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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 8K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported)
AUGUST 17, 1999
INDUSTRIAL HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
TEXAS 1-9580 76-0289495
(State of other jurisdiction (Commission File Number) (IRS Employer
of incorporation) Identification No.)
</TABLE>
7135 ARDMORE, HOUSTON, TEXAS 77054
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code
(713) 747-1025
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(Former name or former address, if changed since last report.)
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<PAGE>
ITEM 5. OTHER EVENTS
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 "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,(1)
---------------------------------------------------------
1994 1995(3) 1996(4) 1997(5) 1998(6)
---------- ---------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS EXCEPT FOR PER SHARE AMOUNTS)
INCOME STATEMENT DATA:
Sales................................ $ 66,016 $ 75,186 $ 99,405 $ 151,228 $ 218,208
Cost of sales........................ 49,178 57,540 75,822 111,387 168,369
---------- ---------- --------- ---------- ----------
Gross profit......................... 16,838 17,646 23,583 39,841 49,839
Selling, general & administrative.... 14,783 15,441 19,264 28,837 38,311
---------- ---------- --------- ---------- ----------
Operating income..................... 2,055 2,205 4,319 11,004 11,528
Equity in earnings (losses) of
unconsolidated affiliates.......... -- -- -- (61) 2,144
Other income (expense)............... (1,042) (1,466) (1,589) (2,263) (3,439)
---------- ---------- --------- ---------- ----------
Income before income taxes........... 1,013 739 2,730 8,680 10,233
Income tax provision................. 260 74 1,025 3,477 4,099
---------- ---------- --------- ---------- ----------
Net income........................... 753 665 1,705 5,203 6,134
Distributions to shareholders........ 20 68 77 130 34
---------- ---------- --------- ---------- ----------
Net income available to common
shareholders....................... $ 733 $ 597 $ 1,628 $ 5,073 $ 6,100
========== ========== ========= ========== ==========
Basic earnings per share............. $ .09 $ .07 $ .18 $ .44 $ .44
Diluted earnings per share........... $ .08 $ .07 $ .17 $ .41 $ .42
Weighted average number of common
shares outstanding -- basic........ 8,414 8,412 9,060 11,489 14,000
Weighted average number of common
shares outstanding -- diluted...... 9,318 8,510 9,710 12,403 14,726
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------------
1994 1995 1996 1997 1998
--------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS)
BALANCE SHEET DATA:
Working capital...................... $ 5,409 $ 4,676 $ 6,036 $ 7,768 $ 9,236
Total assets......................... 34,544 42,516 62,907 95,461 203,669
Long-term obligations(2)............. 5,495 7,426 9,461 13,510 30,334
Total liabilities.................... 22,952 29,501 40,439 58,137 137,756
Shareholders' equity................. 11,592 13,015 22,468 37,324 65,913
</TABLE>
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(1) The combinations of our company with GHX, Moores, Ameritech and UWS in March
through July 1998 and Blastco Services Company, Inc. ("Blastco") in 1999
and the combination of Blastco and Valve Repair and Supply Company, Inc. in
1997 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 RJ Machine in January 1998, 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.
1
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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 net assets acquired.
Our recent growth through acquisitions has created opportunities to reduce
costs and increase margins through integration of our operations. We may
consider (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, (v) using the best practices of
our most efficient manufacturing plants throughout all of our facilities, (vi)
reducing working capital levels company-wide and (vii) selling non-strategic
assets.
Our results of operations are affected by the level of economic activity in
the industries served by our customers, which in turn may be affected by other
factors, including the level of economic activity in the U.S. and foreign
markets they serve. The principal industries served by our clients are the
automotive, home furnishings, petrochemical and oil and gas industries. An
economic slowdown in these industries could result in a decrease in demand for
our products and services, which could adversely affect our operating results.
During 1998 and into 1999, oil and gas prices declined significantly, resulting
in a decrease in the demand for our products and services that are used in the
exploration and production of oil and gas. Exploration and production
expenditures generally lag improvements in oil and gas prices; therefore,
although oil and gas prices have improved during 1999, we have yet to experience
significant sales increases. Absent substantial increases in expenditures for
exploration and production, we expect demand for these products and services to
continue to remain depressed.
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.
2
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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,
------------------------------------------------
1996 1997 1998
-------------- --------------- ---------------
<S> <C> <C> <C>
Sales:
Fastener Manufacturing and
Distribution.................. $ 53,252,342 $ 79,472,953 $ 110,403,167
Heavy Fabrication............... -- -- 40,011,472
Valve Manufacturing and
Repair........................ 29,725,995 56,130,384 53,487,881
Machine Tool Distribution....... 16,427,091 15,624,347 14,305,192
-------------- --------------- ---------------
99,405,428 151,227,684 218,207,712
-------------- --------------- ---------------
Cost of Sales:
Fastener Manufacturing and
Distribution.................. 41,208,559 59,166,263 83,189,597
Heavy Fabrication............... -- -- 34,775,923
Valve Manufacturing and
Repair........................ 20,805,241 38,762,176 38,531,540
Machine Tool Distribution....... 13,808,638 13,458,243 11,871,634
-------------- --------------- ---------------
75,822,438 111,386,682 168,368,694
-------------- --------------- ---------------
Selling, General and Administrative
Fastener Manufacturing and
Distribution.................. 8,929,284 14,762,350 20,319,963
Heavy Fabrication............... -- -- 3,254,128
Valve Manufacturing and
Repair........................ 7,450,021 10,767,049 10,639,143
Machine Tool Distribution....... 2,085,818 2,423,430 2,410,902
Corporate....................... 798,647 884,040 1,686,506
-------------- --------------- ---------------
19,263,770 28,836,869 38,310,642
-------------- --------------- ---------------
Operating Income..................... $ 4,319,220 $ 11,004,133 $ 11,528,376
============== =============== ===============
</TABLE>
YEAR ENDED DECEMBER 31, 1998 COMPARED WITH YEAR ENDED DECEMBER 31, 1997
SALES. On a consolidated basis sales increased $66,980,028 or 44% 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 1998 and the inclusion of a full
year of operations of two companies in 1998 that were acquired in 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 decreased $2,642,503
or 5% in 1998 compared to 1997. This decrease was primarily due to a $3,487,015
decrease in sales at Blastco attributable to the assignment of demolition
contracts to AWR Acquisition, L.L.C. ("AWR"), a company in which we have a
33 1/3% interest. Our interest in the earnings from these contracts is included
in the earnings from equity investments in unconsolidated affiliates. The
decrease in sales at Blastco was partially offset by an $844,512 increase in
sales resulting from the inclusion of a full year of operations of two companies
acquired during 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.
3
<PAGE>
COST OF SALES. On a consolidated basis, cost of sales increased
$56,982,012 or 51% in 1998 compared to 1997. Cost of sales as a percentage of
sales was 77% in 1998 compared to 74% 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 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 remained relatively unchanged from 75% in 1998 compared to
74% in 1997.
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
continued through the first six months of 1999 as Beaird reduced its backlog.
Cost of sales for the valve manufacturing and repair segment decreased
$230,636 or 0.6% in 1998 compared to 1997. This decrease was primarily due to
the decrease in sales at Blastco described above, offset by the inclusion of a
full year of operations of two companies acquired during 1997. Cost of sales as
a percentage of sales was 72% in 1998 and 69% in 1997.
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 $9,473,773 or 33% 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 $127,906 or 1% 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.
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.
EARNINGS FROM EQUITY INVESTMENTS IN UNCONSOLIDATED AFFILIATES. On a
consolidated basis, earnings from equity investments increased $2,204,651 in
1998 compared to 1997, primarily as a result of a full year of operations from
our investment in AWR which had in process two contracts for demolition and site
abatement and from our investment in O.F. Acquisition, L.L.C. ("O.F.") which
was entered into during 1998.
4
<PAGE>
INTEREST EXPENSE. On a consolidated basis, interest expense increased
$2,587,616 or 94% 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.
OTHER INCOME, NET. On a consolidated basis, other income, net increased
$1,049,648 or 322% in 1998 compared to 1997, primarily as a result of
recognition of income resulting from the sale of an interest in a demolition
contract to one of our equity investees.
INCOME TAXES. Income tax expense increased $621,530 or 18% in 1998
compared to 1997. The effective tax rate was 40% for 1998 and 1997.
NET INCOME. Net income was $6,134,229 in 1998 compared to $5,203,292 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 $51,822,256 or 52% 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 one of
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 $26,404,389
or 89% in 1997 compared to 1996, primarily as a result of an acquisition in
March 1997 and a $15.1 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 $802,744 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
$35,564,244 or 47% in 1997 compared to 1996. However, cost of sales as a
percentage of sales was 74% in 1997 compared to 76% 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 one of 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
$17,956,935 or 86% primarily as the result of an acquisition in March 1997 and
an $11.6 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 69% 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.
5
<PAGE>
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 $9,573,099 or 50% 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 increase in selling, general
and administrative expenses at one of our other operating subsidiaries within
this segment. The increase at this subsidiary 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 $3,317,028 or 45% primarily as the result of an
acquisition in March 1997 and a $2.2 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.
LOSSES FROM EQUITY INVESTMENTS IN UNCONSOLIDATED AFFILIATES. In 1997, we
recognized $60,520 in losses primarily related to an equity investment in a
recycling company.
INTEREST EXPENSE. On a consolidated basis, interest expense increased
$707,868 or 35% 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.
INCOME TAXES. Income taxes increased $2,452,275 or 239% in 1997 compared
to 1996. The effective tax rate for 1997 was 40% compared to 38% for 1996.
NET INCOME. Net income was $5,203,292 in 1997 compared to $1,705,567 in
1996 as a result of the foregoing factors.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, we had working capital of $9,235,590, short-term debt
of $42,486,422, current maturities of long-term debt of $23,547,890, long-term
debt of $30,334,166 and shareholders' equity of $65,912,800. Historically, our
principal liquidity requirements and uses of cash have been for debt service,
capital expenditures, working capital and acquisition financing, and our
principal sources of liquidity and cash have been from cash flows from
operations, borrowings under long-term debt arrangements and issuances of equity
securities. We have financed acquisitions through bank borrowings, issuances of
equity and debt securities and internally generated funds.
NET CASH USED BY OPERATING ACTIVITIES. For the year ended December 31,
1998, net cash used by operating activities was $5,136,596 compared to 1997 and
1996, which provided cash of $3,379,665 and $2,370,449. 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
6
<PAGE>
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 $6,232,069, $4,959,872 and $4,225,273, respectively.
Other significant investing activities in 1998 included the sale of an interest
in a demolition contract for $2,100,000 and acquisitions. The aggregate cash
purchase price for acquisitions was $58.7 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 issuance of equity securities. Financing activities provided net cash of
$13,465,409 in 1998 compared to $1,389,565 in 1997 and $4,002,901 in 1996.
During 1998, we issued common stock providing net proceeds of $12,914,854
compared to net proceeds of $2,136,978 in 1997 and $6,248,281 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 $9,324,942 under our credit facilities
compared to $1,772,458 and $1,064,603 during 1997 and 1996.
PRINCIPAL DEBT INSTRUMENTS. As of December 31, 1998, we had an aggregate of
$96,368,478 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, $23,547,890 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, March 31,
1999, and June 30, 1999, we were not in compliance with several of these
covenants; however, we obtained waivers for the non-compliance from those
lenders. In addition, as of December 31, 1998 and March 31, 1999, we were not in
compliance with certain non-financial covenants related to our ability to
provide financial support to Belleli Energy; however, in the second quarter of
1999 we obtained waivers for this noncompliance from our lenders. Although
management expects to be able to obtain waivers should there be further events
of non-compliance, no assurance can be given that we will be able to obtain
future waivers from our lenders.
Our existing credit facility is a revolving line of credit with Comerica
Bank -- Texas. The principal amount is the lesser of $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) or the Eurodollar rate as quoted by
Comerica Bank -- Livonia, MI, plus 2.5% 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 31, 1999, the borrowing
capacity was $45 million and availability was $1.6 million.
On June 17, 1999, we amended our credit facility. The principal amount of
our amended credit facility is the lesser of $55 million or a defined borrowing
base. Advances under the revolving line of credit bear interest, at out option,
at either (i) the prime rate in effect at the time of the advance (which was
7.75% at June 30, 1999) or (ii) an adjusted Eurodollar rate plus an amount
ranging from 2% to 2.75% based upon our ratios of senior debt to EBITDA. The
borrowing base is defined as 80% of eligible accounts receivable and 50% of
eligible inventory subject to certain limitations. At June 30, 1999, the
borrowing capacity under the credit facility was $46.8 million and availability
was $3.1 million. The revolving line of credit matures on June 16, 2001.
In connection with the acquisitions of businesses, we have entered into
various term loans secured by machinery, equipment and real estate of the
businesses acquired and issued a convertible debenture and obtained a loan from
a financial institution in the principal amount of $15 million that matures in
November 1999 in connection with the acquisition of Beaird. See Note 9 to the
Consolidated Financial Statements.
7
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BELLELI ENERGY. In 1998, we entered into an option agreement that grants
us the right to purchase approximately 96% of Belleli Energy S.r.l.
("Belleli") through 2002. Belleli is an Italian company that manufactures
thick walled pressure vessels and heat exchangers, as well as designs,
engineers, constructs and erects components for desalination, electric power and
petrochemical plants. The option agreement calls for payments totaling
approximately $600,000 in 1999, $700,000 in 2000, $800,000 in 2001 and $400,000
in 2002. During the second quarter of 1999, the option agreement was amended to
include an additional option payment of $3 million, of which $2.6 million was
funded by a private placement of our common stock and the remainder from the
conversion of a $400,000 note receivable from Belleli.
In connection with the Belleli option agreement, we have agreed to support
the financing of Belleli to the extent its existing lines of credit and bonding
arrangements are not sufficient to support successful implementation of an
agreed upon business plan. We currently estimate that we may need to provide or
assist in arranging support to Belleli of up to $20 million, which may take the
form of cash, equity, bonding or other support; however, the actual amount of
our obligation is subject to numerous variables outside of our control,
including Belleli's success in obtaining new contracts, its cash flow from
operations and its customers' and suppliers' bonding requirements. At December
31, 1998, we had a note receivable from Belleli for $400,000 which was secured
by accounts receivable and which was converted to an additional option payment
subsequent to year end. At December 31, 1998 we had provided to customers and
suppliers third-party performance guarantees of $5.2 million and letters of
credit of $520,000, all of which had expired subsequent to year end. We are
exposed to credit loss in the event of nonperformance by Belleli under these
arrangements; however, we do not anticipate nonperformance by Belleli. To date
we have been able to provide this financial support through bonding arrangements
with our bank and performance guarantees; however, even if we are successful in
refinancing certain of our debt facilities in 1999, 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.
We are currently exploring various financing alternatives to meet our
future liquidity needs and repay currently maturing debt obligations. We
anticipate refinancing certain of our debt facilities in 1999, although no
assurances can be given that we will be able to refinance such facilities or
that we will be able to obtain terms that are as favorable as those that
currently exist. For the six months ending June 30, 1999 we have made capital
expenditures of $5.1 million and anticipate spending $4.7 million for the
remainder of 1999. We believe that our overall treasury management of cash on
hand from operations and available borrowings under new or existing credit
facilities will be adequate to meet capital requirements and provide working
capital needs in connection with integrating our businesses acquired and for
continued maintenance and improvements in our business.
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.
8
<PAGE>
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 October 31, 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
September 30, 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.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1999, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard No. 137, Accounting for Derivative
Instruments and Hedging Activities -- Deferral of the Effective Date of FASB
Standard No. 133. This statement amends Statement No. 133 which establishes
accounting and reporting standards for derivative instrument embedded in other
contracts. This statement is effective for all fiscal years beginning after June
15, 2000. 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.
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, as amended,
the principal balance is due in June 2001. As of December 31, 1998, the
revolving line of credit had a principal balance of $42.1 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%.
9
<PAGE>
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.
10
<PAGE>
INDUSTRIAL HOLDINGS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
---------
Independent Auditors' Reports........ F-2
Consolidated Balance Sheets at
December 31, 1997 and 1998......... F-10
Consolidated Statements of Income For
the Years Ended December 31,
1996, 1997 and 1998................ F-11
Consolidated Statements of Cash Flows
For the Years Ended December 31,
1996, 1997 and 1998................ F-12
Consolidated Statements of
Shareholders' Equity For the Years
Ended December 31,
1996, 1997 and 1998................ F-14
Notes to Consolidated Financial
Statements......................... F-15
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 Blastco Services Company, Inc. ("Blastco") in 1999 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 Notes 3 and 16
to the consolidated financial statements. We did not audit the financial
statements, as of December 31, 1998 or for the year then ended, of AWR
Acquisition, L.C. ("AWR"), which is accounted for by use of the equity method.
The Company's equity of $1,237,417 in AWR's net assets at December 31, 1998 and
of $1,215,560 in AWR's net income for the year then ended are included in the
Company's consolidated financial statements. The financial statements of AWR
were audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to the amounts included for AWR, is based solely
on the report of such auditors. We did not audit the consolidated balance sheet
of Blastco as of December 31, 1997, or the related consolidated statements of
income, shareholders' equity, or cash flows for the year then ended, which
statements reflect total assets of $7,980,000 as of December 31, 1997 and total
sales of $12,723,000 for the year then ended. 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 Blastco, 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 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 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
F-2
<PAGE>
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 1999 and 1998
poolings-of-interests, were audited by other auditors, and their report dated
March 5, 1997, expressed an unqualified opinion on those statements. The
financial statements of Blastco for the year ended December 31, 1996 were also
previously audited by other auditors, and their report dated March 5, 1999
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 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 1999 and
1998 poolings-of-interest. In our opinion, such consolidated statements have
been properly combined on the basis described in Notes 3 and 16 to the
consolidated financial statements.
DELOITTE & TOUCHE LLP
Houston, Texas
June 18, 1999 (except for Note 9, as
to which the date is August 16, 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 poolings-of-interest
transactions described in Notes 3 and 16, 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 AUDITORS' 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>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Blastco Services Company, Inc.
We have audited the accompanying consolidated balance sheets of Blastco
Services Company, Inc. and Subsidiary as of December 31, 1997 and 1996, and the
related consolidated statements of operations and comprehensive income,
stockholders' equity and cash flows for the years ended December 31, 1997 and
1996. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audit in accordance with generally accepted auditing
standards. These standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Blastco
Services Company, Inc. and Subsidiary at December 31, 1997 and 1996, and the
results of their operations and cash flows the years then ended in conformity
with generally accepted accounting principles.
SIMONTON, KUTAC & BARNIDGE, L.L.P.
Simonton, Kutac & Barnidge, L.L.P.
Houston, Texas
March 5, 1999
F-9
<PAGE>
INDUSTRIAL HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-------------------------------
1997 1998
-------------- ---------------
(AS RESTATED, SEE NOTE 16)
ASSETS
Current assets:
Cash and cash equivalents............ $ 1,725,053 $ 3,412,411
Accounts receivable -- trade, net.... 23,750,341 45,577,133
Cost and estimated earnings in excess
of billings........................ 5,428,987
Inventories.......................... 21,248,314 48,275,927
Employee advances.................... 165,913 58,823
Notes receivable, current portion.... 1,362,095 4,364,106
Other current assets................. 1,159,195 4,620,337
-------------- ---------------
Total current assets............ 49,410,911 111,737,724
Property and equipment, net.......... 29,608,704 58,793,946
Notes receivable, less current
portion............................ 1,981,976 1,783,769
Investment in unconsolidated
affiliates......................... 594,832 513,284
Other assets......................... 1,491,784 3,365,494
Goodwill and other intangible assets,
net................................ 12,372,887 27,474,438
-------------- ---------------
Total assets.................... $ 95,461,094 $ 203,668,655
============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable........................ $ 18,524,875 $ 42,486,422
Accounts payable -- trade............ 11,458,472 21,628,422
Billings in excess of costs and
estimated earnings................. 5,165,760
Accrued expenses and other........... 7,050,594 9,673,640
Current portion of long-term debt.... 4,608,848 23,547,890
-------------- ---------------
Total current liabilities....... 41,642,789 102,502,134
Long-term debt, less current
portion............................ 13,509,635 30,334,166
Deferred compensation payable, less
current portion.................... 241,778 216,021
Deferred income taxes payable........ 2,742,450 4,703,534
-------------- ---------------
Total liabilities............... 58,136,652 137,755,855
-------------- ---------------
Commitments and contingencies -- Note
10
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,
12,018,683 and 14,739,662
shares issued and outstanding
for 1997 and 1998,
respectively.................. 120,187 147,396
Additional paid-in capital...... 27,971,690 51,545,271
Retained earnings............... 9,232,565 15,165,133
Notes receivable from
officers -- Note 5............ (945,000)
-------------- ---------------
Total shareholders'
equity.................. 37,324,442 65,912,800
-------------- ---------------
Total liabilities and
shareholders' equity.... $ 95,461,094 $ 203,668,655
============== ===============
See notes to consolidated financial statements.
F-10
<PAGE>
INDUSTRIAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1996 1997 1998
-------------- --------------- ---------------
<S> <C> <C> <C>
(AS RESTATED, SEE NOTE 16)
Sales................................ $ 99,405,428 $ 151,227,684 $ 218,207,712
Cost of sales........................ 75,822,438 111,386,682 168,368,694
-------------- --------------- ---------------
Gross profit......................... 23,582,990 39,841,002 49,839,018
Selling, general and administrative
expenses........................... 19,263,770 28,836,869 38,310,642
-------------- --------------- ---------------
Income from operations............... 4,319,220 11,004,133 11,528,376
Earnings (losses) from equity
investments in unconsolidated
affiliates......................... (60,520) 2,144,131
Other income (expense):
Interest expense..................... (2,041,414) (2,749,282) (5,336,898)
Interest income...................... 160,954 160,230 521,771
Other income, net.................... 291,648 325,847 1,375,495
-------------- --------------- ---------------
Total other income (expense)......... (1,588,812) (2,263,205) (3,439,632)
-------------- --------------- ---------------
Income before income taxes........... 2,730,408 8,680,408 10,232,875
Income tax expense................... 1,024,841 3,477,116 4,098,646
-------------- --------------- ---------------
Net income........................... 1,705,567 5,203,292 6,134,229
Distributions to shareholders........ 77,290 130,242 34,297
-------------- --------------- ---------------
Net income available to common
shareholders....................... $ 1,628,277 $ 5,073,050 $ 6,099,932
============== =============== ===============
Basic earnings per share............. $ .18 $ .44 $ .44
Diluted earnings per share........... $ .17 $ .41 $ .42
Weighted average number of common
shares outstanding -- basic........ 9,059,882 11,489,254 14,000,324
Weighted average number of common
shares outstanding -- dilutive..... 9,710,370 12,402,931 14,725,626
</TABLE>
See notes to consolidated financial statements.
F-11
<PAGE>
INDUSTRIAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1996 1997 1998
--------------- -------------- --------------
<S> <C> <C> <C>
(AS RESTATED, SEE NOTE 16)
Cash flows from operating activities:
Net income........................... $ 1,705,567 $ 5,203,292 $ 6,134,229
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities:
Depreciation and amortization... 2,205,042 4,036,768 6,118,583
Equity in (earnings) losses of
unconsolidated affiliates..... 60,520 (2,144,131)
Deferred income tax provision... 455,060 181,307 1,896,019
Deferred compensation paid...... (109,203) (43,754) (174,471)
Deferred gain on demolition
contract...................... (1,000,000)
Income tax benefit from stock
options exercised............. 163,664 48,572
Other........................... 7,500
Changes in assets and
liabilities, net of effect of
purchase acquisitions:
Accounts receivable........ (966,242) (4,594,890) (13,169,318)
Employee advances.......... (109,373) (33,969) 107,090
Inventories................ (1,224,022) (1,551,262) (4,313,973)
Notes receivable........... 118,298 (1,672,129) (2,803,804)
Other assets............... (469,761) (217,803) (3,135,886)
Accounts payable and
accrued expenses........ 757,583 1,847,921 7,300,494
--------------- -------------- --------------
Net cash provided by
(used in) by
operating
activities......... 2,370,449 3,379,665 (5,136,596)
Cash flows from investing activities:
Purchase of property and
equipment..................... (4,225,273) (4,959,872) (6,232,069)
Proceeds from disposals of
property and equipment, net... 109,788 673,392 389,790
Investments in unconsolidated
affiliates.................... (1,676,061) (930,321)
Net proceeds from sale of
interest in demolition
contract...................... 2,000,000
Distributions from
unconsolidated affiliates..... 1,020,709 2,606,000
Business acquisitions, net of
cash acquired................. (2,150,662) (4,474,855)
Cash obtained in purchase of
American...................... 1,244,666
Additional consideration paid to
former shareholders of
Landreth...................... (29,491)
--------------- -------------- --------------
Net cash used in
investing
activities......... (2,900,310) (7,092,494) (6,641,455)
</TABLE>
See notes to consolidated financial statements.
F-12
<PAGE>
INDUSTRIAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1996 1997 1998
-------------- -------------- --------------
<S> <C> <C> <C>
(AS RESTATED, SEE NOTE 16)
Cash flows from financing activities:
Net borrowings under revolving
line of credit................ $ 1,064,603 $ 1,772,458 $ 9,324,942
Proceeds from issuance of
long-term debt................ 1,903,603 3,294,349 1,532,218
Principal payments on notes
payable and long-term debt.... (5,136,296) (5,353,368) (9,277,308)
Proceeds from issuance of common
stock......................... 6,248,281 2,136,978 12,914,854
Notes receivable from
officers...................... (945,000)
Repurchase of common stock by an
acquired company.............. (330,610) (50,000)
Distributions to shareholders... (77,290) (130,242) (34,297)
-------------- -------------- --------------
Net cash provided by
financing activities.... 4,002,901 1,389,565 13,465,409
-------------- -------------- --------------
Net increase (decrease) in cash and
cash equivalents................... 3,473,040 (2,323,264) 1,687,358
Cash and cash equivalents, beginning
of year............................ 575,277 4,048,317 1,725,053
-------------- -------------- --------------
Cash and cash equivalents, end of
year............................... $ 4,048,317 $ 1,725,053 $ 3,412,411
============== ============== ==============
Supplemental disclosure of noncash
investing and financing activities:
Conversion of debt to equity.... $ 1,619,100 $ 3,093,000 $
Redemption of preferred stock
with debt..................... 960,000
Property acquired with debt..... 934,000 1,133,497 147,300
Acquisition of businesses:
Assets acquired............ 11,443,214 24,828,899 83,804,034
Liabilities assumed........ 12,687,881 22,678,237 79,329,179
Supplemental disclosures of cash flow
information:
Cash paid for:
Interest................... $ 1,983,077 $ 2,722,391 $ 4,752,778
Income taxes............... 227,473 2,029,870 2,494,344
</TABLE>
See notes to consolidated financial statements.
F-13
<PAGE>
INDUSTRIAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1996, 1997 AND 1998
(AS RESTATED, SEE NOTE 16)
<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 (as
previously reported)............... 202,960 $ 960,000 6,756,199 $ 67,563 $8,720,616 $ 2,648,150 $
Pooling of interest combination (Note
16) as restated.................... 1,711,027 17,110 718,846 (116,912)
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 10........ (42,639)
Net income........................... 1,705,567
--------- ---------- ---------- ---------- ----------- ----------- ----------
Balance, December 31, 1996........... 202,960 960,000 10,227,558 102,276 17,246,601 4,159,515
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........................... 5,203,292
--------- ---------- ---------- ---------- ----------- ----------- ----------
Balance, December 31, 1997........... 12,018,683 120,187 27,971,690 9,232,565
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)
Repurchase of common stock by an
acquired company................... (50,000)
Reclassification of undistributed
subchapter S earnings of pooled
company............................ 167,364 (167,364)
Notes receivable..................... (945,000)
Net income........................... 6,134,229
--------- ---------- ---------- ---------- ----------- ----------- ----------
Balance, December 31, 1998........... $ 14,739,662 $147,396 $51,545,271 $15,165,133 $(945,000)
========= ========== ========== ========== =========== =========== ==========
<CAPTION>
TOTAL
----------
<S> <C>
Balance, January 1, 1996 (as
previously reported)............... $12,396,329
Pooling of interest combination (Note
16) as restated.................... 619,044
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 10........ (42,639)
Net income........................... 1,705,567
----------
Balance, December 31, 1996........... 22,468,392
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........................... 5,203,292
----------
Balance, December 31, 1997........... 37,324,442
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)
Repurchase of common stock by an
acquired company................... (50,000)
Reclassification of undistributed
subchapter S earnings of pooled
company............................
Notes receivable..................... (945,000)
Net income........................... 6,134,229
-----------
Balance, December 31, 1998........... $65,912,800
===========
</TABLE>
See notes to consolidated financial statements.
F-14
<PAGE>
INDUSTRIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION:
The consolidated financial statements, as presented, give retroactive
effect to the acquisitions accounted for as poolings-of-interest (see Notes 3
and 16). 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,
gas measurement equipment 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 provides plant demolition and site abatement services; 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"). Investments
in unconsolidated affiliates with ownership interests of 50% or less and which
the Company does not control are accounted for using the equity method.
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 necessitating 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.
F-15
<PAGE>
INDUSTRIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following reflects the amounts relating to uncompleted construction
contracts at December 31, 1998:
Costs incurred on uncompleted
contracts.......................... $ 16,781,741
Estimated earnings................... 3,010,509
--------------
19,792,250
Less: Billings to date............... 19,529,023
--------------
$ 263,227
==============
Included in the accompanying
consolidated balance sheet under
the following captions:
Costs and estimated earnings in
excess of billings................. $ 5,428,987
Billings in excess of costs and
estimated earnings................. (5,165,760)
--------------
$ 263,227
==============
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' financial
condition and historically has not incurred significant credit losses.
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 10) due to the nature of the instruments. The
fair values of the Company's debt instruments (see Notes 8 and 9) 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 their carrying value and are 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,
F-16
<PAGE>
INDUSTRIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
machinery and equipment and leasehold improvements and 35 years for buildings).
Maintenance and repairs are charged to expense as incurred; major renewals and
betterments are capitalized.
LONG-LIVED ASSETS
The Company records impairment losses on long-lived assets used in
operations when events and circumstances indicate that the assets might be
impaired and the undiscounted cash flows estimated to be generated by those
assets are less than the carrying amounts of those assets.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill represents the excess of the purchase price over the fair market
value of net tangible assets acquired. At December 31, 1997 and 1998, goodwill
was $12,292,036 and $29,887,463 net of accumulated amortization of $1,369,835
and $2,458,839, 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 $287,937, $628,073, $1,134,577 and for the
years ended December 31, 1996, 1997 and 1998, 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-17
<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:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1996 1997 1998
-------------- -------------- --------------
<S> <C> <C> <C>
EARNINGS FOR BASIC AND DILUTED
COMPUTATION
Net income...................... $ 1,705,567 $ 5,203,292 $ 6,134,229
Distributions to shareholders... (77,290) (130,242) (34,297)
-------------- -------------- --------------
Net income available to common
shareholders -- basic......... 1,628,277 5,073,050 6,099,932
Interest on convertible debt
securities, net of tax........ -- -- 87,656
-------------- -------------- --------------
Net income available to common
shareholders -- diluted....... $ 1,628,277 $ 5,073,050 $ 6,187,588
============== ============== ==============
BASIC EARNINGS PER SHARE
Weighted average number of
common shares outstanding..... 9,059,882 11,489,254 14,000,324
============== ============== ==============
Basic earnings per share........ $ .18 $ .44 $ .44
============== ============== ==============
DILUTED EARNINGS PER SHARE
Weighted average number of
common shares outstanding..... 9,059,882 11,489,254 14,000,324
Shares issuable from assumed
conversion of common share
options, warrants granted and
debt conversion............... 650,488 913,677 725,302
-------------- -------------- --------------
Weighted average number of
common shares outstanding, as
adjusted...................... 9,710,370 12,402,931 14,725,626
============== ============== ==============
Diluted earnings per share...... $ .17 $ .41 $ .42
============== ============== ==============
</TABLE>
There were 882,250 options in 1998 that were not included in the
computation of diluted earnings per share 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 business acquisitions accounted for under the purchase
method.
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 presentation.
F-18
<PAGE>
INDUSTRIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NEW ACCOUNTING PRONOUNCEMENTS
In June 1999, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 137, Accounting for
Derivative Instruments and Hedging Activities -- Deferral of the Effective Date
of FASB Standard No. 133. This statement amends Statement No. 133 which
establishes accounting and reporting standards for derivative instrument
embedded in other contracts. This statement is effective for all fiscal years
beginning after June 15, 2000. 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.
3. BUSINESS ACQUISITIONS:
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 poolings-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 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 January 1998, the Company acquired R.J. Machine Co., Inc. ("RJ"), in
February 1998, the Company acquired Philform, Inc. ("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 $58.7
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 $16.2 million. The final purchase price allocation of
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 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,
F-19
<PAGE>
INDUSTRIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
"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 1997 and 1998 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 approximately $275,598,000, $10,383,000 $.80
and $.76 for 1997 and approximately $274,870,000, $6,463,000, $.44 and $.43 for
1998. On a pro forma unaudited basis, as if the 1996 and 1997 acquisitions had
occurred as of January 1, 1996, sales, net income and basic and diluted earnings
per share would have been approximately $134,216,000, $2,589,000, $.26 and $.24
for 1996 and approximately $159,033,000, $5,671,000, $.49 and $.45 for 1997. 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:
1997 1998
-------------- --------------
Raw materials........................ $ 3,197,946 $ 12,451,960
Finished goods....................... 14,225,648 25,373,644
Other................................ 3,824,720 10,450,323
-------------- --------------
$ 21,248,314 $ 48,275,927
============== ==============
F-20
<PAGE>
INDUSTRIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. NOTES RECEIVABLE:
Notes receivable at December 31 consist of the following:
1997 1998
-------------- --------------
Note receivable from affiliate with
interest at 8.5% due on demand,
unsecured.......................... $ 304,465 $ 2,609,139
Notes receivable from former
shareholders of acquired companies
due through 2001 with interest up
to 8.5%............................ 1,108,632 1,312,287
Mortgage note receivable with
interest at 9.53% due in monthly
installments of $15,166 through
February 2007 secured by land and
building........................... 1,109,838 1,030,120
Notes receivable from employees with
interest up to 6.1% due June 1999,
unsecured.......................... 431,716 210,865
Note receivable from Belleli with
interest at 8.5% due in 1999 and
secured by accounts receivable..... 400,000
Other notes receivable............... 389,420 585,464
-------------- --------------
3,344,071 6,147,875
Less current portion................. 1,362,095 4,364,106
-------------- --------------
$ 1,981,976 $ 1,783,769
============== ==============
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:
1997 1998
-------------- --------------
Land................................. $ 1,762,990 $ 3,136,476
Buildings and improvements........... 5,700,313 13,516,620
Machinery and equipment.............. 30,217,822 53,005,103
Furniture and fixtures............... 2,393,213 2,811,501
Construction in progress............. 858,201
-------------- --------------
40,074,338 73,327,901
Less -- accumulated depreciation and
amortization....................... (10,465,634) (14,533,955)
-------------- --------------
$ 29,608,704 $ 58,793,946
============== ==============
Depreciation expense was $1,917,105, $3,408,695 and $4,984,006 for 1996,
1997 and 1998, respectively.
F-21
<PAGE>
INDUSTRIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. INVESTMENTS IN UNCONSOLIDATED AFFILIATES:
Investments in unconsolidated affiliates consist of a 33 1/3% interest in
AWR Acquisition, L.C. ("AWR"), a 49% interest in O.F. Acquisition, L.P., and a
30% interest in Midland Recycle, LLC ("Midland") and were $594,832 and
$513,284 at December 31, 1997 and 1998, respectively (see Note 10). The
Company's investment in AWR and Midland was acquired in connection with the
Blastco acquisition (see Note 16).
The combined results of operations and financial position of the Company's
unconsolidated affiliates are summarized below:
Condensed Income Statement Information for the years ended December 31:
1997 1998
-------------- --------------
Sales................................... $ 1,418,000 $ 29,329,000
Gross profit............................ 766,000 8,910,000
Net income.............................. (433,000) 4,814,000
Condensed Balance Sheet Information at December 31:
1997 1998
-------------- --------------
Current assets.......................... $ 9,772,000 $ 15,460,000
Non-current assets...................... 2,357,000 10,590,000
Current liabilities..................... 6,331,000 10,765,000
Non-current liabilities................. 3,147,000 5,194,000
8. NOTES PAYABLE:
Notes payable at December 31 consist of the following:
1997 1998
-------------- --------------
Revolving lines of credit with banks
which provide for borrowings up to
the lesser of a defined borrowing
base or $45,750,000, $1,241,468
available at December 31, 1998,
principal due June 30, 2000,
interest payable monthly at prime
(7.75% at December 31, 1998) or the
Eurodollar rate plus 2 1/2% (7.56%
at December 31, 1998), secured by
substantially all assets of the
Company............................ $ 17,022,562 $ 42,086,422
Note payable to a bank maturing in
1999 with interest at prime (7.75%
at December 31, 1998), secured by
certain accounts receivable........ 400,000
Other notes payable paid in 1998..... 1,502,313
-------------- --------------
$ 18,524,875 $ 42,486,422
============== ==============
On June 17, 1999, the Company amended its existing $45 million credit
facility to provide for a $55 million line of credit. Advances under the
revolving line of credit bear interest, at the Company's option, at either (i)
the prime rate in effect at the time of the advance or (ii) an adjusted
Eurodollar rate plus an amount ranging from 2 1/4% to 3% based upon the ratio of
senior debt to EBITDA. Substantially all covenants and conditions remain
unchanged. The revolving line of credit matures on June 16, 2001.
F-22
<PAGE>
INDUSTRIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. LONG-TERM DEBT:
Long-term debt at December 31 consists of the following:
1997 1998
-------------- --------------
Notes payable to banks with monthly
principal payments of $222,494 plus
interest at prime (7.75% at
December 31, 1998), maturing
through 2005, secured by certain
assets of the Company.............. $ 1,263,804 $ 14,099,052
Note payable to a financial
institution with interest at Libor
+ 5% (10.6% at December 31, 1998)
maturing November 1999,
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, secured by
certain equipment.................. 7,888,889 12,038,888
Convertible debenture payable to
former shareholder of Beaird in
three annual installments of
$1,770,833 plus interest at 4%
through 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............................. 1,369,616 3,224,989
Various notes payable to individuals,
payable in monthly installments
including interest ranging from 5%
to 8%, maturing June 1998 through
February 2007, unsecured........... 1,770,898 1,695,898
Various notes payable in monthly
installments through 2003,
including interest ranging from 6%
to 16%, secured by equipment....... 5,812,776 2,510,729
Other notes.......................... 12,500 --
-------------- --------------
18,118,483 53,882,056
Less -- current portion.............. 4,608,848 23,547,890
-------------- --------------
$ 13,509,635 $ 30,334,166
============== ==============
The aggregate maturities of long-term debt at December 31, 1998 are as
follows:
1999............................ $ 23,547,890
2000............................ 8,579,964
2001............................ 7,554,112
2002............................ 4,426,892
2003............................ 6,166,689
Thereafter...................... 3,606,509
--------------
$ 53,882,056
==============
Certain of the Company's debt arrangements as discussed above and in Note 8
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, March 31, 1999, and June 30, 1999, 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. As
of December 31, 1998 and March 31, 1999, the Company was not in compliance with
certain non-financial covenants related to the Company's ability to provide
financial
F-23
<PAGE>
INDUSTRIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
support to Belleli Energy S.r.l. ("Belleli") (see Note 10). In the second
quarter of 1999, the Company obtained waivers for this noncompliance from its
lenders.
10. 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 $478,800 for 1996, $528,800 for 1997 and $183,000 for 1998. Aggregate rent
expense on all operating leases amounted to $1,710,039, $1,843,267 and
$2,827,226 for the years 1996, 1997 and 1998, respectively. Future minimum lease
payments at December 31, 1998 are as follows:
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
============
Lease commitments to related parties are approximately $188,000, $116,000,
$96,000 for 1999, 2000, 2001, respectively, and $56,800 for 2002 and 2003. The
Company has an option to renew one building lease for an additional five years.
During 1998, the Company sold an interest in a demolition contract to AWR,
an equity investee, for $2,000,000, net of associated expenses. This income is
being recognized over the two-year estimated life of the demolition contract.
Included in the accompanying consolidated balance sheet at December 31, 1998
under the caption Investment in Unconsolidated Affiliates is $1,000,000 in
unamortized contract value. The Company has recognized $1,000,000 related to
this contract for the year ended December 31, 1998, which is included in the
accompanying consolidated statement of income under the caption Other Income.
During 1998, the Company recorded $1,035,000 in staffing fee revenues from
an affiliate in which it holds an equity interest. Included in other current
assets on the accompanying consolidated balance sheet at December 31, 1998 is
approximately $20,000 receivable from this entity.
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.
In 1998, we paid St. James Capital Corp. ("St. James Capital"), $1
million in advisory fees in connection with acquisitions of various companies.
In addition, St. James Capital, through an affiliate, owns a 51% interest in OF
Acquisition. Mr. John Thompson, a director of the Company since February 1997,
is also a director and President of St. James Capital. In the second quarter of
1999, we realized proceeds of $2.6 million from the issuance of 349,580 shares
of our common stock to St. James Capital. The shares were valued at $7.44 per
share based upon the closing market price for our stock immediately preceding
the consummation of the sale.
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
9).
During 1996, the Company and a partnership providing a portion of the
financing for the American acquisition, entered into a consulting agreement
whereby the Company provided consulting services to the partnership relating to
the acquisition and 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.
F-24
<PAGE>
INDUSTRIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In 1998, the Company entered into an option agreement which grants the
Company the right to purchase approximately 96% of Belleli through 2002. Belleli
is an Italian company that manufactures thick-walled pressure vessels and heat
exchangers, as well as designs, engineers, constructs and erects components for
desalination, electric power and petrochemical plants. The Company's chief
executive officer and chief financial officer are also directors of Belleli. The
option agreement calls for payments totaling approximately $600,000 in 1999,
$700,000 in 2000, $800,000 in 2001 and $400,000 in 2002. During the second
quarter of 1999, the option agreement was amended to include an additional
option payment of $3 million, of which $2.6 million was funded by a private
placement of the Company's common stock with St. James Capital Corp. and the
remainder from the conversion of a $400,000 note receivable from Belleli (see
Note 5). Additionally, under the option agreement, the Company is to provide
certain financing to Belleli. At December 31, 1998 the Company had provided to
customers and suppliers third-party performance guarantees of $5.2 million and
letters of credit of $520,000, all of which had expired subsequent to year end.
The Company is exposed to credit loss in the event of nonperformance by Belleli
under these arrangements; however, it does not anticipate nonperformance by
Belleli. 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 this financial support through bonding
arrangements with its bank and performance guarantees; 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.
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. Additionally, the Company had guaranteed borrowings totaling $1.98
million of certain companies in which it holds equity interests (see Note 7).
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.
11. INCOME TAXES:
The provision for income taxes for the years ended December 31 is as
follows:
1996 1997 1998
------------ ------------ ------------
Current
Federal......................... $ 428,816 $ 2,948,112 $ 1,691,627
State........................... 140,965 347,697 511,000
------------ ------------ ------------
569,781 3,295,809 2,202,627
Deferred, primarily federal.......... 455,060 181,307 1,896,019
------------ ------------ ------------
Income tax expense................... $ 1,024,841 $ 3,477,116 $ 4,098,646
============ ============ ============
F-25
<PAGE>
INDUSTRIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 $1.5 million for income tax purposes which expire
in 2007 and 2009. These losses may presently be offset against the future income
of the applicable subsidiary only. Of the carryforward amount, $312,000 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 approximately $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., 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:
1997 1998
-------------- --------------
Deferred income tax liabilities:
Depreciation.................... $ (3,563,383) $ (5,183,845)
Other........................... (1,044,132) (1,281,118)
-------------- --------------
Total deferred income
tax liabilities.... (4,607,515) (6,464,963)
-------------- --------------
Deferred income tax assets:
Net operating loss
carryforwards................. 530,537 499,882
Inventory....................... 522,736 436,144
Other........................... 876,613 884,683
-------------- --------------
Total deferred income
tax assets......... 1,929,886 1,820,709
Deferred income tax valuation
allowance.......................... (64,821) (59,280)
-------------- --------------
Deferred income tax liability, net... $ (2,742,450) $ (4,703,534)
============== ==============
A reconciliation of income tax expense computed at statutory rates to
income tax expense for the years ended December 31 is as follows:
1996 1997 1998
------------ ------------ ------------
Tax at statutory rate................ $ 928,338 $ 2,951,338 $ 3,479,177
Effect of permanent difference....... 133,354 295,315 377,905
Reduction in deferred tax asset
valuation allowance................ (238,873) (5,541)
Tax effect of Subchapter S
corporation net income............. (23,754) (77,438) (1,966)
Other................................ 129,504 78,421 (88,189)
State income taxes, net of federal
benefit............................ 96,272 229,480 337,260
------------ ------------ ------------
$ 1,024,841 $ 3,477,116 $ 4,098,646
============ ============ ============
12. 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
F-26
<PAGE>
INDUSTRIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
DISTRIBUTION TO SHAREHOLDERS
Distributions to shareholders consist of distributions to Subchapter S
corporation shareholders prior to the acquisition of the Subchapter S
corporation by the Company as well as 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:
NUMBER OF
COMMON SHARES
--------------
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 $22.50 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 $25.00 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
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 Opinion No. 25 "Accounting for Stock Issued to Employees."
Given the terms of the plan, no compensation cost has been recognized for stock
options granted under the plan.
Under the 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
F-27
<PAGE>
INDUSTRIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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-28
<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 EXERCISE EXERCISABLE AT EXERCISE
EXERCISE 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 SFAS
No. 123 "Accounting for Stock-Based Compensation." For purposes of estimating
the fair value disclosures below, the fair value of each stock option has been
estimated on the grant date with a Black-Scholes option-pricing model using the
following weighted-average assumptions: dividend yield of 0%; expected
volatility 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>
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income........................... As reported $ 1,705,567 $ 5,203,292 $ 6,134,229
Pro forma $ 1,478,998 $ 4,785,377 $ 4,641,237
Earnings per share:
Basic........................... As reported $ .18 $ .44 $ .44
Pro forma $ .15 $ .41 $ .33
Diluted......................... As reported $ .17 $ .41 $ .42
Pro forma $ .14 $ .38 $ .32
</TABLE>
13. 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 $132,000, $230,000 and $359,000 for
1996, 1997 and 1998.
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:
YEAR
ENDED
DECEMBER 31,
-------------
1998
-------------
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
=============
F-29
<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.
YEAR
ENDED
DECEMBER 31,
-------------
1998
-------------
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)
=============
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.
14. REPORTABLE SEGMENTS
Effective January 1, 1998, the Company adopted SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information." 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. Certain
reclassifications have been made to the prior-year amounts to conform to the
current-year presentation.
F-30
<PAGE>
INDUSTRIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
HEAVY
FASTENERS FABRICATION VALVES MACHINES CORPORATE CONSOLIDATED
----------- ----------- ---------- ---------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
1996
Sales................................ $53,252,342 $29,725,995 $16,427,091 $ 99,405,428
Depreciation and amortization........ 1,123,761 847,234 195,327 $ 38,720 2,205,042
Income from operations............... 3,114,499 1,470,733 532,635 (798,647) 4,319,220
Total assets......................... 39,107,171 15,607,415 5,870,016 2,322,763 62,907,365
Capital expenditures................. 2,680,252 2,241,751 227,576 9,694 5,159,273
1997
Sales................................ $79,472,953 $56,130,384 $15,624,347 $151,227,684
Depreciation and amortization........ 2,058,076 1,727,654 238,085 $ 12,953 4,036,768
Income from operations............... 5,544,340 6,601,159 (257,326) (884,040) 11,004,133
Total assets......................... 58,574,755 31,112,693 4,872,691 900,955 95,461,094
Equity investment in affiliates...... 594,832 594,832
Capital expenditures................. 1,799,365 4,101,274 162,383 30,347 6,093,369
1998
Sales................................ $110,403,167 $ 40,011,472 $53,487,881 $14,305,192 $218,207,712
Depreciation and amortization........ 3,151,524 549,849 2,234,069 151,868 $ 31,273 6,118,583
Income from operations............... 6,893,607 1,981,421 4,317,198 22,656 (1,686,506) 11,528,376
Total assets......................... 106,246,831 58,427,308 31,530,596 3,969,087 3,494,833 203,668,655
Equity investment in affiliates...... 1,290,930 (777,646) 513,284
Capital expenditures................. 2,865,211 689,674 2,425,918 79,847 318,719 6,379,369
</TABLE>
RECONCILIATION OF INCOME FROM OPERATIONS TO NET INCOME
<TABLE>
<CAPTION>
1996 1997 1998
-------------- -------------- ---------------
<S> <C> <C> <C>
Income from operations............... $ 4,319,220 $ 11,004,133 $ 11,528,376
Equity in earnings (losses) of
unconsolidated affiliates.......... (60,520) 2,144,131
Other income (expense):
Interest expense................ (2,041,414) (2,749,282) (5,336,898)
Interest income................. 160,954 160,230 521,771
Other income, net............... 291,648 325,847 1,375,495
-------------- -------------- ---------------
Total other income (expense)......... (1,588,812) (2,263,205) (3,439,632)
Income before income taxes........... 2,730,408 8,680,408 10,232,875
Income tax expense................... 1,024,841 3,477,116 4,098,646
-------------- -------------- ---------------
Net income........................... $ 1,705,567 $ 5,203,292 $ 6,134,229
============== ============== ===============
</TABLE>
RECONCILIATION OF PRODUCTS AND SERVICES
<TABLE>
<CAPTION>
1996 1997 1998
--------------- --------------- ---------------
<S> <C> <C> <C>
Cold formed fasteners, fastening
systems and metal components....... $ 23,505,900 $ 31,900,128 $ 36,266,413
Stud bolts, gaskets and hoses........ 29,746,442 47,572,825 74,136,754
Pressure vessels, storage tanks and
related products................... 40,011,472
Valves and related products.......... 29,725,995 56,130,384 53,487,881
Machine tools and other.............. 16,427,091 15,624,347 14,305,192
--------------- --------------- ---------------
Sales................................ $ 99,405,428 $ 151,227,684 $ 218,207,712
=============== =============== ===============
</TABLE>
F-31
<PAGE>
INDUSTRIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. QUARTERLY FINANCIAL DATA (UNAUDITED):
Summarized quarterly financial data for 1997 and 1998 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>
1997(3)
Sales................................ $ 32,516 $35,865 $ 41,441 $41,406
Gross profit......................... 9,134 9,354 11,376 9,977
Net income........................... 1,501 1,164 2,127 411
Earnings per share:
Basic........................... .14 .09 .17 .04
Diluted......................... .13 .09 .16 .03
1998(2)
Sales................................ $ 43,110 $44,581 $ 63,570 $66,947
Gross profit......................... 10,866 12,468 13,378 13,127
Net income........................... 1,393 2,438 1,420 883
Earnings per share:
Basic........................... .10 .18 .10 .06
Diluted......................... .10 .17 .09 .06
</TABLE>
- ------------
(1) Quarterly financial data presented herein has been retroactively restated to
give effect to the pooled companies as described in Notes 3 and 16.
(2) The Company acquired RJ and 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.
(3) The Company acquired Lone Star in February 1997, MVS in March 1997, Rogers
in August 1997 and Walker in November 1997.
F-32
<PAGE>
INDUSTRIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. BLASTCO ACQUISITION:
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 manufactures and sells gas measurement equipment and provides
demolition services to refineries. This business combination has been accounted
for as a pooling-of-interests and, accordingly, the Company's accompanying
historical consolidated financial statements have been restated to include the
accounts and results of Blastco.
Sales, net income and earnings per share amounts for the years ended
December 31, 1996, 1997 and 1998 for the Company and for Blastco are as follows:
IHI BLASTCO COMBINED
---------- ------- --------
1996
Sales................................ $ 93,270 $ 6,135 $ 99,405
Net income........................... $ 1,864 $ (158) $ 1,706
Net income available to common
shareholders....................... $ 1,786 $ (158) $ 1,628
Earnings per share:
Basic........................... $ .24 $ .18
Diluted......................... $ .22 $ .17
1997
Sales................................ $ 138,504 $12,724 $151,228
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
1998
Sales................................ $ 208,971 $ 9,237 $218,208
Net income........................... $ 6,008 $ 126 $ 6,134
Net income available to common
shareholders....................... $ 5,974 $ 126 $ 6,100
Earnings per share:
Basic........................... $ .49 $ .44
Diluted......................... $ .47 $ .42
F-33
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS 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 17TH DAY OF AUGUST 1999.
INDUSTRIAL HOLDINGS, INC.
By: /s/ CHRISTINE A. SMITH
CHRISTINE A. SMITH (CHIEF FINANCIAL
OFFICER AND VICE PRESIDENT)
<PAGE>
INDEX TO EXHIBITS
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER IDENTIFICATION OF EXHIBIT PAGES
--------- --------------------------- -------------
3.1 -- Amended and Restated Articles of
Incorporation of the Company Ex-1
3.2 -- Amended and Restated Bylaws of the
Company Ex-2
10.1 -- Form of Nonstatutory Stock Option
Agreement for the Company's 1998
Incentive Plan Ex-3
10.2 -- Form of Incentive Stock Option
Agreement for the Company's 1998
Incentive Plan Ex-4
21 -- Subsidiaries of the Company Ex-5
23.1 -- Consent of Deloitte & Touche LLP Ex-6
23.2 -- Consent of PricewaterhouseCoopers LLP Ex-7
23.3 -- Consent of Arthur Andersen LLP Ex-8
23.4 -- Consent of Weinstein Spira & Company,
P.C. Ex-9
23.5 -- Consent of Karlins Arnold & Corbitt,
P.C. Ex-10
23.6 -- Consent of Simonton, Kutac &
Barnidge, LLP Ex-11
27.1 -- Financial data schedule
EXHIBIT 3.1
AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
INDUSTRIAL HOLDINGS, INC.
ARTICLE I
The name of the Corporation is Industrial Holdings, Inc.
ARTICLE II
The Corporation shall have perpetual existence.
ARTICLE III
The purpose of the Corporation is to engage in any lawful act or activity for
which a corporation may be organized under the Texas Business Corporation Act.
ARTICLE IV
(A) The maximum number of shares of all classes of stock which the
Corporation is authorized to have outstanding at any one time is
57,500,000 shares, 50,000,000 of which shall be common stock, $.01 par
value per share ("Common Stock") and 7,500,000 of which shall be preferred
stock $.01 par value per share ("Preferred Stock"), issuable in one or
more series. All or any part of the Common Stock and the Preferred Stock
may be issued by the Corporation from time to time and for such
consideration as the Board of Directors may determine. All of such shares,
if and when issued, and upon receipt of such consideration by the
Corporation, shall be fully paid and nonassessable.
(B) The Board of Directors is authorized at any time and from time
to time to divide the Preferred Stock into one or more series and to fix
and determine the relative rights, preferences, qualification, limitations
and restrictions of the shares of any series so established. All shares of
any one series of Preferred Stock shall be identical, except as to the
dates of issue and the dates from which dividends on share of the series
issued on difference dated will cumulate, if cumulative. The Board of
Directors is hereby expressly authorized to adopt a resolution
establishing and designating each such series, determine the number of
shares which shall constitute such series, and determining the relative
rights, preferences, qualifications, limitation and restrictions thereof,
which relative rights, preferences, qualifications, limitations and
restrictions may differ with respect to each series as to:
<PAGE>
(i) The rate or manner of dividends, including whether and to the
extent such dividends shall be cumulative, participating, or
both, the conditions and dates upon which such dividends shall
be payable, and the preference or relation which such
dividends shall bear to the dividends payable on any other
class or classes of stock or any other series of any class or
classes of stock of the Corporation.
(ii) Whether the shares of such series shall be subject to
redemption by the Corporation, and if so, the redemption
price, the time or times of redemption and the terms and
conditions or redemption, which price, time of redemption and
terms and conditions may differ in the event of mandatory
redemption or permissive redemption;
(iii) The amount payable upon shares of such series in the event of
voluntary or involuntary liquidation, dissolution or winding
up of the Corporation;
(iv) Sinking fund provisions, if any, for the redemption or
purchase of shares of such series;
(v) Whether the shares of such series shall be convertible into or
exchangeable for shares of any other class or classes of stock
or any other series of any class or classes of stock of the
Corporation, an if provision be made for conversion or
exchange, the times, prices, rates, adjustments and other
terms and conditions of such conversion or exchange.
(vi) The restrictions, if any, on the issue of any additional
shares or reissue of shares of such series of Preferred Stock;
(vii) Voting rights if any; and
(viii)Any other such relative rights, preferences, qualifications,
limitations or restrictions for such series which Texas law
now or hereafter empowers or permits the Board of Directors to
determine.
(C) Except as otherwise required by law, each holder of Common Stock shall
be entitled to one (1) vote for each share of such Common Stock standing
in his name on the books of the Corporation. Subject to the rights and the
preferences of the Preferred Stock, if any is outstanding, holders of the
Common Stock are entitled to such dividends as may be declares by the
Board of Directors out of funds lawfully available therefor. Upon
liquidation, dissolution or winding up of the affairs of the Corporation,
whether voluntary or involuntary, holders of the Common Stock are entitled
to receive pro rate the remaining assets of the Corporation.
<PAGE>
ARTICLE V
No stockholder of the Corporation shall, by reason of his holding
shares of any class of stock, have any preemptive or preferential right to
purchase or subscribe for any shares of stock of the Corporation, now or
hereafter authorized, any notes, debentures, bonds or other securities
convertible into or carrying warrants, rights or options to purchase, shares of
any class of stock or series of any class of stock of the Corporation, now or
hereafter authorized, or any warrants, rights or options to purchase, subscribe
to or otherwise acquire any such new or additions shares of any class of stock
or series of any class of stock of the Corporation, now or hereafter authorized,
whether or not the issuance of such shares, such notes, debentures, bonds or
other securities or such warrants, rights or options would adversely affect the
dividend, voting or any other rights of such stockholder.
ARTICLE VI
Cumulative voting for the election of directors shall not be permitted.
ARTICLE VII
The holders of any bonds, debentures or other obligations outstanding or
hereafter issued by the Corporation shall have no power to vote in respect to
corporate affairs and management of the Corporation by reason thereof, nor shall
such holders by reason thereof have any right of inspection of the books,
accounts and other records of the Corporation and any other rights which the
stockholders of the Corporation have by reason of the Texas Business Corporation
Act as the same exists or may hereafter be amended.
ARTICLE VIII
The Board of Directors is expressly authorized to alter, amend or repeal
the Bylaws of the Corporation or to adopt new Bylaws.
ARTICLE IX
A director of this Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except to the extent such exemption from liability or
limitation thereof is not permitted under the Texas Business Corporation Act as
the same exists or may hereafter be amended. Any repeal or modification of the
foregoing provision by the stockholders of the Corporation shall not adversely
affect any right or protection f any director of the Corporation for or with
respect to any action or omission of such person occurring prior to such repeal
or modification.
<PAGE>
ARTICLE X
The Board of Directors of the Corporation may, if it deems advisable,
oppose a tender or other offer for the Corporation's securities, whether the
offer is in cash or in the securities of another corporation or otherwise. When
considering whether to oppose an offer, the Board of Directors may, but is not
legally obligated to, consider any pertinent issues; by way of illustration, but
not of limitation, the Board of Directors may, but shall not be legally
obligated to, consider all or any of the following:
(i) Whether the offer price is acceptable based on the historical
and present operating results or financial condition of the
Corporation;
(ii) Whether a more favorable price could be obtained for the
Corporation's securities in the future;
(iii) The impact which an acquisition of the Corporation would have
on the employees, customers, supplies and creditors of the
Corporation and its subsidiaries and the communities which
they serve;
(iv) The reputation and business practices of the offeror and
its management and affiliates as they would affect the
employees, customers, supplies and creditors of the
Corporation and its subsidiaries and the future value of
the Corporation's stock by the value of the securities, if
any, that the offeror is offering in exchange for the
Corporation's securities, based on an analysis of the worth
of the Corporation as compared to the offereor or any other
entity whose securities are being offered, and the
financial condition of the offeror or such other entity, and
(v) Any antitrust or other legal or regulatory issues that are
raised by the offer.
ARTICLE XI
The Corporation shall indemnify every director or officer, their heirs,
executors and administrator, in accordance with Article 2.02-1 of the Texas
Business Corporation Act, against expenses actually and reasonably incurred by
him, as well as any amount paid upon a judgment in connection with any action,
suit or proceeding, civil or criminal, to which he may be made a party by reason
of his being or having been a director or officer of the Corporation, or at the
request of the Corporation, having been a director or officer of any other
corporation of which the Corporation was at such time a shareholder or creditor
and from which other corporation he is not entitled to be indemnified, except in
relation to matters as to which he is found liable on the basis that personal
benefit was improperly received by him, or in which he shall be found liable to
the Corporation. In the event of a settlement, indemnification shall be provided
only in connection with such
<PAGE>
matters covered by the settlement as to which the Corporation is advised by its
special legal counsel that the person to be indemnified did not commit such a
breach of duty. The foregoing shall not be exclusive of other rights to which
the officer or director may be entitled.
ARTICLE XII
No contract or other transaction between the Corporation and any other
corporation shall be affected by the fact that one (1) or more of the directors
or officers of this Corporation is interested in or is a director or officer of
such other corporation and any director or officer individually may be a party
to or may be interested in any contract or transaction of this Corporation. No
contract or transaction of this Corporation with any person or persons, firm or
association shall be affected by the fact that any director or officer of this
Corporation is a party to or interested in such contract or transaction, or in
any way connected with such person or persons, firm or association, provided
that the interest in any such contract or other transactions of any such
director or officer shall be fully disclosed and that such contract or other
transaction shall be authorized or ratified by the vote of a sufficient number
of Directors of the Corporation not so interested. In the absence of fraud, no
director or officer having such adverse interest shall be liable to the
Corporation or to any shareholder or creditor thereof, or to any other person
for any loss incurred by it under or by reason of such contract or transaction,
nor shall any such Director or Officer be accountable for any gains or profits
realized thereon. In any case described in this Article XII any such director
may be counted in determining the existence of a quorum at any meeting of the
board of directors which shall authorize or ratify any such contract or
transaction.
ARTICLE XIII
The name of the registered agent and the address of the registered office
of the Corporation are:
Robert E. Cone
7135 Ardmore
Houston, Texas 77054
ARTICLE XIV
The number of directors of the Corporation shall not be less that one (1)
nor more than twenty-five (25), and may be increased or decreased from time to
time in the manner provided by lay or the By-Laws of the Corporation. Directors
need not be residents of the State of Texas or shareholders of the Corporation.
The initial By-Laws of the Corporation shall be adopted by its board of
directors. The board of directors shall have the power to alter, amend or repeal
the By-Laws from time to time, subject to the reserved power of the Shareholders
at any meeting of shareholders to alter, amend or repeal any provision of the
By-Laws or the adopt new By-Laws.
<PAGE>
The names of the persons who are to serve as directors of the Corporation until
their successors are elected and qualified are:
Robert E. Cone
Barbara S. Shuler
James H. Brock, Jr.
Charles J. Anderson
John P. Madden
James W. Kenney
John L. Thompson
The address of all of the directors named above is 7135 Ardmore, Houston, Texas
77054.
ARTICLE XV
The Corporation will not commence business until it has received for the
issuance of its shares consideration of a value of at least ONE THOUSAND AND
NO/100 DOLLARS ($1,000.00) consisting of money, labor done or property actually
received.
ARTICLE XVI
(A) No director of the Corporation shall be liable to the Corporation or
any of its stockholders for monetary damages for an act or omission
in the director's capacity as a director, provided that this Article
shall not eliminate or limit the liability of a director of the
Corporation.
(i) for any breach of such director's duty of loyalty to the
Corporation or its stockholders;
(ii) for acts or omissions not in good faith that constitute a
breach of duty of the director to the Corporation or that
involve intentional misconduct or a knowing violation of law;
(iii) for any transaction from which such director derived an
improper personal benefit, whether the benefit resulted from
an action taken within the scope of the director's office; or
(iv) for an act or omission for which liability of a director is
expressly provided by an applicable statute.
<PAGE>
(B) If Article 1302-7.06 of the Texas Miscellaneous Corporation Laws Act
("TMCLA") hereafter is amended to authorize the further elimination or
limitation of the liability of directors of the Corporation, then the
liability of a director of the Corporation shall be limited to the fullest
extent permitted by the TMCLA, as so amended, and such limitation of
liability shall be in addition to, and not in lieu of, the limitation on
the liability of a director of the Corporation provided by the foregoing
provisions of this Article.
(C) Any repeal of or amendment of this Article shall be prospective only
and shall not adversely affect any limitation on the liability of a
director of the Corporation existing at the time of such repeal or
amendment.
ARTICLE XVII
Special meetings of the shareholders may be called by (i) the president,
the board of directors, or (ii) the holders of not less than thirty percent
(30%) of shares entitled to vote at the proposed special meeting.
ARTICLE XVIII
Any action required by the TBCA to be taken at any annual or special
meeting of shareholders, or any action which may be taken at any annual or
special meeting of shareholders, may be taken without a meeting, without prior
notice, and without a vote, if a consent or consents in writing, setting forth
the action so taken, shall be signed by the holder or holders of shares bearing
not less than the minimum number of votes that would be necessary to take such
action at a meeting at which the holders of all shares entitled to vote on the
actions were present and voted.
EXHIBIT 3.2
BYLAWS
OF
INDUSTRIAL HOLDINGS, INC.
(a Texas Corporation)
ARTICLE I. NAMES AND OFFICES
1.01 NAME. The name of the Corporation shall be Industrial
Holdings, Inc.
1.02 PRINCIPAL OFFICE. The principal office shall be 1100
Milam, Suite 2050, Houston, Texas 77002.
1.03 OTHER OFFICES. The Corporation may also have an office or
offices at such other place or places, within or without the State of Texas, as
the Board of Directors may, from time to time, designate, or the business of the
Corporation may require.
ARTICLE II. SHAREHOLDERS' MEETINGS
2.01 PLACE OF MEETINGS. All meetings of the shareholders for
the election of Directors shall be held at such time and place, within or
without the State of Texas, as shall be stated in the Notice of the Meeting or
in a duly executed Waiver of Notice thereof.
2.02 ANNUAL MEETING. An Annual Meeting of the shareholders,
commencing with the year 1992, shall be held each year at 10 o'clock a.m. on a
day during the month of May to be selected by the Board of Directors. If such a
day is a legal holiday, then the meeting shall be on the next secular day
following. At the meeting, the shareholders shall elect Directors and transact
such other business as may properly be brought before the meeting. Provided,
however, that the failure to hold any annual meeting required hereby shall not
invalidate any action taken by the Corporation or the Board of Directors
thereof.
2.03 SPECIAL MEETINGS. Special Meetings of the shareholders,
for any purpose or purposes, may be called by the President, the Board of
Directors, or the holders of thirty percent (30%) of all the shares entitled to
vote at the meetings. Business transacted at a Special Meeting shall be confined
to the objects stated in the Notice of the Meeting.
2.04 NOTICE. Written or printed notice stating the place, day
and hour of the meeting and, in case of a Special Meeting, the purpose or
purposes for which the meeting is called, shall be delivered not less than ten
(10) or more than sixty (60) days before the date of the meeting, either
personally or by mail, by or at the direction of the President or the Secretary
to each shareholder of record entitled to vote at the meeting. If a Special
Meeting is called by holders of thirty percent (30%) of the shares of Common
Stock, notice shall be given to the shareholders by the President or Secretary.
If mailed, such Notice shall be deemed to be delivered when deposited in the
United States mail addressed to the shareholder at his address as it appears on
the stock transfer books of the Corporation, with postage thereon prepaid.
Provided, however, that any meeting held without notice to one or more
shareholders shall have the same force and effect as if the notice had been duly
given, and, if the action taken by the Corporation is reflected in any articles
or documents filed with the Secretary of State, those articles or that document
may state that notice was duly given to all persons to whom notice is required
to be given, if said meeting is attended, in person or by proxy, by holders of
shares having not less than the minimum number of votes that would be required
to constitute a quorum and having not less than the minimum number of votes that
would be necessary to take any such action at a meeting at which the holders of
all shares entitled to vote on the action were present and voted.
2.05 QUORUM. The holders of a majority of the shares issued
and outstanding and entitled to vote, represented in person or by proxy, shall
constitute a quorum at all meetings of the shareholders for the transaction of
business except as otherwise provided by statute, by the Articles of
Incorporation, as amended, or by these Bylaws. If a quorum is not present or
represented at a meeting of the shareholders, the shareholders entitled to vote,
present in person or represented by proxy, shall have power to adjourn the
meeting, until a quorum is present
<PAGE>
or represented. At such adjourned meeting at which a quorum is present or
represented, any business may be transacted which might have been transacted at
the meeting as originally notified.
2.06 MAJORITY VOTE; WITHDRAWAL OF QUORUM. When a quorum is
present at any meeting, the vote of the holders of a majority of the shares
having voting power, present in person or by proxy, shall decide any question
brought before such meeting, unless the question is one upon which, by express
provision of any statute, the Articles of Incorporation, as amended, or of these
Bylaws, a vote of a greater number is required in which case such express
provision shall govern and control the decision of such question. The
shareholders present at a duly organized meeting may continue to transact
business until adjournment, notwithstanding the withdrawal of enough
shareholders to leave less than a quorum.
2.07 METHOD OF VOTING. Each outstanding share, regardless of
class, shall be entitled to one vote on each matter submitted to a vote at a
meeting of shareholders, except to the extent that the voting rights of the
shares of any class or classes are limited or denied by the Articles of
Incorporation. At any meeting of the shareholders, every shareholder having the
right to vote may vote either in person, or by proxy executed in writing by the
shareholder or by his duly authorized attorney-in-fact. No proxy shall be valid
after eleven (11) months from the date of its execution, unless otherwise
provided in the proxy. Each proxy shall be revocable unless expressly provided
therein to be irrevocable and unless otherwise made irrevocable by law. Each
proxy shall be filed with the Secretary of the Corporation prior to or at the
time of the meeting. Voting for Directors shall be in accordance with Section
3.06 of these Bylaws. Any vote may be taken by voice or by show of hands unless
someone entitled to vote objects, in which case written ballots shall be used.
At all elections of Directors, or any other case in which inspectors may act,
two inspectors of election may be appointed by the Chairman of the meeting;
provided that, the failure to appoint inspectors of election shall not
invalidate any action taken at any shareholders' meeting.
2.08 VOTING LIST. At least ten (10) days before each meeting
of shareholders, a complete list of the shareholders entitled to vote at the
meeting, arranged in alphabetical order, with the address of each and the number
of voting shares held by each, shall be prepared by the officer or agent having
charge of the stock transfer books. The list, for a period of ten (10) days
prior to the meeting, shall be kept on file at the registered office of the
Corporation and shall be subject to inspection by any shareholder at any time
during usual business hours. The list shall also be produced and kept open at
the time and place of the meeting during the whole time thereof, and shall be
subject to the inspection of any shareholder during the whole time of the
meeting.
2.09 RECORD DATE; CLOSING TRANSFER BOOKS. The Board of
Directors may fix in advance a record date for the purpose of determining
shareholders entitled to notice of or to vote at a meeting of the shareholders,
the record date to be not less than ten (10) nor more than sixty (60) days prior
to the meeting; or the Board of Directors may close the stock transfer books for
such purpose for a period of not less than ten (10) nor more than sixty (60)
days prior to such meeting. In the absence of any action by the Board of
Directors, the last date upon which the notice of the meeting is mailed shall be
the record date. The Board of Directors shall fix the record date for any
special meeting called by holders if thirty percent (30%) or more of the shares
of Common Stock.
2.10 REGISTERED SHAREHOLDERS. The Corporation shall be
entitled to treat the holder of record of any share or shares of stock as the
holder in fact of such share or shares for all purposes, and accordingly shall
not be bound to recognize any equitable or other claim to or interest in such
share on the part of any other person, whether or not it shall have express or
other notice of such claim or interest, except as expressly provided by the laws
of the State of Texas.
2.11 ACTION WITHOUT MEETING. Any action required by statute to
be taken at a meeting of the shareholders, or any action which may be taken at a
meeting of the shareholders, may be taken without a meeting, without prior
notice, and without a vote, if a consent in writing, setting forth the action so
taken, shall be signed by holders of shares having not less than the minimum
number of votes that would be necessary to take such action at a meeting at
which the holders of all shares entitled to vote on the action were present and
voted. The signed consent, or a signed copy, shall be placed in the Minute Book.
2.12 ORDER OF BUSINESS AT MEETINGS; RULES OF MEETING. The
order of business at Annual Meetings and practicable at other meetings of
shareholders shall be as follows unless changed by the Board of Directors, in
its sole and without notice requirements:
<PAGE>
(1) Call to order;
(2) Proof of due notice of meeting;
(3) Determination of quorum and examination of proxies;
(4) Announcement of availability of voting list (see Bylaw
2.08);
(5) Announcement of distribution of annual statement (see
Bylaw 7.03);
(6) Reading and disposing of minutes of last meeting of
shareholders;
(7) Reports of officers and committees;
(8) Appointment of voting inspectors;
(9) Election of Directors;
(10) Report of voting inspectors;
(11) Unfinished business;
(12) New business; and
(13) Adjournment.
The rules that shall govern the meeting shall be those as established by the
Board of Directors.
ARTICLE III. DIRECTORS
3.01 MANAGEMENT. The business and affairs of the Corporation
shall be managed by the Board of Directors who may exercise all such powers of
the Corporation and do all such lawful acts and things as are not exclusively
(by statue or by the Articles of Incorporation or by these Bylaws) directed or
required to he exercised or done by the shareholders.
3.02 NUMBER; QUALIFICATIONS; ELECTION; TERM. The Board of
Directors shall consist of at least two (2) Directors and not more than seven
(7) Directors, none of whom need be shareholders or residents of any particular
state. The Board of Directors shall be divided so that there shall be three
classes, with each class to be as nearly equal in number as possible. Initially
(and until amendment of the Bylaws in accordance with the applicable provisions
thereof), there shall be three (3) members in Class III and two (2) members in
each of Class II and Class I. The terms of Class I Directors shall expire at the
first annual meeting of the shareholders after their election, the terms of
Class II Directors shall expire at the second annual meeting after their
election, and the terms of Class III Directors shall expire at the third annual
meeting after their election. Except as provided in Bylaws 3.03 and 3.05, at
each annual meeting after such classification (i.e., each annual meeting
beginning with the 1995 annual meeting), the number of directors equal to the
number of the class whose term expires at the time of such meeting shall be
elected to hold office until the third succeeding annual meeting. Each Director
shall hold office until his successor shall be elected and shall qualify.
3.03 CHANGE IN NUMBER. The number of Directors may be
increased or decreased from time to time by amendment to these Bylaws, but no
decrease shall have the effect of shortening the term of any incumbent Director.
Any directorship to be filled by reason of an increase in the number of
Directors shall be filled by election at an Annual Meeting or at a Special
Meeting of Shareholders called for the purpose.
3.04 REMOVAL. Any Director may be removed either for or
without cause at any Special or Annual Meeting of Shareholders, by the
affirmative vote of a majority in number of shares of the shareholders present
in person or by proxy at such meeting and entitled to vote for the election of
such Director if notice of intention to act upon such matter shall have been
given in the notice calling such meeting.
3.05 VACANCIES. Any vacancy occurring in the Board of
Directors (by death, resignation, removal or otherwise) may be filled by an
affirmative vote of a majority of the Directors then in office though less than
a quorum of the Board of Directors. A Director elected to fill a vacancy shall
be elected for the unexpired term of his predecessor in office.
3.06 ELECTION OF DIRECTORS. Directors shall be elected by
plurality of the votes cast by the holders of shares entitled to vote in the
election of directors at a meeting of shareholders at which a quorum is present.
<PAGE>
3.07 CHAIRMAN OF THE BOARD OF DIRECTORS. The Board of
Directors may elect a Chairman to preside at all meetings of the Board of
Directors and the shareholders, and invest him with such powers and delegate to
him such duties as the Board of Directors may from time to time designate. In
the event no Chairman is elected, or the designated Chairman is unable to act,
the President shall preside at meetings of the Board of Directors.
3.08 PLACE OF MEETINGS. Meetings of the Board of Directors,
Regular or Special, may be held either within or without the State of Texas.
3.09 FIRST MEETING. The first meeting of each newly elected
Board shall be held without further notice, immediately following the Annual
Meeting of Shareholders, and at the same place, unless (by unanimous consent of
the Directors then elected and serving) such time or place shall be changed.
3.10 REGULAR MEETINQS. Regular Meetings of the Directors may
be held without notice at such time and shall from time to time be determined by
the Board.
3.11 SPECIAL MEETINGS. Special Meetings of the Board of
Directors may be called by the Chairman of the Board of Directors or the
President on three (3) days' notice to each Director, either personally or by
mail or by telegram. Except as otherwise expressly provided by statute, or by
the Articles of Incorporation, or by these Bylaws, neither the business to be
transacted at, nor the purpose of, any Special Meeting need be specified in a
Notice or Waiver of Notice.
3.12 QUORUM; MAJORITY VOTE. At all meetings of the Board of
Directors, a majority of the Directors shall constitute a quorum for the
transaction of business. The act of a majority of the Directors present at any
meeting at which a quorum is present shall be the act of the Board of Directors,
unless the act of a greater number is required by statute or by the Articles of
Incorporation or by these Bylaws. If a quorum is not present at a meeting of the
Board of Directors, the Directors present may adjourn the meeting from time to
time, without notice other than announcement at the meeting, until a quorum is
present.
3.13 COMPENSATION. By resolution of the Board of Directors,
the Directors may be paid their expenses, if any, of attendance at each meeting
of the Board of Directors and may be paid a fixed sum for attendance at each
meeting of the Board of Directors or a stated salary as Director. No such
payment shall preclude any Director from serving the Corporation in any other
capacity and receiving compensation therefore. Members of the executive
committee or of a special or standing committee may, by resolution of the Board
of Directors, be allowed like compensation for attending committee meetings.
3.14 PROCEDURE. The Board of Directors shall keep regular
minutes of its proceedings. The Minutes shall be placed in the Minutes Book of
the Corporation.
3.15 ACTION WITHOUT MEETING. Any action required or permitted
to be taken at a meeting of the Board of Directors may be taken without a
meeting if a consent in writing, setting forth the action is taken, is signed by
all the members of the Board of Directors. Such consent shall have the same
force and effect as a unanimous vote at a meeting. The signed consent, or a
signed copy, shall be placed in the Minute Book.
3.16 INTERESTED DIRECTORS, OFFICERS AND SHAREHOLDERS. No
contract or other transaction between the Corporation and any of its Directors,
officers or shareholders (or any corporation or firm which any of them are
directly or indirectly interested) shall be invalid solely because of this
relationship or because of the presence of such Director, officer or shareholder
at the meeting authorizing such meeting or authorization provided that (a) the
material facts of the relationship or interest of each such Director, officer or
shareholder are known or disclosed and (b) the contract of transaction is fair
to the Corporation as of the time it is authorized or ratified by the Board of
Directors, a committee of the Board or the shareholders.
3.17 COMMITTEES. The Board of Directors may, in its
discretion, by the affirmative vote of the majority of the whole Board of
Directors, appoint committees, which shall have and exercise such powers as
shall be conferred or authorized by the resolution appointing them. A majority
of any such committee, if the committee be composed of more than two members,
may determine its action and fix the time and place for its meetings unless the
Board of Directors shall otherwise provide. The Board of Directors shall have
power at any time
<PAGE>
to fill vacancies in, to change the membership of, or to discharge any such
committee. The designation of such committee and the delegation thereof of
authority shall not operate to relieve the Board of Directors, or any member
thereof, of any responsibility imposed upon it or him by law.
ARTICLE IV. NOTICE
4.01 METHOD. Whenever by statute or theArticles of
Incorporation or these Bylaws, notice is required to be given to a Director or
shareholder, and no provision is made as to how the notice shall be given, it
shall not be construed to mean personal notice, but any such notice may be given
(a) in writing, by mail, postage prepaid, addressed to the Director or
shareholder at the address appearing on the books of the Corporation, or by any
other method permitted by law. Any notice required or permitted to be given by
mail shall be deemed given at the time when the same is thus deposited in the
United States mails.
4.02 WAIVER. Whenever, by statute or the Articles of
Incorporation or these Bylaws, notice is required to be given to a shareholder
or Director, a Waiver thereof in writing signed by the person or persons
entitled to such notice, whether before or after the time stated in such notice,
shall be equivalent to the giving of such notice. Attendance of a Director at a
meeting shall constitute a Waiver of Notice of such meeting, except where a
Director attends for the express purpose of objecting to the transaction of any
business on the ground that the meeting is now lawfully called or convened.
ARTICLE V. OFFICERS AND AGENTS
5.01 NUMBER; QUALIFICATION; ELECTION; TERM.
(a) The Corporation shall have:
(1) A President, a Vice President, a Secretary,
and a Treasurer, and
(2) Such other officers (including a Chairman
of the Board and additional Vice Presidents) and assistant officers and agents
as the Board of Directors may think necessary.
(b) No officer or agent need be a shareholder, a
Director, or a resident of Texas.
(c) Officers named in Section 5.01(a)(1) shall be
elected by the Board of Directors on the expiration of an officer's term or
whenever a vacancy exists. Officers and agents named in Section 5.01(a)(2) may
be elected by the Board at any meeting.
(d) Unless otherwise specified by the Board at the time
of election or appointment, or in an employment contract approved by the Board,
each officer's and agent's term shall end at the first meeting of Directors
after the next Annual Meeting of Shareholders. He shall serve until the end of
his term or, if earlier, his death, resignation, or removal.
(e) Any two or more offices may be held by the same
person.
5.02 REMOVAL. Any officer or agent elected or appointed by the
Board of Directors may be removed by the Board of Directors whenever in its
judgment the best interests of the Corporation will be served thereby. Such
removal shall be without prejudice to the contract rights, if any, of the person
so removed. Election or appointment of an officer or agent shall not of itself
create contract rights.
5.03 VACANCIES. Any vacancy occurring in any office of the
Corporation (by death, resignation, removal or otherwise) may be filed by the
Board of Directors.
5.04 AUTHORITY. Officers and agents shall have such authority
and perform such duties in the management of the Corporation as are provided in
these Bylaws or as may be determined by resolution of the Board of Directors not
inconsistent with these Bylaws.
5.05 COMPENSATION. The compensation of officers and agents
shall be fixed from time to time by the Board of Directors; provided, however,
that all salary voted must be no more than reasonable compensation for services
rendered or to be rendered to the Corporation.
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5.06 CHAIRMAN OF THE BOARD. The Chairman of the Board shall be
the chief executive officer of the Corporation and shall have general and active
management of the business and affairs of the Corporation, shall see that all
orders and resolutions of the Board are carried into effect.
5.07 PRESIDENT. The President shall, in the absence or
disability of the Chairman of the Board, or for any other reason or purpose
perform the duties and have the authority and exercise the powers of the
Chairman of the Board. He shall perform such other duties and have such other
authority and powers as the Board of Directors may from time to time prescribe
or as the Chairman of the Board may from time to time delegate.
5.08 VICE PRESIDENT. The Vice Presidents in the order of their
seniority, unless otherwise determined by the Board of Directors, shall, in the
absence or disability of the Chairman of the Board or President, perform the
duties and have the authority and exercise the powers of the Chairman of the
Board or President. They shall perform such other duties and have such other
authority and powers as the Board of Directors may from time to time prescribe
or as the Chairman of the Board or President may from time to time delegate.
5.09 SECRETARY.
(a) The Secretary shall attend all meetings of the Board
of Directors and all meetings of the shareholders and record all votes and the
Minutes of all proceedings in a book to be kept for that purpose and shall
perform like duties for the Executive Committee when required.
(b) He shall give, or cause to be given, notice of all
meetings of the shareholders and Special Meetings of the Board of Directors.
(c) He shall keep in safe custody the seal of the
Corporation and, when authorized by the Board of Directors or the Executive
Committee, affix the name to any instrument requiring it, and when so affixed it
shall be attested by his signature or by the signature of the Treasurer or an
Assistant Secretary.
(d) He shall be under the supervision of the President.
He shall perform such other duties and have such other authority and powers as
the Board of Directors may from time to time prescribe or as the President may
from time to time delegate.
5.10 ASSISTANT SECRETARY. The Assistant Secretaries in the
order of their seniority, unless otherwise determined by the Board of Directors,
shall, in the absence or disability of the Secretary, perform the duties and
have the authority and exercise the powers of the Secretary. They shall perform
such other duties and have such other powers as the Board of Directors may from
time to time prescribe or as the President may from time to time delegate.
5.11 TREASURER.
(a) The Treasurer shall have the custody of the
corporate funds and securities and shall keep full and accurate -accounts of
receipts and disbursements of the Corporation and shall deposit all moneys and
other valuable effects in the name and to the credit of the Corporation in such
depositories as may be designed by the Board of Directors.
(b) He shall disburse the funds of the Corporation as
may be ordered by the Board of Directors, taking proper vouchers for such
disbursements, and shall render to the President and Directors, at the Regular
Meetings of the Board, or whenever they may require it, an account of all his
transactions as Treasurer and of the financial condition of the Corporation.
(c) If required by the Board of Directors, he shall give
the Corporation a bond in such form, in such sum, and with such surety or
sureties as shall be satisfactory to the Board for the faithful performance of
the duties of his office and for the restoration to the Corporation, in case of
his death, resignation, retirement or removal from office, of all books, papers,
vouchers, money and other property at whatever kind in his possession or under
his control belonging to the Corporation.
(d) He shall perform such other duties and have such
other authority and powers as the Board of Directors may from time to time
prescribe or as the President may from time to time delegate.
<PAGE>
5.12 ASSISTANT TREASURER. The Assistant Treasurers in the
order of their seniority, unless otherwise determined by the Board of Directors,
shall, in the absence or disability of the Treasurer, perform the duties and
have the authority and exercise the powers of the Treasurer. They shall perform
such other duties and have such other powers as the Board of Directors may from
time to time prescribe or the President may from time to time delegate.
ARTICLE VI. CERTIFICATES AND SHAREHOLDERS
6.01 CERTIFICATES. Certificates in the form determined by the
Board of Directors shall be delivered representing all shares to which
shareholders are entitled. Certificates shall be consecutively numbered and
shall be entered in the books of the Corporation as they are issued. Each
certificate shall state on the face thereof the holder's name, the number and
class of shares, the par value of shares or a statement that such shares are
without par value, and such other matters as may be required by law. They shall
be signed by the President or a Vice President and such other officer or
officers as the Board of Directors shall designate, and may be sealed with the
seal of the Corporation or a facsimile thereof. If any certificate is
countersigned by a transfer agent, or an assistant transfer agent or registered
by a registrar (either of which is other then the Corporation or an employee of
the Corporation), the signature of any such officer may be facsimile.
6.02 ISSUANCE. Shares (both treasury and authorized but
unissued) may be issued for such consideration (not less than par value) and to
such persons as the Board of Directors may determine from time to time. Shares
may not be issued until the full amount of the consideration, fixed as provided
by law, has been paid.
6.03 PAYMENT FOR SHARES.
(a) KIND. The consideration for the issuance of shares
shall consist of money paid, labor done (including services actually performed
for the Corporation), or property (tangible or intangible) actually received.
Neither promissory notes nor the promise of future services shall constitute
payment for shares.
(b) VALUATION. In the absence of fraud in the
transaction, the judgment of the Board of Directors as to the value of
consideration received shall be conclusive.
(c) EFFECT. When consideration, fixed as provided by
law, has been paid, the shares shall be deemed to have been issued and shall be
considered fully paid and nonassessable.
(d) ALLOCATION OF CONSIDERATION. The consideration
received for shares shall be allocated by the Board of Directors, in accordance
with law, between stated capital and capital surplus accounts.
6.04 SUBSCRIPTIONS. Unless otherwise provided, subscription of
shares, whether made before or after organization of the Corporation, shall be
paid in full at such time or in such installments and at such times as shall be
determined by the Board of Directors. Any call made by the Board of Directors
for payment on subscriptions shall be uniform as to all shares of the same
series, as the case may be. In case of default in the payment on any installment
or call when payment is due, the Corporation may proceed to collect the amount
due in the same manner as any debt due to the Corporation.
6.05 LOST, STOLEN OR DESTROYED CERTIFICATES. The Corporation
shall issue a new certificate in place of any certificate for shares previously
issued to the registered owner of the certificate:
(a) CLAIM. Makes proof in affidavit form that it has
been lost, destroyed or wrongfully taken;
(b) TIMELY REQUEST. Requests the issuance of a new
certificate before the Corporation has notice that the certificate has been
acquired by a purchaser for value in good faith and without notice of an adverse
claim;
<PAGE>
(c) BOND. Gives a bond in such form, and with such
surety or sureties, with fixed or open penalty, as the Corporation may direct,
to indemnify the Corporation (and its transfer agent and registrar, if any)
against any claim that may be made on account of the alleged loss, destruction,
or theft of the certificate; and
(d) OTHER REQUIREMENTS. Satisfies any other reasonable
requirements imposed by the Corporation. When a certificate has been lost,
apparently destroyed or wrongfully taken, and the holder of record fails to
notify the Corporation within a reasonable time after he has notice of it, and
the Corporation registers a transfer of the shares represented by the
certificate before receiving such notification, the holder of record is
precluded from making any claim against the Corporation for the transfer or for
a new certificate.
6.06 REGISTRATION OF TRANSFER. The Corporation registers the
transfer of a certificate for shares presented for transfer if:
(a) ENDORSEMENT. The certificate is properly by the
registered owner or by his duly authorized attorney;
(b) GUARANTY AND EFFECTIVENESS OF SIGNATURE. The
signature of such person has been guaranteed by a national banking association
or member of the New York Stock Exchange, or reasonable assurance is given that
such endorsements are effective;
(c) ADVERSE CLAIMS. The Corporation has no notice of an
adverse claim or has discharged any duty to inquire into such a claim; and
(d) COLLECTION OF TAXES. Any applicable law relating to
the collection of taxes has been complied with.
6.07 REGISTERED OWNER. Prior to due presentation for
registration for transfer of a certificate for shares, the Corporation may treat
the registered owner as the person exclusively entitled to vote, to receive
notices and otherwise to exercise all the rights and powers of a shareholder.
ARTICLE VII. GENERAL PROVISIONS
7.01 DIVIDENDS AND RESERVES.
(a) DECLARATION AND PAYMENT. Subject to statute and
the Article of Incorporation, dividends may be declared by the Board of
Directors at any regular or Special Meeting and may be paid in cash, in
property, or in shares of the Corporation. The declaration and payment shall be
at the discretion of the Board of Directors.
(b) RECORD DATE. The Board of Directors may fix in
advance a record date for the purpose of determining shareholders entitled to
receive payment of any dividend, the record date to be not more than sixty (60)
days prior to the payment date of such dividend or the Board of Directors may
close the stock transfer books for such purpose for a period of not more than
sixty (60) days prior to the payment date of such dividend. In the absence of
any action by the Board of Directors, the date upon which the Board of Directors
adopts the resolution declaring the dividend shall be the record date.
(c) RESERVES. By resolution the Board of Directors
may create such reserve or reserves out of the earned surplus of the Corporation
as the Directors from time to time, in their discretion, think proper to provide
for contingencies, or to equalize dividends, or to repair or maintain any
property of the Corporation, or for any other purpose they think beneficial to
the Corporation. The Directors may modify or abolish any such reserve in the
manner in which it was created.
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7.02 BOOKS AND RECORDS. The Corporation shall keep correct and
complete books of account and shall keep Minutes of the proceedings of its
shareholders and Board of Directors, and shall keep at its registered office or
principal place of business, or at the office of its transfer agent or register,
a record of its shareholders, giving the names and addresses of all shareholders
and the number and class of the shares held by each.
7.03 ANNUAL STATEMENT. At the request of any holder of record
of any shares, the Corporation shall mail to each shareholder within a
reasonable time an annual statement for its last fiscal year showing in
reasonable detail its assets and liabilities, and the results of its operations.
The Corporation shall also mail to each shareholder its most recent interim
statement if such statement has been filed for public record.
7.04 CHECKS AND NOTES. All checks or demands for money and
notes of the Corporation shall be signed by such officer or officers or such
other person or persons as the Board of Directors may from time to time
designate.
7.05 FISCAL YEAR. The fiscal year of the Corporation shall be
fixed by resolution of the Board of Directors.
7.06 SEAL. The Corporate seal (of which there may be one or
more exemplars) shall contain the name of the Corporation and the name of the
state of incorporation. The seal may be used by impressing it or reproducing a
facsimile of it.
7.07 INDEMNIFICATION OF OFFICERS AND DIRECTORS. Each Director
or officer, whether or not then in office, subject always to the provisions of
the laws of the State of Texas, and the Articles of Incorporation, shall be
indemnified by the Corporation against all costs and expenses (including counsel
fees) reasonably incurred by or imposed upon him in connection with or arising
out of any action, suit or proceeding which he may be for any reason involved by
reason of his being or having been a director or officer of the Corporation,
such-expense to include the costs of any settlement which has been approved by
the Board of Directors (other than amounts to be paid to the Corporation
itself), made with the view to curtailment of costs of litigation. Such
indemnification shall be to the full extent as provided for in Article 2.02-1,
as it presently exists and as it is amended.
7.08 RESIGNATION. Any Director, officer or agent may resign by
giving written notice to the President or the Secretary. The resignation shall
take effect at the time specified therein, or immediately if no time is
specified therein. Unless otherwise specified therein, the acceptance of such
resignation shall not be necessary to make it effective.
7.09 LIMITATION OF LIABILITY. Each Director shall be availed
of the provisions of any limitation of director liability as provided for in the
Articles of Incorporation.
7.10 CONTRACTS. The Board of Directors may authorize any
officer or officers, agent or agents, to enter into any contract or execute and
deliver any instrument in the name of and on behalf of the Corporation, and such
authority may be general or confined to specific instances.
7.11 LOANS. No loan shall be contracted on behalf of the
Corporation and no evidence of indebtedness shall be issued in its name unless
authorized by resolution of the Board of Directors. Such authority may be
general or confined to specific instances.
7.12 AMENDMENT OF BYLAWS. These Bylaws may be altered, amended
or repealed at any meeting of the Board of Directors at which a quorum is
present, by the affirmative vote of a majority of the Directors present at such
meeting, provided notice of the proposed alteration, amendment of repeal is
contained in the notice of such meeting.
7.13 PERSONS AND NUMBERS. Whenever the context so requires,
the masculine shall include the feminine and neuter, and the singular shall
include the plural, and conversely.
<PAGE>
7.14 CONSTRUCTION AND INTERPRETATION. The place of these
Bylaws, their status and their forum shall be at all times in the State of
Texas; and these Bylaws shall be governed by the laws of the State of Texas as
to all matters relating to their validity, construction and interpretation. In
the event that any Court of competent jurisdiction shall judge any portion of
these Bylaws to be invalid or inoperative, then, so far as is reasonable and
possible:
(a) The remainder of these Bylaws shall be considered
valid and operative; and manifested by inoperative.
(b) Effect shall be given to the intent the portion of
these Bylaws held invalid or inoperative.
7.15 TABLE OF CONTENTS: HEADINQS. The Table of Contents and
headings are for organization, convenience, and clarity. In interpreting these
Bylaws, they shall be subordinated in importance to the other written material.
I HEREBY CERTIFY that the foregoing is a true, complete and correct copy
of the Bylaws of Industrial Holdings, Inc., a Texas corporation, as in effect on
the date hereof.
IN WITNESS WHEREOF, I hereunder set my hand and affix the seal of the
corporation, this the 27th day of September 1991.
INDUSTRIAL HOLDINGS, INC.
EXHIBIT 10.1
INDUSTRIAL HOLDINGS, INC.
NONSTATUTORY STOCK OPTION
Optionee: _____________
1. GRANT OF STOCK OPTION. As of the GRANT DATE (identified in Section 18
below), Industrial Holdings, Inc., a Texas corporation (the "COMPANY"), hereby
grants a Nonstatutory Stock Option (the "OPTION") to the OPTIONEE (identified
above), an employee of the Company, to purchase the number of shares of the
Company's common stock, $.01 par value per share (the "COMMON STOCK"),
identified in Section 18 below (the "SHARES"), subject to the terms and
conditions of this agreement (the "AGREEMENT") and the Industrial Holdings, Inc.
1998 Incentive Plan (the "PLAN") which is incorporated herein in its entirety by
reference. The Shares, when issued to Optionee upon the exercise of the Option,
shall be fully paid and nonassessable. The Option is not an "incentive stock
option" as defined in Section 422 of the Internal Revenue Code.
2. DEFINITIONS. All capitalized terms used herein shall have the meanings
set forth in the Plan unless otherwise provided herein. Section 18 below sets
forth meanings for various capitalized terms used in this Agreement.
3. OPTION TERM. The Option shall commence on the Grant Date (identified in
Section 18 below) and terminate on the date immediately prior to the tenth
(10th) anniversary of the Grant Date. The period during which the Option is in
effect and may be exercised is referred to herein as the "OPTION PERIOD".
4. OPTION PRICE. The Option Price per Share is identified in Section 18
below.
5. VESTING. The total number of Shares subject to this Option shall vest
in accordance with the VESTING SCHEDULE (identified in Section 18 below). The
Shares may be purchased at any time after they become vested, in whole or in
part, during the Option Period; provided, however, the Option may only be
exercisable to acquire whole Shares. The right of exercise provided herein shall
be cumulative so that if the Option is not exercised to the maximum extent
permissible after vesting, the vested portion of the Option shall be
exercisable, in whole or in part, at any time during the Option Period.
6. METHOD OF EXERCISE. The Option is exercisable by delivery of a written
notice to the Secretary of the Company, signed by the Optionee, specifying the
number of Shares to be acquired on, and the effective date of, such exercise.
The Optionee may withdraw notice of exercise of this Option, in writing, at any
time prior to the close of business on the business day immediately preceding
the proposed exercise date.
7. METHOD OF PAYMENT. The Option Price upon exercise of the Option shall
be payable to the Company in full either: (i) in cash or its equivalent, or (ii)
subject to prior approval by the
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Committee in its discretion, by tendering previously acquired Shares having an
aggregate Fair Market Value (as defined in the Plan) at the time of exercise
equal to the total Option Price (provided that the Shares must have been held by
the Optionee for at least six (6) months prior to their tender to satisfy the
Option Price), or (iii) subject to prior approval by the Committee in its
discretion, by withholding Shares which otherwise would be acquired on exercise
having an aggregate Fair Market Value at the time of exercise equal to the total
Option Price, or (iv) subject to prior approval by the Committee in its
discretion, by a combination of (i), (ii), and (iii) above. Any payment in
shares of Common Stock shall be effected by the delivery of such shares to the
Secretary of the Company, duly endorsed in blank or accompanied by stock powers
duly executed in blank, together with any other documents as the Secretary may
require. If the payment of the Option Price is remitted partly in Shares, the
balance of the payment of the Option Price shall be paid in either cash,
certified check, bank cashiers' check, or by wire transfer.
The Committee, in its discretion, may allow (i) a "cashless exercise" as
permitted under Federal Reserve Board's Regulation T, 12 CFR Part 220 (or its
successor), and subject to applicable securities law restrictions and tax
withholdings, or (ii) any other means of exercise which the Committee, in its
discretion, determines to be consistent with the Plan's purpose and applicable
law.
As soon as practicable after receipt of a written notification of exercise
and full payment, the Company shall deliver to or on behalf of the Optionee, in
the name of the Optionee or other appropriate recipient, Share certificates for
the number of Shares purchased under the Option. Such delivery shall be effected
for all purposes when a stock transfer agent of the Company shall have deposited
such certificates in the United States mail, addressed to Optionee or other
appropriate recipient.
8. RESTRICTIONS ON EXERCISE. The Option may not be exercised if the
issuance of such Shares or the method of payment of the consideration for such
Shares would constitute a violation of any applicable federal or state
securities or other laws or regulations, including any rule under Part 207 of
Title 12 of the Code of Federal Regulations ("Regulation G") as promulgated by
the Federal Reserve Board, or any rules or regulations of any stock exchange on
which the Common Stock may be listed.
9. TERMINATION OF EMPLOYMENT. Voluntary or involuntary termination of
Employment and the death or Disability of Optionee shall affect Optionee's
rights under the Option as follows:
(a) TERMINATION FOR CAUSE. The vested and non-vested portions of the
Option shall expire at 12:01 a.m. (CST) on the date of termination of
Employment and shall not be exercisable to any extent if Optionee's
Employment with the Company is terminated for Cause (as defined in the
Plan at the time of such termination of Employment).
(b) OTHER INVOLUNTARY TERMINATION OR VOLUNTARY TERMINATION. If
Optionee's Employment with the Company is terminated for any reason other
than for Cause, death or Disability (as defined in the Plan at the time of
termination), then (i) the non-vested portion of the Option shall
immediately expire on the termination date and (ii) the vested portion of
the Option shall expire to the extent not exercised within 90 calendar
days after the date of
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such termination of Employment. In no event may the Option be exercised by
anyone after the earlier of (i) the expiration of the Option Period or
(ii) 90 calendar days after termination of Employment.
(c) DEATH OR DISABILITY. If Optionee's Employment with the Company
is terminated by death or Disability, then (i) the non-vested portion of
the Option shall immediately expire on the date of termination of
Employment and (ii) the vested portion of the Option will terminate 365
calendar days after the date of such termination of Employment to the
extent not exercised by Optionee or, in the case of death, by the person
or persons to whom Optionee's rights under the Option have passed by will
or by the laws of descent and distribution or, in the case of Disability,
by Optionee's legal representative. In no event may the Option be
exercised by anyone after the earlier of (i) the expiration of the Option
Period or (ii) 365 days after Optionee's death or termination of
Employment due to Disability.
10. INDEPENDENT LEGAL AND TAX ADVICE. Optionee acknowledges that the
Company has advised Optionee to obtain independent legal and tax advice
regarding the grant and exercise of the Option and the disposition of any Shares
acquired thereby.
11. REORGANIZATION OF COMPANY. The existence of the Option shall not
affect in any way the right or power of the Company or its stockholders to make
or authorize any or all adjustments, recapitalizations, reorganizations or other
changes in Company's capital structure or its business, or any merger or
consolidation of the Company, or any issue of bonds, debentures, preferred or
prior preference stock ahead of or affecting the Shares or the rights thereof,
or the dissolution or liquidation of the Company, or any sale or transfer of all
or any part of its assets or business, or any other corporate act or proceeding,
whether of a similar character or otherwise.
In the event of a "Change in Control" of the Company (as defined in the
Plan at the time of such event), vesting of the Option may be accelerated and
the Option shall otherwise be affected as provided in the Plan at such time.
12. ADJUSTMENT OF SHARES. In the event of stock dividends, spin-offs of
assets or other extraordinary dividends, stock splits, combinations of shares,
recapitalizations, mergers, consolidations, reorganizations, liquidations,
issuances of rights or warrants and similar transactions or events involving
Company, appropriate adjustments shall be made to the terms and provisions of
this Option as provided in the Plan.
13. NO RIGHTS IN SHARES. Optionee shall have no rights as a stockholder in
respect of the Shares until the Optionee becomes the record holder of such
Shares.
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14. INVESTMENT REPRESENTATION. Optionee will enter into such written
representations, warranties and agreements as Company may reasonably request in
order to comply with any federal or state securities law. Moreover, any stock
certificate for any Shares issued to Optionee hereunder may contain a legend
restricting their transferability as determined by the Company in its
discretion. Optionee agrees that Company shall not be obligated to take any
affirmative action in order to cause the issuance or transfer of Shares
hereunder to comply with any law, rule or regulation that applies to the Shares
subject to the Option.
15. NO GUARANTEE OF EMPLOYMENT. The Option shall not confer upon Optionee
any right to continued employment with the Company or any subsidiary thereof.
16. WITHHOLDING OF TAXES. The Company shall have the right to (a) make
deductions from the number of Shares otherwise deliverable upon exercise of the
Option in an amount sufficient to satisfy withholding of any federal, state or
local taxes required by law, or (b) take such other action as may be necessary
or appropriate to satisfy any such tax withholding obligations.
17. GENERAL.
(a) NOTICES. All notices under this Agreement shall be mailed or
delivered by hand to the parties at their respective addresses set forth
beneath their signatures below or at such other address as may be
designated in writing by either of the parties to one another.
Notices shall be effective upon receipt.
(b) SHARES RESERVED. The Company shall at all times during the
Option Period reserve and keep available under the Plan such number of
Shares as shall be sufficient to satisfy the requirements of this Option.
(c) NONTRANSFERABILITY OF OPTION. The Option granted pursuant to
this Agreement is not transferable other than by will, the laws of descent
and distribution or by a qualified domestic relations order (as defined in
Section 414(p) of the Internal Revenue Code). The Option will be
exercisable during Optionee's lifetime only by Optionee or by Optionee's
legal representative in the event of Optionee's Disability. No right or
benefit hereunder shall in any manner be liable for or subject to any
debts, contracts, liabilities, obligations or torts of Optionee.
(d) AMENDMENT AND TERMINATION. No amendment, modification or
termination of the Option or this Agreement shall be made at any time
without the written consent of Optionee and Company.
(e) NO GUARANTEE OF TAX CONSEQUENCES. The Company and the Committee
make no commitment or guarantee that any federal or state tax treatment
will apply or be available to any person eligible for benefits under the
Option. The Optionee has been advised and been provided the opportunity to
obtain independent legal and tax advice regarding the grant and exercise
of the Option and the disposition of any Shares acquired thereby.
4
<PAGE>
(f) SEVERABILITY. In the event that any provision of this Agreement
shall be held illegal, invalid, or unenforceable for any reason, such
provision shall be fully severable, but shall not affect the remaining
provisions of the Agreement, and the Agreement shall be construed and
enforced as if the illegal, invalid, or unenforceable provision had not
been included herein.
(g) SUPERSEDES PRIOR AGREEMENTS. This Agreement shall supersede and
replace all prior agreements and understandings, oral or written, between
the Company and the Optionee regarding the grant of the Options covered
hereby.
(h) GOVERNING LAW. The Option shall be construed in accordance with
the laws of the State of Texas without regard to its conflict of law
provisions, to the extent federal law does not supersede and preempt Texas
law.
18. DEFINITIONS AND OTHER TERMS. The following capitalized terms shall
have those meanings set forth opposite them:
(a) OPTIONEE: ________________________________
(b) GRANT DATE: ________________________, 199_
(c) SHARES: __________ (_______) Shares of the Company's Common
Stock.
(d) OPTION PRICE: __________ Dollars (_______) per Share.
(e) OPTION PERIOD: ____________, 199__ through ___________, 200__
(until 12:00 p.m. CST).
(f) VESTING SCHEDULE: [Example] Options for __________ of the Shares
shall vest on the first anniversary of the Grant Date, and Options for an
additional [one-third] of the Shares shall vest on each subsequent
anniversary of the Grant Date until fully vested, as follows:
DATE OPTIONS VESTING
---- ---------------
_____________, 1998 ________
_____________, 1999 ________
_____________, 2000 ________
Total
========
5
<PAGE>
IN WITNESS WHEREOF, the Company has, as of _____________, 1998, caused
this Agreement to be executed on its behalf by its duly authorized officer and
Optionee has hereunto set his hand as of the same date.
INDUSTRIAL HOLDINGS, INC.
By:_______________________________
Name:_____________________________
Title:____________________________
Industrial Holdings, Inc.
7135 Ardmore
Houston, Texas 77054
Attention: ______________________
OPTIONEE
___________________________________
Address:
_____________________________
_____________________________
_____________________________
6
EXHIBIT 10.2
INDUSTRIAL HOLDINGS, INC.
INCENTIVE STOCK OPTION AGREEMENT
Optionee: __________________
1. GRANT OF STOCK OPTION. As of the GRANT DATE (identified in Section 19
below), Industrial Holdings, Inc., a Texas corporation (the "COMPANY"), hereby
grants an Incentive Stock Option (the "OPTION") to the OPTIONEE (identified
above), an employee of the Company, to purchase the number of shares of the
Company's common stock, $.01 par value per share (the "COMMON STOCK"),
identified in Section 19 below (the "SHARES"), subject to the terms and
conditions of this agreement (the "AGREEMENT") and the Industrial Holdings, Inc.
1998 Incentive Plan (the "PLAN") which is hereby incorporated herein in its
entirety by reference. The Shares, when issued to Optionee upon the exercise of
the Option, shall be fully paid and nonassessable. The Option is an "incentive
stock option" as defined in Section 422 of the Internal Revenue Code.
2. DEFINITIONS. All capitalized terms used herein shall have the meanings
set forth in the Plan unless otherwise provided herein. Section 19 below sets
forth meanings for various capitalized terms used in this Agreement.
3. OPTION TERM. The Option shall commence on the Grant Date (identified in
Section 19 below) and terminate on the date immediately prior to the tenth
(10th) anniversary of the Grant Date. The period during which the Option is in
effect and may be exercised is referred to herein as the "OPTION PERIOD".
4. OPTION PRICE. The Option Price per Share is identified in Section 19
below. The Option Price shall not be less than the fair market value per Share
on the date of Grant.
5. VESTING. The total number of Shares subject to this Option shall vest
in accordance with the VESTING SCHEDULE (identified in Section 19 below). The
Shares may be purchased at any time after they become vested, in whole or in
part, during the Option Period; provided, however, the Option may only be
exercisable to acquire whole Shares. The right of exercise provided herein shall
be cumulative so that if the Option is not exercised to the maximum extent
permissible after vesting, the vested portion of the Option shall be
exercisable, in whole or in part, at any time during the Option Period.
6. METHOD OF EXERCISE. The Option is exercisable by delivery of a written
notice to the attention of the Secretary of the Company, signed by the Optionee,
specifying the number of Shares to be acquired on, and the effective date of,
such exercise. The Optionee may withdraw notice of exercise of this Option, in
writing, at any time prior to the close of business on the business day
preceding the proposed exercise date.
7. METHOD OF PAYMENT. The Option Price upon exercise of the Option shall
be payable to the Company in full either: (i) in cash or its equivalent, or (ii)
subject to prior approval by the
1
<PAGE>
Committee in its discretion, by tendering previously acquired Shares having an
aggregate Fair Market Value (as defined in the Plan) at the time of exercise
equal to the total Option Price (provided that the Shares must have been held by
the Optionee for at least six (6) months prior to their tender to satisfy the
Option Price), or (iii) subject to prior approval by the Committee in its
discretion, by withholding Shares which otherwise would be acquired on exercise
having an aggregate Fair Market Value at the time of exercise equal to the total
Option Price, or (iv) subject to prior approval by the Committee in its
discretion, by a combination of (i), (ii), and (iii) above. Any payment in
shares of Common Stock shall be effected by the delivery of such shares to the
Secretary of the Company, duly endorsed in blank or accompanied by stock powers
duly executed in blank, together with any other documents as the Secretary may
require. If the payment of the Option Price is remitted partly in Shares, the
balance of the payment of the Option Price shall be paid in either cash,
certified check, bank cashiers' check, or by wire transfer.
The Committee, in its discretion, may allow (i) a "cashless exercise" as
permitted under Federal Reserve Board's Regulation T, 12 CFR Part 220 (or its
successor), and subject to applicable securities law restrictions and tax
withholdings, or (ii) any other means of exercise which the Committee, in its
discretion, determines to be consistent with the Plan's purpose and applicable
law.
As soon as practicable after receipt of a written notification of exercise
and full payment, the Company shall deliver to or on behalf of the Optionee, in
the name of the Optionee or other appropriate recipient, Share certificates for
the number of Shares purchased under the Option. Such delivery shall be effected
for all purposes when a stock transfer agent of the Company shall have deposited
such certificates in the United States mail, addressed to Optionee or other
appropriate recipient.
8. RESTRICTIONS ON EXERCISE. The Option may not be exercised if the
issuance of such Shares or the method of payment of the consideration for such
Shares would constitute a violation of any applicable federal or state
securities or other laws or regulations, including any rule under Part 207 of
Title 12 of the Code of Federal Regulations ("Regulation G") as promulgated by
the Federal Reserve Board, or any rules or regulations of any stock exchange on
which the Common Stock may be listed.
9. TERMINATION OF EMPLOYMENT. Voluntary or involuntary termination of
Employment and the death or Disability of Optionee shall affect Optionee's
rights under the Option as follows:
(a) TERMINATION FOR CAUSE. The vested and non-vested portions of the
Option shall expire on 12:01 a.m. (CST) on the date of termination of
Employment and shall not be exercisable to any extent if Optionee's
Employment with the Company is terminated for Cause (as defined in the
Plan at the time of such termination of Employment).
(b) OTHER INVOLUNTARY TERMINATION OR VOLUNTARY TERMINATION. If
Optionee's Employment with the Company is terminated for any reason other
than for Cause, death or Disability (as defined in the Plan at the time of
termination of Employment), then (i) the non-vested portion of the Option
shall immediately expire on the termination date and (ii) the vested
portion of the Option shall expire to the extent not exercised within 90
calendar days
2
<PAGE>
after the date of such termination of Employment. In no event may the
Option be exercised by anyone after the earlier of (i) the expiration of
the Option Period or (ii) 90 calendar days after termination of
Employment.
(c) DEATH OR DISABILITY. If Optionee's Employment with the Company
is terminated by death or Disability, then (i) the non-vested portion of
the Option shall immediately expire on the date of termination of
Employment and (ii) the vested portion of the Option shall expire 365
calendar days after the date of such termination of Employment to the
extent not exercised by Optionee or, in the case of death, by the person
or persons to whom Optionee's rights under the Option have passed by will
or by the laws of descent and distribution or, in the case of Disability,
by Optionee's legal representative. In no event may the Option be
exercised by anyone after the earlier of (i) the expiration of the Option
Period or (ii) 365 days after Optionee's death or termination of
Employment due to Disability.
10. QUALIFICATION AS AN INCENTIVE STOCK OPTION. The Optionee understands
that the Option is intended to qualify as an "incentive stock option" within the
meaning of Section 422 of the Code. The Optionee must meet certain holding
periods under Section 422(a) of the Code to obtain the federal income tax
treatment applicable to the exercise of incentive stock options and the
disposition of shares acquired thereby. The Optionee further understands that
the exercise price of Shares subject to this Option has been set by the
Committee at a price that the Committee determined to be not less than 100% (or,
if the Optionee, at the Grant Date, owned more than 10% of the total combined
voting power of the Company's outstanding voting securities, 110%) of the Fair
Market Value, as determined in accordance with the Plan, of a share of Common
Stock on the Grant Date. The Optionee further understands and agrees, however,
that the Company shall not be liable or responsible for any additional tax
liability incurred by the Optionee in the event that the Internal Revenue
Service for any reason determines that this Option does not qualify as an
"incentive stock option" within the meaning of the Code.
11. INDEPENDENT LEGAL AND TAX ADVICE. Optionee acknowledges that the
Company has advised Optionee to obtain independent legal and tax advice
regarding the grant and exercise of the Option and the disposition of any Shares
acquired thereby.
12. REORGANIZATION OF COMPANY. The existence of the Option shall not
affect in any way the right or power of the Company or its stockholders to make
or authorize any or all adjustments, recapitalizations, reorganizations or other
changes in Company's capital structure or its business, or any merger or
consolidation of the Company, or any issue of bonds, debentures, preferred or
prior preference stock ahead of or affecting the Shares or the rights thereof,
or the dissolution or liquidation of the Company, or any sale or transfer of all
or any part of its assets or business, or any other corporate act or proceeding,
whether of a similar character or otherwise.
In the event of a "Change in Control" of the Company (as defined in the
Plan at the time of such event), vesting of the Option may be accelerated and
the Option shall otherwise be affected as provided in the Plan at such time.
3
<PAGE>
13. ADJUSTMENT OF SHARES. In the event of stock dividends, spin-offs of
assets or other extraordinary dividends, stock splits, combinations of shares,
recapitalizations, mergers, consolidations, reorganizations, liquidations,
issuances of rights or warrants and similar transactions or events involving
Company, appropriate adjustments shall be made to the terms and provisions of
this Option as provided in the Plan.
14. NO RIGHTS IN SHARES. Optionee shall have no rights as a stockholder in
respect of the Shares until the Optionee becomes the record holder of such
Shares.
15. INVESTMENT REPRESENTATION. Optionee will enter into such written
representations, warranties and agreements as Company may reasonably request in
order to comply with any federal or state securities law. Moreover, any stock
certificate for any Shares issued to Optionee hereunder may contain a legend
restricting their transferability as determined by the Company in its
discretion. Optionee agrees that Company shall not be obligated to take any
affirmative action in order to cause the issuance or transfer of Shares
hereunder to comply with any law, rule or regulation that applies to the Shares
subject to the Option.
16. NO GUARANTEE OF EMPLOYMENT. The Option shall not confer upon Optionee
any right to continued employment with the Company or any subsidiary thereof.
17. WITHHOLDING OF TAXES. The Company shall have the right to (a) make
deductions from the number of Shares otherwise deliverable upon exercise of the
Option in an amount sufficient to satisfy withholding of any federal, state or
local taxes required by law, or (b) take such other action as may be necessary
or appropriate to satisfy any such tax withholding obligations.
18. GENERAL.
(a) NOTICES. All notices under this Agreement shall be mailed or
delivered by hand to the parties at their respective addresses set forth
beneath their signatures below or at such other address as may be
designated in writing by either of the parties to one another. Notices
shall be effective upon receipt.
(b) SHARES RESERVED. Company shall at all times during the Option
Period reserve and keep available under the Plan such number of Shares as
shall be sufficient to satisfy the requirements of this Option.
(c) NONTRANSFERABILITY OF OPTION. The Option granted pursuant to
this Agreement is not transferable other than by will, the laws of descent
and distribution or by a qualified domestic relations order (as defined in
Section 414(p) of the Internal Revenue Code). The Option will be
exercisable during Optionee's lifetime only by Optionee or by Optionee's
legal representative in the event of Optionee's Disability. No right or
benefit hereunder shall in any manner be liable for or subject to any
debts, contracts, liabilities, obligations or torts of Optionee.
4
<PAGE>
(d) AMENDMENT AND TERMINATION. No amendment, modification or
termination of the Option or this Agreement shall be made at any time
without the written consent of Optionee and Company.
(e) NO GUARANTEE OF TAX CONSEQUENCES. The Company and the Committee
make no commitment or guarantee that any federal or state tax treatment
will apply or be available to any person eligible for benefits under the
Option. The Optionee has been advised and been provided the opportunity to
obtain independent legal and tax advice regarding the grant and exercise
of the Option and the disposition of any Shares acquired thereby.
(f) SEVERABILITY. In the event that any provision of this Agreement
shall be held illegal, invalid, or unenforceable for any reason, such
provision shall be fully severable, but shall not affect the remaining
provisions of the Agreement, and the Agreement shall be construed and
enforced as if the illegal, invalid, or unenforceable provision had not
been included herein.
(g) SUPERSEDES PRIOR AGREEMENTS. This Agreement shall supersede and
replace all prior agreements and understandings, oral or written, between
the Company and the Optionee regarding the grant of the Options covered
hereby.
(h) GOVERNING LAW. The Option shall be construed in accordance with
the laws of the State of Texas without regard to its conflict of law
provisions, to the extent federal law does not supersede and preempt Texas
law.
19. DEFINITIONS AND OTHER TERMS. The following capitalized terms shall
have those meanings set forth opposite them:
(a) OPTIONEE: __________
(b) GRANT DATE: ______________
(c) SHARES: ____________________ (______) of the Company's Common
Stock.
(d) OPTION PRICE: _____________________ Dollars ($_____) per
Share.
(e) OPTION PERIOD: _______________ 199__ through ____________ 200_
(until 12:00 p.m. CST).
(f) VESTING SCHEDULE: [Example] Options for ________ of the Shares
shall vest on the first anniversary of the Grant Date, and Options for an
additional _________ of the Shares shall vest on each subsequent
anniversary of the Grant Date until fully vested, as follows:
5
<PAGE>
DATE OPTIONS VESTING
---- ---------------
__________, 1998 ________
__________, 1999 ________
__________, 2000 ________
Total ========
[SIGNATURE PAGE FOLLOWS.]
6
<PAGE>
IN WITNESS WHEREOF, the Company has, as of ______________ 1998, caused
this Agreement to be executed on its behalf by its duly authorized officer, and
Optionee has hereunto executed this Agreement as of the same date.
INDUSTRIAL HOLDINGS, INC.
By:________________________________
___________________________________
Industrial Holdings, Inc.
7135 Ardmore
Houston, TX 77054
Attention: _______________________
OPTIONEE
____________________________________
Signature
Address for Notices:
____________________________________
____________________________________
____________________________________
7
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
A&B Bolt and Supply, Inc.
American Rivet Company, Inc.
Amflow Master Environmental, Inc.
Beaird Industries, Inc.
Blastco Services Company
Bolt Manufacturing Co., Inc.
First Texas Credit Corporation
GHX, Incorporated
GHX, Incorporated of Louisiana
Industrial Abatement, Inc.
Landreth Metal Forming, Inc.
LSS-Lone Star - Houston, Inc.
Losco, Inc.
Manifold Valve Services, Inc.
Moores Pump and Services, Inc.
Philform, Inc.
Pipeline Valve Specialty, Inc.
R.J. Machine Company, Inc.
Regal Machine Tool, Inc.
Rex International Corporation
Rex Machinery Movers, Inc.
Rex Machinery Sales, Inc.
The Rex Group, Inc.
U.S. Crating, Inc.
United Wellhead Services, Inc.
United Wellhead Services of Louisiana, Inc.
Wellhead Recycling, Inc.
WHIR Acquisition, Inc.
XSUP Corporation
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 June 18, 1999
appearing in this Current Report on Form 8-K of Industrial Holdings, Inc. dated
August 17, 1999.
Deloitte & Touche LLP
Houston, Texas
August 17, 1999
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectuses
constituting part of the Registration Statements on Form S-3 (Nos. 33-68376,
33-99852, 333-4160, 333-32033, and 333-53495) 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 Current
Report on Form 8-K.
PricewaterhouseCoopers LLP
Houston, Texas
August 16, 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 (Nos. 33-68376,
33-99852, 333-4160, 333-32033 and 333-53495) and in the Registration on Form S-8
(No. 33-68354, 333-27827 and 333-62653) 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 this current report on
Form 8-K of Industrial Holdings, Inc. dated August 17, 1999.
ARTHUR ANDERSEN LLP
New Orleans, Louisiana
August 17, 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 use in Form 8-K dated August 1999, of Industrial
Holdings, Inc. of our report dated January 22, 1998, on the financial statements
of WHIR Acquisition, Inc. dba Ameritech Fastener Manufacturing, Inc.
WEINSTEIN, SPIRA & COMPANY, P.C.
Houston, Texas
August 13, 1999
EXHIBIT 23.5
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
33-68376, 33-99852, 333-4160, 333-32033, and 333-53495 each on Form S-3, and in
Registration Statement Nos. 33-68354, 333-27827, and 333-62653 each on Form S-8,
of Industrial Holdings, Inc. of our report dated February 12, 1998 appearing in
this Current Report on Form 8-K of Industrial Holdings, Inc. dated August 17,
1999.
KARLINS ARNOLD & CORBITT, PC
The Woodlands, Texas
August 17, 1999
EXHIBIT 23.6
INDEPENDENT AUDITOR'S CONSENT
We consent to the incorporation by reference in Registration Statement Nos.
33-68376, 33-99852, 333-4160, 333-32033, and 333-53495 each on Form S-3, and in
Registration Statement Nos. 33-68354, 333-27827, and 333-62653 each on Form S-8,
of Industrial Holdings, Inc. of our report dated March 5, 1999 for Blastco
Services Company and Subsidiary for the years ended December 31, 1997 and 1996
and September 19, 1997 for GHX, Incorporated and Subsidiary for the years ended
June 30, 1997 and 1996 appearing in this Current Report on Form 8-K of
Industrial Holdings, Inc.
SIMONTON, KUTAC & BARNIDGE, L.L.P.
Houston, Texas
August 17, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE RESTATED FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM INDUSTRIAL HOLDINGS, INC. CURRENT REPORT ON FORM 8-K DATED JUNE
24, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<RESTATED>
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997
<PERIOD-END> DEC-31-1996 DEC-31-1997
<CASH> 4,048,317 1,725,053
<SECURITIES> 0 0
<RECEIVABLES> 14,259,273 23,750,341
<ALLOWANCES> 0 0
<INVENTORY> 15,571,073 21,248,314
<CURRENT-ASSETS> 35,014,853 49,410,911
<PP&E> 27,966,719 40,074,338
<DEPRECIATION> 8,636,344 10,465,634
<TOTAL-ASSETS> 62,907,365 95,461,094
<CURRENT-LIABILITIES> 28,979,135 41,642,789
<BONDS> 0 0
0 0
960,000 0
<COMMON> 102,276 120,187
<OTHER-SE> 21,406,116 37,204,255
<TOTAL-LIABILITY-AND-EQUITY> 62,907,365 95,461,094
<SALES> 99,405,428 151,227,684
<TOTAL-REVENUES> 99,405,428 151,227,684
<CGS> 75,822,438 111,386,682
<TOTAL-COSTS> 75,822,438 111,386,682
<OTHER-EXPENSES> 19,263,770 28,836,869
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 2,041,414 2,749,282
<INCOME-PRETAX> 2,730,408 8,680,408
<INCOME-TAX> 1,024,841 3,477,116
<INCOME-CONTINUING> 1,075,567 5,203,292
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,075,567 5,203,292
<EPS-BASIC> 0.18 0.44
<EPS-DILUTED> 0.17 0.41
</TABLE>
