 333,839
----------- -----------
Total current assets .................................................... 24,591,886 20,432,954
Property and equipment, net .......................................................... 18,819,685 15,579,410
Notes receivable, less current portion ............................................... 1,143,229 1,464,393
Other assets ......................................................................... 761,433 714,495
Goodwill and other, net .............................................................. 12,843,332 5,498,271
----------- -----------
Total assets .............................................................. $58,159,565 $43,689,523
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable ............................................................... $ 8,292,609 $ 9,615,917
Accounts payable - trade .................................................... 5,727,955 4,601,082
Accrued expenses and other .................................................. 2,657,852 1,721,487
Current portion of long-term debt ........................................... 1,725,451 1,393,712
----------- -----------
Total current liabilities .............................................. 18,403,867 17,332,198
Long-term debt, less current portion ........................................ 7,852,716 7,326,444
Deferred compensation payable,
less current portion .................................................. 253,865 285,532
Deferred income taxes payable ............................................... 2,657,037 2,190,902
----------- -----------
Total liabilities ..................................................... 29,167,485 27,135,076
----------- -----------
Shareholders' equity:
Common stock $.01 par value, 50,000,000
shares authorized, 6,364,103 and 4,851,494
shares issued and outstanding ............................................ 63,641 48,515
Additional paid-in capital ........................................................ 26,439,533 15,360,801
Retained earnings ................................................................. 2,488,906 1,145,131
----------- -----------
Total shareholders' equity .......................................... 28,992,080 16,554,447
----------- -----------
Total liabilities and shareholders' equity .......................... $58,159,565 $43,689,523
=========== ===========
</TABLE>
See notes to consolidated financial statements
1
<PAGE>
INDUSTRIAL HOLDINGS, INC.
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
QUARTER ENDED JUNE 30,
1997 1996
------------ ------------
<S> <C> <C>
Sales ...................................................................... $ 21,283,801 $ 13,612,320
Cost of sales .............................................................. 16,030,350 10,801,287
------------ ------------
Gross profit ............................................................... 5,253,450 2,811,033
Selling, general and administrative ........................................ 3,428,486 2,023,199
------------ ------------
Income from operations ..................................................... 1,824,965 787,834
------------ ------------
Other income (expense):
Interest expense ..................................................... (450,262) (329,880)
Interest income ...................................................... 32,855 33,651
Other income (expense) ............................................... 19,294 (7,823)
------------ ------------
Total other income (expense) ................................. (398,113) (304,052)
------------ ------------
Income before income taxes ................................................. 1,426,852 483,782
Income tax expense ......................................................... 601,091 164,484
------------ ------------
Net income ................................................................. $ 825,761 $ 319,295
============ ============
Earnings per share ......................................................... $ .12 $ .07
============ ============
</TABLE>
See notes to consolidated financial statements
2
<PAGE>
INDUSTRIAL HOLDINGS, INC.
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
1997 1996
------------ ------------
<S> <C> <C>
Sales ...................................................................... $ 38,588,147 $ 25,627,328
Cost of sales .............................................................. 28,785,024 20,257,363
------------ ------------
Gross profit ............................................................... 9,803,123 5,369,965
Selling, general and administrative ........................................ 6,755,963 3,899,253
------------ ------------
Income from operations ..................................................... 3,047,160 1,470,712
------------ ------------
Other income (expense):
Interest expense ..................................................... (884,641) (678,221)
Interest income ...................................................... 86,343 60,391
Other income (expense) ............................................... 29,302 (10,363)
------------ ------------
Total other income (expense) ................................. (768,996) (628,193)
------------ ------------
Income before income taxes ................................................. 2,278,164 842,519
Income tax expense ......................................................... 934,391 286,456
------------ ------------
Net income ................................................................. $ 1,343,773 $ 556,063
============ ============
Earnings per share ......................................................... $ .21 $ .14
============ ============
</TABLE>
See notes to consolidated financial statements
3
<PAGE>
INDUSTRIAL HOLDINGS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30
1997 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income ...................................................................... $ 1,343,773 $ 556,063
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization ............................................... 1,153,439 641,863
Deferred income tax provision ............................................... 19,057 286,456
Deferred compensation paid .................................................. (31,667)
Changes in assets and liabilities,
net of acquisitions:
Accounts receivable and advances to
shareholders .......................................................... (1,131,334) (1,050,358)
Inventories .............................................................. (394,153) (1,400,033)
Notes receivable ......................................................... 230,739 151,033
Other assets ............................................................. 118,918 (149,525)
Accounts payable and accrued expenses .................................... (760,100) 641,020
----------- -----------
Net cash provided (used)
by operating activities ......................................... 548,672 (323,481)
Cash flows from investing activities:
Purchase of property and equipment .............................................. (862,191) (932,743)
Purchase of subsidiaries, net of cash ........................................... (1,768,549) (19,000)
Additional consideration paid to former
shareholders of Landreth ..................................................... (99,320)
----------- -----------
Net cash used by investing activities ................................ (2,630,740) (1,051,063)
----------- -----------
Cash flows from financing activities:
Net borrowing under revolving line of credit .................................... (1,209,076) 876,131
Proceeds from long-term debt .................................................... 226,453 184,422
Principal payments on notes payable,
long-term debt and capital lease obligations ................................ (790,569) (950,015)
Proceeds from issuance of common stock .......................................... 1,773,154 1,080,369
----------- -----------
Net cash provided (used) by financing activities ............................ (38) 1,190,907
----------- -----------
Net decrease in cash and equivalents ............................................... (2,082,106) (183,637)
Cash and equivalents, beginning of period .......................................... 3,087,925 428,430
----------- -----------
Cash and equivalents, end of period ................................................ $ 1,005,819 $ 244,793
=========== ===========
Non-cash financing activities:
Debt converted to equity ................................................. $ 2,847,385 $ 804,100
</TABLE>
See notes to consolidated financial statements
4
<PAGE>
INDUSTRIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1997
NOTE A BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have
been prepared in accordance with generally accepted accounting
principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals)
considered necessary for fair presentation have been included.
Operating results for the six months ended June 30, 1997 are not
necessarily indicative of the results that may be expected for
the year ended December 31, 1997. For further information, refer
to the consolidated financial statements and footnotes thereto
included in the Company's annual report on Form 10-K for the year
ended December 31, 1996.
NOTE B INVENTORY
Inventory consists of the following:
June 30 December 31
1997 1996
----------- -----------
Raw materials $ 1,820,805 $1,477,051
Finished goods 8,719,090 7,130,702
Other 1,486,872 1,362,584
----------- -----------
$12,026,767 $9,970,337
=========== ==========
NOTE C RECLASSIFICATION
Reclassifications of amounts have been made from selling, general
and administrative expenses to cost of sales for the six months
and the quarter ended June 30, 1996 to conform to the
classification in the quarter ended June 30, 1997. Certain
reclassifications have been made to the statement of cash flows
for the six months ended June 30, 1996 to conform to the
classification used for the current quarter.
5
<PAGE>
PART I
FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The financial information in the following discussion of
Industrial Holdings, Inc. (including its subsidiaries, the
"Company"), includes the operating results of Industrial
Holdings, Inc. ("IHI") and its subsidiaries. The Company's
business is organized into two divisions: the Fastener
Manufacturing and Sales Division, comprised of Landreth
Engineering Company ("Landreth"), Connecticut Rivet ("CRivet"),
American Rivet Company ("American"), acquired November 1996, and
LSS-Lone Star - Houston, Inc. ("Lone Star"), acquired February
1997, and the Energy Products and Services Division comprised of
the Valve and Supplies Sales Group which includes Pipeline Valve
Specialty ("PVS"), Industrial Municipal Supply Company ("IMSCO")
and Manifold Valve Service ("MVS"), acquired March 1997; the New
Machine Sales and Services Group which includes Regal Machine
Tools ("Regal") and Rex Machinery Movers ("RMM"); the Export
Crating Group which includes U.S. Crating ("USC"); and the Used
Machine Sales Group which includes Rex/Paul's Machine Sales
("RPMS"). Regal, RMM, USC and RPMS comprise the Rex Group
("Rex").
RESULTS OF OPERATIONS
QUARTER ENDED JUNE 30, 1997 COMPARED WITH QUARTER ENDED JUNE 30,
1996.
SALES. On a consolidated basis, sales increased $7,671,481 or 56%
for the quarter ended June 30, 1997 compared to the quarter ended
June 30, 1996. This increase was primarily the result of the
acquisitions of MVS, Lone Star and American (the "Acquisitions").
The increase attributable to the Acquisitions was partially
offset by a $2.0 million decrease in sales at IMSCO as the result
of the loss of key salesmen at that subsidiary.
COST OF SALES. Cost of sales increased $5,229,063 or 48% for the
quarter ended June 30, 1997 compared to the quarter ended June
30, 1996, primarily as a result of the increase in sales
described in the preceding paragraph. Gross margins increased to
25% for the quarter ended June 30, 1997 from 21% for the quarter
ended June 30, 1996, as the lower margin sales at IMSCO were
replaced by higher margin sales at Lone Star, American and MVS.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general
and administrative expenses increased $1,405,287 or 70% for the
quarter ended June 30, 1997 compared to the quarter ended June
30, 1996. This increase was primarily attributable to the
Acquisitions. Selling, general and administrative expenses
increased a greater percentage than sales primarily as a result
of amortization of goodwill related to the Acquisitions.
INTEREST EXPENSE. Interest expense increased $120,382 or 37% for
the quarter ended June 30, 1997 compared to the quarter ended
June 30, 1996, primarily as a result of debt incurred in the
Acquisitions.
6
<PAGE>
INCOME TAXES. The Company's effective tax rate was 42% for the
quarter ended June 30, 1997 compared to 34% for the quarter ended
June 30, 1996. The higher effective tax rate is attributable to
the inclusion of non-deductible amortization of goodwill as a
result of the Acquisitions.
SIX MONTHS ENDED JUNE 30, 1997 COMPARED WITH SIX MONTHS ENDED
JUNE 30, 1996.
SALES. Sales increased $12,960,819 or 51% for the six months
ended June 30, 1997 compared to the six months ended June 30,
1996. This increase was primarily attributable to the
Acquisitions, which was partially offset by a $3.8 million
decrease in sales at IMSCO as the result of the loss of key
salesmen at that subsidiary.
COST OF SALES. Cost of sales increased $8,527,661 or 42% for the
six months ended June 30, 1997 compared to the six months ended
June 30, 1996, primarily as a result of the increase in sales
described in the preceding paragraph. Gross margins increased to
25% for the six months ended June 30, 1997 from 21% for the six
months ended June 30, 1996 as the lower margin sales at IMSCO
were replaced by higher margin sales at American, Lone Star and
PVS.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general
and administrative expenses increased $2,856,707 or 73% for the
six months ended June 30, 1997 compared to the six months ended
June 30, 1996. Selling, general and administrative expenses
increased a greater percentage than sales primarily as a result
of amortization of goodwill related to the Acquisitions.
INTEREST EXPENSE. Interest expense increased $206,420 or 30% for
the six months ended June 30, 1997 compared to the six months
ended June 30, 1997 primarily as a result of debt incurred in the
Acquisitions.
INCOME TAXES. The Company's effective tax rate was 41% for the
six months ended June 30, 1997 compared to 34% for the six months
ended June 30, 1996. The increase in the effective tax rate for
the six months ended June 30, 1997 is attributable to the
inclusion of non-deductible amortization of goodwill as a result
of the Acquisitions.
TOTAL ASSETS. Total assets were $58,159,565 at June 30, 1997
compared to $43,689,523 at December 31, 1996. This increase was
primarily attributable to the acquisitions of Lone Star and MVS.
TOTAL LIABILITIES. Total liabilities were $29,167,485 at June 30,
1997 compared to $27,135,076 at December 31, 1996. This increase
was primarily attributableto an increase in trade accounts
payable, notes payable, and long term debt as a result of the
acquisitions of Lone Star and MVS which was partially offset by
the conversion of 2,847,385 of debt to equity.
LIQUIDITY AND CAPITAL RESOURCES. At June 30, 1997, the Company
had cash of $1,005,819 and additional borrowing capacity under
its line of credit of $2,020,748. The Company's operations
provided cash of $548,670 during the six months ended June 30,
1997 compared to using cash of $323,481 during the six months
ended June 30, 1996. For the six months ended June 30, 1997, the
Company's operations provided cash because the Company's net
income and
7
<PAGE>
depreciation and amortization were not entirely offset by an
increase in accounts receivable and decrease in accounts payable
and accrued expenses. Accounts receivable increased during that
period primarily because of increases in sales at PVS, MVS and
Lone Star and accounts payable and accrued expenses decreased
primarily because of a reduction in liabilities at IMSCO. For the
six months ended June 30, 1996, the Company's operations used
cash because of an increase in accounts receivable as a result of
the acquisition of CRivet. Accounts receivable were not purchased
by the Company as part of the acquisition. At June 30, 1996,
CRivet's accounts receivables balance was $1,602,009, a $970,152
increase from December 31, 1995.
Investing activities used cash of $2,630,740 for the six months
ended June 30, 1997 compared to $1,051,063 for the six months
ended June 30, 1996. This increased use of cash was attributable
to the acquisition of Lone Star and MVS.
Financing activities used cash of $38 for the six months ended
June 30, 1997 compared to providing cash of $1,190,907 for the
six months ended June 30, 1996. This change is due to the
repayment of short term borrowings in the six month period ended
June 30, 1997.
At June 30, 1997, the Company had working capital of $6,187,999,
long-term debt of $7,852,716 and shareholders' equity of
$28,992,080. The Company anticipates that its operating cash
needs for fiscal 1997 can be met with cash generated from
operations, borrowings under its credit facilities with Comerica
Bank-Texas, and private placements of securities. However, any
acquisition of companies in connection with the Company's
acquisition strategy will require additional financing, which
likely would include a combination of debt and equity financing.
8
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is involved in litigation arising in the ordinary course
of its business. In the opinion of management, the ultimate
liability, if any, as a result of these matters will not have a
material adverse effect on the Company's consolidated financial
condition or results of operations.
Item 4 Submission of Matters to a Vote of Security Holders.
(a) The annual meeting of the shareholders of the Company was
held June 30, 1997.
(b) The following persons were elected at that meeting as Class
III Directors to serve until the third annual meeting of
shareholders following their election:
Number of Votes
NAME OF NOMINEE FOR WITHHELD
--------------- --- --------
Robert E. Cone 4,745,307 25,152
James H. Brock, Jr. 4,745,307 25,152
Barbara Shuler 4,744,367 26,902
(c) The number of shares available under the 1994 Amended and
Restated Incentive Option Plan was increased from 250,000 to
500,000.
NUMBER OF VOTES
FOR AGAINST ABSTAIN
2,862,805 176,882 55,598
(d) The number of shares available under the 1995 Non-Employee
Director Option Plan was increased from 105,000 to 210,000.
NUMBER OF VOTES
FOR AGAINST ABSTAIN
2,858,261 181,895 55,229
(e) The Amendment to the Articles of Incorporation of the
Company was adopted to increase the number of authorized
shares of Common Stock from 20,000,000 to 50,000,000.
NUMBER OF VOTES
FOR AGAINST ABSTAIN
4,558,335 169,082 43,042
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 11 - Earnings per Share
(b) Reports on Form 8-K - None
9
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, as amended, the Registrant, Industrial Holdings, Inc., has duly
caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
INDUSTRIAL HOLDINGS, INC.
Date: August 14, 1997 By:/S/CHRISTINE A. SMITH
------------------------
Christine A. Smith
Chief Financial Officer and
Vice President
10
<PAGE>
INDUSTRIAL HOLDINGS, INC.
EARNINGS PER SHARE
JUNE 30, 1997
Earnings per share is based upon the weighted average number of common and
common equivalent shares outstanding during the period as follows:
<TABLE>
<CAPTION>
QUARTER ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
----------------------------- -----------------------------
1997 1996 1997 1996
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Average common shares outstanding ...................... 6,050,114 3,505,393 5,695,210 3,363,239
Net effect of dilutive stock options
and warrants, based on the treasury
stock method using average
market price ........................................ 663,665 750,210 792,307 601,986
---------- ---------- ---------- ----------
6,713,799 4,255,602 6,487,517 3,965,225
========== ========== ========== ==========
Net income ............................................. $ 825,761 $ 319,295 $1,343,773 $ 556,063
========== ========== ========== ==========
Earnings per share ..................................... $ .12 $ .07 $ .21 $ .14
========== ========== ========== ==========
</TABLE>
The above table represents primary earnings per share. Fully diluted earnings
per share for the quarter and six months ended June 30, 1997 and 1996 were the
same as primary earnings per share.
11
EXHIBIT 13.3
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.
12
EXHIBIT 13.4
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
12
<PAGE>
manufacturing operations. In 1996, the Company acquired net cash of $1,244,666
in the acquisition of American. In 1995, the Company used cash of $826,003 to
purchase CRivet.
Financing activities provided cash of $2,866,955 for 1996. The Company
raised $6,248,281 from the issuance of common stock and used approximately
$4,271,224 to repay debt associated with the acquisition of American as well as
other financing and to purchase property and equipment for its fastener
division. Net borrowing under the revolving line of credit increased in 1995 as
a result of borrowings by CRivet to fund increases in working capital. Financing
activities provided cash of $738,136 and $179,614 in 1995 and 1994 as the
Company generated net proceeds from the issuance of common stock of $275,116 and
$418,278 in 1995 and 1994, respectively.
In connection with the acquisition of Landreth, on October 7, 1992 the
Company issued to Renaissance Capital Partners II, Ltd. ("Renaissance"), a 12%
Convertible Debenture due October 1, 1999 in the principal amount of $2,500,000
(the "Renaissance Debenture"). At December 31, 1996, the outstanding principal
balance was $1,060,000. In January and February 1997, Renaissance converted
$360,000 of the outstanding principal balance to 110,430 shares of Common Stock.
The Renaissance Debenture is convertible at a conversion price of $3.26 per
share of common stock, subject to adjustment in certain circumstances. The
Renaissance Debenture requires monthly interest payments and commencing on
November 1, 1997, monthly principal payments of $25,000. The terms of the
Renaissance Debenture restrict the ability of the Company and its subsidiaries
to incur, assume or guarantee any additional indebtedness, to enter into new
lines of business, develop new products or acquire companies other than in
compliance with certain acquisition guidelines promulgated by Renaissance, to
consolidate or merge with another corporation or to sell any of its properties.
Additionally, the Company has entered into a Demand Note and Line of
Credit dated November 1, 1996 ("Demand Note") among the Company and Comerica
Bank-Texas ("Comerica"). The Demand Note is in the principal amount of
$12,000,000 ($14,000,000 at February 1997) or the lesser of a borrowing base as
defined, bearing interest at the prime rate of Comerica and is payable on
demand. This Demand Note allows IMSCO, Landreth, PVS, REX and American to borrow
funds based on 80% of eligible accounts receivable and 40% to 50% of eligible
inventory with various specified sublimits for each individual subsidiary. At
December 31, 1996, the borrowing capacity under the Demand Note was $10,016,464
of which $9,345,917 was outstanding at that date. The Demand Note is secured by
all of the assets of the Company, LEC, IMSCO, REX and American and the accounts,
chattel paper, general intangibles and contract rights of PVS.
In connection with its acquisition of CRivet, in December 1995, the
Company entered into a 9.85% $2.8 million Term Loan with General Electric
Capital Corporation payable in seventy monthly installments of $53,620 through
December 1, 2001. The Term Loan is secured by the machinery and equipment of
CRivet.
In March 1996, the Company completed a private placement of 300,000 shares
of Common Stock. Of the $1,010,000 in proceeds, the Company used $600,000 to
repay a portion of the Renaissance Debenture. The remaining proceeds were used
for the relocation of the Landreth plant to the Company's REX facility and the
CRivet plant to a new location in Connecticut.
In December 1996, the Company completed a tender offer to holders of its
Class A Redeemable Common Stock Purchase Warrants (Class A Warrants) whereby
each Class A Warrantholder received one share of Common Stock, one Class B
Redeemable Common Stock Purchase Warrant (Class B Warrant) and one Class C
Redeemable Common Stock Purchase Warrant (Class C Warrant) for each Class A
Warrant
13
<PAGE>
tendered along with the exercise price of $6 per warrant exercised. As a result
of the tender offer the Company received net proceeds of approximately
$3,556,000 and issued 621,914 shares of Common Stock, 621,914 Class B Warrants
and 621,914 Class C Warrants. The net proceeds were used to repay debt incurred
in the acquisition of American.
At December 31, 1996, the Company had working capital of $3,100,756,
long-term debt of $7,326,444 and shareholders' equity of $16,554,447. The
Company anticipates that its operating cash needs for fiscal 1997 can be met
with cash generated from operations, borrowings under its credit facilities with
Comerica and private placements of debt securities. Any acquisition of
additional companies in connection with the Company's acquisition strategy will
require additional financing, which likely would include a combination of debt
and equity financing.
INFLATION
Although the Company believes that inflation has not had any material
effect on operating results, there can be no assurance that the Company's
business will not be affected by inflation in the future.
SEASONALITY
The Company believes that its business is not subject to any significant
seasonal factors, and the Company does not anticipate significant seasonality in
the future. However, the business and operating results of the Company are
dependent on numerous economic and other factors affecting the industries to
which the Company provides products and services. An economic slowdown in these
industries could result in decrease in demand for the Company's products and
services, which could adversely affect the Company's operating results.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by this item begin at page F-1
hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
14
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this item is incorporated by reference to
the material appearing under the heading "Election of Directors" in the Proxy
Statement for the 1997 Annual Meeting of Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item is incorporated by reference to
the material appearing under the heading "Executive Compensation" in the Proxy
Statement for the 1997 Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item is incorporated by reference to
the material appearing under the heading "Principal Stockholders" and "Certain
Transactions" in the Proxy Statement for the 1997 Annual Meeting of
Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is incorporated by reference to
the material appearing under the heading "Certain Transactions" in the Proxy
Statement for the 1997 Annual Meeting of Stockholders.
15
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
A. FINANCIAL STATEMENTS
See index to consolidated financial statements on F-1.
B. REPORTS ON FORM 8-K
The Company filed a Current Report on Form 8-K dated October
3, 1996, disclosing the execution of a stock purchase
agreement by among the Company and the shareholders of
American.
The Company filed a Current Report on Form 8-K dated November
18, 1996 disclosing the acquisition of the capital stock of
American and the related financing.
The Company filed a Current Report on Form 8-K dated December
13, 1996 disclosing the completion of its offer to its Class A
Warrantholders. Proceeds to the Company were $3,556,000. The
Company issued 621,914 shares of Common Stock, 621,914 Class B
Warrants and 621,914 Class C Warrants.
C. EXHIBITS
See the Exhibit Index appearing on page EX-1.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 27th day of
March 1997.
INDUSTRIAL HOLDINGS, INC.
By:/s/ CHRISTINE A. SMITH
Christine A. Smith
(Chief Financial Officer and Vice President)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons and in the capacities
indicated on the 27th day of March 1997.
SIGNATURE TITLE
By:/s/ ROBERT E. CONE Chairman of the Board of Directors, President and
Robert E. Cone Chief Executive Officer (Principal Executive
Officer)
By:/s/ JAMES H. BROCK, JR. Executive Vice President and Director
James H. Brock, Jr.
By:/s/ CHRISTINE A. SMITH Vice President and Chief Financial Officer
Christine A. Smith (Principal Financial Officer and Chief Accounting
Officer)
By:______________________
Barbara S. Shuler Director
By:/s/ JOHN P. MADDEN
John P. Madden Director
By:/s/ JAMES W. KENNEY
James W. Kenney Director
By:/s/ CHARLES J. ANDERSON
Charles J. Anderson Director
By:/s/ JOHN L. THOMPSON
John L. Thompson Director
<PAGE>
INDEX TO EXHIBITS
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER IDENTIFICATION OF EXHIBIT PAGE
------ ------------------------- ----
3.1 -- Amended and Restated Articles of Incorporation of the Company.
Exhibit 3.1 from Amendment No. 1 to the Company's Registration
Statement on Form S-1 (No. 333-13323) is incorporated herein by
this reference.
3.2 -- Amended and Restated Bylaws of the Company. Exhibit 3.2 from the
Company's Registration Statement on Form S-1 (No. 333-13323) is
incorporated herein by this reference.
4.1 -- Specimen Certificate of Common Stock, $.01 par value, of the
Company. Exhibit 4.1 to the Company's Registration Statement on
Form S-1 (No. 33- 43169) dated October 7, 1991 (the "Registration
Statement"), as amended, is incorporated herein by reference.
4.2 -- Class A Redeemable Warrant Agreement and specimen of Class A
Redeemable Warrant Certificate. Exhibit 4.2 to the Company's
Registration Statement is incorporated herein by this reference.
4.3 -- Designation of Warrant Agent (Class A Redeemable Warrant), dated
as of November 1, 1996. Exhibit 4.3 from Amendment No. 1 to the
Company's Registration Statement on Form S-1 (No. 333-13323) is
incorporated herein by this reference.
4.4 -- Class B Redeemable Warrant Agreement and specimen of Class B
Redeemable Warrant Certificate. Exhibit 4.3 to the Company's
Registration Statement is incorporated herein by this reference.
4.5 -- Designation of Warrant Agent (Class B Redeemable Warrant), dated
as of November 1, 1996. Exhibit 4.5 from Amendment No. 1 to the
Company's Registration Statement on Form S-1 (No. 333-13323) is
incorporated herein by this reference.
4.6 -- Class C Redeemable Warrant Agreement and specimen of Class C
Redeemable Warrant Certificate. Exhibit 4.6 from the Company's
Registration Statement on Form S-1 (No. 333-13323) is
incorporated herein by this reference.
10.1 -- Second Amendment to Employment Agreement of Robert E. Cone.
Exhibit 10.1 to the Company's Registration Statement on Form S-1
(No. 333-13323) is incorporated herein by this reference.
10.2 -- Third Amendment to Employment Agreement of James H. Brock, Jr.
Exhibit 4.6 from the Company's Registration Statement on Form S-1
(No. 333-13323) is incorporated herein by this reference.
10.3 -- Employment Agreement of Thomas C. Landreth, dated October 26,
1992. Exhibit 10.3 to the Company's Registration Statement on
Form S-1 (No. 333- 13323) is incorporated herein by this
reference.
10.4 -- 1995 Non-Employee Director Stock Option Plan incorporated herein
by reference to the Proxy Statement dated May 26, 1995.
10.5 -- 1994 Amended and Restated Incentive Stock Plan. Incorporated
herein by this reference to the Proxy Statement dated May 25,
1994.
10.6 -- Stock Purchase Warrant Agreement dated September 27, 1991, from
the Company in favor of James H. Brock, Jr. Exhibit 10.6 to the
Company's Registration Statement is incorporated herein by this
reference.
10.7 -- Promissory Note dated December 6, 1995, by and among the Company,
Landreth Engineering Company and General Electric Corporation.
Exhibit 10.1 to the Company's Current Report on Form 8-K dated
December 7, 1995 is incorporated herein by this reference.
EX-1
<PAGE>
10.8 -- 12% Convertible Promissory Note dated December 8, 1995, by and
among the Company and St. James Capital Partners, L.P. ("St.
James"). Exhibit 10.1 to the Company's Amendment A2 to its
Current Report on Form 8-K dated December 7, 1995 is incorporated
herein by this reference.
10.9 -- Stock Purchase Warrant Agreement dated December 7, 1995, from the
Company in favor of St. James. Exhibit 10.4 to the Company's
Current Report on Form 8-K dated December 7, 1995 is incorporated
herein by this reference.
10.10 -- Registration Rights Agreement dated December 7, 1995, between the
Company and St. James. Exhibit 10.5 to the Company's Current
Report on Form 8-K dated December 7, 1995 is incorporated herein
by reference.
10.11 -- Purchase Agreement dated December 7, 1995 by and between the
Company, MRMC, Inc. and David Melina. Exhibit 2.1 to the
Company's Current Report on Form 8-K dated December 7, 1995 is
incorporated herein by this reference.
10.12 -- Stock Purchase Agreement dated October 3, 1996, by and among the
Company, Trust "B" Under the Will of Bernard J. Bauer, Sr. and
The Gertrude Bauer Trust dated December 24, 1993. Exhibit 2.1 to
the Company's Current Report on Form 8-K dated October 3, 1996 is
incorporated herein by this reference.
10.13 -- Convertible Debenture Loan Agreement date October 8, 1992, by and
among the Company, Pipeline Valve Specialty, Inc. ("PVS") and
Renaissance Capital Partners II, Ltd. Exhibit 2.2 to the
Company's Current Report on Form 8-K dated October 26, 1992 is
incorporated herein by this reference.
10.14 -- Line of Credit Facility and Demand Note dated November 1, 1996,
by and among the Company, PVS, Landreth, Imsco, REX, American and
Comerica. Exhibit 10.1 to the Company's Current Report on Form
8-K dated November 18, 1996 is incorporated herein by this
reference.
10.15 -- Term Loan dated November 1, 1996 by and among the Company, PVS,
Landreth, Imsco, REX, American and Comerica. Exhibit 10.2 to the
Company's Current Report on Form 8-K dated November 18, 1996 is
incorporated herein by this reference.
10.16 -- 12% Promissory Note dated November 18, 1996 by and among the
Company and St. James. Exhibit 10.3 to the Company's Current
Report on Form 8-K dated November 18, 1996 is incorporated herein
by this reference.
10.17 -- 12% Promissory Note dated November 18, 1996 by and among the
Company and St. James. Exhibit 10.4 to the Company's Current
Report on Form 8-K dated November 18, 1996 is incorporated herein
by this reference.
10.18 -- Stock Purchase Warrant Agreement dated November 18, 1996, from
the Company in favor of St. James. Exhibit 10.5 to the Company's
Current Report on Form 8-K dated November 18, 1996 is
incorporated herein by this reference.
10.19 -- Stock Purchase Warrant Agreement dated November 18, 1996, from
the Company in favor of St. James. Exhibit 10.6 to the Company's
Current Report on Form 8-K dated November 18, 1996 is
incorporated herein by this reference.
10.20 -- Registration Rights Agreement dated November 18, 1996, between
the Company and St. James. Exhibit 10.7 to the Company's Current
Report on Form 8-K dated November 18, 1996 is incorporated herein
by this reference.
11* -- Statement regarding computation of per share earnings. Ex-1
21* -- Subsidiaries of the Company. Ex-2
23.1* -- Consent of Price Waterhouse LLP Ex-3
- ------------------------
* Filed Herewith.
EX-2
<PAGE>
INDUSTRIAL HOLDINGS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Report of Independent Accountants F-2
Consolidated Balance Sheet at December 31, 1996 and 1995 F-3
Consolidated Statement of Income For the Years Ended
December 31, 1996, 1995 and 1994 F-4
Consolidated Statement of Cash Flows For the Years Ended
December 31, 1996, 1995 and 1994 F-5
Consolidated Statement of Shareholders' Equity For the
Years Ended December 31, 1996, 1995 and 1994 F-7
Notes to Consolidated Financial Statements F-8
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Industrial Holdings, Inc.
In our opinion, the consolidated financial statements listed in the Index
appearing on page F-1 present fairly, in all material respects, the financial
position of Industrial Holdings, Inc. and its subsidiaries at December 31, 1996
and 1995, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Houston, Texas
March 5, 1997
F-2
<PAGE>
INDUSTRIAL HOLDINGS, INC.
CONSOLIDATED BALANCE SHEET
December 31,
-------------------------
1996 1995
----------- -----------
ASSETS
Current assets:
Cash and equivalents ............................. $ 3,087,925 $ 428,430
Accounts receivable - trade, net ................. 6,756,218 5,640,253
Inventories ...................................... 9,970,337 7,945,871
Equipment held for sale .......................... 275,000
Advances to shareholders ......................... 77,086 65,210
Notes receivable, current portion ................ 207,549 259,452
Other current assets ............................. 333,839 267,330
----------- -----------
Total current assets ......................... 20,432,954 14,881,546
Property and equipment, net ........................ 15,579,410 9,125,422
Notes receivable, less current portion ............. 1,464,393 1,475,956
Other assets ....................................... 714,495 127,658
Goodwill and other, net ............................ 5,498,271 1,882,974
----------- -----------
Total assets ................................... $43,689,523 $27,493,556
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable .................................... $ 9,615,917 $ 6,688,570
Accounts payable - trade ......................... 4,601,082 4,748,339
Accrued expenses and other ....................... 1,721,487 1,213,176
Current portion of long-term debt ................ 1,393,712 772,858
----------- -----------
Total current liabilities ................... 17,332,198 13,422,943
Long-term debt, less current portion ............. 7,326,444 5,890,849
Deferred compensation payable, less
current portion ............................... 285,532
Deferred income taxes payable .................... 2,190,902 576,771
----------- -----------
Total liabilities .......................... 27,135,076 19,890,563
----------- -----------
Commitments and contingencies (Notes 3 and 9)
Shareholders' equity:
Common stock $.01 par value, 20,000,000
shares authorized, 4,851,494 and 3,091,162
shares issued and outstanding ................. 48,515 30,912
Additional paid-in capital ...................... 15,360,801 7,553,662
Retained earnings ............................... 1,145,131 18,419
----------- -----------
Total shareholders' equity ............... 16,554,447 7,602,993
----------- -----------
Total liabilities and shareholders'
equity ................................... $43,689,523 $27,493,556
=========== ===========
The accompanying notes are an integral part of this statement.
F-3
<PAGE>
INDUSTRIAL HOLDINGS, INC.
CONSOLIDATED STATEMENT OF INCOME
Year Ended December 31,
--------------------------------------------
1996 1995 1994
------------ ------------ ------------
Sales .......................... $ 51,422,950 $ 38,983,070 $ 34,730,339
Cost of sales .................. 40,849,023 31,111,228 27,485,206
------------ ------------ ------------
Gross profit ................... 10,573,927 7,871,842 7,245,133
Selling, general and
administrative ............ 8,001,739 6,401,032 6,569,202
------------ ------------ ------------
Income from operations ......... 2,572,188 1,470,810 675,931
------------ ------------ ------------
Other income (expense):
Interest expense ........... (1,335,904) (982,254) (888,506)
Interest income ............ 160,078 140,173 130,143
Other income ............... 138,912 17,882 183,537
------------ ------------ ------------
Total other income
(expense) .......... (1,036,914) (824,199) (574,826)
------------ ------------ ------------
Income before income taxes ..... 1,535,274 646,611 101,105
Income tax expense ............. 408,562 101,464 69,403
------------ ------------ ------------
Net income ..................... $ 1,126,712 $ 545,147 $ 31,702
============ ============ ============
Earnings per share ............. $ .26 $ .17 $ .01
============ ============ ============
The accompanying notes are an integral part of this statement.
F-4
<PAGE>
INDUSTRIAL HOLDINGS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1996 1995 1994
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income .............................................. $ 1,126,712 $ 545,147 $ 31,702
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization ........................ 1,291,451 865,241 840,234
Deferred income tax provision (benefit) .............. 363,397 (67,422) 20,430
Deferred compensation paid ........................... (109,203)
Other ................................................ 7,500 (12,289) 11,072
Changes in assets and liabilities,
net of acquisitions:
Accounts receivable and advances to
shareholders .................................... 212,814 (1,234,064) 196,698
Inventories ........................................ (803,949) 178,460 (454,923)
Notes receivable ................................... 53,466 208,687 (27,600)
Other assets ....................................... (473,134) 18,148 (61,209)
Accounts payable ................................... (342,282) 640,139 96,333
Accrued expenses ................................... (354,854) 91,365 (298,823)
----------- ----------- -----------
Net cash provided by operating activities ....... 971,918 1,233,412 353,914
----------- ----------- -----------
Cash flows from investing activities:
Purchase of property and equipment ...................... (2,408,476) (605,878) (517,896)
Proceeds from disposals of property and
equipment, net ....................................... 13,923 8,036 7,395
Purchase of CRivet ...................................... (826,003)
Cash obtained in purchase of American .................. 1,244,666 -- --
Additional consideration paid to former
shareholders of Landreth and PVS ..................... (29,491) (307,900) (64,859)
----------- ----------- -----------
Net cash used by investing activities ........... (1,179,378) (1,731,745) (575,360)
----------- ----------- -----------
</TABLE>
The accompanying notes are an integral part of this statement.
F-5
<PAGE>
INDUSTRIAL HOLDINGS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------ ------------ ------------
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from financing activities:
Net borrowings under revolving
line of credit .................................................. $ 112,490 $ 442,065 $ 176,473
Proceeds from notes payable and long-term debt ..................... 777,408 614,745 909,209
Principal payments on notes payable and
long-term debt .................................................. (4,271,224) (593,790) (1,324,346)
Proceeds from issuance of common stock ............................. 6,248,281 275,116 418,278
------------ ------------ ------------
Net cash provided by financing
activities .................................................... 2,866,955 738,136 179,614
------------ ------------ ------------
Net increase (decrease) in cash and equivalents ...................... 2,659,495 239,803 (41,832)
Cash and equivalents, beginning of year .............................. 428,430 188,627 230,459
------------ ------------ ------------
Cash and equivalents, end of year .................................... $ 3,087,925 $ 428,430 $ 188,627
============ ============ ============
Supplemental disclosure of noncash investing and financing activities:
Accounts receivable reclassified to notes receivable ............... $ 140,614
Conversion of debt to equity ....................................... $ 1,619,100
Acquisition of businesses:
Assets acquired ................................................. 11,443,214 5,624,319
Liabilities assumed ............................................. 12,687,881 4,798,316
Supplemental disclosures of cash flow information: Cash paid for:
Interest ........................................................ $ 1,269,380 $ 1,012,880 $ 891,211
Income taxes .................................................... 5,856 786 2,014
</TABLE>
The accompanying notes are an integral part of this statement.
F-6
<PAGE>
INDUSTRIAL HOLDINGS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
Common Stock
--------------------------- Additional Retained
Par paid-in earnings
Shares Value Capital (Deficit) Total
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1994 ... 2,735,769 $ 27,358 $ 6,963,859 $ (558,430) $ 6,432,787
Issuance of common stock ... 261,981 2,620 415,658 -- 418,278
Net income ................. -- -- -- 31,702 31,702
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1994 . 2,997,750 29,978 7,379,517 (526,728) 6,882,767
Issuance of common stock ... 93,412 934 274,182 -- 275,116
Shortfall on sale of stock
by former PVS shareholders-
Note 9 ................... -- -- (100,037) -- (100,037)
Net income ................. -- -- -- 545,147 545,147
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1995 . 3,091,162 30,912 7,553,662 18,419 7,602,993
Issuance of common stock:
Private placement ....... 300,000 3,000 1,007,000 -- 1,010,000
Tender offer to Class A
warrantholders, net .. 621,914 6,219 3,562,681 -- 3,555,900
Exercise of warrants
and options .......... 373,418 3,734 1,665,647 -- 1,682,381
Conversion of debt to equity 465,000 4,650 1,614,450 -- 1,619,100
Shortfall on sale of stock
by former PVS shareholders-
Note 9 .................... -- -- (42,639) -- (42,639)
Net income ................. -- -- -- 1,126,712 1,126,712
------------ ------------ ------------ ------------ ------------
Balance, December 31, 1996 . 4,851,494 $ 48,515 $ 15,360,801 $ 1,145,131 $ 16,554,447
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of this statement.
F-7
<PAGE>
INDUSTRIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - ORGANIZATION:
Industrial Holdings, Inc. (the Company), incorporated in August 1989, operates
five primary segments organized into two divisions: the Fastener Manufacturing
and Sales Division comprised of Landreth Engineering Company ("Landreth"),
American Rivet Company, Inc. ("American") acquired in November 1996, Connecticut
Rivet ("CRivet"), acquired in December 1995, which manufacture industrial metal
fasteners for sale primarily to manufacturers in the furniture, home appliance
and automotive industries and the Energy Products and Services Division
comprised of the Valve Supplies and Sales Group which includes Industrial
Municipal Supply ("IMSCO") and Pipeline Valve Specialty, Inc. ("PVS") which
remanufacture pipeline valves and distribute pipe, valves, fittings and other
products primarily to the petrochemical, chemical and petroleum refining
industries and to pipeline transportation and storage industries; the New
Machine Sales and Service Group which sells new machine tools and provides
machine moving services; the Export Crating Group which provides international
export crating services; and the Used Machine Sales Group which sells used
machine tools. The New Machine Sales and Service, Export Crating and Used
Machine Sales Groups comprise The Rex Group ("REX").
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Industrial
Holdings, Inc. and its wholly-owned subsidiaries (the Companies). Significant
intercompany balances and transactions have been eliminated upon consolidation.
The financial statements include the results of operations of CRivet and
American as of December 7, 1995 and November 1, 1996, respectively (see Note 3).
REVENUE RECOGNITION
Revenues are recognized upon shipment of the product or as the services are
performed.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Earnings are charged with a provision for doubtful accounts based on a current
review of the collectibility of the accounts. Accounts deemed uncollectible are
applied against the allowance for doubtful accounts. The allowance for doubtful
accounts was $179,965 and $80,072 at December 31, 1996 and 1995, respectively.
F-8
<PAGE>
CREDIT RISK
The Company extends credit to its customers in the normal course of business and
generally does not require collateral or other security. The Company performs
ongoing credit evaluations of its customers' financial condition and
historically has not incurred significant credit losses. Notes receivable are
collateralized by land, buildings and equipment.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Management has determined that the fair value of the Company's financial
instruments approximates the carrying amount of such instruments as presented or
disclosed in the financial statements.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost includes, where
applicable, manufacturing labor and overhead. At December 31, 1996, the last-in,
first-out (LIFO) method was used to determine the cost of American's raw
material and rivet inventories totaling $1,225,257. At that date, there was no
LIFO reserve. The first-in, first-out method ("FIFO") was used to determine the
cost of the remaining inventories at December 31, 1996 and all inventories at
December 31, 1995.
PROPERTY AND EQUIPMENT
Property and equipment are stated on the basis of cost. Depreciation is computed
using the straight-line method over the estimated useful lives of the related
assets (3 to 15 years for automobiles, furniture and equipment and 31 years for
buildings). Maintenance and repairs are charged to expense as incurred; major
renewals and betterments are capitalized.
LONG-LIVED ASSETS
In accordance with Statement of Financial Accounting Standards No. 121 ("FAS
121"), Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of, the Company reviews for the impairment of long-lived
assets and certain identifiable intangibles whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Under FAS 121, an impairment loss will be recognized when estimated
future cash flows expected to result from the use of the asset and its eventual
disposition are less than its carrying amount. No such impairment losses have
been identified by the Company.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill represents the excess of the purchase price over the fair market value
of net tangible assets acquired. Goodwill is amortized over 20 years. At
December 31, 1996, goodwill was $5,973,963, net of amortization of $590,550.
Other intangible assets consist primarily of loan origination fees and are
amortized over periods not exceeding seven years.
F-9
<PAGE>
STOCK-BASED COMPENSATION.
The Company adopted Statement of Financial Accounting Standard No. 123 ("FAS
123"), Accounting for Stock-Based Compensation beginning with the Company's
first quarter of 1996. Upon adoption of FAS 123, the Company continued to
measure compensation expense for its stock- based employee compensation plans
using the intrinsic value method prescribed by APB No. 25, Accounting for Stock
Issued to Employees, and has provided in Note 11 pro forma disclosures of the
effect on net income and earnings per share as if the fair value-based method
prescribed by FAS 123 had been applied in measuring compensation expense.
INCOME TAXES
The Company utilizes the liability method in accounting for income taxes. Under
this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse. At December 31, 1995, a valuation
allowance was provided for deferred tax assets which the Company had determined
may not be fully realizable.
EARNINGS PER SHARE
Earnings per share have been computed based on the weighted average number of
common and common equivalent shares outstanding. For 1996, 1995 and 1994, the
weighted average common and common equivalent shares were 4,378,684, 3,149,579
and 3,029,574 for the purpose of computing primary earnings per share. Fully
diluted earnings per share for 1996, 1995 and 1994 were the same as primary
earnings per share, since the effects of the conversion of the debentures was
anti-dilutive.
STATEMENT OF CASH FLOWS
For purposes of the consolidated statement of cash flows, cash equivalents
include all highly liquid investments with original maturities of three months
or less. Changes in assets and liabilities are presented net of the effect of
the purchase of American in 1996 and CRivet in 1995.
ESTIMATES
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Management
believes that the estimates made in connection with these financial statements
are reasonable.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior-year amounts to conform to
the current-year classification.
F-10
<PAGE>
NOTE 3 - BUSINESS ACQUISITIONS:
Effective November 1, 1996, the Company acquired all the capital stock of
American for a purchase price of $11,758,737 including transaction costs.
Effective December 7, 1995, the Company acquired substantially all of the assets
for a purchase price of $3,744,229 and assumed certain liabilities of CRivet
from MRMC, Inc. The following is a pro forma summary (unaudited) of the combined
results of operations for the years ended December 31, 1996 and 1995, assuming
the American and CRivet acquisitions had occurred on January 1, 1995 (in 000's):
1996 1995
--------- -------
Sales ................... $ 59,122 $56,565
========= =======
Net income .............. $ 1,396 $ 1,312
========= =======
Earnings per share ...... $ .28 $ .34
========= =======
The pro forma financial information combines the historical operating results of
IHI for 1996 and 1995 with the results of operations for American for the ten
months ended October 31, 1996 and the twelve months ended December 31, 1995 and
CRivet for the period from January 1, 1995 through December 6, 1995. The pro
forma financial information does not purport to be indicative either of results
of operations that would have occurred had the purchases been made at January 1,
1995 or future results of operations of the combined companies.
These acquisitions have been accounted for by the purchase method of accounting
(determined on a preliminary basis for American) and, accordingly, the acquired
assets and liabilities have been recorded at their estimated fair values at the
date of acquisition as follows:
American CRivet
November 1, December 7,
1996 1995
---------- ----------
Fair value of assets acquired:
Net cash acquired ................. $1,244,667
Accounts receivable .............. 1,383,294
Inventory ......................... 1,220,517 $1,465,436
Property and equipment ............ 4,861,935 4,101,329
Other assets ...................... 234,912 57,554
Goodwill .......................... 3,742,556
Liabilities assumed or incurred:
Accounts payable .................. 195,025 500,000
Accrued expenses .................. 1,257,900 646,675
Notes payable and long-term debt .. 9,984,222 3,891,641
CRivet accounts payable to Landreth 586,003
Deferred income tax liability ..... 1,250,734
F-11
<PAGE>
Effective February 1, 1997, the Company acquired all the capital stock of Lone
Star for $6 million. The purchase was financed through an $800,000 Term Loan
secured by the machinery and equipment of Lone Star, a $900,000 Mortgage Note
secured by the real estate of Lone Star, a $500,000 Term Note payable to the
former shareholder of Lone Star, 84,211 shares of the Company's Common Stock, a
$1.4 million increase in the Company's line of credit facility with Comerica
Bank and $1.8 million cash.
Lone Star, with revenues of $15.5 million in 1996, is a leading
manufacturer and distributor of fasteners to the petrochemical and energy
industries and a speciality provider of custom-in-house coating services.
NOTE 4 - INVENTORIES:
Inventories at December 31 consist of:
1996 1995
---------- ----------
Raw materials .............. $1,477,051 $ 593,396
Finished goods ............. 7,130,702 6,246,340
Other ...................... 1,362,584 1,106,135
---------- ----------
$9,970,337 $7,945,871
========== ==========
NOTE 5 - NOTES RECEIVABLE:
Notes receivable at December 31 consist of the following:
1996 1995
---------- ----------
Mortgage note receivable with interest at 9.53%
due in monthly installments of $15,166
through February 2007 secured by land and
building ................................... $1,182,244 $1,248,138
Note receivable from asset sale due in monthly
installments of $3,790 through July 1999,
unsecured .................................. 105,786 139,624
Various installment notes and leases receivable
from equipment inventory sales due through
2000, secured by equipment ................. 334,624 239,565
Other notes receivable ........................ 49,288 108,081
---------- ----------
1,671,942 1,735,408
Less current portion .......................... 207,549 259,452
---------- ----------
$1,464,393 $1,475,956
========== ==========
F-12
<PAGE>
NOTE 6 - PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment at December 31 consist of:
1996 1995
------------ ------------
Land ........................................ $ 1,193,892 $ 243,892
Leasehold improvements ...................... 973,054 451,869
Buildings ................................... 2,032,126 882,127
Machinery and equipment ..................... 12,142,238 8,309,897
Office equipment, furniture and fixtures .... 1,133,483 579,726
Transportation equipment .................... 614,368 545,633
Construction in progress .................... 592,622 158,091
Property under capital leases ............... 46,732 121,068
------------ ------------
18,728,515 11,292,303
Less - accumulated depreciation
and amortization ......................... (3,149,105) (2,166,881)
------------ ------------
$ 15,579,410 $ 9,125,422
============ ============
NOTE 7 - NOTES PAYABLE:
Notes payable at December 31 consists of the following:
1996 1995
---------- ----------
Revolving line of credit with a bank which provides
for borrowings up to the lesser of a defined
borrowing base or $12,000,000 at December 31, 1996,
$670,547 available at December 31, 1996, principal
due on demand, interest payable monthly at prime
(8.25% at December 31, 1996), secured by substantially
all assets of the Companies .......................... $7,665,917 $5,520,999
12% promissory notes with principal and interest
due October 31, 1997, secured by substantially all
the assets of the Companies .......................... 1,900,000 --
12% convertible promissory note with principal and
interest due December 1, 1996, secured by
substantially all assets of the Companies. Principal
of $804,100 was converted into common stock at $3.74
per share in 1996 .................................... -- 1,000,000
Non-interest bearing note payable to MRMC, Inc.,
principal due in weekly installments of $5,143
through May 1996 ..................................... -- 92,571
Notes payable to individuals, principal due on
demand, interest payable monthly at 12%, secured
by certain notes receivable .......................... 50,000 75,000
---------- ----------
$9,615,917 $6,688,570
========== ==========
F-13
<PAGE>
NOTE 8 - LONG-TERM DEBT:
Long-term debt at December 31, consists of the following:
1996 1995
---------- ----------
9.85% term loan payable in monthly installments
of $53,620 including interest, maturing December 1,
2001 and secured by the machinery and equipment
acquired from MRMC, Inc. ............................. $2,523,218 $2,800,000
12% convertible debentures due October 1, 1999,
with principal of $25,000 and interest payable
monthly. Guaranteed by PVS and secured by the common
stock of IMSCO and LEC. Debentures are convertible
into common stock at $3.26 per share. Principal of
$815,00 was converted into 250,000 shares of common
stock in 1996 ........................................ 1,060,000 2,475,000
Note payable to bank with monthly principal payments
of $6,240 plus interest at prime, maturing on
December 1, 2004, secured by real estate property .... 814,306 653,548
Revolving line of credit with a bank expected to be
refinanced with 180 monthly principal payments of
$9,333 plus interest at prime, secured by the real
estate of American ................................... 1,680,000 --
Notes payable to a bank with monthly principal
payments of $56,243 plus interest at prime to 10.5%,
maturing on November 1, 1997 through 2002, secured by
substantially all assets of the Companies ............ 2,538,799 454,020
Non-interest bearing notes payable to certain former
vendors of MRMC, Inc., principal due in monthly
installments of $5,475 through December 1997 ......... 76,230 141,936
Various installment notes, payable in monthly
installments through 1999, including interest
ranging from 9% to 11.7%, secured by
transportation and other equipment ................... 27,603 139,203
---------- ----------
8,720,156 6,663,707
Less - current portion ............................... 1,393,712 772,858
---------- ----------
$7,326,444 $5,890,849
========== ==========
F-14
<PAGE>
The aggregate maturities of long-term debt at December 31, 1996 (excluding
$360,000 of convertible debenture converted to common stock subsequent to year
end) are as follows:
Year ended December 31:
1997 ....................... $1,393,712
1998 ....................... 1,358,021
1999 ....................... 1,888,049
2000 ....................... 1,142,824
2001 ....................... 1,157,544
Thereafter ................... 1,420,006
----------
$8,360,156
==========
The convertible debenture agreement contains restrictive covenants which, among
other things, requires the Company and its subsidiaries to maintain minimum
amounts of net worth, debt-to-equity ratios, working capital, interest coverage
and fixed charge coverage. The Company is also required to notify the holder if
a material adverse change occurs, and the ability of subsidiaries to declare
dividends to the Company is restricted. At December 31, 1996, due to significant
capital expenditures, the Company was not in compliance with certain restrictive
covenants. The Company has obtained waivers for such non-compliance.
The 12% convertible debentures are subject to redemption at the Company's option
at a rate of 110 percent and 105 percent of the notes in the 12 months ending
October 1, 1997 and 1998. If common stock is issued for consideration per share
less than the $3.26 conversion price of the debentures, then the conversion
price of the debentures is reduced to the consideration per share received by
the Company. In March 1996, the Company paid $600,000 to the holder of the 12%
convertible debentures in payment of current and future principal payments
totaling that amount. The holder waived any prepayment penalty associated with
this prepayment. The Company issued to the holder, warrants to purchase 50,000
shares of common stock at $4.00 per share. Additionally, at December 31, 1996,
the Company has classified $360,000 of the convertible debenture due within one
year as long-term debt since subsequent to year end, the holder converted this
amount to common stock (See Note 11).
NOTE 9 - COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS:
The Companies have entered into noncancellable operating leases with related
parties (former shareholders of Landreth) and other third parties expiring in
various years through 2002. Rent payments to the former shareholders of Landreth
were $106,800 annually for the years 1996, 1995 and 1994. Operating leases
relate to offices, buildings and certain equipment. Aggregate rent expense on
such leases amounted to $935,845, $657,328 and $592,589 for the years 1996, 1995
and 1994. Future minimum lease payments are as follows:
F-15
<PAGE>
Year ended December 31:
1997 .................. $ 815,089
1998 .................. 773,789
1999 .................. 712,180
2000 .................. 310,646
2001 .................. 197,706
Thereafter .............. 70,000
----------
$2,879,410
==========
The lease with the former shareholders of Landreth is for a period of ten years
through 2002 with an option to renew for an additional five years. The Company
has an option to purchase the leased premises at a price equal to the
outstanding indebtedness at the time the option is exercised.
In connection with the purchase of PVS, the former PVS shareholders agreed not
to sell their shares except in accordance with an agreement with the Company.
The Company was obligated to pay two of the former PVS shareholders the
difference between $5 and the proceeds they received upon sale of their common
stock. At December 31, 1995 and 1994, the Company had advances to these
shareholders of $48,750 and $192,750, which were secured by 9,750 and 38,550
shares, respectively. At December 31, 1996, the Company had no advances to these
shareholders and there was no further obligation under this agreement.
During 1996, the Company and a partnership providing a portion of the financing
for the American acquisition, entered into a consulting agreement whereby the
Company provided consulting services to the partnership relating to the
acquisition and operation of one of the partnership's investee companies. Fees
for these consulting services were $100,000 and are included in other income in
1996.
In connection with the purchase of Landreth, the former Landreth shareholders
are entitled to additional consideration based upon the level of Landreth's
pretax profits through 1997, not to exceed $500,000 in the aggregate. For fiscal
1996, 1995 and 1994, the Company paid these shareholders $29,491, $207,863 and
$64,859 as additional consideration. As of December 31, 1996, the maximum
remaining commitment is $112,934.
The Company had an employment agreement with a former REX shareholder that
expired in 1995. Under the agreement, the former shareholder earned 11,667
shares of common stock in 1994 and 2,333 shares of common stock in 1995.
The Company is involved in litigation arising in the ordinary course of its
business. In the opinion of management, the ultimate liability, if any, as a
result of these matters will not have a material adverse effect on the
Companies' consolidated financial position or results of operations.
F-16
<PAGE>
NOTE 10 - INCOME TAXES:
The provision for income taxes for the years ended December 31 is as follows:
1996 1995 1994
--------- --------- ---------
Current:
Federal ....................... $ (31,635) $ 142,886 $ (3,986)
State ......................... 76,800 26,000 52,959
--------- --------- ---------
45,165 168,886 48,973
Deferred , primarily federal ...... 363,397 (67,422) 20,430
--------- --------- ---------
Income tax expense ................ $ 408,562 $ 101,464 $ 69,403
========= ========= =========
The Company and its subsidiaries file a consolidated federal income tax return.
At December 31, 1996, the Company has net operating loss (NOL) carryforwards of
approximately $936,000 for income tax purposes which expire in 2005 through
2007. These losses may presently be offset against the future income of the
applicable subsidiary only. Of the carryforward amount, $134,000 may be used at
any time prior to its expiration. The remaining net operating loss carryforwards
are subject to annual limitations.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the carrying amounts for income tax purposes, primarily resulting
from the acquisitions of the Company's subsidiaries. During 1996, 1995 and 1994,
the Company reduced the deferred tax asset valuation allowance by $238,873,
$223,110 and $2,500, respectively, to reflect $101,000, $26,000 and $2,500,
respectively in deferred tax assets used and to recognize deferred tax assets of
$138,873 in 1996 and $197,110 in 1995. The recognized deferred tax assets are
based upon expected utilization of net operating loss carryforwards and reversal
of certain temporary differences. The Company has assessed its past earnings
history and trends and that of its subsidiary, REX, as well as expected
revenues, cost reductions and expiration dates of carryforwards and has
determined that it is more likely than not these deferred tax assets will be
realized.
The major components of deferred income tax assets and liabilities at December
31 are as follows:
1996 1995
----------- -----------
Deferred income tax liabilities:
Depreciation ................................... $(2,747,473) $(1,125,378)
Other .......................................... (443,590) (194,789)
----------- -----------
Total deferred income tax liabilities .. (3,191,063) (1,320,167)
Deferred income tax assets:
Net operating loss carryforwards ............... 318,216 582,613
Inventory ...................................... 356,258 323,866
Other .......................................... 325,687 75,790
----------- -----------
Total deferred income tax assets ....... 1,000,161 982,269
Deferred income tax assets valuation allowance ... -- (238,873)
----------- -----------
Deferred income taxes ............................ $(2,190,902) $ (576,771)
=========== ===========
F-17
<PAGE>
A reconciliation of income tax expense computed at statutory rates to income tax
expense for the years ended December 31 is as follows:
1996 1995 1994
--------- --------- ---------
Tax at statutory rate ................ $ 521,993 $ 219,848 $ 34,376
Effect of permanent differences ...... 68,897 58,249 47,587
Reduction in deferred tax asset
valuation allowance ............. (238,873) (223,110) (2,500)
Other ................................ 5,857 29,317 (45,013)
State income taxes, net of
federal benefit ................. 50,688 17,160 34,954
$ 408,562 $ 101,464 $ 69,403
========= ========= =========
NOTE 11 - SHAREHOLDERS' EQUITY:
The Company has authorized 20,000,000 shares of $.01 par value preferred stock.
No shares are issued or outstanding.
WARRANTS TO ACQUIRE COMMON STOCK
The following table sets forth the outstanding warrants to acquire 2,844,296
shares of common stock as of December 31, 1996:
Number of
Security Common Shares
-------- -------------
Class A redeemable warrants to acquire common stock at $6.00
per share issued in connection with initial public offering,
currently exercisable, expiring on January 14, 1997,
redeemable upon 30 days notice .................................... 8,786
Class B redeemable warrants to acquire common stock at $10.00
per share issued in connection with initial public offering
and with tender offer to Class A warrantholders, currently
exercisable, expiring on January 14, 1999, redeemable upon 30
days notice ....................................................... 1,256,214
Class C redeemable warrants to acquire common stock at $15.00
per share issued in connection with tender offer to Class A
warrantholders, currently exercisable, expiring on January 14,
1999, redeemable if closing bid price of common stock equals
or exceeds $20.00 for 20 consecutive days ......................... 623,714
Warrant to acquire common stock at $4.00 per share, currently
exercisable, expiring on March 31, 1998 ........................... 50,000
Warrant to acquire common stock at $3.27 per share issued in
connection with private financing, currently exercisable,
expiring on December 8, 2000 ...................................... 325,582
F-18
<PAGE>
Warrant to acquire common stock at $3.80 per share, currently
exercisable, expiring on December 20, 1998 ........................ 25,000
Warrant to acquire common stock at $5.00 per share, currently
exercisable, expiring on January 10, 1999 ........................ 15,000
Warrant to acquire common stock at $7.00 per share issued in
connection with acquisition financing, currently exercisable,
expiring on November 18, 2001 .................................... 540,000
EQUITY INCENTIVE PLANS.
At December 31, 1996, there were 186,080 shares of common stock reserved by the
Board of Directors for issuance under the Company's employee stock option plans.
Options are generally granted at the fair market value of the common stock at
the date of grant and generally immediately or up to seven years after date of
grant. Options granted under the plans must be exercised not later than ten
years from the date of grant.
The following table summarizes activity under the employee stock option plans
for each of the three years in the period ended December 31, 1996:
Weighted average
Shares Price per share price per share
- -------------------------------------- ------- --------------- ---------------
Options outstanding, January 1, 1994 175,500 $3.08
Options granted 75,000 $2.38 2.38
Options canceled (5,000) 3.13 3.13
Options exercised (7,500) 1.00 1.00
-------
Options outstanding, December 31, 1994 238,000 2.93
Options granted 25,000 3.31 3.31
Options exercised (10,000) 3.13 3.13
-------
Options outstanding, December 31, 1995 253,000 2.97
Options granted 233,000 4.06 - 9.25 5.09
Options canceled (3,000) 3.13 3.13
Options exercised (45,000) 2.38 - 4.06 3.00
-------
Options outstanding, December 31, 1996 438,000 4.09
=======
The Company has a stock option plan for Non-Employee Directors (the Director
Plan). At December 31, 1996, there were 125,000 shares of common stock reserved
for issuance under the Director Plan. Pursuant to the terms of the plan, each
non-employee director is entitled to receive options to purchase common stock of
the Company upon initial appointment to the Board (initial grants) and annually
thereafter. Grants vest over nine months and are exercisable until the tenth
anniversary of the date of grant. Grants have an exercise price equal to the
fair market value of the Company's stock on the date of grant.
F-19
<PAGE>
Activity under the plan for each of the three years in the period ended December
31, 1996 was as follows:
Weighted average
Shares Price per share price per share
- -------------------------------------- ------- --------------- ---------------
Options outstanding, January 1, 1994 0
Options granted 60,000 $2.38 $2.38
-------
Options outstanding, December 31, 1994 60,000 2.38
Options granted 0
-------
Options outstanding, December 31, 1995 60,000 2.38
Options granted 25,000 4.06 4.06
Options exercised (5,000) 2.38 2.38
--------
Options outstanding, December 31, 1996 80,000 2.90
=======
The following table summarizes significant ranges of outstanding and exercisable
options at December 31, 1996.
Options Outstanding Options Exercisable
---------------------------------- -------------------------
Weighted Weighted Weighted
Average Average Average
Ranges of Remaining Exercise Shares Exercise
Exercise Prices Shares Life in Years Price In Thousands Price
- --------------- ---------- ------------- --------- ------------ ------------
$2.38 105,000 8.8 $2.38 105,000 $2.38
3.13 130,000 7.8 3.13 130,000 3.13
3.31 25,000 8.0 3.31 25,000 3.31
4.00 10,000 5.8 4.00 10,000 4.00
4.06 76,000 9.1 4.06 56,000 4.06
4.25 50,000 9.1 4.25 50,000 4.25
5.00 - 5.50 100,000 9.1 5.25
8.13 2,500 9.7 8.13
9.25 19,500 9.9 9.25
F-20
<PAGE>
The weighted average fair value at date of grant for options granted during 1996
and 1995 was $4.04 and $2.94 per option, respectively. The fair value of options
at date of grant was estimated using the Black-Scholes model with the following
weighted average assumptions:
1996 1995
- --------------------------- ------------- -------------
Expected life 3-7 3
Interest rate 5.14-6.41% 7.66%
Volatility 142.9-153.2% 176.3%
Dividend yield 0% 0%
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting period. The Company's pro
forma information follows:
1996 1995
----------------------------------- ----------- -----------
Pro forma net income .............. $ 900,160 $ 496,637
Pro forma earnings per share ...... $ .21 $ .16
NOTE 12 - SAVINGS PLAN:
The Company has a 401(k) savings plan which permits participants to contribute
up to 18 percent of their compensation each year. The Company will match at
least 50 percent of a participant's contributions, up to a maximum of 3 percent
of gross pay. The Company's results of operations reflect expenses associated
with the plan of approximately $70,300, $31,500 and $30,500 for 1996, 1995 and
1994.
F-21
<PAGE>
NOTE 13 - SEGMENT INFORMATION:
The Company has five operating business groups: manufacture and sale of
fasteners; valve and industrial supplies sales; new machine sales and related
services; export crating; and used machine sales. Summarized financial
information by business segment for 1996, 1995 and 1994 is presented below.
<TABLE>
<CAPTION>
Energy Products And Services Division
------------------------------------------------------
New
Valve and machine sales Export Used
Fasteners Supplies And Services Crating Machine Sales
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
1996
Operating revenues .................. $22,523,401 $12,472,456 $13,163,876 $ 2,798,272 $ 464,942
Operating profit (loss) ............. 2,064,996 773,204 425,828 335,640 (228,833)
Identifiable assets ................. 17,886,711 6,071,785 2,879,621 915,869 2,074,886
Depreciation and amortization ....... 829,408 227,996 73,611 116,101 5,617
Capital expenditures ................ 2,147,064 24,143 153,204 73,631 741
1995
Operating revenues .................. $13,204,532 $13,449,344 $ 9,868,209 $ 1,817,877 $ 643,108
Operating profit (loss) ............. 1,246,595 702,147 280,274 (31,467) (88,958)
Identifiable assets ................. 14,700,531 6,856,931 2,336,904 841,555 2,273,781
Depreciation and amortization ....... 330,462 189,462 59,997 106,318 6,071
Capital expenditures ................ 478,908 35,891 34,966 42,604 1,549
1994
Operating revenues .................. $12,261,602 $13,672,512 $ 5,918,642 $ 2,530,879 $ 346,704
Operating profit (loss) ............. 1,111,089 503,339 20,364 (107,957) (299,357)
Identifiable assets ................. 8,199,794 7,066,646 2,274,256 722,887 2,265,664
Depreciation and amortization ....... 328,120 318,535 49,747 69,206 5,620
Capital expenditures ................ 248,102 66,968 22,279 157,395 1,194
</TABLE>
Operating profit (loss) is operating revenues less cost of sales and operating
expenses. Corporate expenses and income taxes have not been included in the
computation of operating profit (loss ) of individual segments.
F-22
<PAGE>
NOTE 14 - QUARTERLY FINANCIAL DATA (UNAUDITED):
Summarized quarterly financial data for 1996, 1995 and 1994 are as follows (in
thousands, except per share data):
<TABLE>
<CAPTION>
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
------- -------- -------- -------
<S> <C> <C> <C> <C>
1996
Sales ..................................... $12,015 $ 13,612 $ 12,870 $12,925
Gross profit .............................. 2,559 2,811 2,693 2,511
Net income ................................ 237 319 206 365
Earnings per share ........................ 0.07 0.07 .05 .07
1995
Sales ..................................... $10,406 $ 9,317 $ 9,072 $10,188
Gross profit .............................. 1,919 2,014 1,978 1,960
Net income ................................ 202 152 130 61
Earnings per share ........................ 0.07 0.05 0.04 0.01
1994
Sales ..................................... $ 9,148 $ 9,066 $ 7,575 $ 8,941
Gross profit .............................. 2,099 1,978 1,663 1,505
Net income (loss) ......................... 167 (142) (163) 170
Earnings (loss) per share ................. 0.06 (0.05) (0.05) 0.05
</TABLE>
NOTE 15 - SUBSEQUENT EVENT (UNAUDITED):
In March 1997, the Company acquired all the outstanding capital stock of
Manifold Valve Services, Inc. ("MVS") for 600,000 shares of the Company's Common
Stock and a Term Note in the amount of $442,500, payable to the selling
shareholder in six monthly installments. MVS, operating from a 25,000 square
foot leased manufacturing facility in Jennings, Louisiana, sells and repairs
high pressure valves that are used primarily in oil and gas drilling
applications. MVS' revenues in 1996 were $6.4 million with one customer
comprising 18% of its total 1996 revenues.
F-23
EXHIBIT 13.5
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
EXHIBIT 13.6
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) November 18, 1996
Industrial Holdings, Inc.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Texas 1-9580 76-0289495
(State of other jurisdiction of (Commission File Number) (IRS Employer Identification No.)
incorporation)
</TABLE>
7135 Ardmore Houston, Texas 77054
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (713) 747-1025
______________________________________________________________
(Former name or former address, if changed since last report.)
<PAGE>
ITEM 5. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements of Acquired Company.
1. Financial Statements of American Rivet Company, Inc.
Independent Auditors' Report................................... 7
Balance Sheets at September 30, 1996 (unaudited) and
August 31, 1996 and 1995................................... 8
Statements of Operations and Retained Earnings for the
One Month Ended September 30, 1996 and 1995 (unaudited)
and for the Years Ended August 31, 1996, 1995 and 1994..... 10
Statements of Cash Flows for the One Month Ended
September 30, 1996 and 1995 (unaudited) and for the
Years Ended August 31, 1996, 1995 and 1994.................. 11
Notes to Financial Statements.................................. 12
(b) Pro Forma Financial Information
1. Pro Forma Financial Statements:
Pro Forma Condensed Consolidated Financial
Statements (Unaudited)...................................... 20
Pro Forma Condensed Consolidated Balance Sheet
at September 30, 1996 (Unaudited)........................... 21
Notes to Pro Forma Condensed Consolidated
Balance Sheet at September 30, 1996 (Unaudited)............. 23
Pro Forma Condensed Consolidated Statement of
Operations for the Nine Months Ended
September 30, 1996 (Unaudited).............................. 24
Pro Forma Condensed Consolidated Statement
of Operations for the Year Ended December 31,
1995 (Unaudited)............................................ 25
Notes to Pro Forma Condensed Consolidated
Statements of Operations (Unaudited)........................ 26
EXHIBITS
23.1 Consent of KPMG Peat Marwick LLP.......................... 28
2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed in its behalf by the
undersigned hereunto duly authorized.
INDUSTRIAL HOLDINGS, INC.
By: /s/ Christine A. Smith
VICE PRESIDENT AND CHIEF
FINANCIAL OFFICER
Date: January 24, 1997
3
<PAGE>
EXHIBIT INDEX
EXHIBIT NUMBER AND DESCRIPTION
23.1 Consent of KPMG Peat Marwick LLP
4
<PAGE>
AMERICAN RIVET COMPANY, INC.
Financial Statements and Schedules
August 31, 1996, 1995, and 1994
(With Independent Auditors' Report Thereon)
5
<PAGE>
TABLE OF CONTENTS
- -------------------------------------------------------------------------------
Page(s)
-------
Independent Auditors' Report.................................... 7
Financial Statements:
Balance Sheets............................................. 8-9
Statements of Operations and Retained Earnings............. 10
Statements of Cash Flows................................... 11
Notes to Financial Statements.............................. 12
6
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
American Rivet Company, Inc:
We have audited the accompanying balance sheets of American Rivet Company, Inc.
as of August 31, 1996 and 1995, and the related statements of operations and
retained earnings and cash flows for each of the years in the three-year period
ended August 31, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of American Rivet Company, Inc. as
of August 31, 1996 and 1995 and the results of its operations and its cash flows
for the years in the three-year period ended August 31, 1996 in conformity with
generally accepted accounting principles.
As discussed in notes 1 and 2 to the financial statements, the Company changed
its method of accounting for investments as of September 1, 1994 to adopt the
provisions of Financial Accounting Standards Board's Statement of Financial
Accounting Standards No. 115 "Accounting for Certain Investments in Debt and
Equity Securities."
KPMG Peat Marwick LLP
October 2, 1996
7
<PAGE>
AMERICAN RIVET COMPANY, INC.
Balance Sheets
September 30, 1996, August 31, 1996 and 1995
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
(Unaudited)
ASSETS September 30, August 31, August 31,
1996 1996 1995
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 576,776 $ 967,540 1,105,816
Marketable securities 1,776,464 1,668,638 1,706,113
Accounts and notes receivable:
Trade, net of allowance of $20,000 in
1996 and 1995 1,265,773 1,133,439 1,155,708
Officer and employee receivables -- 447 16,163
Other 900 912 2,514
Inventories 648,745 559,413 669,280
Prepaid expenses 67,054 56,563 18,214
Deferred income taxes 62,666 62,666 64,164
- -------------------------------------------------------------------------------------------------------
Total current assets 4,398,378 4,449,618 4,737,972
- -------------------------------------------------------------------------------------------------------
Other assets:
Deferred income taxes 37,306 37,306 26,793
Deposits 425 425 152,113
Cash surrender value of officers' life insurance 128,499 126,876 107,405
- -------------------------------------------------------------------------------------------------------
166,230 164,607 286,311
- -------------------------------------------------------------------------------------------------------
Property, plant and equipment, net of accumulated
depreciation 1,974,850 1,999,859 1,487,915
Intangible assets:
Goodwill 117,254 117,254 117,254
Organizational expense 958 958 958
- -------------------------------------------------------------------------------------------------------
118,212 118,212 118,212
- -------------------------------------------------------------------------------------------------------
Deferred charges 159,440 154,482 155,237
- -------------------------------------------------------------------------------------------------------
$6,817,110 6,886,778 6,785,647
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
8
<PAGE>
AMERICAN RIVET COMPANY, INC.
Balance Sheets
September 30, 1996, August 31, 1996 and 1995
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
(Unaudited)
September 30, August 31, August 31,
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1996 1995
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Current liabilities:
Accounts payable - trade $ 254,263 92,843 196,332
Accrued liabilities:
Salaries, wages, and commissions 51,460 75,312 90,099
Property taxes 97,848 149,000 150,519
Profit-sharing trust 4,150 68,101 106,554
Payroll taxes 2,327 948 23,626
Deferred compensation 23,390 23,390 21,597
Dividends -- -- 78,000
Insurance 70,674 70,674 70,674
Income taxes 43,806 32,106 87,706
Waste removal 42,000 42,000 42,000
Other 2,648 60,468 924
- -------------------------------------------------------------------------------------------------------
Total current liabilities 592,566 614,842 868,031
- -------------------------------------------------------------------------------------------------------
Deferred compensation 429,610 428,699 418,617
- -------------------------------------------------------------------------------------------------------
Total liabilities 1,022,176 1,043,541 1,286,648
- -------------------------------------------------------------------------------------------------------
Stockholders' equity:
Net unrealized gain on marketable securities 195,162 164,383 122,846
Common stock, par value $10 per share.
Authorized 1,000,000 shares; issued 100,000
shares 1,000,000 1,000,000 1,000,000
Retained earnings 5,107,893 5,186,975 4,884,274
- -------------------------------------------------------------------------------------------------------
6,303,055 6,351,358 6,007,120
Less common stock held in treasury, at cost,
22,000 shares 508,121 508,121 508,121
- -------------------------------------------------------------------------------------------------------
Total stockholders' equity 5,794,934 5,843,237 5,498,999
- -------------------------------------------------------------------------------------------------------
$6,817,110 6,886,778 6,785,647
- -------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE>
AMERICAN RIVET COMPANY, INC.
Statement of Operations and Retained Earnings
One month ended September 30, 1996 and 1995, and years ended August 31, 1996,
1995 and 1994
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
(Unaudited)
One Month Ended
September 30 Years Ended August 31
-------------------------- ------------------------------
1996 1995 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Gross sales $686,891 629,885 8,799,350 9,188,341 8,666,053
Returns and allowances 3,871 5,243 56,977 37,911 30,075
- ---------------------------------------------------------------------------------------------------------------------
Net sales 683,020 624,642 8,742,373 9,150,430 8,635,978
Cost of sales 525,527 530,237 6,792,944 6,880,036 6,590,781
- ---------------------------------------------------------------------------------------------------------------------
Gross profit 157,493 94,405 1,949,429 2,270,394 2,045,197
Selling and administrative expenses 122,373 112,402 1,502,114 1,520,403 1,445,371
- ---------------------------------------------------------------------------------------------------------------------
Income (loss) from operations 35,120 (17,997) 447,315 749,991 599,826
- ---------------------------------------------------------------------------------------------------------------------
Other income (expense);
Investment income, net 7,497 3,853 104,934 113,514 88,634
Deferred compensation expense (634) (777) (8,546) (9,281) (7,590)
Realized gain (loss) on securities
transactions, net (408) 212 33,685 7,871 105
Gain on sale of property, plant,
and equipment -- -- 5,000 54,093 500
Unclassified (5,517) 182 (302) 1,510 638
- ---------------------------------------------------------------------------------------------------------------------
938 3,470 134,771 167,707 82,287
- ---------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 36,058 (14,527) 582,086 917,698 682,113
Income tax expense (benefit) 15,300 (4,700) 240,385 355,900 253,200
- ---------------------------------------------------------------------------------------------------------------------
Net income (loss) 20,758 (9,827) 341,701 561,798 428,913
Retained earnings at beginning of year 5,186,975 4,884,274 4,884,274 4,478,476 4,166,563
Cash dividends paid or accrued per
share of $1.28, $0, $.50, $2.00, and
$1.50, respectively (99,840) -- (39,000) (156,000) (117,000)
- ---------------------------------------------------------------------------------------------------------------------
Retained earnings at end of year $ 5,107,893 4,874,447 5,186,975 4,884,274 4,478,476
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
10
<PAGE>
AMERICAN RIVET COMPANY, INC.
Statements of Cash Flows
One month ended September 30, 1996 and 1995, and years ended August 31, 1996,
1995 and 1994
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
(Unaudited)
One Month Ended
September 30 Years Ended August 31
--------------------------- -----------------------------------------
1996 1995 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income $20,758 (9,827) 341,701 561,798 428,913
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 25,009 17,289 258,204 217,700 214,860
Deferred income taxes -- -- (9,015) (26,400) (38,800)
Deferred compensation 2,777 2,777 11,875 15,110 14,918
Gain on sale of property, plant, and equipment -- -- (5,000) (54,093) (500)
(Gain) loss on sale of marketable securities 408 (212) (33,685) (7,871) (105)
Changes in assets and liabilities:
Decrease (increase) in accounts and notes
receivable (131,875) 69,093 39,587 (26,339) (75,958)
Decrease (increase) in inventories and
prepaid expenses (99,823) (50,894) 71,518 (43,442) 132,424
Increase (decrease) in income taxes 11,700 (4,700) (55,600) 90,300 (2,594)
Decrease (increase) in other noncurrent assets (6,581) (6,954) (18,716) (6,907) (16,749)
Increase (decrease) in accounts payable and
accrued liabilities other than deferred
compensation and income taxes (33,976) (155,446) (121,382) 223,332 (20,183)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities ( 211,603) (138,874) 479,487 943,188 636,226
- ----------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Additions to property, plant, and equipment -- (3,552) (770,148) (324,259) (109,336)
Proceeds from sale of property, plant, and
equipment -- -- 5,000 61,005 12,810
Proceeds from sale of marketable securities -- 15,087 490,233 358,863 74,151
Purchase of marketable securities (77,456) (29,104) (377,536) (299,762) (675,211)
Decrease (increase) in deposits -- (208,730) 151,688 (151,572) 4,661
- ----------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (77,456) (226,299) (500,763) (355,725) (692,925)
- ----------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Dividends paid to stockholders (99,840) -- (117,000) (78,000) (117,000)
Principal payments on long-term deferred
compensation (1,865) (1,722) -- -- --
- ----------------------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (101,705) (1,722) (117,000) (78,000) (117,000)
- ----------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents(390,764) (366,895) (138,276) 509,463 (173,699)
Cash and cash equivalents at beginning of year 967,540 1,105,816 1,105,816 596,353 770,052
- ----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 576,776 738,921 967,540 1,105,816 596,353
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information-
cash paid during the year for income taxes, net
of refunds received $ -- -- 305,000 292,000 373,000
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to financial statements.
11
<PAGE>
AMERICAN RIVET COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
August 31, 1996, 1995, and 1994
- --------------------------------------------------------------------------------
(1) Significant Accounting Policies
DESCRIPTION OF BUSINESS
American Rivet Company ("Company") is a national manufacturer of rivets with
approximately 35% of its annual net sales derived from the automotive
industry. Approximately 10% of the Company's net sales were provided by one
customer for the years ended August 31, 1996 and 1995.
INTERIM UNAUDITED FINANCIAL STATEMENTS
The unaudited interim financial data as of September 30, 1996 and for the one
month ended September 30, 1996 and 1995 reflects all normal recurring
adjustments, consisting only of normal recurring adjustments which are, in
the opinion of management, necessary for a fair presentation of financial
position and operating results for the interim periods.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that effect the reported amounts of assets and liabilities and disclosure 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, but management does not
believe such differences will materially affect its financial position,
results of operations or cash flows.
MARKETABLE SECURITIES
The Company adopted Statement of Financial Accounting Standards No. 115 (SFAS
115), "Accounting for Certain Investments in Debt and Equity Securities,"
effective September 1, 1994. The cumulative effect of the adoption of SFAS
115 resulted in an increase in stockholders' equity of $63,451. In accordance
with SFAS 115, prior years' financial statements have not been restated to
reflect the change in accounting method. At August 31, 1994 marketable
securities were classified as available-for-sale and were reported at the
lower of aggregate amortized cost or fair value.
Management determines the appropriate classification of its investments in
debt and equity securities at the time of purchase and reevaluates such
determination at each balance sheet date. Debt securities for which the
Company does not have the intent or ability to hold to maturity are
classified as available-for-sale, along with the Company's investment in
equity securities. Securities available for sale are carried at fair value,
with unrealized gains and losses reported in a separate component of
shareholders' equity. At August 31, 1996, the Company had no investments that
qualified as trading or held to maturity.
The amortized cost of debt securities classified as available-for-sale is
adjusted for amortization of premiums and accretion of discounts to maturity.
Such amortization and interest are included in interest income. Realized
gains and losses are shown separately. The cost of securities sold is based
on the specific identification method.
At August 31, 1996, the Company's investments in debt and equity securities
were classified as marketable securities. These investments are diversified
among high credit quality securities in accordance with the Company's
investment policy.
12
<PAGE>
AMERICAN RIVET COMPANY, INC.
Notes to Financial Statements
- --------------------------------------------------------------------------------
INVENTORIES
Inventories are valued at the lower of cost or market. The last-in, first-out
(LIFO) method is used to determine cost for the rivet business inventories,
and the first-in, first-out (FIFO) method is used to determine cost for the
automatic rivet setting machine parts inventories.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are carried at cost less accumulated
depreciation. Depreciation is generally calculated using accelerated methods
over the estimated useful lives of between 5-45 years of the respective
assets. When assets are retired or otherwise disposed of, the cost and
related depreciation are removed from the accounts, and any gain or loss is
recognized in income for the period. The cost of maintenance is charged to
income as incurred; significant renewals and betterments are capitalized.
INCOME TAXES
The Company utilizes the asset and liability method of accounting for income
taxes. Under this method, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
GOODWILL AND ORGANIZATIONAL EXPENSE
The goodwill and organizational expense which arose in 1953 is not being
amortized, as it has no determinable life.
DEFERRED CHARGES
Deferred charges consist of certain tools and factory supplies which are
charged to operations as they are used in production.
DEFERRED COMPENSATION
The Company has deferred compensation contracts with certain past and present
key executives. Periodic accrual is being made, over the projected active
term of employment of present executives, of an amount equivalent to the
present value of the benefits at the date of retirement.
13
<PAGE>
AMERICAN RIVET COMPANY, INC.
Notes to Financial Statements
- --------------------------------------------------------------------------------
PROFIT-SHARING PLAN
The Company maintains a qualified noncontributory profit-sharing plan for
full-time employees who satisfy minimum age and service requirements.
Contributions to the plan are at the discretion of the Board of Directors.
The Board of Directors authorized contributions of $53,000, $88,000 and
$40,000 for fiscal years 1996, 1995, and 1994 respectively.
The Company amended the plan, effective September 1, 1993, to add a 401(k)
provision in addition to the existing plan. The 401(k) offers two investment
options: the Balanced Fund and Fixed Income Fund. In fiscal 1994 the Company
matched $0.50 on the dollar for employee contributions of up to $400. In
fiscal years 1995 and 1996, the Company matched $0.75 on the dollar for
employee contributions of up to $500. The Company matched contributions at a
cost of $15,101, $15,277 and $6,725 for fiscal years 1996, 1995 and 1994,
respectively.
CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three months or
less to be cash equivalents.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash and cash equivalents, accounts receivable,
accounts payable and accrued expenses approximate fair value because of the
short maturity of these items. The Company's marketable securities are
presented in the financial statements at fair market value as determined by
quoted market prices.
(2) MARKETABLE SECURITIES AND CASH EQUIVALENTS
In accordance with SFAS 115, the Company's marketable securities have been
classified as available-for-sale securities and are reported at their fair
value of $2,007,441 and $2,037,282 compared to a historical cost of
$1,843,058 and $1,914,436 for fiscal 1996 and 1995, respectively. The net
unrealized gains of $164,383 and $122,846 are reported as a separate
component of stockholders' equity at August 31, 1996 and 1995, respectively.
A summary of the Company's investment securities follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
September 30, 1996 (Unaudited)
------------------------------------------------------------------
Gross Gross
Estimated unrealized unrealized
Cost fair value gains losses
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Equity securities $ 1,132,453 1,317,755 195,872 10,570
Corporate bonds 43,644 45,775 2,131 --
U.S. Treasury notes 405,206 412,934 7,728 --
- ----------------------------------------------------------------------------------------------------------
1,581,303 1,776,464 205,731 10,570
Cash equivalents 276,234 276,234 -- --
- ----------------------------------------------------------------------------------------------------------
$1,857,537 2,052,698 205,731 10,570
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE>
AMERICAN RIVET COMPANY, INC.
Notes to Financial Statements
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
August 31, 1996
------------------------------------------------------------------
Gross Gross
Estimated unrealized unrealized
Cost fair value gains losses
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Equity securities $1,012,130 1,159,710 155,580 8,000
Corporate bonds 86,919 99,038 14,669 2,550
U.S. Treasury notes 405,206 409,890 5,778 1,094
- ----------------------------------------------------------------------------------------------------------
1,504,255 1,668,638 176,027 11,644
Cash equivalents 338,803 338,803 -- --
- ----------------------------------------------------------------------------------------------------------
$1,843,058 2,007,441 176,027 11,644
- ----------------------------------------------------------------------------------------------------------
August 31, 1995
------------------------------------------------------------------
Gross Gross
Estimated unrealized unrealized
Cost fair value gains losses
- ----------------------------------------------------------------------------------------------------------
Equity securities $1,104,544 1,205,200 104,981 4,325
Corporate bonds 74,517 76,163 2,371 725
U.S. Treasury notes 404,206 424,750 20,544 --
- ----------------------------------------------------------------------------------------------------------
1,583,267 1,706,113 127,896 5,050
Cash equivalents 331,169 331,169 -- --
- ----------------------------------------------------------------------------------------------------------
$ 1,914,436 2,037,282 127,896 5,050
- ----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
</TABLE>
Contractual maturities of debt securities (Corporate bonds and U.S.Treasury
notes) at August 31, 1996 are shown below:
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Amortized Estimated
cost fair value
- -------------------------------------------------------------------------------
Due in:
1997 $ 199,956 205,734
1998 - 2001 -- --
2002 - 2006 275,500 285,044
2007 and later 16,669 18,150
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
15
<PAGE>
AMERICAN RIVET COMPANY, INC.
Notes to Financial Statements
- --------------------------------------------------------------------------------
Proceeds, gross realized gains, and gross realized losses during the years ended
August 31, 1996 and 1995 were as follows:
- -------------------------------------------------------------------------------
1996 1995
- -------------------------------------------------------------------------------
Proceeds from sales $ 490,233 358,863
Gross realized gains 36,558 22,074
Gross realized losses 2,873 14,203
- -------------------------------------------------------------------------------
For the purposes of determining gross realized gains and losses, the cost of
securities sold is based upon specific identification.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(3)INVENTORIES
Inventories at September 30, 1996, August 31, 1996 and 1995 consist of the
following:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
(Unaudited)
September 30 August 31
1996 1996 1995
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Rivet business:
Raw materials $ 668,545 645,883 704,109
Work in process and finished goods 638,796 563,006 548,770
- -----------------------------------------------------------------------------------------------------------
1,307,341 1,208,889 1,252,879
Less LIFO reserve 664,878 655,758 616,000
- -----------------------------------------------------------------------------------------------------------
642,463 553,131 636,879
Automatic rivet setting machine parts 6,282 6,282 32,401
- -----------------------------------------------------------------------------------------------------------
$ 648,745 559,413 669,280
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
</TABLE>
If the Company had valued rivet business inventories under the FIFO method,
net income for fiscal 1996, 1995 and 1994 would have increased by
approximately $23,800, $19,000 and $9,000, respectively, and retained
earnings would have been higher by $386,800, $363,000 and $335,000 in fiscal
1996, 1995 and 1994, respectively.
16
<PAGE>
AMERICAN RIVET COMPANY, INC.
Notes to Financial Statements
- --------------------------------------------------------------------------------
(4)PROPERTY, PLANT, AND EQUIPMENT
Major categories of property, plant, and equipment at August 31, 1996 and
1995 are summarized as follows:
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
1996 1995
- -----------------------------------------------------------------------------
Land and land improvements $ 229,631 229,631
Building and building improvements 1,660,311 1,653,817
Machinery and equipment 8,374,175 7,617,114
Automatic rivet setting machines - leased 42,482 42,482
Office furniture, fixtures, and equipment 344,518 337,925
Automobiles 147,312 147,312
Condominium, including furnishings 211,647 211,647
- -----------------------------------------------------------------------------
11,010,076 10,239,928
Less accumulated depreciation 9,010,217 8,752,013
- -----------------------------------------------------------------------------
$ 1,999,859 1,487,915
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
Depreciation expense for fiscal 1996, 1995, and 1994 amounted to $258,204,
$217,700 and $214,860, respectively.
(5) INCOME TAX EXPENSE
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Income tax expense (benefit) is summarized as follows:
- ------------------------------------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------
Current:
Federal $ 198,200 313,000 243,700
State 51,200 69,300 48,300
- ------------------------------------------------------------------------------
249,400 382,300 292,000
Deferred (9,015) (26,400) (38,800)
- ------------------------------------------------------------------------------
$ 240,385 355,900 253,200
- ------------------------------------------------------------------------------
17
<PAGE>
AMERICAN RIVET COMPANY, INC.
Notes to Financial Statements
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
A reconciliation of the statutory U.S. Federal income tax rate of 34% in fiscal
1996, 1995, and 1994 to the Company's effective tax rate for the corresponding
periods is as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
1996 1995 1994
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Federal tax at 34% $ 197,900 312,000 231,900
Add (deduct) tax effect of:
State taxes, net of federal tax effect 33,800 45,700 31,900
Dividend exclusion (4,500) (4,300) (3,200)
Tax-exempt interest (7,200) (6,800) (4,600)
Officers' life insurance premiums 3,100 2,500 2,600
Travel and entertainment 3,900 9,500 6,800
Other, net 13,385 (2,700) (12,200)
- -----------------------------------------------------------------------------------------------------------
Provision for income taxes $ 240,385 355,900 253,200
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at August 31, 1996 and
1995 are presented as follows:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1996 1995
- --------------------------------------------------------------------------------
Deferred tax assets:
Deferred compensation $ 174,596 $ 170,010
Health insurance accrual 27,294 27,294
Accounts receivable 7,724 7,724
Waste removal accrual 16,220 16,220
Other 2,373 4,585
- --------------------------------------------------------------------------------
Total gross deferred tax assets 228,207 225,883
Deferred tax liability - property,
plant, and equipment (128,235) (134,876)
- --------------------------------------------------------------------------------
Net deferred tax asset $ 99,972 90,957
- --------------------------------------------------------------------------------
A valuation allowance has not been provided for deferred tax assets at August
31, 1996 or 1995 as management believes it is more likely than not that the
results of future operations will generate sufficient taxable income to realize
the deferred tax assets.
18
<PAGE>
AMERICAN RIVET COMPANY, INC.
Notes to Financial Statements
- --------------------------------------------------------------------------------
(6) RELATED PARTIES
Deferred compensation relates to agreements with certain key past and present
officers of the Company. These agreements are in the form of annuities
beginning at age 65 and continuing over a ten year period or less depending
on the last survival of the officer or spouse. Amounts accrue straight-line
to the date of retirement and all agreements are fully funded. The current
portion of the accrual at August 31, 1996 and 1995 represents payments due
within the next twelve months for a past officer's beneficiary. Deferred
compensation expense was approximately $33,000 in fiscal 1996, 1995 and 1994.
(7)SUBSEQUENT EVENTS
Some aspects of the Company's business are regulated by environmental laws,
and the Company regularly takes steps to comply with applicable requirements.
The Company believes it is in compliance with the environmental laws. In
October, 1996, the Company engaged environmental engineering consultants to
review the Company's facility. The tests and findings have not been
completed, but do indicate that some expenditures related to environmental
matters may be necessary. Since the extent or range of the cost is not yet
known, no accrual has been made in the financial statements for costs related
to the environmental matters. Based upon information presently available,
such costs are not expected to have a material adverse effect on the
Company's financial position or its results of operations.
(8) COMMITMENTS AND CONTINGENCIES
Subsequent to year end, the Company's Board of Directors authorized a
dividend of $1.28 per share for stockholders of record on September 5, 1996.
The total amount of $99,840 was paid subsequently.
19
<PAGE>
INDUSTRIAL HOLDINGS, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
The following unaudited pro forma financial statements give effect to
the acquisition by Industrial Holdings, Inc. ("IHI") of American Rivet Company,
Inc. ("American") in a transaction accounted for as a purchase which closed
November 1996. The allocation of purchase price is based on preliminary
information currently available and will be revised as necessary prior to the
issuance of the 1996 financial statements, although no material adjustments are
anticipated. The following unaudited pro forma financial statements also give
effect to the exercise of 621,914 Class A Warrants, the issuance of 621,914
shares of Common Stock and the application of the net proceeds therefrom which
occurred December 15, 1996.
The unaudited pro forma condensed consolidated balance sheet is based on
the September 30, 1996 balance sheets of IHI included in the financial
statements of IHI filed with Form 10-Q for the quarter ended September 30, 1996
and in the 1995 Annual Report filed on Form 10-K and the financial statements of
American appearing elsewhere in this Form 8-K, and has been prepared to reflect
the acquisition of American and the exercise of warrants as if the acquisition
and exercise had occurred at September 30, 1996. The acquisition of MRMC, Inc's
("MRMC") Fastener Division ("CRivet") was completed in December 1995 and its
balance sheet as of September 30, 1996 is included in that of IHI.
The unaudited pro forma condensed consolidated statements of operations
are based on the income statements of IHI filed with Form 10-Q for the quarter
ended September 30, 1996 and in the 1995 Annual Report filed on Form 10-K and
the financial statements and the income statement of American for the 12-month
period ended December 31, 1995 and the nine-month period ended September 30,
1996 (not presented separately herein). Additionally, the unaudited pro forma
condensed consolidated statement of operations for the year ended December 31,
1995 is based on the Statement of Direct Revenues and Direct Expenses of CRivet
for the period from January 1, 1995 through December 7, 1995 (not presented
separately herein). The unaudited pro forma condensed consolidated statements of
operations combine the results of operations of IHI, CRivet and American for the
year ended December 31, 1995, as if the acquisitions had occurred on January 1,
1995 and combine the results of operations of IHI and American for the nine
months ended September 30, 1996 as if the acquisition had occurred on January 1,
1996.
These unaudited pro forma financial statements should be read in
conjunction with the historical financial statements and notes thereto of IHI
filed with Form 10-Q for the quarter ended September 30, 1996 and in the 1995
Annual Report filed on Form 10-K and the financial statements of CRivet filed
with Form 8-K/A3 dated July 5, 1996 and American included elsewhere in this Form
8-K.
20
<PAGE>
INDUSTRIAL HOLDINGS, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
SEPTEMBER 30, 1996
(000'S OMITTED)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
---------------------- ----------------------------
ADJUSTMENTS
IHI AMERICAN (NOTE 1) COMBINED
--------- ------- ----------- --------
<S> <C> <C> <C> <C>
Assets
Current assets:
Cash and equivalents $ 1,131 $ 301 $ (103) (d) $ 1,329
Marketable securities 2,053 (2,053) (d)
Accounts receivable-trade 6,027 1,266 7,293
Inventories 8,782 649 656 (a) 10,087
Property and equipment held for sale 100 100
Advances to shareholders 17 17
Notes receivable, current portion 284 284
Other current assets 495 67 562
--------- ------- ----------- --------
Total current assets 16,836 4,336 (1,500) 19,672
Property and equipment, net 10,258 1,975 3,125 (a) 15,158
(200) (c)
Notes receivable 1,249 1,249
Other assets 152 288 (134) (a) 306
Goodwill, net 1,831 118 3,706 (b) 5,655
--------- -------- -------- --------
Total assets $ 30,326 $ 6,717 $ 4,997 $42,040
========= ======== ======== =======
</TABLE>
21
<PAGE>
INDUSTRIAL HOLDINGS, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
SEPTEMBER 30, 1996
(000'S OMITTED)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
--------------------- ---------------------------
ADJUSTMENTS
IHI AMERICAN (NOTE 1) COMBINED
-------- ----------- ------- -------
<S> <C> <C> <C>
Liabilities and Shareholders' Equity
Current liabilities:
Notes payable $ 6,500 $ $ 7,212 (d) $ 10,112
(3,600) (f)
Accounts payable-trade 4,610 254 4,864
Accrued expenses and other 1,050 338 478 1,866
Current portion of long-term debt 1,136 360 (d) 1,496
-------- ----------- ------- -------
Total current liabilities 13,296 592 4,450 18,338
Long-term debt, less current portion 4,252 1,440 (d) 5,692
Deferred compensation payable 430 (36) (a) 394
Deferred income taxes payable 819 (100) 1,338 (h) 2,057
-------- -------- -------- -------
Total liabilities 18,367 922 7,192 26,481
Shareholders' equity
Net unrealized gain on marketable
securities 195 (195) (e)
Common stock 41 1,000 (1,000) (e) 47
6 (f)
Less: Treasury stock (508) 508 (e)
Additional paid-in capital 11,135 3,594 (f) 14,729
Retained earnings 783 5,108 (5,108) (e) 783
--------- -------- -------- ----------
Total shareholders' equity 11,959 5,795 (2,195) 15,559
-------- -------- -------- ---------
Total liabilities and
shareholders' equity $ 30,326 $ 6,717 $ 4,997 $ 42,040
======== ======== ======== =========
</TABLE>
22
<PAGE>
Note 1 - The pro forma balance sheet reflects the acquisition of American for a
purchase price of $11,759,000 plus estimated acquisition expenses of $670,000,
the exercise of 621,914 Class A Warrants, the issuance of 621,914 shares of
Common Stock and the application of the net proceeds therefrom. Pro forma
adjustments are made to:
a. Adjust the assets and liabilities of American to the estimated fair
market values at the acquisition date.
b. Record goodwill on the purchase of American.
c. Reflect the distribution of Florida real estate to sellers.
d. Record the issuance of a 12% bridge note payable in the amount of
$3,500,000, the drawdown of $3,712,000 on the 8.25% Comerica Bank
Demand Note, the issuance of an 8.25% term note in the amount of
$1,800,000, and the disbursement of $2,156,000 of American cash and
marketable securities to complete the purchase acquisition.
e. Eliminate the common stock, treasury stock, unrealized gains and
retained earnings of American.
f. Reflect the repayment of the Comerica Bank Demand Note with the
$3,600,000 in net proceeds from the exercise of the 621,914 Class A
Warrants and the related issuance of 621,914 shares of Common Stock.
g. Establish a net deferred income tax liability for deferred income
taxes applicable to differences in fair market values and book bases
of assets acquired and liabilities assumed in a. above.
23
<PAGE>
INDUSTRIAL HOLDINGS, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
(000'S OMITTED)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
-------------------- -------------------------------------
ACQUISITION
ADJUSTMENTS
IHI AMERICAN (NOTE 1) COMBINED
--- -------- -------- --------
<S> <C> <C> <C>
Sales $ 38,498 $ 6,786 $ $ 45,283
Cost of sales 29,975 5,118 (28) (a) 35,032
(26) (b)
(6) (c)
Gross profit 8,523 1,668 60 10,251
Operating expenses:
Selling, general and 6,186 1,157 (583) (a) 6,760
administrative
Depreciation and amortization 293 7 133 (b) 433
--------- ----------- -------- ---------
Total operating expenses 6,479 1,164 (450) 7,193
-------- --------- --------- --------
Income from operations 2,044 504 510 3,058
Other income (expense):
Interest expense (960) (388) (d) (1,348)
Interest income 96 71 (71) (e) 96
Other income (3) 26 (26) (e) (3)
---------- ------------ ----------- ------------
Total other income (expense) (867) 97 (485) (1,255)
--------- ------------ ---------- -----------
Income before income taxes 1,177 601 25 1,803
Income tax expense 413 240 10 (i) 663
--------- ----------- --------- -----------
Net income $ 764 $ 361 $ 15 $ 1,140
======== ========== ======== ==========
Earnings per share (j) $ .19 $ .24
========= ===========
</TABLE>
24
<PAGE>
INDUSTRIAL HOLDINGS, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE YEAR ENDED DECEMBER 31, 1995
(000'S OMITTED)
<TABLE>
<CAPTION>
PRO FORMA
---------------------------------------------
ACQUISITION ADJUSTMENTS
HISTORICAL (NOTE 1)
----------------------------------- --------------------------------
IHI CRIVET AMERICAN CRIVET AMERICAN COMBINED
-------- ----------- ---------- ----------- -------- --------
<S> <C> <C> <C> <C> <C>
Sales $ 38,983 $ 9,986 $ 8,718 $ (1,122) (k) $ 56,565
Cost of sales 30,613 7,979 6,790 (557) (f) 43,797
(389) (g)
180 (h)
312 (b) 46
(1,122) (k)
(c) (12)
(a) (43)
Gross profit 8,370 2,007 1,928 454 9 12,768
Cost of sales:
Selling, general and 6,512 779 1,461 210 (1) 8,392
administrative 100 (m)
(a) (670)
Depreciation and amortization 413 40 (b) 175 628
-------- ----------- ---------- ----------- -------- --------
Total operating expenses 6,925 779 1,501 310 (495) 9,020
------- --------- --------- --------- -------- --------
Income from operations 1,445 1,228 427 144 504 3,748
Other income (expense):
Interest expense (982) (523) (d) (518) (2,023)
Interest income 140 130 (e) (130) 140
Other income (expense) 18 57 (e) (57) 18
--------- ----------- --------- ----------- -------- ---------
Total other income (expense) (824) 187 (523) (705) (1,865)
-------- ----------- -------- -------- ------- --------
Income before income taxes 621 1,228 614 (379) (201) 1,883
Income tax expense 76 0 238 335 (i) (78) 571
---------- ----------- --------- --------- -------- --------
Net income $ 545 $ 1,228 $ 376 $ (714) $ (123) $ 1,312
======== ========= ======== ========= ======== =======
Earnings per share (j) $ .17 $ .34
========= ========
</TABLE>
25
<PAGE>
Note 1 - The above statements give effect to the following pro forma adjustments
necessary to reflect the acquisition and the issuance of debt related to the
acquisition outlined in Note 1 to the pro forma balance sheet:
a. Reduce cost of sales and selling, general and administrative expenses
for reductions in executive payrolls, reductions in professional fees,
elimination of directors fees, reduction in executive benefits,
elimination of profit sharing plan contributions and elimination of
expenses related to Florida real estate.
b. Record change in depreciation and amortization expense resulting from
(i) the increase in acquired property, plant and equipment as a result
of the allocation of the purchase price and (ii) amortization of
acquired goodwill over 20 years.
c. Reduce cost of sales for the effect of the difference in lifo and fifo
basis of accounting for inventory.
d. Reflect interest charges (i) for American on $1,800,000 of 8.25% term
debt, $3,712,000 8.25% Comerica Bank Demand Note, 12% $3,500,000 bridge
note and $3,600,000 reduction in short term borrowings as a result of
application of net proceeds from the exercise of 621,914 Class A
Warrants; (ii) for CRivet on $1,000,000 of 12% convertible notes,
$2,800,000 of 9.85% term note and $1,400,000 Demand Note secured to
finance the acquisition.
e. Eliminate interest income and other income.
f. Reduce payroll expense for employees not hired upon acquisition of
CRivet and which are not needed to operate at historical levels of
operations when the operations of CRivet are combined with those of IHI.
Pro forma production staffing levels at CRivet are comparable to those
at Landreth and include 65 employees compared to 71 production employees
at Landreth. Pro forma sales and engineering staffing levels include 8
employees at CRivet compared to 8 employees at Landreth. Substantially
all other administrative functions will be performed by Landreth. These
staffing reductions are as a result of Landreth's more efficient
operating and management techniques. Pro forma adjustments for 1995
include the elimination of an additional 32 production employees not
hired by Landreth at acquisition.
g. Reverse the effect of the CRivet obsolescence reserve recorded in the
period ended December 7, 1995.
h. Increase expense for the rental of CRivet plant facility at $15,000 per
month.
i. Increase in income taxes as a result of the pro forma pretax earnings of
CRivet and American.
j. Increase in earnings per share as a result of pro forma earnings of
CRivet and American and increase in weighted average of common stock
equivalents (i) for American for the effect of 540,000 warrants sold in
connection with $3,500,000 bridge note, (ii) for CRivet for the effect
of 400,000 warrants sold in connection with $1,000,000 convertible note,
and (iii) the issuance of 621,914 shares of common stock and the related
common stock equivalents for the additional incentive warrants issued in
connection with the exercise of Class A Warrants.
k. Eliminate intercompany sales and cost of goods sold between CRivet and
Landreth.
26
<PAGE>
l. Increase CRivet general and administrative expenses for office supplies,
data processing, telephone, professional fees and travel and
entertainment. Pro forma amounts based on Landreth's historical usage,
data processing system to be implemented, number of telephones,
estimated additional audit and legal fees and travel anticipated between
Houston and Connecticut.
m. Increase CRivet commission expense by 1% to percentage expected to be
paid by Landreth.
27
EXHIBIT 13.7
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) FEBRUARY 6, 1997
INDUSTRIAL HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
TEXAS 1-9580 76-0289495
(State of other jurisdiction (Commission File Number) (IRS Employer
of incorporation) Identification No.)
7135 ARDMORE HOUSTON, TEXAS 77054
(Address of principal executive office(Zip Code)
Registrant's telephone number, including area code(713) 747-1025
(Former name or former address, if changed since last report.)
1
<PAGE>
ITEM 5. FINANCIAL STATEMENTS AND EXHIBITS
(a)FINANCIAL STATEMENTS OF ACQUIRED COMPANY.
1. Financial Statements of LSS-Lone Star-Houston, Inc.
Report of Independent Certified Public Accountants......... 4
Consolidated Balance Sheet at December 31, 1996............ 5
Consolidated Statement of Operations for the
Year Ended December 31, 1996........................... 7
Consolidated Statement of Stockholder's Equity..............8
Consolidated Statement of Cash Flows for the Year Ended
December 31, 1996..................................... 9
Notes to Financial Statements............................. 10
(b)PRO FORMA FINANCIAL INFORMATION
1. Pro Forma Financial Statements:
Pro Forma Condensed Consolidated Financial
Statements (Unaudited)................................. 15
Pro Forma Condensed Consolidated Balance Sheet
at December 31, 1996 (Unaudited)....................... 16
Notes to Pro Forma Condensed Consolidated
Balance Sheet at December 31, 1996 (Unaudited)......... 17
Pro Forma Condensed Consolidated Statement
of Operations for the Year Ended December 31,
1996 (Unaudited)....................................... 18
Notes to Pro Forma Condensed Consolidated
Statements of Operations (Unaudited)................... 19
2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed in its behalf by the
undersigned hereunto duly authorized.
INDUSTRIAL HOLDINGS, INC.
By: /s/ CHRISTINE A. SMITH
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
Date: April 18, 1997
3
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
January 31, 1997
The Board of Directors
LSS - Lone Star - Houston, Inc.
We have audited the accompanying consolidated balance sheets of LSS - Lone Star
- - Houston, Inc. and Subsidiary as of December 31, 1996, and the related
consolidated statements of earnings, stockholders' equity and cash flows for the
year then ended. 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 audit.
Except as discussed in the following paragraph, we conducted our audit in
accordance with generally accepted auditing standards. Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
We did not observe the physical inventory (stated at $684,455) taken as of
December 31, 1995, since that date was prior to our initial engagement as
auditors for the Company, and the Company's records do not permit adequate
retroactive tests of inventory quantities.
In our opinion, except for the effects of such adjustments, if any, as might
have been determined to be necessary in the statements of income, retained
earnings, and cash flows had we been able to observe the physical inventory
taken as of December 31, 1995, the financial statements referred to in the first
paragraph present fairly, in all material respects, the consolidated financial
position of LSS - Lone Star - Houston, Inc. and Subsidiary at December 31, 1996,
and the consolidated results of its operations and its consolidated cash flows
for the year then ended in conformity with generally accepted accounting
principles.
Simonton, Kutac & Barnidge, L.L.P.
4
<PAGE>
LSS - LONE STAR - HOUSTON, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996
ASSETS
Current Assets:
Cash ................................................... $ 8,253
Accounts receivable - trade ............................ 1,713,434
Accounts receivable - employees ........................ 4,181
Inventories ............................................ 795,270
Prepaid expenses and other ............................. 13,870
-----------
Total Current Assets ............................. 2,535,008
Property and Equipment:
Land ................................................... 115,417
Building ............................................... 879,162
Machinery and equipment ................................ 1,227,854
Office furniture and equipment ......................... 214,697
-----------
2,437,130
Less: accumulated depreciation ........................ (921,285)
-----------
Total Property and Equipment ..................... 1,515,845
-----------
Other assets .............................................. 38,572
Total Assets ..................................... $ 4,089,425
===========
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
LSS - LONE STAR - HOUSTON, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1996
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable ............................................ $1,517,553
Accrued expenses ............................................ 290,478
Notes payable ............................................... 270,828
Current portion of long-term obligations .................... 278,049
----------
Total Current Liabilities ............................. 2,356,908
----------
Long-term obligations .......................................... 571,912
----------
Total Liabilities ..................................... 2,928,820
----------
Stockholders' Equity:
Common stock; $1.00 par value, 1,000
shares authorized, issued and outstanding ................... 1,000
Additional paid in capital .................................. 46,154
Retained earnings ........................................... 1,113,451
----------
Total Stockholders' Equity ............................ 1,160,605
----------
Total Liabilities and Stockholders' Equity ............ $4,089,425
==========
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
LSS - LONE STAR - HOUSTON, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
Sales ...................................................... $ 15,473,896
Cost of sales .............................................. 9,497,757
------------
Gross Profit ...................................... 5,976,139
------------
Operating Expenses:
Warehouse and shop ...................................... 1,435,508
Selling expenses ........................................ 891,317
Delivery ................................................ 378,756
General and administrative .............................. 2,880,879
------------
Total Operating Expenses .......................... 5,586,460
------------
Net Operating Income ....................................... 389,679
------------
Other Income and (Expenses)
Other income ............................................ 1,518
Interest expense ........................................ (113,793)
Other expense ........................................... (922)
------------
Total Other Income and (Expenses) ................. (113,197)
------------
Net income before taxes .................................... 276,482
Provision for income taxes ................................. (90,000)
------------
Net income ................................................. $ 186,482
============
The accompanying notes are an integral part of these financial statements.
7
<PAGE>
LSS - LONE STAR - HOUSTON, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1996
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED STOCKHOLDERS'
STOCK CAPITAL EARNINGS EQUITY
------ ------- ---------- ----------
Balance, January 1, 1996 ....... $1,000 $46,154 $ 926,969 $ 974,123
Net income for the year ........ -- -- 186,482 186,482
------ ------- ---------- ----------
Balance, December 31, 1996 ..... $1,000 $46,154 $1,113,451 $1,160,605
====== ======= ========== ==========
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
LSS - LONE STAR - HOUSTON, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996
Cash Flows from Operating Activities:
Net income .................................................. $ 186,482
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation ............................................. 212,154
Investment write-off ..................................... 39,923
Increase in accounts receivable - trade .................. (152,669)
Increase in accounts receivable - employees .............. (3,433)
Decrease in prepaid expenses and other ................... 1,196
Increase in inventories .................................. (110,815)
Increase in other assets ................................. (11,137)
Increase in accounts payable ............................ 274,368
Decrease in accrued expenses ............................. (72,052)
---------
Total adjustments ..................................... 177,535
---------
Net Cash Provided from Operating Activities ........... 364,017
---------
Cash Flows from Investing Activities:
Capital expenditures ........................................ (415,324)
---------
Cash Flows from Financing Activities:
Principal payments on notes payable ......................... (27,500)
Borrowings on notes payable ................................. 141,347
Principal payments on long-term obligations ................. (564,912)
Borrowings on long-term obligations ......................... 504,559
---------
Net Cash Provided by Financing Activities ................ 53,494
---------
Net Increase in Cash & Cash Equivalents ........................ 2,187
Cash and cash equivalents at beginning of period ............... 6,066
---------
Cash and cash equivalents at end of period ..................... $ 8,253
=========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Interest paid during the year .................................. $ 113,793
---------
Income tax paid during the year ................................ $ 85,000
=========
The accompanying notes are an integral part of these financial statements.
9
<PAGE>
LSS - LONE STAR - HOUSTON, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
LSS-Lone Star-Houston, Inc. and subsidiary (the Company) is a manufacturer and
distributor of quality fasteners. The Company extends credit to customers
located in Harris and surrounding counties, Texas.
A summary of the significant accounting policies consistently applied in the
preparation of the accompanying financial statements follows:
PRINCIPLES OF CONSOLIDATION -- The accompanying financial statements include the
accounts of LSS-Lone Star- Houston, Inc. and its wholly-owned subsidiary, Amflow
Master Environmental, Inc. All intercompany transactions have been eliminated in
consolidation.
CASH AND CASH EQUIVALENTS -- The Company considers all highly liquid short-term
investments with a maturity of ninety days or less from the purchase date to be
cash equivalents.
ACCOUNTS RECEIVABLE -- The Company considers accounts receivable to be fully
collectible; accordingly, no allowance for doubtful accounts is required. If
amounts become uncollectible, they will be charged to operations when that
determination is made.
INVENTORIES -- Inventories consist of raw materials and finished goods.
Inventories are valued at the lower of cost (first-in, first-out method) or
market. Raw materials and finished goods amounted to $117,343 and $677,927 at
December 31, 1996.
PROPERTY, PLANT AND EQUIPMENT -- Property, plant and equipment is stated at
cost. Depreciation is provided in amounts sufficient to relate to cost of
depreciable assets to operations over their estimated service lives on an
accelerated method.
INCOME TAXES -- Deferred tax assets and liabilities are recognized for the
future tax consequences attributable to temporary differences between the
financial statement carrying amounts of assets and liabilities and their
respective tax bases. When management determines that its more likely than not
that a deferred tax asset will not be realized, a valuation allowance is
established. Deferred tax assets and liabilities are measured using enacted tax
rates expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date.
10
<PAGE>
LSS - LONE STAR - HOUSTON, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES -- In preparing financial statements in conformity with
generally accepted accounting principles, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure 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.
NOTE 2 - NOTES PAYABLE
The Company has a line of credit agreement with a bank with monthly interest at
prime plus 1% (9.25% at December 31, 1996) providing for maximum borrowings of
$325,000, collateralized by substantially all assets of the Company. Principal
advances are due at maturity. The line of credit matures on May 1, 1997.
NOTE 3 - LONG-TERM OBLIGATIONS
Long-term obligations consists of the following:
Note payable to a bank; due in monthly installments
of $5,480, plus interest at prime plus 1.5% (9.75%
at December 31, 1996) due April 25, 1997;
collateralized by substantially all assets of the Company ........ $ 21,920
Notes payable to a bank; due in monthly installments of
$8,333, plus interest at prime plus 1% (9.25% at
December 31, 1996) due May 1, 1998; collateralized
by substantially all assets of the Company ....................... 141,667
Notes payable to a bank; due in monthly installments of
$4,167, plus interest at 9.25%, due April 19, 2001;
collateralized by substantially all assets of the
Company .......................................................... 196,225
Note payable to a bank; due in monthly installments
of $5,000, plus interest at prime plus 1% (9.25%
at December 31, 1996), due January 16, 1997,
collateralized by substantially all assets of the
Company .......................................................... 5,000
11
<PAGE>
LSS - LONE STAR - HOUSTON, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 3 - LONG-TERM OBLIGATIONS (CONTINUED)
Note payable to a finance company; due in monthly
installments of $9,449, including interest at 10%,
due April 1, 2002; collateralized by land and building............ 439,774
Obligations under capital leases, due in monthly installments
ranging from $705 to $1,191, including interest at various
rates; collateralized by the related assets ...................... 45,375
--------
849,961
Less: current portion .............................................. 278,049
--------
$571,912
========
Approximate future maturities of long-term obligations as of
December 31, 1996 are as follows:
FOR THE YEAR ENDED
DECEMBER 31, AMOUNT
- ------------------ --------
1997 ............................................... $278,049
1998 ............................................... 182,833
1999 ............................................... 135,191
2000 ............................................... 140,336
2001 ............................................... 103,112
Thereafter ............................................ 10,440
--------
$849,961
========
NOTE 4 - CAPITAL LEASES
The Company is the leasee of certain equipment under capital leases expiring in
various years through November 20, 1998. The assets and liabilities under
capital leases are recorded at the lower of the present value of the minimum
lease payments or the fair value of the asset. The assets are depreciated over
the lower of the related lease terms or their estimated productive lives.
Depreciation of assets under capital lease is included in depreciation expense
for 1996.
12
<PAGE>
LSS - LONE STAR - HOUSTON, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 4 - CAPITAL LEASES (CONTINUED)
Following is a summary of equipment held under capital leases:
Machinery and equipment $ 75,672
Office furniture and equipment 36,660
----------
112,332
Less: accumulated depreciation (56,250)
----------
$ 56,082
==========
Future minimum lease payments under capital leases as of December 31, 1996 are
as follows:
For the Year Ended
DECEMBER 31, AMOUNT
------------------ ----------
1997 $ 36,220
1998 14,614
---------
Total minimum lease payments 50,834
Less amount representing interest (5,459)
---------
Present value of net minimum lease payments $ 45,375
=========
Interest rates on capitalized leases vary and are imputed based on the lower of
the Company's incremental borrowing rate at the inception of each lease or the
lessor's implicit rate of return.
NOTE 5 - COMMITMENTS AND CONTINGENCIES
Outstanding letters of credit at December 31, 1996 are approximately $150,000.
NOTE 6 - INCOME TAXES
The provision (benefit) for income taxes consisted of the following:
Currently payable $ 90,000
Deferred --
Total $ 90,000
========
13
<PAGE>
LSS - LONE STAR - HOUSTON, INC. AND SUBSIDIARY
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 6 - INCOME TAXES (CONTINUED)
A reconciliation of income taxes computed at the statutory Federal income tax
rate and income taxes reported in the statements of earnings follows:
Tax at statutory rate ..................................... $ 94,000
Graduated tax rates ....................................... (3,000)
Other ..................................................... (1,000)
--------
Total provision (benefit) ............................... $ 90,000
========
NOTE 7 - SIGNIFICANT CUSTOMERS
The Company had sales to one customer representing 11.5% of total sales in 1996.
NOTE 8 - RELATED PARTY TRANSACTIONS
The Company leases certain delivery trucks recorded as capital leases from the
sole stockholder of the Company. During the year ended December 31, 1996,
rentals under long-term lease obligations were $18,751.
The Company has an outstanding balance of $1,251 due from the sole stockholder
at December 31, 1996.
NOTE 9 - SAVINGS PLAN
The Company has an employee tax-deferred savings plan (under Section 401(k) of
the Internal Revenue Code) available to all full-time employees who have been
employed by the Company one year and are at least 21 years old. Employees may
contribute up to 10% of their earnings and the Company may make matching
discretionary contributions. The Company's contribution's paid or accrued to the
plan was approximately $87,000 for the year ended December 31, 1996.
14
<PAGE>
INDUSTRIAL HOLDINGS, INC.
PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
The following unaudited pro forma financial statements give effect to the
acquisition by Industrial Holdings, Inc. ("IHI") of LSS-Lone Star-Houston, Inc.
("Lone Star") in a transaction accounted for as a purchase which closed January
1997. The allocation of purchase price is based on preliminary information
currently available and will be revised as necessary prior to the issuance of
the 1997 financial statements, although no material adjustments are anticipated.
The unaudited pro forma condensed consolidated balance sheet is based on
the December 31, 1996 balance sheets of IHI included in the financial statements
of IHI filed in the 1996 Annual Report filed on Form 10-K and the financial
statements of Lone Star appearing elsewhere in this Form 8-K, and has been
prepared to reflect the acquisition of Lone Star as if the acquisition had
occurred at December 31, 1996. The acquisition of American Rivet Company, Inc.
("American") was completed in November 1996 and its balance sheet as of December
31, 1996 is included in that of IHI.
The unaudited pro forma condensed consolidated statements of operations
are based on the income statements of IHI in the 1996 Annual Report filed on
Form 10-K, the statement of operations for Lone Star for the year ended December
31, 1996 appearing elsewhere in this Form 8-K and the income statement of
American for the 10-month period ended October 31, 1996 (not presented
separately herein). The unaudited pro forma condensed consolidated statements of
operations combine the results of operations of IHI, Lone Star and American for
the year ended December 31, 1996, as if the acquisitions had occurred on January
1, 1996.
These unaudited pro forma financial statements should be read in
conjunction with the historical financial statements and notes thereto of IHI in
the 1996 Annual Report filed on Form 10-K and the financial statements of
American filed with Form 8-K/A dated November 18, 1996 and Lone Star included
elsewhere in this Form 8-K.
15
<PAGE>
INDUSTRIAL HOLDINGS, INC.
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
DECEMBER 31, 1996
(000'S OMITTED)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
------------------ -------------------------
ADJUSTMENTS
IHI LONE STAR (NOTE 1) COMBINED
------- ------- ------- -------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and equivalents ............ $ 3,088 $ 8 $(1,818)(a) $ 1,278
Accounts receivable-trade ....... 6,756 1,713 (100)(b) 8,369
Inventories ..................... 9,970 795 -- 10,765
Advances to shareholders ........ 77 -- -- 77
Notes receivable, current portion 208 -- -- 208
Other current assets ............ 334 18 -- 352
------- ------- ------- -------
Total current assets ....... 20,433 2,534 (1,918) 21,049
Property and equipment, net ......... 15,580 1,516 1,038 (b) 18,134
Notes receivable .................... 1,464 -- -- 1,464
Other assets ........................ 715 39 -- 754
Goodwill, net ....................... 5,498 -- 3,158 (c) 8,656
------- ------- ------- -------
Total assets ............... $43,690 $ 4,089 $ 2,278 $50,057
======= ======= ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable ................... $ 9,616 $ 271 $ (271)(d) $11,016
1,400 (a)
Accounts payable-trade .......... 4,601 1,518 -- 6,119
Accrued expenses and other ...... 1,722 290 28 (a) 2,040
Current portion of long-term
debt ..................... 1,394 278 (278)(d) 1,714
320 (a)
------- ------- ------- -------
Total current liabilities ....... 17,333 2,357 1,199 20,889
Long-term debt, less current
portion ......................... 7,326 572 (572)(d) 9,206
1,880 (a)
Deferred compensation payable ....... 286 -- -- 286
Deferred income taxes payable ....... 2,191 -- 325 (e) 2,516
------- ------- ------- -------
Total liabilities .......... 27,136 2,929 2,832 32,897
Shareholders' equity
Common stock .................... 48 1 (1)(f) 49
1 (g)
Additional paid-in capital ...... 15,361 46 (46)(f) 15,966
605 (g)
Retained earnings ............... 1,145 1,113 (1,113)(f) 1,145
------- ------- ------- -------
Total shareholders' equity . 16,554 1,160 (554) 17,160
------- ------- ------- -------
Total liabilities and shareholders .. s 43,690 $ 4,089 $ 2,278 $50,057
======= ======= ======= =======
</TABLE>
16
<PAGE>
Note 1 - The pro forma balance sheet reflects the acquisition of Lone Star for a
purchase price of $6,080,000 including estimated acquisition expenses of
$382,000. Pro forma adjustments are made to:
a. Record the payment of cash, the drawdown of $1,400,000 on the 8.25%
Comerica Bank demand note, the issuance of 8.25% term notes in the
amount of $900,000 and $800,000 secured by real estate and equipment,
respectively, the issuance of an 8% $500,000 term note payable to the
selling shareholder and accrual of unpaid transaction expenses.
b. Adjust the assets and liabilities of Lone Star to the estimated fair
market values at the acquisition date.
c. Record goodwill on the purchase of Lone Star.
d. Record the repayment of Lone Star debt.
e. Establish a net deferred income tax liability for deferred income taxes
applicable to differences in fair market values and book bases of assets
acquired and liabilities assumed in b. above.
f. Eliminate the common stock, additional paid-in capital and retained
earnings of Lone Star.
g. Record the payment of 84,211 shares of IHI common stock to the selling
shareholder.
17
<PAGE>
INDUSTRIAL HOLDINGS, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE YEAR ENDED DECEMBER 31, 1996
(000'S OMITTED)
<TABLE>
<CAPTION>
PRO FORMA
------------------------------------
HISTORICAL ACQUISITION ADJUSTMENTS (NOTE 1)
-------------------------------- ------------------------------------
IHI LONE STAR AMERICAN LONE STAR AMERICAN COMBINED
-------- -------- ------- ------- -------- --------
<S> <C> <C> <C> <C>
Sales .................... $ 51,423 $ 15,474 $ 7,699 $ 74,596
Cost of sales ............ 40,849 9,498 5,930 $ 15 (c) (14)
2,163 (b) 58,298
(a) (142)
-------- -------- ------- ------- -------- --------
Gross profit ............. 10,574 5,976 1,769 (2,178) (156) 16,298
Operating expenses ....... 8,002 5,587 1,355 (392)(a) (479) 12,201
(2,163)(b)
161 (c) 132
-------- -------- ------- ------- -------- --------
Income from operations ... 2,572 389 414 217 504 4,096
Other income (expense):
Interest expense ...... (1,336) (114) (183)(d) (431) (1,881)
Interest income ....... 160 79 (e) (79) 160
Other income (expense) 139 1 (89) (1)(e) 89 140
-------- -------- ------- ------- -------- --------
Total other income
(expense) ........ (1,037) (113) (10) (184) (422) (1,582)
-------- -------- ------- ------- -------- --------
Income before income taxes 1,535 276 404 33 82 2,515
Income tax expense ....... 408 90 181 15 (f) 37 716
-------- -------- ------- ------- -------- --------
Net income ............... $ 1,127 $ 186 $ 223 $ 18 $ 45 $ 1,799
======== ======== ======= ======= ======== ========
Earnings per share (g) ... $ .26 $ .36
======== ========
</TABLE>
18
<PAGE>
Note 1 - The above statements give effect to the following pro forma adjustments
necessary to reflect the acquisition and the issuance of debt related to the
acquisition outlined in Note 1 to the pro forma balance sheet:
a. Reduce cost of sales and selling, general and administrative expenses
for reductions in executive payrolls, reductions in professional fees,
elimination of directors fees, reduction in executive benefits,
elimination of profit sharing plan contributions and elimination of
expenses related to Florida real estate.
b. Reclassify amounts from selling general and administrative expenses to
cost of sales.
c. Adjust depreciation and amortization expense for changes resulting from
(i) the increase in acquired property, plant and equipment as a result
of the allocation of the purchase price and (ii) amortization of
acquired goodwill over 20 years.
d. Adjust interest expense (i) for Lone Star on $1,700,000 of 8.25% term
debt, $1,400,000 8.25% Comerica Bank demand note and 8% $500,000 term
note payable to seller and (ii) for American on $1,800,000 of 8.25% term
debt, $3,712,000 8.25% Comerica Bank demand note, 12% $3,500,000 bridge
note and $3,600,000 reduction in short term borrowings as a result of
application of net proceeds from the exercise of 621,914 Class A
Warrants.
e. Eliminate interest income and other income.
f. Increase in income taxes as a result of the pro forma pretax earnings of
Lone Star and American.
g. Increase in earnings per share as a result of pro forma earnings of Lone
Star and American and increase in weighted average of common stock
equivalents (i) for Lone Star for the effect of 84,211 shares of IHI
common stock issued to selling shareholder, (ii) for American for the
effect of 540,000 warrants, and (iii) the issuance of 621,914 shares of
common stock and the related common stock equivalents for the additional
incentive warrants issued in connection with the exercise of Class A
Warrants.
19
EXHIBIT 13.8
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) MAY 8, 1997
INDUSTRIAL HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
TEXAS 76-0289495
(State of other jurisdiction 1-9580 (IRS Employer
of corporation) (Commission File Number) Identification No.)
7135 ARDMORE HOUSTON, TEXAS 77054
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code(713) 747-1025
(Former name or former address, if changed since last report.)
1
<PAGE>
ITEM 4. CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANTS.
(a) Previous Independent Accountants
(i) On May 8, 1997, Price Waterhouse LLP declined to stand for
re-election as the independent accountants for Industrial Holdings,
Inc.
(ii) The reports of Price Waterhouse LLP on the financial
statements for the past two fiscal years contained no adverse opinion
or disclaimer of opinion and were not qualified or modified as to
uncertainty, audit scope or accounting principle.
(iii) In connection with its audits for the two most recent
fiscal years and through May 8, 1997, there have been no disagreements
with Price Waterhouse LLP on any matter of accounting principles and
practices, financial statement disclosure or auditing scope or
procedure, which disagreements if not resolved to the satisfaction of
Price Waterhouse LLP would have caused them to make reference thereto
in their report on the financial statements for such years.
(iv) During the two most recent fiscal years and through May 8,
1997, there have been no reportable events (as defined in Regulation
S-K Item 304(a)(1)(v)).
(v) The Registrant has requested that Price Waterhouse LLP
furnish it with a letter addressed to the SEC stating whether or not
it agrees with the above statements. A copy of such letter, dated May
13, 1997, is filed as Exhibit 16 to this Form 8-K.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
a. FINANCIAL STATEMENTS
Not Applicable.
b. PRO FORMA FINANCIAL INFORMATION
Not Applicable.
c. EXHIBITS
16.1 Letter re: Change in Certifying Accountant
2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed in its behalf by the
undersigned hereunto duly authorized.
INDUSTRIAL HOLDINGS, INC.
By: /s/ CHRISTINE A. SMITH
CHIEF FINANCIAL OFFICER
Date: May 14, 1997
3
<PAGE>
EXHIBIT INDEX
EXHIBIT NUMBER AND DESCRIPTION PAGE
16.1 Letter re: Change in Certifying Accountant Ex-1
4
EXHIBIT 13.9
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) MARCH 29, 1997
INDUSTRIAL HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
TEXAS 1-9580 76-0289495
(State of other jurisdiction of (Commission File Number) (IRS Employer
incorporation) Identification No.)
7135 ARDMORE HOUSTON, TEXAS 77054
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code(713) 747-1025
______________________________________________________________
(Former name or former address, if changed since last report.)
<PAGE>
ITEM 5. FINANCIAL STATEMENTS AND EXHIBITS
(a) FINANCIAL STATEMENTS OF ACQUIRED COMPANY.
1. Financial Statements of Manifold Valve Service, Inc.
Independent Auditor's Report.............................. 4
Balance Sheets at December 31, 1995 and 1996 and
February 28, 1997 (Unaudited)............................ 5
Statements of Income and Retained Earnings for the
Years Ended December 31, 1995 and 1996 and
Unaudited for Each of the Two Months Ended
February 28, 1996 and 1997............................... 7
Statements of Cash Flows for the Years Ended
December 31, 1995 and 1996 and Unaudited for Each
of the Two Months Ended February 28, 1996 and 1997....... 8
Notes to Financial Statements............................. 9
(b) PRO FORMA FINANCIAL INFORMATION
1. Pro Forma Financial Statements:
Pro Forma Condensed Consolidated Financial
Statements (Unaudited)................................... 13
Pro Forma Condensed Consolidated Statement of Income
for the Three Months Ended March 31, 1997 (Unaudited).... 14
Pro Forma Condensed Consolidated Statement of Income
for the Year Ended December 31, 1996 (Unaudited)......... 15
Notes to Pro Forma Condensed Consolidated Statements
of Income (Unaudited).................................... 16
2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed in its behalf by the
undersigned hereunto duly authorized.
INDUSTRIAL HOLDINGS, INC.
By: /s/ CHRISTINE A. SMITH
VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
Date: June 12, 1997
3
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Stockholders
Manifold Valve Service, Inc.
We have audited the accompanying balance sheets of Manifold Valve Service, Inc.
as of December 31, 1995 and 1996, and the related statements of income and
retained earnings, and cash flows for the years then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Manifold Valve Service, Inc. as
of December 31, 1995 and 1996, and the results of its operations and its cash
flows for the years then ended, in conformity with generally accepted accounting
principles.
HEIN + ASSOCIATES LLP
Houston, Texas
February 21, 1997, except as to Note 10,
which is as of March 29, 1997
4
<PAGE>
MANIFOLD VALVE SERVICE, INC.
BALANCE SHEETS
DECEMBER 31,
----------------------- FEBRUARY 28,
1995 1996 1997
---------- ---------- ----------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents ........... $ 75,024 $ 366,367 $ 185,399
Accounts receivable:
Trade, net of allowance for
doubtful accounts of $15,000 836,293 1,020,287 1,363,332
Other .......................... 8,369 3,544 500
Inventory ........................... 640,335 870,844 881,293
Income taxes recoverable from parent -- 29,632 --
Other current assets ................ 26,256 29,014 30,007
---------- ---------- ----------
Total current assets ...... 1,586,277 2,319,688 2,460,531
Property and Equipment, net ............. 575,459 739,976 821,066
Other Assets, net ....................... 24,200 -- --
---------- ---------- ----------
Total assets .............. $2,185,936 $3,059,664 $3,281,597
========== ========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities:
Accounts payable .................... $ 175,523 $ 258,582 $ 581,030
Accrued expenses .................... 73,219 144,944 67,254
Income taxes payable to parent ...... 39,937 -- 101,295
---------- ---------- ----------
Total current liabilities . 288,679 403,526 749,579
Deferred Income Taxes Payable ........... 36,556 54,337 58,672
Commitments and Contingencies (Note 5)
Stockholder's Equity
Common stock, $.01 par value; 10,000
shares authorized, issued and
outstanding ....................... 100 100 100
Additional paid-in capital .......... 1,106,172 1,106,172 1,106,172
Retained earnings ................... 754,429 1,495,529 1,367,074
---------- ---------- ----------
Total stockholder's equity ..... 1,860,701 2,601,801 2,473,346
---------- ---------- ----------
Total liabilities and
stockholder's equity ........ $2,185,936 $3,059,664 $3,281,597
========== ========== ==========
See accompanying notes to these financial statements.
5
<PAGE>
MANIFOLD VALVE SERVICE, INC.
STATEMENTS OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, TWO MONTHS ENDED FEBRUARY 28,
---------------------------- ----------------------------
1995 1996 1996 1997
------------ ------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C>
Revenues ............................. $ 5,860,346 $ 6,373,825 $ 880,162 $ 1,761,888
Costs and Expenses:
Cost of sales .................... 3,974,670 4,207,230 657,152 1,276,339
Depreciation and amortization .... 128,149 159,105 21,783 16,216
General and administrative ....... 774,322 842,935 115,219 152,461
------------ ------------ ------------ ------------
Total costs and expenses 4,877,141 5,209,270 794,154 1,445,016
------------ ------------ ------------ ------------
Income From Operations ............... 983,205 1,164,555 86,008 316,872
Other Income (Expense):
Interest income (expense), net ... (9,749) 7,538 380 2,982
Other, net ....................... 26,320 8,234 (332) 165
------------ ------------ ------------ ------------
Total other income ..... 16,571 15,772 48 3,147
------------ ------------ ------------ ------------
Income Before Income Tax Expense ..... 999,776 1,180,327 86,056 320,019
Income Tax Expense:
Federal:
Current ..................... 323,000 364,068 27,900 66,990
Deferred .................... -- 17,781 -- 4,335
State ............................ 50,500 57,378 4,100 10,630
------------ ------------ ------------ ------------
373,500 439,227 32,000 81,955
------------ ------------ ------------ ------------
Net Income ........................... 626,276 741,100 54,056 238,064
Distributions to Parent .............. -- -- -- (366,519)
Retained Earnings, beginning of period 128,153 754,429 754,429 1,495,529
------------ ------------ ------------ ------------
Retained Earnings, end of period ..... $ 754,429 $ 1,495,529 $ 808,485 $ 1,367,074
============ ============ ============ ============
</TABLE>
See accompanying notes to these financial statements.
6
<PAGE>
MANIFOLD VALVE SERVICE, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, TWO MONTHS ENDED FEBRUARY 28,
------------------------ -----------------------------
1995 1996 1996 1997
--------- --------- --------- ---------
(Unaudited)
<S> <C> <C> <C> <C>
Cash Flows From Operating Activities:
Net income ................................. $ 626,276 $ 741,100 $ 54,056 $ 238,064
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization ......... 128,149 159,105 21,783 16,216
Deferred income tax expense ........... -- 17,781 -- 4,335
Changes in assets and liabilities:
Receivables ...................... 4,799 (179,169) (7,752) (340,001)
Inventory ........................ (99,419) (230,509) 10,497 (10,449)
Income taxes recoverable/
payable ...................... 19,700 (69,569) 29,738 130,927
Other current assets ............. (244) (2,758) (10,616) (993)
Accounts payable ................. 2,834 83,059 18,940 322,448
Accrued expenses ................. (312,726) 71,725 70,682 (77,690)
Other ............................ -- -- (57,736) 8,851
--------- --------- --------- ---------
Net cash provided by operating
activities ....................... 369,369 590,765 129,592 291,708
Cash Flows From Investing Activities:
Purchases of property and equipment ........ (79,809) (317,153) (3,625) (106,157)
Proceeds from sale of property and equipment -- 17,731 -- --
--------- --------- --------- ---------
Net cash used in investing activities . (79,809) (299,422) (3,625) (106,157)
Cash Flows From Financing Activities:
Repayments of long-term debt ............... (401,884) -- -- --
Distributions to parent .................... -- -- -- (366,519)
--------- --------- --------- ---------
Net cash used in financing
activities ............................ (401,884) -- -- (366,519)
--------- --------- --------- ---------
(Decrease) Increase in Cash and Cash
Equivalents ................................ (112,324) 291,343 125,967 (180,968)
Cash and Cash Equivalents, beginning
of period .................................. 187,348 75,024 75,024 366,367
--------- --------- --------- ---------
Cash and Cash Equivalents, end of
period ..................................... $ 75,024 $ 366,367 $ 200,991 $ 185,399
========= ========= ========= =========
Supplemental Cash Flow Disclosures:
Interest paid .............................. $ 23,073 $ -- $ -- $ --
Income taxes paid .......................... $ 349,500 $ 393,700 $ -- $ --
========= ========= ========= =========
</TABLE>
See accompanying notes to these financial statements.
7
<PAGE>
MANIFOLD VALVE SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION - Manifold Valve Service, Inc. (the Company) primarily
repairs and remanufactures high pressure valves that are principally
used in oil and gas drilling applications, primarily along the U.S. Gulf
Coast and worldwide. The Company is wholly-owned by Catalyst Energy
Services, Inc. (CESI).
REVENUE RECOGNITION - Revenue on valve repair and remanufacture services
is recognized upon the delivery of the equipment to the customer.
INVENTORY - Inventories are stated at the lower of cost or market with
cost determined using the first-in, first-out method for the valve parts
and specific identification for valve finished goods.
USE OF ESTIMATES - The preparation of the Company's financial statements
in conformity with generally accepted accounting principles requires the
Company's management to make estimates and assumptions that affect the
amounts reported in these financial statements and accompanying notes.
Actual results could differ from those estimates.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost.
Depreciation is recorded using the straight-line method over a range of
estimated useful lives of the assets as follows:
Building 10 years
Machinery and equipment 5-10 years
Vehicles 5 years
Furniture and fixtures 3-10 years
INCOME TAXES - The accounts of the Company are included in the
consolidated federal income tax return of CESI. The income taxes
recognized in the accompanying financial statements were determined on a
separate return basis. Deferred income taxes are accounted for under the
liability method, whereby deferred tax assets and liabilities are
recognized for the expected tax effect of current differences between the
tax and financial reporting bases of the Company's assets and liabilities.
The Company's deferred tax liability represents the difference between tax
and financial reporting methods for determining the depreciation on
property and equipment.
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid
investments with an original maturity of three months or less to be cash
equivalents.
CONCENTRATION OF CREDIT RISK - The Company maintains deposits in banks
which may exceed the amount of federal deposit insurance available.
Management believes that the risk of any possible deposit loss is minimal.
8
<PAGE>
MANIFOLD VALVE SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES: (continued)
NEW ACCOUNTING STANDARDS - The Financial Accounting Standards Board (the
FASB) issued SFAS No. 121 entitled IMPAIRMENT OF LONG-LIVED ASSETS which
is effective beginning in 1996. SFAS No. 121 specifies certain events and
circumstances which indicate the cost of an asset or assets may be
impaired, the method by which the evaluation should be performed and the
method by which writedowns, if any, of the asset or assets are to be
determined and recognized. SFAS No. 121 did not have a material impact on
the Company's financial condition or operating results upon
implementation.
The FASB also issued SFAS No. 123, ACCOUNTING FOR STOCK BASED
COMPENSATION, effective for fiscal years beginning after December 15,
1995. This statement allows companies to choose to adopt the statement's
new rules for accounting for employee stock-based compensation plans. For
those companies which choose not to adopt the new rules, the statement
required disclosures as to what earnings and earnings per share would have
been if the new rules had been adopted. SFAS No. 123 did not have a
material impact on the Company's financial condition or operating results
upon implementation.
UNAUDITED INTERIM INFORMATION: The balance sheet as of February 28, 1997
and the statements of income and retained earnings for the two months
ended February 28, 1996 and 1997 (February 29 for 1996, but is presented
herein as February 28), were taken from the Company's books and records
without audit. However, in the opinion of management, such information
includes all adjustments (consisting only of normal recurring accruals),
which are necessary to properly reflect the financial position of the
Company as of February 28, 1997, and the results of its operations and its
cash flows for the two months ended February 28, 1996 and 1997. The
results of operation for the interim periods presented are not necessarily
indicative of the results to be expected for the year.
2. INVENTORY:
Inventory consisted of the following categories at December 31, 1995 and
1996:
DECEMBER 31,
----------------------------- FEBRUARY 28,
1995 1996 1997
------------ ------------ ------------
(Unaudited)
Valve parts ................. $ 274,714 $ 377,616 $ 355,196
Valve finished goods ........ 365,621 493,228 526,097
------------ ------------ ------------
$ 640,335 $ 870,844 $ 881,293
============ ============ ============
9
<PAGE>
MANIFOLD VALVE SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS
3. PROPERTY AND EQUIPMENT:
Property and equipment consisted of the following:
DECEMBER 31,
---------------------------- FEBRUARY 28,
1995 1996 1997
------------ ------------ ------------
(Unaudited)
Building ........................ $ 4,919 $ 4,919 $ 4,919
Transportation equipment ........ 144,917 144,917 247,818
Office equipment and machinery .. 726,805 1,017,869 1,021,125
------------ ------------ ------------
876,641 1,167,705 1,273,862
Less accumulated depreciation and
amortization ............... (301,182) (427,729) (452,796)
------------ ------------ ------------
$ 575,459 $ 739,976 $ 821,066
============ ============ ============
4. INCOME TAXES:
The following is a reconciliation of expected to actual income tax
expense:
YEARS ENDED DECEMBER 31,
------------------------------
1995 1996
------------ ------------
Federal income tax expense at 34% .......... $ 339,924 $ 401,311
State income taxes and
nondeductible expenses ............... 33,576 37,916
------------ ------------
$ 373,500 $ 439,227
============ ============
5. RELATED PARTY TRANSACTIONS:
In January 1992, the Company entered into a five-year lease agreement with
the president of the Company for the lease of real property located in
Jennings, Louisiana. In December 1996, the Company signed a three-year
renewal extending the lease term through December 31, 1999, at a lease
rate of $5,000 per month. Rent expense was $60,000 for the years ended
December 31, 1995 and 1996.
Effective January 1992, the Company entered into separate five-year
employment agreements with three of its officers. As part of the
agreement, the Company agreed to pay an annual performance bonus equal to
30% of annual adjusted earnings before interest and taxes in excess of
$500,000. The bonus was not to exceed an aggregate of $800,000 during the
term of the agreements, which aggregate was met during 1996. In addition,
the officers agreed not to compete with the Company for the three years
subsequent to the expiration of the agreement. Effective November 1996,
the Company entered into new two-year employment agreements with the same
three officers. As part of these agreements, the Company has agreed to pay
the three officers collectively, an annual performance bonus equal to 2%
of the Company's adjusted earnings before interest and taxes, as defined.
10
<PAGE>
MANIFOLD VALVE SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS
5. RELATED PARTY TRANSACTIONS:
For the years ended December 31, 1995 and 1996, the Company recognized
expenses of approximately $240,000 and $208,000, respectively, related to
these bonus agreements.
6. MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK:
The Company's ten largest customers generated approximately 84% and 80% of
its revenues for the years ended December 31, 1995 and 1996, respectively.
The largest customer represented 18% and 17% of the Company's revenues for
the years ended December 31, 1995 and 1996, respectively.
Three customers (representing in excess of 10% individually) had balances
that approximated 60% and 44% of the outstanding accounts receivable at
December 31, 1995 and 1996, respectively, and two customers approximated
51% at February 28, 1997. The Company performs ongoing evaluations of its
customers and generally does not require collateral. The Company assesses
its credit risk and provides an allowance for doubtful accounts which it
deems doubtful of collection.
7. BENEFIT PLAN:
The Company participates in CESI's defined contribution 401(k) plan
covering substantially all of its employees who have completed one year of
service. The Company makes contributions to the Plan at its discretion and
such contributions vest to the participants over a five-year period. The
Company made contributions to the Plan during the years ended December 31,
1995 and 1996, of approximately $32,000 and $28,000, respectively.
8. CREDIT FACILITY:
In September 1995, the Company entered into a revolving credit facility
with a bank. This facility allowed the Company to borrow an amount
relative to certain current assets, up to a maximum of $500,000. The
interest rate charged was the bank's prime rate plus 3/4% and was payable
monthly. The Company had no outstanding amounts at December 31, 1995 under
this facility, which was canceled in December 1996.
9. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The Company's financial instruments consist of trade receivables and
payables. The Company believes the carrying value of these financial
instruments approximate their estimated fair value.
11
<PAGE>
MANIFOLD VALVE SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS
10. SUBSEQUENT EVENT:
Effective March 1, 1997, CESI contracted to sell 100% of the outstanding
common stock of the Company to a third party for consideration valued at
approximately $6,450,000.
12
<PAGE>
MANIFOLD VALVE SERVICE, INC.
NOTES TO FINANCIAL STATEMENTS
INDUSTRIAL HOLDINGS, INC.
PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
The following unaudited pro forma financial statements give effect to the
acquisition by Industrial Holdings, Inc. ("IHI") of Manifold Valve Service, Inc.
("MVS") in a transaction accounted for as a purchase which closed March 1997.
The allocation of purchase price is based on preliminary information currently
available and will be revised as necessary prior to the issuance of the 1997
financial statements, although no material adjustments are anticipated.
The unaudited pro forma condensed consolidated statements of income are
based on the income statements of IHI in the 1996 Annual Report filed on Form
10-K and in the Report on Form 10-Q for the quarter ended March 31, 1997, the
statements of income for LSS-Lone Star Houston, Inc. ("Lone Star") for the year
ended December 31, 1996 and the month ended January 31, 1997 (not presented
separately herein), the income statement of American Rivet Company, Inc.
("American") for the ten months ended October 31, 1996 (not presented separately
herein) and the income statement of MVS for the year-ended December 31, 1996 and
the two month period ended February 28, 1997. The unaudited pro forma condensed
consolidated statements of income combine the results of operations of IHI, Lone
Star, American and MVS for the year ended December 31, 1996 as if the
acquisitions had occurred on January 1, 1996 and combine the results of
operations of IHI, Lone Star and MVS for the three months ended March 31, 1997
as if the acquisitions had occurred on January 1, 1997.
These unaudited pro forma financial statements should be read in
conjunction with the historical financial statements and notes thereto of IHI in
the 1996 Annual Report filed on Form 10-K and in the Report on Form 10-Q for the
quarter ended March 31, 1997 and the financial statements of American filed with
Form 8-K/A dated November 18, 1996, Lone Star filed with Form 8-K/A dated
February 6, 1997 and MVS included elsewhere in this Form 8-K.
13
<PAGE>
INDUSTRIAL HOLDINGS, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED MARCH 31, 1997
(000'S OMITTED)
<TABLE>
<CAPTION>
PRO FORMA
-----------------------------------
ACQUISITION ADJUSTMENTS
HISTORICAL (NOTE 1)
------------------------------- --------------------
IHI MVS LONE STAR MVS LONE STAR COMBINED
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Sales .......................... $ 17,304 $ 1,762 $ 1,268 $ -- $ -- $ 20,334
Cost of sales .................. 12,755 1,293 982 -- 6(c) 15,036
-------- -------- -------- -------- -------- --------
Gross profit ................... 4,549 469 286 -- (6) 5,298
Operating expenses ............. 3,327 152 371 -- (48)(a) 3,832
-- -- -- 17 13(c) --
-------- -------- -------- -------- -------- --------
Income from operations ......... 1,222 317 (85) (17) 29 1,466
Other income (expense):
Interest expense ............ (434) -- (26) -- 1(d) (459)
Interest income ............. 53 3 -- (3) -- 53
Other income (expense) ...... 10 -- (8) -- 8(e) 10
-------- -------- -------- -------- -------- --------
Total other income (expense) (371) 3 (34) (3) 9 (396)
-------- -------- -------- -------- -------- --------
Income before income taxes ..... 851 320 (119) (20) 38 1,070
Income tax expense ............. 333 82 (37) (5) 8(f) 381
-------- -------- -------- -------- -------- --------
Net income ..................... $ 518 $ 238 $ (82) $ (15) $ 30 $ 689
======== ======== ======== ======== ======== ========
Earnings per share (g) $ .09 $ .10
======== ========
</TABLE>
14
<PAGE>
INDUSTRIAL HOLDINGS, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE YEAR ENDED DECEMBER 31, 1996
(000'S OMITTED)
<TABLE>
<CAPTION>
PRO FORMA
---------------------------------------------
ACQUISITION ADJUSTMENTS
HISTORICAL (NOTE 1)
---------------------------------------- ----------------------------------
IHI MVS LONE STAR AMERICAN MVS LONE STAR AMERICAN COMBINED
-------- ------ -------- ------- ------- ------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales ....................... $ 51,423 $6,374 $ 15,474 $ 7,699 -- -- -- $ 80,970
Cost of sales ............... 40,849 4,366 9,498 5,930 -- $ 26 (14)(c) --
-- -- -- -- 2,163 (b) 62,676
-- -- -- -- -- -- (142)(a) --
-------- ------ -------- ------- ------- ------- ------------ --------
Gross profit ................ 10,574 2,008 5,976 1,769 -- (2,189) 156 18,294
Operating expenses .......... 8,002 843 5,587 1,355 -- (392) (479)(a) 13,250
-- -- -- -- -- (2,163) -- (b) --
-- -- -- -- 205 160 132 (c) --
-------- ------ -------- ------- ------- ------- ------------ --------
Income from operations ...... 2,572 1,165 389 414 (205) 206 503 5,044
Other income (expense):
Interest expense ........... (1,336) -- (114) -- -- (183) (431)(d) (2,064)
Interest income ............ 160 8 -- 79 (8) -- (79)(e) 160
Other income (expense) ..... 139 8 1 (89) (8) (1) 89 (e) 139
-------- ------ -------- ------- ------- ------- ------------ --------
Total other income (expense) (1,037) 16 (113) (10) (16) (184) (421) (1,765)
-------- ------ -------- ------- ------- ------- ------------ --------
Income before income taxes .. 1,535 1,181 276 404 (221) 22 82 3,279
Income tax expense .......... 408 439 90 181 (13) 7 37 (f) 1,149
-------- ------ -------- ------- ------- ------- ------------ --------
Net income .................. $ 1,127 $ 742 $ 186 $ 223 $ (208) $ 15 $ 45 $ 2,130
======== ====== ======== ======= ======= ======= ============ ========
Earnings per share (g) $ .26 $ .38
======== ========
</TABLE>
15
<PAGE>
Note 1 - The above statements give effect to the following pro forma adjustments
necessary to reflect the acquisition and the issuance of debt related to the
acquisition outlined in Note 1 to the pro forma balance sheet:
a. Reduce cost of sales and selling, general and administrative
expenses for reductions in executive payrolls, reductions in
professional fees, elimination of directors fees, reduction in
executive benefits, elimination of profit sharing plan
contributions and elimination of expenses related to Florida real
estate.
b. Reclassify amounts from selling general and administrative expenses
to cost of sales.
c. Adjust depreciation and amortization expense for changes resulting
from (i) the increase in acquired property, plant and equipment as
a result of the allocation of the purchase price and (ii)
amortization of acquired goodwill over 20 years.
d. Adjust interest expense (i) for Lone Star on $1,700,000 of 8.25%
term debt, $1,400,000 8.25% Comerica Bank demand note and 8%
$500,000 term note payable to seller and (ii) for American on
$1,800,000 of 8.25% term debt, $3,712,000 8.25% Comerica Bank
demand note, 12% $3,500,000 bridge note and $3,600,000 reduction in
short term borrowings as a result of application of net proceeds
from the exercise of 621,914 Class A Warrants.
e. Eliminate interest income and other income.
f. Increase in income taxes as a result of the pro forma pretax
earnings of the acquired subsidiary.
g. Increase in earnings per share as a result of pro forma earnings of
the acquired subsidiary and increase in weighted average of common
stock equivalents (i) for MVS for the effect of 600,000 shares of
IHI common stock issued to the selling shareholder (ii) for Lone
Star for the effect of 84,211 shares of IHI common stock issued to
selling shareholder, (iii) for American for the effect of 540,000
warrants, and (iv) the issuance of 621,914 shares of common stock
and the related common stock equivalents for the additional
incentive warrants issued in connection with the exercise of Class
A Warrants.
16
EXHIBIT 13.10
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) SEPTEMBER 3, 1997
INDUSTRIAL HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
TEXAS 1-9580 76-0289495
(State of other (Commission File Number) (IRS Employer Identification No.)
jurisdiction of
incorporation)
7135 ARDMORE HOUSTON, TEXAS 77054
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code(713) 747-1025
(Former name or former address, if changed since last report.)
1
<PAGE>
ITEM 4. CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANTS.
On September 5, 1997, Industrial Holdings, Inc. engaged Deloitte &
Touche LLP, to act as independent certified public accountants. Deloitte &
Touche LLP replaces Price Waterhouse L.L.P. who resigned on May 8, 1997.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed in its behalf by
the undersigned hereunto duly authorized.
INDUSTRIAL HOLDINGS, INC.
By: /s/ CHRISTINE A. SMITH
CHIEF FINANCIAL OFFICER
Date: September 5, 1997
2
EXHIBIT 13.11
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) NOVEMBER 10, 1997
INDUSTRIAL HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
TEXAS 1-9580 76-0289495
(State of other jurisdiction of (Commission File Number) (IRS Employer Identification No.)
incorporation)
</TABLE>
7135 ARDMORE HOUSTON, TEXAS 77054
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (713) 747-1025
______________________________________________________________
(Former name or former address, if changed since last report.)
1
<PAGE>
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
(a) ACQUISITION OF BOLT MANUFACTURING CO., INC.
Effective November 1, 1997, Industrial Holdings, Inc., a Texas
corporation (the "Company") acquired all the capital stock of Bolt Manufacturing
Co., Inc. doing business as WALKER BOLT Manufacturing Company ("WALKER"), a
Texas corporation, pursuant to the terms of a stock purchase agreement by and
among the Company and Ralph Walker, Jr. and David Introligator (the
"Shareholders"), the sole shareholders of WALKER.
WALKER manufactures specialty fasteners (which include bolts, screws,
nuts and washers), to order, in small quantities for quick delivery. Its
customers are primarily distributors which sell to refineries, chemical plants,
pulp mills and others in the United States and Canada.
The purchase price (the "Purchase Price") of the capital stock was $5
million cash, plus the repayment at closing of $1 million in notes payable by
WALKER to the Shareholders (the "Shareholder Notes"), plus the assumption of
liabilities. The purchase price was determined through arm's-length negotiations
between the Company and the Shareholders which had no pre-existing relationship
with the Company or any of its affiliates, directors, officers or associates
outside the normal course of business. The purchase price was financed as
described below.
In connection with the acquisition of WALKER, the Company entered
into with Heller Financial, Inc. ("Heller") an $8 million term note at LIBOR
(currently 5.63%) plus 2.5%, payable in installments of principal plus interest
over six years (the "Heller Note"). The Heller Note is secured by certain
machinery and equipment of the Company. Proceeds of $2.1 million from the Heller
Note were used to retire existing term notes payable to Comerica Bank - Texas
("Comerica"). The remaining proceeds, or $5.9 million, were used to finance a
portion of the purchase price of WALKER and repay the Shareholder Notes. The
remainder of the purchase price was financed through an increase in the
Company's existing Line of Credit Facility and Demand Note ("Demand Note") with
Comerica.
2
<PAGE>
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements for Acquired Companies
Independent Auditors' Report
Balance Sheets at September 30, 1997 (unaudited) and December 31,
1996 and 1995
Statements of Earnings for the Nine Months Ended September 30,
1997 and 1996 (unaudited) and Years Ended December 31,
1996 and 1995
Statements of Shareholders' Equity for the Nine Months Ended
September 30, 1997 (unaudited) and the Years Ended
December 31, 1996 and 1995
Statements of Cash Flows for the Nine Months Ended September
30, 1997 and 1996 (unaudited) and Years Ended December
31, 1996 and 1995
Notes to Financial Statements
(b) Pro Forma Financial Information
Pro Forma Condensed Consolidated Financial Statements (Unaudited)
Pro Forma Condensed Consolidated Balance Sheet at
September 30, 1997 (Unaudited)
Notes to Pro Forma Condensed Consolidated Balance Sheet at
September 30, 1997
Pro Forma Condensed Consolidated Statement of Operations for the
Nine Months ended September 30, 1997 (Unaudited)
Pro Forma Condensed Consolidated Statement of Operations for the
Year Ended December 31, 1996 (Unaudited)
Notes to Pro Forma Condensed Consolidated Statement of Operation
3
<PAGE>
EXHIBITS
PAGE
----
2.1 Purchase Agreement by and among Industrial Holdings,
Inc. (the "Company") and Bolt Manufacturing Co., Inc. Ex-1
7.1 Financial Statements of Bolt Manufacturing Co., Inc. F-1
7.2 Pro Forma Condensed Consolidated Financial Statements F-12
10.1 Promissory Note by and Among Industrial Holdings, Inc., American
Rivet Company, Inc., LSS-Lone Star-Houston, Inc., Bolt
Manufacturing Co., Inc. and Heller Financial, Inc. Ex-4
4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed in its behalf by the
undersigned hereunto duly authorized.
INDUSTRIAL HOLDINGS, INC.
By: /s/ CHRISTINE A. SMITH
CHIEF FINANCIAL OFFICER
Date: December 1, 1997
5
<PAGE>
INDEX TO EXHIBITS
2.1 Purchase Agreement by and among Industrial Holdings, Inc. (the
"Company") and Bolt Manufacturing Co., Inc.
7.1 Financial Statements of Bolt Manufacturing Co., Inc.
7.2 Pro Forma Condensed Consolidated Financial Statements
10.1 Promissory Note by and Among Industrial Holdings, Inc., American
Rivet Company, Inc. ("American"), LSS-Lone Star-Houston, Inc.
("Lone Star"), Bolt Manufacturing Co., Inc. and Heller Financial, Inc.
6
<PAGE>
EXHIBIT 2.1
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT dated as of November 1, 1997, by and among
INDUSTRIAL HOLDINGS, INC., a Texas corporation (the "Purchaser"), and RALPH
WALKER, JR. ("Walker"), a resident of Houston, Harris County, Texas, and M.
DAVID INTROLIGATOR ("Introligator"), a resident of Houston, Harris County,
Texas, being the shareholders (Walker and Introligator are herein collectively
referred to as the "Shareholders"), of BOLT MANUFACTURING CO., INC., a Texas
corporation doing business as WALKER BOLT MANUFACTURING CO. (the "Company").
W I T N E S S E T H:
WHEREAS, the Shareholders are the owners of one hundred (100%) percent
of the issued and outstanding shares of capital stock of the Company, such
shares being of the class and par value as set forth in TABLE I, and the
Shareholders desire to sell all of such shares to the Purchaser (all of such
shares of capital stock to be sold hereunder herein collectively referred to as
the "Shares"), and the Purchaser desires to purchase the Shares, all upon the
terms and conditions set forth herein; and
WHEREAS, this Agreement sets forth the terms and conditions to which the
parties have agreed and further contemplates the execution and delivery of
certain collateral agreements and the consummation of certain related
transactions hereinafter described;
NOW, THEREFORE, in consideration of the mutual promises and covenants of
the parties, and subject to the terms and conditions set forth herein, the
parties agree as follows:
1. SALE AND PURCHASE OF THE SHARES. Each of the Shareholders agrees,
subject to the conditions to the Shareholder's obligations herein set forth, to
sell, assign and convey to the Purchaser on the Effective Date (as hereinafter
defined), free and clear of all security interests, pledges, liens, charges and
encumbrances, the number of Shares set opposite the name of such Shareholder in
TABLE I, and to transfer and deliver to the Purchaser the certificates
evidencing such Shares, duly endorsed in blank or accompanied by stock powers
duly executed in blank. The Purchaser agrees, subject to the conditions to its
obligations herein set forth, to purchase and accept the Shares for the
consideration set forth in Section 2(a) hereof.
2. PURCHASE PRICE AND PAYMENT; RELATED MATTERS.
2.1 The total purchase price (the "Purchase Price") for the Shares shall
be as follows:
(a) The sum of FOUR MILLION SEVEN HUNDRED NINE THOUSAND FIVE HUNDRED
SIXTY-FOUR AND NO/100 DOLLARS ($4,709,564.00), payable by the Purchaser
to the Share holders at the Closing on the Closing Date by cashiers
checks as follows:
SHAREHOLDER AMOUNT
----------- ------
Walker $1,883,825
Introligator $2,825,738
----------
Total $4,709,563
EX-1
<PAGE>
(b) The sum of ONE MILLION AND NO/100 DOLLARS ($1,000,000.00), payable
by the Purchaser to the Shareholders in the form of cashiers checks at
the Closing on the Closing Date, in full and final satisfaction of the
following described promissory notes representing sums owing by the
Company to the Shareholders and set forth on the Interim Balance Sheet
(as defined below) (the "Shareholder Notes"), it being understood that
any sums remaining owing on any Shareholder Notes after application of
the $1,000,000.00 provided for in this Section 1(b) shall be
automatically forgiven and fully discharged, and further that the UCC-1
financing statements on file with the Texas Secretary of State by the
Company in favor of the Shareholders pertaining to the Shareholder Notes
shall be terminated at Closing:
(i) promissory note dated June 11, 1997 in the original principal
sum of $400,000.00 executed by the Company and payable to the
order of Walker; which note has an outstanding balance as of the
date hereof equal to $400,000.00; and
(ii) promissory note dated June 11, 1997 in the original
principal sum of $600,000.00 executed by the Company and payable
to the order of D. I. Financial; which note has an outstanding
balance as of the date hereof equal to $600,000.00.
(c) The sum of THREE HUNDRED FIFTY-SIX THOUSAND SEVEN HUNDRED SIXTY-ONE
AND NO/100 DOLLARS ($356,761.00), which sum shall be reduced by accrued
compensation of $200,000.00 to be paid to those employees of the Company
in the amounts set forth on SCHEDULE 2.1(C) hereto as a discretionary
bonus for past services rendered to the Company, with the balance of
$156,761.00 of undistributed earnings and profits being payable to the
Shareholders at the Closing on the Closing Date in the form of cashiers
checks as follows:
SHAREHOLDER AMOUNT
----------- ------
Walker $ 62,704
Introligator 94,057
--------
Total $156,761
Funds necessary to accomplish the payments described in this subsection
(c) shall be placed in the Company by the Purchaser at the Closing on
the Closing Date, and Purchaser shall cause the Company to issue checks
in the amounts and to the parties described herein above.
(d) The sum of ONE HUNDRED EIGHTEEN THOUSAND FIFTY AND NO/100 DOLLARS
($118,050), payable by the Purchaser to the Shareholders in the form of
a cashier's check at the Closing on the Closing Date, such sum being
equal to the estimated additional tax liability to be owing by the
Company as a result of built-in gains tax created by the filing of a
Section 338(h)(10) election (the "Election") with the Internal Revenue
Service (the "IRS") in connection with the transaction contemplated by
this Agreement to be paid to the Shareholders as follows:
SHAREHOLDER AMOUNT
----------- ------
Walker $ 47,220
Introligator 70,830
--------
Total $118,050
2
<PAGE>
Shareholders hereby covenant and agree with Purchaser that (i) the
Shareholders shall file the short period federal corporation income tax return
for the Company for the period January 1, 1997 through October 31, 1997 (the
"Short Period Tax Return"), (ii) the Shareholders shall pay the above built-in
gains tax with the filing of the Short Period Tax Return, and (iii) the
Shareholders shall cause a copy of the Short Period Tax Return, as filed, to be
delivered to Purchaser on or about the date of its filing with the IRS.
Purchaser shall provide the Shareholders with any and all information necessary
in order that the Shareholders are able to comply with their covenant to file
the aforementioned tax return. Purchaser hereby covenants with Shareholders to
timely pay any State of Texas franchise tax liability incurred as a result of
the Election.
2.2 ALLOCATION OF PURCHASE PRICE. ONE THOUSAND AND NO/100 ($1,000.00)
DOLLARS of the amount of the Purchase Price set forth in Section 2.1 is
hereby allocated to the covenant against competition of the Shareholders
set forth in Section 5(c) hereof. The Purchaser and Shareholders agree
to reflect the foregoing allocation in their respective income tax
returns; further Purchaser and Shareholders shall jointly file IRS Form
8023 (attached hereto as SCHEDULE 2.2) with the Internal Revenue Service
on or before the 15th day of the ninth (9th) month after the Effective
Date.
2.3 FURTHER ASSURANCES. Each of the Shareholders hereby agrees to
execute and deliver from time to time at the request of the Purchaser
and without further consideration, subject to approval by Shareholders'
counsel, such additional instruments of conveyance and transfer and to
take such other action as the Purchaser may reasonably require more
effectively to convey, assign, transfer and deliver the Shares to the
Purchaser.
3. REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDERS. The Shareholders,
jointly and severally, represent and warrant to and agree with the Purchaser
that:
(a) ORGANIZATION AND STANDING OF THE COMPANY. The Company is a
corporation duly organized, validly existing and in good standing under
the laws of the State of Texas. The Company has full corporate power and
authority to conduct its business as it is now being conducted and is
not qualified to do business as a foreign corporation in any other
jurisdiction. Attached hereto as SCHEDULE 3(A) are true, correct and
complete copies of the Company's Articles of Incorporation (duly
certified by the Secretary of State of the State of Texas) and By-Laws
(certified by the Secretary of the Company) as in effect on the date
hereof.
(b) SUBSIDIARIES. The Company has no subsidiaries. Further, the Company
does not own, directly or indirectly, any of the outstanding capital
stock or securities convertible into capital stock of any other
corporation, or own, directly or indirectly, any participating interest
in any partnership, joint venture or other business enterprise.
(c) CAPITAL STOCK. The authorized capital stock of the Company consists
of One Million (1,000,000) shares of Common Stock, $1.00 par value per
share, of which, on the date hereof, Sixty- two Thousand Five Hundred
(62,500) shares are validly issued and outstanding, fully paid and
nonassessable, 100% of which are owned by the Shareholders as set forth
on Table I. The Company has no treasury shares, outstanding
subscriptions, options or other agreements or commitments obliga ting it
to issue shares of capital stock. Shareholders have not, and have not
permitted the Company to issue or enter into any subscriptions, options,
agreements or other commitments in respect of the issuance, transfer,
sale, repurchase or encumbrance of any shares of capital stock.
3
<PAGE>
(d) FINANCIAL STATEMENTS. The following audited and unaudited financial
statements of the Corporation have been delivered to the Purchaser and
are attached as SCHEDULE 3(D) hereto:
(i) the audited balance sheets of the Company as of December 31,
1996 and December 31, 1995 (the "Audited Balance Sheets") and
the related audited statements of income and retained earnings
and cash flows for the years then ended (together with related
notes and schedules), which financial statements contain a
report of Weinstein Spira & Company, P.C., independent auditors,
reporting thereon (such balance sheets, the related statements
of income and retained earnings and cash flows, and the related
notes and schedules, being hereinafter together referred to as
the "Audited Financial Statements"); and
(ii) the unaudited statements of income and retained earnings
and cash flows of the Company as of September 30, 1997 and
September 30, 1996, together with the unaudited balance sheet of
the Company as of September 30, 1997 (the "Unaudited Balance
Sheets") for the purpose of inclusion in the Purchaser's public
filings, being hereinafter together referred to as the
"Unaudited Financial Statements"); and
(iii) the unaudited balance sheet of the Company as of October
31, 1997 (the "Interim Balance Sheet") and the related unaudited
statement of income for the ten (10) month period then ended
(together with related notes and schedules) (such balance sheet
and related statements of income, and the related notes and
schedules, being hereinafter together referred to as the
"Interim Financial Statements").
The Audited Financial Statements, and to the best of the
Shareholders' knowledge, the Unaudited Financial Statements and
the Interim Financial Statements (collectively, the "Financial
Statements"), including the related notes and schedules, have
been prepared from the books and records of the Company in
conformity with generally accepted accounting principles applied
by the Company on a basis consistent with preceding years and
throughout the periods involved ("GAAP") and present fairly the
financial position of the Company as of the dates of such
statements, subject with respect to the Interim Financial
Statements to year-end adjustments.
The trade accounts and other receivables of the Company which
are classified as current assets on the Audited Balance Sheets,
the Unaudited Balance Sheets and the Interim Balance Sheet
(collectively, the "Balance Sheets") are bona fide receivables,
were acquired in the ordinary course of business, are stated in
accordance with GAAP and, subject to the reserve for doubtful
accounts, are believed to be good and collectible, and are not
subject to any factoring arrangement.
The inventories of the Company reflected on the Balance Sheets
have been valued in accordance with GAAP. As of October 31,
1997, there have been no write-ups of inventories or other
assets.
To the best of the Shareholders' knowledge, the Company has no
liabilities of the type and in amounts required to be reflected
or disclosed in a balance sheet (or notes thereto) prepared in
accordance with GAAP other than:
4
<PAGE>
(i) those set forth or reserved against in the Interim
Balance Sheet,
(ii) those incurred since the date of the Interim
Balance Sheet in the ordinary course of business,
(iii) those disclosed in the schedules attached hereto,
and
(iv) those referred to in this Agreement or that exist
by reason of this Agreement.
The Company's books of account have been kept in all material
respects in the ordinary course of business in accordance with
GAAP, the transactions entered therein represent bona fide
transactions, and the revenues, expenses, assets and liabilities
of the Company have been properly recorded in such books in all
material respects.
(e) ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as set forth in any
Schedule delivered to the Purchaser pursuant to this Section 3 or except
as contemplated by this Agreement, since the date of the Interim
Financial Statements, and to the best of the Shareholders' knowledge,
the Company has not:
(i) issued, delivered or agreed to issue or deliver any stock,
bonds or other corporate securities (whether authorized and
unissued or held in the treasury) or granted or agreed to grant
any options, warrants or other rights calling for the issuance
thereof;
(ii) borrowed or agreed to borrow any funds or incurred, or
become subject to, any obligation or liability (absolute or
contingent) except in the ordinary course of business in
customary amounts;
(iii) paid any obligation or liability (absolute or contingent)
except in the ordinary course of business in customary amounts;
(iv) paid any obligation or liability (absolute or contingent)
other than current liabilities reflected in or shown on the
Company's Financial Statements (or the notes thereto) and
obligations or liabilities incurred since the date thereof and
permitted to be so incurred by the foregoing clause (ii) of this
Section (e);
(v) except as otherwise permitted herein, declared or made, or
agreed to declare or make, any payment of dividends or
distribution of any assets of any kind whatsoever to the Share
holders, or purchased or redeemed any shares of its capital
stock;
(vi) except as otherwise permitted herein, sold or transferred,
or agreed to sell or transfer, any of its assets, properties or
rights (except sales in the ordinary course of business) or
canceled or agreed to cancel, any debts or claims;
(vii) entered or agreed to enter into any agreement or
arrangement granting any preferential rights to purchase
substantially all of the assets, properties or rights of the
Company (including management and control thereof), or requiring
the consent of any party to the transfer and assignment of such
assets, properties or rights (or changes in management or
control thereof), or providing for the merger or consolidation
of the Company with or into
5
<PAGE>
another corporation;
(viii) suffered any material losses or waived any rights of
material value;
(ix) except in the ordinary course of business, made or
permitted any amendment or termination of any contract,
agreement or license to which it is a party;
(x) except for the discretionary merit bonuses to those Company
employees set forth on SCHEDULE 2.1(C), made any accrual or
arrangement for a payment of bonuses or special compensation of
any kind or any severance or termination pay to any present or
former officer or employee;
(xi) except for the discretionary merit bonuses to those Company
employees set forth on SCHEDULE 2.1(C), increased the rate of
compensation payable or to become payable by it to any of its
officers or key employees compensated at a rate in excess of
$10,000.00 per annum; or made any increase in any profit
sharing, bonus, incentive, deferred compensation, insurance,
pension, retirement or other employee benefit plan, payment or
arrangement made to, for or with any such officers or key
employees;
(xii) except for the verbal commitment of the Company to
purchase a particular lathe in late December 1997 at a cost of
approximately $15,000.00 for which no purchase order was issued,
made any capital expenditures or commitments therefor
aggregating more than $10,000.00 or committed to purchase
inventories, parts, supplies or other items in excess of its
normal, ordinary and usual requirements or at excessive prices,
all computed based on historical practices of the Company;
(xiii) experienced any significant labor trouble; or
(xiv) suffered any damage, destruction or loss, whether or not
covered by insurance, which materially and adversely affects its
assets or business, or had any material adverse change in the
business, operations, financial condition or prospects of the
Company.
Between the date of the Interim Financial Statements and the Closing
Date, the Shareholders shall not permit the Company to do any of the
things listed in Clauses (i) through (xii) of this Section (e) without
the prior written consent of the Purchaser, which consent will not be
unreasonably withheld, except as otherwise permitted by this Agreement.
(f) TAX MATTERS. (i) The Company has made an election to be treated for
federal income tax purposes as a Subchapter "S" corporation, within the
meaning of Internal Revenue Code Sections 1361 et seq., for the
respective periods shown on SCHEDULE 3(F)(I) hereto through the Closing
Date (the "S Period"). (ii) During the S Period, each Shareholder has
duly and timely filed all tax reports and returns required to be filed
by them. All such tax returns were consistent with the tax returns filed
by the Company. The Shareholders have timely paid in full all taxes
shown on their tax returns. The Shareholders shall bear full
responsibility for the payment of any and all taxes which are owed by
them. Except for an audit performed prior to the S Period of which there
were no adverse results, there are no currently pending audits,
inquiries, investigations or examinations relating to any of the
Shareholders tax returns pending, and there are no claims which have
been asserted relating to any of the Shareholders tax returns which if
determined adversely would result in the assertion by any governmental
entity of any tax deficiency against the Company. Since acquiring the
Shares of the Company, there have been no waivers or extensions of
statutes of limitations by the Shareholders. All other state, county and
local and other taxes, including without limitation, income taxes,
payroll taxes,
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corporate franchise taxes, sales, excise and use taxes and ad valorem
taxes, due and payable by the Company for the periods ended prior to the
Closing Date have been paid (or reserved for) and there is no further
liability other than the reserve (whether or not disclosed on its
returns) for any taxes relating to such periods, and no interest or
penalties have accrued or are accruing with respect thereto. The Company
has timely filed in correct form all tax returns and reports required to
be filed by it on or before the date of this Agreement with all such
taxing authorities. The current liability for state and local taxes
reflected on the Company's Financial Statements, if any, represents at
the date thereof, reasonable and adequate provision for the payment of
all accrued and unpaid current state and local taxes of the Company.
Other than those owing for the current period, no Federal taxes are due
and owing by the Company. No assessments of deficiencies have been made
against the Company, and no extensions of time are in effect for the
filing of any returns or the assessment of deficiencies. No examinations
by the IRS of the Federal income tax returns of the Company for any
taxable year are presently pending. The Shareholders have delivered to
the Purchaser true and complete copies of all of the Company's Federal
Income Tax Returns and payroll tax returns of the Company for each of
its fiscal years that Purchaser has requested. In the event that after
the Closing Date a deficiency is determined in the amount of Federal,
state or local tax payable by the Company, which deficiency relates to
periods prior to the Effective Date, then in that event, the
Shareholders, in the manner and to the extent set forth in Section 11
hereof, shall be fully responsible for and shall indemnify and hold the
Purchaser and the Company harmless from the payment of any such
deficiency, tax liability, penalty, interest, loss, costs, expenses or
claim (including attorney and accountant fees) with respect thereto.
The Shareholders shall cause the Election to be filed with the IRS
within fourteen (14) days after the Purchaser furnishes the Shareholders
with an allocation of the Purchase Price acceptable to Purchaser and
Shareholders.
(g) CONTRACTS AND OPERATING AGREEMENTS. To the best of the Shareholders'
knowledge, SCHEDULE 3(G) hereto is a complete and accurate listing of
all mortgages, liens, licenses, leases, sales representation agreements,
purchase orders, and other executory contracts, commitments and
agreements of the Company, to which or by which it is bound, whether
written or oral, (x) entered into in the ordinary course of business
involving the payment by the Company of more than $5,000.00 in the
aggregate with respect to any such contract, commitment or agreement, or
(y) entered into other than in the ordinary course of business (the
"Contracts"). To the best of the Shareholders' knowledge, each and all
of the Contracts have been duly executed by, or assigned to, the
Company, are currently in effect, are valid and binding upon the parties
thereto and are enforceable in all material respects in accordance with
their terms. Neither the Company nor the Shareholders are aware of any
facts that would prevent the performance of any of the Contracts.
Neither the Company nor (to the best of the Shareholders' knowledge) any
other party is in default under any one or more of the Contracts nor has
any claim of default been asserted by the Company or any such other
party. To the best of the Shareholders' knowledge, the Company has
committed no act and there has been no omission which will result in the
breach by it of any Contract.
(h) TITLE TO PROPERTIES AND RELATED MATTERS. To the best of the
Shareholders' knowledge, SCHEDULE 3(h) hereto is a complete list of any
and all real property and improvements, and all personal property
(including all major items of furnishings, equipment and automobiles)
owned by the Company. The
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assets reflected in Schedule 3(h) and in the Company's Financial
Statements, were at the date thereof, and, except for assets consumed or
disposed of in the ordinary course of business since the date thereof
(or distributed to the Shareholders as permitted hereunder), are now
owned by the Company by good and marketable title, will be at Closing
free and clear from all security interests, mortgages, liens, claims,
defects in title and encumbrances except liens, charges or encumbrances
discussed or referred to in the Company's Financial Statements, the
related notes or schedules thereto or in Schedule 3(h) delivered to the
Purchaser pursuant to this Section 3. Except as disclosed in Schedule
3(h), all such assets in use are in good operating condition and repair,
subject to ordinary wear and tear. Except as set forth in Section
3(e)(xii) regarding the lathe therein described, there are no material
capital expenditures currently contemplated or necessary to maintain the
current operation of the Company's business. Shareholders make no
representations with respect to the condition of the assets reflected on
Schedule 3(h), which assets are being accepted AS INSPECTED by the
Purchaser in their "AS IS," "WHERE IS" condition WITH ALL FAULTS.
(i) RECEIVABLES. All notes receivable, contracts receivable and accounts
receivable included in the Company's Financial Statements or which have
arisen since the date of the Company's Financial Statements (the
"Receivables") are valid, have arisen in the ordinary course of
business, and are collectible and are expected to be paid no later than
ninety (90) days after the date of Closing. None of the Receivables have
been the subject of any factoring by the Company. Except for any
Receivable owing to the Company by LSS-Lone Star-Houston, Inc.,
Shareholders hereby jointly and severally guarantee the collectability
of the Receivables of the Company within six (6) months of the Closing
Date to the extent of ninety-five percent (95%) of the total amount of
such Receivables as of the Closing Date. Upon any such payment by the
Shareholders hereunder, the Company shall assign such receivable to the
Shareholders.
(j) LITIGATION AND PROCEEDINGS. To the best of the Shareholders'
knowledge, there are no actions, suits or proceedings pending or, to the
knowledge of the Shareholders, threatened against or affecting the
Company or the Shareholders, at law or in equity, or by any governmental
department, commission, board, bureau or agency, or before any
arbitrator of any kind, which involve the possibi lity of any judgment
or liability not covered by casualty or liability insurance, except for
that certain Order of the Texas Water Commission Finding Substantial
Noncompliance and Requiring Certain Actions of the Company dated April
25, 1990 (the "TWC Order"); and the Company is not in default with
respect to any judgment, order, writ, injunction, decree, award, or, to
the best of the Shareholders' knowledge and belief, in default with
respect to any rule or regulation of an court, arbitrator or
governmental department, commission, board, bureau or agency. Purchaser
acknowledges that Shareholders have disclosed to Purchaser that there
have been EEOC claims made against the Company in the past, and shall
keep such matters confidential.
(k) INSURANCE COVERAGE. Attached as SCHEDULE 3(k) is a list of all
policies and contracts of insurance, including hospitalization, life,
property or liability, showing policy limits, expiration dates, types of
coverage and names of insured. Prior to Closing, the Company maintained
policies of casualty, liability, use and occupancy, and workmen's
compensation and other forms of insurance with reputable and financially
sound insurers, covering its properties and assets in amounts and
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against such losses and risks as are generally maintained for comparable
businesses and properties, and valid policies for such insurance were
duly in force.
(l) EMPLOYEE RELATIONS. Attached as SCHEDULE 3(l)-A is a list of all
bonus, incentive, compensation, disability, pension, profit sharing,
group insurance or employee welfare plans of any nature whatsoever
(collectively, the "Plans"); all employment contracts and all other
contracts, agreements or commitments to or with individual employees or
agents extending for a period of more than thirty (30) days from the
date thereof or providing for earlier termination only upon the payment
of a penalty, severance pay or an equivalent thereof;
(i) Except as set forth in SCHEDULE 3(l)-B, there are no written
employment agreements in effect between the Company and any of
its employees and no collective bargaining agreements covering
any such employees. The Company's employees are not members of a
collective bargaining group and no union organizing activities
are in process or contemplated. The Company does not contribute
or have any obligation to make any payments or contributions to a
multi-employer plan, as that term is defined in Section 3(37) of
the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and the Company does not have any actual or potential
liability under Section 4201 of ERISA for any complete or partial
withdrawal from a multi-employer plan.
(ii) To the best of the Shareholders' knowledge, the Company is
in compliance with applicable laws respecting employment and
employment practices, terms and conditions of employment and
wages and hours of employees, and no labor strike, dispute,
slowdown or representation campaign or work-stoppage is pending
or threatened with respect to Company employees.
(iii) There is not, pending or threatened, any unfair labor
practice complaint against the Company pending before any
relevant authority or union representation petition respecting
the employees of the Company.
(iv) To the best of Shareholders' knowledge, the Plans comply in
all material respects with the requirements of applicable laws.
There are no actions, suits, claims or investigations pending or
threatened with respect to any Plan. There is no liability
required to be accrued under the Plans except to the extent
reflected in the Company's Financial Statements. The Company has
reserved funds on its Financial Statements to make full payment
of all amounts which the Company is required to pay prior to the
Effective Date under the terms of each Plan.
(v) To the best of the Shareholders' knowledge, the group health
plan maintained by the Company has been administered in good
faith compliance with the reasonable interpretation of the
continuation coverage requirements contained in Title X of the
Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA).
(vi) To the best of the Shareholders' knowledge, the Company has
not entered into any severance or similar arrangement in respect
of any present or former employee that will result in any
obligation (absolute or contingent) of Purchaser or the company
to make any payment to any present or former employee following
termination of employment.
(m) PATENTS, TRADEMARKS AND LICENSES. SCHEDULE 3(m) contains a complete
and accurate list of any and all domestic and foreign patents, patent
applications, licenses, trademarks, trademark
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applications, trade names, trade name applications, copyrights and
copyright applications owned by or licensed to the Company or in which
the Company has any right or interest whatsoever (the "Intellectual
Property"), all of which are in good standing. The Company owns or has
all rights necessary to use all such Intellectual Property necessary for
the conduct of its business as currently conducted, and the conduct of
such business does not conflict with or infringe upon any patent,
trademark, trade name, trade secret or copyright of others. The Company
has received no notice of any claim of infringement or other complaint
that its operations conflict with or infringe upon the patents, trade
names, trademarks, trade secrets or copyrights of others.
(n) COMPLIANCE WITH APPLICABLE LAWS. To the best of the Shareholders'
knowledge, the Company's business is being conducted in compliance with
applicable laws, ordinances, rules and regulations of governmental
authorities.
(o) INVENTORY. None of the inventories of the Company shown on the
Company's books are obsolete, defective or otherwise not saleable or
usable in the ordinary course of business. The levels of inventories
currently on hand are not in excess of or less than that necessary for
the operation of the Company's business in the ordinary course of
business consistent with past practices of the Company.
(p) GUARANTEES, ETC. To the best of the Shareholders' knowledge, the
Company has not given any guarantee, indemnity, warranty or bond, or
incurred any other similar obligation or created any security for or in
respect of, liabilities, actual or contingent, of any other person,
except for product warranties given in the ordinary course of business.
(q) OSHA AND ADA. The Company has not received notice of any violation
by the Company nor is any action pending which alleges any violation,
and to the best of the Shareholders' knowledge, the Company is not in
violation of either the Occupational Safety and Health Act of 1970 or
the Americans With Disabilities Act.
(r) CUSTOMERS. Other than the situation pertaining to TSP Texas Screw
Products ("TSP") described in that certain letter attached hereto as
SCHEDULE 3(r) (the "TSP Letter"), the Shareholders have no actual
knowledge or information that any of the Company's customers has ceased,
or intends to cease, to acquire products or services from the Company or
has reduced, or intends to materially reduce, the use of the products or
services sold by the Company for any reason or as a result of the
transaction contemplated by this Agreement. The Purchaser and the
Company intends to abide by the spirit and intent of the TSP Letter.
(s) OFFICERS, DIRECTORS AND EMPLOYEES. Attached hereto as SCHEDULE 3(s)
is a list of all officers and directors of the Company, and all
employees whose aggregate remuneration is in excess of $20,000.00 per
year. There are no amounts owed to any officer, director or employee of
the Company other than as reflected in the Company's Financial
Statements. Other than anyone associated with Ameritech Fastener
Manufacturing Co. ("Ameritech"), no officer, director or employee of the
Company, or any affiliate of the Company, owns, directly or indirectly,
beneficially or otherwise, any material interest in, or is an employee,
officer or director of, or a consultant, agent for or representative of,
any customer, competitor or supplier of the Company.
(t) ABSENCE OF ADVERSE AGREEMENTS. To the best of the Shareholders'
knowledge, and except for the TWC Order, the Company is not a party to
any instrument or agreement or subject to any charter or other corporate
restriction or any judgment, order, writ, injunction, decree or award
which
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materially and adversely affects the business, properties, assets or
condition, financial or otherwise, of the Company.
(u) NO DEFAULTS. To the best of the Shareholders' knowledge, the Company
is not in default under, nor has any event occurred which with notice or
lapse of time or both, could result in a waiver (except caused by the
statute of limitations) of any material right or default under, any
outstanding indenture, mortgage, lease, contract or agreement to which
the Company is a party or by which the Company or its assets may be
bound, or under any provision of the Company's Articles of Incorpora
tion or By-Laws (or comparable instruments). All liabilities of the
Company are, and will be on the Effective Date, current and not in
default.
(v) BANKS, SIGNATORIES. SCHEDULE 3(v) is a list setting forth the name
of each bank, savings and loan or other financial institution in which
the Company has any account or safe deposit box, the style and number of
each such account or safe deposit box and the names of all persons
authorized to draw thereon or to have access thereto.
(w) NO CONFLICTS. To the best of Shareholders' knowledge, the execution
and performance of this Agreement and the transactions contemplated
hereby will not violate any provision of or result in a breach of or
constitute a default under the Articles of Incorporation or By-Laws of
the Company.
(x) BOOKS AND RECORDS. To the best of the Shareholders' knowledge, the
books and records of the Company are in all material respects complete
and correct and have been maintained in accordance with good business
practice and reflect a true record of all meetings or proceedings of the
Board of Directors and Shareholders of the Company.
(y) BROKERS. Neither the Company nor the Shareholders are a party to or
in any way obligated under a contract or other agreement, and there are
no outstanding claims against any of them, for the payment of any
broker's or finder's fees in connection with the origin, negotiation,
execution or performance of this Agreement.
(z) TITLE TO SHARES AND AUTHORITY. Each Shareholder now has and on the
Effective Date will have valid title to the Shares set opposite such
Shareholder's name in TABLE I and on the Effective Date, after the
contemporaneous termination of that certain Buy-Sell Agreement in effect
between the Shareholders, the Shareholders will have full right, power
and authority and due authorization to sell and transfer such Shares
hereunder, and upon the delivery of and payment for such Shares, such
Shareholder will transfer to the Purchaser valid title thereto, free and
clear of any security interests, pledges, liens or similar encumbrances.
This Agreement constitutes the valid and legally binding obligation of
each Shareholder, enforceable in accordance with its terms.
(aa) DISCLOSURE. Neither this Agreement, the Schedules attached hereto,
nor any other document furnished by the Company or the Shareholders to
Purchaser, taken as a whole, contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements
contained herein and therein not misleading, and except as disclosed
herein or therein, there is no fact (other than matters of a general
economic or a political nature which do not effect the business of the
Company uniquely) known to the Shareholders which materially adversely
effects the properties, business, operations or financial condition of
the Company.
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(bb) NON-OWNED PROPERTY. Except for the assets of Ameritech which are
listed on SCHEDULE 3(BB) hereto, all tangible personal property located
at the Company's facility situated at 10202 Airline Drive, Houston,
Texas, as of the Closing Date, is owned by the Company and has been
included in the Company's Financial Statements.
(cc) INSPECTIONS. Up to the Closing Date, the Shareholders shall have
afforded, and shall continue to afford the Purchaser and its agents the
opportunity to make full and complete inspection of (i) the Company's
books and records (including without limitation, the Company's Financial
Statements, tax returns, accounts receivable, accounts payable, etc.),
(ii) the Company's assets (including without limitation, the inventory
and tangible and intangible personal property) and (iii) all mechanical
equipment, the roof, the structural integrity of the improvements on the
Real Property and the interior of the improvements.
(dd) REAL PROPERTY LEASES. The Company's facility located at 10202
Airline Drive and the vacant property across therefrom at 120 Dale
Street in Houston, Texas (the "Real Property") are leased pursuant to
the terms of a lease agreement with Jezierski Properties Partnership
(the "Landlord"), a true and correct copy of which is attached hereto as
SCHEDULE 3(dd)-A (the "Real Property Lease"). The Real Property Lease
(i) is in full force and effect, (ii) is not in default, (iii) contains
no provision which would cause a default or event of default by virtue
of the transactions evidenced hereby, and (iv) terminates on April 11,
2001. A portion of the real property covered by the Real Property Lease
located at 10202 Airline Drive, Houston, Texas 77037 (which portion is
described further on SCHEDULE 3[dd]-B hereto), is currently subleased by
the Company to Ameritech pursuant to a sublease agreement which is also
attached as SCHEDULE 3(dd)-B hereto (the "Ameritech Sublease"). The
Ameritech Sublease is in full force and effect, no default exists
thereunder, contains no provision which would cause a default or event
of default by virtue of the transactions evidenced hereby, and
terminates on December 31, 1997. At Closing, Shareholders shall have
delivered to Purchaser (1) a Landlord's Estoppel Certificate signed by
the Landlord in substantially the form of EXHIBIT "A-1" hereto, and (2)
a Tenant Estoppel Certificate signed by Ameritech in substantially the
form of EXHIBIT "A-2" hereto.
4. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER. The Purchaser
represents and warrants to the Shareholders that:
(a) ORGANIZATION, STANDING AND AUTHORITY OF THE PURCHASER. The Purchaser
is a corporation duly organized, validly existing and in good standing
under the laws of the State of Texas, and has full corporate power and
authority to conduct its business as it is now being conducted, to enter
into and carry out the provisions of this Agreement.
(b) NO VIOLATION. Neither the execution and delivery of this Agreement,
nor the consummation of the transactions contemplated hereby, will
violate any provision of the Articles of Incorporation or By-Laws of the
Purchaser, violate any provision of any agreement or other obligation to
which the Purchaser is a party or by which the Purchaser is bound or to
which its assets are subject, or violate or result in a breach of,
constitute a default under, any judgment, order, decree, rule or
regulation of any court or governmental agency to which the Purchaser is
subject.
(c) CORPORATE PROCEEDINGS OF THE PURCHASER. The execution, delivery and
performance of this Agreement has been authorized by the Board of
Directors of the Purchaser, and this Agreement constitutes the valid and
legally binding obligation of the Purchaser, enforceable in accordance
with its terms.
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(d) BROKERS. The Purchaser is not a party to or in any way obligated
under a contract or other agreement, and there are no outstanding claims
against it, for the payment of any broker's or finder's fees in
connection with the origin, negotiation, execution or performance of
this Agreement.
(e) INVESTMENT. The Shares will be acquired for investment and not with
a view to distribution thereof, nor with any intention of distributing
or selling or otherwise disposing of the Shares. Purchaser represents
that it has made an independent determination of the value of the Shares
being acquired hereunder and the value of the assets owned by the
Company. Purchaser further represents that it has had available to it
all information requested in order to have made the determination herein
described, and that it has not relied upon any opinions of Shareholders
as to such values.
(f) PAYMENT OF RESERVED ITEMS. Purchaser hereby represents to the
Shareholders that it shall cause the Company to pay any and all items
properly reserved for on the Company's Interim Financial Statements as
of the Effective Date, provided such reserves represent valid accruals
for such reserved items.
(g) OPPORTUNITY TO INSPECT. Purchaser hereby represents to the
Shareholders that it has been afforded by the Shareholders the
opportunity to make full and complete inspection of (i) the Company's
books and records (including the Company's Financial Statements, tax
returns, accounts receivable, accounts payable, etc.), (ii) the
Company's assets (including without limitation, the inventory and
tangible and intangible personal property), and (iii) all mechanical
equipment, the roof, the structural integrity of the improvements on the
Real Property and the interior of such improvements.
(h) REVIEW OF REAL PROPERTY LEASES. Purchaser hereby represents to the
Shareholders that it has been given copies of the Real Property Lease
and the Ameritech Sublease, and has been afforded by the Shareholders
the opportunity to make full and complete review thereof, and Purchaser
has approved the terms set forth therein.
(i) RESULTS OF DUE DILIGENCE. As of the Closing Date, and as a result of
its due diligence, Purchaser is not aware of any matter or condition
which would give rise to, or result in, a claim against Shareholders by
Purchaser.
5. ADDITIONAL COVENANTS AND AGREEMENTS OF SHAREHOLDERS.
(a) RESIGNATIONS. The Shareholders agree to deliver to the Purchaser at
Closing (effective on the Effective Date) the resignations of (i) each
of the Shareholders as the sole directors of the Company, (ii) Walker as
the Chairman of the Board of Directors and Chief Executive Officer of
the Company, (iii) Introligator as the Vice President of the Company,
(iv) Richard M. Kaplan as the Secretary of the Company, and (v) such
other officers and directors of the Company as may be requested by the
Purchaser.
(b) DELIVERY OF STOCK CERTIFICATES AND OTHER MATERIALS. At the Closing,
the Shareholders shall deliver to the Purchaser the certificates
evidencing the Shares duly endorsed and accompanied by executed Stock
Powers, as well as all minute books, stock certificate books, corporate
seals and other corporate books, records, data and papers of the
Company.
(c) COVENANT AGAINST COMPETITION. Each Shareholder hereby agrees that
from and after the
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Effective Date, he will not, directly or indirectly, for a period of
five (5) years, but not to exceed the maximum period allowed by law, (1)
own, operate, engage in or be interested in, affiliated or connected
with (other than by purchasing securities on a national securities
exchange or established over-the-counter market) any person, firm,
corporation or other entity (except for the Purchaser or any subsidiary
thereof) operating or purporting to operate any business in the States
of Texas, Louisiana, Mississippi, Alabama and Florida (the "Restricted
Territory") (but not to exceed the maximum area permitted by law) which
competes in any manner with the business of the Company as of the
Closing Date, including the manufacture of specialty nuts, bolts and
studs used primarily in the energy industry (the "Company's Business
Activity"); or (2) solicit or accept (either on his own account or as
the agent of another person) the business of any person in connection
with the Company's Business Activity in the Restricted Territory, such
person having been a customer of the Company for such goods or services
during the period of twelve (12) months prior to the Effective Date; (3)
induce, solicit or endeavor to entice any person to leave the service or
employment of the Company; or (4) use any trade name (including the
expression "Walker Bolt") (or any other name intended or likely to be
confused with such trade name) used by the Company at any time during
the four (4) years immediately preceding the Effective Date. Each
Shareholder hereby acknowledges that the foregoing restrictions are
reasonable in scope and necessary for the protection of the goodwill of
the Company and that a breach of this covenant would cause Purchaser and
the Company substantial damage impossible of precise determination.
Accordingly, in addition to such other rights and remedies as may be
available to the Purchaser and the Company in the event of any breach,
actual or threatened, of the foregoing provisions of this Section 5(c),
the Purchaser and the Company (or any successor or successors thereof),
shall be entitled to enjoin such breach, actual or threatened. Each
Shareholder further agrees that should any portion of the foregoing
covenant be unenforceable because of the scope thereof or the period
covered thereby or otherwise, the covenant shall be deemed to be reduced
and limited to enable it to be enforced to the extent permissible under
the laws and public policies in the jurisdiction in which enforcement is
sought. Notwithstanding the foregoing, nothing contained in this
paragraph shall in any manner, and at any time, affect, restrict or
limit (y) Shareholder Introligator (or an entity to which he is related)
from continuing to conduct, participate or take part in, to any extent,
the liquidation business, including, but not limited to, the liquidation
or sale of machinery or equipment similar to the machinery or equipment
owned by the Company, or used in connection with the Company's Business
Activity; or (z) Shareholder Walker from owning or being involved with
Ameritech.
(d) CONSENTS. The Shareholders and the Company shall obtain all
approvals and consents which must be obtained in order to effectuate the
transaction contemplated hereby and to satisfy the terms and conditions
of this Agreement, as reasonably requested by Purchaser prior to the
Closing.
6. DISCLOSURES AND DISCLAIMERS OF SHAREHOLDERS.
(a) DISCLAIMER BY SHAREHOLDERS REGARDING ENVIRONMENTAL CONDITION OF REAL
PROPERTY. The Shareholders have made no, and specifically disclaim, and
Purchaser accepts that Shareholders have disclaimed, any and all
representations, guaranties or warranties, express or implied, or
arising by operation of law of or relating to the Real Property,
including without limitation, of or relating to (i) the use, economic
potential, expenses, operation, characteristics or condition of the Real
Property or any portion thereof, including without limitation,
warranties, suitability, habitability, merchantability, tenantability,
design or fitness for any specific or a particular purpose, or good and
workmanlike condition, (ii) the nature, manner, construction, condition,
state of repair or lack of repair of any improvements located on the
Real Property, on the surface or subsurface thereof, whether or not
obvious, visible, or apparent, (iii) the nature or quality of
construction, structural design or engineering
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of the Real Property, (iv) the environmental condition of the Real
Property and the presence or absence of or contamination by Hazardous
Materials, or compliance of the Real Property with regulations or laws
pertaining to help or the environment, and these (the soil conditions,
drainage, flooding characteristics, utilities or other conditions)
existing in, on, or under the Real Property. The Purchaser hereby
expressly assumes all risks, liabilities, claims, damages, and costs
(and agrees that Shareholders shall not be held liable for any special,
direct, indirect, consequential or other damages) which arise or occur
on or after the Closing date resulting or arising from or related to the
ownership, use, lease, condition, location, maintenance, repair or
operation of the Real Property. Purchaser acknowledges that any
condition of the Real Property which Purchaser discovers or desires to
correct or improve after the Closing shall be at Purchaser's sole
expense. Purchaser expressly waives (to the extent allowed by applicable
law) any claims under federal law, state or other law that Purchaser
might otherwise have against Shareholders relating to the use,
characteristics or condition of the Real Property. The provisions of
this paragraph shall survive the Closing. As used in this Agreement, the
term "Hazardous Materials" shall mean any flammables, explosives,
radioactive material, hazardous waste, including without limitation,
substances defined as "asbestos," "asbestos containing material,"
"hazardous substances," "hazardous materials," or "toxic substances" in
the Comprehensive Environmental Response, Compensation and Liability Act
of 1980, as amended, 42 U.S.C. Sec. 9601, ET SEQ.; and The Hazardous
Materials Transportation Act, 49 U.S.C. Sec. 1801, ET SEQ.; The
Resources Conversation and Recovery Act, 42 U.S.C. Sec. 6901 ET SEQ. For
purposes of this Contract, "Applicable Laws" shall mean any and all
laws, statutes, ordinances, rules, regulations, orders, or
determinations of any governmental authority pertaining to health or the
environment in effect in any and all jurisdictions in which
Shareholders, Purchaser, the owner, or any previous owner, tenant,
occupant or user of the Real Property, or any other person is conducting
or at any time has conducted business, or where the Real Property is
located, including without limitation, the federal Clean Air Act, as
amended; the federal Comprehensive Environmental, Response,
Compensation, and Liability Act of 1980 ("CERCLA"), as amended; the
Federal Water Pollution Control Act, as amended; the federal
Occupational Safety and Health Act of 1970, as amended; the Resource
Conversation and Recovery Act of 1976 ("RCRA"), as amended; the federal
Safe Drinking Water Act, as amended; the federal Toxic Substances
Control Act, as amended; the federal Superfund Amendments and
Reauthorization Act of 1986, as amended; the federal Hazardous Materials
Transportation Act, as amended; the federal Hazardous Substances Act, as
amended; the Texas Solid Waste Disposal Act of 1969, as amended; the
Texas Injection Well Act, as amended; the Texas Comprehensive Municipal
Solid Waste Management, Resource Recovery and Conservation Act, as
amended; the Texas Hazardous Substances, as amended; the Texas Water
Quality Control Act, as amended; the Texas Clean Air Act, as amended;
Petroleum Storage Tank Remediation Fund Act effective May 31, 1989, Ch.
227, ss.ss. 1-19, 1989 Tex. Sess. Law Serv. 1006 (Vernon), as amended;
and other environmental conservation or protection laws. The provisions
of this Section 6 shall supercede any other provision to the contrary
contained in this Agreement. The Environmental Liabilities Indemnity
Agreement being given to the Shareholder by the Purchaser pursuant to
this Agreement shall not be limited as to time or monetary amount.
(b) SEWAGE TREATMENT FACILITY. Purchaser acknowledges and agrees that
Shareholders have advised Purchaser that there is a sewage treatment
facility (the "Sewage Treatment Facility") located on the Real Property,
owned by the Landlord, and operated by the Company. Further, as a
material inducement to Shareholders to enter into this Agreement, and to
sell the Stock to Purchaser, Purchaser acknowledges and agrees that (i)
Purchaser has inspected the Sewage Treatment Facility, and is satisfied
with such inspection; (ii) Purchaser, in acquiring the Stock from
Shareholders, is in no way relying upon any statements or
representations made by Shareholders regarding the condition or
15
<PAGE>
operation of the Sewage Treatment Facility; (iii) Purchaser is familiar
with the obligations of the Company under the Real Property Lease
regarding the Sewage Treatment Plant; (iv) Purchaser has been advised by
the Shareholders of the existence of, and given a copy of, the TWC
Order; (v) Purchaser has been informed and advised by Shareholders that
the Company has been unable to achieve a discharge effluent within
specifications of the State of Texas, and thus has been operating on a
"pump and haul" basis; and (vi) Purchaser hereby releases and
indemnifies Shareholders from any and all responsibility and liability
regarding the operation of the Sewage Treatment Facility by the Company,
and the TWC Order.
7. CONDITIONS TO OBLIGATIONS OF THE PURCHASER. The obligations of the
Purchaser to consummate the transaction contemplated hereby shall be subject to
the satisfaction, on or before the Effective Date, of all of the following
conditions unless expressly waived in writing by the Purchaser:
(a) OPINION OF COUNSEL. The Purchaser shall have received the opinion of
Weycer Kaplan Pulaski & Zuber, P.C., counsel for the Shareholders and
the Company, dated the Effective Date, to the effect that:
(i) the Company is a corporation duly organized, validly
existing and in good standing under the laws of the State of
Texas and has corporate power to carry on its business as it is
now being conducted;
(ii) the authorized capital stock and the outstanding shares of
the Company are as set forth in Section 3(c) hereof, and the
Shares are duly and validly issued, fully paid, non-assessable
and outstanding;
(iii) this Agreement has been duly executed and delivered by the
Shareholders and, assuming the legal competency of the
Shareholders, constitutes the valid and binding obligation of
the Shareholders enforceable in accordance with its terms
(except as otherwise limited by bankruptcy, insolvency,
reorganization, moratorium and similar laws affecting creditors'
rights and except that such counsel need not express an opinion
as to whether any covenant contained herein is specifically
enforceable);
(iv) the transfer of the Shares from the Shareholders shall vest
in the Purchaser valid ownership in the Shares, free and clear
of all security interests, pledges, liens, encumbrances, charges
or assessments, and no other endorsement is required to transfer
such ownership to the Purchaser, and such counsel is not aware
of any adverse claim with respect to any Shares;
(v) except as stated in such opinion or in any Schedule
delivered to the Purchaser pursuant to Section 3 of this
Agreement, such counsel does not know of any litigation,
proceeding or governmental investigation pending or threatened
against or relating to the Company or to the properties or
business of the Company or against the Shareholders relating to
the transactions contemplated by this Agreement;
(vi) no authorization, consent or approval of any court or
governmental body or authority is necessary to the validity of
the transfer by the Shareholders of the Shares to the Purchaser
as provided in this Agreement; and
(vii) the consummation of the transaction contemplated by this
Agreement will not result
16
<PAGE>
in the breach of or constitute a default under the Articles of
Incorporation or By-Laws of the Company, or any loan, credit or
similar agreement or any court decree to which the Company or
the Shareholders are a party and of which such counsel has
actual knowledge, or by which any of them or their properties
may be bound.
(b) OTHER LEGAL MATTERS. Legal matters in connection with this Agreement
and the transaction contemplated hereby shall have been approved by
Stumpf Falgout Craddock & Massey, P.C., counsel for the Purchaser, and
the Shareholders shall have furnished to such counsel originals of such
corporate records of the Company and copies of such other documents as
such counsel may reasonably have requested for such purpose, at least
three (3) days prior to the Closing Date.
(c) NO DAMAGE OR DESTRUCTION. Between the Effective Date and the Closing
Date, there shall not have occurred any casualty to any facility,
property, equipment or inventory owned or used by the Company as a
result of which either the monetary amount of damage or destruction
aggregates five (5%) percent or more of the aggregate book value shown
on the books of account of the entire facilities, properties, equipment
and inventory of the Company, or the total monetary amount of damage or
destruction is less than five (5%) percent of the aggregate book value
shown on the books of account of the entire facilities, properties,
equipment and inventory of the Company, but more than $50,000, and such
loss shall not be substantially covered by valid, existing insurance
underwritten by responsible insurers.
(d) NO MATERIAL ADVERSE CHANGES. The Shareholders shall have delivered
to the Purchaser their certificate stating that there has been no
material adverse change in the business, operations, financial condition
or properties of the Company since the date of the Company's Interim
Financial Statements.
(e) ABSENCE OF LITIGATION. No litigation, governmental action,
insolvency, receivership or other proceeding shall have been threatened,
asserted or commenced with respect to the transaction contemplated
herein.
(f) CONSENTS. The Shareholders and the Company shall have obtained all
approvals and consents which must be obtained in order to effectuate the
transaction contemplated hereby and to satisfy the terms and conditions
of this Agreement.
8. CONDITIONS TO OBLIGATIONS OF THE SHAREHOLDERS. The respective
obligations of the Shareholders to consummate the transaction contemplated
hereby shall be subject to the satisfaction, on or before the Effective Date, of
all of the following conditions, unless expressly waived in writing by the
Shareholders:
(a) PAYMENT OF SHAREHOLDER NOTES. The Purchaser shall cause the Company
to pay in full the Shareholder Notes at the Closing on the Closing Date.
(b) EXECUTION OF ENVIRONMENTAL LIABILITIES INDEMNITY AGREEMENT. The
Purchaser (or if this Agreement is assigned pursuant to Section 16(a),
then Purchaser and such assignee) shall execute an agreement in the form
of EXHIBIT "B" hereto pursuant to which the Purchaser shall indemnify
the Shareholders for any environmental liabilities (as defined therein)
pertaining to the Real Property.
9. THE CLOSING AND THE EFFECTIVE DATE. The execution and delivery of
this Agreement and the instruments, certificates and other documents required
hereunder (the "Closing") shall take place at the offices of Stumpf Falgout
Craddock & Massey, 1400 Post Oak Boulevard, Suite 400, Houston, Texas 77056, at
17
<PAGE>
8:00 a.m. local time on November 10, 1997, or at such other time and day or
other location as may be mutually agreed by the Purchaser and the Shareholders.
The date and time of such execution and delivery is herein called the "Closing
Date". On or effective as of 12:01 a.m., Houston, Texas, time on November 1,
1997, the sale and exchange of the Shares as contemplated hereunder shall be
effective (the "Effective Date"). On the Closing Date, certificates representing
the Shares, the minute books, stock certificate books, corporate seals and other
corporate books, records, data and papers of the Corporation shall be delivered
by the Shareholders against delivery of the Purchase Price pursuant to Section 2
hereof.
10. NATURE AND SURVIVAL OF REPRESENTATIONS AND WARRANTIES.
(a) NATURE OF STATEMENTS. All statements contained in any schedule or
any certificate or other instrument delivered by or on behalf of the
Shareholders or the Purchaser pursuant to this Agreement or in
connection with the transactions contemplated hereby shall be deemed
representations and warranties made by the Shareholders or the
Purchaser, as the case may be.
(b) SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All representations,
warranties, covenants, agreements and undertakings contained herein or
in any Schedule, certificate or other document shall remain operative
and in full force and effect, and shall survive the Effective Date and
the delivery of all consideration and documents pursuant to this
Agreement, and shall continue in effect for a period of two (2) years
after the Effective Date, subject to the limits of Section 11(c) hereof,
and, as to representations made by the Shareholders concerning or
affecting any tax liability of the Company, until a date which is six
(6) months after the statute of limitations has run against the Federal,
state and local government; provided, however, that any such
representation, warranty, covenant, agreement or undertaking as to which
a bona fide claim shall have been asserted during such survival period
shall continue in effect until such time as such claim shall have been
resolved in accordance with the terms of this Agreement.
11. INDEMNIFICATION BY SHAREHOLDERS AND RELATED MATTERS.
(a) INDEMNIFICATION BY SHAREHOLDERS. Subject to the provisions of
Sections 10(b) and 11(c) hereof, the Shareholders, jointly and
severally, agree to defend, indemnify and hold harmless the Pur chaser
and the Company, and their respective successors and assigns, from,
against and in respect of any loss, damages, liability or expense,
including reasonable fees for attorneys and other outside consultants
(hereinafter collectively called the "Losses"), resulting from:
(i) any material inaccuracy or material breach by any
Shareholder of any of the warranties or representations
contained in this Agreement, any schedule attached hereto, or in
any agreement or instrument executed in connection herewith;
(ii) any breach, non-compliance or nonfulfillment by any
Shareholder of any covenant, agreement or undertaking to be
complied with or performed by them contained herein or pursuant
to this Agreement; provided however, the breach by a Shareholder
of the covenant set forth in Section 5(c) above shall not give
rise to a joint and several indemnity obligation of both
Shareholders, but rather the Shareholder violating such covenant
shall be solely obligated to defend, indemnify and hold harmless
the Purchaser and the Company for any loss, damages, liability
or expense resulting therefrom;
18
<PAGE>
(iii) any Federal, state or local income tax liability
(including any penalty and interest thereon) of the Company (1)
with respect to taxable periods of the Company ending on or
before the Effective Date; (2) with respect to taxable periods
of the Company beginning before the Effective Date and ending
after the Effective Date to the extent attributable to the
income, assets, operations or reporting requirements of the
Company prior to the Effective Date; (3) which are imposed upon
the Purchaser as a result of any breach of warranty or
misrepresentation under Section 3(f); and (4) which the
Shareholders are obligated to indemnify Purchaser and the
Company pursuant to Section 3(f) hereof; and
(iv) any liability arising out of any and all actions, suits,
proceedings, claims, demands, judgments, costs and expenses
(including reasonable legal and accounting fees) incident to any
of the foregoing items in this Section 11(a).
(b) PROCEDURE FOR MAKING CLAIMS. If and whenever the Purchaser desires
to claim indemnification from the Shareholder pursuant to the provisions
of this Section 11, the Purchaser shall promptly deliver to the
Shareholders a certificate signed by the Chairman of the Board or Chief
Executive Officer of the Purchaser (the "Notice of Claim") stating that
the Purchaser or the Company, their successors and assigns, has paid or
properly accrued losses, damages or expenses in an aggregate stated
amount to which the Purchaser is entitled to indemnification pursuant to
this Section 11, provided, however, such notice shall be given prior to
the payment of an indemnity item if reasonable in light of the
circumstances causing, or threatening to cause, a loss, and specifying
the individual items of loss, damage or expense included in the amount
so stated, the date each such item was paid or properly accrued and the
nature of the misrepresentation, breach of warranty or claim to which
such item is related, provided, however, failure to notify the
Shareholders shall relieve the Shareholders from liability only if they
are prejudiced thereby. The Shareholders shall have the right to contest
(prior to payment or entry of an agreement to pay) and defend any claim
by a third party at the expense of the Shareholders. The Purchaser
and/or the Company, as the case may be, shall provide to the
Shareholders prompt and complete disclosure of all pertinent information
in the possession of or available to the Purchaser or the Company and
shall extend full and timely assistance and cooperation in the
investigation and defense of the claim, suit or action, with respect to
which such indemnification is claimed. Shareholders, in the defense of
any such claim, suit, action or proceeding, shall not con sent to the
entry of any judgment or decree except with the written consent of
Purchaser or the Company, nor enter into any settlement (except the
written consent of the Purchaser or the Company) which does not include
as an unconditional term thereof the giving by the claimant or plaintiff
to Purchaser or the Company of a release from every liability in respect
of such claim, suit, action or proceeding. In any defense of any claim
by a third party, Purchaser and Company shall have the right (but shall
not be obligated) to participate in such defense through counsel of its
own selection and at its own expense. Provided, however, should a
dispute arise between Purchaser, Shareholders and/or Company regarding
how the defense of such claim should be handled, the decision of the
Shareholders shall control.
(c) INDEMNIFICATION THRESHOLD AND LIMITATION OF SHAREHOLDERS'
INDEMNIFICATION LIABILITY. Notwithstanding any of the provisions of this
Section 11, Purchaser agrees not to make claims for Losses hereunder
unless and until the aggregate of such claims exceeds One Hundred
Thousand and No/100 Dollars ($100,000.00) (the "Indemnification
Threshold"); provided however, that (i) the Indemnification Threshold
shall not be applicable to claims by Purchaser for Losses arising from a
breach by any Shareholder of Sections 3(a), (c), (f) and (i), and any
claim arising from a breach of any provision of any such Section shall
not be taken into account for purposes of determining when the
Indemnification Threshold has been met, and (ii) in no event shall the
Shareholders' joint and several
19
<PAGE>
liability under this Section 11 exceed the aggregate sum of One Million
and No/100 Dollars ($1,000,000.00); and (iii) the Shareholders'
liability under this Section 11 applies only to claims made against the
Purchaser and/or the Company on or before October 31, 1999.
12. INDEMNIFICATION BY THE PURCHASER AND RELATED MATTERS.
(a) INDEMNIFICATION BY THE PURCHASER. The Purchaser agrees to defend,
indemnify and hold harmless the Shareholders, their respective
successors, assigns and personal representatives, from, against and in
respect of any and all loss, damages, liability or expense, including
reasonable fees for attorneys and other outside consultants
(collectively, the "Losses") resulting from:
(i) the breach by the Purchaser of any of its covenants or
warranties, or the inaccuracy of any of its representations
contained herein;
(ii) any claims or causes of action asserted after the Effective
Date against either Shareholder pertaining to any action taken
thereby which was legally within the scope and duty of such
Shareholder's authority as an officer and director of the
Company; and
(iii) any liability arising out of any and all actions, suits,
proceedings, claims, demands, judgments, costs and expenses
(including reasonable legal and accounting fees) incident to any
of the foregoing items of this Section 12(a).
(b) PROCEDURE FOR MAKING CLAIMS. If and whenever the Shareholders
(collectively and individually) desire to claim indemnification from the
Purchaser pursuant to the provisions of this Section 12, the
Shareholders shall promptly deliver to the Purchaser a certificate
signed by the Shareholders (the "Notice of Claim") stating that the
Shareholders, their heirs, personal representatives, successors or
assigns, have paid or properly accrued losses, damages or expenses in an
aggregate stated amount to which the Shareholders is entitled to
indemnification pursuant to this Section 12, and specifying the
individual items of loss, damage or expense included in the amount so
stated, the date each such item was paid or properly accrued and the
nature of the misrep resentation, breach of warranty or claim to which
such item is related, provided, however, failure to notify the Purchaser
shall relieve the Purchaser from liability only if it is prejudiced
thereby. The Purchaser shall have the right to contest (prior to payment
or entry into an agreement to pay) and defend any claim by a third party
at the expense of the Purchaser. The Shareholders shall provide to the
Purchaser prompt and complete disclosure of all pertinent information in
the possession of or available to the Shareholders and shall extend full
and timely assistance in the cooperation in the investigation of the
defense of the claim, suit or action, with respect to which such
indemnification is claimed. The Purchaser, in the defense of any such
claim, suit, action or proceeding, shall not con sent to the entry of
any judgment or decree except with the written consent of the
Shareholders nor enter into any settlement (except with the written
consent of the Shareholders) which does not include as an unconditional
term thereof the giving by the claimant or plaintiff to the Shareholders
of a release from every liability in respect of such claim, suit, action
or proceeding. In any defense of any claim by a third party, the
Shareholders shall have the right (but shall not be obligated) to
participate in such defense through counsel of their own selection and
at their own expense. Provided, however, should a dispute arise between
the Purchaser and the Shareholders regarding how the defense of such
claim should be handled, the decision of the Purchaser shall control.
20
<PAGE>
13. EXPENSES. The Shareholders and the Purchaser shall pay their or its
own expenses (including without limitation counsel and accounting fees and
expenses) incident to the preparation and carrying out of this Agreement and the
consummation of the transactions contemplated hereby.
14. NOTICES. All notices, demands and requests which may be given or
which are required to be given by either party to the other shall be in writing
and shall be deemed effective when either: personally delivered to the intended
recipient; sent by certified or registered mail, return receipt requested,
addressed to the intended recipient at the address specified below; delivered in
person to the address set forth below for the party to which the notice was
given; deposited into the custody of a nationally recognized overnight delivery
service such as Federal Express Corporation, Emery or Purolator, addressed to
such party at the address specified below; or sent by facsimile, telegram or
telex, provided that receipt for such facsimile, tele gram or telex is verified
by the sender and followed by a notice sent in accordance with one of the other
provisions set forth above. Notices shall be effective on the date of delivery
or receipt, of, if delivery is not accepted, on the earlier of the date that
delivery is refused or three (3) days after the date the notice is mailed. For
purposes of this Paragraph, the addresses of the parties for all notices are as
follows (unless changes by similar notice in writing are given by the particular
person whose address is to be changed):
(a) if to the Shareholders, to the address of such Shareholders as
shown in Table I with a copy to: Richard M. Kaplan, Weycer
Kaplan Pulaski & Zuber, P.C., 1400 Summit Tower, Eleven Greenway
Plaza, Houston, Texas 77046-1104;
(b) or if to the Purchaser, to 7435 Ardmore, Houston, Texas 77054,
Attn: Robert E. Cone, Chief Executive Officer, with a copy to:
Lawrence J. Fontana, Stumpf Falgout Craddock & Massey, P.C.,
1400 Post Oak Boulevard, Suite 400, Houston, Texas 77056.
Any party hereto may designate a different address by written notice
given to the other parties.
15. SATISFACTION OF CONDITIONS; TERMINATION.
(a) BEST EFFORTS TO SATISFY CONDITIONS. The Shareholders agree to use
their best efforts to bring about the satisfaction of the conditions
specified in Section 7 hereof, and the Purchaser agrees to use its best
efforts to bring about the satisfaction of the conditions specified in
Section 8 hereof.
(b) TERMINATION. This Agreement may be terminated prior to the Closing,
without liability on the part of any party hereto to any other party
hereto, by the Purchaser or the Shareholders.
In the event of termination by the Purchaser or the Shareholders as
provided above, written notice shall forthwith be given to the other
party.
16. MISCELLANEOUS.
(a) ASSIGNMENT. This Agreement may not be assigned by any party hereto
without the prior written consent of the other parties, provided,
however, the Purchaser shall have the right at any time prior to Closing
to assign this Agreement to a corporation wholly-owned by the Purchaser;
should Purchaser assign this Agreement as aforesaid, Purchaser shall
execute at the Closing, an agreement agreeing to be bound by the
indemnification provisions of Section 12 above. Subject to the
foregoing, this Agreement shall be binding upon and shall inure to the
benefit of the parties hereto and their
21
<PAGE>
respective successors and assigns and the heirs, executors,
administrators and personal representatives of the Shareholders.
(b) SECTION AND PARAGRAPH HEADINGS. The Section and Paragraph headings
of this Agreement are for reference purposes only and shall not affect
in any way the meaning or interpretation of this Agreement.
(c) AMENDMENT. This Agreement may be amended only by an instrument in
writing executed by the parties hereto.
(d) ENTIRE AGREEMENT. This Agreement and the exhibits, Schedules,
certificates and documents referred to herein constitute the entire
agreement of the parties, and supersede all understandings with respect
to the subject matter hereof.
(e) PUBLIC ANNOUNCEMENTS. No publication and/or press release of any
nature shall be issued pertaining to this Agreement or the transaction
contemplated hereby without the prior written approval of the Purchaser,
except as may be required by law.
(f) COUNTERPARTS. This Agreement may be executed in counterparts, each
of which shall be deemed an original, but all of which shall constitute
one and the same instrument.
(g) GOVERNING LAW. THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH
AND GOVERNED BY THE LAWS OF THE STATE OF TEXAS, AND VENUE FOR ANY
DISPUTE ARISING HEREUNDER SHALL BE IN HARRIS COUNTY, TEXAS, AND THE
PARTIES HERETO IRREVOCABLY SUBMIT TO THE JURISDICTION OF THE COURTS OF
THE STATE OF TEXAS.
(h) JOINDER OF SPOUSES. The spouses of the Shareholders join herein pro
forma, to acknowledge that they are fully aware of, understand and fully
consent to the provisions of this Agreement and its binding effect on
the community property interests, if any, they may own in the Shares
owned by their respective spouse, and that their respective awareness,
understanding and agreement is evidenced by their respective signatures
to this Agreement.
(i) ARBITRATION PROCEDURE. In the event of disputes between the parties
with respect to the terms and conditions of this Agreement, such
disputes shall be resolved by and through an arbitration proceeding to
be conducted under the auspices of the American Arbitration Association
("AAA") (or any like organization successor thereto) in Houston, Texas.
Such arbitration proceeding shall be conducted in as expedited a manner
as is then permitted by the commercial arbitration rules (formal or
informal) of the AAA, and the arbitrator or arbitrators in any such
arbitration (an "Arbitration") shall be persons who are expert in the
subject matter of the dispute. Both the foregoing agreement of the
parties to arbitrate any and all claims, and the results, determination,
finding, judgment and/or award rendered through such Arbitration, shall
be final and binding on the parties hereto and may be specifically
enforced by legal proceedings. The parties agree and acknowledge that
money damages may not be an adequate remedy for any breach of the
provisions of this Agreement and that any party may, in its sole
discretion, ask for specific performance and/or injunctive relief in
order to enforce or prevent any violations of the provisions of this
Agreement.
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<PAGE>
Such Arbitration may be initiated by written notice from either party to
the other which shall be compulsory and binding proceeding on each
party. The Arbitration shall be conducted before a panel of arbitrators
selected in accordance with the rules of the AAA. Each party shall bear
separately the cost of their respective attorneys, witnesses and experts
in connection with such Arbitration. Time is of the essence of this
arbitration procedure, and the arbitrators shall be instructed and
required to render their decision within ten (10) days following
completion of the Arbitration.
Any and all legal proceedings to enforce this Agreement (including any
action to compel arbitration hereunder or to enforce any award or
judgment rendered thereby) shall governed by Texas law.
(j) DECEPTIVE TRADE PRACTICES ACT AND REAL ESTATE FRAUD WAIVER.
Purchaser expressly waives the applicability of Chapter 17 of the Texas
Business and Commerce Code Sections 17.41 et. seq. - the Texas Deceptive
Trade Practices Act (the "DTPA") and chapter 27.01 of the Texas Business
and Commerce Code - the Real Estate Fraud Act (the "Act") with respect
to this transaction, to the greatest extent allowed. Purchaser
acknowledges that all elements necessary for an enforceable waiver exist
in this transaction. Specifically, Purchaser represents and warrants as
follows:
(i) Purchaser is not in a significantly disparate bargaining
position;
(ii) Purchaser is represented by competent, experience legal
counsel;
(iii) This transaction does not involve the purchase or lease of
a family residence;
(iv) The Purchase Price exceeds $500,000.00; and
(v) Purchaser expressly intends to waive the provisions of the
DTPA.
Purchaser also represents and warrants that it is a business consumer
with ample knowledge and bargaining power in this transaction. The
execution of this waiver shall not be interpreted to imply that this
transaction is otherwise within the ambit of the DTPA or the Act.
Purchaser has directed its legal counsel to execute a copy of this
Agreement solely for the purpose of satisfying the requirements of the
Act and for no other purpose. Purchaser acknowledges that it has fully
and completely discussed this waiver with its legal counsel and with
full knowledge instructs its legal counsel to execute the acknowledgment
required to waive the DTPA and the Act.
23
<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly executed by the parties
as of the date and year first above written.
PURCHASER:
INDUSTRIAL HOLDINGS, INC.
By: /s/ CHRISTINE A. SMITH
Vice President
SPOUSES: SHAREHOLDERS:
/s/ GEORGIA E. WALKER /s/ RALPH WALKER, JR.
/s/ JUDITH A. INTROLIGATOR /s/ M. DAVID INTROLIGATOR
PURCHASER'S ATTORNEY ACKNOWLEDGMENT
THIS CONTRACT IS EXECUTED BY LEGAL COUNSEL FOR PURCHASER SOLELY FOR
THE PURPOSE OF SATISFYING THE REQUIREMENTS OF TEX. BUS. COMM. CODE SECTION
17.42.
/s/ LAWRENCE J. FONTANA
Purchaser's Counsel
24
<PAGE>
EXHIBIT 7.1
INDEPENDENT AUDITORS' REPORT
Board of Directors
Bolt Manufacturing Co., Inc.
Houston, Texas
We have audited the accompanying Balance Sheets of Bolt Manufacturing Co., Inc.
(an S Corporation) as of December 31, 1995 and 1996, and the related Statements
of Earnings, Shareholders' Equity and Cash Flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Bolt Manufacturing Co., Inc.,
as of December 31, 1995 and 1996, and the results of its operations and cash
flows for the years then ended, in conformity with generally accepted accounting
principles.
WEINSTEIN SPIRA & COMPANY, P.C.
Houston, Texas
January 24, 1997
F-1
<PAGE>
BOLT MANUFACTURING CO., INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------- SEPTEMBER 30,
1995 1996 1997
---------- ---------- ----------
(Unaudited)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents:
Demand deposits ......................................... $ 5,159 $ 22,285 $ 17,603
Interest bearing deposits ............................... 218,803 186,687 316,816
---------- ---------- ----------
223,962 208,972 334,419
Receivables:
Trade - net of allowance for doubtful
accounts of $20,000 at
September 30, 1997; $10,000 at
December 31, 1996 and 1995 ............................ 995,056 850,956 896,998
Related party ........................................... 6,226 11,978 11,553
Other ................................................... 308 7,663 3,582
Inventories ................................................ 340,290 244,324 426,431
Prepaid expenses ........................................... 102,586 149,393 48,134
---------- ---------- ----------
Total Current Assets .................................. 1,668,428 1,473,286 1,721,117
---------- ---------- ----------
PROPERTY AND EQUIPMENT
Machinery and equipment .................................... 1,216,442 1,280,195 1,337,044
Office equipment ........................................... 81,301 81,128 92,958
Furniture and fixtures ..................................... 5,000 5,000 5,000
Tooling and dies ........................................... 10,000 10,000 10,000
Transportation equipment ................................... 33,454 45,608 45,608
Leasehold improvements ..................................... 2,115 2,115 8,776
---------- ---------- ----------
1,348,312 1,424,046 1,499,386
Less: Accumulated depreciation and
amortization ............................................ 980,327 1,050,782 1,129,009
---------- ---------- ----------
367,985 373,264 370,377
---------- ---------- ----------
$2,036,413 $1,846,550 $2,091,494
========== ========== ==========
</TABLE>
See notes to financial statements.
F-2
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------- SEPTEMBER 30,
1995 1996 1997
---------- ---------- ----------
(Unaudited)
<S> <C> <C>
LIABILITIES
CURRENT LIABILITIES
Note payable .................................................. $ 260,000 $ 100,000
Accounts payable - trade ...................................... 197,344 92,678 $ 140,958
Accrued expenses .............................................. 240,178 243,621 413,416
---------- ---------- ----------
Total Current Liabilities ................................ 697,522 436,299 554,374
NOTES PAYABLE .................................................... 1,000,000
---------- ---------- ----------
697,522 436,299 1,554,374
SHAREHOLDERS' EQUITY
CAPITAL STOCK - common; $1 par value,
1,000,000 shares authorized; shares issued and outstanding .... 62,500 62,500 62,500
RETAINED EARNINGS ................................................ 1,276,391 1,347,751 474,620
---------- ---------- ----------
1,338,891 1,410,251 537,120
---------- ---------- ----------
$2,036,413 $1,846,550 $2,091,494
========== ========== ==========
</TABLE>
See notes to financial statements.
F-3
<PAGE>
BOLT MANUFACTURING CO., INC.
STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
--------------------------------- ----------------------------------
1995 1996 1996 1997
----------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C>
SALES ...................................... $ 7,132,510 $ 6,452,216 $ 4,961,927 $ 5,419,698
Cost of Sales .............................. 4,747,191 4,421,520 3,358,171 3,521,325
----------- ----------- ----------- -----------
GROSS MARGIN ............................... 2,385,319 2,030,696 1,603,756 1,898,373
Operating Expenses ......................... 1,574,734 1,520,086 1,124,853 1,308,199
----------- ----------- ----------- -----------
EARNINGS FROM .............................. 810,585 510,610 478,903 590,174
----------- ----------- ----------- -----------
OPERATIONS
OTHER INCOME (EXPENSE)
Interest expense ....................... (31,787) (21,330) (16,679) (33,549)
Other income ........................... 9,110 6,821 1,814 1,137
Interest income ........................ 8,952 8,805 5,440 4,242
Gain on sale of assets ................. 4,903
----------- ----------- ----------- -----------
(13,725) (801) (9,425) (28,170)
----------- ----------- ----------- -----------
NET EARNINGS ............................... $ 796,860 $ 509,809 $ 469,478 $ 562,004
=========== =========== =========== ===========
</TABLE>
See notes to financial statements.
F-4
<PAGE>
BOLT MANUFACTURING CO., INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996,
AND FOR THE NINE MONTH-PERIOD ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
--------------------------------- RETAINED SHAREHOLDERS'
SHARES AMOUNT EARNINGS EQUITY
---------- ----------- ---------- -------------
<S> <C> <C> <C> <C>
BALANCE - DECEMBER 31, 1994 ................. 62,500 $ 62,500 $1,056,741 $1,119,241
Net Earnings ................................ 796,860 796,860
Distributions to Shareholders ............... (577,210) (577,210)
---------- ----------- ---------- ----------
BALANCE - DECEMBER 31, 1995 ................. 62,500 62,500 1,276,391 1,338,891
Net Earnings ................................ 509,809 509,809
Distributions to Shareholders ............... (438,449) (438,449)
---------- ----------- ---------- ----------
BALANCE - DECEMBER 31, 1996 ................. 62,500 62,500 1,347,751 1,410,251
Net Earnings (Unaudited) .................... 562,004 562,004
Distributions to Shareholders
(Unaudited) ............................. (1,435,135) (1,435,135)
---------- ----------- ---------- ----------
BALANCE - SEPTEMBER 30, 1997
(Unaudited) ............................. 62,500 $ 62,500 $ 474,620 $ 537,120
========== =========== ========== ==========
</TABLE>
See notes to financial statements.
F-5
<PAGE>
BOLT MANUFACTURING CO., INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
--------------------------------- ---------------------------------
1995 1996 1996 1997
----------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Cash received from customers ......... $ 7,095,172 $ 6,583,131 $ 5,085,978 $ 5,379,299
Cash paid to suppliers and
employees ......................... (6,224,908) (5,883,188) (4,415,294) (4,622,403)
Interest received .................... 8,952 8,805 5,440 4,242
Interest paid ........................ (31,787) (21,330) (16,679) (25,216)
----------- ----------- ----------- -----------
Net Cash Provided by
Operating Activities ........... 847,429 687,418 659,445 735,922
----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment .................. (123,308) (110,526) (78,831) (75,340)
Proceeds from dispositions ............. 6,567
----------- ----------- ----------- -----------
Net Cash Used in Investing
Activities ..................... (123,308) (103,959) (78,831) (75,340)
----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Payments of debt ....................... (120,000) (160,000) (90,000) (100,000)
Distributions to shareholders .......... (577,210) (438,449) (438,449) (1,435,135)
Proceeds from shareholder notes ........ 1,000,000
----------- ----------- ----------- -----------
Net Cash Used in Financing
Activities ..................... (697,210) (598,449) (528,449) (535,135)
----------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS ................... 26,911 (14,990) 52,165 125,447
Cash and Cash Equivalents -
Beginning of Period .................... 197,051 223,962 223,962 208,972
----------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS - END OF PERIOD .. $ 223,962 $ 208,972 $ 276,127 $ 334,419
=========== =========== =========== ===========
</TABLE>
See notes to financial statements.
F-6
<PAGE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
----------------------------- -----------------------------
1995 1996 1996 1997
--------- --------- --------- ---------
(Unaudited)
<S> <C> <C> <C> <C>
RECONCILIATION OF NET EARNINGS
TO NET CASH PROVIDED BY
OPERATING ACTIVITIES
Net earnings ................................... $ 796,860 $ 509,809 $ 469,478 $ 562,004
Adjustments to reconcile net
earnings to net cash provided
by operating activities:
Depreciation and amortization ............. 107,869 103,583 77,608 78,227
Bad debt expense .......................... 1,185 27,684 13,500 16,009
Gain on sale of fixed assets .............. (4,903)
(Increase) Decrease in:
Receivables ............................ (47,634) 103,309 108,737 (57,545)
Inventories ............................ (11,754) 95,966 (3,457) (182,107)
Prepaid expenses ....................... (20,009) (46,807) (111,698) 101,259
Increase (Decrease) in:
Accounts payable - trade ............... 450 (104,666) (53,780) 48,280
Accrued expenses ....................... 20,462 3,443 159,057 169,795
--------- --------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES .......... $ 847,429 $ 687,418 $ 659,445 $ 735,922
========= ========= ========= =========
</TABLE>
See notes to financial statements.
F-7
<PAGE>
BOLT MANUFACTURING CO., INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997, IS UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company maintains its accounts on the accrual basis of accounting in
accordance with generally accepted accounting principles. Accounting principles
followed by the Company and the methods of applying those principles which
materially affect the determination of financial position, results of
operations, and cash flows are summarized below:
DESCRIPTION OF BUSINESS
Bolt Manufacturing Co., Inc. manufactures specialty bolts and nuts for
customers throughout the United States and Canada.
INCOME RECOGNITION
Revenue is recognized at the date of product shipment, and accounts
receivable are recorded at that time. Earnings are charged with a provision
for doubtful accounts based on current review of collectibility of accounts.
INVENTORIES
Inventories, consisting of raw materials, work-in-process, and finished goods
are presented at the lower of cost (as determined by the first-in, first-out
method) or market. Work-in-process and finished goods include the cost of
material and any related direct and indirect production costs. Inventories
consist of the following:
DECEMBER 31,
------------------------- September 30,
1995 1996 1997
-------- -------- --------
Raw materials ............... $260,931 $196,361 $307,443
Work-in-process ............. 59,300 37,109 94,974
Finished goods .............. 20,059 10,854 24,014
-------- -------- --------
$340,290 $244,324 $426,431
======== ======== ========
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation is computed at
rates sufficient to amortize the cost of the assets over their estimated
useful lives using the straight-line method. Depreciation is based on the
following estimated useful lives:
Machinery and equipment 5 - 7 years
Office equipment 5 years
Furniture and fixtures 5 years
Tooling and dies 5 years
Transportation equipment 3 years
Leasehold improvements 6 years
F-8
<PAGE>
BOLT MANUFACTURING CO., INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND 1996
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997, IS UNAUDITED)
INCOME TAX
The Company is taxed under the S Corporation provisions of the Internal
Revenue Code. Under these provisions, the Company is not liable for federal
corporate income taxes. Instead, the shareholders are liable for individual
federal income taxes on the Company's taxable income.
CASH AND CASH EQUIVALENTS
The Company considers all short-term investments with an original maturity of
three months or less to be cash equivalents. There are deposits in excess of
federally insured limits.
USE OF ESTIMATES
The preparation of 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 disclosure 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.
NOTE 2 - OPERATING LEASES
The Company leases its warehouse and office facilities and certain equipment
under operating lease agreements. At December 31, 1996, the future minimum
rental payments required under the leases were as follows:
YEAR ENDING
DECEMBER 31,
1997 $ 91,660
1998 83,342
1999 77,400
2000 77,400
2001 19,350
--------
$349,152
Rent expense for the periods ended December 31, 1995 and 1996, and September 30,
1996 and 1997, totaled $77,400 and $77,300, $57,950 and $58,050, respectively.
F-9
<PAGE>
BOLT MANUFACTURING CO., INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND 1996
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997, IS UNAUDITED)
NOTE 3 - RELATED PARTY TRANSACTIONS
The Company paid $88,000 in consulting fees to related parties during the year
ended December 31, 1995.
The Company paid $99,000 in consulting fees to an affiliate of a shareholder
during the period ended September 30, 1997.
As discussed in Note 4, the Company has $1,000,000 in shareholder notes payable.
The Company received $14,385 and $1,250 in expense reimbursements from an entity
related by common ownership for the year ended December 31, 1996 and 1995,
respectively. At December 31, 1996 and 1995, respectively, the Company had a
receivable from the entity of $11,978 and $6,226.
The Company received $44,234 and $14,082 in expense reimbursements from an
entity related by common ownership for the period ended September 30, 1997 and
1996, respectively. At September 30, 1997 and 1996, respectively, the Company
had a receivable from the entity of $11,553 and $7,135.
Additionally, in April, 1996, the Company began subleasing part of its facility
to the related entity under a lease agreement which has been classified as an
operating lease. The lease expired December 31, 1996. The Company renewed the
lease for an additional 12 months expiring on December 31, 1997. Total rent
income for the year ended December 31, 1996, and the nine months ended September
30, 1997, under this agreement was $6,400 and $9,000, respectively.
NOTE 4 - NOTE PAYABLE
The Company had a note agreement with a bank which bore interest at the prime
rate plus .5% per annum and was secured by accounts receivable, equipment,
general intangibles and inventory. The note was due on demand; if no demand is
made it is payable in monthly installments of $10,000, plus interest, until
February, 1998. Outstanding borrowings at December 31, 1995 and 1996, were
$260,000 and $100,000, respectively. As of March 31, 1997, the Company has paid
the note in full.
The Company also had a $100,000 line-of-credit with a bank, bearing interest at
prime plus 1%, secured by equipment, accounts receivable, inventory, fixtures,
and intangibles, which matured on April 1, 1997. There were no borrowings under
this line-of-credit at December 31, 1996.
At April 1, 1997, the Company obtained a $150,000 line-of-credit with a bank,
bearing interest at prime plus 1%, secured by accounts receivable, inventory,
fixtures and intangibles, which matures on August 15, 1998. There were no
borrowings under this line-of-credit at September 30, 1997.
F-10
<PAGE>
BOLT MANUFACTURING CO., INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 AND 1996
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997, IS UNAUDITED)
The Company has entered into loan agreements which contain restrictive
covenants, including maintenance of certain financial ratios and restrictions on
borrowings. At December 31, 1996, the Company was in compliance with the
covenants and restrictions.
As of September 30, 1997, the Company has note agreements with its shareholders
for a principal amount of $1,000,000. The notes bear interest at 10% per annum,
with interest due quarterly beginning September, 1997. The notes are secured by
equipment and are due on June 11, 1999. Interest of $30,525 has been expensed,
with $22,192 being paid to shareholders as of September 30, 1997.
NOTE 5 - SUBSEQUENT EVENT
Effective November 1, 1997, the shareholders of the Company sold all outstanding
shares of stock to Industrial Holdings, Inc. for approximately $5,000,000, cash
plus repayment of the shareholders' notes of $1,000,000 and the assumption of
certain liabilities.
NOTE 6 - UNAUDITED INTERIM STATEMENTS
The financial statements as of September 30, 1997, and for the six months ended
September 30, 1996 and 1997, are unaudited; however, in the opinion of
management, all adjustments (consisting solely of normal recurring adjustments)
necessary to a fair presentation of the financial statements for these interim
periods have been made. Accounting estimates at interim dates inherently involve
greater reliance on estimates than at year end. The results for the interim
periods are not necessarily indicative of the results to be obtained for a full
fiscal year.
F-11
<PAGE>
EXHIBIT 7.2
INDUSTRIAL HOLDINGS, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED)
The following unaudited pro forma financial statements give effect to
the November 1997 acquisition by the Company of Bolt Manufacturing Co., Inc.
doing business as WALKER BOLT Manufacturing Co. ("WALKER") in a transaction
accounted for as a purchase. The allocation of purchase price is based on
preliminary information currently available and will be revised as necessary.
The estimated purchase price adjustments are subject to completion of asset
appraisals, the final determination of certain tax liabilities, differences
between the estimated and actual costs of professional fees and adjustments to
certain other accruals.
The unaudited pro forma condensed consolidated balance sheet is based on
the September 30, 1997 balance sheets of the Company included in the Report on
Form 10-Q for the three months ended September 30, 1997 and of WALKER included
in the financial statements of WALKER appearing elsewhere in this Report on Form
8-K, and has been prepared to reflect the acquisition of WALKER as if the
acquisition had been consummated at September 30, 1997. The acquisitions of Lone
Star and MVS were completed in the first quarter of 1997 and their balance
sheets as of September 30, 1997 are included in that of the Company.
The unaudited pro forma condensed consolidated statements of operations
are based on the income statements of the Company, American, Lone Star and MVS
(not presented separately herein) and WALKER appearing elsewhere in this Report
on Form 8-K as if the acquisitions had occurred at the beginning of the period
presented. Such unaudited pro forma condensed consolidated financial statements
combine (i) the audited operating results for the Company for the year ended
December 31, 1996 and the unaudited operating results for the nine months ended
September 30, 1997 (ii) the audited operating results of MVS for the year ending
December 31, 1996 and the unaudited results of operations for the two-months
ended February 28, 1997; (iii) the audited operating results of Lone Star for
the year ended December 31, 1996; (iv) the unaudited operating results of
American for the period from January 1, 1996 through September 30, 1996; and (v)
the audited operating results of WALKER for the year ended December 31, 1996 and
the unaudited operating results for the nine months ended September 30, 1997.
The results of operations for the one month ended January 31, 1997 for Lone Star
and one month ended October 31, 1996 for American have not been presented based
upon management's belief that such would not be significant to the pro forma
statements of operations.
The Company acquired WALKER effective November 1, 1997, MVS on March 1,
1997, Lone Star on February 1, 1997 and American on November 1, 1996 and the
operating results subsequent to the date of acquisition are reflected in the
Company's historical information for the periods presented.
F-12
<PAGE>
The pro forma financial information does not purport to be indicative
either of the results of operations that would have occurred had the purchase
been made at the beginning of the periods presented or future results of
operations of the combined companies. These unaudited pro forma financial
statements should be read in conjunction with the historical financial
statements and notes thereto of the Company included in its 1996 Annual Report
on Form 10-K and in its Report on Form 10-Q for the quarter ended September 30,
1997, the financial statements of American filed with Form 8-K/A dated November
18, 1996, Lone Star filed with Form 8-K/A dated February 6, 1997, MVS filed with
Form 8-K/A dated June 12, 1997 and WALKER included elsewhere in this Form 8-K.
F-13
<PAGE>
INDUSTRIAL HOLDINGS, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
SEPTEMBER 30, 1997
(000'S OMITTED)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
------------------------ ------------------------------
ADJUSTMENTS
IHI WALKER (NOTE 1) COMBINED
------- ------ -------- --------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and equivalents .............................. $ 216 $ 334 $ (30)(a) $ 520
Accounts receivable-trade ......................... 11,084 897 (57)(b) 11,924
Inventories ....................................... 12,556 426 12,982
Advances to shareholders .......................... 92 92
Notes receivable, current portion ................. 981 981
Other current assets .............................. 1,153 64 1,217
------- ------ -------- -------
Total current assets ........................ 26,082 1,721 (87) 27,716
Property and equipment, net ............................ 18,918 370 3,630(c) 22,918
Notes receivable ....................................... 1,214 1,214
Other assets ........................................... 768 30(c) 798
Goodwill, net .......................................... 12,833 1,112(d) 13,945
------- ------ -------- -------
Total assets ................................ $59,815 $2,091 $ 4,685 $66,591
======= ====== ======== =======
</TABLE>
F-14
<PAGE>
INDUSTRIAL HOLDINGS, INC. AND SUBSIDIARIES
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
SEPTEMBER 30, 1997
(000'S OMITTED)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
--------------------------- ---------------------------
ADJUSTMENTS
IHI WALKER (NOTE 1) COMBINED
------- ------ -------- --------
<S> <C> <C> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable ................................... $ 10,110 $ $ 309 (e) $ 10,419
Accounts payable-trade .......................... 6,958 141 (57)(b) 7,042
Accrued expenses and other ...................... 2,320 413 90 (g) 2,823
Current portion of long-term debt ............... 1,617 793 (e) 2,410
-------- ------- ------- --------
Total current liabilities ................... 21,005 554 1,135 22,694
Long-term debt, less current portion ................. 6,045 1,000 7,207 (e) 11,132
(1,000)(e)
(2,120)(e)
Deferred compensation payable ........................ 248 248
Deferred income taxes payable ........................ 2,648 2,648
Common stock with put redemption option ............. 6,000 6,000
Shareholders' equity
Common stock .................................... 58 63 (63)(f) 58
Additional paid-in capital ...................... 20,656 20,656
Retained earnings ............................... 3,155 474 (474)(f) 3,155
-------- ------- ------- --------
Total shareholders' equity ................ 23,869 537 (537) 23,869
-------- ------- ------- --------
Total liabilities and shareholders' equity $ ......... $ 59,815 $ 2,091 $ 4,685 $ 66,591
======== ======= ======= ========
</TABLE>
F-15
<PAGE>
Note 1 - The pro forma balance sheet reflects the acquisition of WALKER for cash
of $5 million, payment of $1 million note payable to shareholders by WALKER plus
estimated transaction expenses. The allocation of purchase price is based on
preliminary information and is subject to change based on the final
determination of certain tax liabilities, differences between the estimated and
actual costs of professional fees, completion of asset appraisals and
adjustments to certain other accruals:
a. Reflect use of cash to pay certain transaction expenses.
b. Eliminate intercompany accounts.
c. Adjust the assets and liabilities of WALKER to their estimated fair market
values at the acquisition date.
d. Record goodwill on the purchase of WALKER.
e. Record the drawdown on the Company's demand note with Comerica Bank of
Texas ("Comerica"), retire existing term note and term note payable to
Heller Financial, Inc. ("Heller") and the repayment of $1,000,000 note
payable assumed in the WALKER Acquisition and of $2,120,000 in existing
term note payable to Comerica.
f. Eliminate the shareholders equity of WALKER.
g. Record accrued transaction costs.
F-16
<PAGE>
INDUSTRIAL HOLDINGS, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(000'S OMITTED)
<TABLE>
<CAPTION>
PRO FORMA
---------------------------------------
ACQUISITION ADJUSTMENTS
HISTORICAL (NOTE 1)
---------------------------------- --------------------
IHI MVS WALKER MVS WALKER COMBINED
-------- --------- -------- ------- -------- ---------
<S> <C> <C> <C> <C> <C>
Sales $59,642 $ 1,762 $ 5,420 $ (166)(a) $ 66,658
Cost of sales 44,953 1,293 3,522 135 (b) 49,737
(166)(a)
Gross profit 14,689 469 1,898 (135) 16,921
Selling, general and 10,438 152 1,308 (250)(d) 11,712
administrative
17 47 (b)
-------- --------- -------- ------- -------- --------
Income from operations 4,251 317 590 (17) 68 5,209
Other income (expense):
Interest expense (1,281) (34) (350)(e) (1,665)
Interest income 130 3 4 (3) (4)(f) 130
Other income (expense) 273 2 275
-------- --------- -------- ------- -------- --------
Total other income (expense) (878) 3 (28) (3) (354) (1,260)
-------- --------- -------- ------- -------- --------
Income before income taxes 3,373 320 562 (20) (286) 3,949
Income tax expense 1,363 82 (5) 95 (g) 1,535
-------- --------- -------- ------- -------- --------
Net income $ 2,010 $ 238 $ 562 $ (15) $ (381) $ 2,414
======== ========= ======== ======= ======== ========
Earnings per share (h) $ .30 $ .35
======== ========
</TABLE>
F-17
<PAGE>
INDUSTRIAL HOLDINGS, INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE YEAR ENDED DECEMBER 31, 1996
(000'S OMITTED)
<TABLE>
<CAPTION>
PRO FORMA
---------------------------------------------------
ACQUISITION ADJUSTMENTS
HISTORICAL (NOTE 3)
------------------------------------------------ ------------------------------------
IHI MVS LONE STAR AMERICAN WALKER MVS LONE STAR AMERICAN WALKER COMBINED
------- ------ ------- -------- ----- ----- ------ ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales $51,423 $ 6,374 $ 15,474 $ 6,786 $ 6,452 $(275)(a) $ 86,234
Cost of sales 40,849 4,366 9,498 5,118 4,422 $ 26 $ (34) 179 (b) 66,312
2,163 (c)
(275)(a)
------- ------ ------- -------- ----- ----- ------ ------ ----- --------
Gross profit 10,574 2,008 5,976 1,668 2,030 (2,189) 34 (179) 19,922
Selling, general and 8,002 843 5,587 1,164 1,520 (392) (329) (246)(d) 14,542
administrative (2,163) (c)
$ 205 161 127 63 (b)
------- ------ ------- -------- ----- ----- ------ ------ ----- --------
Income from operations 2,572 1,165 389 504 510 (205) 205 236 4 5,380
Other income (expense):
Interest expense (1,336) (114) (21) (182) (558) (482)(e) (2,693)
Interest income 160 7 71 9 (7) (71) (9)(f) 160
Other income (expense) 139 8 1 26 11 185
------- ------ ------- -------- ----- ----- ------ ------ ----- --------
Total other income
(expense) (1,037) 15 (113) 97 (1) (7) (182) (629) (491) (2,348)
------- ------ ------- -------- ----- ----- ------ ------ ----- --------
Income before income
taxes 1,535 1,180 276 601 509 (212) 22 (393) (487) 3,032
Income tax expense 408 439 90 240 -- (12) 7 (157) 8 (g) 1,023
------- ------ ------- -------- ----- ----- ------ ------ ----- --------
Net income $ 1,127 $ 741 $ 186 $ 361 $ 509 $(200) $ 16 $ (236) $(495) $ 2,009
======= ====== ======= ======== ======= ====== ====== ======= ====== ========
Earnings per share (h) $ .26 $ .39
======= ========
</TABLE>
F-18
<PAGE>
Note 3 - The above statements give effect to the following pro forma adjustments
necessary to reflect the acquisition and the issuance of debt related to the
acquisition of WALKER outlined in Note 1 to the pro forma balance sheet:
a. Eliminate intercompany sales.
b. Adjust depreciation and amortization expense for changes resulting from
(i) the increase in acquired property, plant and equipment as a result of
the allocation of the purchase price and depreciation of the fair market
value of the acquired property, plant and equipment over their remaining
useful lives of 3 to 30 years and (ii) amortization of acquired goodwill
over 20 years.
c. Reclassify amounts from selling general and administrative expenses to
cost of sales to be consistent with the classification used by the
Company.
d. Reduce cost of sales and selling, general and administrative expenses for
contractual reductions as part of the acquisition in executive payrolls,
elimination of directors fees, reduction in executive benefits and
elimination of expenses related to Florida entertainment facility
eliminated as part of the American acquisition.
e. Adjust interest expense (i) for Lone Star on $1,700,000 of 8.25% term
debt, $1,400,000 demand note and 8% $500,000 term note payable to seller;
(ii) for American on $1,800,000 of 8.25% term debt, $3,712,000 demand note
and 12% $3,500,000 bridge note; and (iii) for Walker on $309,000 demand
note, $5,880,000 8.1% term note.
f. Eliminate interest income.
g. Adjust income taxes as a result of the changes in the pro forma pretax
earnings of the acquired subsidiaries.
h. Increase in earnings per share as a result of pro forma earnings of the
acquired subsidiaries and increase in weighted average of common stock
equivalents (i) for MVS for the effect of 600,000 shares of IHI common
stock issued to the selling shareholders (ii) for Lone Star for the effect
of 84,211 shares of IHI common stock issued to selling shareholder, and
(iii) for American for the effect of 540,000 warrants.
F-19
<PAGE>
EXHIBIT 10.1
Loan No.: 1960082-0001
PROMISSORY NOTE
$8,000,000.00 November 10, 1997
FOR VALUE RECEIVED, INDUSTRIAL HOLDINGS, INC., a Texas corporation,
AMERICAN RIVET COMPANY, Inc., an Illinois corporation, LSS-LONE STAR-HOUSTON,
INC., a Texas corporation, and BOLT MANUFACTURING COMPANY, INC., a Texas
corporation (collectively, "Maker"), jointly and severally, promises to pay to
the order of HELLER FINANCIAL, INC., a Delaware corporation (together with any
holder of this Note, "Payee"), at its office located at 500 West Monroe Street,
Chicago, Illinois 60661, or at such other place as Payee may from time to time
designate, the principal sum of Eight Million and 00/100 Dollars
($8,000,000.00), together with interest thereon at a rate per annum equal to the
One Month LIBOR Rate (hereafter defined), plus two and 50/100 percent (2.50%),
payable in seventy-two (72) consecutive monthly installments of principal plus
interest commencing January 1, 1998, and continuing on the same day of each
consecutive calendar month thereafter until this Note is fully paid. Subject to
adjustment in accordance with the next sentence in the event of the Mandatory
Prepayment (as defined in Section 3 of the Security Agreement (defined below)),
the first seventy-one (71) such monthly installments shall each be in the
principal amount of One Hundred Eleven Thousand One Hundred Eleven and 12/100
Dollars ($111,111.12), plus accrued interest, and the final monthly installment
shall be in the amount of the entire then outstanding principal balance
hereunder, plus all accrued and unpaid interest, charges and other amounts owing
hereunder or under the Security Agreement (defined below). Notwithstanding
anything else in this Note, if Maker makes the Mandatory Prepayment, each
consecutive monthly installment payment hereunder shall thereafter be in an
equal amount of principal, plus accrued interest, provided, however that the
final monthly installment shall be in the amount of the entire then outstanding
principal balance hereunder, plus all accrued and unpaid interest, charges and
other amounts owing hereunder or under the Security Agreement. All payments
shall be applied first to interest and then to principal. Interest shall be
computed on the basis of a 360-day year and charged for the actual number of
days elapsed. Maker shall make an interest only initial payment on December 1,
1997 of all accrued interest from the date of this Note through November 30,
1997.
For purposes of this Note, the term "One Month LIBOR Rate" means, for each
calendar month, a rate of interest equal to:
(a) the rate of interest determined by Payee at which deposits in
U.S. Dollars are offered for the one (1) month interest period based on
information presented on the Reuters Screen LIBO Page as of 11:00 A.M. (London
time) on the day which is two (2) business days (not counting Saturdays) prior
to the first day of each calendar month; provided that if at least two (2) such
offered rates appear on the Reuters Screen LIBO Page in respect of such interest
period, the arithmetic mean of all such rates (as determined by Payee) will be
the rate used; provided further that if there are fewer than two (2) offered
rates or Reuters ceases to provide LIBOR quotations, such rate shall be
the average rate of interest determined by Payee at which deposits in U.S.
Dollars are offered for the one
Ex-4
<PAGE>
(1) month interest period by Bankers Trust Company and Chase Bank, N. A. (or
their respective successors) to banks with combined capital and surplus in
excess of $500,000,000 in the London interbank market as of 11:00 A.M. (London
time) on the applicable interest rate determination date, divided by
(b) a number equal to 1.0 minus the aggregate (but without
duplication) of the rates (expressed as a decimal fraction) of reserve
requirements in effect on the day which is two (2) business days prior to the
beginning of each calendar month (including, without limitation, basic,
supplemental, marginal and emergency reserves under any regulations of the Board
of Governors of the Federal Reserve System or other governmental authority
having jurisdiction with respect thereto, as now and from time to time in
effect) for Eurocurrency funding (currently referred to as "Eurocurrency
liabilities" in Regulation D of such Board) which are required to be maintained
by a member bank of the Federal Reserve System;
(Such rate to be adjusted to the nearest one sixteenth of one percent (1/16
of 1%) or, if there is no nearest one sixteenth of one percent (1/16 of 1%), to
the next higher one sixteenth of one percent (1/16 of 1%)).
For the initial funding month (or any fraction thereof) under this Note,
the interest rate hereunder shall be the One Month LIBOR Rate in effect on the
day of funding, plus Two and 50/100 percent (2.50%).
Notwithstanding the foregoing, if at any time implementation of any
provision hereof shall cause the interest contracted for or charged herein or
collectable hereunder to exceed the applicable lawful maximum rate, then the
interest shall be limited to such applicable lawful maximum.
This Note is secured by the collateral described in the Security Agreement
dated November 10, 1997, between Maker and Payee (the "Security Agreement;" and
together with all related documents and instruments, the "Loan Documents") to
which reference is made for a statement of the nature and extent of protection
and security afforded, certain rights of Payee and certain rights and
obligations of Maker, including Maker's rights and obligations, if any, to
prepay the principal balance hereof.
Time is of the essence hereof. If payment of any installment or any other
sum due under this Note or the Loan Documents is not paid within ten (10) days
of its hen due date, Maker agrees to pay a late charge equal to the lesser of
(i) five cents (5(cent)) per dollar on, and in addition to, the amount of each
such payment, or (ii) the maximum amount Payee is permitted to charge by law. In
the event of the occurrence of an Event of Default (as defined in the Security
Agreement), then the entire unpaid principal balance hereof with accrued and
unpaid interest thereon, together with all other sums payable under this Note or
the Loan Documents, shall, at the option of Payee and without notice or demand,
become immediately due and payable, such accelerated balance bearing interest
until paid at the rate of Three Five and 50/100 percent (35.50%) per annum above
the then otherwise applicable interest rate hereunder.
<PAGE>
Maker and all endorsers, guarantors or any others who may at any time
become liable for the payment hereof hereby consent to any and all extensions of
time, renewals, waivers and modifications of, and substitutions or release of
security or of any party primarily or secondarily liable on, or with respect to,
this Note or any of the Loan Documents or any of the terms and provisions
thereof that may be made, granted or consented to by Payee, and agree that suit
may be brought and maintained against any one or more of them, at the election
of Payee, without joinder of the others as parties thereto, and that Payee shall
not be required to first foreclose, proceed against, or exhaust any security
herefor, in order to enforce payment of this Note by any one or more of them.
Maker and all endorsers, guarantors or any others who may at any time become
liable for the payment hereof hereby severally waive presentment, demand for
payment, notice of nonpayment, protest, notice of protest, notice of dishonor,
and all other notices in connection with this Note, filing of suit and diligence
in collecting this Note or enforcing any of the security herefor, and, without
limiting any provision of any of the Loan Documents, agree to pay, if permitted
by law, all expenses incurred in collection, including reasonable attorneys'
fees, and hereby waive all benefits of valuation, appraisement and exemption
laws.
If there be more than one Maker, all the obligations, promises, agreements
and covenants of Maker under this Note are joint and several.
THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
INTERNAL LAWS AND DECISIONS OF THE STATE OF ILLINOIS, WITHOUT REGARD TO
PRINCIPLES OF CONFLICTS OF LAW. AT PAYEE'S ELECTION AND WITHOUT LIMITING PAYEE'S
RIGHT TO COMMENCE AN ACTION IN ANY OTHER JURISDICTION, MAKER HEREBY SUBMITS TO
THE EXCLUSIVE JURISDICTION AND VENUE OF ANY COURT (FEDERAL, STATE OR LOCAL)
HAVING SITUS WITHIN THE STATE OF ILLINOIS, EXPRESSLY WAIVES PERSONAL SERVICE OF
PROCESS AND CONSENTS TO SERVICE BY CERTIFIED MAIL, POSTAGE PREPAID, DIRECTED TO
THE LAST KNOWN ADDRESS OF MAKER, WHICH SERVICE SHALL BE DEEMED COMPLETED WITHIN
TEN (10) DAYS AFTER THE DATE OF MAILING THEREOF.
MAKER HEREBY WAIVES ITS RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF
ACTION BASED UPON OR ARISING OUT OF THIS NOTE. THIS WAIVER IS INFORMED AND
FREELY MADE. MAKER ACKNOWLEDGES THAT THIS WAIVER IS A MATERIAL INDUCEMENT TO
ENTER INTO A BUSINESS RELATIONSHIP, THAT PAYEE HAS ALREADY RELIED ON THE WAIVER
IN MAKING THE LOAN EVIDENCED BY THIS NOTE, AND THAT PAYEE WILL CONTINUE TO RELY
ON THE WAIVER IN ITS RELATED FUTURE DEALINGS. MAKER FURTHER WARRANTS AND
REPRESENTS THAT IT HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL AND THAT IT
KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION
WITH LEGAL COUNSEL.
<PAGE>
INDUSTRIAL HOLDINGS, INC. AMERICAN RIVET COMPANY, INC.
By:/s/ CHRISTINE A. SMITH By:/s/ CHRISTINE A. SMITH
Name: Christine A. Smith Name: Christine A. Smith
Title: Vice President Title: Vice President
LSS-LONE STAR-HOUSTON, INC. BOLT MANUFACTURING CO., INC.
By:/s/ CHRISTINE A. SMITH By:/s/ CHRISTINE A. SMITH
Name: Christine A. Smith Name: Christine A. Smith
Title: Vice President Title: Vice President
Witness/Attest:
/s/ LARRY FONTANA
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the use of our report dated January 24, 1997, on the financial
statements of Bolt Manufacturing Co., Inc. as of December 31, 1996 and 1995, and
for each of the years then ended included herein in the Industrial Holdings,
Inc. Current Report to the Securities and Exchange Commission, Form 8-K.
WEINSTEIN SPIRA & COMPANY, P.C.
Houston, Texas
November 26, 1997
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Offering
Circular-Prospectus constituting part of this Amendment No. 1 to Registration
Statement on Form S-2 (No. 333-37915) of our report dated March 5, 1997
appearing on page F-2 of the Annual Report on Form 10-K of Industrial Holdings,
Inc. for the year ended December 31, 1996.
PRICE WATERHOUSE LLP
Houston, Texas
October 13, 1997
EXHIBIT 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the use in this Registration Statement on Form S-2 of our
report dated January 31, 1997, relating to the consolidated balance sheet of LSS
- - Lone Star - Houston, Inc. and Subsidiary as of December 31, 1996, and for the
year then ended, incorporated by reference in this Registration Statement.
Simonton, Kutac & Barnidge, L.L.P.
Houston, Texas
November 25, 1997
EXHIBIT 23.3
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in this Registration Statement
on Form S-2 of our report dated February 21, 1997, with respect to the balance
sheets of Manifold Valve Service, Inc. as of December 31, 1995 and 1996, and the
related statements of income and retained earnings, and cash flows for the years
then ended, which report appears in the Form 8-K of Industrial Holdings, Inc.
dated June 12, 1997.
Hein + Associates LLP
Houston, Texas
November 25, 1997
EXHIBIT 23.4
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in this Registration Statement on
Form S-2 of Industrial Holdings, Inc., of our report dated October 2, 1996, with
respect to the balance sheets of American Rivet Company as of August 31, 1996
and 1995, and the related statements of operations and retained earnings and
cash flows for each of the years in the three-year period ended August 31, 1996,
which report appears in the Form 8-K of Industrial Holdings, Inc., dated
November 18, 1996.
KPMG Peat Marwick LLP
Chicago, Illinois
November 25, 1997
EXHIBIT 23.5
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the use of our report dated January 24, 1997, on the financial
statements of Bolt Manufacturing Co., Inc. as of December 31, 1996 and 1995, and
for each of the years then ended included herein in the Industrial Holdings,
Inc. Registration Statement on Form S-2, Amendment No. 1.
WEINSTEIN SPIRA & COMPANY, P.C.
Houston, Texas
December 1, 1997
