SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8K
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 17, 1998
INDUSTRIAL HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
TEXAS 1-9580 76-0289495
(State of other jurisdiction (Commission (IRS Employer
of incorporation) 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.)
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ITEM 5. OTHER EVENTS
(a) 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 included herein. This information should also be
read in conjunction with - "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,(1)
---------------------------------------------------
(in thousands except for per share amounts)
1997 (5) 1996 (4) 1995 (3) 1994 1993
--------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Sales ........................... $ 138,504 $ 93,270 $ 72,285 $ 63,692 $ 60,956
Cost of sales ................... 101,892 71,589 55,568 47,603 45,590
--------- -------- -------- -------- --------
Gross profit .................... 36,612 21,681 16,717 16,089 15,366
Selling, general & administrative 26,860 17,169 14,579 14,067 13,315
--------- -------- -------- -------- --------
Operating income ................ 9,752 4,512 2,138 2,022 2,051
Other income (expense) .......... (1,757) (1,634) (1,387) (1,043) (957)
--------- -------- -------- -------- --------
Income before income taxes ...... 7,995 2,878 751 979 1,094
Income tax provision ............ 3,197 1,015 61 260 136
--------- -------- -------- -------- --------
Net income ...................... 4,798 1,863 690 719 958
Distributions to shareholders ... 130 77 68 20 20
--------- -------- -------- -------- --------
Net income available to common
shareholders ................. $ 4,668 $ 1,786 $ 622 $ 699 $ 938
========= ======== ======== ======== --------
Basic earnings per share ........ $ .48 $ .24 $ .09 $ .10 $ .15
Diluted earnings per share ...... $ .43 $ .22 $ .09 $ .09 $ .15
Weighted average common
shares outstanding - basic ... 9,778 7,349 6,702 6,703 6,278
Weighted average common
shares outstanding - diluted . 10,692 7,999 6,799 7,607 6,451
</TABLE>
DECEMBER 31,
------------------------------------------------
(in thousands except for per share amounts)
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
BALANCE SHEET DATA:
Working capital ........ $10,577 $ 6,732 $ 4,159 $ 4,131 $ 4,269
Total assets ........... 87,602 59,461 40,994 33,411 31,528
Long-term obligations(2) 12,953 8,998 7,250 5,107 5,504
Total liabilities ...... 51,144 37,454 28,598 23,072 21,707
Shareholders' equity ... 36,458 22,007 12,396 10,339 9,821
(1) The combinations of the Company with GHX, Moores, Ameritech and UWS
(the "1998 Merger Companies") in March through July 1998 were
accounted for as poolings-of-interest. The selected consolidated
financial data have been prepared as if the 1998 Merger Companies had
been combined for all periods presented.
(2) Excludes deferred income taxes and deferred compensation.
(3) The Company acquired Landreth - Connecticut in December 1995 and the
results of its operations have been included from the date of
acquisition.
(4) The Company acquired American Rivet in November 1996 and the results
of its operations have been included from the date of acquisition.
(5) The Company acquired Lone Star in February 1997, Manifold Valve
Services in March 1997, Specialty Rubber & Gasket - Deer Park in May
1997, Rogers Equipment in August 1997 and Walker in November 1997. The
results of their operations have been included from the date of
acquisition.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
GENERAL
The analysis of the Company's operations encompassing the fiscal years ended
December 31, 1997, 1996 and 1995 has been restated to give retroactive effect to
the Company's acquisitions of GHX, Incorporated and Subsidiary ("GHX"), WHIR
Acquisition, Inc., d/b/a Ameritech Fastener Manufacturing, Inc.("Ameritech"),
Moores Pump and Supply, Inc. ("Moores") and United Wellhead Services, Inc.
("UWS") in 1998, all of which have been accounted for as poolings-of-interest.
Management's Discussion and Analysis of Financial Condition and Result of
Operations should be read, in conjunction with the Company's consolidated
beneficial statements included elsewhere herein. The Company, incorporated in
August 1989, operates three business segments which are organized into operating
divisions:
(i) FASTENER MANUFACTURING AND SALES DIVISION (THE "FASTENER
DIVISION") which manufactures industrial metal fasteners and
metal components for sale primarily to manufacturers in the
home furnishings and automotive industries and which
manufactures and distributes industrial metal fasteners and
fabricates and distributes gaskets, hose, fittings and other
products primarily to the petrochemical and chemical refining
and energy industries;
(ii) VALVE AND PUMP MANUFACTURING AND REPAIR DIVISION (THE "VALVE
DIVISION") which remanufactures and sells pumps and high
pressure valves, including pipelines valves, blow out
preventers, manifold valves and wellhead valves, and
distributes other products primarily to the petrochemical,
chemical and petroleum refining industries, the pipeline
transportation and storage industries and energy industries;
and
(iii) MACHINE SALES AND SERVICE DIVISION (THE "MACHINE DIVISION")
which sells new and used machine tools and provides export
crating services.
The operating entities comprising each division are as follows:
<TABLE>
<CAPTION>
FASTENER DIVISION VALVE DIVISION MACHINE DIVISION
----------------- -------------- ----------------
<S> <C> <C>
Landreth - Houston Pipeline Valve Speciality ("PVS") Rex Group ("REX")
Landreth - Connecticut Manifold Valve Services ("MVS")
American Rivet ("American") Rogers Equipment
Ameritech Moores Pump and Supply
Lone Star - Houston ("Lone Star") United Wellhead Services ("UWS")
Walker Bolt IMSCO
GHX
</TABLE>
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RESULTS OF OPERATIONS
1997 1996 1995
------------ ----------- -----------
Sales:
Fastener Division ............... $ 74,869,116 $44,004,557 $32,046,304
Valve Division .................. 48,010,902 32,838,480 27,909,881
Machine Division ................ 15,624,347 16,427,091 12,329,194
------------ ----------- -----------
138,504,365 93,270,128 72,285,379
Cost of Sales:
Fastener Division ............... 55,166,713 33,624,878 24,520,391
Valve Division .................. 33,266,895 24,155,417 20,982,028
Machine Division ................ 13,458,243 13,808,638 10,065,971
------------ ----------- -----------
101,891,851 71,588,933 55,568,390
Selling, General and Administrative:
Fastener Division ............... 13,759,779 7,395,726 5,733,023
Valve Division .................. 9,792,464 6,888,412 6,105,129
Machine Division ................ 2,423,430 2,085,818 2,103,374
Corporate ....................... 884,040 798,647 637,781
------------ ----------- -----------
26,859,713 17,168,603 14,579,307
Operating Income ................... $ 9,752,801 $ 4,512,592 $ 2,137,682
============ =========== ===========
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996.
SALES. On a consolidated basis sales increased $45,234,237 or 48% in
1997 compared to 1996.
Fastener Division sales increased $30,864,559 or 70% in 1997 compared
to 1996, primarily as a result of the acquisition of Lone Star in February 1997
and the inclusion of a full year's operations of American which was acquired in
November 1996 and a $3.8 million (or 19%) increase in sales at GHX. The sales
increase at GHX is primarily attributable to the strength of the energy sector
in 1997.
Valve Division sales increased $15,172,422 or 46% in 1997 compared to
1996, primarily as a result of the acquisition of MVS in March 1997 and an $8.5
million (or 42%) increase in sales at UWS and Moores. Sales increases at these
subsidiaries are primarily attributable to the strength of the energy sector in
1997. These increases in sales were offset by a $4.6 million decrease in sales
at IMSCO as a result of the loss of key salesmen in late 1996. By late 1997, all
key salesmen had been replaced and as a result, fourth quarter sales for IMSCO
increased 21% over the third quarter and were only $198,000 less than the fourth
quarter of the preceding year.
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Machine Division sales decreased $802,746 or 5% primarily because of
delays in receipts of machine tools from the manufacturer which caused some
cancellation of orders by customers as well as deferral of shipments to
customers to 1998. Management does not expect this delay in the receipt of
machine tools to continue in 1998.
COST OF SALES. On a consolidated basis, cost of sales increased
$30,302,918 or 42% in 1997 compared to 1996. However, cost of sales as a
percentage of sales was 74% in 1997 compared to 77% in 1996.
Cost of sales for the Fastener Division increased $21,541,835 or 64% in
1997 compared to 1996, primarily as a result of the acquisitions of Lone Star
and American and a $2.4 million (or 16%) increase in cost of sales at GHX as a
result of the increase in sales described above. Cost of sales as a percentage
of sales was 74% in 1997 compared to 76% in 1996. The 1996 cost of sales
percentage was unusually high because of the relocation of the Connecticut
manufacturing facility in late 1996 and the accompanying loss in production
efficiency during the period of the relocation.
Cost of sales for the Valve Division increased $9,111,478 or 38%
primarily as the result of the acquisition of MVS and a $5.1 million (or 35 %)
increase in cost of sales at UWS and Moores as a result of the increase in sales
described above which was partially offset by a decrease in cost of sales at
IMSCO as a result of the corresponding decrease in sales. Cost of sales as a
percentage of sales was 69% in 1997 compared to 74% in 1996 as lower margin
sales at IMSCO were replaced with higher margin sales at PVS and MVS.
Cost of sales for the Machine Division decreased $350,395 or 3% as a
result of the decrease in sales. Cost of sales as a percentage of sales was 86%
in 1997 compared to 84% in 1996. The increase in cost of sales as a percentage
of sales was primarily due to the opening in 1997 of the crating facility
located at the Houston Ship Channel and to increased lumber costs in the export
crating operations. Lumber costs remain high in 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. On a consolidated basis,
selling, general and administrative expenses increased $9,691,110 or 56% in 1997
compared to 1996.
Selling, general and administrative expenses for the Fastener Division
increased $6,364,053 or 86% primarily as the result of the acquisitions of Lone
Star and American and an $850,000 (or 19%) increase is selling, general and
administrative expenses at GHX. The increase at GHX was the result of the
increase in sales described above. Selling, general and administrative expenses
increased a greater percentage than sales because of the inclusion of goodwill
amortization associated with the acquisitions of Lone Star and American.
Selling, general and administrative expenses for the Valve Division
increased $2,904,052 or 42% primarily as the result of the acquisition of MVS
and a $2.3 million (or 48%) increase in selling, general and administrative
expenses at UWS and Moores as a result of increased sales which was partially
offset by a decrease in selling, general and administrative expenses at IMSCO.
This increase was less than the related increase in sales, as most costs at MVS
are accounted for as cost of sales.
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Selling, general and administrative expenses for the Machine Division
increased $337,612 or 16% for 1997 compared to 1996 primarily as a result of the
hiring of four additional sales people in 1997.
There was no significant change in Corporate selling, general and
administrative expenses.
INTEREST EXPENSE. On a consolidated basis, interest expense increased
$545,974 or 29% in 1997 compared to 1996. The increase was the result of
increases in debt related to the acquisitions of Lone Star and American. This
increase was partially offset by a reduction in interest expense at Landreth as
a result of a $3,093,000 conversion of debt to equity in 1997.
OTHER INCOME - NET. On a consolidated basis, other income increased
$423,388 or 379% in 1997 compared to 1996. This increase was primarily the
result of a $270,000 insurance gain related to a fire at an unused manufacturing
facility and a $140,000 gain on the sale of equipment.
INCOME TAXES. Income taxes increased $2,182,108 or 215% in 1997
compared to 1996. The effective tax rate for 1997 was 40% compared to 35% for
1996. During 1996, the Company reduced its deferred tax asset valuation
allowance by $239,000. No similar reduction occurred in 1997.
NET INCOME. Net income was $4,798,054 in 1997 compared to $1,863,262 in
1996 as a result of the foregoing factors.
YEAR ENDED DECEMBER 31, 1996 COMPARED WITH YEAR ENDED DECEMBER 31, 1995.
SALES. On a consolidated basis sales increased 20,984,749 or 29% in
1996 compared to 1995.
Fastener Division sales increased $11,958,253 or 37% as a result of the
inclusion of a full year of operation of Landreth - Connecticut ("CRivet")
acquired in December 1995 and the acquisition of American in November 1996 and a
$2.6 million (or 14%) increase in revenues at GHX and Ameritech as a result of
these companies either opening new locations or including a full year's
operation of the location in 1996.
Valve Division sales increased $4,928,599 or 18% as a result of the
increased activity in the energy sector as each entity within the Valve
Division, with the exception of IMSCO, experienced sales increases. IMSCO's
sales decreased $1,377,793 or 13% as a result of the loss of key salesmen at
IMSCO in late 1996.
Machine Division sales increased $4,097,899 or 33% as a result of an
increase in new machine sales.
COST OF SALES. On a consolidated basis, cost of sales increased
$16,020,543 or 29% in 1996 compared to 1995. Cost of sales as a percentage of
sales was 77% in 1996 and 1995.
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Fastener Division cost of sales increased $9,104,487 or 37% in 1996
compared to 1995. Cost of sales as a percentage of sales was 76% in 1996 and 77%
in 1995. The increase in cost of sales was primarily the result of the
acquisitions of CRivet and American and a $1.8 million (or 13%) increase in cost
of sales at GHX and Ameritech as a result of the sales increase described above.
Valve Division costs of sales increased $3,173,389 or 15% in 1996
compared to 1995 as a result of the sales increases described above. Cost of
sales as a percentage of sales was 74% in 1996 and 75% in 1995 as lower margin
sales at IMSCO were replaced with higher margin sales at PVS.
Machine Division cost of sales increased $3,742,667 or 37% in 1996
compared to 1995. Cost of sales as a percentage of sales was comparable at 84%
in 1996 and 82% in 1995.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. On a consolidated basis,
selling, general and administrative expenses increased $2,589,296 or 18% in 1996
compared to 1995.
Selling, general and administrative expenses for the Fastener Division
increased $1,662,703 or 29% for 1996 compared to 1995. This increase was
primarily attributable to the acquisitions of CRivet and American and a $421,000
(or 10%) increase is selling, general and administrative expenses at GHX and
Ameritech as a result of the increase in sales described above.
Selling, general and administrative expenses for the Valve Division
increased $783,283 or 13% in 1996 compared to 1995 as a result of the sales
increases described above.
There was no significant change in selling, general and administrative
expenses for the Machine Division.
There was no significant change in Corporate selling, general, and
administrative expenses.
INTEREST EXPENSE. Interest expense increased $345,156 or 22% in 1996
compared to 1995 due to increases in debt as a result of the acquisitions of
CRivet and American which were partially offset by a reduction in interest rates
in 1996 compared to 1995.
OTHER INCOME - NET. Other income increased $78,400 or 236% 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 35% in 1996
compared to 8% in 1995. The Company reduced its deferred tax asset valuation
allowance by $239,000 in 1996 compared to $435,000 in 1995. A portion of the
reduction, approximately $101,000 and $65,000, was to reflect deferred tax
assets used in 1996 and 1995, respectively. The remainder was to recognize a
deferred tax asset of $138,000 and $370,000 in 1996 and 1995, respectively.
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.
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NET INCOME. As a result of the foregoing factors, the Company had net
income of $1,863,262 in 1996 compared to net income of $689,792 in 1995.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, the Company had cash of $1,677,400, working
capital of $10,576,892 and additional borrowing capacity under its lines of
credit and notes of $4,321,287. The Company's operations provided cash of
$3,199,432 during 1997 compared to $2,062,659 and $742,134 during 1996 and 1995.
These cash flows were primarily attributable to increased net income and
depreciation and amortization over the three year period as a result of
acquisitions of businesses, which were offset by increases in current assets
which have increased as sales have increased.
Capital expenditures in 1997 for property and equipment were comparable
to 1996 as both years included major equipment purchases for the Fastener
Division as well as the relocation in 1997 of the Landreth Texas manufacturing
facility and the relocation in 1996 of the Landreth Connecticut manufacturing
facility and the related increases in leasehold improvements. In 1997, the
Company used cash of $2,150,662 in the acquisition of businesses. 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 used cash of $373,138 in 1997 compared to
providing cash of $3,382,577 in 1996 and $1,421,919 in 1995. The Company raised
$2,136,978 in 1997 from the issuance of common stock compared to $6,248,281 in
1996. The 1996 proceeds were used to repay approximately $4,271,224 in debt
associated with the acquisition of American as well as other financing and to
purchase property and equipment for its Fastener Division.
At December 31, 1997, the Company had a Demand Note and Line of Credit
dated November 1, 1996 ("Demand Note") among the Company and Comerica Bank-Texas
("Comerica"), as well as lines of credit payable to other banks. The Demand Note
and lines of credit are in the principal amount of $20,550,000, in the
aggregate, or the lesser of a borrowing base as defined, bearing interest
primarily at the prime rate. The Demand Note allows the Company to borrow funds
based on 80% of eligible accounts receivable and 50% of eligible inventory. At
December 31, 1997, the borrowing capacity under the Demand Note and lines of
credit was $19,044,000 and availability was $4,321,287. The Demand Note and
lines of credit are secured by substantially all of the assets of the Company.
In connection with its acquisitions of businesses, the Company has
entered into various term loans in the principal amount of $10,669,805 secured
by the machinery and equipment and real estate of the businesses acquired.
At December 31, 1997, the Company had working capital of $10,576,892,
long-term debt of $12,953,100 and shareholders' equity of $36,457,855. In
January 1998, the Company completed an offer (the "Offer") to the holders of its
issued and outstanding Class B Warrants to exchange each Class B Warrant and
$10.00 cash for one share of the Company's Common Stock, one Class C Warrant and
one Class D Warrant. The Company received net proceeds of $10,910,000 after
deducting approximately $100,000 of expenses incurred in connection with the
Offer. The Company
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anticipates that its operating cash needs for 1998 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.
YEAR 2000 COMPLIANCE
The Company is exposed to the risk that the year 2000 issue (the "Year
2000 Issue") could cause system failures or miscalculations causing disruption
of operations, including, among other things, a temporary inability to process
transactions, send invoices, or engage in similar normal business activities.
During 1997, the Company undertook a corporate-wide initiative designed to
assess the impact of the Year 2000 Issue on software and hardware utilized in
the Company's operations, including information technology infrastructure ("IT")
and embedded manufacturing control technology ("Non-IT").
The Company's initiative is to be conducted in three phases:
assessment, implementation and testing. During the assessment phase, the Company
completed a comprehensive inventory of IT and Non-IT systems and equipment. Many
of the Company's IT systems include hardware and packaged software recently
purchased from large vendors who have represented that these systems are already
year 2000 compliant. However, the Company has determined that it will be
necessary to modify portions of its financial and accounting software.
The Company believes that with modifications to its existing software,
the Year 2000 Issue can be mitigated. The implementation of these remediation
efforts is underway and is expected to be completed by June 30, 1999. However,
if such modifications are not made, or are not completed timely, the Year 2000
Issue could have a material impact on the Company's operations. The Company
plans to complete the testing of the year 2000 modifications as these
modifications are implemented. The Company has not established a contingency
plan but intends to formulate one to address unavoidable risks, and it expects
to have the contingency plan formulated by mid-1999.
The Company does not currently rely on the IT systems of other
companies; however, failure of the Company's suppliers or its customers to
become Year 2000 compliant might have a material impact on the Company's
operations. The Company intends to continue to pursue an acquisition strategy;
and as a result there can be no assurance that the IT systems being used by an
acquired
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company will be compliant within the Year 2000 Issue or that any such conversion
or failure to convert an acquired system would not have an adverse effect on the
Company.
The Company's efforts with respect to the Year 2000 Issue have been
handled internally by management and other Company employees. Costs of
developing and carrying out this initiative are being funded from the Company's
operations and have not represented a material expense to the Company. The
Company has not completed its assessment but currently believes that the costs
of addressing the Year 2000 Issue will not be significant and will not have a
material adverse impact on the Company's financial condition.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings
Per Share ("SFAS No. 128"). SFAS No. 128, which was effective for periods ending
after December 15, 1997, specifies the computation, presentation and disclosure
requirements of earnings per share and supercedes Accounting Principles Board
Opinion No. 15. SFAS No. 128 requires a dual presentation of basic and diluted
earnings per share. Basic earnings per share, which excludes the impact of
common share equivalents, replaces primary earnings per share. Diluted earnings
per share, which utilizes the average market price per share as opposed to the
greater of the average market price per share or ending market price per share
when applying the treasury stock method in determining common share equivalents,
replaces fully diluted earnings per share.
In February 1997, the FASB also issued Statement of Financial Account
Standards No.129, Disclosure of Information about Capital Structure, ("SFAS No.
129") which establishes standards for disclosing information about an entity's
capital structure. SFAS No. 129 was effective for periods ending after December
15, 1997. The adoption of SFAS No. 129 did not impact the Company's capital
structure disclosures.
In June 1997 the FASB issued SFAS No. 130, Reporting Comprehensive
Income. Comprehensive income is a more inclusive financial reporting methodology
that includes disclosure of certain financial information that historically has
not been recognized in the presentation of net income. SFAS No. 130 requires the
reporting of comprehensive income in addition to net income from operations.
SFAS No. 130 is effective for periods beginning after December 15, 1997. At
December 31, 1997, the Company had no items of comprehensive income, and as a
result believes that the adoption of SFAS No. 130 will have no impact upon
implementation.
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information. SFAS No. 131 requires that companies
report, in their financial statements, financial and descriptive information
about reportable operating segments defined by reference to the way in which
management reviews operations in order to assess performance and allocate
resources. Management is evaluating what, if any, additional disclosures may be
required upon implementation of SFAS No. 131.
In February 1998, FASB issued SFAS No. 132, Employer's Disclosures
about Pensions and Other Postretirement Benefits, which revises certain
disclosure requirements of the employer, and is effective for fiscal years
beginning after December 15, 1998. Management is evaluating what, if any,
additional disclosures may be required upon the implementation of SFAS No. 132.
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In March 1998, the Accounting Standards Executive Committee ("AcSEC")
of the American Institute of Certified Public Accountants ("AICPA") reached a
consensus on Statement of Position ("SOP") No. 98-1, Accounting for the Cost of
Computer Software Developed or Obtained for Internal Use, which provides
guidance on accounting for the costs of computer software. SOP No. 98-1 is
effective for the fiscal years beginning after December 15, 1998. Management is
evaluating what, if any, impact this SOP will have on the Company upon
implementation.
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
This report includes "forward looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21B of the
Securities Exchange Act of 1934, as amended. All statements other than
statements of historical fact included in this report are forward looking
statements. Such forward looking statements include, without limitation,
statements under "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Liquidity and Capital Resources" - regarding the
Company's estimate of sufficiency of existing capital resources and ability to
raise additional capital to fund cash requirements for future operations.
Although the Company believes that the expectations reflected in such forward
looking statements are reasonable, it can given no assurance that such
expectations reflected in such forward looking statements will prove to have
been correct. The ability to achieve the Company's expectations is contingent
upon a number of factors which include demand for the Company's products, need
for additional capital for newly acquired companies and the Company's ability to
complete new acquisitions.
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INDUSTRIAL HOLDINGS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Independent Auditors' Reports ....................................... F-2
Consolidated Balance Sheets at December 31, 1997 and 1996 ........... F-7
Consolidated Statements of Income For the Years Ended
December 31, 1997, 1996 and 1995 ................................... F-8
Consolidated Statements of Cash Flows For the Years Ended
December 31, 1997, 1996 and 1995 ................................... F-9
Consolidated Statements of Shareholders' Equity For the
Years Ended December 31, 1997, 1996 and 1995 ....................... F-11
Notes to Consolidated Financial Statements .......................... F-12
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Industrial Holdings, Inc.
Houston, Texas
We have audited the accompanying consolidated balance sheet of Industrial
Holdings, Inc. and subsidiaries (the "Company") as of December 31, 1997, and the
related consolidated statements of income, shareholders' 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. The accompanying consolidated financial
statements give retroactive effect to the mergers of the Company and GHX,
Incorporated and Subsidiary ("GHX"), Whir Acquisition, Inc., d/b/a Ameritech
Fastener Manufacturing, Inc. ("Ameritech"), Moores Pump and Supply, Inc.
("Moores") and United Wellhead Services, Inc. ("UWS") in 1998, all of which have
been accounted for as a poolings-of-interest as described in Note 15 to the
consolidated financial statements. We did not audit the balance sheets of
Ameritech as of December 31, 1997, or the related statements of income,
shareholders' equity, or cash flows for the year then ended, such statements
reflect total assets of $610,000 as of December 31, 1997 and total sales of
$1,695,000 for the year then ended. We did not audit the consolidated balance
sheet of UWS as of December 31, 1997, or the related consolidated statements of
operations, stockholders' equity or cash flows for the year then ended, which
statements reflect total assets of $4,897,000 as of December 31, 1997 and total
revenues of $11,237,000 for the year then ended. Those statements were audited
by other auditors whose reports have been furnished to us, and our opinion,
insofar as it relates to the amounts included for Ameritech and UWS for 1997, is
based solely on the reports of such other auditors. We did not audit the
financial statements of Moores for the year ended April 30, 1997, such
statements reflect $13,419,000 of sales for the year then ended. We did not
audit the consolidated financial statements of GHX for the year ended June 30,
1997, such statements reflect $21,849,000 of net sales for the year then ended.
Those financial statements were audited by other auditors whose reports have
been furnished to us, and our opinion, insofar as it relates to the amounts
included for Moores and GHX for such periods, is based solely on the reports of
such other auditors. As described in Note 15 to the consolidated financial
statements, subsequent to the issuance of the reports of the other auditors, the
financial statements of Moores and the consolidated financial statements of GHX
were restated to conform to the fiscal year of the Company for the year ended
December 31, 1997.
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 and reports of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audit and the reports of other auditors, such
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Industrial Holdings, Inc. and
subsidiaries as of December 31, 1997, and the results of their operations and
their cash flows for the year then ended in conformity with generally accepted
accounting principles.
The consolidated financial statements of the Company for the years ended
December 31, 1996 and 1995, prior to their restatement for the 1998
poolings-of-interests, were audited by other auditors, and their report dated
March 5, 1997, expressed an unqualified opinion on those statements. The
consolidated financial statements of UWS for the years ended December 31, 1996
and 1995 were also previously audited by other auditors, and their report dated
February 12, 1998 expressed an unqualified opinion on those statements. The
financial statements of Ameritech for the year ended December 31, 1996 and the
period from inception (September 15, 1995) through December 31, 1995 were also
previously audited by other auditors, and their report dated January 22, 1998
expressed an unqualified opinion on those statements. The consolidated financial
statements of GHX for the years ended June 30, 1997, 1996 and 1995 were also
previously audited by other auditors, and their report dated September 19, 1997
expressed an unqualified opinion on those statements. The financial statements
of Moores for the years ended April 30, 1997, 1996 and 1995 were also previously
audited by other auditors, and their report dated June 17, 1997 expressed an
unqualified opinion on those statements. We audited the adjustments described in
Note 15 that were applied to restate the 1997, 1996, and 1995 financial
statements of Moores and the 1997, 1996 and 1995 consolidated financial
statements of GHX. In our opinion, such adjustments are appropriate and have
been properly applied. We audited the combination of the accompanying
consolidated balance sheet as of December 31, 1996, and the related consolidated
statements of income, shareholders' equity and cash flows and for each of the
two years in the period ended December 31, 1996, after restatement for the 1998
poolings-of-interest. In our opinion, such consolidated statements have been
properly combined on the basis described in Note 15 to the consolidated
financial statements.
DELOITTE & TOUCHE LLP
Houston, Texas
November 11, 1998
F-2
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Industrial Holdings, Inc.
In our opinion, the consolidated balance sheet and the related consolidated
statements of income, cash flows and shareholders' equity (not presented
separately herein) of Industrial Holdings, Inc. and its subsidiaries as they
existed prior to the pooling-of-interests transaction described in Note 15,
present fairly, in all material respects, the financial position of Industrial
Holdings, Inc. and its subsidiaries at December 31, 1996, and the results of
their operations and their cash flows for each of the two 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-3
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of
Moores Pump and Supply, Inc.:
We have audited the balance sheets of Moores Pump and Supply, Inc. (a Louisiana
corporation) as of April 30, 1997 and 1996, and the related statements of
income, retained earnings and cash flows for each of the years in the three year
period ended April 30, 1997 (not presented separately herein). 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.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Moores Pump and Supply, Inc. as
of April 30, 1997 and 1996, and the results of its operations and its cash flows
for each of the years in the three year period ended April 30, 1997 in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
New Orleans, Louisiana
June 17, 1997
F-4
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Industrial Holdings, Inc.:
We have audited the Balance Sheets of WHIR Acquisition, Inc., dba Ameritech
Fastener Manufacturing, Inc. (an S Corporation) as of December 31, 1997 and
1996, and the related Statements of Operations, Shareholders' Equity and Cash
Flows for each of the two years in the period ended December 31, 1996, and the
period from inception (September 15 , 1995) through December 31, 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the 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 WHIR Acquisition, Inc., dba
Ameritech Fastener Manufacturing, Inc. as of December 31, 1997 and 1996, and the
results of its operations and cash flows for each of the two years in the period
ended December 31, 1996, and the period from inception (September 15, 1995)
through December 31, 1995, in conformity with generally accepted accounting
principles.
WEINSTEIN SPIRA & COMPANY, P.C.
Houston, Texas
January 22, 1998
F-5
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and Directors and of
UNITED WELLHEAD SERVICES, INC.
Corpus Christi, Texas
We have audited the consolidated balance sheets of UNITED WELLHEAD SERVICES,
INC. and subsidiary as of December 31, 1997 and 1996 and the related
consolidated statements of results of operations, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1997. 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.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above presents
fairly, in all material respects, the financial position of UNITED WELLHEAD
SERVICES, INC. and subsidiary at December 31, 1997 and 1996, and the results of
their operations and cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
KARLINS FULLER ARNOLD & KLODOSKY, P.C.
The Woodlands, Texas
February 12, 1998
F-6
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
GHX, Incorporated and Subsidiary
We have audited the consolidated balance sheets of GHX, Incorporated and
Subsidiary as of June 30, 1997 and 1996 and the related consolidated statements
of operations, stockholders' equity and cash flows for each of the years in the
three year period ended June 30, 1997. 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 GHX, Incorporated and
Subsidiary as of June 30, 1997 and 1996 and the results of its operations and
cash flows for each of the years in the three year period ended June 30, 1997 in
conformity with generally accepted accounting principles.
SIMONTON, KUTAC & BARNIDGE, LLP
Houston, Texas
September 19, 1997
F-7
<PAGE>
INDUSTRIAL HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1997 1996
----------- -----------
(As restated See Note 15)
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents ......................................... $ 1,677,400 $ 3,899,639
Accounts receivable - trade, net ............................. 21,392,147 13,087,129
Inventories .................................................. 20,020,386 15,191,595
Employee advances ............................................ 113,681 131,944
Notes receivable, current portion ............................ 1,362,095 207,549
Other current assets ......................................... 1,096,698 670,467
----------- -----------
Total current assets ..................................... 45,662,407 33,188,323
Property and equipment, net ....................................... 26,399,464 17,710,360
Notes receivable, less current portion ............................ 1,677,511 1,464,393
Other assets ...................................................... 1,490,133 1,464,551
Goodwill and other intangible assets, net ......................... 12,372,887 5,633,193
----------- -----------
Total assets ............................................... $87,602,402 $59,460,820
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable ................................................ $14,993,496 $13,209,246
Accounts payable - trade ..................................... 10,837,780 7,807,395
Accrued expenses and other ................................... 5,699,277 3,393,109
Current portion of long-term debt ............................ 3,554,962 2,047,040
----------- -----------
Total current liabilities ............................... 35,085,515 26,456,790
Long-term debt, less current portion .............................. 12,953,100 8,998,178
Deferred compensation payable, less current portion ............... 241,778 285,532
Deferred income taxes payable ..................................... 2,864,154 1,713,277
----------- -----------
Total liabilities ...................................... 51,144,547 37,453,777
----------- -----------
Commitments and contingencies
Shareholders' equity:
Preferred stock $.01 par value, 7,500,000 shares
authorized, no shares issued or outstanding
Preferred stock of subsidiary
$4.73 par value, 202,960 shares authorized,
issued and outstanding for 1996 ............................. 960,000
Common stock $.01 par value, 50,000,000
shares authorized, 10,307,656 and 8,516,531
shares issued and outstanding for 1997 and 1996, respectively 103,077 85,166
Additional paid-in capital ..................................... 27,252,844 16,527,755
Retained earnings .............................................. 9,101,934 4,434,122
----------- -----------
Total shareholders' equity ........................... 36,457,855 22,007,043
----------- -----------
Total liabilities and shareholders' equity ........... $87,602,402 $59,460,820
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-8
<PAGE>
INDUSTRIAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------
1997 1996 1995
------------- ------------ ------------
(As restated See Note 15)
<S> <C> <C> <C>
Sales ....................................... $ 138,504,365 $ 93,270,128 $ 72,285,379
Cost of sales ............................... 101,891,851 71,588,933 55,568,390
------------- ------------ ------------
Gross profit ................................ 36,612,514 21,681,195 16,716,989
Selling, general and administrative expenses 26,859,713 17,168,603 14,579,307
------------- ------------ ------------
Income from operations ...................... 9,752,801 4,512,592 2,137,682
------------- ------------ ------------
Other income (expense):
Interest expense ...................... (2,452,557) (1,906,583) (1,561,427)
Interest income ....................... 160,231 160,954 141,426
Other income, net ..................... 535,012 111,624 33,224
------------- ------------ ------------
Total other income (expense) .. (1,757,314) (1,634,005) (1,386,777)
------------- ------------ ------------
Income before income taxes .................. 7,995,487 2,878,587 750,905
Provision for income taxes .................. 3,197,433 1,015,325 61,113
------------- ------------ ------------
Net income .................................. 4,798,054 1,863,262 689,792
Distributions to shareholders ............... 130,242 77,290 67,690
------------- ------------ ------------
Net income available to common shareholders . $ 4,667,812 $ 1,785,955 $ 622,102
------------- ------------ ------------
Basic earnings per share .................... $ .48 $ .24 $ .09
Diluted earnings per share .................. $ .43 $ .22 $ .09
Weighted average number of common shares
outstanding .............................. 9,778,226 7,348,855 6,702,097
Weighted average number of common shares
outstanding plus potential dilutive common
shares ................................... 10,691,903 7,999,343 6,799,239
</TABLE>
See notes to consolidated financial statements.
F-9
<PAGE>
INDUSTRIAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------
1997 1996 1995
----------- ----------- -----------
(As restated See Note 15)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ......................................... $ 4,798,054 $ 1,863,262 $ 689,792
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization .................. 3,103,887 1,823,790 1,468,620
Deferred income tax provision (benefit) ........ 303,009 455,060 (220,593)
Deferred compensation paid ..................... (43,754) (109,203)
Income tax benefit from stock options exercised 163,664
Other .......................................... 7,500 (12,289)
Changes in assets and liabilities,
net of acquisitions:
Accounts receivable ......................... (3,408,840) (642,780) (2,210,926)
Employee advances ......................... 18,263 (109,373) 140,036
Inventories ................................. (702,812) (1,152,064) 72,804
Notes receivable ............................ (1,367,664) 53,466 68,073
Other assets ................................ (279,885) (356,634) (246,914)
Accounts payable and accrued expenses ....... 615,510 229,635 993,531
----------- ----------- -----------
Net cash provided by operating activities 3,199,432 2,062,659 742,134
Cash flows from investing activities:
Purchase of property and equipment ................. (3,571,263) (3,394,135) (1,065,201)
Proceeds from disposals of property and
equipment, net .................................. 673,392 69,787 22,687
Purchase of businesses, net of cash ................ (2,150,662) (826,003)
Cash obtained in purchase of American ............. 1,244,666
Additional consideration paid to former
shareholders of Landreth ........................ (29,491) (307,900)
----------- ----------- -----------
Net cash used by investing activities ... (5,048,533) (2,109,173) (2,176,417)
----------- ----------- -----------
</TABLE>
See notes to consolidated financial statements.
F-10
<PAGE>
INDUSTRIAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1997 1996 1995
------------ ------------ -----------
(As restated See Note 15)
<S> <C> <C> <C>
Cash flows from financing activities:
Net (repayments) borrowings under revolving
line of credit ....................................................... $ (658,921) $ 479,603 $ 842,882
Proceeds from issuance of long-term debt ................................. 3,603,342 1,601,532 814,745
Principal payments on notes payable and
long-term debt ....................................................... (4,993,685) (4,869,549) (1,703,134)
Proceeds from issuance of common stock ................................... 2,136,978 6,248,281 575,116
Proceeds from issuance of preferred stock ................................ 960,000
Repurchase of common stock by an
an acquired company .................................................. (330,610)
Distributions to shareholders ............................................ (130,242) (77,290) (67,690)
------------ ------------ -----------
Net cash provided (used) by financing
activities ........................................................ (373,138) 3,382,577 1,421,919
------------ ------------ -----------
Net increase (decrease) in cash and equivalents ............................. (2,222,239) 3,336,063 (12,364)
Cash and equivalents, beginning of year ..................................... 3,899,639 563,576 575,940
------------ ------------ -----------
Cash and equivalents, end of year ........................................... $ 1,677,400 $ 3,899,639 $ 563,576
============ ============ ===========
Supplemental disclosure of noncash investing and financing activities:
Accounts receivable reclassified to notes receivable ..................... $ 140,614
Conversion of debt to equity ............................................. $ 3,093,000 $ 1,619,100
Redemption of preferred stock with debt .................................. 960,000
Acquisition of businesses:
Assets acquired ...................................................... 24,828,899 11,443,214 5,624,319
Liabilities assumed .................................................. 22,678,237 12,687,881 4,798,316
Supplemental disclosures of cash flow information: Cash paid for:
Interest ............................................................. $ 2,425,666 $ 1,848,246 $ 1,586,590
Income taxes ......................................................... 2,025,185 211,327 117,695
</TABLE>
See notes to consolidated financial statements.
F-11
<PAGE>
INDUSTRIAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1997, 1996 AND 1995
(As Restated, See Note 15)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
------------------------ ------------------------ ADDITIONAL RETAINED
PAR PAR PAID-IN EARNINGS
SHARES VALUE SHARES VALUE CAPITAL (DEFICIT) TOTAL
----------- --------- ----------- ---------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1995 .......... -- -- $ 2,997,750 $ 29,978 $ 7,379,517 $ (526,728) $ 6,882,767
(as previously reported)
Pooling-of-interest combination ... -- -- 3,541,037 35,411 868,194 2,552,776 3,456,381
(Note 15) as restated
Issuance of common stock .......... -- -- 217,412 2,174 572,942 -- 575,116
Issuance of preferred stock ....... 202,960 $ 960,000 -- -- -- -- 960,000
Distributions to shareholders ..... (67,690) (67,690)
Shortfall on sale of stock by
former PVS shareholders-Note 9 .. -- -- -- -- (100,037) -- (100,037)
Net income ........................ -- -- -- -- -- 689,792 689,792
----------- --------- ----------- ---------- ------------ ----------- ------------
Balance, December 31, 1995 ........ 202,960 960,000 6,756,199 67,563 8,720,616 2,648,150 12,396,329
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 -- 3,568,900
Exercise of warrants
and options ................. -- -- 373,418 3,734 1,665,647 -- 1,669,381
Conversion of debt to equity ...... -- -- 465,000 4,650 1,614,450 -- 1,619,100
Distributions to shareholders ..... -- -- -- -- -- (77,290) (77,290)
Shortfall on sale of stock
by former PVS shareholders-
Note 9 .......................... -- -- -- -- (42,639) -- (42,639)
Net income ........................ -- -- -- -- -- 1,863,262 1,863,262
----------- --------- ----------- ---------- ------------ ----------- ------------
Balance, December 31, 1996 ........ 202,960 960,000 8,516,531 85,166 16,527,755 4,434,122 22,007,043
Issuance of common stock:
Acquisitions ................... -- -- 728,461 7,285 5,672,683 5,679,968
Private placement .............. -- -- 71,530 715 644,790 645,505
Exercise of warrants and options -- -- 462,680 4,627 1,486,846 1,491,473
Redemption of preferred stock ..... (202,960) (960,000) -- -- -- (960,000)
Income tax benefits from stock
options exercised ............... -- -- -- -- 163,664 -- 163,664
Conversion of debt to equity ...... -- -- 528,454 5,284 3,087,716 -- 3,093,000
Distributions to shareholders ..... (130,242) (130,242)
Repurchase of common stock by an .. (330,610) (330,610)
acquired company
Net income ........................ -- -- -- -- -- 4,798,054 4,798,054
----------- --------- ----------- ---------- ------------ ----------- ------------
Balance, December 31, 1997 ........ 10,307,656 $ 103,077 $ 27,252,844 $ 9,101,934 $ 36,457,855
=========== ========= =========== ========== ============ =========== ============
</TABLE>
See notes to consolidated financial statements.
F-12
<PAGE>
INDUSTRIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION:
The Company's consolidated financial statements, as presented, give
retroactive effect to the 1998 acquisitions accounted for as
poolings-of-interest (see Note 15). The Company, incorporated in August 1989,
operates in three business segments which are organized as operating divisions.
(i) FASTENER MANUFACTURING AND SALES DIVISION (THE "FASTENER
DIVISION") which manufactures industrial metal fasteners and
metal components for sale primarily to manufacturers in the
home furnishings and automotive industries and which
manufactures and distributes industrial metal fasteners and
fabricates and distributes gaskets, hose, fittings and other
products primarily to the petrochemical and chemical refining
and energy industries;
(ii) VALVE AND PUMP MANUFACTURING AND REPAIR DIVISION (THE "VALVE
DIVISION") which remanufactures and sells pumps and high
pressure valves, including pipelines valves, blow out
preventers, manifold valves and wellhead valves, and
distributes other products primarily to the petrochemical,
chemical and petroleum refining industries, the pipeline
transportation and storage industries and energy industries;
and
(iii) MACHINE SALES AND SERVICE DIVISION (THE "MACHINE DIVISION")
which sells new and used machine tools and provides export
crating services.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Industrial
Holdings, Inc. and its wholly-owned subsidiaries (the "Company"). Significant
intercompany balances and transactions have been eliminated in consolidation.
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 $256,159 and $263,330 at December 31, 1997 and 1996, respectively.
F-13
<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
The Company's financial instruments consist of primarily cash, trade accounts
and notes receivable, accounts and notes payable, and debt instruments. The book
values of cash, trade accounts receivables and accounts payable are
representative of their respective fair values due to the short-term maturity of
these instruments. It is not practicable to estimate the fair values of the
related party amounts (see Note 9) due to the nature of the instruments. The
fair values of the Company's debt instruments (see Notes 7 and 8) are
representative of their carrying values based upon (i) variable rate terms or
(ii) management's opinion that the existing rates are equivalent to the current
rates offered to the Company for fixed-rate long-term debt with the same
maturities and security structure. The fair value of notes receivable
approximates its carrying value and is estimated by discounting the future cash
flows using current rates at which similar loans would be made to borrowers with
similar credit ratings and for the same remaining maturities.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost includes, where
applicable, manufacturing labor and overhead. The first-in, first-out method
("FIFO") is used to determine the cost of substantially all of the inventories
except for certain valve inventories for which the specific identification
method is used to determine the cost.
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 furniture and fixtures, machinery and equipment and
leasehold improvements and 35 years for buildings). Maintenance and repairs are
charged to expense as incurred; major renewals and betterments are capitalized.
LONG-LIVED ASSETS
The Company records impairment losses on long-lived assets used in operations
when events and circumstances indicate that the assets might be impaired and the
undiscounted cash flows estimated to be generated by those assets are less than
the carrying amounts of those assets.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill represents the excess of the purchase price over the fair market value
of net tangible assets acquired. At December 31, 1997 and 1996, goodwill was
$12,292,036 and $6,227,527 net of accumulated amortization of $1,369,835 and
$759,591, respectively. Other intangible assets consist primarily of loan
origination fees. Goodwill and other intangible assets are amortized over 5 to
20 years. Amortization expense was $628,073, $287,937, and $233,982 for the
years ended December 31, 1997, 1996 and 1995, respectively.
F-14
<PAGE>
STOCK-BASED COMPENSATION
The Company adopted Statement of Financial Accounting Standards 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 Accounting Principle Board
Opinion No. 25 ("APB No. 25"). Accounting for Stock Issued to Employees, and has
provided 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. SEE Note 11.
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.
EARNINGS PER SHARE
Basic earnings per share has been computed by dividing net income by the
weighted average number of common shares outstanding. Diluted earnings per share
has been computed by dividing net income by the weighted average number of
common shares outstanding plus dilutive potential common shares.
The following table presents information necessary to calculate basic and
diluted earnings per share for the periods indicated, with 1996 and 1995 being
restated to conform with the requirements of Statement of Financial Accounting
Standards No. 128, Earnings Per Share, described below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1997 1996 1995
------------ ----------- -----------
<S> <C> <C> <C>
EARNINGS FOR BASIC AND DILUTED COMPUTATION
Net income ..................................... $ 4,798,054 $ 1,863,245 $ 689,792
Distributions to shareholders .................. (130,242) (77,290) (67,690)
------------ ----------- -----------
Net income available to common shareholders .... $ 4,667,812 $ 1,785,955 $ 622,102
============ =========== ===========
BASIC EARNINGS PER SHARE
Weighted average common shares outstanding ...... 9,778,226 7,348,855 6,702,097
============ =========== ===========
Basic earnings per share ........................ $ .48 $ .24 $ .09
============ =========== ===========
DILUTED EARNINGS PER SHARE
Weighted average common shares outstanding ...... 9,778,226 7,348,855 6,702,097
Shares issuable from assumed conversion of common
share options and warrants granted .......... 913,677 650,488 97,142
------------ ----------- -----------
Weighted average common shares outstanding,
as adjusted ................................. 10,691,903 7,999,343 6,799,239
============ =========== ===========
Diluted earnings per share ...................... $ .43 $ .22 $ .09
============ =========== ===========
</TABLE>
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 at the date of purchase. Changes in assets and liabilities are presented
net of the effect of the purchase of businesses.
F-15
<PAGE>
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.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings Per
Share. SFAS No. 128, which was effective for periods ending after December 15,
1997, specifies the computation, presentation and disclosure requirements of
earnings per share and supercedes Accounting Principles Board Opinion No. 15.
SFAS No. 128 requires a dual presentation of basic and diluted earnings per
share. Basic earnings per share, which excludes the impact of common share
equivalents, replaces primary earnings per share. Diluted earnings per share,
which utilizes the average market price per share as opposed to the greater of
the average market price per share or ending market price per share when
applying the treasury stock method in determining common share equivalents,
replaces fully diluted earnings per share.
In February 1997, the FASB also issued SFAS No. 129, Disclosure of Information
about Capital Structure, which establishes standards for disclosing information
about an entity's capital structure. SFAS No. 129 was effective for periods
ending after December 15, 1997. The adoption of SFAS No. 129 did not impact the
Company's capital structure disclosures.
In June 1997 the FASB issued SFAS No. 130, Reporting Comprehensive Income.
Comprehensive income is a more inclusive financial reporting methodology that
includes disclosure of certain financial information that historically has not
been recognized in the presentation of net income. SFAS No. 130 requires the
reporting of comprehensive income in addition to net income from operations.
SFAS No. 130 is effective for periods beginning after December 15, 1997. At
December 31, 1997, the Company had no items of comprehensive income, and as a
result believes that the adoption of SFAS No. 130 will have no impact upon
implementation.
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. SFAS No. 131 requires that companies report,
in their financial statements financial and descriptive information about
reportable operating segments defined by reference to the way in which
management reviews operations in order to assess performance and allocate
resources. Management is evaluating what, if any, additional disclosures may be
required upon implementation of SFAS No. 131.
In February 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 132, Employer's Disclosures about Pensions and Other Postretirement
Benefits, which revises certain disclosure requirements of the employer, and is
effective for fiscal years beginning after December 15, 1998. Management is
evaluating what, if any, additional disclosures may be required upon the
implementation of SFAS No. 132.
In March 1998, the Accounting Standards Executive Committee ("AcSEC") of the
American Institute of Certified Public Accountants ("AICPA") reached a consensus
on Statement of Position ("SOP") No. 98-1, Accounting for the Cost of Computer
Software Developed or Obtained for Internal Use, which provides guidance on
accounting for the costs of computer software. SOP No. 98-1 is effective for the
fiscal years beginning after December 15, 1998. Management is evaluating what,
if any, impact this SOP will have on the Company upon implementation.
F-16
<PAGE>
3. BUSINESS ACQUISITIONS:
In February 1997, the Company acquired LSS-Lone Star-Houston, Inc. ("Lone
Star"), in March 1997, the Company acquired Manifold Valve Services, Inc.
("MVS"), in May 1997, the Company acquired the assets and assumed certain
liabilities of SRG Texas, Inc. and SRG Products Corporation (collectively, "SRG"
or "GHX-Deer Park"), in August 1997, the Company acquired the assets and assumed
certain liabilities of Rogers Equipment ("Rogers") and in November 1997, the
Company acquired WALKER Bolt Manufacturing ("WALKER"). The aggregate purchase
price of the acquisitions was $18.9 million cash and assumed liabilities plus
728,461 shares of common stock valued at $5,680,000. The aggregate excess of
cost over the fair value of net assets acquired was $7.4 million. In November
1996, the Company acquired American Rivet Company, Inc. ("American") for $11.4
cash and assumed liabilities. The aggregate excess of cost over the fair value
of net assets acquired in connection with the American acquisition was $3.7
million. In December 1995, the Company acquired the assets and assumed certain
liabilities of MRMC, Inc. ("Landreth-Connecticut") for $5.7 million cash and
assumed liabilities. These acquisitions have been accounted for by the purchase
method of accounting and, accordingly assets and liabilities have been recorded
at their estimated fair values at the date of acquisition. The final purchase
price allocation of SRG and WALKER are subject to certain adjustments relating
to the appraised value of assets and to certain other accruals. The results of
operations of the acquired businesses have been included in the consolidated
financial statements from the respective acquisition dates.
On a pro forma unaudited basis, as if the 1997 and 1996 acquisitions had
occurred as of January 1, 1996, sales, net income and basic and diluted earnings
per share would have been $146,310,000, $5,266,000, $.52 and $.48 for 1997 and
$128,081,000, $2,746,000, $.33 and $.30 for 1996. On a pro forma unaudited
basis, as if the 1996 and 1995 acquisitions had occurred as of January 1, 1995,
sales, net income and basic and diluted earnings per share would have been
$100,969,000, $2,132,000, $.26 and $.24 for 1996 and $89,867,000, $1,457,000,
$.19 and $.18 for 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, 1996 or 1995 or future results of operations
of the combined companies.
4. INVENTORIES:
Inventories at December 31 consist of:
1997 1996
----------- -----------
$ 3,197,946 $ 2,770,624
Raw materials ...................... 12,997,720 10,998,681
Finished goods ..................... 3,824,720 1,422,290
----------- -----------
Other .............................. $20,020,386 $15,191,595
=========== ===========
F-17
<PAGE>
5. NOTES RECEIVABLE:
Notes receivable at December 31 consist of the following:
1997 1996
---------- ----------
Note receivable from former shareholder
of MVS due March 1998 ......................... $1,108,632 --
Mortgage note receivable with interest at
9.53% due in monthly installments of
$15,166 through February 2007 secured
by land and building .......................... 1,109,838 $1,182,244
Notes receivable from officers
due June 1999, unsecured ..................... 431,716 --
Note receivable from asset sale due in
monthly installments of $3,790
through July 1999, unsecured .................. 74,673 105,786
Various installment notes receivable from
equipment inventory sales due through
2000, secured by equipment .................... 308,608 334,624
Other notes receivable ........................... 6,139 49,288
---------- ----------
3,039,606 1,671,942
Less current portion ............................. 1,362,095 207,549
---------- ----------
$1,677,511 $1,464,393
========== ==========
6. PROPERTY AND EQUIPMENT:
Property and equipment at December 31 consist of:
1997 1996
------------ ------------
Land ..................................... $ 1,716,990 $ 1,373,990
Buildings and improvements ............... 5,483,683 3,667,978
Machinery and equipment .................. 25,839,250 18,296,697
Furniture and fixtures ................... 2,358,182 1,881,304
Construction in progress ................. -- 592,622
------------ ------------
35,398,105 25,812,591
Less - accumulated depreciation
and amortization ...................... (8,998,641) (8,102,231)
------------ ------------
$ 26,399,464 $ 17,710,360
============ ============
F-18
<PAGE>
7. NOTES PAYABLE:
Notes payable at December 31 consists of the following:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Revolving lines of credit with banks which provide for borrowings up to the
lesser of a defined borrowing base or $20,550,000, $4,321,287 available at
December 31, 1997, principal due on demand through 1999, interest payable
monthly at prime (8.5% at December 31,
1997) to 10%, secured by substantially all assets of the Company ............... $14,722,562 $12,798,687
12% promissory note with principal and interest due October 31, 1997, secured by
substantially all the assets of the Company,
exchanged for 190,000 shares of common stock in 1997 ........................... -- 1,900,000
9% notes payable to individuals due December 31, 1998 including
interest, unsecured ............................................................ 237,754 115,308
Other notes payable ............................................................ 33,180 75,251
----------- -----------
$14,993,496 $14,889,246
=========== ===========
</TABLE>
F-19
<PAGE>
8. LONG-TERM DEBT:
Long-term debt at December 31, consists of the following:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Note payable to a financial institution with monthly principal payments of
$111,111 plus interest at libor + 2.5% (8.22% at December 31, 1997) , maturing
December 2003 and secured by certain equipment
$ 7,888,889
9.85% term loan payable in monthly installments of $53,620 including interest,
maturing December 1, 2001 and secured by machinery and
equipment ...................................................................... 2,069,470 $ 2,523,218
Revolving line of credit payable to 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
12% convertible debentures due October 1, 1999, with principal of $25,000 and
interest payable monthly. Principal was converted into
325,154 shares of common stock in 1997 ......................................... 1,060,000
Various notes payable in monthly installments, including interest
ranging from 7.65% to 10%, maturing December 2004 through ...................... 1,166,771 1,311,450
February 2010, secured by real estate
Notes payable to a bank with monthly principal payments of $26,126 plus interest
at prime, maturing on November 1, 1997 through 2002,
secured by certain assets of the Companies ..................................... 1,263,804 2,538,799
Various notes payable to individuals, payable in monthly installments including
interest ranging from 5% to 8%, maturing June 1998 through
February 2007, primarily unsecured ............................................. 1,770,898 177,480
Various installment notes, payable in monthly installments through 2001,
including interest ranging from 7.6% to 16%, secured primarily
by equipment ................................................................... 2,335,730 1,491,771
Other notes .................................................................... 12,500 262 500
----------- -----------
16,508,062 11,045,218
Less - current portion ......................................................... 3,554,962 2,047,040
----------- -----------
$12,953,100 $ 8,998,178
=========== ===========
</TABLE>
F-20
<PAGE>
The aggregate maturities of long-term debt at December 31, 1997 are as follows:
Year ended December 31:
1998 ................................................ $ 3,554,962
1999 ................................................ 3,355,070
2000 ................................................ 2,774,915
2001 ................................................ 2,539,985
2002 ................................................ 1,407,569
Thereafter ............................................. 2,875,561
-----------
$16,508,062
===========
The note payable to a financial institution contains restrictive covenants which
require the Company to maintain a minimum leverage ratio and fixed charge
coverage ratio. At December 31, 1997, the Company was in compliance with these
restrictive covenants.
9. COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS:
The Company has entered into noncancellable operating leases with related
parties for buildings and other third parties for buildings and equipment
expiring in various years through 2002. Rent payments to the related parties
were $528,800 for 1997 and $478,800 annually for 1996 and 1995. Aggregate rent
expense on such leases amounted to $1,843,267 $1,710,039 and $1,400,791 for the
years 1997, 1996 and 1995. Future minimum lease payments are as follows:
Year ended December 31:
1998 ...................... $2,055,643
1999 ...................... 1,773,186
2000 ...................... 1,180,025
2001 ...................... 766,015
2002 ...................... 595,697
2003 ...................... 120,000
----------
$6,490,566
==========
Lease commitments to related parties are $166,800 annually through 1999 and
$106,800 thereafter through 2002 with an option to renew one building lease for
an additional five years. Additionally, the Company has an option to purchase
that same leased premises at a price equal to the outstanding indebtedness at
the time the option is exercised.
In connection with the 1997 purchase of Lone Star, the Company issued a note
payable to the former shareholder and President of Lone Star with quarterly
principal and interest payments of $30,575, maturing in January 2002 (see Note
8).
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.
F-21
<PAGE>
In connection with the purchase of Landreth Engineering Company ("Landreth"),
the former Landreth shareholders were entitled to additional consideration based
upon the level of Landreth's pretax profits through 1997, not to exceed $500,000
in the aggregate. For 1996 and 1995, the Company paid these shareholders $29,491
and $207,863 as additional consideration. No amounts were payable under this
agreement for 1997 and no further obligation exists.
In connection with the purchase of Pipeline Valve Specialty Company, Inc.
("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 per share and the
proceeds they received upon sale of their common stock. These obligations were
satisfied in 1996.
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 position or results of operations or cash flows.
10. INCOME TAXES:
The provision for income taxes for the years ended December 31 is as follows:
1997 1996 1995
---------- ---------- ---------
Current:
Federal ....................... $2,558,607 $ 428,816 $ 256,208
State ......................... 335,817 131,449 25,498
---------- ---------- ---------
2,894,424 560,265 281,706
Deferred , primarily federal ...... 303,009 455,060 (220,593)
---------- ---------- ---------
Income tax expense ................ $3,197,433 $1,015,325 $ 61,113
========== ========== =========
The Company and its subsidiaries file a consolidated federal income tax return.
At December 31, 1997, the Company has net operating loss (NOL) carryforwards of
approximately $1,370,000 for income tax purposes which expire in 2007 and 2009.
These losses may presently be offset against the future income of the applicable
subsidiary only. Of the carryforward amount, $197,100 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 and 1995, the
Company reduced the deferred tax asset valuation allowance by $239,000 and
$435,000, respectively, to reflect $101,000 and $65,000, respectively in
deferred tax assets used and to recognize deferred tax assets of $138,000 in
1996 and $370,000 in 1995. The recognized deferred tax assets are based upon
expected utilization of net operating loss carryforwards of its subsidiaries,
The Rex Group, Inc. ("REX") and United Wellhead Services, Inc. ("UWS"), and
reversal of certain temporary differences. The Company has assessed its past
earnings history and trends and that of its subsidiaries, 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.
F-22
<PAGE>
The major components of deferred income tax assets and liabilities at December
31 are as follows:
1997 1996
----------- -----------
Deferred income tax liabilities:
Depreciation .................................. $(3,563,383) $(2,820,008)
Other ......................................... (1,044,132) (443,590)
----------- -----------
Total deferred income tax liabilities . (4,607,515) (3,263,598)
----------- -----------
Deferred income tax assets:
Net operating loss carryforwards .............. 465,716 528,226
Inventory ..................................... 466,857 416,117
Other ......................................... 810,788 605,978
----------- -----------
Total deferred income tax assets ...... 1,743,361 1,550,321
----------- -----------
Deferred income taxes ............................ $(2,864,154) $(1,713,277)
=========== ===========
A reconciliation of income tax expense computed at statutory rates to income tax
expense for the years ended December 31 is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- ---------
<S> <C> <C> <C>
Tax at statutory rate .................... $ 2,718,465 $ 978,719 $ 255,308
Effect of permanent difference ........... 284,435 133,354 96,598
Reduction in deferred tax asset valuation
allowance ............................. -- (238,873) (435,135)
Tax effect of S-Corp net income .......... (77,438) (23,754) 1,265
Other .................................... 50,332 79,122 135,265
State income taxes, net of federal benefit 221,639 86,756 7,812
----------- ----------- ---------
$ 3,197,433 $ 1,015,325 $ 61,113
=========== =========== =========
</TABLE>
11. SHAREHOLDERS' EQUITY:
PREFERRED STOCK OF SUBSIDIARIES
Preferred stock has a par value of $4.73 per share and a liquidation value of
$4.73 per share. Preferred stock accumulated 6% dividends in 1996 and 1997.
Holders of preferred stock have preferences upon liquidation of a subsidiary.
COMMON STOCK
Holders of the Company's common stock are entitled to one vote per share on all
matters to holders to be voted on by shareholders and are entitled to receive
dividends, if any, as may be declared from time to time by the Board of
Directors of the Company. Upon any liquidation or dissolution of the Company,
the holders of common stock are entitled, subject to any preferential rights of
the holders of preferred stock, to receive a pro rata share of all of the assets
remaining available for distribution to shareholders after payment of all
liabilities.
F-23
<PAGE>
WARRANTS TO ACQUIRE COMMON STOCK
The following table sets forth the outstanding warrants to acquire 2,598,810
shares of common stock as of December 31, 1997:
<TABLE>
<CAPTION>
NUMBER OF
SECURITY COMMON SHARES
------------
<S> <C>
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 B
warrantholders,
currently exercisable, expiring on January 14, 1999, redeemable upon 30 days notice .. 1,254,414
Class C redeemable warrants to acquire common stock at $15.00 per share issued
in connection with tender offer to Class B 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 ....................................................... 621,914
Warrant to acquire common stock at $10.00 per share, currently exercisable, expiring
on June 18, 2007 ..................................................................... 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 ....................... 136,514
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 .......... 520,968
</TABLE>
EMPLOYEE STOCK OPTION PLAN
At December 31, 1997, the Company has a stock-based compensation plan under
which shares or options can be granted to employees. The Company measures
compensation cost for this plan using the intrinsic value method of accounting
prescribed by APB Opinion No. 25 "Accounting for Stock Issued to Employees."
Given the terms of the plan, no compensation cost has been recognized for stock
options granted under the plan.
Under the 1994 Amended and Restated Incentive Stock Plan (the "Employee Plan"),
the Company may grant incentive or nonqualified options to key employees. As of
December 31, 1997, there were no shares of common stock reserved for issuance
under the Employee Plan. The option price per share is generally the fair market
value on the date the option is granted and each option is exercisable into one
share of common stock. The options under the Employee Plan are exercisable
immediately to seven years after the grant date in accordance with the vesting
provisions of the individual agreements set forth at the time of the award. All
options expire ten years from the date of the grant.
F-24
<PAGE>
The following table summarizes information about employee stock options
outstanding at December 31:
<TABLE>
<CAPTION>
1997 1996 1995
--------------------- -------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
FIXED OPTIONS SHARES PRICE SHARES PRICE SHARES PRICE
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of the year .. 438,000 $ 4.09 253,000 $ 2.97 238,000 $ 2.93
Granted ............................... 208,750 $ 9.87 233,000 $ 5.09 25,000 $ 3.31
Exercised ............................. (124,000) $ 2.90 (45,000) $ 3.00 (10,000) $ 3.13
Forfeited ............................. -- -- (3,000) $ 3.13 -- --
-------- -------- -------- -------- -------- --------
Outstanding at end of year ............ 522,750 $ 6.68 438,000 $ 4.09 253,000 $ 2.97
-------- -------- -------- -------- -------- --------
Options exercisable at end of year .... 293,250 $ 5.34 296,000 $ 3.33 253,000 $ 2.97
Weighted-average fair value of options
granted during the year at market
price ............................... 208,750 $ 2.92 83,000 $ 1.64 25,000 $ 1.21
Weighted-average fair value of
options granted during the year where
exercise price is greater than market
price at grant date ................. -- -- 150,000 $ 2.22 -- --
</TABLE>
DIRECTORS' STOCK OPTION PLAN
The Company has a stock option plan for Non-Employee Directors (the "Director
Plan"). At December 31, 1997, there were 100,000 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.
The following table summarizes information about directors stock options
outstanding at December 31:
<TABLE>
<CAPTION>
1997 1996 1995
------------------- ------------------- -----------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
FIXED OPTIONS SHARES PRICE SHARES PRICE SHARES PRICE
------- -------- ------- -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of the year 80,000 $ 2.90 60,000 $ 2.38 60,000 $ 2.38
Granted ............................ 25,000 $ 11.60 25,000 $ 4.06 -- --
Exercised .......................... (45,000) $ 2.56 (5,000) $ 2.38 -- --
------- -------- ------- -------- ------ --------
Outstanding at end of year ......... 60,000 $ 6.78 80,000 $ 2.90 60,000 $ 2.38
------- -------- ------- -------- ------ --------
Options exercisable at end of year . 60,000 $ 6.78 80,000 $ 2.90 60,000 $ 2.38
Weighted-average fair value of
options granted during the year .. 25,000 $ 3.25 25,000 $ 1.19 -- --
</TABLE>
F-25
<PAGE>
The following table summarizes significant ranges of outstanding and exercisable
options at December 31, 1997.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------- ----------------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
NUMBER REMAINING AVERAGE NUMBER AVERAGE
RANGE OF OUTSTANDING AT CONTRACTUAL EXERCISABLE EXERCISABLE AT EXERCISABLE
EXERCISABLE PRICES DECEMBER 31, 1997 LIFE PRICE DECEMBER 31, 1997 PRICE
- --------------------------- ------------------ --------------- ------------- ------------------ -------------
<S> <C> <C> <C> <C> <C>
$2.38 15,000 6.8 $2.38 15,000 $2.38
$3.13-$3.31 91,000 6.1 $3.18 91,000 $3.18
$4.00-$4.25 121,000 7.8 $4.13 101,000 $4.15
$5.00-$5.50 100,000 8.1 $5.25 50,000 $5.00
$8.13-$12.50 255,750 9.3 $9.97 96,250 $10.17
</TABLE>
The Company's reported net income and earnings per share would have been reduced
had compensation cost for the Company's stock-based compensation plans been
determined using the fair value method of accounting as set forth in SFAS No.
123 "Accounting for Stock-Based Compensation." For purposes of estimating the
fair value disclosures below, the fair value of each stock option has been
estimated on the grant date with a Black-Scholes option-pricing model using the
following weighted-average assumptions: dividend yield of 0%; expected
volatility of .451%; risk-free interest rate of 5.7%; and expected lives of 3 to
7 years for stock options granted. The effects of using the fair value method of
accounting on net income and earnings per share are indicated in the pro forma
amounts below:
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Net income As reported.......... $4,798,054 $1,863,262 $ 689,792
Pro forma............ $4,380,139 $1,636,693 $ 641,282
Earnings per share:
Basic As reported.......... $ .48 $ .24 $ .09
Pro forma............ $ .44 $ .21 $ .09
Diluted As reported.......... $ .43 $ .22 $ .09
Pro forma............ $ .40 $ .19 $ .08
</TABLE>
12. SAVINGS PLANS:
The Company maintains various 401(k) savings plans which permit participants to
contribute up to 18 percent of their compensation each year. The Company will
match a percentage of a participant's contributions, subject to specified
limits. The Company's results of operations reflect expenses associated with the
plan of approximately $230,000, $132,000 and $51,000 for 1997, 1996 and 1995.
F-26
<PAGE>
13. DIVISION INFORMATION:
The Company operates three Segments: fastener manufacturing and sales; valve and
pump manufacturing and repair; and machine sales and services. Summarized
financial information by business Division for 1997, 1996 and 1995 is presented
below.
VALVE AND MACHINE SALES
FASTENERS PUMP AND SERVICE
----------- ----------- ------------
1997
Operating revenues ................. $74,869,116 $48,010,902 $ 15,624,347
Operating profit (loss) ............ 5,942,624 4,951,543 (257,326)
Identifiable assets ................ 55,848,001 25,460,167 4,872,691
Depreciation and amortization ...... 2,000,157 852,691 238,085
Capital expenditures ............... 1,788,287 1,590,246 162,363
1996
Operating revenues ................. $44,004,557 $32,838,480 $ 16,427,091
Operating profit ................... 2,983,953 1,794,651 532,635
Identifiable assets ................ 36,462,335 14,670,784 5,870,376
Depreciation and amortization ...... 1,039,532 533,738 195,329
Capital expenditures ............... 2,399,515 482,355 227,576
1995
Operating revenues ................. $32,046,304 $27,909,881 $ 12,329,194
Operating profit ................... 1,792,890 822,724 159,849
Identifiable assets ................ 21,199,797 13,649,447 5,452,240
Depreciation and amortization ...... 487,788 640,609 172,386
Capital expenditures ............... 995,717 253,404 79,119
Operating profit 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 of individual Divisions.
F-27
<PAGE>
14. QUARTERLY FINANCIAL DATA (UNAUDITED):
Summarized quarterly financial data for 1997, 1996 and 1995 are as follows (in
thousands, except per share data):
<TABLE>
<CAPTION>
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ ------------
<S> <C> <C> <C> <C>
1997
Sales ....................................................... $ 29,823 $ 33,325 $ 36,429 $ 38,927
Gross profit ................................................ 8,463 8,789 9,489 9,872
Net income .................................................. 1,246 1,253 1,515 784
Earnings per share:
Basic .................................................... .14 .12 .14 .08
Diluted .................................................. .12 .11 .13 .07
1996
Sales ....................................................... $ 21,572 $ 23,288 $ 23,751 $ 24,659
Gross profit ................................................ 5,086 5,365 5,674 5,556
Net income .................................................. 383 711 413 356
Earnings per share:
Basic .................................................... .05 .10 .05 .04
Diluted .................................................. .05 .08 .05 .04
1995
Sales ....................................................... $ 18,660 $ 16,637 $ 17,900 $ 19,088
Gross profit ................................................ 4,384 3,773 4,351 4,209
Net income .................................................. 284 (169) 342 233
Earnings per share:
Basic .................................................... .04 (.02) .05 .03
Diluted .................................................. .04 (.03) .05 .03
</TABLE>
15. SUBSEQUENT EVENTS:
In January 1998, the Company completed an offer (the "Offer") to the holders of
its issued and outstanding Class B Warrants to exchange each Class B Warrant and
$10.00 cash for one share of the Company's Common Stock, one Class C Warrant and
one Class D Warrant. The holders of 1,101,689 Class B Warrants tendered their
Class B Warrants and purchased 1,101,689 shares of Common Stock and were issued
1,101,689 Class C Warrants and 1,101,689 Class D Warrants. The Company received
net proceeds of $10,910,000 after deducting approximately $100,000 of expenses
incurred in connection with the Offer. After the completion of the Offer, there
are 152,725 Class B Warrants, 1,723,603 Class C Warrants and 1,101,689 Class D
Warrants outstanding.
F-28
<PAGE>
In February 1998, the Company acquired Philform, in July 1998, the Company
acquired Beaird Industries, Inc. ("Beaird"), in August 1998, the Company
acquired the assets and assumed certain liabilities of Ideal Products ("Ideal"),
in August 1998, the Company acquired A&B Bolt and Supply, Inc. ("A&B") and in
September 1998, the Company acquired the assets of Erie Manufacturing. The
aggregate purchase price of these acquisitions was $58.1 million cash and
assumed liabilities plus 1,227,854 shares of common stock valued at $10.5
million. The aggregate excess of cost over fair value of net assets acquired was
$12.2 million. These acquisitions have been accounted for by the purchase method
of accounting and, accordingly, assets and liabilities have been recorded at
their estimated fair values at the date of acquisition. Additionally, Beaird and
Ideal are subject to certain post closing, purchase price adjustments based upon
the final determination of net assets acquired. The final purchase price
allocations for each acquisition are subject to certain adjustments relating to
the appraised value of the assets and final determination of accruals.
In March 1998, the Company acquired all of the outstanding capital stock of WHIR
Acquisition, Inc., doing business as Ameritech Fastener Manufacturing, Inc.
("Ameritech") for 124,000 shares of the Company's common stock, upon merger of a
wholly owned subsidiary of the Company with and into Ameritech, with Ameritech
being the surviving corporation. As a result, Ameritech became a wholly owned
subsidiary of the Company. Ameritech, located in Houston, Texas, manufactures
fasteners for sale to the aerospace, automotive, petroleum, and petrochemical
industries.
In March 1998, the Company acquired all of the outstanding capital stock of GHX,
Incorporated ("GHX") for 693,878 shares of the Company's common stock, upon
merger of a wholly owned subsidiary of the Company with and into GHX, with GHX
being the surviving corporation. As a result, GHX became a wholly owned
subsidiary of the Company. GHX, located in Houston, Texas, fabricates and
distributes industrial gaskets and molded rubber products and distributes
industrial packing, hose, fittings and high temperature textiles to customers in
the petrochemical industries.
In April 1998, the Company acquired all of the outstanding capital stock of
Moores Pump and Supply, Inc. ("Moores") for 1,600,000 shares of the Company's
common stock, upon merger of a wholly owned subsidiary of the Company with and
into Moores, with Moores being the surviving corporation. As a result, Moores
became a wholly owned subsidiary of the Company. Moores, located in Lafayette,
Louisiana, is a supplier and servicer of pumps and packers to the energy
industry, as well as provides fabrication, repair and machine shop services to
its customers.
In July 1998, the Company acquired all of the outstanding capital stock of UWS
for 1,247,158 shares of the Company's common stock, upon merger of a wholly
owned subsidiary of the Company with and into UWS, with UWS being the surviving
corporation. As a result, UWS became a wholly owned subsidiary of the Company.
UWS, headquartered in Corpus Christi, Texas, manufactures, reconditions,
distributes, installs, provides maintenance for, and sells oilfield equipment,
valves, drilling spools and manifolds.
The mergers with Ameritech, GHX, Moores, and UWS (together the "Acquired
Companies") were accounted for as poolings-of-interests (the "Poolings"). For
purposes of restating the Company's consolidated financial statements to give
retroactive effect to the Poolings, the consolidated financial statements of the
Company as of December 31, 1997 and 1996 and for the three-year period ended
December 31, 1997 were combined with (i) the financial statements of Ameritech
as of December 31, 1997 and 1996 and for the period from inception (September
15, 1995) through December 31, 1997, (ii) the financial statements of Moores as
of December 31,
F-29
<PAGE>
1997 and 1996 and for the three year period ended December 31, 1997, and (iii)
the consolidated financial statements of UWS, GHX and Moores as of December 31,
1997 and 1996 and for the three-year period ended December 31, 1997. The
consolidated financial statements of GHX as of June 30, 1997 and for the
three-year period then ended and the financial statements of Moores as of April
30, 1997 and for the three-year period then ended have been restated to conform
to the fiscal year of the Company. The Company's consolidated financial
statements as of December 31, 1997 and 1996 and for the three-year period ended
December 31, 1997 include all necessary adjustments to conform the fiscal
periods of the Acquired Companies as previously presented to that of the
Company.
Sales, net income and earnings per share amounts for the years ended December
31, 1997, 1996 and 1995 for the Company and for the Acquired Companies (as
restated to conform to the Company's fiscal year) are as follows:
<TABLE>
<CAPTION>
INDUSTRIAL HOLDINGS ACQUIRED COMPANIES AS RESTATED
----------------------- ------------------ ------------
(as previously reported)
<S> <C> <C> <C>
1997
Sales ............. $ 83,563,855 $ 54,940,510 $138,504,365
Net income ........ $ 2,709,465 $ 2,088,589 $ 4,798,054
Earnings per share
Basic ......... $ 0.44 $ 0.48
Diluted ....... $ 0.39 $ 0.43
1996
Sales ............. $ 51,422,950 $ 41,847,178 $ 93,270,128
Net income ........ $ 1,126,712 $ 736,550 $ 1,863,262
Earnings per share
Basic ......... $ 0.31 $ 0.24
Diluted ....... $ 0.26 $ 0.22
1995
Sales ............. $ 38,983,070 $ 33,302,309 $ 72,285,379
Net income ........ $ 545,147 $ 144,645 $ 689,792
Earnings per share
Basic ........ $ 0.18 $ 0.09
Diluted ....... $ 0.17 $ 0.09
</TABLE>
F-30
<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: November 17, 1998
F-31
<PAGE>
EXHIBITS
Exhibit 11 Earnings per share .............................. Ex-1
Exhibit 21 Subsidiaries of the Company ..................... Ex-2
Exhibit 23 Consent of Independent Auditors ................. Ex-3 - Ex-8
F-32
EXHIBIT 11
INDUSTRIAL HOLDINGS, INC.
EARNINGS PER SHARE
(thousands of dollars, except per share data)
YEAR ENDED DECEMBER 31
------------------------------
1997 1996 1995
-------- ------- -------
Net income ................................... $ 4,798 $ 1,863 $ 690
Distributions to shareholders ................ (130) (77) (67)
-------- ------- -------
Net Income available to common shareholders .. $ 4,668 $ 1,786 $ 622
======== ======= =======
Basic earnings per share
Weighted average common shares
outstanding ........................... 9,778 7,349 6,701
======== ======= =======
Basic earnings per share .................. $ .48 $ .24 $ .09
======== ======= =======
Diluted earnings per share
Weighted average common
shares outstanding ..................... 9,778 7,349 6,701
Shares issuable from assumed
conversion of common stock
options and warrants granted ............ 914 650 97
-------- ------- -------
Weighted average common shares
outstanding, as adjusted .................. 10,692 7,999 6,799
======== ======= =======
Diluted earnings per share ................... $ .43 $ .22 $ .09
======== ======= =======
Ex-1
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
Pipeline Valve Specialty Company, Inc.
Landreth Engineering Company
The Rex Group, Inc.
Rex Supply Corporation
Regal Machine Tool, Inc.
Rex Machinery Sales, Inc.
Rex International Corporation
U.S. Crating, Inc.
First Texas Credit Corporation
XTEL Corporation
Rex Machinery Movers, Inc.
Losco, Inc.
American Rivet Company, Inc.
LSS-Lone Star - Houston, Inc.
Manifold Valve Services, Inc.
WALKER BOLT Manufacturing Co.
Philform, Inc.
WHIR Acquisition, Inc.
GHX, Incorporated
Moores Pump and Supply, Inc.
United Wellhead Services, Inc.
Ex-2
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.'s
33-68376, 33-99852, 333- 4160, 333-32033, and 333-53285 each on Form S-3, and in
Registration Statement No.'s 33-68354, 333-27827, and 33-62653 each on Form S-8,
of Industrial Holdings, Inc. of our report dated November 11, 1998 appearing in
this Current Report on Form 8-K of Industrial Holdings, Inc. dated November 17,
1998.
DELOITTE & TOUCHE LLP
Houston, Texas
November 17, 1998
Ex-3
<PAGE>
Item 14.c Exhibit 23.2 Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Prospectuses
constituting part of the Registration Statements on Form S-3 (Nos. 33-68376,
33-99852, 333-4160, 333-32033, and 333- 53285) and in the Registration Statement
on Form S-8 (Nos. 33-68354, 333-27827, and 33-62653) of Industrial Holdings,
Inc. of our report dated March 5, 1997 appearing on Page F-3 of this Form 8-K.
PricewaterhouseCoopers LLP
Houston, Texas
November 17, 1998
Ex-4
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference in the Registration Statements on Form S-3 (No.'s 33-68376, 33-99852,
333-4160, 333-32033) and in the Registration Statements on Form S-8 (No.'s
33-68354 and 333-27827) of Industrial Holdings, Inc. of our reports dated June
17, 1997, on Moores Pump and Supply, Inc. for each of the three years in the
period ended April 30, 1997, included in Industrial Holdings, Inc.'s Form 8-K.
ARTHUR ANDERSEN LLP
New Orleans, Louisiana
November 17, 1998
Ex-5
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Industrial Holdings, Inc.
We consent to the incorporation by reference in Registration Statement No.'s
33-68376, 33-99852, 333- 4160, 333-32033 and 333-53285, each on Form S-3, and in
Registration Statement No.'s 33-68354, 333-27827 and 333-62653, each on Form
S-8, and the use in Form 8-K of Industrial Holdings, Inc. of our report dated
January 22, 1998, on the financial statements of WHIR Acquisition, Inc. dba
Ameritech Manufacturing, Inc.
WEINSTEIN SPIRA & COMPANY, P.C.
Houston, Texas
November 17, 1998
Ex-6
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
Industrial Holdings, Inc.
We consent to the incorporation by reference in Registration Statement No.'s
33-68376, 33-99852, 333- 4160, 333-32033 and 333-53285, each on Form S-3, and in
Registration Statement No.'s 33-68354, 333-27827 and 333-62653, each on Form
S-8, and the use in Form 8-K of Industrial Holdings, Inc. of our report dated
February 12, 1998, on the financial statements of UNITED WELLHEAD SERVICES, Inc.
KARLINS FULLER ARNOLD & KLODOSKY, P.C.
The Woodlands, Texas
November 17, 1998
Ex-7
<PAGE>
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference in Registration Statement
No.'s 33-68376, 33- 99852, 333-4160, 333-32033 and 333-53285, each on Form S-3,
and in Registration Statement No.'s 33-68354, 333-27827 and 333-62653, each on
Form S-8, and the use in Form 8-K of Industrial Holdings, Inc. of our report
dated September 19, 1997, on the financial statements of GHX, Incorporated and
Subsidiary.
SIMONTON, KUTAC & BARNIDGE, LLP
Houston, Texas
November 17, 1998
Ex-8
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,677,400
<SECURITIES> 0
<RECEIVABLES> 21,392,147
<ALLOWANCES> 0
<INVENTORY> 20,020,386
<CURRENT-ASSETS> 45,662,407
<PP&E> 26,399,464
<DEPRECIATION> 0
<TOTAL-ASSETS> 87,602,402
<CURRENT-LIABILITIES> 35,085,515
<BONDS> 0
0
0
<COMMON> 103,077
<OTHER-SE> 36,354,778
<TOTAL-LIABILITY-AND-EQUITY> 87,602,402
<SALES> 138,504,365
<TOTAL-REVENUES> 138,504,365
<CGS> 101,891,851
<TOTAL-COSTS> 101,891,851
<OTHER-EXPENSES> 26,859,713
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,452,557
<INCOME-PRETAX> 7,995,487
<INCOME-TAX> 3,197,433
<INCOME-CONTINUING> 4,798,054
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,798,054
<EPS-PRIMARY> .48
<EPS-DILUTED> .43
</TABLE>
