SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended
June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-19580
INDUSTRIAL HOLDINGS, INC.
(exact name of registrant as specified in its charter)
TEXAS 76-0289495
(STATE OR OTHER JURISDICTION (IRS EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
7135 ARDMORE, HOUSTON, TEXAS 77054
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(713) 747-1025
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (i) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (ii) has been subject to such
filing requirements for the past 90 days. Yes [x] No [ ]
At August 11, 1999, there were 15,111,094 shares of Common Stock outstanding.
<PAGE>
INDUSTRIAL HOLDINGS, INC.
INDEX
PAGE NO.
PART I FINANCIAL INFORMATION
Item 1 Financial Statements (unaudited)
Consolidated Balance Sheets at June 30, 1999
and December 31, 1998 as restated ......................... 1
Consolidated Statements of Income for the Three Months
ended June 30, 1999 and 1998 as restated .................. 2
Consolidated Statements of Income for the Six Months
ended June 30,1999 and 1998 as restated ................... 3
Consolidated Statements of Cash Flows for the Six Months
ended June 30, 1999 and 1998 as restated .................. 4
Notes to Consolidated Financial Statements ................ 5
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations ....................... 9
Item 3 Quantitative and Qualitative Disclosures about Market Risk 18
PART II OTHER INFORMATION
Item 1. Legal Proceedings (no response required)
Item 2. Changes in Securities and Use of Proceeds ................. 18
Item 3. Defaults upon Senior Securities
(no response required)
Item 4. Submission of Matters to a Vote of
Security Holders .......................................... 18
Item 5. Other Information (no response required)
Item 6. Exhibits and Reports on Form 8-K .......................... 19
<PAGE>
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements.
INDUSTRIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
------------- -------------
ASSETS (As restated
see Note 6)
<S> <C> <C>
Current assets:
Cash and equivalents ....................................... $ 1,684,392 $ 3,412,411
Accounts receivable - trade, net ........................... 41,000,007 45,577,133
Costs and estimated earnings in excess of billings.......... 12,192,314 5,428,987
Employee advances .......................................... 59,397 58,823
Inventories ................................................ 44,399,368 48,275,927
Notes receivable, current portion .......................... 3,018,937 4,364,106
Other current assets ....................................... 2,208,258 4,620,337
------------- -------------
Total current assets ................................. 104,562,673 111,737,724
Property and equipment, net .................................... 64,868,082 58,793,946
Notes receivable, less current portion ......................... 1,605,499 1,783,769
Investment in unconsolidated affiliates ........................ 3,680,988 513,284
Other assets ................................................... 7,465,930 3,365,494
Goodwill and other, net ........................................ 26,793,284 27,474,438
------------- -------------
Total assets ........................................... $ 208,976,456 $ 203,668,655
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable, current ................................... $ $ 42,486,422
Accounts payable - trade ................................. 20,472,401 21,628,422
Billings in excess of costs and estimated earnings........ 1,606,296 5,165,760
Accrued expenses and other ............................... 11,305,561 9,673,640
Current portion of long-term debt ........................ 25,883,600 23,547,890
------------- -------------
Total current liabilities ........................... 59,267,858 102,502,134
Notes payable, long-term ....................................... 43,678,082
Long-term debt, less current portion ........................... 27,681,692 30,334,166
Deferred compensation payable, less current portion ............ 224,185 216,021
Deferred income taxes payable .................................. 6,301,062 4,703,534
------------- -------------
Total liabilities .................................. 137,152,879 137,755,855
------------- -------------
Commitments and contingencies
Shareholders' equity:
Preferred stock $.01 par value, 7,500,000 shares
authorized, no shares issued or outstanding
Common stock $.01 par value, 50,000,000
shares authorized, 15,111,094 and 14,739,662
shares issued and outstanding, at June 30, 1999 and
December 31, 1998, respectively .......................... 151,110 147,396
Additional paid-in capital .................................. 54,217,882 51,545,271
Retained earnings ........................................... 18,399,585 15,165,133
Notes receivable from officers .............................. (945,000) (945,000)
------------- -------------
Total shareholders' equity ....................... 71,823,577 65,912,800
------------- -------------
Total liabilities and shareholders' equity ....... $ 208,976,456 $ 203,668,655
============= =============
</TABLE>
See notes to unaudited consolidated financial statements
1
<PAGE>
INDUSTRIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED JUNE 30,
----------------------------
1999 1998
------------ ------------
(As restated
see Note 6)
Sales .......................................... $ 68,458,726 $ 44,580,543
Cost of sales .................................. 55,197,053 32,112,821
------------ ------------
Gross profit ................................... 13,261,673 12,467,722
Selling, general and administrative expenses ... 10,956,602 8,986,730
------------ ------------
Income from operations ......................... 2,305,071 3,480,992
Equity in earnings of unconsolidated affiliates 767,522 548,924
Other income (expense):
Interest expense ......................... (1,940,790) (847,502)
Interest income .......................... 84,060 51,723
Other income, net ....................... 353,499 569,027
------------ ------------
Total other income (expense) ... (1,503,231) (226,752)
Income before income taxes ..................... 1,569,362 3,803,164
Provision for income taxes ..................... 685,519 1,365,209
------------ ------------
Net income ..................................... 883,843 2,437,955
Distributions to shareholders ..................
------------ ------------
Net income available to common shareholders .... $ 883,843 $ 2,437,955
============ ============
Basic earnings per share ....................... $ 0.06 $ 0.18
============ ============
Diluted earnings per share ..................... $ 0.06 $ 0.17
============ ============
Weighted average number of common shares
outstanding - basic ......................... 14,842,187 13,819,809
Weighted average number of common shares
outstanding - diluted ....................... 15,427,953 14,465,899
See notes to unaudited consolidated financial statements
2
<PAGE>
INDUSTRIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
SIX MONTHS ENDED JUNE 30,
----------------------------
1999 1998
------------ ------------
(As restated
see Note 6)
Sales ......................................... $ 141,233,454 $ 87,690,713
Cost of sales ................................. 112,743,084 64,357,387
------------- ------------
Gross profit .................................. 28,490,370 23,333,326
Selling, general and administrative expenses .. 21,449,994 17,310,477
------------- ------------
Income from operations ........................ 7,040,376 6,022,849
Equity in earnings of unconsolidated affiliates 1,330,653 838,829
Other income (expense):
Interest expense ........................ (3,936,535) (1,683,115)
Interest income ......................... 158,742 205,219
Other income, net ...................... 882,779 822,298
------------- ------------
Total other income (expense) ...... (2,895,014) (655,598)
Income before income taxes .................... 5,476,015 6,206,080
Provision for income taxes .................... 2,241,563 2,375,317
------------- ------------
Net income .................................... 3,234,452 3,830,763
Distributions to shareholders ................. 34,297
------------- ------------
Net income available to common shareholders ... $ 3,234,452 $ 3,796,466
============= ============
Basic earnings per share ...................... $ 0.22 $ 0.28
============= ============
Diluted earnings per share .................... $ 0.22 $ 0.27
============= ============
Weighted average number of common shares
outstanding - basic ........................ 14,800,489 13,547,767
Weighted average number of common shares
outstanding - diluted ...................... 15,410,877 14,141,703
See notes to unaudited consolidated financial statements
3
<PAGE>
INDUSTRIAL HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
----------------------------
1999 1998
------------ ------------
(As restated
see Note 6)
<S> <C> <C>
Cash flows from operating activities:
Net income ...................................................... $ 3,234,452 $ 3,830,763
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization ............................. 3,765,371 2,491,566
Equity in earnings of unconsolidated affiliates ........... (1,330,653) (838,829)
Deferred income tax provision ............................. 1,597,528 49,713
Deferred compensation paid ................................ 8,164 (12,579)
Deferred gain on demolition contract ...................... (500,000) (500,000)
Changes in assets and liabilities, net of acquisitions:
Accounts receivable ................................... 4,577,126 921,909
Employee advances ..................................... (574) 54,858
Inventories ........................................... 3,876,559 (662,163)
Notes receivable ...................................... 1,523,439 (4,237,664)
Other assets .......................................... (11,654,443) (2,555,290)
Accounts payable ...................................... (1,156,021) (646,286)
Accrued expenses and other ............................ (2,877,543) (954,236)
------------ ------------
Net cash provided by (used in) operating activities 1,063,405 (3,058,238)
------------ ------------
Cash flows from investing activities:
Purchase of property and equipment ............................. (5,118,129) (5,935,438)
Proceeds from disposals of property and equipment, net ......... 112,535 166,268
Distributions received from unconsolidated affiliates .......... 1,897,353
Investments in unconsolidated affiliates ....................... (1,337,051) (129,389)
Net proceeds from sale of interest in
demolition contract ......................................... 2,000,000
Business acquisitions, net of cash acquired .................... (1,697,664)
------------ ------------
Net cash used in investing activities ............. (6,342,645) (3,698,870)
------------ ------------
Cash flows from financing activities:
Net borrowings under revolving line of credit .................. 1,591,660 (1,993,647)
Proceeds from the issuance of long-term debt ................... 3,192,251 2,429,993
Principal payments on notes payable and long-term debt ......... (3,909,015) (5,578,577)
Proceeds from issuance of common stock ......................... 2,676,325 12,826,568
Distributions to shareholders .................................. (34,297)
------------ ------------
Net cash provided by financing activities ................. 3,551,221 7,650,040
------------ ------------
Net increase (decrease) in cash and equivalents ................... (1,728,019) 892,932
Cash and equivalents, beginning of period ......................... 3,412,411 1,725,053
------------ ------------
Cash and equivalents, end of period ............................... $ 1,684,392 $ 2,617,985
============ ============
Supplemental disclosures for cash flow information:
Cash paid for:
Interest ........................................ 3,692,434 1,659,286
Taxes ........................................... 364,000 2,103,326
</TABLE>
See notes to unaudited consolidated financial statements
4
<PAGE>
INDUSTRIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1999
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered
necessary for fair presentation have been included. These financial
statements include the accounts of Industrial Holdings, Inc. and its
subsidiaries (the "Company"). All significant intercompany balances
have been eliminated in consolidation. Operating results for the three
and six month periods ended June 30, 1999 are not necessarily
indicative of the results that may be expected for the year ended
December 31, 1999. For further information, refer to the consolidated
financial statements and footnotes thereto of the Company as of
December 31, 1998 and 1997 and for the three-year period ended
December 31, 1998.
2. INVENTORIES
Inventories consists of the following:
June 30, December 31,
1999 1998
----------- -----------
Raw materials .............. $12,350,627 $12,451,960
Finished goods ............. 22,838,659 25,373,644
Other ...................... 9,210,082 10,450,323
----------- -----------
$44,399,368 $48,275,927
=========== ===========
3. RECLASSIFICATION
Certain amounts have been reclassified from previous periods to
conform to the current period presentation.
4. REPORTABLE SEGMENTS
The Company's determination of reportable segments considers the
strategic operating units under which the Company sells various types
products and services to various customers. Financial information for
purchase transactions are included in the segment disclosures only for
periods subsequent to the dates of acquisition. The Company evaluates
performance based on income from operations excluding certain
corporate costs not allocated to the segments. Intersegment sales are
not material. Substantially all sales are from domestic sources and
all assets are held in the United States.
5
<PAGE>
<TABLE>
<CAPTION>
HEAVY
FASTENERS FABRICATION VALVES MACHINES CORPORATE CONSOLIDATED
------------ ----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
AS OF AND FOR THE THREE
MONTHS ENDED JUNE 30, 1999
Sales .............................. $ 30,370,861 $26,125,641 $11,115,592 $ 846,632 $ 68,458,726
Income from operations ............. 887,925 452,143 1,959,095 (285,564) (708,528) 2,305,071
Total assets ....................... 72,764,015 54,997,074 30,237,087 4,114,823 46,863,457 208,976,456
FOR THE THREE MONTHS ENDED
JUNE 30, 1998
Sales .............................. 24,033,407 15,523,094 (1) 5,024,042 44,580,543 (1)
Income from operations ............. 1,811,448 1,894,421 (1) 37,004 (261,881) 3,480,992 (1)
FOR THE SIX MONTHS ENDED
JUNE 30, 1999
Sales .............................. 64,630,554 51,719,845 22,691,917 2,191,138 141,233,454
Income from operations ............. 2,961,947 1,159,886 4,433,141 (383,453) (1,131,145) 7,040,376
FOR THE SIX MONTHS ENDED
JUNE 30, 1998
Sales .............................. 47,714,561 30,479,273 (1) 9,496,879 87,690,713 (1)
Income from operations ............. 3,630,217 2,822,642 (1) 44,511 (474,521) 6,022,849 (1)
AS OF DECEMBER 31, 1998
Total assets ....................... 106,246,831 58,427,308 31,530,596 (1) 3,969,087 3,494,833 203,668,655 (1)
</TABLE>
(1) As Restated - see Note 6
5. EARNINGS PER SHARE
The following table presents information necessary to calculate basic
and diluted earnings per share for the periods indicated.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JUNE 30,
----------------------------
1999 1998(1)
----------- -----------
<S> <C> <C>
EARNINGS FOR BASIC AND DILUTED COMPUTATION
Net income ........................................... $ 883,843 $ 2,437,955
Distributions to shareholders.........................
----------- -----------
Net income available for common shareholders - basic . 883,843 2,437,955
Interest on convertible debt securities, net of tax .. 43,828
----------- -----------
Net income available for common shareholders - diluted $ 927,671 $ 2,437,955
=========== ===========
BASIC EARNINGS PER SHARE
Weighted average common shares outstanding ........... 14,842,187 13,819,809
=========== ===========
Basic earnings per share ............................. $ 0.06 $ 0.18
=========== ===========
DILUTED EARNINGS PER SHARE
Weighted average common shares outstanding ........... 14,842,187 13,819,809
Shares issuable from assumed conversion of common
share options, warrants granted and debt conversion 585,766 646,090
----------- -----------
Weighted average common shares outstanding,
as adjusted ....................................... 15,427,953 14,465,899
=========== ===========
Diluted earnings per share ........................... $ 0.06 $ 0.17
=========== ===========
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------------
1999 1998(1)
----------- -----------
<S> <C> <C>
EARNINGS FOR BASIC AND DILUTED COMPUTATION
Net income ........................................... $ 3,234,452 $ 3,830,763
Distributions to shareholders ........................ 34,297
----------- -----------
Net income available for common shareholders - basic . 3,234,452 3,796,466
Interest on convertible debt securities, net of tax .. 87,656
----------- -----------
Net income available for common shareholders - diluted 3,322,108 3,796,466
=========== ===========
BASIC EARNINGS PER SHARE
Weighted average common shares outstanding ........... 14,800,489 13,547,767
=========== ===========
Basic earnings per share ............................. $ 0.22 $ 0.28
=========== ===========
DILUTED EARNINGS PER SHARE
Weighted average common shares outstanding ........... 14,800,489 13,547,767
Shares issuable from assumed conversion of common
share options, warrants granted and debt conversion 610,388 593,936
----------- -----------
Weighted average common shares outstanding,
as adjusted ........................................ 15,410,877 14,141,703
=========== ===========
Diluted earnings per share ........................... $ 0.22 $ 0.27
=========== ===========
</TABLE>
(1) As Restated - see Note 6
6. ACQUISITIONS
In January 1999, the Company acquired all the outstanding capital
stock of Blastco for 1,711,027 shares of the Company's common stock,
upon merger of a wholly owned subsidiary of the Company with and into
Blastco, with Blastco being the surviving corporation. As a result,
Blastco became a wholly owned subsidiary of the Company. Blastco,
headquartered in Midland, Texas, demolishes refineries.
The merger with Blastco was accounted for as a pooling-of-interests.
The Company's consolidated balance sheet as of December 31, 1998 and
the consolidated statements of income for the three months and the six
months ended June 30, 1998 have been restated to include the results
of operations of Blastco. The Company's consolidated statements of
income for the three months and the six months ended June 30, 1999
include the results of operations of Blastco for the period.
7
<PAGE>
Sales, net income, net income available to common shareholders and
earnings per share for the three months and the six months ended June
30, 1998 previously reported by the separate companies and the
combined amounts presented in the accompanying consolidated financial
statements are as follows:
THREE MONTHS ENDED JUNE 30, 1998
-----------------------------------
INDUSTRIAL COMBINED
HOLDINGS,INC. BLASTCO COMPANIES
------------- ------- ---------
(000'S OMITTED)
Sales .................................... $ 40,924 $ 3,657 $ 44,581
============= ======= =========
Net income ............................... $ 1,771 $ 667 $ 2,438
============= ======= =========
Net income available to
common shareholders ................... $ 1,771 $ 667 $ 2,438
============= ======= =========
Earnings per share:
Basic ................................. $ .15 $ .18
Diluted ............................... $ .14 $ .17
SIX MONTHS ENDED JUNE 30, 1998
-----------------------------------
INDUSTRIAL COMBINED
HOLDINGS,INC. BLASTCO COMPANIES
------------- ------- ---------
(000'S OMITTED)
Sales .................................... $ 81,700 $ 5,991 $ 87,691
============= ======= =========
Net income ............................... $ 3,382 $ 449 $ 3,831
============= ======= =========
Net income available to
common shareholders ................... $ 3,347 $ 449 $ 3,796
============= ======= =========
Earnings per share:
Basic ................................. $ .28 $ .28
Diluted ............................... $ .27 $ .27
7. DEBT
As of June 30, 1999, the Company had an aggregate of $97.2 million
borrowed under our principal bank credit facility and debt instruments
entered into or assumed in connection with acquisitions as well as
other bank financings. Of these borrowed amounts, $25.9 million is
scheduled to mature during the next twelve months. Our existing credit
facility is a revolving line of credit with Comerica Bank-Texas. The
principal amount is the lesser of $55 million or a defined borrowing
base. Advances under the revolving line of credit bear interest, at
the Company's option, at either (i) the prime rate in effect at the
time of the advance (which was 7.75% at June 30, 1999) or (ii) an
adjusted Eurodollar rate plus an amount ranging from 2% to 2 3/4%
based upon our ratios of senior debt to EBITDA. The borrowing base is
defined as 80% of eligible accounts receivable and 50% of eligible
inventory subject to certain limitations. At June 30, 1999, the
borrowing capacity under the credit facility was $46.8 million and
availability was $3.1 million. The revolving line of credit matures on
June 16,
8
<PAGE>
2001. Certain of the Company's debt arrangements contain requirements
as to the maintenance of minimum levels of working capital and net
worth, minimum ratios of debt to cash flow, cash flow to certain fixed
charges, liabilities to tangible net worth and capital expenditures.
At June 30, 1999, the Company was not in compliance with several of
these covenants; however, it obtained waivers for the non-compliance
from the applicable lending institutions. Although management expects
to be able to obtain waivers should there be further events of non-
compliance, no assurance can be given that the Company will be able to
obtain waivers from its lenders.
In July 1998, the Company acquired Beaird Industries, Inc. ("Beaird")
from Trinity Industries, Inc. (the "Seller") for $28.0 million in cash
and a $5.0 million note to the Seller. Under the purchase agreement
the Seller assumed all liabilities and retained certain accounts
receivable of Beaird. The Company believes that it is entitled to
receive $3.2 million of excess purchase price paid to the Seller under
the purchase agreement resulting from liabilities incurred by the
Company in connection with the acquisition. Additionally, on July 15,
1999, the first installment was due on the Seller note of $1.8
million. The Company and the Seller have agreed to extend the note
payment to August 25, 1999 pending resolution of the final purchase
price calculation.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
GENERAL
We own and operate a diversified group of middle-market industrial
manufacturing businesses whose products include metal fasteners, medium and
thick-walled heavy pressure vessels, high pressure industrial valves and related
products and services. Operations are organized into three core business
segments: (i) fastener manufacturing; (ii) heavy fabrication; and (iii) valve
manufacturing and repair. Through a fourth segment, we also distribute machine
tools and provide export crating services.
This section should be read in conjunction with our unaudited consolidated
financial statements included elsewhere in this document.
Our historical financial statements have been restated for all periods
presented to include the results of operations from each of the companies that
were acquired in acquisitions accounted for under the pooling-of-interests
method. The results of operations for companies acquired in acquisitions
accounted for under the purchase method are included in our historical financial
statements from the date of such acquisition. Since these "purchase"
acquisitions were consummated at various times during 1998, the financial
information contained herein with respect to each fiscal period does not fully
reflect the results of operations that would have been achieved had these
acquisitions been consummated at the beginning of the periods presented or which
may be achieved in the future. In connection with each "purchase" acquisition,
we have recorded goodwill to the extent the purchase price exceeded the fair
market value of the specific assets acquired, which is generally amortized over
20 years.
Our results of operations are affected by the level of economic activity
in the industries served by our customers, which in turn may be affected by
other factors, including the level of economic activity in the U.S. and foreign
markets they serve. The principal industries served by our clients are the
automotive, home furnishings, petrochemical and oil and gas industries. An
economic slowdown in these industries could result in a decrease in demand for
our products and services, which could adversely affect our operating results.
During 1998 and into 1999, oil and gas prices declined significantly, resulting
in a decrease in the demand for our products and services that are used in the
exploration and production of oil and gas. Exploration and production
expenditures generally lag improvements in oil and gas prices; therefore,
although oil and gas prices
9
<PAGE>
have improved during 1999, we have yet to experience significant sales
increases.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ------------------
1999 1998 1999 1998
------- -------- -------- -------
Sales: (000'S OMITTED) (000'S OMITTED)
Fastener Segment ................ $30,371 $ 24,034 $ 64,630 $47,715
Heavy Fabrication Segment (1) ... 26,125 51,720
Valve Segment ................... 11,116 15,523 22,692 30,479
Machine Segment ................. 847 5,024 2,191 9,497
------- -------- -------- -------
68,459 44,581 141,233 87,691
Cost of Sales:
Fastener Segment ................ 23,532 17,667 49,769 35,184
Heavy Fabrication Segment (1) ... 23,996 47,040
Valve Segment ................... 7,019 10,145 14,298 21,075
Machine Segment ................. 650 4,301 1,636 8,098
------- -------- -------- -------
55,197 32,113 112,743 64,357
Selling, General and Administrative:
Fastener Segment ................ 5,950 4,554 11,900 8,901
Heavy Fabrication Segment (1) ... 1,678 3,520
Valve Segment ................... 2,138 3,484 3,961 6,581
Machine Segment ................. 482 687 938 1,354
Corporate ....................... 709 262 1,131 475
------- -------- -------- -------
10,957 8,987 21,450 17,311
------- -------- -------- -------
Operating Income ..................... $ 2,305 $ 3,481 $ 7,040 $ 6,023
======= ======== ======== =======
(1) The Heavy Fabrication Segment is comprised solely of Beaird Industries
which was acquired July 1, 1998.
THREE MONTHS ENDED JUNE 30, 1999 COMPARED WITH THREE MONTHS ENDED JUNE 30, 1998.
SALES. On a consolidated basis, sales increased $23.9 million or 54% for the
three months ended June 30, 1999 compared to the three months ended June 30,
1998.
Fastener Segment sales increased $6.0 million or 25% for the three months ended
June 30, 1999 compared to the three months ended June 30, 1998. This increase
was primarily attributable to the acquisitions of Ideal Products and A&B Bolt
and Supply, Inc., in the third quarter of 1998 which added $11.0 million in
sales in the second quarter of 1999, partially offset by $5.0 million aggregate
sales decrease in our stud bolt, rivet and gasket operations primarily related
to depressed activity in the oil and gas industries as exploration and
production expenditures lagged the increase in oil and gas prices. Additionally,
a softness in the refining and processing industries beginning late in the first
quarter of 1999 negatively impacted second quarter sales during the three months
ended June 30, 1999.
10
<PAGE>
The Heavy Fabrication Segment was formed July 1, 1998 with the acquisition of
Beaird. Under the purchase method of accounting, no sales were recorded relating
to this segment prior to the second half of 1998. Sales for the three month
period ending June 30, 1999 increased $9.3 million or 55% compared to the second
quarter of 1998. Sales increased based on a strategic decision to expand the
range of products manufactured, primarily the production of wind turbine towers.
Beaird's primary contract for wind turbine towers required delivery of the
towers on or before June 30, 1999. Therefore, substantially all of the sales
related to these towers were recognized prior to July 1, 1999. The completed
wind turbine tower contract has not been replaced and we anticipate sales for
this segment to decline in the third and fourth quarters of 1999.
Valve Segment sales decreased $4.4 million or 28% for the three months ended
June 30, 1999 compared to the three months ended June 30, 1998. This decrease
was primarily attributable to a decrease in sales volume directly related to the
decline in the price of oil and gas during 1998 and the resulting cost reduction
efforts implemented by our customers for production and maintenance. Exploration
and production expenditures generally lag improvements in oil and gas prices;
therefore, although oil and gas prices have improved during 1999, we have yet to
experience significant sales increases.
Machine Segment sales decreased $4.2 million or 83% for the three months ended
June 30, 1999 compared to the three months ended June 30,1998 as the demand for
machine tools declined in the energy industry. Sales also declined in the second
quarter due to a change in management for this segment during the second
quarter. The transition phase associated with new management negatively impacted
sales and earnings. The transition was substantially complete in July 1999 and
current sales trends indicate positive growth for the latter half of the third
quarter, with August sales expected to double the average for the second quarter
of 1999.
COST OF SALES. Cost of sales increased $23.1 million or 72% for the three months
ended June 30, 1999 compared to the three months ended June 30, 1998. Cost of
sales as a percentage of sales was 81% for the second quarter of 1999 compared
to 72% for the second quarter of 1998. Cost of sales as a percentage of sales
was higher on a consolidated basis primarily as a result of the addition in July
1998 of the heavy fabrication segment, which typically has lower gross margins
on its large contract business in comparison to our other segments. In addition,
the valve segment, which typically has the highest margins of all our segments,
represented a smaller percentage of total sales excluding the heavy fabrication
segment (26% in the first quarter of 1999 compared to 35% in the first quarter
of 1998).
Fastener Segment cost of sales increased $5.9 million or 33% for the three
months ended June 30, 1999 compared to the three months ended June 30, 1998,
primarily as a result of the increased sales described above. Cost of sales as a
percentage of sales was 77% for the second quarter of 1999 compared to 74% for
the comparable period in 1998 as a result of management and production changes,
including planned reductions in inventory at two of our facilities.
Heavy Fabrication Segment cost of sales as a percentage of sales was 92% for the
three months ended June 30, 1999. Gross margins were adversely affected by the
increase in volume associated with the wind turbine tower product addition,
resulting in higher than usual overtime and outsourcing costs which were needed
to meet customer delivery schedules.
Valve Segment cost of sales decreased $3.1 million or 31% primarily as a result
of the decrease in sales described above. Cost of sales as a percentage of sales
was 63% for the second quarter 1999 compared to 65% for the second quarter in
1998. Cost of sales as a percent of sales decreased because as sales decreased,
the valve companies reduced their workforce and were able to eliminate overtime
and outsourcing of production and due to the growth (both in actual sales and as
a percentage of total valve segment sales) of higher margin contracts associated
with refinery demolition.
11
<PAGE>
Machine Segment cost of sales decreased $3.7 million or 85% as a result of the
decrease in sales described above. Cost of sales as a percentage of sales was
77% for the three months ended June 30, 1999 compared to 86% for the same period
in 1998. Sales related to export crating represented 48% of total sales of this
segment for the second quarter of 1999 compared to 21% in the second quarter of
1998. Gross margins have historically been higher for crating compared to
machine sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $2.0 million or 22% for the three months ended
June 30, 1999 compared to the three months ended June 30, 1998. This increase
was primarily attributable to the purchase acquisitions of Beaird, Ideal and A&B
which added $3.4 million in expenses in the second quarter of 1999, partially
offset by a net decrease of $1.4 million in expenses in the remainder of the
Company. This net decrease is the result of deliberate cost reduction measures
implemented as a result of the decrease in sales.
Fastener Segment selling, general and administrative expenses increased $1.4
million or 31% primarily as a result of the acquisitions described above.
Heavy Fabrication Segment selling, general and administrative expenses for the
three months ended June 30, 1999 relate to Beaird's operations during the second
quarter of 1999 and were comparable to the historical amounts prior to the
acquisition of Beaird.
Valve Segment selling, general and administrative expenses decreased $1.3
million or 39%. This decrease was the result of personnel reductions and
reductions in other general and administrative expenses in response to decreases
in sales.
Machine Segment selling, general and administrative expenses decreased $0.2
million or 30% primarily as a result of cost reduction measures implemented due
to the decreases in sales described above.
Corporate selling, general and administrative expenses increased $0.4 million or
171%. This increase was attributable to personnel additions and increases in
professional fees associated with our growth.
EARNINGS FROM EQUITY INVESTMENTS IN UNCONSOLIDATED AFFILIATES. On a consolidated
basis, earnings from equity investments in unconsolidated affiliates increased
$0.2 million or 40%. The increase is primarily as the result of the company's
investment in one affiliate which is engaged in the demolition of refineries.
This affiliate reported greater earnings in the second quarter of 1999 compared
to the same period in 1998 due to favorable progress on its demolition
contracts.
INTEREST EXPENSE. Interest expense increased $1.1 million or 129% for the three
months ended June 30, 1999 compared to the three months ended June 30, 1998,
primarily as a result of $57.7 million in debt assumed or incurred in connection
with acquisitions in the third quarter of 1998.
OTHER INCOME. On a consolidated basis, other income decreased $0.2 million in
the three months ended June 30, 1999. Other income for the quarter ended June
30, 1999 consisted primarily of $0.25 million recognized as deferred gain on the
sale of a demolition contract in the first quarter of 1998 and $0.1 million in
rental payments for real estate and equipment from one of our equity affiliates.
INCOME TAXES. Income tax expense decreased $0.7 million or 50% for the second
quarter of 1999 compared to the second quarter of 1998. Our effective tax rate
was 44% for the three months ended June 30, 1999 and 36% for the three
12
<PAGE>
months ended June 30, 1998. The increase in the effective tax rate is primarily
the result of state taxes associated with the purchase acquisitions in the third
quarter of 1998.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1998.
SALES. On a consolidated basis, sales increased $53.5 million or 61% for the six
months ended June 30, 1999 compared to the six months ended June 30, 1998.
Fastener Segment sales increased $16.9 million or 35% for the six months ended
June 30, 1999 compared to the six months ended June 30, 1998. This increase was
primarily attributable to the acquisitions of Ideal Products and A&B Bolt and
Supply, Inc., in the third quarter of 1998 which added $23.6 million in sales in
the six months ended June 30, 1999, which was partially offset by a $6.7 million
aggregate sales decrease in our stud bolt, rivet and gasket operations primarily
related to depressed activity in the oil and gas industries as exploration and
production expenditures lagged the increase in oil and gas prices. Additionally,
a softness in the refining and processing industries beginning late in the first
quarter of 1999 negatively impacted second quarter sales for 1999.
The Heavy Fabrication Segment was formed July 1, 1998 with the acquisition of
Beaird. Under the purchase method of accounting, no sales were recorded relating
to this segment prior to the second half of 1998. Sales for the six month period
ending June 30, 1999 increased $20.3 million or 65% compared to the first half
of 1998. Sales increased based on a strategic decision to expand the range of
products manufactured, primarily to the production of wind turbine towers.
Beaird's primary contract for wind turbine towers required delivery of the
towers on or before June 30, 1999. Therefore, substantially all of the sales
related to these towers were recognized prior to July 1, 1999. The completed
wind turbine tower contract has not been replaced and we anticipate sales for
this segment to decline in the third and fourth quarters of 1999.
Valve Segment sales decreased $7.8 million or 26% for the six months ended June
30, 1999 compared to the six months ended June 30, 1998. This decrease was
primarily attributable to a decrease in sales volume directly related to the
decline in the price of oil during 1998 and the resulting cost reduction efforts
implemented by our customers for production and maintenance. Increases in
exploration and production expenditures generally lag improvements in oil
prices; therefore, although oil prices have improved during 1999, we did not
experience sales increases until late in the second quarter.
Machine Segment sales decreased $7.3 million or 77% for the six months ended
June 30, 1999 compared to the six months ended June 30,1998 as the demand for
machine tools declined in the energy industry. Sales also declined in the second
quarter due to a change in management for this segment during the second
quarter. The transition phase associated with new management negatively impacted
sales and earnings. The transition was substantially complete in July 1999 and
current sales trends indicate solid growth for the latter half of the third
quarter, with August sales expected to double the average for the second quarter
of 1999.
COST OF SALES. Cost of sales increased $48.4 million or 75% for the six months
ended June 30, 1999 compared to the six months ended June 30, 1998. Cost of
sales as a percentage of sales was 80% for the first six months of 1999 compared
to 73% for the first six months of 1998. Cost of sales as a percentage of sales
was higher on a consolidated basis primarily as a result of the addition in July
1998 of the heavy fabrication segment, which typically has lower gross margins
on its large contract business in comparison to our other segments.In addition,
the valve segment, which typically has the highest margins of all our segments,
represented a smaller percentage of total sales excluding the heavy fabrication
segment (25% in the first half of 1999 compared to 35% in the first half of
1998).
13
<PAGE>
Fastener Segment cost of sales increased $14.6 million or 41% for the six months
ended June 30, 1999 compared to the six months ended June 30, 1998, primarily as
a result of the increased sales described above. Cost of sales as a percentage
of sales was 77% for the first half of 1999 compared to 74% for the comparable
period in 1998 as a result of management and production changes, including
planned reductions in inventory at two of our facilities. Additionally, several
large sales were made during the first half of 1999 that had lower than average
margins resulting from lower negotiated pricing, acceptable due to the high
volume.
Heavy Fabrication Segment cost of sales as a percentage of sales was 91% for the
six months ended June 30, 1999. Gross margin were adversely affected by the
aftermath of the labor negotiations which concluded in November 1998. The
backlog created during the negotiation process was still being cleared in the
first half of 1999 and this, along with the increase in volume associated with
the wind turbine tower product addition, resulted in higher than usual overtime
and outsourcing costs.
Valve Segment cost of sales decreased $6.8 million or 32% primarily as a result
of the decrease in sales described above. Cost of sales as a percentage of sales
was 63% for the first quarter 1999 compared to 69% for the first quarter in
1998. Cost of sales as a percent of sales decreased because as sales decreased,
the valve companies reduced their workforce and were able to eliminate overtime
and outsourcing of production and due to the growth (both in actual sales and as
a percentage of total valve segment sales) of higher margin contracts associated
with refinery demolition.
Machine Segment cost of sales decreased $6.5 million or 80% as a result of the
decrease in sales described above. Cost of sales as a percentage of sales was
75% for the six months ended June 30, 1999 compared to 85% for the same period
in 1998. Sales related to export crating represented 38% of total sales for the
first quarter of 1999 compared to 20% in the first quarter of 1998. Gross
margins have historically been higher for crating compared to machine sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $4.1 million or 24% for the six months ended
June 30, 1999 compared to the six months ended June 30, 1998. This increase was
primarily attributable to the purchase acquisitions made in the third quarter of
1998 which added $6.9 million in expenses in the second quarter of 1999,
partially offset by a net decrease of $2.8 million in expenses in the remainder
of the Company. This net decrease is the result of deliberate cost reduction
measures implemented as a result of the decrease in sales.
Fastener Segment selling, general and administrative expenses increased $3.0
million or 34% primarily as a result of the acquisitions described above.
Heavy Fabrication Segment selling, general and administrative expenses for the
six months ended June 30, 1999 relate to Beaird's operations during the first
quarter of 1999 and were comparable to the historical amounts prior to the
acquisition of Beaird.
Valve Segment selling, general and administrative expenses decreased $2.6
million or 40%. This decrease was the result of the elimination of the salary
and related expenses of the president of a company who resigned in connection
with the acquisition of that company, which was accounted for under the
pooling-of-interests method of accounting, other personnel reductions, and
reductions in other general and administrative expenses in response to decreases
in sales.
Machine Segment selling, general and administrative expenses decreased $0.4
million or 31% primarily as a result of cost reduction measures implemented due
to the decreases in sales described above.
Corporate selling, general and administrative expenses increased $0.7 million or
138%. This increase was attributable to personnel additions and increases in
professional fees associated with our growth.
EARNINGS FROM EQUITY INVESTMENTS IN UNCONSOLIDATED AFFILIATES. On a consolidated
basis, earnings from equity
14
<PAGE>
investments in unconsolidated affiliates increased $0.5 million or 59%,
primarily as the result of the company's investment in one affiliate which is
engaged in the demolition of refineries and that did not have significant
activity until the second quarter of 1998.
INTEREST EXPENSE. Interest expense increased $2.3 million or 134% for the six
months ended June 30, 1999 compared to the six months ended June 30, 1998,
primarily as a result of $57.7 million in debt assumed or incurred in connection
with acquisitions in the third quarter of 1998.
OTHER INCOME. On a consolidated basis, other income was $0.9 million for the six
months ended June 30, 1999, primarily consisting of $0.5 million in deferred
gain recognition on the sale of a demolition contract, $0.2 million in rental
payments for real estate and equipment from one of our equity affiliates and
$0.1 million related to gains on the disposals of assets.
INCOME TAXES. Income tax expense decreased $0.1 million or 6% for the first six
months of 1999 compared to the first six months of 1998. Our effective tax rate
was 41% for the six months ended June 30, 1999 and 38% for the six months ended
June 30, 1998. The increase in the effective tax rate is primarily related to
state income taxes associated with the acquisitions made in the third quarter of
1998.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1999, we had working capital of $45.3 million, current maturities of
long-term debt of $25.9 million, long term debt of $27.7 million, a line of
credit due June 2001 of $43.7 million and shareholders' equity of $71.8 million.
Historically, our principal liquidity requirements and uses of cash have been
for debt service, capital expenditures, working capital and acquisition
financing, and our principal sources of liquidity and cash have been from cash
flows from operations, borrowings under long-term debt arrangements and
issuances of equity securities. We have financed acquisitions through bank
borrowings, issuances of equity securities and internally generated funds.
NET CASH PROVIDED BY OPERATING ACTIVITIES. For the six months ended June 30,
1999, net cash provided by operating activities was $1.1 million compared to
1998, which used cash of $3.1 million. The cash provided in 1999 was primarily
as a result of net income and depreciation and amortization exceeding changes in
current assets and liabilities while in 1998 increases in current assets and
liabilities exceeded net income and depreciation and amortization. The most
significant changes in working capital for the six months ended June 30, 1999
resulted from increases in costs and estimated earnings in excess of billings
and billings in excess of costs and estimated earnings, both related to the
timing of billings in relation to activity on long-term contracts. For the six
months ended June 30, 1998, changes in working capital consisted primarily of an
increase in accounts receivable and an increase in notes receivable resulting
from the transfer of inventory to an affiliate in exchange for a note receivable
in the first quarter of 1998.
NET CASH USED IN INVESTING ACTIVITIES. Principal uses of cash are for capital
expenditures and acquisitions. For the six months ended June 30, 1999 and 1998,
we made capital expenditures of approximately $5.1 million and $5.9 million,
respectively. Other significant investing activities in 1999 included
investments in unconsolidated affiliates of $1.3 million. Other investing
activities in 1998 included acquisitions, net of cash acquired, of $1.7 million,
distributions from unconsolidated affiliates of $1.9 million and the sale of an
interest in a demolition contract for $2.0 million.
NET CASH PROVIDED BY FINANCING ACTIVITIES. Our principal sources of cash other
than from operations are from financing activities, including borrowings under
our credit facilities and issuances of equity securities. Financing activities
provided net cash of $3.6 million in the six months ended June 30, 1999 compared
to $7.7 million in the comparable period in 1998. During the six months ended
June 30, 1999, we issued common stock providing net proceeds of $2.7 million
compared to net proceeds of $12.8 million in the six months ended June 30, 1998.
During 1998, we completed an offer to the holders of our Class B warrants to
exchange each Class B warrant and $10.00 cash for one
15
<PAGE>
share of common stock, one Class C warrant and one Class D warrant, from which
we received net proceeds of $10.9 million after deducting approximately $100,000
of related expenses. During the six months ended June 30, 1999, we had net
borrowings under the lines of credit of $1.6 million and borrowed $3.2 million
in long-term debt compared to a net repayment under the line of credit of $2.0
million and borrowings of $2.4 million in the comparable period in 1998.
Repayments of principal on long-term debt were $3.9 million and $5.6 million for
the six months ended June 30, 1999 and 1998, respectively.
PRINCIPAL DEBT INSTRUMENTS. As of June 30, 1999, we had an aggregate of $97.2
million borrowed under our principal bank credit facility and debt instruments
entered into or assumed in connection with acquisitions as well as other bank
financings. Of these borrowed amounts,$25.9 million is scheduled to mature
during the next twelve months. Certain of our debt arrangements contain
requirements as to the maintenance of minimum levels of working capital and net
worth, minimum ratios of debt to cash flow, cash flow to certain fixed charges,
liabilities to tangible net worth and capital expenditures. At June 30, 1999, we
were not in compliance with several of these covenants; however we obtained
waivers for the non-compliance from the applicable lending institutions.
Although management expects to be able to obtain waivers should there be further
events of non-compliance, no assurance can be given that we will be able to
obtain future waivers from our lenders.
Our existing credit facility is a revolving line of credit with Comerica
Bank-Texas. The principal amount is the lesser of $55 million or a defined
borrowing base. Advances under the revolving line of credit bear interest, at
our option, at either (i) the prime rate in effect at the time of the advance
(which was 7.75% at June 30, 1999) or (ii) an adjusted Eurodollar rate plus an
amount ranging from 2% to 2 .75% based upon our ratios of senior debt to EBITDA.
The borrowing base is defined as 80% of eligible accounts receivable and 50% of
eligible inventory subject to certain limitations. At June 30, 1999, the
borrowing capacity under the credit facility was $46.8 million and availability
was $3.1 million. The revolving line of credit matures on June 16, 2001.
In June 1998, we entered into a loan from a financial institution in the
principal amount of $15 million that matures in November 1999. This loan bears
interest at Libor plus 5.0%. In connection with the acquisitions of businesses,
we also have entered into various term loans secured by machinery, equipment and
real estate of the businesses acquired and issued a convertible debenture in
connection with the acquisition of Beaird.
BELLELI ENERGY. In 1998, we entered into an option agreement that grants us the
right to purchase approximately 96% of Belleli Energy S.r.l. ("Belleli) through
2002. Belleli is an Italian company that manufactures thick walled pressure
vessels and heat exchangers, as well as designs, engineers, constructs and
erects components for desalination, electric power and petrochemical plants. The
option agreement calls for payments totaling approximately $600,000 in 1999,
$700,000 in 2000, $800,000 in 2001 and $400,000 in 2002. During the second
quarter of 1999, the option agreement was amended to include an additional
option payment of $3 million, of which $2.6 million was funded by a private
placement of our common stock and the remainder from the conversion of a
$400,000 note receivable from Belleli.
In connection with the Belleli option agreement, we have agreed to support the
financing of Belleli to the extent its existing lines of credit and bonding
arrangements are not sufficient to support successful implementation of an
agreed upon business plan. We currently estimate that we will need to provide or
assist in arranging support to Belleli of up to $20 million, which may take the
form of cash, equity, bonding or other support; however, the actual amount is
subject to numerous variables outside of our control, including Belleli's
success in obtaining new contracts, its cash flow from operations and its
customers' and suppliers' bonding requirements. At June 30, 1999, we had
provided to customers and suppliers third-party performance guarantees of $5.2
million. We are exposed to credit loss in the event of nonperformance by Belleli
under these arrangements; however, we do not anticipate nonperformance by
Belleli. To date we have been able to provide this financial support through
bonding arrangements with our bank and performance guarantees; however, even if
we are successful in refinancing certain of our debt facilities in the third
quarter, there can
16
<PAGE>
be no assurance that such sources will continue to be available to the extent
necessary to provide adequate support to Belleli, which would require us to
pursue additional sources of financing on terms that may be less desirable or
advantageous than our current arrangements.
We are currently exploring various financing alternatives to meet our future
liquidity needs and repay currently maturing debt obligations, including the $15
million loan maturing November 1999. We anticipate refinancing certain of our
debt facilities in the third quarter of 1999, although no assurances can be
given that we will be able to refinance such facilities or that we will be able
to obtain terms that are as favorable as those that currently exist. For the six
months ending June 30, 1999 we have made capital expenditures of $5.1 million
and anticipate spending $4.7 million for the remainder of 1999. We believe that
our overall treasury management of cash on hand from operations and available
borrowings under new or existing credit facilities will be adequate to meet
capital requirements and provide working capital needs in connection with
integrating our businesses acquired and for continued maintenance and
improvements in our business.
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 21E 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" regarding our estimates of future trends in sales, expenses or
earnings and regarding our estimate of sufficiency of existing capital resources
and ability to raise additional capital to fund cash requirements for future
operations. Although we believe that the expectations reflected in such forward
looking statements are reasonable, there can be no assurance that the
expectations reflected in such forward looking statements will prove to be
correct. The ability to achieve these expectations is contingent upon a number
of factors which include demand for products, need for additional capital for
newly acquired companies and the ability to complete new acquisitions.
YEAR 2000 COMPLIANCE
We are 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, we
undertook a corporate-wide initiative designed to assess the impact of the Year
2000 Issue on software and hardware utilized in our operations, including
information technology infrastructure ("IT") and embedded manufacturing control
technology ("Non-IT") and the impact, if any, that the year 2000 issue, as it
relates to customers and suppliers could have on our business.
This initiative is being conducted in three phases: assessment, implementation
and testing. During the assessment phase, we completed a comprehensive inventory
of IT and Non-IT systems and equipment. Many of our IT systems include hardware
and packaged software recently purchased from large vendors who have represented
that these systems are already year 2000 compliant. However, we have determined
that it will be necessary to modify portions of our financial and accounting
software.
We believe that with modifications to existing software, the Year 2000 Issue can
be mitigated. The implementation of these remediation efforts is underway and is
expected to be completed by September 30, 1999. However, if such modifications
are not made, or are not completed timely, the Year 2000 Issue could have a
material impact on operations. We plan to complete the testing of the year 2000
modifications as these modifications are implemented. We have not established a
contingency plan but intend to formulate one to address unavoidable risks, and
we expect to have the contingency plan formulated by the end of the third
quarter 1999.
17
<PAGE>
We do not currently rely on the IT systems of other companies; however, failure
of our suppliers or customers to become year 2000 compliant might have a
material adverse impact on our operations. We intend 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 company will be compliant with the Year 2000
Issue or that any such conversion or failure to convert an acquired system would
not have an adverse effect on our business, financial condition, results of
operations or cash flows.
Efforts with respect to the Year 2000 Issue have been handled internally by our
management and our other employees. Costs of developing and carrying out this
initiative are being funded from operations and have not represented a material
expense. We have not completed our remediation efforts but currently believe
that the costs of the Year 2000 Issue will not be significant and will not have
a material adverse impact on our business, financial condition, results of
operations or cash flows.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk generally represents the risk that losses may occur in the value of
financial instruments as a result of movements in interest rates, foreign
currency exchange rates and commodity prices.
We are exposed to some market risk due to the floating interest rate under our
revolving line of credit and long-term debt. Under the revolving line of credit,
the principal balance is due in June 2001. As of June 30, 1999 the revolving
lines of credit had a principal balance of $43.7 million and the long-term debt
had a balance of $12.6 million at a floating interest rate equal to the lenders'
prime rate, 7.75% at June 30, 1999. We also have $25.7 million of long-term debt
bearing interest at Libor plus 2.5% to 5%. The Libor rate as of June 30, 1999
was 5.0%. A 1.0% increase in interest rates could result in a $0.9 million
annual increase in interest expense on the existing principal balance. We have
determined that it is not necessary to participate in interest rate-related
derivative financial instruments because we currently do not expect significant
short-term increases in interest rates charged under the revolving line of
credit or the long-term debt.
PART II
OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
In June 1999, SJMB, L.P. purchased 349,580 shares of common stock for $2.6
million. The proceeds from the sale were used to provide an option payment to
Belleli Energy S.r.l.
The above sale was exempt from registration under Section 4(2) of the Securities
Act since no public offering was involved.
Item 4. Submission of Matters to a Vote of Security Holders
(a) The annual meeting of the shareholders of the Company was held June
30, 1999.
18
<PAGE>
(b) The following persons were elected at that meeting as Class II
Directors to serve until the third annual meeting of shareholders
following their election:
NUMBER OF VOTES
---------------
NAME OF NOMINEE FOR AGAINST
--------------- --- -------
John P. Madden 11,647,218 56,964
John L. Thompson 11,612,551 91,631
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
EXHIBIT
NUMBER IDENTIFICATION OF EXHIBIT
------ -------------------------
27 Financial Data Schedules
(b) Reports on Form 8-K - none
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant, Industrial Holdings, Inc., has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: August 13, 1999 By:/s/ CHRISTINE A. SMITH
Christine A. Smith,
Chief Financial Officer and
Executive Vice President
19
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE RESTATED FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE INDUSTRIAL HOLDINGS, INC. FORM 10-Q DATED JUNE 30, 1999 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 2,617,985
<SECURITIES> 0
<RECEIVABLES> 24,133,778
<ALLOWANCES> 0
<INVENTORY> 24,972,379
<CURRENT-ASSETS> 58,373,901
<PP&E> 44,754,858
<DEPRECIATION> 12,247,627
<TOTAL-ASSETS> 112,470,296
<CURRENT-LIABILITIES> 37,988,958
<BONDS> 0
0
0
<COMMON> 138,805
<OTHER-SE> 58,497,877
<TOTAL-LIABILITY-AND-EQUITY> 112,470,296
<SALES> 87,690,713
<TOTAL-REVENUES> 87,690,713
<CGS> 64,357,387
<TOTAL-COSTS> 64,357,387
<OTHER-EXPENSES> 17,310,477
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,683,115
<INCOME-PRETAX> 6,206,080
<INCOME-TAX> 2,375,317
<INCOME-CONTINUING> 3,796,466
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,796,466
<EPS-BASIC> 0.28
<EPS-DILUTED> 0.27
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE INDUSTRIAL HOLDINGS, INC. FORM 10-Q DATED JUNE 30, 1999 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<CASH> 1,684,392
<SECURITIES> 0
<RECEIVABLES> 41,000,007
<ALLOWANCES> 0
<INVENTORY> 44,399,368
<CURRENT-ASSETS> 104,562,673
<PP&E> 82,134,540
<DEPRECIATION> 17,266,459
<TOTAL-ASSETS> 208,976,456
<CURRENT-LIABILITIES> 59,267,858
<BONDS> 0
0
0
<COMMON> 151,110
<OTHER-SE> 71,672,467
<TOTAL-LIABILITY-AND-EQUITY> 208,976,456
<SALES> 141,233,454
<TOTAL-REVENUES> 141,233,454
<CGS> 112,743,084
<TOTAL-COSTS> 112,743,084
<OTHER-EXPENSES> 21,449,994
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,936,535
<INCOME-PRETAX> 5,476,015
<INCOME-TAX> 2,241,563
<INCOME-CONTINUING> 3,234,452
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,234,452
<EPS-BASIC> 0.22
<EPS-DILUTED> 0.22
</TABLE>
