SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
------------------------
<TABLE>
<S> <C>
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
</TABLE>
COMMISSION FILE NUMBER: 0-19580
INDUSTRIAL HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TEXAS 76-0289495
(STATE OR OTHER JURISDICTION (IRS EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
7135 ARDMORE, HOUSTON, TEXAS 77054
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(713) 747-1025
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE.
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
TITLE OF EACH CLASS
COMMON STOCK, $.01 PAR VALUE
CLASS B REDEEMABLE WARRANT
CLASS C REDEEMABLE WARRANT
CLASS D REDEEMABLE WARRANT
Indicate by check mark whether the registrant (i) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (ii) has been subject to such
filing requirements for the past 90 days. Yes [X] [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of common stock held by non-affiliates of the
registrant was $99,623,010 at March 26, 1999. At that date, there were
14,758,765 shares of common stock outstanding.
THE REGISTRANT'S PROXY STATEMENT, TO BE FILED PURSUANT TO REGULATION 14A OF
THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, WITH RESPECT TO THE 1999 ANNUAL
MEETING OF STOCKHOLDERS, IS INCORPORATED BY REFERENCE INTO PART III OF THIS
REPORT.
================================================================================
<PAGE>
TABLE OF CONTENTS
FORM 10-K
PART I
<TABLE>
<CAPTION>
ITEM PAGE
------ ----
<S> <C> <C> <C>
Business........................................................................................... 1
1.
Properties......................................................................................... 6
2.
Legal Proceedings.................................................................................. 7
3.
Submission of Matters to a Vote of Security Holders................................................ 7
4.
</TABLE>
PART II
<TABLE>
<S> <C> <C> <C>
5. Market for Registrant's Common Stock and Related Stockholder Matters............................... 7
Selected Financial Data............................................................................ 8
6.
Management's Discussion and Analysis of Financial Condition
7.
and Results of Operations.......................................................................... 9
Quantitative and Qualitative Disclosures About Market Risk......................................... 16
7.A
Financial Statements and Supplementary Data........................................................ 16
8.
Changes in and Disagreements with Accountants on Accounting
9.
and Financial Disclosure........................................................................... 16
</TABLE>
PART III
<TABLE>
<S> <C> <C> <C>
10. Directors and Executive Officers of the Registrant................................................. 17
Executive Compensation............................................................................. 17
11.
Security Ownership of Certain Beneficial Owners and Management..................................... 17
12.
Certain Relationships and Related Transactions..................................................... 17
13.
</TABLE>
PART IV
<TABLE>
<S> <C> <C> <C>
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.................................... 17
</TABLE>
i
<PAGE>
UNLESS OTHERWISE INDICATED, ALL REFERENCES TO "WE," "US," "OUR" OR
"OUR COMPANY" INCLUDE INDUSTRIAL HOLDINGS, INC. AND ALL OF ITS SUBSIDIARIES.
PART I
ITEM 1. BUSINESS
GENERAL
We own and operate a diversified group of middle-market industrial
manufacturing and distribution businesses. Our operations are organized into
three core business segments: (i) fastener manufacturing and distribution; (ii)
heavy fabrication; and (iii) valve manufacturing and repair. Through a fourth
segment, we also distribute machine tools. We believe our businesses are
characterized by strong market positions in niche markets, high value-added
products and services, an established and diversified customer base, cost-
efficient equipment and production facilities with a low sensitivity to
technological change and experienced and committed management. Our products and
services are sold to a broad customer base in the automotive, home furnishings,
petrochemical, oil and gas and various other industrial and consumer products
industries. Most of our products are manufactured to specific technical
requirements and for specific customer orders. We believe that the diversified
nature of our products, services and end-user markets reduces the effect of
operating performance fluctuations in any one of our core business segments and
limits our overall exposure to cyclical downturns within individual industry
sectors.
Industrial Holdings, Inc. was incorporated in August 1989. Our principal
executive offices are located at 7135 Ardmore, Houston, Texas 77054, and our
telephone number is (713) 747-1025.
BUSINESS STRATEGY
Our business strategy is to increase the sales, cash flow and profitability
of each core business segment:
ENHANCE INTERNAL GROWTH. We believe that significant opportunities
exist to enhance internal growth in our core business segments. We plan
to achieve this growth by (i) identifying new applications and new
markets for our existing products, (ii) identifying new applications for
our existing production capabilities and skill base, (iii) promoting
cross selling opportunities across our customer base and (iv) expanding
into international markets. We believe that our strong market positions
within the niche markets we serve enhance our ability to effectively
implement this strategy.
CAPITALIZE ON INTEGRATION OPPORTUNITIES. Our recent growth through
acquisitions has created additional opportunities to reduce costs and
increase margins through integration of our operations. We will continue
to improve our cost structure and increase margins by (i) consolidating
certain administrative functions and eliminating redundant costs, (ii)
consolidating selected facilities, (iii) capitalizing on purchasing
economies of scale and leveraging key vendor relationships, (iv)
pursuing intercompany supply arrangements by substituting our components
for those previously produced by outside vendors and (v) utilizing the
best practices of our most efficient manufacturing plants throughout all
of our facilities.
PURSUE SELECTED STRATEGIC ACQUISITIONS. We believe that each of our
three core business segments has sufficient critical mass to provide a
platform for the acquisition and integration of complementary
businesses. The industries in which we compete are large and highly
fragmented, creating an attractive environment for additional
acquisitions whereby we can leverage our competitive position and market
opportunities. We historically have financed many of our acquisitions
with equity capital. In six of our eight acquisitions in 1998, we used
our common stock as all or part of the consideration paid. We have a
focused and disciplined acquisition strategy that we use to identify and
acquire well established, high value-added businesses with experienced
and motivated management teams.
1
<PAGE>
ACQUISITIONS
Since 1996, we acquired 14 companies that either expanded or complimented
our then existing product offerings. We continue to integrate these acquired
companies into our existing operations, which we believe will allow us to
achieve cost savings through the elimination of general and administrative
functions and to exploit cross-selling opportunities. In addition, on July 1,
1998, we acquired Beaird Industries, which resulted in the formation of our
heavy fabrication segment.
The following chart describes each of our acquisitions since January 1,
1996.
<TABLE>
<CAPTION>
ACQUISITION DESCRIPTION OF ACCOUNTING
ACQUIRED COMPANY DATE SEGMENT CONSIDERATION TREATMENT
- - ------------------------------------- ------------- ------------------------------ -------------- -----------
<S> <C> <C> <C> <C>
American............................. November 1996 Fastener Manufacturing and Cash Purchase
Distribution
Lone Star............................ February 1997 Fastener Manufacturing and Cash and Stock Purchase
Distribution
MVS.................................. March 1997 Valve Manufacturing and Repair Stock Purchase
Rogers............................... August 1997 Valve Manufacturing and Repair Cash Purchase
WALKER............................... November 1997 Fastener Manufacturing and Cash Purchase
Distribution
Philform............................. February 1998 Fastener Manufacturing and Stock Purchase
Distribution
Ameritech............................ March 1998 Fastener Manufacturing and Stock Pooling
Distribution
Moores Pump and Supply, Inc.......... April 1998 Valve Manufacturing and Repair Stock Pooling
GHX, Inc............................. April 1998 Fastener Manufacturing and Stock Pooling
Distribution
United Wellhead Services, Inc........ July 1998 Valve Manufacturing and Repair Stock Pooling
Beaird Industries, Inc............... July 1998 Heavy Fabrication Cash Purchase
Ideal................................ August 1998 Fastener Manufacturing and Cash Purchase
Distribution
A&B Bolt and Supply, Inc............. August 1998 Fastener Manufacturing and Cash and Stock Purchase
Distribution
Blastco Services Company, Inc........ January 1999 Valve Manufacturing and Repair Stock Pooling
</TABLE>
In July 1998, we entered into an option agreement that grants us the right
to purchase approximately 95% of Belleli Energy S.r.L. through 2003. 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.
OPERATIONS
PRODUCTS AND SERVICES
FASTENER MANUFACTURING AND DISTRIBUTION. Our fastener manufacturing and
distribution segment consists of the metal forming operations and the stud bolt
and gasket operations. Our metal forming operations manufacture cold formed
fasteners and specialty metal components for sale primarily to original
2
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equipment manufacturers in the home furnishings, automotive, lawn and garden and
electrical components industries. These fasteners are manufactured in solid,
semi-tubular, tubular or multi-dimensional form. We emphasize the manufacture of
special cold-formed fasteners that are primarily targeted to more highly-
engineered applications. These special cold-formed fasteners can, in many cases,
replace more expensive machined parts. In addition to metal fasteners, we also
manufacture electrical components (including retention clips, fuse holders,
contacts and switch components), drapery hardware and wire drawn products such
as common pins and safety pins, as well as rivet setting machines, which are
sold to original equipment manufacturers. The six facilities used for metal
forming operations are strategically located based on the industries they serve.
We believe our engineering and manufacturing capabilities, multiple
manufacturing facilities and broad equipment base make us one of the leading
suppliers of cold formed fasteners in the U.S.
Our stud bolt and gasket operations manufacture and distribute stud bolts,
nuts, gaskets, hoses, fittings and other products from 13 locations in Texas and
Louisiana primarily to the petrochemical, chemical and oil and gas industries
located in the Gulf Coast region of the U.S. We manufacture ASTM Grade stud
bolts and threaded fasteners, with emphasis on value added services such as
electroplating, coating and special machining and traceability. We also produce
specialty industrial fasteners including bolts, screws, studs, nuts and washers,
all of which are made to order using forging, heat-treating, machining, grinding
and threading processes. In addition to our manufactured products, we distribute
a full line of industrial fasteners and other related products, including
valves, pipe, gaskets, pipe hangers, steel, strainers, swages, tools, tubing and
mill supplies. Our gaskets are fabricated from steel sheet or cut in standard or
custom shapes out of various soft gasket materials. We believe that we are one
of the leading manufacturers and distributors of stud bolts and gaskets in the
Gulf Coast market, which is one of the largest oil and gas exploration,
production and refining regions in North America. Our distribution facilities
for stud bolt and gasket operations carry a broad product line, while our
manufacturing facilities focus on specialty orders that generally require a
rapid turnaround.
HEAVY FABRICATION SEGMENT. Through our heavy fabrication segment, we
manufacture and distribute medium and thick-walled pressure vessels, gas turbine
casings, heat exchangers and other large machined weldments. Our products are
sold to customers in the electric power, marine, petrochemical, petroleum
refining and medical equipment industries and to major capital equipment
suppliers. These products range in size from 500,000 to 2,000,000 pounds and are
produced from sophisticated materials that are subject to quality requirements
including fit, shape, size and metallurgy. We believe we are one of only four
manufacturers in the U.S. with the capabilities and equipment required to
produce these large machined weldments, which generally are critical components
for their respective end use applications. We offer complete fabrication,
material and welding laboratories, machining and finishing capabilities that are
certified to conform to the International Quality System Standard 9001. Our
facility in Shreveport, Louisiana is strategically located with access to
commercial waterways, which is critical for the transportation of our large
pressure vessels and other heavy weldments.
VALVE MANUFACTURING AND REPAIR SEGMENT. Through our valve manufacturing
and repair segment, we manufacture, remanufacture, distribute, install and
provide maintenance and repair services for high-pressure valves, blow out
preventers, pumps and other related products for companies in the exploration,
production and pipeline transportation of oil and gas and in the petrochemical,
chemical and petroleum refining industries located primarily in the Gulf Coast
region. Through the acquisition of Blastco in January 1999, we also provide
refinery and tank farm dismantling services. The cost to provide these products
and services has a high variable component that consists primarily of labor and
raw materials costs. Accordingly, the cost structure of this segment can be
quickly adjusted in response to market conditions. We believe that we are one of
the leading remanufacturers and distributors of valves and pumps in the Gulf
Coast and believe that we are a leading provider of refinery dismantling
services.
MACHINE TOOL DISTRIBUTION SEGMENT. We distribute new machine tools in
South Texas and Louisiana for certain manufacturers including Okuma Machinery,
Inc. on an exclusive basis, and other manufacturers on a non-exclusive basis. We
also sell used machine tools primarily to larger corporations and machine
3
<PAGE>
shops in the Gulf Cost region. Machine tools are used in various industries in
the manufacturing process to cut metal and are sold in a variety of sizes
depending upon the task they are designed to perform. We also provide crating
services for products to be exported. Generally we crate other companies'
products at our facility and then forward the crated products to the shipping
source, which is typically an ocean-going vessel.
CUSTOMERS AND MARKETS
Within the fastener manufacturing and distribution segment, the customers
for our cold formed fasteners are primarily original equipment manufacturers in
the home furnishings, automotive and lawn and garden industries. Our electrical
components are sold to manufacturers of electrical products, while our drapery
hardware and our wire drawn products are primarily sold to apparel
manufacturers, drycleaners and distributors of drapery hardware. Our stud bolts,
specialty fasteners and gaskets are sold primarily to customers in the
petrochemical, chemical and oil and gas industries on the Gulf Coast through our
network of distribution facilities. Our manufacturing and distribution
facilities within this segment are strategically located based on the customers
that they serve. A significant portion of the products produced by our fastener
manufacturing and distribution segment are manufactured to specific customer
order. No single customer within this segment accounted for over 10% of our
total sales within the segment.
The major markets served by our heavy fabrication segment include electric
power, marine, petrochemical, petroleum refining and medical equipment
industries. Our customer base for this segment consists primarily of large
multinational corporations and engineering and construction companies. Most of
the large fabricated and machined weldments are manufactured pursuant to
long-term contracts and almost all of our products within this segment are
manufactured to specific customer orders. We utilize both an inside and outside
sales staff in marketing our products in this segment. While we usually sell our
pressure vessels directly to engineering and construction firms, we market
directly to the end-users as well. Three customers, Formosa Plastics Corp.,
Vestas-American Wind Technology, Inc. and Bechtel Corp., each accounted for over
10% of total sales within this segment. Sales to these three customers
represented 37% of total sales within this segment.
Our valve manufacturing and repair segment sells its products primarily to
customers in the oil and gas exploration and production, pipeline
transportation, refining and product storage industries. Per-job orders account
for substantially all of our remanufacturing and repair work performed and
pipeline valves sold. We also sell new, used and remanufactured pipeline valves
from existing inventory according to special customer orders. We conduct our
sales efforts through our inside sales staff and through sales representatives.
No single customer within this segment accounted for over 10% of our total sales
within the segment.
SUPPLIERS AND RAW MATERIALS
The principal raw material that we use in our fastener manufacturing and
distribution and heavy fabrication segments is steel wire and steel. To date, we
have encountered no difficulty in meeting supply requirements of any raw
materials in these segments. We generally maintain an inventory level of raw
materials necessary for approximately 30 days of operations in our fastener
manufacturing and distribution segment. We generally do not maintain a
substantial raw material inventory in our heavy fabrication segment. The steel
industry is cyclical, and steel prices can be volatile due to a number of
factors beyond our control. This volatility can significantly affect our raw
material costs. Competitive conditions determine whether steel price increases
can be passed on to our customers. Our inability to pass some or all future
steel price increases to our customers could have an adverse effect on our
business, financial condition, results of operations and cash flows.
In our valve manufacturing and repair segment, we acquire new and used
valves and related equipment from suppliers, including individual brokers, other
remanufacturing companies or original equipment manufacturers. We currently have
a significant inventory of valves.
We do not maintain firm contractual agreements with any of our suppliers.
Instead, we purchase our raw materials on a continuing basis from suppliers on
the most favorable terms that we can negotiate. Since
4
<PAGE>
product purchases are negotiated on a continuing basis, our ability to obtain
raw materials may not be as secure as if they were subject to a long-term
contract. Our inability to obtain sufficient raw materials from our suppliers
would have a material adverse effect on our business, financial condition,
results of operations and cashflows.
COMPETITION
Our cold formed fastener products are subject to competition from a number
of small companies as well as four larger manufacturers. In the special cold
formed fastener market that is concentrated primarily in the automotive and
electronic markets, we also face competition from larger public companies and
foreign manufacturers. We also compete with nine stud bolt manufacturers on a
national basis as well as other manufacturers on a regional basis. We have many
competitors in the markets for our gaskets, hose and related products that
compete in a particular product category. Our competitors within our heavy
fabrication segment vary based on the products manufactured. As the size and
complexity of the products increase, competition is generally less. The market
for each product is very competitive and we face competition from a number of
different manufacturers in each of our product areas. In our valve manufacturing
and repair segment, we believe that we are subject to competition from less than
ten similarly-sized remanufacturing businesses. We believe that our broad
inventory of valves and valve parts, machining capabilities and our high level
of service are our primary competitive advantages. Factors that affect
competition within all of our segments include price, quality and customer
service. Some of our competitors within each of our segments have greater
financial and other resources than us.
BACKLOG
We acquired our heavy fabrication business in June 1998. A significant
amount of the sales of our heavy fabrication segment relate to products that
require more than several months to manufacture. As of December 31, 1998, the
backlog for the heavy fabrication segment was $58,620,000.
As of December 31, 1998, the backlog for the fastener manufacturing and
distribution and valve manufacturing and repair segments was $7,932,000 and
$1,956,000, respectively, compared to $9,676,000 and $4,289,000 for the fastener
manufacturing and distribution segment and valve manufacturing and repair
segments, respectively, at December 31, 1997. Orders for products produced by
these segments are generally shipped within 10-20 days. Accordingly, we do not
believe that the amount of our backlog for these segments is a reliable
indication of our future sales in the segments.
REGULATION
ENVIRONMENTAL REGULATION
We are subject to extensive and changing federal, state and local
environmental laws including laws and regulations that relate to air and water
quality, impose limitations on the discharge of pollutants into the environment
and establish standards for the treatment, storage and disposal of toxic and
hazardous wastes. Stringent fines and penalties may be imposed for
non-compliance with these environmental laws. In addition, environmental laws
could impose liability for costs associated with investigating and remediating
contamination at our facilities or at third-party facilities at which we have
arranged for the disposal or treatment of hazardous materials.
Although no assurances can be given, we believe that we are in compliance
in all material respects with all environmental laws and we are not aware of any
non-compliance or obligation to investigate or remediate contamination that
could reasonably be expected to result in material liability. However, it is
possible that unanticipated factual developments could cause us to make
environmental expenditures that are significantly different from those we
currently expect. In addition, environmental laws continue to be amended and
revised to impose stricter obligations. We cannot predict the effect such future
requirements, if enacted, would have on us, although we believe that such
regulations would be enacted over time and would affect the industry as a whole.
5
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HEALTH AND SAFETY MATTERS
Our facilities and operations are governed by laws and regulations,
including the federal Occupational Safety and Health Act, relating to worker
health and workplace safety. We believe that appropriate precautions are taken
to protect employees and others from workplace injuries and harmful exposure to
materials handled and managed at its facilities. While we do not anticipate that
we will be required in the near future to expend material amounts by reason of
such health and safety laws and regulations, we are unable to predict the
ultimate cost of compliance with these changing regulations.
EMPLOYEES
As of December 31, 1998, we employed approximately 2,100 persons. Of these
employees, approximately 570 are represented under one collective bargaining
agreement, which was recently renegotiated and which expires on November 20,
2002. We have not experienced a work stoppage at any of our facilities.
ITEM 2. PROPERTIES
We manufacture our products in the United States and distribute our
products and provide services throughout North America. We have 22
manufacturing/distribution facilities and nine distribution facilities in seven
states. At December 31, 1998, these facilities contained an aggregate of
approximately 1.9 million square feet of which approximately 27% is owned and
the remainder leased.
We maintain our principal executive offices at 7135 Ardmore, Houston,
Texas. The office facility portion of this property consists of conventional
office space and is, in our opinion, adequate to meet our needs for the
foreseeable future. We believe that all existing office and warehouse facilities
leased or owned by our subsidiaries are adequate to meet our needs for the
foreseeable future and are suitable for the business conducted therein.
The following chart lists our material facilities by segment:
<TABLE>
<CAPTION>
SEGMENT NUMBER OF FACILITIES SQUARE FOOTAGE
- - ------------------------------------- -------------------- --------------
<S> <C> <C>
Fastener Manufacturing and
Distribution....................... 19 683,000
Heavy Fabrication.................... 1 691,000
Valve Manufacturing and Repair....... 9 336,000
Machine Tool Distribution............ 2 193,000
</TABLE>
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ITEM 3. LEGAL PROCEEDINGS
We are involved in various claims and litigation arising in the ordinary
course of business. While there are uncertaintites inherent in the ultimate
outcome of such matters and it is impossible to currently determine the ultimate
costs that may be incurred, we believe the resolution of such uncertainties and
the incurrence of such costs should not have a material adverse effect on our
consolidated financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our security holders in the fourth
quarter of 1998.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Our common stock trades on The NASDAQ Stock Market ("Nasdaq") under the
symbol "IHII." The following table sets forth the high and low closing sales
prices of our common stock, for the periods indicated below:
<TABLE>
<CAPTION>
PRICE RANGE
--------------------
HIGH LOW
--------- ---------
<S> <C> <C>
1998
First Quarter................... $ 16.06 $ 11.63
Second Quarter.................. $ 16.06 $ 12.50
Third Quarter................... $ 15.38 $ 8.75
Fourth Quarter.................. $ 11.13 $ 8.00
1997
First Quarter................... $ 14.00 $ 10.63
Second Quarter.................. $ 11.25 $ 9.88
Third Quarter................... $ 15.88 $ 10.88
Fourth Quarter.................. $ 16.00 $ 11.81
</TABLE>
All of the foregoing prices reflect interdealer quotations, without retail
mark-up, mark-downs or commissions and may not necessarily represent actual
transactions in our common stock.
On March 26 , 1999, the last reported sales price of our common stock, as
quoted by Nasdaq, was $7.63 per share. On March 26, 1998, there were
approximately 523 record holders of our common stock.
We have never paid dividends on our common stock and do not anticipate
paying any cash dividends in the foreseeable future. We currently intend to
retain future earnings to support our operations and growth. Any payment of cash
dividends in the future will be dependent on the amount of funds legally
available therefor, our earnings, financial condition, capital requirements and
other factors that the Board of Directors may deem relevant. Additionally,
certain of our debt agreements restrict the payment of dividends.
7
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ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth, for the periods included, selected
consolidated data of our company for the five years ended December 31, 1998
derived from our consolidated financial statements. The following information
should be read in conjunction with our consolidated financial statements and the
related notes thereto and "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations" appearing elsewhere in this
report.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,(1)
-------------------------------------------------------
1998(6) 1997(5) 1996(4) 1995(3) 1994
---------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
INCOME STATEMENT DATA:
Sales................................ $ 208,971 $ 138,504 $ 93,270 $ 72,285 $ 63,692
Cost of sales........................ 159,991 101,892 71,589 55,568 47,603
---------- ---------- --------- --------- ---------
Gross profit......................... 48,980 36,612 21,681 16,717 16,089
Selling, general & administrative.... 35,976 26,860 17,169 14,579 14,067
---------- ---------- --------- --------- ---------
Operating income..................... 13,004 9,752 4,512 2,138 2,022
Other income (expense)............... (3,123) (1,757) (1,634) (1,387) (1,043)
---------- ---------- --------- --------- ---------
Income before income taxes........... 9,881 7,995 2,878 751 979
Income tax provision................. 3,873 3,197 1,015 61 260
---------- ---------- --------- --------- ---------
Net income........................... 6,008 4,798 1,863 690 719
Distributions to shareholders........ 34 130 77 68 20
---------- ---------- --------- --------- ---------
Net income available to common
shareholders....................... $ 5,974 $ 4,668 $ 1,786 $ 622 $ 699
========== ========== ========= ========= =========
Basic earnings per share............. $ .49 $ .48 $ .24 $ .09 $ .10
Diluted earnings per share........... $ .47 $ .43 $ .22 $ .09 $ .09
Weighted average common shares
outstanding -- basic............... 12,289 9,778 7,349 6,702 6,703
Weighted average common shares
outstanding -- diluted............. 13,015 10,692 7,999 6,799 7,607
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital...................... $ 10,753 $ 10,577 $ 6,732 $ 4,159 $ 4,131
Total assets......................... 196,982 87,602 59,461 40,994 33,411
Long-term obligations(2)............. 29,649 12,953 8,998 7,250 5,107
Total liabilities.................... 132,012 51,144 37,454 28,598 23,072
Shareholders' equity................. 64,970 36,458 22,007 12,396 10,339
</TABLE>
- - ------------
(1) The combinations of our company with GHX, Moores, Ameritech and UWS in March
through July 1998 were accounted for as poolings-of-interest. The selected
consolidated financial data have been prepared as if these companies had
been combined for all periods presented.
(2) Excludes deferred income taxes and deferred compensation.
(3) We acquired Landreth's Connecticut manufacturing facility in December 1995
and the results of its operations have been included from the date of
acquisition.
(4) We acquired American Rivet in November 1996 and the results of its
operations have been included from the date of acquisition.
(5) We acquired Lone Star in February 1997, Manifold Valve Services in March
1997, Rogers Equipment in August 1997 and Walker in November 1997. The
results of their operations have been included from the date of acquisition.
(6) We acquired Philform in February 1998, Beaird in July 1998, and Ideal and
A&B in August 1998. The results of their operations have been included from
the date of acquisition.
8
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ITEM 7. 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 and distribution businesses whose products include metal
fasteners, large and heavy pressure vessels, high pressure industrial valves and
related products and services. Operations are organized into three core business
segments: (i) fastener manufacturing and distribution; (ii) heavy fabrication;
and (iii) valve manufacturing and repair. Through a fourth segment, we also
distribute machine tools.
Our historical financial statements have been restated to include, for all
periods presented, 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, 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.
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, 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. Absent substantial increases in oil and gas prices,
we expect demand for these products and services to continue to remain depressed
from 1997 levels.
In 1998, one of our operating units, IMSCO, was moved from the valve
manufacturing and repair segment to the fastener manufacturing and distribution
segment. As a result, 1997 and 1996 segment information has been restated to
reflect the change consistent with management's view of the operations of the
business.
This section should be read in conjunction with our consolidated financial
statements included elsewhere.
9
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain income statement data for each of
our segments for each of the periods presented.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------------
1998 1997 1996
--------------- --------------- --------------
<S> <C> <C> <C>
Sales:
Fastener Manufacturing and
Distribution.................. $ 110,403,167 $ 79,472,953 $ 53,252,342
Heavy Fabrication............... 40,011,472 -- --
Valve Manufacturing and
Repair........................ 44,251,577 43,407,065 23,590,695
Machine Tool Distribution....... 14,305,192 15,624,347 16,427,091
--------------- --------------- --------------
208,971,408 138,504,365 93,270,128
--------------- --------------- --------------
Cost of Sales:
Fastener Manufacturing and
Distribution.................. 83,189,597 59,166,263 41,208,559
Heavy Fabrication............... 34,775,923 -- --
Valve Manufacturing and
Repair........................ 30,154,646 29,267,345 16,571,736
Machine Tool Distribution....... 11,871,634 13,458,243 13,808,638
--------------- --------------- --------------
159,991,800 101,891,851 71,588,933
--------------- --------------- --------------
Selling, General and Administrative
Fastener Manufacturing and
Distribution.................. 20,319,963 14,762,350 8,929,284
Heavy Fabrication............... 3,254,128 -- --
Valve Manufacturing and
Repair........................ 8,304,087 8,789,893 5,354,854
Machine Tool Distribution....... 2,410,902 2,423,430 2,085,818
Corporate....................... 1,686,506 884,040 798,647
--------------- --------------- --------------
35,975,586 26,859,713 17,168,603
--------------- --------------- --------------
Operating Income..................... $ 13,004,022 $ 9,752,801 $ 4,512,592
=============== =============== ==============
</TABLE>
YEAR ENDED DECEMBER 31, 1998 COMPARED WITH YEAR ENDED DECEMBER 31, 1997
SALES. On a consolidated basis sales increased $70,467,043 or 51% in 1998
compared to 1997.
Sales for the fastener manufacturing and distribution segment increased
$30,930,214 or 39% in 1998 compared to 1997. This increase was primarily as a
result of the acquisitions of two companies in the third quarter of 1998 and the
inclusion of a full year of operations of two companies in 1998 that were
acquired in late 1997.
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
months ended December 31, 1998 increased compared to the periods prior to the
acquisition of Beaird by approximately $13.1 million or 49% over the comparable
1997 period and $8.6 million or 27% over the six months ended June 30, 1998.
Sales increased based on a strategic decision to increase sales by expanding the
range of products manufactured.
Sales for the valve manufacturing and repair segment increased $844,512 or
2% in 1998 compared to 1997. This sales increase was almost entirely
attributable to the inclusion of a full year of operations of a company acquired
in the third quarter of 1997.
Sales for the machine tool distribution segment decreased $1,319,155 or 8%
as demand for machine tools declined in the Texas Gulf Coast region.
COST OF SALES. On a consolidated basis, cost of sales increased
$58,099,949 or 57% in 1998 compared to 1997. Cost of sales as a percentage of
sales was 76.6% in 1998 compared to 73.6% in 1997. Cost of sales as a percentage
of sales was higher on a consolidated basis primarily as a result of the
addition in 1998 of
10
<PAGE>
the heavy fabrication segment, which typically has lower gross margins on its
large contract business in comparison to our other segments.
Cost of sales for the fastener manufacturing and distribution segment
increased $24,023,334 or 41% in 1998 compared to 1997. Cost of sales as a
percentage of sales was 75.4% in 1998 compared to 74.4% in 1997 as a result of
increased competition in this segment.
Cost of sales for the heavy fabrication segment as a percentage of sales
was 87% for the six months ended December 31, 1998. Gross margins were adversely
affected by the significant increase in sales during a period in which we were
unable to hire or retain adequate skilled workers due to the terms of our then
existing union contract that covered most of Beaird's workforce. The union
contract expired in November 1998 and the effectiveness of the workforce was
further reduced during the period of contract renegotiation. A new collective
bargaining agreement was entered into in late November 1998. We believe that the
terms of this agreement provides us with adequate flexibility to hire employees
with the appropriate skills. With the settlement of the contract and additional
new hires, Beaird experienced improvements in labor efficiency beginning in
December 1998. However, due to the increase in backlog during the third and
fourth quarters, the effects on gross margins in the fourth quarter of 1998 are
expected to continue through the first quarter of 1999 as Beaird reduces its
backlog.
Cost of sales for the valve manufacturing and repair segment increased
$887,301 or 3% compared to 1997. Cost of sales increased as a result of the
comparable increase in sales. Cost of sales as a percentage of sales was 68.1%
in 1998 compared to 67.4% in 1997. This slight increase was primarily as a
result of the effects of the decline in the oil and gas sector during 1998.
Cost of sales for the machine tool distribution segment decreased
$1,586,609 or 12% in 1998 compared to 1997 primarily as a result of the decrease
in sales described above.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. On a consolidated basis,
selling, general and administrative expenses increased $9,115,873 or 34% in 1998
compared to 1997.
Selling, general and administrative expenses for the fastener manufacturing
and distribution segment increased $5,557,613 or 38% primarily as the result of
acquisitions in the third quarter of 1998 and the inclusion of a full year of
operations of two companies in 1998 that were acquired in late 1997.
Selling, general and administrative expenses in the heavy fabrication
segment for the six months ended December 31, 1998 relate to Beaird's operations
during the second half of 1998 and were comparable to the historical amounts
prior to the acquisition of Beaird.
Selling, general and administrative expenses for the valve manufacturing
and repair segment decreased $485,806 or 6% in 1998 compared to 1997. This was
primarily as the result of the elimination of the salary and related expenses of
the president of a company who resigned in connection with our acquisition of
the company, which was accounted for under the pooling-of-interests method of
accounting.
Selling, general and administrative expenses for the machine tool
distribution segment for 1998 did not change significantly from 1997.
Selling, general and administrative expenses at corporate increased
$802,466 or 91% in 1998 compared to 1997 primarily as a result of personnel
increases and increases in professional fees that have resulted from our growth.
INTEREST EXPENSE. On a consolidated basis, interest expense increased
$2,475,790 or 101% in 1998 compared to 1997, primarily as a result of $57.7
million in debt assumed or incurred in connection with acquisitions in 1998.
INTEREST INCOME. On a consolidated basis, interest income increased
$361,541 or 226% in 1998 compared to 1997. Interest income was earned primarily
on the $10.9 million raised in January 1998 in connection with our offer to
Class B warrant holders, which was held in interest bearing accounts prior to
being used to repay debt and in acquisitions, as well as on notes receivable,
which have increased since 1997.
11
<PAGE>
OTHER INCOME -- NET. On a consolidated basis, other income increased
$748,325 or 140% in 1998 compared to 1997. Other income in 1998 includes
$840,930 of equity in the earnings of an unconsolidated limited partnership,
which was entered into in 1998.
INCOME TAXES. Income tax expense increased $675,298 or 21% in 1998
compared to 1997. The effective tax rate for 1998 was 39.2% compared to 40.0%
for 1997.
NET INCOME. Net income was $6,008,052 in 1998 compared to $4,798,054 in
1997 as a result of the foregoing factors.
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.
Sales for the fastener manufacturing and distribution segment increased
$26,220,611 or 49% in 1997 compared to 1996. This was primarily as a result of
an acquisition in February 1997, the inclusion of a full year's operations of a
company acquired in November 1996 and a $3.8 million increase in sales at our
other operating subsidiaries within this segment, which was primarily
attributable to the strength of the energy sector in 1997. These increases were
partially offset by a $4.6 million decrease in sales at one of our operating
subsidiaries 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 at this
subsidiary increased 21% over the third quarter and were only $198,000 less than
the fourth quarter of the preceding year.
Sales for the valve manufacturing and repair segment increased $19,816,370
or 84% in 1997 compared to 1996, primarily as a result of an acquisition in
March 1997 and an $8.5 million increase in sales at our other operating
subsidiaries within this segment. Sales increases at these subsidiaries were
primarily attributable to the strength of the energy sector in 1997.
Machine tool distribution segment sales decreased $802,746 or 5% primarily
because of delays in receipts of machine tools from manufacturers, which caused
some cancellation of orders by customers as well as deferral of shipments to
customers to 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 manufacturing and distribution segment
increased $17,957,704 or 44% in 1997 compared to 1996, primarily as a result of
the acquisitions in 1997 and 1996 and a $2.4 million increase in cost of sales
at our other operating subsidiaries within this segment as a result of the
increase in sales described above. These increases were partially offset by a
decrease in cost of sales at one of our operating subsidiaries as a result of
the corresponding decrease in sales. Cost of sales as a percentage of sales was
74% in 1997 compared to 77% in 1996. The 1996 cost of sales percentage was
unusually high because of the relocation of a manufacturing facility in late
1996 and the accompanying loss in production efficiency during the period of the
relocation.
Cost of sales for the valve manufacturing and repair segment increased
$12,695,609 or 77% primarily as the result of an acquisition in March 1997 and a
$5.1 million increase in cost of sales at our other operating subsidiaries
within this segment as a result of the increase in sales described above. Cost
of sales as a percentage of sales was 67% in 1997 compared to 70% in 1996 as
higher margin sales were achieved as a result of the strength in the energy
sector during 1997.
Cost of sales for the machine tool distribution segment 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 a crating
facility located at the Houston Ship Channel and to increased lumber costs.
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 manufacturing
and distribution segment increased $5,833,066 or 65% primarily as the result of
the acquisitions in 1997 and 1996 and an $849,342
12
<PAGE>
increase in selling, general and administrative expenses at our other operating
subsidiaries within this segment. The increase at our operating subsidiaries was
the result of the increase in sales described above. Selling, general and
administrative expenses increased at a greater percentage than sales because of
the inclusion of goodwill amortization associated with the acquisitions in 1997
and 1996.
Selling, general and administrative expenses for the valve manufacturing
and repair segment increased $3,435,038 or 64% primarily as the result of an
acquisition in March 1997 and a $2.3 million increase in selling, general and
administrative expenses at our other operating subsidiaries within this segment
due to increased sales. This increase was partially offset by a decrease in
selling, general and administrative expenses at one of our other operating
subsidiaries in this segment. This increase was less than the related increase
in sales as most costs at that subsidiary are accounted for as cost of sales.
Selling, general and administrative expenses for the machine tool
distribution segment 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 two acquisitions in November 1996 and February
1997. This increase was partially offset by a reduction in interest expense at
one of our other operating subsidiaries 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, we reduced our 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.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, we had working capital of $10,752,741, short-term
debt of $41,386,422, current maturities of long-term debt of $23,049,999,
long-term debt of $29,648,637 and shareholders' equity of $64,970,036.
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, sales of equity and internally generated funds.
NET CASH USED BY OPERATING ACTIVITIES. For the year ended December 31,
1998, net cash used by operating activities was $6.3 million compared to 1997
and 1996, which provided cash of $3.2 million and $2.1 million. The cash used in
1998 was primarily as a result of the acquisition of Beaird and the related net
increases in receivables, inventory, other assets and accounts payable over
those acquired. Beaird's receivables and inventories increased as sales
increased for the six months ended December 31, 1998 compared to the six month
period ended June 30, 1998, which was prior to the Beaird acquisition.
Additionally, receivables and payables increased at Beaird as $7.0 million in
accounts receivable and all liabilities were distributed to the seller prior to
acquisition. Cash was provided in 1997 and 1996 primarily because net income and
depreciation and amortization were greater than increases in current assets
resulting from increased sales.
NET CASH USED BY INVESTING ACTIVITIES. Principal uses of cash are for
capital expenditures and acquisitions. For 1998, 1997 and 1996, the Company made
capital expenditures of approximately $5.0
13
<PAGE>
million, $3.6 million and $3.4 million, respectively. Other significant
investing activities included acquisitions. The aggregate cash purchase price
for acquisitions was $58.1 million in 1998, $18.9 million in 1997 and $11.4
million in 1996.
NET CASH PROVIDED BY FINANCING ACTIVITIES. Our principal sources of cash
are from financing activities, including borrowings under our credit facilities,
and sales of equity securities. Financing activities provided net cash of $16.8
million in 1998 compared to using cash of $0.4 million in 1997 and providing
cash of $3.3 million in 1996. During 1998, we issued common stock providing net
proceeds of $12.9 million compared to net proceeds of $2.1 million in 1997 and
$6.2 million in 1996. 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 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 $0.1
million of related expenses. The 1998 common stock proceeds were used to repay
$1.6 million in term debt and to fund acquisitions. During 1998, we borrowed
$13.0 million under our credit facilities compared to $2.9 million and $2.0
million during 1997 and 1996.
PRINCIPAL DEBT INSTRUMENTS. As of December 31, 1998, we had an aggregate
of $94.1 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, $23.0 million is scheduled to
mature during 1999. 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 December 31, 1998, we were not
in compliance with several of these covenants; however we obtained waivers for
the non-compliance from those lenders. In the future, we may not be able to
comply with all of these covenants and no assurance can be given that if unable
to comply, we will be able to obtain waivers from our lenders.
We are currently exploring various financing alternatives to meet our
future liquidity needs. We anticipate refinancing certain of our debt facilities
in the second 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.
Our existing credit facility is a revolving line of credit with Comerica
Bank -- Texas. The principal amount is the lesser of $45 million or a defined
borrowing base. The credit facility bears interest at the prime rate of Comerica
(which was 7.75% at December 31, 1998) and allows the borrowing of funds based
on 80% of eligible accounts receivable and 50% of eligible inventory. At
December 31, 1998, the borrowing capacity under the credit facility was $45
million and availability was $1.2 million. At March 26, 1999, the borrowing
capacity was $45 million and availability was $2.2 million.
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. See Note 8 to the Consolidated Financial Statements.
BELLELI ENERGY. In 1998, we entered into an option agreement that grants
us the right to purchase approximately 95% of Belleli Energy S.r.L.
("Belleli") through 2003. 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 two payments annually
totaling approximately $600,000 in 1999, $700,000 in 2000, $800,000 in 2001 and
$400,000 in 2002.
We have agreed during the option period to support the financing of Belleli
in order for it to achieve its operating plan. We anticipate that the majority
of this financing will take the form of providing bonding for projects that
Belleli undertakes, and to a lesser extent, working capital infusions. At
December 31, 1998, we have provided $400,000 in working capital loans, which are
supported by accounts receivable, and $520,000 in bonding support in the form of
letters of credit, $254,000 of which have expired subsequent to
14
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year end. We currently anticipate that Belleli may need up to $20 million in
financial support from us through the end of 1999 which may be in the form of
bonding, working capital loans or other financing. To date, we have been able to
provide financing support to Belleli through bonding arrangements with our bank
and cash flow from operations; however, even if we are successful in refinancing
certain of our debt facilities in the second quarter, there can 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 or force us to sell to a third party all or part of our
rights to purchase Belleli.
INFLATION
Although we believe that inflation has not had any material effect on
operating results, our business may be affected by inflation in the future.
SEASONALITY
We believe that our business is not subject to any significant seasonal
factors, and do not anticipate significant seasonality in the future.
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 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 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
mid-1999.
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 cashflows.
15
<PAGE>
NEW ACCOUNTING PRONOUNCEMENTS
In February 1998, the Financial Accounting Standards Board (the "FASB")
issued SFAS No. 132, Employer's Disclosures about Pensions and Other
Postretirement Benefits, which revises certain disclosure requirements about
pensions and postretirement benefits. It does not change the measurement or
recognition of these plans and is effective for fiscal years beginning after
December 15, 1997.
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants 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. We are evaluating what, if any, impact
this SOP will have on us upon implementation.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instrument and Hedging Activities. This statement establishes accounting and
reporting standards for derivative instrument embedded in other contracts. This
statement is effective for all fiscal years beginning after June 15, 1999. We
are currently evaluating what impact adoption of this statement will have on our
consolidated financial statements.
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 -- Liquidity and Capital Resources" 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 have been 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.
ITEM 7.A 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. Under the revolving line of credit, the principal
balance is due in June 2000. As of December 31, 1998, the revolving line of
credit had a principal balance of $41.4 million at a floating interest rate of
7.75% per annum. We also have $27.0 million of long-term debt bearing interest
at Libor plus 2.5% to 5%. The Libor rate as of December 31, 1998 was 5.56%. A
1.0% increase in interest rates could result in a $0.7 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.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required hereunder are
included in this report as set forth in Item 14(a).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
16
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this item is incorporated by reference to the
material appearing under the heading "Election of Directors" in the Proxy
Statement for the 1999 Annual Meeting of Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item is incorporated by reference to the
material appearing under the heading "Executive Compensation" in the Proxy
Statement for the 1999 Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item is incorporated by reference to the
material appearing under the heading "Principal Stockholders" and "Certain
Transactions" in the Proxy Statement for the 1999 Annual Meeting of
Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is incorporated by reference to the
material appearing under the heading "Certain Transactions" in the Proxy
Statement for the 1999 Annual Meeting of Stockholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
a. Financial Statements
See index to consolidated financial statements on page F-1.
b. Reports on Form 8-K
We filed an amendment to a Current Report on Form 8-K dated October 28,
1998 disclosing the historical and pro forma financial statements of
A&B Bolt.
We filed a Current Report on Form 8-K dated November 18, 1998 that
included our financial statements, which were restated to give effect
to the acquisitions of Ameritech, GHX, Moores and UWS, which were
accounted for as poolings-of-interest.
c. Exhibits
See the Exhibit Index appearing on page EX-1.
17
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SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, ON THE 30TH DAY OF
MARCH 1999.
INDUSTRIAL HOLDINGS, INC.
By: ____/s/__CHRISTINE A. SMITH_______
CHRISTINE A. SMITH (CHIEF FINANCIAL
OFFICER AND VICE PRESIDENT)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS AND IN THE CAPACITIES
INDICATED ON THE 30TH DAY OF MARCH 1999.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- - ------------------------------------------------------ ---------------------------------------------------------
<C> <S>
By: /s/ROBERT E. CONE Chairman of the Board of Directors, President and Chief
ROBERT E. CONE Executive Officer (Principal Executive Officer)
By: /s/CHRISTINE A. SMITH Vice President and Chief Financial Officer (Principal
CHRISTINE A. SMITH Financial Officer and Chief Accounting Officer)
By: /s/CHARLES J. ANDERSON Director
CHARLES J. ANDERSON
By: /s/JAMES H. BROCK, JR. Director
JAMES H. BROCK, JR.
By: /s/JAMES W. KENNEY Director
JAMES W. KENNEY
By: /s/JOHN P. MADDEN Director
JOHN P. MADDEN
By: /s/BARBARA S. SHULER Director
BARBARA S. SHULER
By: /s/JOHN L. THOMPSON Director
JOHN L. THOMPSON
</TABLE>
18
<PAGE>
INDUSTRIAL HOLDINGS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Independent Auditors' Reports........ F-2
Consolidated Balance Sheets at
December 31,
1998 and 1997...................... F-9
Consolidated Statements of Income For
the Years Ended December 31,
1998, 1997 and 1996................ F-10
Consolidated Statements of Cash Flows
For the Years Ended December 31,
1998, 1997 and 1996................ F-11
Consolidated Statements of
Shareholders' Equity For the Years
Ended December 31,
1998, 1997 and 1996................ F-13
Notes to Consolidated Financial
Statements......................... F-14
</TABLE>
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 sheets of Industrial
Holdings, Inc. and subsidiaries (the "Company") as of December 31, 1998 and
1997, and the related consolidated statements of income, shareholders' equity,
and cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. 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 3 to the consolidated financial statements. We did not audit the balance
sheet 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 3 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 years ended
December 31, 1998 and 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 audits and reports of other auditors provide a reasonable
basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, such
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of the Company as of December 31, 1998
and 1997, and the results of their operations and their cash flows for the years
then ended in conformity with generally accepted accounting principles.
The consolidated financial statements of the Company for the years ended
December 31, 1996, 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 year ended December 31, 1996
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 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 and 1996 were also
previously
F-2
<PAGE>
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 and 1996 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 3 that
were applied to restate the 1997 and 1996 financial statements of Moores and the
1997 and 1996 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 statements of income, shareholders'
equity and cash flows for the year 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 3 to the consolidated
financial statements.
DELOITTE & TOUCHE LLP
Houston, Texas
March 26, 1999
F-3
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Industrial Holdings, Inc.
In our opinion, the 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 3, present fairly, in all material respects, the
results of their operations and their cash flows for the year 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 audit. We conducted our audit 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 audit provides a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Houston, Texas
March 5, 1997
F-4
<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 the related statements of
income, retained earnings and cash flows for each of the years in the two 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 or 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 the results of its operations and its cash flows for
each of the years in the two year period ended April 30, 1997 in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
New Orleans, Louisiana
June 17, 1997
F-5
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Industrial Holdings, Inc.
We have audited the accompanying 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 the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of 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 the years then ended, in conformity
with generally accepted accounting principles.
WEINSTEIN SPIRA & COMPANY, P.C.
Houston, Texas
January 22, 1998
F-6
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and Directors 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 two 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 two years in the period
ended December 31, 1997 in conformity with generally accepted accounting
principles.
KARLINS ARNOLD & CORBITT, P.C.
(Successors to Karlins Fuller Arnold & Klodsky, P.C.)
The Woodlands, Texas
February 12, 1998
F-7
<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
two 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 two year period ended June 30, 1997 in
conformity with generally accepted accounting principles.
SIMONTON, KUTAC & BARNIDGE, LLP
Houston, Texas
September 19, 1997
F-8
<PAGE>
INDUSTRIAL HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1998 1997
--------------- --------------
ASSETS
<S> <C> <C>
Current assets:
Cash and equivalents................. $ 3,262,670 $ 1,677,400
Accounts receivable -- trade, net.... 44,276,132 21,392,147
Contracts in progress with revenues
in excess of progress billings..... 5,428,987 --
Inventories.......................... 46,530,397 20,020,386
Employee advances.................... 58,823 113,681
Notes receivable, current portion.... 4,364,106 1,362,095
Other current assets................. 4,571,035 1,096,698
--------------- --------------
Total current assets............ 108,492,150 45,662,407
Property and equipment, net.......... 55,134,141 26,399,464
Notes receivable, less current
portion............................ 1,470,409 1,677,511
Investment in unconsolidated limited
partnership........................ 1,290,930 --
Other assets......................... 3,352,223 1,490,133
Goodwill and other intangible assets,
net................................ 27,242,498 12,372,887
--------------- --------------
Total assets.................... $ 196,982,351 $ 87,602,402
=============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable........................ $ 41,386,422 $ 14,993,496
Accounts payable -- trade............ 20,460,797 10,837,780
Billings in excess of costs and
estimated earnings on long-term
contracts.......................... 4,565,760 --
Accrued expenses and other........... 8,276,431 5,699,277
Current portion of long-term debt.... 23,049,999 3,554,962
--------------- --------------
Total current liabilities....... 97,739,409 35,085,515
Long-term debt, less current
portion............................ 29,648,637 12,953,100
Deferred compensation payable, less
current portion.................... 216,021 241,778
Deferred income taxes payable........ 4,408,248 2,864,154
--------------- --------------
Total liabilities............... 132,012,315 51,144,547
--------------- --------------
Commitments and contingencies -- Note
9
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,
13,028,635 and 10,307,656
shares issued and outstanding
for 1998 and 1997,
respectively.................. 130,286 103,077
Additional paid-in capital...... 50,876,425 27,252,844
Retained earnings............... 14,908,325 9,101,934
Notes receivable from
officers -- Note 5............ (945,000) --
--------------- --------------
Total shareholders'
equity.................. 64,970,036 36,457,855
--------------- --------------
Total liabilities and
shareholders' equity.... $ 196,982,351 $ 87,602,402
=============== ==============
</TABLE>
See notes to consolidated financial statements.
F-9
<PAGE>
INDUSTRIAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1998 1997 1996
--------------- --------------- --------------
<S> <C> <C> <C>
Sales................................ $ 208,971,408 $ 138,504,365 $ 93,270,128
Cost of sales........................ 159,991,800 101,891,851 71,588,933
--------------- --------------- --------------
Gross profit......................... 48,979,608 36,612,514 21,681,195
Selling, general and administrative
expenses........................... 35,975,586 26,859,713 17,168,603
--------------- --------------- --------------
Income from operations............... 13,004,022 9,752,801 4,512,592
--------------- --------------- --------------
Other income (expense):
Interest expense..................... (4,928,347) (2,452,557) (1,906,583)
Interest income...................... 521,771 160,231 160,954
Earnings from equity investment in
unconsolidated limited
partnership........................ 840,930 -- --
Other income, net.................... 442,407 535,012 111,624
--------------- --------------- --------------
Total other income (expense)......... (3,123,239) (1,757,314) (1,634,005)
--------------- --------------- --------------
Income before income taxes........... 9,880,783 7,995,487 2,878,587
Income tax expense................... 3,872,731 3,197,433 1,015,325
--------------- --------------- --------------
Net income........................... 6,008,052 4,798,054 1,863,262
Distributions to shareholders........ 34,297 130,242 77,290
--------------- --------------- --------------
Net income available to common
shareholders....................... $ 5,973,755 $ 4,667,812 $ 1,785,972
=============== =============== ==============
Basic earnings per share............. $ .49 $ .48 $ .24
Diluted earnings per share........... $ .47 $ .43 $ .22
Weighted average number of common
shares outstanding -- basic........ 12,289,297 9,778,226 7,348,855
Weighted average number of common
shares outstanding dilutive
securities......................... 13,014,599 10,691,903 7,999,343
</TABLE>
See notes to consolidated financial statements.
F-10
<PAGE>
INDUSTRIAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1998 1997 1996
--------------- -------------- --------------
Cash flows from operating activities:
<S> <C> <C> <C>
Net income........................... $ 6,008,052 $ 4,798,054 $ 1,863,262
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization... 4,958,456 3,103,887 1,823,790
Equity in earnings of
unconsolidated limited
partnership................... (840,930)
Deferred income tax provision... 1,539,859 303,009 455,060
Deferred compensation paid...... (174,472) (43,754) (109,203)
Income tax benefit from stock
options
exercised..................... 48,572 163,664
Other........................... 7,500
Changes in assets and
liabilities, net of effect of
purchase acquisitions:
Accounts receivable........ (14,269,002) (3,408,840) (642,780)
Employee advances.......... 54,858 18,263 (109,373)
Inventories................ (3,811,397) (702,812) (1,152,064)
Notes receivable........... (2,794,909) (1,367,664) 53,466
Other assets............... (3,138,390) (279,885) (356,634)
Accounts payable and
accrued expenses........ 6,107,670 615,510 229,635
--------------- -------------- --------------
Net cash provided
(used) by operating
activities......... (6,311,633) 3,199,432 2,062,659
Cash flows from investing activities:
Purchase of property and
equipment..................... (5,021,944) (3,571,263) (3,394,135)
Proceeds from disposals of
property and equipment, net... 376,315 673,392 69,787
Business acquisitions, net of
cash.......................... (4,239,334) (2,150,662)
Cash obtained in purchase of
American...................... 1,244,666
Additional consideration paid to
former shareholders of
Landreth...................... (29,491)
--------------- -------------- --------------
Net cash used by
investing
activities......... (8,884,963) (5,048,533) (2,109,173)
</TABLE>
See notes to consolidated financial statements.
F-11
<PAGE>
INDUSTRIAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1998 1997 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Cash flows from financing activities:
Net (repayments) borrowings
under revolving line of
credit........................ $ 11,756,321 $ (658,921) $ 479,603
Proceeds from issuance of
long-term debt................ 1,272,195 3,603,342 1,601,532
Principal payments on notes
payable and long-term debt.... (8,182,207) (4,993,685) (4,869,549)
Proceeds from issuance of common
stock......................... 12,914,854 2,136,978 6,248,281
Notes receivable from
officers...................... (945,000)
Repurchase of common stock by an
acquired company.............. (330,610)
Distributions to shareholders... (34,297) (130,242) (77,290)
-------------- -------------- --------------
Net cash provided (used) by
financing activities.... 16,781,866 (373,138) 3,382,577
-------------- -------------- --------------
Net increase (decrease) in cash and
equivalents........................ 1,585,270 (2,222,239) 3,336,063
Cash and equivalents, beginning of
year............................... 1,677,400 3,899,639 563,576
-------------- -------------- --------------
Cash and equivalents, end of year.... $ 3,262,670 $ 1,677,400 $ 3,899,639
============== ============== ==============
Supplemental disclosure of noncash
investing and financing activities:
Conversion of debt to equity.... $ 3,093,000 $ 1,619,100
Redemption of preferred stock
with debt..................... 960,000 --
Acquisition of businesses:
Assets acquired............ $ 83,307,736 24,828,899 11,443,214
Liabilities assumed........ 79,068,402 22,678,237 12,687,881
Supplemental disclosures of cash flow
information:
Cash paid for:
Interest................... $ 4,344,227 $ 2,425,666 $ 1,848,246
Income taxes............... 2,395,184 2,025,185 211,327
</TABLE>
See notes to consolidated financial statements.
F-12
<PAGE>
INDUSTRIAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
NOTES
PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE
--------------------- ----------------------- PAID-IN RETAINED FROM
SHARES PAR VALUE SHARES PAR VALUE CAPITAL EARNINGS OFFICERS
--------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1996............. 202,960 $ 960,000 6,756,199 $ 67,563 $8,720,616 $2,648,150 $ --
Issuance of common stock:
Private placement.................. 300,000 3,000 1,007,000
Tender offer to Class A
warrantholders, net.............. 621,914 6,219 3,562,681
Exercise of warrants and options... 373,418 3,734 1,665,647
Conversion of debt to equity......... 465,000 4,650 1,614,450
Distributions to shareholders........ (77,290)
Shortfall on sale of stock by former
PVS shareholders -- Note 9......... (42,639)
Net income........................... 1,863,262
--------- ---------- ---------- ---------- ---------- ---------- ----------
Balance, December 31, 1996........... 202,960 960,000 8,516,531 85,166 16,527,755 4,434,122
Insurance of common stock:
Acquisitions....................... 728,461 7,285 5,672,683
Private placement.................. 71,530 715 644,790
Exercise of warrants and options... 462,680 4,627 1,486,846
Redemption of preferred stock........ (202,960) (960,000)
Income tax benefits from stock
options exercised.................. 163,664
Conversion of debt to equity......... 528,454 5,284 3,087,716
Distributions to shareholders........ (130,242)
Repurchase of common stock by an
acquired company................... (330,610)
Net income........................... 4,798,054
--------- ---------- ---------- ---------- ---------- ---------- ----------
Balance, December 31, 1997........... 10,307,656 $103,077 $27,252,844 $9,101,934
Issuance of common stock:
Acquisitions....................... 1,227,854 12,279 10,507,721
Exercise of warrants and options... 1,493,125 14,930 12,899,924
Income tax benefits from stock option
exercised.......................... 48,572
Distributions to shareholders........ (34,297)
Transfer earnings of Sub S
corporation........................ 167,364 (167,364)
Notes receivable..................... (945,000)
Net income........................... 6,008,052
--------- ---------- ---------- ---------- ---------- ---------- ----------
Balance, December 31, 1998........... -- $ -- 13,028,635 $130,286 $50,876,425 $14,908,325 $(945,000)
========= ========== ========== ========== ========== ========== ==========
<CAPTION>
TOTAL
----------
<S> <C>
Balance, January 1, 1996............. $12,396,329
Issuance of common stock:
Private placement.................. 1,010,000
Tender offer to Class A
warrantholders, net.............. 3,568,900
Exercise of warrants and options... 1,669,381
Conversion of debt to equity......... 1,619,100
Distributions to shareholders........ (77,290)
Shortfall on sale of stock by former
PVS shareholders -- Note 9......... (42,639)
Net income........................... 1,863,262
----------
Balance, December 31, 1996........... 22,007,043
Insurance of common stock:
Acquisitions....................... 5,679,968
Private placement.................. 645,505
Exercise of warrants and options... 1,491,473
Redemption of preferred stock........ (960,000)
Income tax benefits from stock
options exercised.................. 163,664
Conversion of debt to equity......... 3,093,000
Distributions to shareholders........ (130,242)
Repurchase of common stock by an
acquired company................... (330,610)
Net income........................... 4,798,054
----------
Balance, December 31, 1997........... $36,457,855
Issuance of common stock:
Acquisitions....................... 10,520,000
Exercise of warrants and options... 12,914,854
Income tax benefits from stock option
exercised.......................... 48,572
Distributions to shareholders........ (34,297)
Transfer earnings of Sub S
corporation........................
Notes receivable..................... (945,000)
Net income........................... 6,008,052
----------
Balance, December 31, 1998........... $64,970,036
==========
</TABLE>
See notes to consolidated financial statements.
F-13
<PAGE>
INDUSTRIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION:
The consolidated financial statements, as presented, give retroactive
effect to the 1998 acquisitions accounted for a poolings-of-interest (see Note
3). Industrial Holdings, Inc., incorporated in August 1989, operates in four
business segments.
(i) FASTENER MANUFACTURING AND DISTRIBUTION 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 gasket, hose, fittings and other products
primarily to the petrochemical and chemical refining and oil and gas
industries;
(ii) HEAVY FABRICATION which manufactures and distributes medium and
thick-walled pressure vessels, gas turbine casings, heat exchangers
and other large machine weldments primarily to customers in the
electric power, marine, petrochemical and medical equipment
industries;
(iii) VALVE MANUFACTURING AND REPAIR 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
(iv) MACHINE SALES AND SERVICE 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
For the majority of its operations, the Company recognizes revenues upon
shipment of its product or upon completion of services it renders. Revenues and
profits on long-term contracts are recognized using the percentage-of-completion
method. The percentage-of-completion is determined by relating costs or labor
incurred to date to management's estimate of total costs or total labor,
respectively, to be incurred on each contract. Revisions of estimates are
reflected in the year in which the facts necessatating the revisions become
known. If a loss is indicated on any contract in process, a provision is made
currently for the entire loss. There are no significant amounts included in the
accompanying balance sheet that are not expected to be recovered from existing
contracts at current contract values, or that are not expected to be collected
within one year.
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 $606,874 and $256,159 at December 31, 1998
and 1997, respectively.
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'
F-14
<PAGE>
INDUSTRIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 value 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, 1998 and 1997, goodwill
was $29,643,301 and $12,292,036 net of accumulated amortization of $2,446,617
and $1,369,835, respectively. Other intangible assets consist primarily of loan
origination fees. Goodwill and other intangible assets are amortized over 5 to
30 years. Amortization expense was $1,122,355, $628,073, and $287,937 for the
years ended December 31, 1998, 1997 and 1996, respectively.
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.
F-15
<PAGE>
INDUSTRIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table presents information necessary to calculate basic and
diluted earnings per share for the periods indicated, with 1996 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,
----------------------------------------------
1998 1997 1996
-------------- -------------- --------------
<S> <C> <C> <C>
EARNINGS FOR BASIC AND DILUTED
COMPUTATION
Net income...................... $ 6,008,052 $ 4,798,054 $ 1,863,262
Distributions to shareholders... (34,297) (130,242) (77,290)
-------------- -------------- --------------
Net income used for basic
earnings per share............ 5,973,755 4,667,812 1,785,972
Interest on convertible debt
securities, net of tax........ 87,656 -- --
-------------- -------------- --------------
Net income available to common
shareholders.................. $ 6,061,411 $ 4,667,812 $ 1,785,972
============== ============== ==============
BASIC EARNINGS PER SHARE
Weighted average common shares
outstanding................... 12,289,297 9,778,226 7,348,855
============== ============== ==============
Basic earnings per share........ $ .49 $ .48 $ .24
============== ============== ==============
DILUTED EARNINGS PER SHARE
Weighted average common shares
outstanding................... 12,289,297 9,778,226 7,348,855
Shares issuable from assumed
conversion of common share
options, warrants granted and
debt conversion............... 725,302 913,677 650,488
-------------- -------------- --------------
Weighted average common shares
outstanding, as adjusted...... 13,014,599 10,691,903 7,999,343
============== ============== ==============
Diluted earnings per share...... $ .47 $ .43 $ .22
============== ============== ==============
</TABLE>
There were 882,250 options for 1998 that were not included in EPS because
the inclusion would have been anti-dilutive.
CASH EQUIVALENTS
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 business.
ESTIMATES
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Management
believes that the estimates made in connection with these financial statements
are reasonable.
RECLASSIFICATIONS
Certain reclassifications have been made to the prior-year amounts to
conform to the current-year classification.
F-16
<PAGE>
INDUSTRIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NEW ACCOUNTING PRONOUNCEMENTS
In February 1998, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards No. 132 ("SFAS No. 132"),
Employer's Disclosures about Pensions and Other Postretirement Benefits, which
revises certain disclosure requirements about pensions and postretirement
benefits. It does not change the measurement or recognition of these plans and
is effective for fiscal years beginning after December 15, 1997.
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instrument and Hedging Activities. This statement establishes accounting and
reporting standards for derivative instrument embedded in other contracts. This
statement is effective for all fiscal years beginning after June 15, 1999. The
Company is currently evaluating what impact adoption of this statement will have
on our consolidated financial statements.
In June 1997 the FASB issued SFAS No. 130, Reporting Comprehensive Income.
The statement was effective for fiscal years beginning after December 15, 1997
and required retroactive presentation of comprehensive income for all periods
presented. For each of the years in the three years ended December 31, 1998, the
Company had no transactions which would have given rise to comprehensive income.
In March 1998, the Accounting Standards Executive Committee ("AcSEC") of
the American Institute of Certified Public Accounting ("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 year beginning after December 15, 1998. Management is
evaluating what, if any, impact this SOP will have on the Company upon
implementation.
3. BUSINESS ACQUISITIONS:
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 were $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 $16.0 million. The final purchase price allocation of
Philform, Beaird, Ideal and A&B are subject to certain adjustments relating to
the appraised value of assets, final purchase price adjustments 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.
In March 1998, the Company acquired WHIR Acquisition, Inc., doing business
as Ameritech Fastener Manufacturing, Inc. ("Ameritech") and GHX, Incorporated
("GHX"). In April 1998, the Company acquired Moores Pump and Supply, Inc.
("Moores") and in July 1998, the Company acquired United Wellhead Services,
Inc. ("UWS") in transactions accounted for as pooling-of-interest (the
"Poolings"). In the Poolings the outstanding capital stock of Ameritech, GHX,
Moores and UWS (together, the "Pooled Companies") was exchanged for 3,665,036
shares of the Company's common stock.
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 two-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 two year period ended
December 31, 1997, (ii) the financial statements of Moores as of December 31,
1997 and 1996 and for the two-year period ended December 31, 1997, and (iii) the
consolidated financial statements of UWS, GHX and Moores as of
F-17
<PAGE>
INDUSTRIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1997 and 1996 and for the two-year period ended December 31, 1997.
The consolidated financial statements of GHX as of June 30, 1997 and for the
two-year period then ended and the financial statements of Moores as of April
30, 1997 and for the two-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 two-year period ended December 31,
1997 include all necessary adjustments to conform the fiscal periods of the
Pooled Companies as previously presented to that of the Company.
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. 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 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 1998 and 1997 acquisitions as
described above which were accounted for under the purchase method of accounting
had occurred as of January 1, 1997, sales, net income and basic and diluted
earnings per share would have been $265,386,000, $7,701,000, $.59 and $.55 for
1998 and $262,875,000, $9,977,000, $.89 and $.82 for 1997. 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. 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, 1997 or 1996 or future
results of operations of the combined companies.
4. INVENTORIES:
Inventories at December 31, consist of:
<TABLE>
<CAPTION>
1998 1997
-------------- --------------
Raw materials........................ $ 12,451,960 $ 3,197,946
<S> <C> <C>
Finished goods....................... 23,628,114 12,997,720
Other................................ 10,450,323 3,824,720
-------------- --------------
$ 46,530,397 $ 20,020,386
============== ==============
</TABLE>
F-18
<PAGE>
INDUSTRIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. NOTES RECEIVABLE:
Notes receivable at December 31 consist of the following:
<TABLE>
<CAPTION>
1998 1997
-------------- --------------
<S> <C> <C>
Note receivable from affiliate with
interest at 8.5% due on demand,
unsecured.......................... $ 2,609,139
Notes receivable from former
shareholders of acquired companies
due in 1999........................ 1,312,287 $ 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........................... 1,030,120 1,109,838
Notes receivable from employees due
June 1999, unsecured............... 210,865 431,716
Note receivable from Belleli with
interest at 8.5% due in 1999 and
secured by accounts receivables.... 400,000
Various installment notes receivable
from assets sales due through 2000
primarily secured by equipment..... 268,093 383,281
Other notes receivable............... 4,012 6,139
-------------- --------------
5,834,515 3,039,606
Less current portion................. 4,364,106 1,362,095
-------------- --------------
$ 1,470,409 $ 1,677,511
============== ==============
</TABLE>
At December 31, 1998, the Company had notes receivable from officers of
$945,000. Notes totaling $695,000 and bearing interest of 5.7% are due in 1999.
One note in the amount of $250,000 at 6.1% is due in 2003.
6. PROPERTY AND EQUIPMENT
Property and equipment at December 31 consist of:
<TABLE>
<CAPTION>
1998 1997
-------------- --------------
<S> <C> <C>
Land................................. $ 2,875,655 $ 1,716,990
Buildings and improvements........... 13,181,525 5,483,683
Machinery and equipment.............. 47,412,937 25,839,250
Furniture and fixtures............... 2,758,387 2,358,182
Construction in progress............. 858,201 --
-------------- --------------
67,086,705 35,398,105
Less -- accumulated depreciation and
amortization....................... (11,952,564) (8,998,641)
-------------- --------------
$ 55,134,141 $ 26,399,464
============== ==============
</TABLE>
Depreciation expense was $3,836,101, $2,475,814 and $1,535,853 for 1998,
1997 and 1996, respectively.
F-19
<PAGE>
INDUSTRIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. NOTES PAYABLE:
Notes payable at December 31 consists of the following:
<TABLE>
<CAPTION>
1998 1997
-------------- --------------
<S> <C> <C>
Revolving lines of credit with banks
which provide for borrowings up to
the lesser of a defined borrowing
base or $45,000,000, $1,191,468
available at December 31, 1998,
principal due on demand through
1999, interest payable monthly at
prime (7.75% at December 31, 1998),
secured by substantially all assets
of the Company..................... $ 41,386,422 $ 14,722,562
9% notes payable to individuals due
December 31, 1998 including
interest, unsecured................ 237,754
Other notes payable.................. -- 33,180
-------------- --------------
$ 41,386,422 $ 14,993,496
============== ==============
</TABLE>
8. LONG-TERM DEBT:
<TABLE>
<CAPTION>
1998 1997
-------------- --------------
<S> <C> <C>
Notes payable to banks with monthly
principal payments of $222,494 plus
interest at prime (7.75% at
December 31, 1998), maturing on
November 1, 1997 through 2005,
secured by certain assets of the
Company............................ $ 14,099,052 $ 1,263,804
Note payable to a financial
institution -- maturing November
1999 with interest at Libor + 5%
(10.6% at December 31, 1998)payable
monthly, unsecured................. 15,000,000
Notes payable to a financial
institution with monthly principal
payments of $215,298 plus interest
at libor + 2.5% (8.06% at December
31, 1998), maturing December 2003
and October 2004 and secured by
certain equipment.................. 12,038,888 7,888,889
Convertible debenture payable to
former shareholder of Beaird
payable in three annual
installments of $1,770,833 plus
interest at 4% thereafter June
2001, unsecured, with principal and
interest convertible to the
Company's common stock at $12.75
per share.......................... 5,312,500
Various notes payable in monthly
installments, including interest
ranging from 7.65% to 10%, maturing
2004 through 2010, secured by real
estate............................. 3,030,550 1,166,771
Various notes payable to individuals,
payable in monthly installments
including interest ranging from 5%
to 8%, maturing June 1998 through
February 2007, primarily
unsecured.......................... 1,435,121 1,770,898
Various installment notes, payable in
monthly installments through 2003,
including interest ranging from
7.6% to 16%, secured primarily by
equipment.......................... 1,782,525 4,405,200
Other notes.......................... -- 12,500
-------------- --------------
52,698,636 16,508,062
Less -- current portion.............. 23,049,999 3,554,962
-------------- --------------
$ 29,648,637 $ 12,953,100
============== ==============
</TABLE>
F-20
<PAGE>
INDUSTRIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The aggregate maturities of long-term debt at December 31, 1998 are as
follows:
<TABLE>
<S> <C>
Year ended December 31:
1999............................ $ 23,049,999
2000............................ 8,240,537
2001............................ 7,446,921
2002............................ 4,356,814
2003............................ 6,135,963
Thereafter...................... 3,468,402
--------------
$ 52,698,636
==============
</TABLE>
Certain of the company's debt arrangements contain requirements as to the
maintenance of minimum levels of working capital and net worth, minimum rates of
debt to cash flow, cash flow to certain fixed charges, liabilities to tangible
net worth and capital expenditures. At December 31, 1998, the Company was not in
compliance with several of these covenants. Subsequently, the Company has
received waivers on compliance with these covenants from the applicable lending
institutions.
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 2007. Rent payments to the related parties
were $183,000 for 1998, $528,800 for 1997 and $478,800 for 1996. Aggregate rent
expense on all operating leases amounted to $2,827,226, $1,843,267 and
$1,710,039 for the years 1998, 1997 and 1996. Future minimum lease payments are
as follows:
<TABLE>
<S> <C>
Year ended December 31:
1999............................ $ 2,090,001
2000............................ 1,839,786
2001............................ 1,353,886
2002............................ 1,048,745
2003............................ 561,238
Thereafter...................... 1,335,955
------------
$ 8,229,611
============
</TABLE>
Lease commitments to related parties are $188,000, $116,000, $96,000 for
1999, 2000, 2001, respectively, and $56,800 annually thereafter through 2003
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 its 1998 acquisition of GHX, an officer of the Company
who was a minority shareholder of GHX, received 24,345 shares of the Company's
common stock.
During 1998, the Company paid St. James Capital Corp. $1,000,000 in
advisory fees in connection with the acquisitions of various companies. Mr. John
Thompson, a director of the Company is also a director and president of St.
James Capital Corp.
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
F-21
<PAGE>
INDUSTRIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
partnership relating to the acquisition and operations of one of the
partnership's investee companies. Fees for these consulting services were
$100,000 and are included in other income, net in 1996.
In 1998, the Company entered into an option agreement which grants the
Company the right to purchase approximately 95% of Belleli Energy S.r.L. through
2003. 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 two payments annually totaling approximately $600,000
in 1999, $700,000 in 2000, $800,000 in 2001 and $400,000 in 2002. At December
31, 1998, the Company had made one payment in the amount of $287,500.
Additionally, under the option agreement, the Company is to provide certain
financing to Belleli. At December 31, 1998, the Company had a note receivable
from Belleli for $400,000 which is secured by accounts receivable and had
provided letters of credit to customers and suppliers of Belleli totaling
$520,000, $254,000 of which have expired subsequent to year end. The Company
currently anticipates that Belleli may need up to $20 million in financial
support from the Company through the end of 1999. To date, the Company has been
able to provide financing support to Belleli through bonding arrangements with
its bank and cash flow from its operations; however, there can be no assurance
that such sources will continue to be available to the extent necessary to
provide adequate support to Belleli, which would require the Company to pursue
other sources of financing on terms that may be less desirable or advantageous
than its current arrangements, or force the Company to sell to a third party all
or part of its rights to purchase Belleli.
In connection with the 1992 purchase of Landreth Engineering Company
("Landreth"), 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, the Company paid these
shareholders $29,491 as additional consideration. No amounts were payable under
this agreement for 1997 and no further obligation exists.
In connection with the 1992 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.
At December 31, 1998, the Company had $2,422,000 in letters of credit
outstanding.
The Company is involved in litigation arising in the ordinary course of its
business. In the opinion of management, the ultimate liabilities, 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:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Current
Federal......................... $ 1,941,872 $ 2,558,607 $ 428,816
State........................... 391,000 335,817 131,449
------------ ------------ ------------
2,332,872 2,894,424 560,265
Deferred, primarily federal.......... 1,539,859 303,009 455,060
------------ ------------ ------------
Income tax expense................... $ 3,872,731 $ 3,197,433 $ 1,015,325
============ ============ ============
</TABLE>
The Company and its subsidiaries file a consolidated federal income tax
return. At December 31, 1998, the Company has net operating loss (NOL)
carryforwards of approximately $1,296,000 for income tax purposes which expire
in 2007 and 2009. These losses may presently be offset against the future income
of
F-22
<PAGE>
INDUSTRIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the applicable subsidiary only. Of the carryforward amount, $296,000 may be used
at any time prior to its expiration. The remaining net operating loss
carryforwards are subject to annual limitations.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the carrying amounts for income tax purposes, primarily resulting
from the acquisitions of the Company's subsidiaries. During 1996 the Company
reduced the deferred tax asset valuation allowance by $239,000 to reflect
$101,000 in deferred tax assets used and to recognize deferred tax assets of
$138,000. 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.
The major components of deferred income tax assets and liabilities at
December 31 are as follows:
<TABLE>
<CAPTION>
1998 1997
-------------- --------------
Deferred income tax liabilities:
<S> <C> <C>
Depreciation.................... $ (5,123,016) $ (3,563,383)
Other........................... (982,115) (1,044,132)
-------------- --------------
Total deferred income
tax liabilities.... (6,105,131) (4,607,515)
-------------- --------------
Deferred income tax assets:
Net operating loss
carryforwards................. 440,602 465,716
Inventory....................... 371,598 466,857
Other........................... 884,682 810,788
-------------- --------------
Total deferred income
tax assets......... 1,696,882 1,743,361
-------------- --------------
Deferred income tax liability, net... $ (4,408,249) (2,864,154)
============== ==============
</TABLE>
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>
1998 1997 1996
------------ ------------ ------------
Tax at statutory rate................ $ 3,359,466 $ 2,718,465 $ 978,719
<S> <C> <C> <C>
Effect of permanent difference....... 358,179 284,435 133,354
Reduction in deferred tax asset
valuation allowance................ (238,873)
Tax effect of Sub S corporation net
income............................. (1,966) (77,438) (23,754)
Other................................ (101,008) 50,332 79,123
State income taxes, net of federal
benefit............................ 258,060 221,639 86,756
------------ ------------ ------------
$ 3,872,731 $ 3,197,433 $ 1,015,325
============ ============ ============
</TABLE>
11. SHAREHOLDERS' EQUITY:
COMMON STOCK
Holders of the Company's common stock are entitled to one vote per share on
all matters 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>
INDUSTRIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DISTRIBUTION TO SHAREHOLDERS
Distributions to shareholders consist of distributions to Sub S corporation
shareholders prior to the acquisition of the Sub S corporation by the Company as
well as in 1997 and 1996 dividends earned by holders of preferred stock of
acquired companies prior to acquisition by the Company.
WARRANTS TO ACQUIRE COMMON STOCK
In 1998, the Company completed an offer to the holders of Class B warrants
to exchange each Class B warrant and $10.00 cash for one share of common stock,
one Class C warrant and one Class D warrant. The Company received net proceeds
of $10.9 million after deducting approximately $0.1 million of related expenses.
The following table sets forth the outstanding warrants to acquire
3,506,863 shares of common stock as of December 31, 1998:
<TABLE>
<CAPTION>
NUMBER OF
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, 2000, redeemable upon 30 days
notice............................. 149,375
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, 2000, redeemable if closing bid
price of common stock equals or
exceeds $20.00 for 20 consecutive
days............................... 1,724,603
Class D 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, 2000, redeemable if closing bid
price of common stock equals or
exceeds $22.50 for 20 consecutive
days............................... 1,102,689
Warrant to acquire common stock at
$3.27 per share issued in
connection with private financing,
currently exercisable, expiring on
December 8, 2000................... 117,909
Warrant to acquire common stock at
$7.00 per share issued in
connection with acquisition
financing, currently exercisable,
expiring on November 18, 2001...... 382,287
Warrant to acquire common stock at
$10.00 per share, currently
exercisable, expiring on June 18,
2007............................... 30,000
</TABLE>
EMPLOYEE STOCK OPTION PLAN
At December 31, 1998, 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 Option 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 1998 Incentive Stock Plan ("Plan"), the Company may grant
incentive or nonqualified options to key employees. As of December 31, 1998,
there were 2.3 million 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
five 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>
INDUSTRIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes information about employee stock options
outstanding at December 31:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------- -------------------- -------------------
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............................... 522,750 $ 6.68 438,000 $ 4.09 253,000 $ 2.97
Granted.............................. 822,000 $11.87 208,750 $ 9.87 233,000 $ 5.09
Exercised............................ (156,800) $ 4.42 (124,000) $ 2.90 (45,000) $ 3.00
Forfeited............................ (8,250) $ 9.82 -- -- (3,000) $ 3.13
--------- -------- -------- -------- ------- --------
Outstanding at end of year........... 1,179,700 $10.57 522,750 $ 6.68 438,000 $ 4.09
--------- -------- -------- -------- ------- --------
Options exercisable at end of year... 455,077 $ 8.79 293,250 $ 5.34 296,000 $ 3.33
Weighted-average fair value of
options granted during the year at
market price....................... 186,500 $ 3.70 208,750 $ 2.92 83,000 $ 1.64
Weighted-average fair value of
options granted during the year
where exercise price is greater
than market price at grant date.... 631,000 $ 5.99 -- -- 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, 1998, there were 150,000 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>
1998 1997 1996
---------------------- ---------------------- ----------------------
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............................... 60,000 $ 6.78 80,000 $ 2.90 60,000 $ 2.38
Granted.............................. 25,000 $ 12.50 25,000 $ 11.60 25,000 $ 4.06
Exercised............................ (10,000) $ 2.38 (45,000) $ 2.56 (5,000) $ 2.38
---------- --------- ---------- --------- ---------- ---------
Outstanding at end of year........... 75,000 $ 9.20 60,000 $ 6.78 80,000 $ 2.90
---------- --------- ---------- --------- ---------- ---------
Options exercisable at end of year... 75,000 $ 9.20 60,000 $ 6.78 80,000 $ 2.90
---------- --------- ---------- --------- ---------- ---------
Weighted-average fair value of
options granted during the year at
market price....................... 25,000 $ 3.25 25,000 $ 1.19
Weighted-average fair value of
options granted during the year
where exercise price is greater
than market price at grant date.... 25,000 $ 5.07
</TABLE>
F-25
<PAGE>
INDUSTRIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes significant ranges of outstanding and
exercisable options at December 31, 1998.
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
NUMBER REMAINING AVERAGE NUMBER AVERAGE
RANGE OF OUTSTANDING AT CONTRACTUAL EXERCISABLE EXERCISABLE AT EXERCISABLE
EXERCISABLE PRICES DECEMBER 31, 1998 LIFE PRICE DECEMBER 31, 1998 PRICE
- - ------------------------------------- ----------------- ------------ ------------ ----------------- ------------
<S> <C> <C> <C> <C> <C>
$2.38................................ 5,000 5.8 $ 2.38 5,000 $ 2.38
$4.00 - $5.00........................ 180,000 6.8 $ 4.77 180,000 $ 4.77
$9.00 - $10.50....................... 389,200 8.6 $ 9.74 174,077 $ 9.81
$11.38 - $12.50...................... 651,000 8.8 $12.46 171,000 $12.34
$13.75............................... 25,000 9.6 $13.75 -- --
</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 SAFS
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 range of .445% to .460%, a risk-free interest rate of 5.75%; and
expected lives of 3 to 6 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>
1998 1997 1996
------------ ------------ ------------
Net income........................... As reported $ 6,008,052 $ 4,798,054 $ 1,863,262
<S> <C> <C> <C> <C>
Pro forma $ 4,515,060 $ 4,380,139 $ 1,636,693
Earnings per share:
Basic........................... As reported $ .49 $ .48 $ .24
Pro forma $ .36 $ .44 $ .21
Diluted......................... As reported $ .47 $ .43 $ .22
Pro forma $ .35 $ .40 $ .19
</TABLE>
12. EMPLOYEE BENEFIT 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 $359,000, $230,000 and $132,000 for
1998, 1997 and 1996.
July 1, 1998, the Company acquired Beaird. Beaird has a non-contributory
defined benefit plan covering its union employees. The plan provides benefits
that are generally based on years of service. Annual contributions to the plan
are sufficient to satisfy legal requirements.
Net pension cost attributable to the Beaird plan includes the following
components:
<TABLE>
<CAPTION>
YEAR
ENDED
DECEMBER 31,
-------------
1998
-------------
<S> <C>
Service cost -- benefits earned
during the period.................. $ 419,856
Interest cost on projected benefit
obligation......................... 191,703
Expected return on plan assets....... (218,033)
-------------
Total pension cost.............. $ 393,526
=============
</TABLE>
F-26
<PAGE>
INDUSTRIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Following are reconciliations of the Company's beginning and ending
balances of its retirement plan benefit obligation, plan assets and funded
status for 1998.
<TABLE>
<CAPTION>
YEAR
ENDED
DECEMBER 31,
-------------
1998
-------------
<S> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at July 1,
1998........................... $ 5,909,781
Service cost.................... 419,856
Interest cost................... 191,703
Benefits paid................... (22,807)
Actuarial (gain) loss...........
-------------
Benefit obligation, end of
year........................... $ 6,498,533
-------------
CHANGE IN PLAN ASSETS
Plan asset, at July 1, 1998 4,784,729
Benefits paid................... (22,807)
Employer contributions.......... 588,574
Actual investment return........ 73,456
-------------
Plan assets, end of year........ $ 5,423,952
-------------
RECONCILIATION OF FUNDED STATUS
Funded status................... (1,074,581)
Unrecognized prior service
cost........................... --
Unrecognized actuarial (gain)
loss........................... 144,577
-------------
Net amount recognized........... $ (930,004)
=============
</TABLE>
The benefit obligation was determined using an assumed discount rate of
6.5%. A long-term annual rate of compensation increase of 4.5% was assumed for
the plan. The assumed long-term rate of return on plan assets was 9%. The
unrecognized transitional asset, prior service cost and net (gain) or loss
related to the plan were recognized at the acquisition date.
13. REPORTABLE SEGMENTS
Effective January 1, 1998, the Company adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information" (SFAS No. 131). 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 accounting policies of the segments are the same as those of the
Company as described in Note 2. 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.
F-27
<PAGE>
INDUSTRIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
HEAVY
FASTENERS FABRICATION VALVES MACHINES CORPORATE CONSOLIDATED
----------- ----------- ---------- ---------- --------- ------------
1998
<S> <C> <C> <C> <C> <C> <C>
Sales................................ $110,403,167 $40,011,472 $44,251,577 $14,305,192 $208,971,408
Depreciation and amortization........ 3,151,524 549,849 1,073,942 151,868 31,273 4,958,456
Income from operations............... 6,893,607 1,981,421 5,792,844 22,656 (1,686,506) 13,004,022
Total assets......................... 106,246,831 58,427,308 24,844,292 3,969,087 3,494,833 196,982,351
Equity investment in limited
partnership........................ 1,290,930 1,290,930
Capital expenditures................. 2,865,211 689,674 1,068,493 79,847 318,719 5,021,944
1997
Sales................................ 79,472,953 43,407,065 15,624,347 138,504,365
Depreciation and amortization........ 2,058,076 794,773 238,085 12,953 3,103,887
Income from operations............... 5,544,340 5,349,827 (257,326) (884,040) 9,752,801
Total assets......................... 58,574,755 23,254,001 4,872,691 900,955 87,602,402
Capital expenditures................. 1,799,365 1,579,168 162,383 30,347 3,571,263
1996
Sales................................ 53,252,342 23,590,695 16,427,091 93,270,128
Depreciation and amortization........ 1,123,761 465,982 195,327 38,720 1,823,790
Income from operations............... 3,114,499 1,664,105 532,635 (798,647) 4,512,592
Total assets......................... 39,107,171 12,160,870 5,870,016 2,322,763 59,460,820
Capital expenditures................. 2,680,252 476,613 227,576 9,694 3,394,135
</TABLE>
RECONCILIATION OF INCOME FROM OPERATIONS TO NET INCOME
<TABLE>
<CAPTION>
1998 1997 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Income from operations............... $ 13,004,022 $ 9,752,801 $ 4,512,592
Other income (expense):
Interest expense................ (4,928,347) (2,452,557) (1,906,583)
Interest income................. 521,771 160,231 160,954
Equity in earnings of
unconsolidated limited
partnership................... 840,930 -- --
Other income, net............... 442,407 535,012 111,624
-------------- -------------- --------------
Total other income (expense)......... (3,123,239) (1,757,314) (1,634,005)
Income before income taxes........... 9,880,783 7,995,487 2,878,587
Income tax expense................... 3,872,731 3,197,433 1,015,325
-------------- -------------- --------------
Net income........................... $ 6,008,052 $ 4,798,054 $ 1,863,262
============== ============== ==============
</TABLE>
RECONCILIATION OF PRODUCTS AND SERVICES
<TABLE>
<CAPTION>
1998 1997 1996
--------------- --------------- --------------
<S> <C> <C> <C>
Cold formed fasteners, fastening
systems and metal components....... $ 36,266,413 $ 31,900,128 $ 23,505,900
Stud bolts, gaskets and hoses........ 74,136,754 47,572,825 29,746,442
Pressure vessels, storage tanks and
related products................... 40,011,472 0 0
Valves and related products.......... 44,251,577 43,407,065 23,590,695
Machine tools and other.............. 14,305,192 15,624,347 16,427,091
--------------- --------------- --------------
Sales................................ $ 208,971,408 $ 138,504,365 $ 93,270,128
=============== =============== ==============
</TABLE>
F-28
<PAGE>
INDUSTRIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. QUARTERLY FINANCIAL DATA (UNAUDITED):
Summarized quarterly financial data for 1998, 1997 and 1996 are as follows
(in thousands, except per share data):
<TABLE>
<CAPTION>
MARCH 31(1) JUNE 30(1) SEPTEMBER 30(1) DECEMBER 31(1)
------------ ----------- ---------------- ---------------
<S> <C> <C> <C> <C>
1998(2)
Sales................................ $ 40,777 $40,924 $ 61,885 $65,386
Gross Profit......................... 10,848 10,821 13,724 13,586
Net income........................... 1,611 1,771 1,677 949
Earnings per share:
Basic........................... .14 .15 .13 .07
Diluted......................... .13 .14 .13 .07
1997
Sales................................ $ 29,823 $33,326 $ 36,428 $38,927
Gross Profit......................... 8,287 8,964 9,588 9,773
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
</TABLE>
- - ------------
(1) Quarterly financial data presented herein has been retroactively restated to
give effect to the pooled companies as described in Note 3.
(2) The Company acquired Philform in February 1998, Beaird in July 1998, and
Ideal and A&B Bolt in August 1998. The results of their operations have been
included from the date of acquisition.
F-29
<PAGE>
INDUSTRIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. SUBSEQUENT EVENT:
In January 1999, the Company issued 1,711,027 shares of its common stock
for all the outstanding common stock of Blastco Services Co. ("Blastco"), a
company which dismantles refineries. This business combination will be accounted
for as a pooling-of-interest and, accordingly, the Company's historical
consolidated financial statements will be restated to include the accounts and
results of Blastco.
The following unaudited proforma data summarizes the combined results of
the Company and Blastco as if the combination had been consummated on December
31, 1998.
<TABLE>
<CAPTION>
IHI BLASTCO COMBINED
---------- ------- --------
<S> <C> <C> <C>
1998
Sales................................ $ 208,971 $12,073 $221,044
Net income........................... $ 6,008 $ 1,546 $ 7,554
Net income available to common
shareholders....................... $ 5,974 $ 1,546 $ 7,520
Earnings per share:
Basic........................... $ .49 $ .54
Diluted......................... $ .47 $ .52
1997
Sales................................ $ 138,504 $12,723 $151,227
Net income........................... $ 4,798 $ 405 $ 5,203
Net income available to common
shareholders....................... $ 4,668 $ 405 $ 5,073
Earnings per share:
Basic........................... $ .48 $ .44
Diluted......................... $ .43 $ .41
1996
Sales................................ $ 93,270 $ 6,135 $ 99,405
Net income........................... $ 1,863 $ (158) $ 1,705
Net income available to common
shareholders....................... $ 1,786 $ (158) $ 1,628
Earnings per share:
Basic........................... $ .24 $ .18
Diluted......................... $ .22 $ .17
</TABLE>
F-30
<PAGE>
INDEX TO EXHIBITS
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER IDENTIFICATION OF EXHIBIT PAGES
------ ------------------------- -----
3.1 -- Amended and Restated Articles of
Incorporation of the Company. Exhibit
3.1 from Amendment No. 1 to the
Company's Registration Statement on
Form S-1 (No. 333-13323) (the "1996
Registration Statement") is
incorporated herein by this
reference.
3.2 -- Amended and Restated Bylaws of the
Company. Exhibit 3.2 from the 1996
Registration Statement is
incorporated herein by this
reference.
4.1 -- Specimen Certificate of Common Stock,
$.01 par value, of the Company.
Exhibit 4.1 to the Company's
Registration Statement on Form S-1
(No. 33-43169) dated October 7, 1991
(the "Registration Statement"), as
amended, is incorporated herein by
reference.
4.2 -- Class B Redeemable Warrant Agreement
and specimen of Class B Redeemable
Warrant Certificate. Exhibit 4.2 to
the Company's Registration Statement
is incorporated herein by this
reference.
4.3 -- Designation of Warrant Agent (Class B
Redeemable Warrant), dated as of
November 1, 1996. Exhibit 4.3 the
1996 Registration Statement is
incorporated herein by this
reference.
4.4 -- Class C Redeemable Warrant Agreement
and specimen of Class C Redeemable
Warrant Certificate. Exhibit 4.4 to
the 1996 Registration Statement is
incorporated herein by this
reference.
4.5 -- Designation of Warrant Agent (Class C
Redeemable Warrant), dated as of
November 1, 1996. Exhibit 4.5 to the
1996 Registration Statement is
incorporated herein by this
reference.
4.6 -- Class D Redeemable Warrant Agreement
and specimen of Class D Redeemable
Warrant Certificate, Exhibit 4.5 from
Amendment No. 1 to the Company's
Registration Statement on Form S-2
(No. 333-37915) (the "1997
Registration Statement") is
incorporated herein by this
reference.
10.1 -- Second Amendment to Employment
Agreement of Robert E. Cone. Exhibit
10.1 to the 1996 Registration
Statement is incorporated herein by
this reference.
10.2 -- Third Amendment to Employment
Agreement of James H. Brock, Jr.
Exhibit 4.6 from the 1996
Registration Statement is
incorporated herein by this
reference.
10.3 -- The Company's 1998 Incentive Plan is
incorporated herein by this reference
to the Proxy Statement dated June 10,
1998.
10.4 -- 1995 Non-Employee Director Stock
Option Plan incorporated herein by
reference to the Proxy Statements
dated May 27, 1997 and May 25, 1994.
10.5 -- 1994 Amended and Restated Incentive
Stock Plan. Incorporated herein by
this reference to the Proxy Statement
dated May 27, 1997 and May 26, 1995.
10.6 -- Promissory Note dated December 6,
1995, by and among the Company,
Landreth Engineering Company and
General Electric Corporation. Exhibit
10.1 to the Company's Current Report
on Form 8-K dated December 7, 1995 is
incorporated herein by this
reference.
10.7 -- 12% Convertible Promissory Note dated
December 8, 1995, by and among the
Company and St. James Capital
Partners, L.P. ("St. James").
Exhibit 10.1 to the Company's
Amendment A2 to its Current Report on
Form 8-K dated December 7, 1995 is
incorporated herein by this
reference.
10.8 -- Convertible Debenture Loan Agreement
date October 8, 1992, by and among
the Company, Pipeline Valve
Specialty, Inc., ("PVS") and
Renaissance Capital Partners II, Ltd.
Exhibit 2.2 to the Company's Current
Report on Form 8-K Dated October 26,
1992 is incorporated herein by this
reference.
<PAGE>
INDEX TO EXHIBITS -- CONTINUED
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER IDENTIFICATION OF EXHIBIT PAGES
------ ------------------------- -----
10.9 -- Line of Credit Facility, by and among
the Company and Comerica. Exhibit
10.1 to the Company's Current Report
on Form 8-K dated July 14, 1998
incorporated herein by this
reference.
10.10 -- Promissory Note by and among the
Company, American Rivet Company,
Inc., LSS-LoneStar-Houston, Inc.,
Bolt Manufacturing Co., Inc. and
Heller Financial, Inc. ("Heller").
Exhibit 10.1 from the Company's
Current Report on Form 8-K dated
December 1, 1997 is incorporated
herein by this reference.
10.11* -- Promissory Note dated August 14, 1998
by and among the Company, American
Rivet Company, Inc.,
LSS-LoneStar-Houston, Inc., Bolt
Manufacturing Co., Inc., Manifold
Valve Services, Inc., and Rex
Machinery Movers, Inc. and Heller. Ex-1
10.12 -- Agreement of Limited Partnership of
O.F. Acquisition, L.P. Exhibit 2.2
from the Company's Current Report on
Form 8-K dated February 10, 1998 is
incorporated herein by this
reference.
10.13 -- Comerica Leasing Corporation Lease
Agreement. Exhibit 10.2 from the
Company's Current Report on Form 8-K
dated July 14, 1998 is incorporated
herein by this reference.
10.14 -- EnSerCo, L.L.C. Promissory Note.
Exhibit 10.3 from the Company's
Current Report on Form 8-K dated July
14, 1998 is incorporated herein by
this reference.
10.15 -- 12% Promissory Note dated November
18, 1996 by and among the Company and
St. James. Exhibit 10.3 to the
Company's Current Report on Form 8-K
dated November 18, 1996 is
incorporated herein by this
reference.
10.16 -- 12% Promissory Note dated November
18, 1996 by and among the Company and
St. James. Exhibit 10.4 to the
Company's Current Report on Form 8-K
dated November 18, 1996 is
incorporated herein by this
reference.
10.17 -- Stock Purchase Warrant Agreement
dated November 18, 1996, from the
Company in favor of St. James.
Exhibit 10.5 to the Company's Current
Report on Form 8-K dated November 18,
1996 is incorporated herein by this
reference.
11* -- Statement regarding computation of
per share earnings Ex-2
21* -- Subsidiaries of the Company Ex-3
23.1* -- Consent of Deloitte & Touche LLP Ex-4
23.2* -- Consent of PricewaterhouseCoopers LLP Ex-5
23.3* -- Consent of Arthur Andersen LLP Ex-6
23.4* -- Consent of Weinstein Spira & Company,
P.C. Ex-7
23.5* -- Consent of Karlins Arnold & Corbitt,
P.C. Ex-8
23.6* -- Consent of Simonton, Kutac &
Barnidge, LLP Ex-9
27.1* -- Financial data schedule
- - ------------
* Filed herewith.
EXHIBIT 10.11
PROMISSORY NOTE
$7,500,000 August 14,1998
FOR VALUE RECEIVED, Industrial Holdings, Inc., a Texas corporation, American
Rivet Company, Inc., an Illinois corporation, LSS-Lone Star-Houston, Inc., a
Texas corporation, Bolt Manufacturing Co., Inc., a Texas corporation, Manifold
Valve Services, Inc., a Delaware corporation, and Rex Machinery Movers, Inc., a
Texas corporation (collectively, "Maker"), jointly and severally, promise to pay
to the order of Heller Financial, Inc., a Delaware corporation (together with
any holder of this Note, "Payee"), at its office located at 500 West Monroe
Street, Chicago, Illinois 60661, or at such other place as Payee may from time
to time designate, the principal sum of Seven Million Five Hundred Thousand and
00/100 Dollars ($7,500,000), together with interest thereon at a rate per annum
equal to the One Month LIBOR Rate (hereafter defined), plus two and 50/100
percent (2.50%), payable in seventy-two (72) consecutive monthly installments of
principal plus interest commencing October 1, 9998 and continuing on the same
day of each consecutive calendar month thereafter until this Note is fully paid.
Subject to adjustment in accordance with the next sentence in the event of the
Mandatory Prepayment (as defined in Section 3 of the Security Agreement (defined
below)), the first seventy-one (71) such monthly installments shall each be in
the principal amount of One Hundred Four Thousand One Hundred Sixty-Seven and
00/100 Dollars ($104,167), plus accrued interest, and the final monthly
installment shall be in the amount of the entire then outstanding principal
balance hereunder, plus all accrued and unpaid interest, charges and other
amounts owing hereunder or under the Security Agreement (defined below).
Notwithstanding anything else in this Note, if Maker makes the Mandatory
Prepayment, each consecutive monthly installment payment hereunder shall
thereafter be in an equal amount of principal, determined by dividing the
outstanding principal balance of this Note, after giving effect to the Mandatory
Prepayment, by the number of principal installments then remaining, plus accred
interest, provided, however that the final monthly installment shall be in the
amount of the entire then outstanding principal balance hereunder, plus all
accrued and unpaid interest, charges and other amounts owing hereunder or under
the Security Agreement. All payments shall be applied first to interest and then
to principal. Interest shall be computed on the basis of a 360-day year and
charged for the actual number of days elapsed. Maker shall make an interest only
initial payment on September 1, 1998 of all accrued interest from the date of
this Note through August 31, 1998.
For purposes of this Note, the term "One Month LIBOR Rate" means, for each
calendar month, a rate of interest equal to:
(a) the rate of interest determined by Payee at which deposits in U.S.
Dollars are offered for the one (1) month interest period based on information
presented on the Reuters Screen LIBO Page as of 11:00 A.M. ) London time) on the
day which is two (2) business days (not counting Saturdays) prior to the first
day of each calendar month; provided that if at least two (2) such offered rates
appear on the Reuters Screen LIBO
Ex-1
<PAGE>
Page in respect of such interest period, the arithmetic mean of all such rates
(as determined by Payee) will be the rate used; provided further that if there
are fewer than two (2) offered rates or Reuters ceases to provide LIBOR
quotations, such rate shall be the average rate of interest determined by Payee
at which deposits in U.S. Dollars are offered for the one (1) month interest
period by Bankers Trust Company and Chase Bank, N.A. (or their respective
successors) to banks with combined capital and surplus in excess of $500,000,000
in the London interbank market as of 11:00 A.M. (London time) on the applicable
interest rate determination date, divided by
(b) a number equal to 1.0 minus the aggregate (but without duplication) of
the rates (expressed as a decimal fraction) of reserve requirements in effect on
the day which is two (2) business days prior to the beginning of each calendar
month (including, without limitation, basic, supplemental, marginal and
emergency reserves under any regulations of the Board of Governors thereto, as
now and from time to time in effect) for Eurocurrency funding (currently
referred to as a member bank of the Federal Reserve System; (such rate to be
adjusted to the nearest one sixteenth of one percent (1/16 of 1%) or, if there
is no nearest one sixteenth of one percent (1/16 of 1%) , to the next higher one
sixteenth of one percent (1/16 of 1%)).
For the initial funding month (or any fraction thereof (under this Note,
the interest rate hereunder shall be the One Month LIBOR Rate in effect on the
day of funding, plus Two and 50/100 percent (2.50%).
Notwithstanding for foregoing, if at any time implementation of any
provision hereof shall cause the interest contracted for or charged herein or
collectable hereunder to exceed the applicable lawful maximum rate, then the
interest shall be limited to such applicable lawful maximum.
This Note is secured by, among other property, the collateral described in
the Amended and Restated Security Agreement dated August 14, 1998, between Maker
and Payee (the "Security Agreement;" and together with all related documents and
instruments, the "Loan Documents") to which reference is made for a statement of
the nature and extent of protection and security afforded, certain rights of
Payee and certain rights and obligations of Maker, including Maker's rights and
obligations, if any, to prepay the principal balance hereof.
Time is of the essence hereof. If payment of any installment or any other
sum due under this Note or the Loan Documents is not paid within ten (10) days
of its then due date, Maker agrees to pay a late charge equal to the lesser of
(i) five cents (5c) per dollar on, and in addition to, the amount of each such
payment, or (ii) the maximum amount Payee is permitted to charge by law. In the
event of the occurrence of an Event of Default (as defined in the Security
Agreement), then the entire unpaid principal balance hereof with accrued and
unpaid interest thereon, together with all other sums payable under this Note or
the Loan Documents, shall, at the option of Payee and without notice or demand,
become immediately due and payable, such accelerated balance bearing
2
<PAGE>
interest until paid at the rate of three and .50/100 percent (3.50%) per annum
above the then otherwise applicable interest rate hereunder.
Maker and all endorsers, guarantors or any others who may at any time
become liable for the payment hereof consent to any ad all extensions of time,
renewals, waivers and modifications of, and substitutions or release of security
or of any party primarily or secondarily liable on, or with respect to, this
Note or any of the Loan Documents or any of the terms and provisions thereof
that may be made, granted or consented to by Payee, and agree that suit may be
brought and maintained against any one or more of them, at the election of
Payee, without joinder of the others as parties thereto, and that Payee shall
not be required to first foreclose, proceed against, or exhaust any security
hereof, in order to enforce payment of this Note by any or more of them. Maker
and all endorsers, guarantors or any others who may at any time become liable
for the payment hereof hereby severally waiver presentment, demand for payment,
notice of nonpayment, protest, notice of protest, notice of dishonor, and all
other notices in connection with this Note, filing of suit and diligence in
collecting this Note or enforcing any of the security herefor, and, without
limiting any provisions of any of the Loan Documents, agree to pay, if permitted
by law, all expenses incurred in collection, including reasonable attorney's
fees, and hereby waive all benefits of valuation, appraisement and exemption
laws.
If there be more than one Maker, all the obligations, promises, agreements
and covenants of Makers under this Note are joint and several.
THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
INTERNAL LAWS AND DECISIONS OF THE STATE OF ILLINOIS, WITHOUT REGARD TO
PRINCIPLES OF CONFLICTS OF LAW. AT PAYEE'S ELECTION AND WITHOUT LIMITING PAYEE'S
RIGHT TO COMMENCE AN ACTION IN ANY OTHER JURISDICTION, MAKER HEREBY SUBMITS TO
THE EXCLUSIVE JURISDICTION AND VENUE OF ANY COURT (FEDERAL, STATE OR LOCAL)
HAVING SITUS WITHIN THE STATE OF ILLINOIS, EXPRESSLY WAIVES PERSONAL SERVICE OF
PROCESS AND CONSENTS TO SERVICE BY CERTIFIED MAIL, POSTAGE PREPAID, DIRECTED TO
THE LAST KNOWN ADDRESS OF MAKER, WHICH SERVICE SHALL BE DEEMED COMPLETED WITHIN
TEN (10) DAYS AFTER THE DATE OF MAILING THEREOF.
MAKER HEREBY WAIVES ITS RIGHTS TO A JURY TRAIL OF ANY CLAIM OR CAUSE OF
ACTION BASED UPON OR ARISING OUT OF THIS NOTE. THIS WAIVER IS INFORMED AND
FREELY MADE. MAKER ACKNOWLEDGES THAT THIS WAIVER IS A MATERIAL INDUCEMENT TO
ENTER INTO A BUSINESS RELATIONSHIP, THAT PAYEE HAS ALREADY RELIED ON THE WAIVER
IN MAKING THE LOAN EVIDENCED BY THIS NOTE, AND THAT PAYEE WILL CONTINUE TO RELY
ON THE WAIVER IN ITS RELATED FUTURE DEALINGS. MAKER FURTHER WARRANTS AND
REPRESENTS THAT IT HAS REVIEWED THIS WAIVER WITH ITS LEGAL COUNSEL AND THAT IT
KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION
WITH LEGAL COUNSEL.
3
<PAGE>
Industrial Holdings, Inc., Bolt Manufacturing Co., Inc.,
a Texas corporation a Texas corporation
By:/s/CHRISTINE A. SMITH BY: /s/ CHRISTINE A. Smith
Name: Christine A. Smith Name: Christine A. Smith
Title: Executive Vice President Title: Vice President
American Rivet Company, Inc., LSS-Lone Star-Houston, Inc.,
an Illinois corporation a Texas corporation
By:/s/CHRISTINE A. SMITH BY: /s/ CHRISTINE A. Smith
Name: Christine A. Smith Name: Christine A. Smith
Title: Vice President Title: Vice President
Manifold Valve Services, Inc., Rex Machine Movers, Inc.,
a Delaware corporation a Texas corporation
By:/s/CHRISTINE A. SMITH BY: /s/ CHRISTINE A. Smith
Name: Christine A. Smith Name: Christine A. Smith
Title: Vice President Title: Vice President
4
EXHIBIT 11
INDUSTRIAL HOLDINGS, INC.
EARNINGS PER SHARE
(thousands of dollars, except per share data)
YEAR ENDED DECEMBER 31
-------------------------------
1998 1997 1996
-------- -------- -------
Net income .................................. $ 6,008 $ 4,798 $ 1,863
Distributions to shareholders ............... (34) (130) (77)
-------- -------- -------
Net income available to common shareholders . $ 5,974 $ 4,668 $ 1,786
======== ======== =======
Basic earnings per share
Weighted average common shares
outstanding .......................... 12,289 9,778 7,349
======== ======== =======
Basic earnings per share ................. $ .49 $ .48 $ .24
======== ======== =======
Net income .................................. $ 6,008 $ 4,798 $ 1,863
Distributions to shareholders ............... (34) (130) (77)
Interest on convertible debt ................ 87 -- --
-------- -------- -------
$ 6,061 $ 4,668 $ 1,786
Diluted earnings per share
Weighted average common
shares outstanding .................... 12,289 9,778 7,349
Shares issuable from assumed
conversion of common stock
options, warrants granted
and convertible debentures ............. 726 914 650
-------- -------- -------
Weighted average common shares
outstanding, as adjusted ................. 13,015 10,692 7,999
======== ======== =======
Diluted earnings per share .................. $ .47 $ .43 $ .22
======== ======== =======
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
A&B Bolt and Supply, Inc.
American Rivet Company, Inc.
Beaird Industries, Inc.
Blastco Services Co.
First Texas Credit Corporation
GHX, Incorporated
Landreth Engineering Company
LSS-Lone Star - Houston, Inc.
Losco, Inc.
Manifold Valve Services, Inc.
Moores Pump and Supply, Inc.
Philform, Inc.
Pipeline Valve Specialty Company, Inc.
R.J. Machine Company, Inc.
Regal Machine Tool, Inc.
Rex International Corporation
Rex Machinery Movers, Inc.
Rex Machinery Sales, Inc.
Rex Supply Corporation
The Rex Group, Inc.
U.S. Crating, Inc.
United Wellhead Services, Inc.
WALKER BOLT Manufacturing Co.
WHIR Acquisition, Inc.
XTEL Corporation
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.'s
33-68376, 33-99852, 333-4160, 333-32033, and 333-53495 each on Form S-3, and in
Registration Statement No.'s 33-68354, 333-27827, and 333-62653 each on Form
S-8, of Industrial Holdings, Inc. of our report dated March 26, 1999 appearing
in this Annual Report on Form 10-K of Industrial Holdings, Inc. for the year
ended December 31, 1998.
DELOITTE & TOUCHE LLP
Houston, Texas
March 30, 1999
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC 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 333-53495) and in the Registration Statements
on Form S-8 (Nos. 33-68354, 333-27827, and 333-62653) of Industrial Holdings,
Inc. of our report dated March 5, 1997 appearing on Page F-4 of this Annual
Report on Form 10-K.
PricewaterhouseCoopers LLP
Houston, Texas
March 30, 1999
EXHIBIT 23.3
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 333-53495) and in the Registration Statements on Form
S-8 (No.'s 33-68354, 333-27827 and 333-53495) of Industrial Holdings, Inc. of
our report dated June 17, 1997, on Moores Pump and Supply, Inc. for each of the
two years in the period ended April 30, 1997, included in the Industrial
Holdings, Inc.'s Form 10-K for the year ended December 31, 1998.
ARTHUR ANDERSEN LLP
New Orleans, Louisiana
March 29, 1999
EXHIBIT 23.4
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 the Registration Statement
No.'s 33-68376, 33-99852, 333-4160, 333-32033 and 333-53495, 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 10-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
March 29, 1999
EXHIBIT 23.5
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 the Registration Statement No.'s
33-68376, 33-99852, 333-4160, 333-32033 and 333-53495, each on Form S-3, and in
Registration Statement No.'s 33-68354, 333-27827 and 333-62653, each on Form
S-8, and in the use in Form 10-K of Industrial Holdings, Inc. of our report
dated February 12, 1998, on the financial statements of UNITED WELLHEAD
SERVICES, Inc.
KARLINS ARNOLD & CORBITT, P.C.
(successors to Karlins Fuller Arnold & Klodsky, P.C.)
The Woodlands, Texas
March 29, 1999
EXHIBIT 23.6
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement No.'s 33-68376, 33-99852, 333-4160, 333-32033 and 333-53495, 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 10-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
March 29, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 3,262,670
<SECURITIES> 0
<RECEIVABLES> 44,883,006
<ALLOWANCES> 606,874
<INVENTORY> 46,530,397
<CURRENT-ASSETS> 108,492,150
<PP&E> 67,086,705
<DEPRECIATION> 11,952,564
<TOTAL-ASSETS> 196,982,351
<CURRENT-LIABILITIES> 97,739,409
<BONDS> 0
0
0
<COMMON> 130,286
<OTHER-SE> 64,839,750
<TOTAL-LIABILITY-AND-EQUITY> 196,982,351
<SALES> 208,971,408
<TOTAL-REVENUES> 208,971,408
<CGS> 159,991,800
<TOTAL-COSTS> 159,991,800
<OTHER-EXPENSES> 35,975,586
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,928,347
<INCOME-PRETAX> 9,880,783
<INCOME-TAX> 3,872,731
<INCOME-CONTINUING> 6,008,052
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,008,052
<EPS-PRIMARY> 0.49
<EPS-DILUTED> 0.47
</TABLE>
