SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended
March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 0-19580
INDUSTRIAL HOLDINGS, INC.
(exact name of registrant as specified in its charter)
TEXAS
(STATE OR OTHER JURISDICTION
OF INCORPORATION OR ORGANIZATION)
76-0289495
(IRS EMPLOYER
IDENTIFICATION NO.)
7135 ARDMORE, HOUSTON, TEXAS 77054
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)
(713) 747-1025
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Indicate by check mark whether the registrant (i) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (ii) has been subject to such
filing requirements for the past 90 days. Yes [x] No [ ]
At May 13,1999, there were 14,764,202 shares of Common Stock
outstanding.
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INDUSTRIAL HOLDINGS, INC.
INDEX
<TABLE>
<CAPTION>
<S> <C>
PAGE NO.
--------
PART I FINANCIAL INFORMATION
Item 1 Financial Statements
Consolidated Balance Sheets at March 31, 1999
(unaudited) and December 31, 1998 1
Consolidated Statement of Income for the Three Months
ended March 31, 1999 and 1998 (unaudited) 2
Consolidated Statement of Cash Flows for the Three
months ended March 31, 1999 and 1998 (unaudited) 3
Notes to Unaudited Consolidated Financial Statements 4
Item 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 3 Quantitative and Qualitative Disclosures about Market
Risk 14
PART II OTHER INFORMATION
Item 1. Legal Proceedings (no response required)
Item 2. Changes in Securities and Use of Proceeds 15
Item 3. Defaults upon Senior Securities
(no response required)
Item 4. Submission of Matters to a Vote of
Security Holders (no response required)
Item 5. Other Information (no response required)
Item 6. Exhibits and Reports on Form 8-K 15
</TABLE>
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INDUSTRIAL HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
March 31, December 31,
1999 1998
------------- -------------
<S> <C> <C>
ASSETS (As restated)
Current assets:
Cash and equivalents .................................... $ 1,484,538 $ 3,412,411
Accounts receivable - trade, net ........................ 46,341,072 45,577,133
Contracts in progress with revenues in excess of billings 7,552,149 5,428,987
Employee advances ....................................... 58,823
Inventories ............................................. 49,466,494 48,275,927
Notes receivable, current portion ....................... 4,147,693 4,364,106
Other current assets .................................... 4,945,746 4,620,337
------------- -------------
Total current assets ................................ 113,937,692 111,737,724
Property and equipment, net ...................................... 60,630,732 58,793,946
Notes receivable, less current portion ........................... 1,456,825 1,783,769
Investment in unconsolidated affiliates .......................... 2,576,466 1,513,284
Other assets ..................................................... 4,101,860 3,365,494
Goodwill and other, net .......................................... 27,132,194 27,474,438
------------- -------------
Total assets .......................................... $ 209,835,769 $ 204,668,655
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable ........................................... $ 44,790,413 $ 42,486,422
Accounts payable - trade ................................ 19,865,991 21,628,422
Billings in excess of costs and estimated earnings ...... 6,830,419 5,999,093
Accrued expenses and other .............................. 12,244,172 9,220,307
Current portion of long-term debt ....................... 23,376,884 23,547,890
------------- -------------
Total current liabilities .......................... 107,107,879 102,882,134
Long-term debt, less current portion ............................. 28,975,373 30,334,166
Deferred compensation payable, less current portion .............. 235,686 216,021
Deferred income taxes payable .................................... 4,702,705 4,703,534
------------- -------------
Total liabilities ................................. 141,021,643 138,135,855
Commitments and contingencies
Shareholders' equity:
Preferred stock $.01 par value, 7,500,000 shares
authorized, no shares issued or outstanding
Common stock $.01 par value, 50,000,000
shares authorized, 14,761,515 and 14,739,662
shares issued and outstanding, respectively ................ 147,614 147,396
Additional paid-in capital .................................... 51,630,770 51,545,271
Retained earnings ............................................. 17,980,742 15,785,133
Notes receivable from officers ................................ (945,000) (945,000)
------------- -------------
Total shareholders' equity ...................... 68,814,126 66,532,800
------------- -------------
Total liabilities and shareholders' equity ...... $ 209,835,769 $ 204,668,655
============= =============
</TABLE>
See notes to unaudited consolidated financial statements
1
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INDUSTRIAL HOLDINGS, INC.
CONSOLIDATED STATEMENT OF INCOME (UNAUDITED)
THREE MONTHS ENDED MARCH 31,
----------------------------
1999 1998
------------ ------------
(As restated)
Sales .......................................... $ 72,774,728 $ 45,210,170
Cost of sales .................................. 57,546,031 32,344,566
------------ ------------
Gross profit ................................... 15,228,697 12,865,604
Selling, general and administrative expenses ... 10,493,392 8,323,748
------------ ------------
Income from operations ......................... 4,735,305 4,541,856
Equity in earnings of unconsolidated affiliates 563,131 289,905
Other income (expense):
Interest expense ......................... (1,995,745) (835,613)
Interest income .......................... 74,682 153,496
Other income, net ....................... 279,280 3,271
------------ ------------
Total other income (expense) ..... (1,641,783) (678,846)
------------ ------------
Income before income taxes ..................... 3,656,653 4,152,915
Provision for income taxes ..................... 1,461,044 1,675,108
------------ ------------
Net income ..................................... 2,195,609 2,477,807
Distributions to shareholders .................. 34,297
------------ ------------
Net income available to common shareholders .... $ 2,195,609 $ 2,443,510
============ ============
Basic earnings per share ....................... $ .15 $ .18
Diluted earnings per share ..................... $ .15 $ .17
Weighted average number of common shares
outstanding - basic ......................... 14,758,122 13,254,952
Weighted average number of common shares
outstanding - diluted ....................... 15,393,132 13,797,149
See notes to unaudited consolidated financial statements
2
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INDUSTRIAL HOLDINGS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
1999 1998
------------ ------------
Cash flows from operating activities: (As restated)
<S> <C> <C>
Net income $ 2,195,609 $ 2,477,807
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization ...................................... 1,821,958 1,280,708
Equity in earnings of unconsolidated affiliates ................. (563,131) (289,905)
Deferred income tax expense (benefit) .............................. (829) 294,947
Deferred compensation paid ......................................... 19,665 (6,227)
Changes in assets and liabilities, net of acquisitions:
Accounts receivable and employee advances ....................... (763,939) (5,496,343)
Inventories ..................................................... (1,190,567) 1,378,779
Notes receivable ................................................ 543,357 (4,306,271)
Other assets .................................................... (3,126,114) (555,155)
Accounts payable ................................................ (1,762,431) 291,203
Accrued expenses ................................................ 3,855,191 1,493,272
------------ ------------
Net cash provided (used)
by operating activities ................................ 1,028,769 (3,437,185)
Cash flows from investing activities:
Purchase of property and equipment ..................................... (3,392,083) (4,463,472)
Proceeds from disposals of property and equipment, net ................. 75,583 72,945
Distributions received from unconsolidated affiliates .................. 197,791
Investment in unconsolidated affiliates ................................ (500,051) (69,132)
Business acquisitions, net of cash ..................................... (1,589,013)
------------ ------------
Net cash used by investing activities ....................... (3,816,551) (5,850,881)
------------ ------------
Cash flows from financing activities:
Net borrowing under revolving line of credit ........................... 2,303,991 4,119,042
Proceeds from the issuance of long-term debt ........................... 246,637 2,228,939
Principal payments on long-term debt ................................... (1,776,436) (2,950,829)
Proceeds from issuance of common stock ................................. 85,717 11,635,591
Distributions to shareholders .......................................... (34,297)
------------ ------------
Net cash provided by financing activities .................... 859,909 14,998,446
------------ ------------
Net increase (decrease) in cash and equivalents ........................... (1,927,873) 5,710,380
Cash and equivalents, beginning of period ................................. 3,412,411 1,725,053
------------ ------------
Cash and equivalents, end of period ....................................... $ 1,484,538 $ 7,435,433
============ ============
Supplemental disclosures for cash flow information:
Cash paid for:
Interest ................................................ $ 1,803,683 $ 856,257
Taxes ................................................... $ 970,000
</TABLE>
See notes to unaudited consolidated financial statements
3
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INDUSTRIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 1999
NOTE A BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have
been prepared in accordance with generally accepted accounting
principles for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. In
the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for fair presentation
have been included. These financial statements include the
accounts of Industrial Holdings, Inc. and its subsidiaries (the
"Company"). All significant intercompany balances have been
eliminated in consolidation. Operating results for the three
months ended March 31, 1999 are not necessarily indicative of the
results that may be expected for the year ended December 31,
1999. For further information, refer to the consolidated
financial statements and footnotes thereto as of December 31,
1998 and 1997 and for the three-year period ended December 31,
1998.
NOTE B INVENTORY
Inventory consists of the following:
March 31 December 31
1999 1998
----------- -----------
Raw materials ...................... $15,319,737 $12,451,960
Finished goods ..................... 25,692,940 25,373,644
Other .............................. 8,453,817 10,450,323
----------- -----------
$49,466,494 $48,275,927
NOTE C RECLASSIFICATION
Certain amounts have been reclassified from previous periods
to conform to the current presentation.
4
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NOTE D REPORTABLE SEGMENTS
The Company's determination of reportable segments considers the strategic
operating units under which the Company sells various types products and
services to various customers. Financial information for purchase transactions
are included in the segment disclosures only for periods subsequent to the dates
of acquisition. The Company evaluates performance based on income from
operations excluding certain corporate costs not allocated to the segments.
Intersegment sales are not material. Substantially all sales are from domestic
sources and all assets are held in the United States.
<TABLE>
<CAPTION>
HEAVY
FASTENERS FABRICATION VALVES MACHINES CORPORATE CONSOLIDATED
AS OF AND FOR THE THREE
MONTHS ENDED
MARCH 31, 1999
<S> <C> <C> <C> <C> <C>
Sales ............................ $ 34,259,693 $ 25,594,204 $ 11,576,325 $ 1,344,506 $ 72,774,728
Income from operations ........... 2,151,022 707,743 2,499,746 (97,889) $ (525,317) 4,735,305
Total assets ..................... 104,285,793 62,468,797 35,205,920 3,646,380 4,228,879 209,835,769
THREE MONTHS ENDED
MARCH 31, 1998
Sales ............................ 23,681,154 17,056,179 4,472,837 45,210,170
Income from operations ........... 1,850,784 2,957,221 7,507 (273,656) 4,541,856
AS OF DECEMBER 31, 1998
Total assets ..................... 106,246,831 58,427,308 32,530,596 3,969,087 3,494,833 204,668,655
</TABLE>
NOTE E EARNINGS PER SHARE
The following table presents information necessary to calculate basic and
diluted earnings per share for the periods indicated.
<TABLE>
<CAPTION>
Three months ended
March 31,
1999 1998
----------- -----------
<S> <C> <C>
EARNINGS FOR BASIC AND DILUTED
COMPUTATION
Net income ........................................... $ 2,195,609 $ 2,477,807
Distributions to shareholders ........................ 34,297
----------- -----------
Net income available for common shareholders - basic . 2,195,609 2,443,510
Interest on convertible debt securities, net of tax .. 43,828
----------- -----------
Net income available for common shareholders - diluted $ 2,239,437 $ 2,443,510
=========== ===========
BASIC EARNINGS PER SHARE
Weighted average common shares outstanding ........... 14,758,122 13,254,952
=========== ===========
Basic earnings per share ............................. $ 0.15 $ 0.18
=========== ===========
</TABLE>
5
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DILUTED EARNINGS PER SHARE
Weighted average common shares outstanding ......... 14,758,122 13,254,952
Shares issuable from assumed conversion of
common share options, warrants granted and debt
conversion ....................................... 635,010 542,197
---------- ----------
Weighted average common shares outstanding,
as adjusted ...................................... 15,393,132 13,797,149
========== ==========
Diluted earnings per share ......................... $ 0.15 $ 0.17
========== ==========
NOTE F ACQUISITIONS
In January 1999, the Company acquired all the outstanding
capital stock of Blastco Services Co., Inc. ("Blastco") for
1,711,027 shares of the Company's common stock, upon merger of
a wholly owned subsidiary of the Company with and into
Blastco, with Blastco being the surviving corporation. As a
result, Blastco became a wholly owned subsidiary of the
Company. Blastco, headquartered in Midland, Texas, demolishes
refineries.
The merger with Blastco was accounted for as a
pooling-of-interests. The Company's consolidated balance sheet
as of December 31, 1998 and the consolidated statement of
income for the three months ended March 31, 1998 have been
restated to include the results of operations of Blastco. The
Company's consolidated statement of income for the three
months ended March 31, 1999 include the results of operations
of Blastco for the period.
Sales, net income and earnings per share for the three months
ended March 31, 1998 previously reported by the separate
companies and the combined amounts presented in the
accompanying consolidated financial statements are as follows:
THREE MONTHS ENDED MARCH 31, 1998
Industrial Combined
HOLDINGS,INC. BLASTCO COMPANIES
(000's omitted)
Sales ............................ $40,777 $ 4,433 $45,210
======= ======= =======
Net income ....................... $ 1,611 $ 867 $ 2,478
======= ======= =======
Net income available to
common shareholders ............ $ 1,577 $ 867 $ 2,444
======= ======= =======
Earnings per share:
Basic ................... $ .14 $ .18
6
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Diluted ................. $ .13 $ .17
NOTE G DEBT
As of March 31, 1999, we had an aggregate of $97.1 million
borrowed under our principal bank credit facility and debt
instruments entered into or assumed in connection with
acquisitions as well as other bank financings. Of these borrowed
amounts, $23.4 million is scheduled to mature during 1999.
Certain of our debt arrangements contain requirements as to the
maintenance of minimum levels of working capital and net worth,
minimum ratios of debt to cash flow, cash flow to certain fixed
charges, liabilities to tangible net worth and capital
expenditures. At March 31, 1999, we were not in compliance with
several of these covenants; however, we obtained waivers for the
non-compliance from those lenders.
7
<PAGE>
PART I
FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
GENERAL
We own and operate a diversified group of middle-market industrial
manufacturing businesses whose products include metal fasteners, medium and
thick-walled heavy pressure vessels, high pressure industrial valves and related
products and services. Operations are organized into three core business
segments: (i) fastener manufacturing; (ii) heavy fabrication; and (iii) valve
manufacturing and repair. Through a fourth segment, we also distribute machine
tools and provide export crating services.
This section should be read in conjunction with our unaudited
consolidated financial statements included elsewhere.
Our historical financial statements have been restated for all periods
presented to include the results of operations from each of the companies that
were acquired in acquisitions accounted for under the pooling-of-interests
method. The results of operations for companies acquired in acquisitions
accounted for under the purchase method are included in our historical financial
statements from the date of such acquisition. Since these "purchase"
acquisitions were consummated at various times during 1998, the financial
information contained herein with respect to each fiscal period does not fully
reflect the results of operations that would have been achieved had these
acquisitions been consummated at the beginning of the periods presented or which
may be achieved in the future. In connection with each "purchase" acquisition,
we have recorded goodwill to the extent the purchase price exceeded the fair
market value of the specific assets acquired, which is generally amortized over
20 years.
Our results of operations are affected by the level of economic
activity in the industries served by our customers, which in turn may be
affected by other factors, including the level of economic activity in the U.S.
and foreign markets they serve. The principal industries served by our clients
are the automotive, home furnishings, petrochemical and oil and gas industries.
An economic slowdown in these industries could result in a decrease in demand
for our products and services, which could adversely affect our operating
results. During 1998 and into 1999, oil and gas prices declined significantly,
resulting in a decrease in the demand for our products and services that are
used in the exploration and production of oil and gas. Absent substantial
increases in oil and gas prices that result in 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 was moved from the valve
manufacturing and repair segment to the fastener manufacturing and distribution
segment. As a result, 1998 segment information has been restated to reflect the
change consistent with management's view of the operations of the business.
8
<PAGE>
RESULTS OF OPERATIONS
Three Months Ended
March 31,
1999 1998
-------- --------
Sales: (000's omitted)
Fastener Segment .................... $ 34,260 $ 23,681
Heavy Fabrication Segment (1) ....... 25,594
Valve Segment ....................... 11,576 17,056
Machine Segment ..................... 1,344 4,473
-------- --------
72,774 45,210
Cost of Sales:
Fastener Segment .................... 26,236 17,516
Heavy Fabrication Segment (1) ....... 23,044
Valve Segment ....................... 7,279 11,030
Machine Segment ..................... 987 3,798
-------- --------
57,546 32,344
Selling, General and Administrative:
Fastener Segment .................... 5,872 4,314
Heavy Fabrication Segment (1) ....... 1,842
Valve Segment ....................... 1,798 3,069
Machine Segment ..................... 456 667
Corporate ........................... 525 274
-------- --------
10,493 8,324
Operating Income ............................. $ 4,735 $ 4,542
======== ========
(1) The Heavy Fabrication Segment is comprised solely of Beaird Industries
which was acquired July 1, 1998.
THREE MONTHS ENDED MARCH 31, 1999 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1998.
SALES. On a consolidated basis, sales increased $27.6 million or 61% for the
three months ended March 31, 1999 compared to the three months ended March 31,
1998.
Fastener Segment sales increased $10.6 million or 45% for the three months ended
March 31, 1999 compared to the three months ended March 31, 1998. This increase
was primarily attributable to the acquisitions of Ideal Products and A&B Bolt
and Supply, Inc., in the third quarter of 1998 which added $12.6 million in
sales in the first quarter of 1999, partially offset by $2.0 million in
aggregate sales decreases in our stud bolt and gasket operations primarily
related to declining oil prices and the resulting slow down in the oil and gas
industries in the first three months of 1999.
9
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The Heavy Fabrication Segment was formed July 1, 1998 with the acquisition of
Beaird. Under the purchase method of accounting, no sales were recorded relating
to this segment prior to the second half of 1998. Sales for the three month
period ending March 31, 1999 increased $11.0 million or 76% compared to the
comparable 1998 period. Sales increased based on a strategic decision to
increase sales by expanding the range of products manufactured, primarily the
production of wind turbine towers.
Valve Segment sales decreased $5.5 million or 32% for the three months ended
March 31, 1999 compared to the three months ended March 31, 1998. This decrease
was primarily attributable to a decrease in sales volume directly related to the
decline in the price of oil and the resulting cost reduction efforts implemented
by our customers for production and maintenance.
Machine Segment sales decreased $3.1 million or 70% for the three months ended
March 31, 1999 compared to the three months ended March 31,1998 as the demand
for machine tools declined.
COST OF SALES. Cost of sales increased $25.2 million or 78% for the three months
ended March 31, 1999 compared to the three months ended March 31, 1998. Cost of
sales as a percentage of sales was 79% for the first quarter of 1999 compared to
72% for the first quarter of 1998. Cost of sales as a percentage of sales was
higher on a consolidated basis primarily as a result of the addition in July
1998 of the heavy fabrication segment, which typically has lower gross margins
on its large contract business in comparison to our other segments.
Fastener Segment cost of sales increased $8.7 million or 50% for the three
months ended March 31, 1999 compared to the three months ended March 31, 1998,
primarily as a result of the increased sales described above. Cost of sales as a
percentage of sales was 77% for the first quarter of 1999 compared to 74% for
the comparable period in 1998 as a result of management and production changes,
including planned reductions in inventory at one of our facilities.
Heavy Fabrication Segment cost of sales as a percentage of sales was 90% for the
three months ended March 31, 1999. Gross margin was adversely affected by the
aftermath of the labor negotiations which concluded in November 1998. The
backlog created during the negotiation process was still being cleared in the
first quarter of 1999 resulting in higher than usual overtime and outsourcing
costs.
Valve Segment cost of sales decreased $3.8 million, or 34%, primarily as a
result of the decrease in sales described above. Cost of sales as a percentage
of sales was 63% for the first quarter 1999 compared to 65% for the first
quarter in 1998. Cost of sales as a percent of sales decreased because as sales
decreased, the valve companies reduced their workforce and were able to
eliminate overtime and outsourcing of production.
Machine Segment cost of sales decreased $2.8 million or 74% as a result of the
decrease in sales described above. Cost of sales as a percentage of sales was
73% for the three months ended March 31, 1999 compared to 85% for the same
period in 1998. Sales related to export crating represented 31% of total sales
for the first quarter of 1999 compared to 19% in the first quarter of 1998.
Gross margins have historically been higher for crating compared to machine
sales.
10
<PAGE>
SELLING. GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $2.2 million or 26% for the three months ended
March 31, 1999 compared to the three months ended March 31, 1998, primarily as a
result of the purchase acquisitions made in the third quarter of 1998.
Fastener Segment selling, general and administrative expenses increased $1.6
million or 36% primarily as a result of the acquisitions described above.
Heavy Fabrication Segment selling, general and administrative expenses for the
three months ended March 31, 1999 relate to Beaird's operations during the first
quarter of 1999 and were comparable to the historical amounts prior to the
acquisition of Beaird.
Valve Segment selling, general and administrative expenses decreased $1.3
million or 41%. This decrease was primarily as a result of the elimination of
the salary and related expenses of the president of a company who resigned in
connection with the acquisition of that company, which was accounted for under
the pooling-of-interests method of accounting, as well as other reductions in
general and administrative expenses in response to decreases in sales.
Machine Segment selling, general and administrative expenses decreased $211,000
or 32% primarily as a result of cost reduction measures implemented due to the
decreases in sales described above.
Corporate selling, general and administrative expenses increased $251,000 or
92%. This increase was attributable to personnel additions and increases in
professional fees associated with our growth.
EARNINGS FROM EQUITY INVESTMENTS IN UNCONSOLIDATED AFFILIATES. On a consolidated
basis, earnings from equity investments in unconsolidated affiliates increased
$273,226 or 94% primarily as the result of the company's investment in one
affiliate, which is engaged in the demolition of refineries, that did not have
significant activity until the second quarter of 1998.
INTEREST EXPENSE. Interest expense increased $1.2 million or 139% for the three
months ended March 31, 1999 compared to the three months ended March 31, 1998,
primarily as a result of $57.7 million in debt assumed or incurred in connection
with acquisitions in the third quarter of 1998.
OTHER INCOME. On a consolidated basis, other income increased $276,000 in the
three months ended March 31, 1999 compared to the three months ended March 31,
1998 primarily as the result of the sale of equipment in 1999.
INCOME TAXES. Income tax expense decreased $214,000 or 13% for the first three
months of 1999 compared to the first three months of 1998. Our effective tax
rate was 40% for the three months ended March 31, 1999 and March 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999, we had working capital of $6.8 million, short-term debt of
$44.8 million, current maturities of long-term debt of $23.4 million, long term
debt of $29.0 million and shareholders' equity of
11
<PAGE>
$68.8 million. Historically, our principal liquidity requirements and uses of
cash have been for debt service, capital expenditures, working capital and
acquisition financing, and our principal sources of liquidity and cash have been
from cash flows from operations, borrowings under long-term debt arrangements
and issuances of equity securities. We have financed acquisitions through bank
borrowings, issuance of equity securities and internally generated funds.
NET CASH PROVIDED BY OPERATING ACTIVITIES. For the three months ended March 31,
1999, net cash provided by operating activities was $1.0 million compared to
1998, which used cash of $3.4 million. The cash provided in 1999 was primarily
as a result of net income and depreciation and amortization exceeding changes in
current assets and liabilities while in 1998 increases in current assets and
liabilities exceeded net income and depreciation and amortization, primarily as
the result of increases in accounts receivable in the first quarter of 1998 and
notes receivable resulting from the transfer of inventory to an affiliate in
exchange for a note receivable.
NET CASH USED BY INVESTING ACTIVITIES. Principal uses of cash are for capital
expenditures and acquisitions. For the three months ended March 31, 1999 and
1998, we made capital expenditures of approximately $3.4 million and $4.5
million respectively. Other significant investing activities in 1998 included
acquisitions.
NET CASH PROVIDED BY FINANCING ACTIVITIES. Our principal sources of cash are
from financing activities, including borrowings under our credit facilities, and
issuances of equity securities. Financing activities provided net cash of
$860,000 in the three months ended March 31, 1999 compared to $15.0 million in
the comparable period in 1998. During the three months ended March 31, 1999, we
issued common stock providing net proceeds of $86,000 compared to net proceeds
of $11.6 million in the three months ended March 31, 1999 in the comparable
period in 1998. During 1998, we completed an offer to the holders of our Class B
warrants to exchange each Class B warrant and $10.00 cash for one share of
common stock, one Class C warrant and one Class D warrant, from which we
received net proceeds of $10.9 million after deducting approximately $100,000 of
related expenses. During the three months ended March 31, 1999, we had net
borrowings under the lines of credit of $2.3 million and borrowed $247,000 in
long-term debt compared to $4.1 million and $2.2 million, respectively in the
comparable period in 1998.
PRINCIPAL DEBT INSTRUMENTS. As of March 31, 1999, we had an aggregate of $97.1
million borrowed under our principal bank credit facility and debt instruments
entered into or assumed in connection with acquisitions as well as other bank
financings. Of these borrowed amounts, $23.4 million is scheduled to mature
during 1999. Certain of our debt arrangements contain requirements as to the
maintenance of minimum levels of working capital and net worth, minimum ratios
of debt to cash flow, cash flow to certain fixed charges, liabilities to
tangible net worth and capital expenditures. At March 31, 1999, we were not in
compliance with several of these covenants; however we obtained waivers for the
non-compliance from those lenders. In the future, we may not be able to comply
with all of these covenants and no assurance can be given that if unable to
comply, we will be able to obtain waivers from our lenders.
We are currently exploring various financing alternatives to meet our future
liquidity needs. We anticipate refinancing certain of our debt facilities in the
second quarter of 1999, although no assurances can be given that we will be able
to refinance such facilities or that we will be able to obtain terms that are as
favorable as those that currently exist.
12
<PAGE>
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 March 31, 1999) and allows the borrowing of funds based on
80% of eligible accounts receivable and 50% of eligible inventory. At March 31,
1999, the borrowing capacity under the credit facility was $45 million and
availability was $1.6 million.
We entered into a loan from a financial institution in the principal amount of
$15 million that matures in November 1999. This loan bears interest at Libor
plus 5.0%. In connection with the acquisitions of businesses, we also have
entered into various term loans secured by machinery, equipment and real estate
of the businesses acquired and issued a convertible debenture in connection with
the acquisition of Beaird.
BELLELI ENERGY. In 1998, we entered into an option agreement that grants us the
right to purchase approximately 95% of Belleli Energy S.r.L. ("Belleli") through
2003. Belleli is an Italian company that manufactures thick walled pressure
vessels and heat exchangers, as well as designs, engineers, constructs and
erects components for desalination, electric power and petrochemcial plants. The
option agreement calls for two payments annually totaling approximately $600,000
in 1999, $700,000 in 2000, $800,000 in 2001 and $400,000 in 2002.
We have agreed during the option period to support the financing of Belleli in
order for it to achieve its operating plan. We anticipate that the majority of
this financing will take the form of providing bonding for projects that Belleli
undertakes, and to a lesser extent, working capital infusions. At March 31,
1999, we have provided $400,000 in working capital loans, which are supported by
accounts receivable, and $266,000 in bonding support in the form of letters of
credit. We currently anticipate that Belleli may need significant financial
support from us through the end of 1999 which may be in the form of bonding,
working capital loans or other financing. To date, we have been able to provide
financing support to Belleli through bonding arrangements with our bank and cash
flow from operations; however, even if we are successful in refinancing certain
of our debt facilities in the second quarter, there can be no assurance that
such sources will continue to be available to the extent necessary to provide
adequate support to Belleli, which would require us to pursue additional sources
of financing on terms that may be less desirable or advantageous than our
current arrangements.
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.
13
<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 June 30, 1999. However, if such modifications are
not made, or are not completed timely, the Year 2000 Issue could have a material
impact on operations. We plan to complete the testing of the year 2000
modifications as these modifications are implemented. We have not established a
contingency plan but intend to formulate one to address unavoidable risks, and
we expect to have the contingency plan formulated by mid-1999.
We do not currently rely on the IT systems of other companies; however, failure
of our suppliers or customers to become year 2000 compliant might have a
material adverse impact on our operations. We intend to continue to pursue an
acquisition strategy and, as a result, there can be no assurance that the IT
systems being used by an acquired company will be compliant with the Year 2000
Issue or that any such conversion or failure to convert an acquired system would
not have an adverse effect on our business, financial condition, results of
operations or cash flows.
Efforts with respect to the Year 2000 Issue have been handled internally by our
management and our other employees. Costs of developing and carrying out this
initiative are being funded from operations and have not represented a material
expense. We have not completed our remediation efforts but currently believe
that the costs of the Year 2000 Issue will not be significant and will not have
a material adverse impact on our business, financial condition, results of
operations or cashflows.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk generally represents the risk that losses may occur in the value of
financial instruments as a result of movements in interest rates, foreign
currency exchange rates and commodity prices.
We are exposed to some market risk due to the floating interest rate under our
revolving line of credit and long-term debt. Under the revolving line of credit,
the principal balance is due in June 2000. As of March 31, 1999 the revolving
lines of credit had a principal balance of $44.8 million and the long-term debt
had a balance of $13.4 million at a floating interest rate equal to the lenders'
prime rate, 7.75% at March 31, 1999. We also have $26.4 million of long-term
debt bearing interest at Libor plus 2.5% to 5%. The Libor rate as of March 31,
1999 was 5.0%. A 1.0% increase in interest rates could result in a $0.9 million
annual increase in interest expense on the existing principal balance. We have
determined that it is not necessary to participate in interest rate-related
derivative financial instruments because we currently do not expect significant
short-term increases in interest rates charged under the revolving line of
credit or the long-term debt.
14
<PAGE>
PART II
OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds
In January 1999, in connection with the merger of a wholly owned subsidiary of
the company with Blastco Services Co., Inc. ("Blastco"), the Company exchanged
1,711,027 shares of common stock for the outstanding common stock of Blastco.
In January 1999, Charles E. Underbrink exercised warrants to purchase 18,605
shares of common stock at $3.27 per share. These warrants were issued in 1995 in
connection with financing for an acquisition.
All of the above sales were exempt from registration under Section 4(2) of the
Securities Act since no public offering was involved.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - none
(b) Reports on Form 8-K - none
15
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
as amended, the Registrant, Industrial Holdings, Inc., has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
INDUSTRIAL HOLDINGS, INC.
Date: May 14, 1999 By: /s/CHRISTINE A. SMITH
Christine A. Smith,
Chief Financial Officer
and Executive Vice President
16
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE QUARTERLY REPORT ON FORM 10-Q FOR THE PERIOD ENDED MARCH 31, 1999 FOR
INDUSTRIAL HOLDINGS, INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,484,538
<SECURITIES> 0
<RECEIVABLES> 46,341,072
<ALLOWANCES> 0
<INVENTORY> 49,466,494
<CURRENT-ASSETS> 113,937,692
<PP&E> 60,630,732
<DEPRECIATION> 0
<TOTAL-ASSETS> 209,835,769
<CURRENT-LIABILITIES> 107,107,879
<BONDS> 0
0
0
<COMMON> 147,614
<OTHER-SE> 68,666,512
<TOTAL-LIABILITY-AND-EQUITY> 209,835,769
<SALES> 72,774,728
<TOTAL-REVENUES> 72,774,728
<CGS> 57,546,031
<TOTAL-COSTS> 57,546,031
<OTHER-EXPENSES> 10,493,392
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,995,745
<INCOME-PRETAX> 3,656,653
<INCOME-TAX> 1,461,044
<INCOME-CONTINUING> 2,195,609
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,195,609
<EPS-PRIMARY> 0.15
<EPS-DILUTED> 0.15
</TABLE>
