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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED
JUNE 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 000-19580
INDUSTRIAL HOLDINGS, INC.
(exact name of registrant as specified in its charter)
TEXAS 76-0289495
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
7135 ARDMORE, HOUSTON, TEXAS 77054
(Address of principal executive offices, including zip code)
(713) 747-1025
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE.
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
TITLE OF EACH CLASS
COMMON STOCK, $.01 PAR VALUE
CLASS B REDEEMABLE WARRANT
CLASS C REDEEMABLE WARRANT
CLASS D REDEEMABLE WARRANT
Indicate by check mark whether the registrant (i) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (ii) has been subject to such
filing requirements for the past 90 days. Yes [ ] No [X]
The aggregate market value of common stock held by non-affiliates of the
registrant was $23,962,080 at August 7, 2000. At that date, there were
13,524,832 shares of common stock outstanding.
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<PAGE>
INDUSTRIAL HOLDINGS, INC.
INDEX
PAGE NO.
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets at June 30, 2000 and
December 31, 1999..................................1
Consolidated Statements of Operations for the
Three and Six Months ended June 30, 2000 and
1999 ..............................................2
Consolidated Statements of Cash Flows for the
Six Months ended June 30, 2000 and 1999............3
Notes to Consolidated Financial Statements............4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.......9
Item 3. Quantitative and Qualitative Disclosures about
Market Risk........................................21
PART II OTHER INFORMATION
Item 1. Legal Proceedings....................................22
Item 2. Changes in Securities................................22
Item 3. Defaults upon Senior Securities......................22
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.....................22
i
<PAGE>
PART I
FINANCIAL INFORMATION
INDUSTRIAL HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
JUNE 30, 2000 DECEMBER 31, 1999
--------------- ---------------
ASSETS (UNAUDITED)
<S> <C> <C>
Current assets:
Cash and equivalents ......................................................................... $ 1,009 $ 1,738
Accounts receivable - trade, net ............................................................. 36,351 38,511
Cost and estimated earnings in excess of billings ............................................ 2,099 3,704
Inventories .................................................................................. 35,676 38,260
Employee advances ............................................................................ 59 59
Notes receivable, current portion ............................................................ 2,974 4,175
Other current assets ......................................................................... 1,914 4,702
--------------- ---------------
Total current assets ...................................................................... 80,082 91,149
Property and equipment, net .................................................................. 55,964 64,707
Notes receivable, less current portion ....................................................... 551 1,120
Investment in unconsolidated affiliates ...................................................... 1,656 (1,005)
Other assets ................................................................................. 7,594 7,172
Goodwill and other intangible assets, net .................................................... 25,224 26,100
--------------- ---------------
Total assets .............................................................................. $ 171,071 $ 189,243
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable ................................................................................ $ 43,867 $ 46,193
Accounts payable - trade ..................................................................... 25,785 24,688
Billings in excess of costs and estimated earnings ........................................... 849 2,170
Accrued expenses ............................................................................. 11,784 11,410
Current portion of long-term obligations ..................................................... 28,377 42,767
--------------- ---------------
Total current liabilities ................................................................. 110,662 127,228
Long-term obligations, less current portion .................................................. 15,178 9,903
Other long-term liabilities .................................................................. 2,513 2,202
Deferred income tax liability ................................................................ 306 306
--------------- ---------------
Total liabilities ......................................................................... 128,659 139,639
--------------- ---------------
Shareholders' equity:
Preferred stock $.01 par value, 7,500,000 shares
authorized, no shares issued or outstanding
Common stock $.01 par value, 50,000,000 shares authorized, 15,271,097 and
15,111,097 shares issued and outstanding
at June 30, 2000 and December 31, 1999, respectively .................................... 153 151
Additional paid-in capital ................................................................ 54,865 54,201
Retained deficit .......................................................................... (8,654) (3,868)
Treasury stock, at cost, 1,586,265 shares ................................................. (3,272)
Notes receivable from officers ............................................................ (680) (880)
--------------- ---------------
Total shareholders' equity .............................................................. 42,412 49,604
--------------- ---------------
Total liabilities and shareholders' equity ................................................ $ 171,071 $ 189,243
=============== ===============
</TABLE>
See notes to unaudited consolidated financial statements.
1
<PAGE>
INDUSTRIAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ----------------------------
2000 1999 2000 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales .............................................................. $ 52,505 $ 66,514 $ 106,071 $ 138,838
Cost of sales ...................................................... 41,549 53,999 84,731 111,457
------------ ------------ ------------ ------------
Gross profit ....................................................... 10,956 12,515 21,340 27,381
Selling, general and administrative expenses ....................... 10,748 10,957 23,508 21,450
------------ ------------ ------------ ------------
Income (loss) from operations ...................................... 208 1,558 (2,168) 5,931
Earnings from equity investments
in unconsolidated affiliates .................................... 20 767 40 1,331
Other income (expense):
Interest expense ................................................ (2,792) (1,940) (5,886) (3,937)
Interest income ................................................. 33 84 100 159
Other income (expense), net ..................................... 3,262 353 3,179 883
------------ ------------ ------------ ------------
Total other income (expense) ....................................... 503 (1,503) (2,607) (2,895)
------------ ------------ ------------ ------------
Income (loss) before income taxes .................................. 731 822 (4,735) 4,367
Income tax expense ................................................. 50 359 50 1,771
------------ ------------ ------------ ------------
Net income (loss) .................................................. $ 681 $ 463 $ (4,785) $ 2,596
============ ============ ============ ============
Basic earnings (loss) per share .................................... $ .05 $ .03 $ (.33) $ .17
Diluted earnings (loss) per share .................................. $ .05 $ .03 $ (.33) $ .17
Weighted average number of common shares
outstanding - basic ............................................. 13,556 14,842 14,334 14,800
Weighted average number of common shares
outstanding - dilutive .......................................... 13,952 15,428 14,334 15,411
</TABLE>
See notes to unaudited consolidated financial statements.
2
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
----------------------------------
2000 1999
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ..................................................................... $ (4,785) $ 2,596
Adjustments to reconcile net income (loss) to net
cash provided by operating activities:
Depreciation and amortization .................................................... 3,727 3,765
Equity in earnings of unconsolidated affiliates .................................. (40) (1,331)
Deferred income tax expense ...................................................... 1,270
Deferred compensation paid ....................................................... 8 8
Stock compensation ............................................................... 261
Deferred gain on demolition contract ............................................. (500)
Gain on sale of Blastco Services Company ......................................... (2,551)
Changes in assets and liabilities, net of effect of purchase Acquisitions and
divestitures:
Accounts receivable .............................................................. 1,074 6,522
Inventories ...................................................................... (962) 2,791
Notes receivable ................................................................. 2,044 1,524
Prepaid expenses and other assets ................................................ 2,163 (11,655)
Accounts payable ................................................................. 2,577 (1,156)
Accrued expenses and other ....................................................... 2,504 (2,771)
--------------- ---------------
Net cash provided by operating activities ................................................ 6,020 1,063
Cash flows from investing activities:
Purchase of property and equipment .................................................... (2,438) (5,118)
Proceeds from disposals of property and equipment, net ................................ 669 113
Proceeds from sale of Blastco Services Company ........................................ 2,000
Investment in unconsolidated affiliates ............................................... (1,446) (1,337)
--------------- ---------------
Net cash used in investing activities .................................................... (1,215) (6,342)
Cash flows from financing activities:
Net borrowings (repayments) under
revolving line of credit ............................................................ (2,326) 1,592
Proceeds from the issuance of long-term obligations ................................... 1,997 3,192
Principal payments on long-term obligations ........................................... (5,205) (3,909)
Proceeds from issuance of common stock ................................................ 2,676
--------------- ---------------
Net cash provided by (used in) by financing activities ................................... (5,534) 3,551
Net decrease in cash and cash equivalents ................................................ (729) (1,728)
Cash and cash equivalents, beginning of period ........................................... 1,738 3,412
--------------- ---------------
Cash and cash equivalents, end of period ................................................. $ 1,009 $ 1,684
=============== ===============
Supplemental schedule of non-cash investing and financing activities:
Issuance of warrants .................................................................. $ 407
Supplemental disclosures of cash flow information:
Cash paid for:
Interest ............................................................................ $ 3,220 $ 3,692
Income taxes ........................................................................ 364
</TABLE>
See notes to unaudited consolidated financial statements.
3
<PAGE>
INDUSTRIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 2000
1. BASIS OF PRESENTATION AND MANAGEMENT PLANS
The accompanying unaudited 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 Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
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
subsidiaries (the "Company"). All significant intercompany balances have been
eliminated in consolidation. Operating results for the three and six months
ended June 30, 2000 are not necessarily indicative of the results that may be
expected for the year ended December 31, 2000. For further information, refer to
the consolidated financial statements and footnotes thereto included in the
Company's annual report on Form 10-K for the year ended December 31, 1999.
Certain amounts have been reclassified from previous periods to conform to the
current presentation.
The accompanying unaudited consolidated financial statements have been
prepared on a going concern basis, which contemplated the realization of assets
and the satisfaction of liabilities in the normal course of business. As
disclosed in the financial statements, the Company had current liabilities in
excess of current assets of $36.1 million and $30.6 million and debt in default
at December 31, 1999 and June 30, 2000, respectively. In addition, the Company
incurred a net loss of $19.0 million for the year ended December 31, 1999 and
$4.8 million for the six-month period ended June 30, 2000. These conditions
raise substantial doubt about the Company's ability to continue as a going
concern. The accompanying unaudited consolidated financial statements do not
include any adjustments that may result from the outcome of this uncertainty.
The Company has a $15 million note payable to EnSerCo, L.L.C. ("EnSerCo")
that became due on November 15, 1999. The Company was granted an extension of
the due date through January 31, 2000. On January 31, 2000, the Company was
unable to repay the amounts borrowed and defaulted on the note payable. EnSerCo
has not called this note due; however, it retains the right to do so. The
Company has held preliminary discussions with EnSerCo to modify the terms of the
original note agreement, which include extending the due date; however, no
agreement has been reached between the parties. Furthermore, no assurances can
be given that the Company will be able to successfully conclude any arrangement
being considered.
The Company has an $8.5 million term note with Heller Financial, Inc.
("Heller"), which expires on September 30, 2004. The Company was not in
compliance with certain financial covenants at each of the required quarterly
reporting dates during 1999 and 2000. The Company requested and received waivers
from Heller through the September 30, 1999 reporting period; however, the
Company did not seek waivers for the reporting dates of December 31, 1999 or
March 31, 2000. For the June 30, 2000 period, the Company has held preliminary
discussions with Heller to obtain waivers for the events of non-compliance and
to modify the credit agreement to provide financial covenants that the Company
will be able to comply with; however, no assurances can be given that the
Company will be able to successfully obtain the required waivers. Currently, the
Company is in violation of the credit agreement and although Heller has not
expressed the intent to call this obligation, it retains the right to do so.
The Company's continuation as a going concern is dependent upon its ability
to generate sufficient cash flow to meet its obligations on a timely basis, to
obtain the refinancing discussed above or new financing as may be required.
4
<PAGE>
2. INVENTORY
Inventory consists of the following (dollars in thousands):
JUNE 30, DECEMBER 31,
2000 1999
------------ ------------
Raw materials .......................... $ 9,550 $ 11,791
Finished goods ......................... 19,729 22,088
Other .................................. 6,397 4,381
------------ ------------
$ 35,676 $ 38,260
============ ============
3. REPORTABLE SEGMENTS
The Company's determination of reportable segments considers the strategic
operating units under which the Company sells various types of products and
services to various customers. 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.
During the second quarter of 2000, the Company's operations were reorganized
into four business segments: (i) the engineered products group; (ii) the stud
bolt and gasket group; (iii) the energy group (formerly known as valve
manufacturing and repair); and (iv) the heavy fabrication group. The engineered
products group and the stud bolt and gasket group were previously combined in
the fastener manufacturing and distribution segment. The energy group also
includes what was formerly known as the machine tool distribution segment.
Additionally, one of the Company's subsidiaries that was previously included in
the fastener manufacturing and distribution segment is now part of the energy
group.
<TABLE>
<CAPTION>
ENGINEERED STUD BOLT HEAVY
FOR THE THREE MONTHS ENDED: PRODUCTS AND GASKET ENERGY FABRICATION CORPORATE CONSOLIDATED
--------------- --------------- ------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
JUNE 30, 2000
Sales ........................... $ 9,813 $ 12,617 $ 22,993 $ 7,082 $ $ 52,505
Income (loss) from operations ... 532 620 2,042 (1,378) (1,608) 208
JUNE 30, 1999
Sales ........................... $ 11,039 $ 10,561 $ 18,788 $ 26,126 $ $ 66,514
Income (loss) from operations ... 185 263 1,367 452 (709) 1,558
FOR THE SIX MONTHS ENDED:
JUNE 30, 2000
Sales ........................... $ 20,115 $ 25,311 $ 45,599 $ 15,046 $ $ 106,071
Income (loss) from operations ... 1,053 1,436 2,085 (2,860) (3,882) (2,168)
JUNE 30, 1999
Sales ........................... $ 21,796 $ 23,246 $ 42,076 $ 51,720 $ $ 138,838
Income (loss) from operations ... 988 893 4,021 1,160 (1,131) 5,931
AS OF JUNE 30, 2000:
Total assets .................... $ 48,049 $ 25,055 $ 53,918 $ 35,200 $ 8,849 $ 171,071
AS OF DECEMBER 31, 1999:
Total assets .................... $ 49,613 $ 24,565 $ 59,485 $ 44,987 $ 10,593 $ 189,243
</TABLE>
5
<PAGE>
4. EARNINGS (LOSS) PER SHARE
The following table presents information necessary to calculate basic and
diluted earnings (loss) per share for the periods indicated (in thousands,
except per share amounts):
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
-----------------------------------
2000 1999
--------------- ---------------
<S> <C> <C>
EARNINGS FOR BASIC AND DILUTED COMPUTATION:
Net income used for basic earnings per share ........................................... $ 681 $ 463
Interest on convertible debt securities, net of tax .................................... 44 44
--------------- ---------------
Net income available to common shareholders ............................................ $ 725 $ 507
=============== ===============
BASIC EARNINGS PER SHARE:
Weighted average common shares outstanding ............................................. 13,556 14,842
Basic earnings per share .................................................................. $ .05 $ .03
=============== ===============
DILUTED EARNINGS PER SHARE:
Weighted average common shares outstanding ............................................. 13,556 14,842
Shares issuable from assumed conversion of common share
options, warrants granted and debt conversion ........................................ 813 586
--------------- ---------------
Weighted average common shares outstanding, as adjusted ................................ 14,369 15,428
=============== ===============
Diluted earnings per share ................................................................ $ .05 $ .03
=============== ===============
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-----------------------------------
2000 1999
--------------- ---------------
<S> <C> <C>
EARNINGS (LOSS) FOR BASIC AND DILUTED COMPUTATION:
Net income (loss) used for basic earnings (loss) per share ............................. $ (4,785) $ 2,596
Interest on convertible debt securities, net of tax .................................... 88
--------------- ---------------
Net income (loss) available to common shareholders ..................................... $ (4,785) $ 2,684
=============== ===============
BASIC EARNINGS (LOSS) PER SHARE:
Weighted average common shares outstanding ............................................. 14,334 14,800
Basic earnings (loss) per share ........................................................... $ (.33) $ .17
=============== ===============
DILUTED EARNINGS (LOSS) PER SHARE:
Weighted average common shares outstanding ............................................. 14,334 14,800
Shares issuable from assumed conversion of common share
options, warrants granted and debt conversion ........................................ 611
--------------- ---------------
Weighted average common shares outstanding, as adjusted ................................ 14,334 15,411
=============== ===============
Diluted earnings (loss) per share ......................................................... $ (.33) $ .17
=============== ===============
</TABLE>
There were 4,076,113 stock options and warrants that were not included in the
earnings per share computation for the three months ended June 30, 2000 as their
effect was anti-dilutive. No stock options and warrants were included in the
loss per share computation for the six months ended June 30, 2000 as their
effect was anti-dilutive due to the loss recorded. There were 4,027,617 stock
options and warrants that were not included in the earnings per share
computation for the three months and six months ended June 30, 1999 as their
effect was anti-dilutive. Effective June 9, 2000, an aggregate of 2,039,500
stock options were granted to approximately 125 employees.
6
<PAGE>
5. DEBT
On June 30, 2000 the Company entered into an amendment of its credit
agreement with Comerica Bank-Texas, National Bank of Canada and Hibernia Bank
(the "Senior Lenders"), which (i) accelerated the maturity to January 31, 2001,
(ii) reduced the revolving credit line to the lesser of $50 million or the
defined borrowing base, (iii) increased the interest rate from prime plus 2% to
prime plus 3%, payable weekly and (iv) modified the financial covenants to
require maintenance of minimum consolidated tangible net worth, and earnings
before interest, taxes, depreciation and amortization ("EBITDA")-to-debt-service
ratio as well as to require limitations on capital expenditures. In addition,
the Senior Lenders waived all prior violations under the credit agreement. At
June 30, 2000, the Company was in compliance with the loan covenants.
In connection with the Company's amended credit agreement with its Senior
Lenders, St. James Capital Corp. or its affiliates (collectively, "St. James")
agreed, under the terms of a Limited Guaranty Agreement with the Company's
Senior Lenders (the "Guaranty"), to guarantee up to $2.0 million of any amount
that the Senior Lenders advance to the Company in excess of the defined
borrowing base amount under the amended credit agreement. As a condition of
providing this Guaranty, the Company entered into a Reimbursement Agreement with
St. James. Additionally, St. James has entered into a Credit Support Agreement
under which it has agreed to advance up to $1.5 million of funds to cure future
financial covenant defaults under the Company's amended credit agreement.
Under the Reimbursement Agreement and in consideration of the Guaranty, the
Company issued warrants to St. James to purchase 400,000 shares of the Company's
common stock at $1.25 per share (valued at $84,000) and forgave a $0.35 million
note receivable from St. James. In addition, the Company will issue subordinated
notes to St. James for Guaranty payments and Credit Support payments, if any,
that are made to the Senior Lenders. These notes, if any, and accrued interest
at an annual rate of 11%, will be due on January 31, 2002. The principal amount
of these notes together with all accrued and unpaid interest is convertible into
shares of the Company's common stock at a conversion price of $1.25 per share.
Additionally, the Company agreed to issue to St. James warrants to purchase a
number of shares of the Company's common stock equal to the amount of any
Guaranty payments multiplied by 0.25, so that if St. James makes the full $2.0
million in Guaranty payments, the Company would issue 500,000 warrants to
acquire shares of its common stock at $1.25 per share. At June 30, 2000, there
were no Guaranty or Credit Support payments.
As discussed in Note 1, the Company has a $15 million note payable to
EnSerCo, L.L.C. ("EnSerCo") that became due on November 15, 1999. The Company
was granted an extension of the due date through January 31, 2000. On January
31, 2000, the Company was unable to repay the amounts borrowed and defaulted on
the note payable. EnSerCo has not called this note due; however, it retains the
right to do so. The Company has held preliminary discussions with EnSerCo to
modify the terms of the original note agreement, which include extending the due
date; however, no agreement has been reached between the parties. Furthermore,
no assurances can be given that the Company will be able to successfully
conclude any arrangement being considered. As a result, the Company has
classified this obligation as current in the accompanying consolidated balance
sheets at December 31, 1999 and June 30, 2000.
The Company's $8.5 million term note with Heller contains 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, current ratio, and capital expenditures, all of which are
calculated on a trailing twelve month basis. At December 31, 1999, March 31,
2000 and June 30, 2000, the Company was not in compliance with several of these
covenants. Because of the losses incurred in 1999, the Company did not meet
certain required levels of working capital and net worth, ratios of debt to cash
flow, cash flow to certain fixed charges, liabilities to tangible net worth and
current ratio required by the debt agreements. Additionally, the Company does
not anticipate being in compliance with these covenants any time during 2000
absent modifications from Heller. The Company has not received waivers for these
covenant violations, and as a result, has classified this obligation as current
in the accompanying consolidated balance sheets at December 31, 1999 and June
30, 2000. Although Heller has not expressed the intent to do so, it has the
ability to accelerate repayment of these obligations.
7
<PAGE>
In July 1998, the Company acquired Beaird Industries, Inc. ("Beaird") from
Trinity Industries, Inc. (the "Seller") for $35.0 million in cash and
receivables and a $5.0 million note to the Seller. Under the purchase agreement,
the Seller assumed all liabilities and retained certain accounts receivable of
Beaird. The Company believed that it was entitled to receive $2.2 million of
excess purchase price paid to the Seller under the purchase agreement resulting
from liabilities incurred by the Company in connection with the acquisition, and
$1.84 million in other claims arising from breaches of representation and
warranties. On July 15, 1999, the first installment of $1.8 million was due on
the Seller note. It was the Company's position that it has offset the amount
owed under the purchase agreement against this principal and interest payment.
Although the Seller agreed that the Company was owed an amount, in January 2000,
the Seller filed suit against the Company in the 134th Judicial District in the
District Court of Dallas County, Texas, in a suit styled TRINITY INDUSTRIES,
INC. V. INDUSTRIAL HOLDINGS, INC. In the lawsuit, the Seller alleged that the
Company defaulted on the $5 million note payment and asserted that the amount it
owed the Company was not sufficient to pay the first principal and interest
payment and additionally could not be offset against the $5 million note
payment. In response, in February 2000, the Company filed a counterclaim
alleging the Seller's fraud in failing to disclose, and in misrepresenting,
certain facts about Beaird. In June 2000, the litigation was settled. Pursuant
to the settlement agreement, the Seller agreed to reduce the note payable by
$1.6 million in satisfaction of the counterclaim and reimbursement to the
Company for losses incurred and recognized during 1999 on a contract. The
Company has recorded the reduction in the note payable as an offset to the
original purchase price and the loss reimbursement as other income during the
three-month period ended June 30, 2000. The new note has a balance of $3.4
million with interest at the prime rate of interest and is payable in equal
quarterly installments over two years beginning January 31, 2001.
6. COMMITMENTS AND CONTINGENCIES
The Company is involved in various claims and 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.
7. DIVESTITURES
Effective April 1, 2000, the Company sold its refinery dismantling and gas
metering subsidiary, Blastco Services Company ("Blastco") back to Blastco's
former shareholders. The sales price of Blastco was $2.0 million in cash, $0.8
million in notes receivable and 1,586,265 shares of the Company's common stock
that the former shareholders of Blastco received in the Company's acquisition of
Blastco in a pooling-of-interests transaction. Also, the Company retained
inventory and equipment with a net book value of $0.3 million. The Company
recognized a gain of approximately $2.6 million in connection with this sale,
which is included in other income.
On a pro forma unaudited basis, as if this divestiture had occurred as of
January 1, 2000, sales, net loss and loss per share would have been $52.5
million, $1.57 million and $.12 per share and $102.6 million, $5.7 million and
$.42 per share for the three months and six months ended June 30, 2000,
respectively.
8. SUBSEQUENT EVENTS
The Company has entered into an agreement with St. James to acquire from
SJMB, L.P. ("SJMB") the general partnership interest and the 51% of limited
partnership interests of OF Acquisition, L.P. ("Orbitform") that the Company
does not already own (the "Orbitform Partnership Interests") (the "St. James
Transaction"). The purchase price for the Orbitform Partnership Interests is
approximately $7.8 million in the form of (i) $6.9 million in secured
subordinated debt bearing interest at an annual rate of 11% that is convertible
into shares of the Company's common stock ($3.45 million convertible any time at
$1.15 per share and $3.45 million convertible after one year at $2.00 per
share), (ii) warrants to acquire 300,000 shares of the Company's common stock at
an exercise price of $1.25 per share (valued at $64,000), and (iii) forgiveness
of an $0.8 million note receivable from St. James. The St. James Transaction is
subject to shareholder approval and is to be voted on at the Annual Meeting of
Shareholders on August 15, 2000.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
GENERAL
The Company owns and operates 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. During the second quarter of 2000, the Company's
operations were reorganized into four business segments: (i) the engineered
products group; (ii) the stud bolt and gasket group; (iii) the energy group
(formerly known as valve manufacturing and repair); and (iv) the heavy
fabrication group. The engineered products group and the stud bolt and gasket
group were previously combined in the fastener manufacturing and distribution
segment. The energy group also includes what was formerly known as the machine
tool distribution segment. Additionally, one of the Company's subsidiaries that
was previously included in the fastener manufacturing and distribution segment
is now part of the energy group.
In addition to its current focus on refinancing its indebtedness (see
Liquidity and Capital Resources), the Company's business strategy is to increase
the sales, cash flow and profitability of each business group through a
turnaround plan that was developed and implemented by the Company to address the
operational difficulties that occurred during 1999 and into 2000. This
turnaround plan entails streamlining operations and refocusing on core
competencies in the following three areas:
ENHANCE REVENUE GROWTH. The Company believes that significant opportunities
exist to enhance revenue growth in its business groups. The Company plans to
achieve this growth by (i) promoting cross-selling opportunities across its
customer base; (ii) identifying new applications and new markets for existing
products, production capabilities, and skill base; and (iii) acquiring
companies that are strategic fits within its business segments. To date in
the engineered products group as well as the stud bolt and gasket group, the
Company has integrated the sales of certain product lines across each of the
related companies within these groups. In the energy group, rather than
integrate the sales of its product lines across the companies within that
group, the Company has begun to integrate its customer base through the joint
marketing of the individual companies' products and services to the entire
energy group customer base. Over the next year, the Company will continue to
expand on these efforts. In the heavy fabrication group, the Company has
focused its efforts on developing and expanding its power generation
customers in order to solidify its position in this burgeoning market. The
Company believes that its strong market positions within the niche markets it
serves enhances its ability to effectively implement this aspect of the
turnaround plan. Although historically much of the Company's growth has been
through acquisition, acquisitions will not be an area of emphasis until the
turnaround plan has been fully executed and the Company's financial
performance has returned to historical levels.
ELIMINATE WASTE. The Company believes that significant opportunities exist to
reduce or eliminate waste by: (i) reducing working capital levels
company-wide through increased inventory turns and accelerated collection of
receivables; (ii) selling non-strategic assets that are not part of the
Company's core competencies; (iii) consolidating selected facilities, (iv)
converting present manufacturing processes to "lean" or more efficient
manufacturing techniques, and (v) fully implementing the Company's ERP
systems, which will allow managers to obtain and use production information
faster and more efficiently than before.
During the past eighteen months, the Company has (i) consolidated three of
its facilities into other existing facilities, (ii) sold three non-core
business units, (iii) closed and liquidated four non-core and unprofitable
business units, (iv) completed the installation of two ERP systems, (v)
converted one plant from a traditional "batch and queue" operation to one
that employs one-piece flow or cellular production, and (vi) reduced
inventory and receivables. On a going-forward basis, the Company intends to
(i) consolidate an additional plant into an existing facility, (ii) sell
three parcels of excess real estate, (iii) convert the distribution
operations of its stud bolt and gasket group to a common ERP system, and (iv)
continue the implementation of "lean" manufacturing techniques. The Company
plans to continue to pursue similar measures when it is in its best interest
to do so.
9
<PAGE>
DEVELOP EMPLOYEES. The Company believes that employee development is an
integral part of the turnaround plan. Across all of the Company's businesses,
its management, sales and operations teams have participated in numerous
training and development programs that focus on management, sales,
production, technical, safety and quality issues. The Company believes that
this training is a valuable tool in the development and enhancement of its
employees' skill sets and that the Company will continue to be rewarded for
these efforts by a better trained, more knowledgeable and skilled workforce.
The Company's results of operations are affected by the level of economic
activity in the industries served by its 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 the Company's
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 the Company's products and services, which could adversely affect
operating results. During 1998 and into 1999, oil and gas prices declined
significantly, resulting in a decrease in the demand for the Company's 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 and
into 2000, the Company did not experience significant sales increases through
the end of 1999. The Company has experienced increased sales and backlog in
2000.
This section should be read in conjunction with the Company's consolidated
financial statements included elsewhere.
10
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth certain operating statement data for each
of the Company's segments for each of the periods presented (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------- --------------- --------------- ---------------
2000 1999 2000 1999
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Sales:
Engineered Products .................................. $ 9,813 $ 11,039 $ 20,115 $ 21,796
Stud Bolt and Gasket ................................. 12,617 10,561 25,311 23,246
Energy ............................................... 22,993 18,788 45,599 42,076
Heavy Fabrication .................................... 7,082 26,126 15,046 51,720
--------------- --------------- --------------- ---------------
52,505 66,514 106,071 138,838
--------------- --------------- --------------- ---------------
Cost of Sales:
Engineered Products .................................. 7,979 9,264 16,387 17,739
Stud Bolt and Gasket ................................. 9,385 7,723 18,660 17,032
Energy ............................................... 17,141 13,016 34,625 29,646
Heavy Fabrication .................................... 7,044 23,996 15,059 47,040
--------------- --------------- --------------- ---------------
41,549 53,999 84,731 111,457
--------------- --------------- --------------- ---------------
Selling, General and Administrative:
Engineered Products .................................. 1,302 1,590 2,675 3,069
Stud Bolt and Gasket ................................. 2,612 2,575 5,214 5,321
Energy ............................................... 3,810 4,405 8,890 8,409
Heavy Fabrication .................................... 1,416 1,678 2,847 3,520
Corporate ............................................ 1,608 709 3,882 1,131
--------------- --------------- --------------- ---------------
10,748 10,957 23,508 21,450
--------------- --------------- --------------- ---------------
Operating Income (Loss) ................................. $ 208 $ 1,558 $ (2,168) $ 5,931
=============== =============== =============== ===============
</TABLE>
THREE MONTHS ENDED JUNE 30, 2000 COMPARED WITH THREE MONTHS ENDED JUNE 30,
1999.
SALES. On a consolidated basis, sales decreased $14.0 million or 21% for the
three months ended June 30, 2000 compared to the three months ended June 30,
1999.
Sales for the Engineered Products Group decreased $1.2 million or 11% for the
three months ended June 30, 2000 compared to the three months ended June 30,
1999. While two of the group's manufacturing locations have experienced
relatively flat sales, its manufacturing location in Connecticut has experienced
significant sales declines attributable to several of its major customers. These
declines have been the result of customers purchasing product from foreign
competitors or customers slowing purchases either in response to an overstock
situation or softness in their own sales.
Sales for the Stud Bolt and Gasket Group increased $2.1 million or 19% for
the three months ended June 30, 2000 compared to the three months ended June 30,
1999. Sales increased due to improvements in the oil and gas market.
11
<PAGE>
Sales for the Energy Group increased $4.2 million or 22% for the three months
ended June 30, 2000 compared to the three months ended June 30, 1999. The
Company sold Rogers Equipment in October 1999 and Blastco in April 2000.
Excluding Blastco and Rogers, sales would have increased $7.4 million or 48% for
the three months ended June 30, 2000 compared to the three months ended June 30,
1999. The increase is attributable to internal growth primarily as the result of
improved economic conditions in the energy sector. Increasing worldwide demand
for oil and gas coupled with declining production has resulted in more stable
prices and the worldwide rig count has increased. Should oil and gas prices
remain at or near current levels, we expect sales to continue to increase in
this segment.
Sales for the Heavy Fabrication Group decreased $19.0 million or 73% for the
three months ended June 30, 2000 compared to the three months ended June 30,
1999. The decrease is attributable to the completion of a major contract for
wind turbine towers in June 1999 that has only recently been replaced. A
substantial percentage of this segment's revenues is derived from customers in
the hydrocarbon processing industry. Customers in the processing industry
materially reduced their capital spending during 1999 and into 2000, which
directly impacted sales in this segment. Additionally, heavy competitive
pressure from overseas, particularly Korean competition, has negatively impacted
sales in the markets the Company has traditionally served. The Company actively
pursued sales in new markets in the first quarter of 2000 and is beginning to
see results from these efforts. Backlog at Beaird as of June 30, 2000 (excluding
the wind turbine tower contract) has increased 126% over December 31, 1999. In
August 2000, Beaird entered into a contract with FPL Energy LLC to fabricate up
to 800 wind turbine towers by November 2001 for a total price in excess of $55
million. The initial order of 242 towers is for delivery to a wind energy
project in West Texas. As a result of this contract as well as other efforts,
sales in the second half of 2000 are expected to exceed sales in the first half
of the year.
COST OF SALES. Cost of sales decreased $12.5 million or 23% for the three
months ended June 30, 2000 compared to the three months ended June 30, 1999.
Cost of sales for the Engineered Products Group decreased $1.3 million or 14%
for the three months ended June 30, 2000 compared to the three months ended June
30, 1999 primarily as a result of the decrease in sales described above.
However, gross margin increased from 16% for the second quarter of 1999 to 19%
for the second quarter of 2000 as a result of improvements in manufacturing
efficiencies.
Cost of sales for the Stud Bolt and Gasket Group increased $1.7 million or
22% for the three months ended June 30, 2000 compared to the three months ended
June 30, 1999 primarily as a result of the increase in sales described above.
Gross margin decreased from 27% for the second quarter of 1999 to 26% in the
second quarter of 2000. The decline in gross margin was primarily attributable
to competitive pressure within the industry.
Cost of sales for the Energy Group increased $4.1 million or 32% for the
three months ended June 30, 2000 compared to the three months ended June 30,
1999 primarily as a result of the increase in sales described above. Gross
margin decreased from 31% for the second quarter of 1999 to 26% in the second
quarter of 2000. The significant decrease in margin was primarily attributable
to the refinery demolition business, Blastco, which had an unusually high gross
margin in 1999. Blastco was sold effective April 1, 2000, and therefore had no
activity in the second quarter of 2000. Additionally in the second quarter of
2000, the Energy Group began providing temporary workers to the oil and gas
construction industry. The margins for this activity are lower than those for
the group's more traditional light manufacturing and service activities.
Excluding Blastco and Rogers, gross margin would have decreased from 27% for the
three months ended June 30, 1999 to 25% for the three months ended June 30,
2000.
Cost of sales for the Heavy Fabrication Group decreased $17.0 million or 71%
for the three months ended June 30, 2000 compared to the three months ended June
30, 1999. In response to the declining sales, Beaird attempted to reduce costs
in all areas and substantially reduced its workforce. Gross margin decreased
from 8% in the second quarter of 1999 to 1% in the second quarter of 2000 as
sales decreased to levels that were insufficient to generate enough gross profit
to cover fixed costs.
12
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses decreased $0.2 million or 2% for the three months ended
June 30, 2000 compared to the three months ended June 30, 1999.
The Engineered Products Group's selling, general and administrative expenses
decreased $0.3 million or 18% for the three months ended June 30, 2000 compared
to the three months ended June 30, 1999. This decrease was the result of cost
reduction efforts at the various plants.
The Stud Bolt and Gasket Group's selling, general and administrative expense
was $2.6 million in the second quarter of 2000 and 1999.
The Energy Group's selling, general and administrative expenses decreased
$0.6 million or 14% for the three months ended June 30, 2000 compared to the
three months ended June 30, 1999 primarily as a result of the sale of Blastco,
the Company's refinery demolition subsidiary, effective April 2000. Excluding
Blastco and Rogers, selling, general and administrative expenses would have
increased $0.1 million or 3% for the three months ended June 30, 2000 compared
to the three months ended June 30, 1999 primarily as a result of the increase in
sales described above.
The Heavy Fabrication Group's selling, general and administrative expense
decreased $0.3 million or 16% for the three months ended June 30, 2000 compared
to the three months ended June 30, 1999 due to a reduction in the workforce and
cost reduction measures implemented as a result of the decrease in sales
detailed above.
Corporate selling, general and administrative expenses increased $0.9 million
or 127% for the three months ended June 30, 2000 compared to the three months
ended June 30, 1999 due primarily to professional fees and other expenses
associated with the Company's refinancing efforts, the amendment to its current
loan agreements and preparation of its proxy statement as well as an increase in
salaries and related expenses resulting from additional corporate personnel and
other compensation.
EARNINGS FROM EQUITY INVESTMENTS IN UNCONSOLIDATED AFFILIATES. On a
consolidated basis, earnings from equity investments decreased $0.75 million for
the three months ended June 30, 2000 compared to the three months ended June 30,
1999 primarily as a result of the Company's equity investee involved in
demolition activities which had earnings in the second quarter of 1999. Blastco,
the subsidiary holding the equity interest, was sold effective April 2000.
INTEREST EXPENSE. Interest expense increased $0.85 million or 44% for the
three months ended June 30, 2000 compared to the three months ended June 30,
1999, primarily as a result of higher debt levels and interest rates.
OTHER INCOME (EXPENSE), NET. Other income (expense) was $3.3 million for the
three months ended June 30, 2000 compared to $0.4 million for the three months
ended June 30, 1999. In the second quarter of 2000, the Company recognized a
gain of approximately $2.6 million on the sale of Blastco and $.8 million (net
of expenses) in income on the settlement of its litigation with Trinity
Industries.
INCOME TAXES. The Company recognized no federal tax expense for the three
months ended June 30, 2000 as a result of adjustments to its valuation allowance
to offset the deferred tax asset associated with net operating loss carry
forwards.
NET INCOME (LOSS). Net income was $0.7 million, or $.05 per share, for the
three months ended June 30, 2000 compared to net income of $0.5 million, or $.03
per share, for the three months ended June 30, 1999 as a result of the foregoing
factors.
13
<PAGE>
SIX MONTHS ENDED JUNE 30, 2000 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1999.
SALES. On a consolidated basis, sales decreased $32.8 million or 24% for the
six months ended June 30, 2000 compared to the six months ended June 30, 1999.
Sales for the Engineered Product Group decreased $1.7 million or 8% for the
six months ended June 30, 2000 compared to the six months ended June 30, 1999.
While two of the group's manufacturing locations have experienced relatively
flat sales, its manufacturing location in Connecticut has experienced
significant sales declines attributable to several of its major customers. These
declines have been the result of customers purchasing product from foreign
competitors or customers slowing purchases either in response to an overstock
situation or softness in their own sales.
Sales for the Stud Bolt and Gasket Group increased $2.1 million or 9% for the
six months ended June 30, 2000 compared to the six months ended June 30, 1999.
Sales increased due to improvements in the oil and gas market with almost all
the increase occurring in the second quarter.
Sales for the Energy Group increased $3.5 million or 8% for the six months
ended June 30, 2000 compared to the six months ended June 30, 1999. The Company
sold Rogers Equipment in October 1999 and Blastco in April 2000. Excluding
Blastco and Rogers, sales would have increased $7.3 million or 21% for the six
months ended June 30, 2000 compared to the six months ended June 30, 1999, with
almost all the increase occurring in the second quarter. The increase is
attributable to internal growth primarily as the result of improved economic
conditions in the energy sector. Increasing worldwide demand for oil and gas
coupled with declining production has resulted in more stable prices and the
worldwide rig count has increased.
Sales for the Heavy Fabrication Group decreased $36.7 million or 71% for the
six months ended June 30, 2000 compared to the six months ended June 30, 1999.
The decrease is attributable to the completion of a major contract for wind
turbine towers in June 1999 that has only recently been replaced. A substantial
percentage of this segment's revenues is derived from customers in the
hydrocarbon processing industry. Customers in the processing industry materially
reduced their capital spending during 1999 and into 2000, which directly
impacted sales in this segment. Additionally, heavy competitive pressure from
overseas, particularly Korean competition, has negatively impacted sales in the
markets the Company has traditionally served. The Company actively pursued sales
in new markets in the first half of 2000 and is beginning to see results from
these efforts. Backlog at Beaird as of June 30, 2000 (excluding the wind turbine
tower contract) has increased 126% over December 31, 1999. In August 2000,
Beaird entered into a contract with FPL Energy LLC to fabricate up to 800 wind
turbine towers by November 2001 for a total price in excess of $55 million. The
initial order of 242 towers is for delivery to a wind energy project in West
Texas. As a result of this contract as well as other efforts, sales in the
second half of 2000 are expected to exceed sales in the first half of the year.
COST OF SALES. Cost of sales decreased $26.7 million or 24% for the six
months ended June 30, 2000 compared to the six months ended June 30, 1999.
Cost of sales for the Engineered Products Group decreased $1.4 million or 8%
for the six months ended June 30, 2000 compared to the six months ended June 30,
1999 primarily as a result of the decrease in sales described above as gross
margin remained relatively constant.
Cost of sales for the Stud Bolt and Gasket Group increased $1.6 million or
10% for the six months ended June 30, 2000 compared to the six months ended June
30, 1999 primarily as a result of the decrease in sales described above. Gross
margin decreased from 27% for the first six months of 1999 to 26% in the first
six months of 2000. The decline in gross margin was primarily attributable to
competitive pressure within the industry.
Cost of sales for the Energy Group increased $5.0 million or 17% for the six
months ended June 30, 2000 compared to the six months ended June 30, 1999
primarily as a result of the increase in sales described above. Gross margin
decreased from 30% for the first six months of 1999 to 24% for the first six
months of 2000. The significant decrease in margin was primarily attributable to
the refinery demolition business, Blastco, which had an unusually high gross
margin in 1999. Additionally in the second quarter of 2000, the Energy Group
began providing temporary workers to the oil and gas construction industry. The
margins on this activity are lower than those on the group's
14
<PAGE>
more traditional light manufacturing and service activities. Excluding Blastco
and Rogers, gross margin would have been 26% for the six months ended June 30,
1999 and 2000.
Cost of sales for the Heavy Fabrication Group decreased $32.0 million or 68%
for the six months ended June 30, 2000 compared to the six months ended June 30,
1999. In response to the declining sales, Beaird attempted to reduce costs in
all areas and substantially reduced its workforce. Gross margin decreased from
9% in the first aix months of 1999 to 0% in the first six months of 2000 as
sales decreased to levels that were insufficient to generate enough gross profit
to cover fixed costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $2.1 million or 10% for the six months ended
June 30, 2000 compared to the six months ended June 30, 1999.
The Engineered Products Group's selling, general and administrative expense
decreased $0.4 million or 13% for the six months ended June 30, 2000 compared to
the six months ended June 30, 1999 due to cost reduction measures implemented as
a result of the decrease in sales detailed above.
The Stud Bolt and Gasket Group's selling, general and administrative expense
decreased $0.1 million or 2% for the six months ended June 30, 2000 compared to
the six months ended June 30, 1999 cost reduction measures implemented in the
first quarter of 2000.
The Energy Group's selling, general and administrative expenses increased
$0.5 million or 6% for the six months ended June 30, 2000 compared to the six
months ended June 30, 1999 primarily as a result of an increase of $0.5 million
at Blastco, the company's refinery demolition subsidiary, which was sold in
April 2000 and increases associated with the increase in sales described above.
The Heavy Fabrication Group's selling, general and administrative expense
decreased $0.7 million or 19% for the six months ended June 30, 2000 compared to
the six months ended June 30, 1999 due to a reduction in the workforce and cost
reduction measures implemented as a result of the decrease in sales detailed
above.
Corporate selling, general and administrative expenses increased $2.8 million
or 243% for the six months ended June 30, 2000 compared to the six months ended
June 30, 1999 due primarily to professional fees and other expenses associated
with the company's refinancing efforts and other expenses associated with the
company's refinancing efforts, the amendment to its current loan agreements and
preparation of its proxy as well as an increase in salaries and related expenses
resulting from additional corporate personnel.
EARNINGS FROM EQUITY INVESTMENTS IN UNCONSOLIDATED AFFILIATES. On a
consolidated basis, earnings from equity investments decreased $1.3 million for
the six months ended June 30, 2000 compared to the six months ended June 30,
1999 primarily as a result of the Company's equity investee involved in
demolition activities which had earnings in the first quarter of 1999 and had no
earnings in 2000 as anticipated losses on its contracts were accrued as of
December 31, 1999.
INTEREST EXPENSE. Interest expense increased $1.9 million or 50% for the six
months ended June 30, 2000 compared to the six months ended June 30, 1999,
primarily as a result of higher debt levels and interest rates.
OTHER INCOME (EXPENSE), NET. Other income (expense) was $3.2 million for the
six months ended June 30, 2000 compared to $0.1 million for the six months ended
June 30, 1999. In the second quarter of 2000, the Company recognized a gain of
approximately $2.6 million on the sale of Blastco and $0.8 million (net of
expenses) in income on the settlement of its litigation with Trinity Industries.
INCOME TAXES. The Company recognized no federal tax benefit for the six
months ended June 30, 2000 as a result of adjustments to its valuation allowance
to offset the deferred tax asset associated with net operating loss carry
forwards.
NET INCOME (LOSS). The net loss was $4.8 million, or a loss of $.33 per
share, for the six months ended June 30, 2000 compared to net income of $2.6
million, or $.17 per share, for the six months ended June 30, 1999 as a result
of the foregoing factors.
15
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2000, we had a deficit in retained earnings of $8.7 million and a
working capital deficit of $30.6 million as a result of $72.2 million in debt
maturing on or before June 30, 2001.
PRINCIPAL DEBT INSTRUMENTS. As of June 30, 2000, we had an aggregate of $87.4
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.
We are currently exploring various financing alternatives to meet our future
liquidity needs. We anticipate refinancing certain of our debt facilities in
2000, 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.
On June 30, 2000 the Company entered into an amendment of its credit
agreement with Comerica Bank-Texas, National Bank of Canada and Hibernia Bank
(the "Senior Lenders"), which (i) accelerated the maturity to January 31, 2001,
(ii) reduced the revolving credit line to the lesser of $50 million or the
defined borrowing base, (iii) increased the interest rate from prime plus 2% to
prime plus 3%, payable weekly and (iv) modified the financial covenants to
require maintenance of minimum consolidated tangible net worth, and earnings
before interest, taxes, depreciation and amortization ("EBITDA")-to-debt-service
ratio as well as to require limitations on capital expenditures. In addition,
the Senior Lenders waived all prior violations under the credit agreement. At
June 30, 2000, the Company was in compliance with the loan covenants. At June
30, 2000, we had no availability under the credit facility. At August 7, 2000,
we had availability under the facility of approximately $2.4 million.
In connection with the Company's amended credit agreement with its Senior
Lenders, St. James Capital Corp. or its affiliates (collectively, "St. James")
agreed, under the terms of a Limited Guaranty Agreement with the Company's
Senior Lenders (the "Guaranty"), to guarantee up to $2.0 million of any amount
that the Senior Lenders advance to the Company in excess of the defined
borrowing base amount under the amended credit agreement. As a condition of
providing this Guaranty, the Company entered into a Reimbursement Agreement with
St. James. Additionally, St. James has entered into a Credit Support Agreement
under which it has agreed to advance up to $1.5 million of funds to cure future
financial covenant defaults under the Company's amended credit agreement.
We have a $15 million note payable to EnSerCo, L.L.C. ("EnSerCo") that became
due on November 15, 1999. We were granted an extension of the due date through
January 31, 2000. On January 31, 2000, we were unable to repay the amounts
borrowed and defaulted on the note payable. EnSerCo has not called this note
due; however, it retains the right to do so. We have held preliminary
discussions with EnSerCo to modify the terms of the original note agreement,
which include extending the due date; however, no agreement has been reached
between the parties. Furthermore, no assurances can be given that we will be
able to successfully conclude any arrangement being considered.
We have an $8.5 million term note with Heller Financial, Inc. ("Heller"),
which expires on September 30, 2004. We were not in compliance with certain
financial covenants at each of the required quarterly reporting dates during
1999. We requested and received waivers from Heller through the September 30,
1999 reporting period; however, we did not seek waivers for the reporting dates
of December 31, 1999 or March 31, 2000. For the June 30, 2000 period, the
Company has held preliminary discussions with Heller to obtain waivers for the
events of non-compliance and to modify the credit agreement to provide financial
covenants that the Company will be able to comply with; however, no assurances
can be given that the Company will be able to successfully obtain the required
waivers. Currently, the Company is in violation of the credit agreement and
although Heller has not expressed the intent to call this obligation, it retains
the right to do so.
Our liquidity has been constrained by our borrowing base limitations and by
our operating losses and, as a result, our financial position and cash flows
have been adversely effected. We have experienced an increase in the level of
our accounts payable at December 31, 1999 and June 30, 2000 as compared to prior
periods. We continue to explore various alternatives to improve our liquidity,
including refinancing our indebtedness with other lenders. In addition, we have
identified and are pursuing the sale of non-strategic assets as well as raising
additional debt and equity capital. There can be no assurance that we will
successfully refinance our indebtedness with other lenders, or successfully sell
non-strategic assets.
16
<PAGE>
During the third quarter of 1999, we developed and implemented a turnaround
plan to streamline our operations and refocus on our core competencies through
enhanced revenue growth, elimination of waste and development of employees. As a
part of this turnaround plan, we closed duplicate facilities, reduced personnel,
eliminated certain products, wrote-off the related inventory, and adopted
uniform information systems platforms in the engineered products group. On a
going-forward basis, we intend to (i) consolidate an additional plant into an
existing facility, (ii) sell three parcels of excess real estate, (iii) convert
the distribution operations of stud bolt and gasket group to a common ERP
system, and (iv) continue the implementation of "lean" manufacturing. We will
continue to pursue other similar measures when it is in our best interest to do
so.
The engineered products group's operating profits have been adversely
effected by over capacity and resulting inefficient operations. As a result, we
have closed two manufacturing facilities and have consolidated their operations
into the three remaining facilities. Personnel reductions and inventory
write-offs took place in connection with these facility consolidations. We
expect the full benefit of the various overhead and cost reductions to occur in
late 2000.
The stud bolt and gasket group serves both the oil and gas exploration and
production industry and the hydrocarbon processing industry. The stud bolt and
gasket operations have experienced results similar to the energy group
operations. As oil and gas prices have increased, sales and profitability within
these operations have improved. We have experienced increasing backlog and sales
in both the first and second quarter of 2000 over the fourth quarter of 1999.
The energy group is closely tied to the price of oil and gas. Sales and
operating income within the energy group were adversely affected in 1999. The
reduction in sales volume and profitability has been primarily attributable to
reductions in the worldwide and gulf coast rig counts, continued caution
regarding the long-term hydrocarbon price environment, consolidation within the
oil and gas industry, and ongoing cost reduction efforts by oil and gas
companies. Within the energy group, we believe that sales reached their lowest
levels during the second and third quarters of 1999. Increasing worldwide demand
for oil and gas coupled with declining production in many areas should support a
more stable and favorable level of oil and gas prices, resulting in increased
exploration and production spending in 2000 and an improved demand for oilfield
services. We have experienced such a trend for the first half of 2000 in our
energy group, with increasing backlog and sales in the first and second quarter
of 2000 over the fourth quarter of 1999.
The heavy fabrication segment's sales and profitability have decreased
significantly in the first six months of 2000 compared to the first six months
of 1999. This segment's customers have seen a reduction in their margins because
of the volatility of oil feedstock prices during 1999, and have significantly
reduced their capital spending. In addition, it has experienced significant
competitive pressures from overseas. Mainly because of these factors, revenues
continued to decline in the fourth quarter of 1999 and the first six months of
2000. However, in response to this revenue decline, we have continued to reduce
overhead and make other operational improvements to increase the efficiency of
our operations as well as seek new markets for our products. The composition of
our backlog at the end of the second quarter of 2000 reflects this approach
since a significant portion consists of products for the power generation
industry as opposed to our traditional products that serve the hydrocarbon
processing industry. In August 2000, Beaird entered into a contract with FPL
Energy LLC to fabricate up to 800 wind turbine towers by November 2001 for a
total price in excess of $55 million. The initial order of 242 towers is for
delivery to a wind energy project in West Texas. As a result of this contract as
well as other efforts, sales in the second half of 2000 are expected to exceed
sales in the first half of the year.
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES. For the six months ended
June 30, 2000, net cash provided by operating activities was $6.0 million
compared to the six months ended June 30, 1999, which provided cash of $1.1
million. Cash was provided primarily through the collection of notes and
accounts receivable and increases in accounts payable and accrued liabilities.
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NET CASH USED IN INVESTING ACTIVITIES. Principal uses of cash are for capital
expenditures and acquisitions. For the six months ended June 30, 2000 and 1999,
the Company made capital expenditures of approximately $2.4 million and $5.1
million, respectively. Additionally, the Company made investments in
unconsolidated affiliates of $1.4 million and $1.3 million, respectively.
Effective April 2000, the Company sold its refinery demolition subsidiary,
Blastco, and received $2 million in cash proceeds.
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES. Sources of cash from
financing activities include borrowings under our credit facilities and sales of
equity securities. Financing activities used net cash of $5.5 million in the six
months ended June 30, 2000 compared with providing $3.6 million in 1999. During
the six months ended June 30, 2000, we repaid $2.3 million of our borrowings
under our credit facilities compared to net borrowings of $1.6 million during
the same period in 1999. During the six months ended June 30, 2000, we had
proceeds from issuance of long-term obligations of $2.0 million, compared to
proceeds of $3.2 million in the six months ended June 30, 1999. During the six
months ended June 30, 2000, we made principal payments on long-term obligations
of $5.2 million compared to $3.9 million in the six months ended June 30, 1999.
FORWARD LOOKING INFORMATION AND RISK FACTORS
Certain information in this Quarterly Report, including the information we
incorporate by reference, includes forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. You can identify our forward-looking statements by the
words "expects," "projects," "believes," "anticipates," "intends," "plans,"
"budgets," "predicts," "estimates" and similar expressions.
We have based the forward-looking statements relating to our operations on
our current expectations, and estimates and projections about the oil and gas
industry and us in general. We caution you that these statements are not
guarantees of future performance and involve risks, uncertainties and
assumptions that we cannot predict. In addition, we have based many of these
forward-looking statements on assumptions about future events that may prove to
be inaccurate. Our actual outcomes and results may differ materially from what
we have expressed or forecast in the forward-looking statements.
WE ARE IN DEFAULT UNDER OUR NOTE WITH ENSERCO AND CERTAIN TERM LOANS AND OUR
LENDERS HAVE THE RIGHT TO DECLARE ALL OUTSTANDING AMOUNTS IMMEDIATELY DUE AND
PAYABLE.
We have a $15 million note payable to EnSerCo that was due on November 15,
1999 and extended to January 31, 2000. On January 31, 2000, we were unable to
repay the amounts borrowed and defaulted on the note. EnSerCo has not called
this note; however, they retain the right to do so. We have held preliminary
discussions with EnSerCo to modify the terms of the original note agreement,
which include extending the due date; however, no agreement has been reached
between us. Furthermore, no assurances can be given that we will be able to
successfully conclude any arrangement being considered and we remain in default.
We have an $8.5 million term note with Heller Financial, Inc. ("Heller"),
which expires on September 30, 2004. We were not in compliance with certain
financial covenants at each of the required quarterly reporting dates during
1999. We requested and received waivers from Heller through the September 30,
1999 reporting period; however, we did not seek waivers for the reporting dates
of December 31, 1999 or March 31, 2000. For the June 30, 2000 period, the
Company has held preliminary discussions with Heller to obtain waivers for the
events of non-compliance and to modify the credit agreement to provide financial
covenants that the Company will be able to comply with; however, no assurances
can be given that the Company will be able to successfully obtain the required
consents. Currently, the Company is in violation of the credit agreement and
although Heller has not expressed the intent to call this obligation, it retains
the right to do so.
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EVEN IF WE SUCCESSFULLY RESTRUCTURE OUR CREDIT FACILITY AND TERM LOANS, OUR
SUBSTANTIAL DEBT COULD ADVERSELY AFFECT OUR BUSINESS, FINANCIAL CONDITION,
RESULTS OF OPERATIONS OR PROSPECTS.
We have a significant amount of debt, which requires us to dedicate a
substantial portion of our cash flow from operations to payments on our debt,
thereby reducing the availability of our cash flow to fund current working
capital, capital expenditures and other general corporate needs. In addition, it
could:
- increase our vulnerability to general adverse economic and industry
conditions;
- limit our ability to fund future working capital, acquisitions, capital
expenditures and other general corporate requirements;
- limit our flexibility in planning for, or reacting to, changes in our
business and our industry; and
- place us at a competitive disadvantage compared to our competitors that
have less debt.
EVEN IF OUR LENDERS DO NOT DECLARE ALL AMOUNTS UNDER OUR CREDIT FACILITY AND
TERM LOANS IMMEDIATELY DUE AND PAYABLE, WE WILL REQUIRE A SIGNIFICANT AMOUNT OF
CASH TO SERVICE OUR DEBT.
Our ability to service our debt and to fund capital expenditures will depend
on our ability to generate cash in the future. Our ability to generate
sufficient cash, to a large extent, is subject to general economic, financial,
competitive, legislative, regulatory and other factors that are beyond our
control. We cannot assure you that we will generate sufficient cash flow or be
able to obtain sufficient funding to satisfy our debt service requirements.
We also cannot assure you that our business will generate sufficient cash
flow from operations or that future borrowings and financing alternatives will
be available to us under our credit facility or from alternative sources in an
amount sufficient to service our debts or to fund our other liquidity needs.
EVEN IF WE SUCCESSFULLY RESTRUCTURE OUR CREDIT FACILITY AND TERM LOANS, OUR
DEBT TERMS IMPOSE CONDITIONS AND RESTRICTIONS THAT COULD SIGNIFICANTLY ADVERSELY
IMPACT OUR ABILITY TO OPERATE OUR BUSINESSES.
Our credit agreements contain restrictive covenants that, among other things,
impose certain limitations on us and require us to maintain specified
consolidated financial ratios and satisfy certain consolidated financial tests.
Our ability to meet those financial ratios and financial tests may be affected
by events beyond our control. If we fail to meet those tests or breach any of
the covenants in the future, the lenders may still declare all amounts
outstanding under the credit facility, together with accrued interest, to be
immediately due and payable. If we are unable to repay those amounts, the
lenders could proceed against the collateral granted to them. Our assets may not
be sufficient to repay in full that indebtedness or any other indebtedness.
EVEN IF WE ARE SUCCESSFUL IN ATTRACTING BUYERS FOR OUR NON-STRATEGIC ASSETS
AND INVESTMENTS, WE MAY NOT BE ABLE TO RECOVER THE CARRYING VALUE OF SUCH
AMOUNTS.
We are in the process of selling a number of non-strategic assets and
investments as a part of our turnaround plan. Due to the current carrying values
of certain of our non-strategic assets and investments on our consolidated
balance sheet, we may not be able to dispose of certain of these non-strategic
assets and investments at a price that will allow us to recover the carrying
value of such non-strategic assets and investments.
THE MARKET VALUE OF OUR COMMON STOCK MAY DECLINE FURTHER IF WE CONTINUE TO
INCUR NET LOSSES.
For the 1999 fiscal year, we incurred a net after-tax loss of $19.0 million,
and a net after-tax loss of $4.8 million for the six months ended June 30, 2000.
The price of our common stock, which has declined significantly in the past
year, depends on many factors, most importantly our financial performance. If we
continue to incur net losses, our stock price could decline further.
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SOME OF THE MARKETS FOR OUR PRODUCTS ARE CYCLICAL, WHICH MAY ADVERSELY IMPACT
SALES OF THOSE PRODUCTS DURING A DECLINE IN THOSE MARKETS.
Some of our products are sold in markets that are affected by the state of
both the U.S. and worldwide economies and by conditions within the industries
that purchase our products. Therefore, sales of these products may be reduced as
a result of conditions in the markets in which they are sold. Even though the
markets in which we sell our products are diversified, decreased sales in some
of these markets may not be offset by sales in our other markets, which may
result in a material adverse effect on our business, financial condition,
results of operations or prospects. A significant percentage of our 2000 sales,
most of which are attributable to our energy group and stud bolt and gasket
group, are derived from the domestic oil and gas industry.
OUR ACQUISITION STRATEGY MAY NOT ACHIEVE OUR OBJECTIVES AS A RESULT OF A
NUMBER OF POTENTIAL FACTORS.
Our acquisition strategy has been a significant component of our business
plan, and we plan to resume our acquisition strategy after our turnaround plan
has been accomplished and our financial performance has returned to historical
levels. While we evaluate business opportunities on a regular basis, we may not
be successful in identifying any additional acquisitions or we may not have
sufficient financial resources to make additional acquisitions. In addition, as
we complete acquisitions and expand our operations, we will be subject to all of
the risks inherent in an expanding business, including integrating financial
reporting, establishing satisfactory budgetary and other financial controls,
funding increased capital needs and overhead expenses, obtaining management
personnel required for expanded operations, and funding cash flow shortages that
may occur if anticipated sales and revenues are not realized or are delayed,
whether by general economic or market conditions or unforeseen internal
difficulties. Our future performance will depend, in part, on our ability to
manage expanding operations and to adapt our operational systems for these
expansions. We may not succeed at effectively and profitably managing the
integration of our current or any future acquisitions.
We may fail or be unable to discover liabilities in the course of performing
due diligence investigations on each business that we have acquired or will
acquire in the future. Liabilities could include those arising from employee
benefits contribution obligations of a prior owner or noncompliance with
federal, state or local environmental requirements by prior owners for which we,
as a successor owner, may be responsible. We try to minimize these risks by
conducting due diligence as we deem appropriate under the circumstances.
However, we may not have identified, or in the case of future acquisitions,
identify, all existing or potential risks. We also generally require each seller
of acquired businesses or properties to indemnify us against undisclosed
liabilities. In some cases, this indemnification obligation may be supported by
deferring payment of a portion of the purchase price or other appropriate
security. However, we cannot assure you that the indemnification, even if
obtained, will be enforceable, collectible or sufficient in amount, scope or
duration to fully offset the possible liabilities associated with the business
or property acquired. Any of these liabilities, individually or in the
aggregate, could have a material adverse effect on our business, financial
condition, results of operations or prospects.
MANY OF THE INDUSTRIES IN WHICH WE PARTICIPATE ARE HIGHLY COMPETITIVE, WHICH
MAY RESULT IN A LOSS OF MARKET SHARE OR A DECREASE IN REVENUE OR PROFIT MARGINS.
Many of the industries in which we operate are highly competitive. Some of
our competitors within each of our segments have greater financial and other
resources than us. In our key engineered products areas of semi-tubular
engineered fasteners and cold-formed specialty fasteners, safety and straight
pins and threaded stud bolts, we face competition from very small manufacturers
as well as from the operations of companies much larger than ourselves. Our
competitors within our heavy fabrication segment vary based on the products
fabricated. As the size and complexity of the products increase, competition is
generally less. The market for each of our key heavy fabrication products is
very competitive, and we face competition from a number of different
manufacturers in each of our product areas. In our energy segment, we believe
that we are subject to competition from less than ten similarly-sized
remanufacturing businesses. Factors that affect competition within all of our
segments include price, quality and customer service. Strong competition may
result in a loss of market share in the segments in which we operate and a
decrease in revenue and profit margins.
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THE LOSS OF KEY PERSONNEL COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR RESULTS
OR OPERATIONS.
Our success depends largely upon the abilities and experience of certain key
management personnel. If we lose the services of one or more of our key
personnel, it could have a material adverse effect on our business and results
of operations. We do not have non-compete agreements with all of our key
personnel. In addition, we generally do not maintain key-man life insurance
policies on our executives.
OUR INSURANCE COVERAGE MAY BE INADEQUATE TO COVER CERTAIN CONTINGENT
LIABILITIES.
Our business exposes us to possible claims for personal injury or death
resulting from the use of our products. We carry comprehensive insurance,
subject to deductibles, at levels we believe are sufficient to cover existing
and future claims. However, we could be subject to a claim or liability that
exceeds our insurance coverage. In addition, we may not be able to maintain
adequate insurance coverage at rates we believe are reasonable.
OUR OPERATIONS ARE SUBJECT TO REGULATION BY FEDERAL, STATE AND LOCAL
GOVERNMENTAL AUTHORITIES THAT MAY LIMIT OUR ABILITY TO OPERATE OUR BUSINESS.
Our business is affected by governmental regulations relating to our industry
segments in general, as well as environmental and safety regulations that have
specific application to our business. While we are not aware of any proposed or
pending legislation, future legislation may have an adverse effect on our
business, financial condition, results of operations or prospects.
We are subject to various federal, state and local environmental laws,
including those governing air emissions, water discharges and the storage,
handling, disposal and remediation of petroleum and hazardous substances. In
particular, our refinery demolition business involves the removal of asbestos
and other environmental contaminants for which we are responsible for handling
and disposal. We have in the past and will likely in the future incur
expenditures to ensure compliance with environmental laws. Due to the
possibility of unanticipated factual or regulatory developments, the amount and
timing of future environmental expenditures could vary substantially from those
currently anticipated. Moreover, certain of our facilities have been in
operation for many years and, over that time, we and other predecessor operators
have generated and disposed of wastes that are or may be considered hazardous.
Accordingly, although we have undertaken considerable efforts to comply with
applicable laws, it is possible that environmental requirements or facts not
currently known to us will require unanticipated efforts and expenditures that
cannot be currently quantified.
Item 3. Qualitative and Quantitative 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 certain of our term debt. As of June 30, 2000,
the revolving line of credit had a principal balance of $43.9 million and an
interest rate that floats with prime. We also have $8.5 million of long-term
debt bearing interest at Libor plus 2.5% and long-term debt of $10.7 million at
an interest rate that floats with prime. A 1.0% increase in interest rates could
result in a $0.6 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.
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PART II
OTHER INFORMATION
Item 1. Legal Proceedings
We are involved in various claims and litigation arising in the ordinary
course of business. While there are uncertainties inherent in the ultimate
outcome of such matters and it is impossible to currently determine the ultimate
costs that may be incurred, we believe the resolution of such uncertainties and
the incurrence of such costs should not have a material adverse effect on our
consolidated financial condition or results of operations.
Item 2. Changes in Securities
In March 2000, the Company issued warrants to purchase 750,000 shares of its
common stock to SJMB at an exercise price of $1.25 per share as compensation for
consulting services provided in connection with its investment in Belleli
Energy. These warrants were valued at $157,500.
On June 13, 2000, the Company issued warrants to purchase 400,000 shares of
its common stock to SJMB at an exercise price of $1.25 per share in
consideration of a $2 million guaranty provided by SJMB to the Company's Senior
Lenders. These warrants were valued at $108,000.
On June 30, 2000, the Company issued warrants to purchase 150,000 shares of
its common stock to its Senior Lenders at an exercise price of $1.40 per share
in connection with the amendment of its credit agreement. These warrants were
valued at $60,000.
On June 13, 2000, the Company issued warrants to purchase 300,000 shares of
its common stock to SJMB at an exercise price of $1.25 per share in connection
with the Company's acquisition from SJMB of the Orbitform Partnership Interests.
These warrants were valued at $81,000.
On June 13, 2000, the Company issued warrants to purchase 300,000 shares of
its common stock to Robert E. Cone, Chairman of the Board, at an exercise price
of $1.25 per share as compensation for services. These warrants were valued at
$81,000.
Item 3. Defaults upon Senior Securities
See Item 1. Financial Statements (unaudited) Note 1. Basis of Presentation
and Management Plans and Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital Resources
for a discussion of the Company's debt in default.
Item 6. Exhibits and Reports on Form 8-K
(a) Reports on Form 8-K
In June 2000, the Company filed a report on Form 8-K disclosing the sale of
Blastco Services Company ("Blastco"), its subsidiary engaged in the refinery
demolition business, to two of its former shareholders. The report included the
unaudited pro forma combined financial statements of the Company for the three
months ended March 31, 2000 and the year ended December 31, 1999 as if the
transaction had taken place January 1, 1999.
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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: August 10, 2000 By: /S/ CHRISTINE A. SMITH
----------------------------
Christine A. Smith,
Executive Vice President and
Chief Accounting Officer
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