SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES EXCHANGE ACT OF
1934
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Confidential, For Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11 or Rule 14a-12
INDUSTRIAL HOLDINGS, INC.
--------------------------------------------------------------------------------
(Name of Registrant as Specified in its Charter)
(Name of Person(s) Filing Proxy Statement, if other than Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and
0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which
the filing fee is calculated and state how it was determined):
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the form or schedule and the date of its filing.
(1) Amount previously paid:
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(4) Date Filed:
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INDUSTRIAL HOLDINGS, INC.
7135 ARDMORE
HOUSTON, TEXAS 77054
-----------------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD AUGUST 14, 2000
-----------------------
Dear Shareholder:
You are invited to attend the Annual Meeting of Shareholders of Industrial
Holdings, Inc. ("IHI", or the "Company"). The meeting will be held at the
Company's offices at 7135 Ardmore, Houston, Texas 77054, at 10:00 a.m., Houston
time, on Monday, August 14, 2000, to:
1. Elect three Class III directors to serve until the third Annual Meeting
of Shareholders following this meeting;
2. Approve the issuance of the following-described securities:
(i) to SJMB, L.P. ("SJMB"), our affiliate, in connection with our
acquisition from SJMB, or one of its affiliates, of the general
partnership interest and the 51% of limited partnership interests
of OF Acquisition, L.P. ("Orbitform") that we do not already own
(the "Orbitform Partnership Interests") (the "Acquisition"):
(a) 11% promissory notes (x) in the original principal amount of
$3,450,000, convertible at any time, together with accrued
interest thereon, into shares of our Common Stock, par value
$0.01 per share, at a price of $1.15 per share ("Acquisition
Note A"), and (y) in the original principal amount of
$3,450,000, convertible, together with accrued interest thereon,
beginning one year after issuance into shares of our Common
Stock at a price of $2.00 per share ("Acquisition Note B"), only
if we elect not to prepay this amount in the first year instead
(collectively, the "Acquisition Notes");
(b) warrants (the "Acquisition Warrants") to purchase 300,000 shares
of Common Stock at an exercise price of $1.25 per share (the
"Acquisition Warrant Shares");
(c) on the full conversion of Acquisition Note A, together with
accrued interest thereon, at least 3,000,000 shares of our
Common Stock (the "Acquisition Note A Shares");
(d) only if we do not prepay the principal and accrued interest
within one year, on the full conversion of Acquisition Note B,
together with accrued interest thereon, at least 1,725,000
shares of our Common Stock (the "Acquisition Note B Shares");
and
(e) on the full exercise of the Acquisition Warrants, the
Acquisition Warrant Shares (the Acquisition Notes, the
Acquisition Warrants, the Acquisition Note A Shares, the
Acquisition Note B Shares and the Acquisition Warrant Shares,
collectively, the "Acquisition Securities").
(ii) to SJMB and St. James Capital Partners, L.P. ("SJCP"), in
connection with their providing up to $1,500,000 of funding to us
under an Optional Credit Support Agreement with Comerica
Bank-Texas, National Bank of Canada and Hibernia Bank (our "Senior
Lenders"), in order to cure future potential financial covenant
defaults under our amended credit agreement with our Senior
Lenders (the "Credit Support Agreement"):
(a) an 11% promissory note of up to a maximum principal amount of
$1,500,000, depending on the actual amount of funding under the
Credit Support Agreement, convertible at any time, together with
accrued interest thereon, into shares of our Common Stock, at a
price of $1.25 per share (the "Credit Support Note");
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(b) on the full conversion of the Credit Support Note, at least
1,200,000 shares of our Common Stock (the "Credit Support Note
Shares");
(c) warrants to purchase up to 375,000 shares of our Common Stock at
a price of $1.25 per share, depending on the actual amount of
funding under the Credit Support Agreement (the "Credit Support
Warrants"); and
(d) on the full exercise of the Credit Support Warrants, up to the
375,000 underlying shares of Common Stock (the "Credit Support
Warrant Shares") (the Credit Support Note Shares, Credit Support
Warrants and the Credit Support Warrant Shares, collectively,
the "Credit Support Securities").
3. Consider and act upon such other business as may properly come before
the meeting.
A record of shareholders has been taken as of the close of business on
June 23, 2000, and only those shareholders of record on that date will be
entitled to notice of and to vote at the meeting. A shareholders' list will be
available beginning July 28, 2000, and may be inspected during normal business
hours for at least 10 days before the annual meeting at the offices of the
Company, 7135 Ardmore, Houston, Texas 77054.
Your participation in the Company's affairs is important. To ensure your
representation if you do not expect to be present at the meeting, please sign
and date the enclosed proxy and return it promptly in the enclosed stamped
envelope. The prompt return of proxies will ensure a quorum and save the Company
the expense of further solicitation.
Sincerely,
CHRISTINE A. SMITH
Chief Financial Officer and
Executive Vice President
July [14], 2000
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TABLE OF CONTENTS
PAGE
PROXY STATEMENT......................................................... 1
VOTING OF SHARES........................................................ 1
SUMMARY ............................................................... 3
PROPOSAL 1 - ELECTION OF DIRECTORS...................................... 5
DIRECTORS AND EXECUTIVE OFFICERS
Nominees for Directors............................................... 6
Other Directors...................................................... 6
Other Executive Officers............................................. 7
Compliance With Section 16(a) of the Exchange Act.................... 7
Board and Committee Activity: Structure and Compensation............ 8
OTHER INFORMATION
Security Ownership of Certain Beneficial Owners and Management....... 9
Executive Compensation............................................... 10
Employment Agreements................................................ 11
Performance Graph.................................................... 12
Compensation Committee Report........................................ 13
Certain Transactions................................................. 14
PROPOSAL 2 - APPROVAL OF THE ISSUANCE OF THE ACQUISITION SECURITIES
AND THE CREDIT SUPPORT SECURITIES
The Acquisition...................................................... 15
Backgrounds of the Parties......................................... 17
IHI............................................................. 17
Engineered Products Group....................................... 18
Orbitform....................................................... 19
St. James and Its Affiliates.................................... 19
Description of Orbitform Business
Products and Services........................................... 19
Customers and Markets........................................... 19
Suppliers and Raw Materials..................................... 19
Competition..................................................... 20
Backlog......................................................... 20
Regulation...................................................... 20
Employees....................................................... 20
Orbitform Risk Factors............................................. 21
Legal Proceedings.................................................. 21
Management......................................................... 22
Price Paid for the Acquisition..................................... 22
Accounting Treatment............................................... 22
Our Reasons for the Acquisition.................................... 22
Other Transactions with SJMB and SJCP.............................. 22
Selected Historical Financial Information of IHI................... 24
Selected Historical Financial Information of Orbitform............. 26
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Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................... 27
Selected Pro Forma Condensed Combined Financial Information........ 29
The Credit Support Agreement......................................... 30
Summary of Terms................................................... 30
Our Reasons for the Credit Support Agreement....................... 30
SJMB's Maximum Potential Stock Ownership............................. 30
Interests of Certain Persons in the Acquisition and the Credit
Support Agreement............................................... 31
Regulatory Approvals................................................. 31
Record Date.......................................................... 31
Vote Required to Approve the Issuance of the Acquisition Securities
and the Credit Support Securities............................... 31
Our Recommendation to Shareholders................................... 32
COST OF SOLICITATION.................................................... 33
RELATIONSHIP WITH INDEPENDENT AUDITORS.................................. 33
SHAREHOLDER PROPOSALS................................................... 33
OTHER MATTERS........................................................... 33
ANNUAL REPORT AND FINANCIAL INFORMATION................................. 33
ANNEX A - UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS............. A-1
ANNEX B - AUDITED FINANCIAL STATEMENTS OF OF ACQUISITION, L.P........... B-1
EXHIBITS ............................................................... EX-1
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INDUSTRIAL HOLDINGS, INC.
7135 ARDMORE
HOUSTON, TEXAS 77054
-----------------------
PROXY STATEMENT
We are mailing this proxy statement to shareholders on or about July [14],
2000, in connection with the solicitation of proxies by the Board of Directors
of Industrial Holdings, Inc. (the "Company" or "IHI") for use at the Annual
Meeting of Shareholders to be held at our principal offices at 7135 Ardmore,
Houston, Texas 77054, at 10:00 a.m., Houston time, on August 14, 2000, and at
any adjournments thereof (the "Annual Meeting"), to consider and vote on the
matters set forth in the accompanying Notice of Annual Meeting of Shareholders.
All shares represented by properly executed proxies, unless such proxies
previously have been revoked, will be voted at the Annual Meeting according to
the directions on such proxies. If there is no direction indicated, the shares
will be voted FOR: (i) the election of each of the nominees named herein to the
Board of Directors; (ii) the approval of the issuance of the Acquisition
Securities and the Credit Support Securities; and (iii) any other proposals as
may properly come before the meeting. A shareholder may revoke a proxy by (a)
delivering to us written notice of revocation, (b) delivering to us a signed
proxy bearing a later date or (c) voting in person at the Annual Meeting.
VOTING OF SHARES
At the close of business on June 23, 2000, the record date for determining
shareholders entitled to notice of and to vote at the Annual Meeting (the
"Record Date"), there were issued, outstanding and entitled to vote 13,524,832
shares of our common stock, par value $.01 per share ("Common Stock"). A
majority of the shares of Common Stock outstanding on the Record Date,
represented in person or by proxy, is needed to constitute a quorum at the
Annual Meeting. Each share of Common Stock is entitled to one vote on all
questions requiring a shareholder vote at the Annual Meeting. For purposes of
the quorum and the discussion below regarding the vote necessary to take
shareholder action, shareholders of record who are present at the meeting in
person or by proxy and who abstain, and broker non-votes are considered
shareholders who are present and entitled to vote and they count toward the
quorum.
Brokers holding shares of record for customers generally are not entitled
to vote on certain matters unless they receive voting instructions from their
customers. "Uninstructed shares" means shares held by a broker who has not
received instructions from its customers on such matters and the broker has so
notified us on a proxy form in accordance with industry practice or has
otherwise advised us that it lacks voting authority. "Broker non-votes" means
the votes that could have been cast on the matter in question by brokers with
respect to uninstructed shares if the brokers had received their customers'
instructions.
PROPOSAL 1 - ELECTION OF DIRECTORS: Directors are elected by a plurality
of the votes cast by the holders of Common Stock and the three nominees who
receive the most votes will be elected. Abstentions and broker non-votes will
not be taken into account in determining the outcome of the election.
PROPOSAL 2 - APPROVAL OF THE ISSUANCE OF THE ACQUISITION SECURITIES AND
THE CREDIT SUPPORT SECURITIES: To be approved, the issuance of the Acquisition
Securities and the Credit Support Securities would usually require the
affirmative vote of the majority of the shares present in person or by proxy at
the meeting and entitled to vote. Since the Acquisition Securities and the
Credit Support Securities, if and when converted and exercised, may result in
SJMB and its affiliates effectively controlling us, the Board of Directors is
requiring that Proposal 2 receive the affirmative vote of a majority of the
shares present in person or by proxy at the meeting and entitled to vote, in
addition to the votes represented by the 1,365,130 shares that SJMB and its
affiliated entities currently own. Therefore while SJMB and its affiliated
entities' votes on Proposal 2 will be counted, Proposal 2 must receive, in
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addition to those votes, a majority of our other shares that are present in
person or by proxy at the meeting and entitled to vote.
Though uninstructed shares are not entitled to vote on this matter, they
are considered to be present at the meeting and therefore have the effect of
negative votes. Abstentions also have the effect of negative votes.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE NOMINEES FOR DIRECTORS
AND FOR PROPOSAL 2.
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SUMMARY
This summary highlights selected information from this proxy statement. It
may not contain all of the information that is important to you. To fully
understand the Acquisition and the Credit Support Agreement, we urge you to
carefully read the entire proxy statement and the documents that we refer to,
which are attached as exhibits to this proxy statement.
Certain information in this proxy statement, including that set forth in
the section titled "Risk Factors," are forward-looking statements within the
meaning of Section 27A the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. You can identify these forward-looking
statements by the words "expects," "projects," "estimates," "believes,"
"anticipates," "intends," "plans," "budgets," "predicts" and similar
expressions.
The forward-looking statements relating to Orbitform's operations in
particular are based on current expectations, estimates and projections and the
industries in which it operates. We caution you that these statements are not
guarantees of future performance and involve risks, uncertainties and
assumptions about future events that may prove to be inaccurate. Orbitform's
actual results and performance may differ materially from what we have expressed
or forecast in the forward-looking statements.
Industrial Holdings, Inc. Orbitform
7135 Ardmore 1600 Executive Drive
Houston, Texas 77054 Jackson, Michigan 49204
(713) 747-1025 (517) 787-9447
o We currently own 49% of Orbitform's limited partnership interests through
Philform, Inc, our wholly - owned subsidiary, and reflect our interest
through "Investment in Unconsolidated Affiliates" on our balance sheet, and
through "Earnings from Equity Investments in Unconsolidated Affiliates" on
our income statement. See "Proposal 2 - The Acquisition - Backgrounds of the
Parties - IHI."
o The additional earnings that 100% of Orbitform would bring to us would
improve our ability to comply with our financial covenants under our amended
credit agreement with our Senior Lenders. We also feel it will put us in a
better position to refinance our outstanding debt with our Senior Lenders
before it comes due on January 31, 2001. See "Proposal 2 - The Acquisition -
Our Reasons for the Acquisition."
o We believe the Acquisition and resulting control of the Orbitform business
will be a strategic complement to our existing Engineered Products Group by
providing us with greater opportunities to develop and enhance markets for
our engineered fasteners and engineered fastener-setting machines. Orbitform
designs and builds both orbital and impact rivet setting machines (or
engineered fastener-setting machines) and systems, which, if the Acquisition
is approved by our shareholders, will allow us to provide a complete solution
to our engineered fastener customers' needs. In our existing Engineered
Products Group, we presently only supply the manufactured fastener and not
the machines and systems required to set the fastener in its end-use
application. We believe that this combination will provide us with a
significant competitive advantage over those engineered fastener
manufacturers that are not able to supply the customer with setting equipment
or systems. Additionally, we believe this combination will allow each of
Orbitform and IHI to more effectively market its products to the other's
respective customers. See "Proposal 2 - The Acquisition - Backgrounds of the
Parties - Engineered Products Group" and " - Reasons for the Acquisition."
o The Acquisition Notes will mature on December 31, 2001 and will carry
interest at 11% that will be accrued but not paid until maturity. They will
be secured by a second lien on certain of our assets and by a second pledge
of our subsidiaries' capital stock, both of which will be subordinated to the
lien and pledge of these assets to our Senior Lenders. See "Proposal 2 - The
Acquisition - Acquisition Notes."
o In 1999, Orbitform generated earnings before interest, income taxes,
depreciation and amortization ("EBITDA"), adjusted for the management fee
charged by us to Orbitform, of $2.3 million. If we acquire the Orbitform
Partnership Interests, we will obtain the full benefit of Orbitform's cash
flow and borrowing base collateral of about $2.8 million. See "Proposal 2 -
The Acquisition - Our Reasons for the Acquisition."
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o The purchase price for the Acquisition is approximately $7.8 million. The
purchase price represents about a 6.6 multiple of a 51% share of 1999
adjusted EBITDA. See "Proposal 2 - The Acquisition - Price Paid for the
Acquisition."
o We will treat the Acquisition as a purchase, which means we will reflect
Orbitform's assets and liabilities on our books based on their estimated fair
value when we acquire them. See "Proposal 2 - The Acquisition - Accounting
Treatment."
o We recently revised the financial covenants in our amended credit agreement
with our Senior Lenders. Under the Credit Support Agreement (as defined in
"Proposal 2-The Credit Support Agreement"), SJMB and SJCP may elect, at their
sole option, to advance to us up to $1.5 million ("Credit Support Payments")
to prevent a potential financial covenant default. See "Proposal 2 -The
Credit Support Agreement-Our Reasons for the Credit Support Agreement."
o If SJMB and SJCP make Credit Support Payments, we will issue a Credit Support
Note to them to evidence our indebtedness. The Credit Support Note will
mature on January 31, 2002 and will carry interest at 11% that will be
accrued but not paid until maturity. Like the Acquisition Notes, the Credit
Support Note will be secured by a second lien on certain of our assets and by
a second pledge of our subsidiaries' capital stock, also subordinated to the
lien and pledge of these assets to our Senior Lenders. We will also issue to
SJMB and SJCP Credit Support Warrants to purchase a number of shares of our
Common Stock equal to 0.25 of the principal amount of the Credit Support
Note. See "Proposal 2 -The Credit Support Agreement-Summary of Terms."
o SJMB and its affiliated entities now own 1,365,130 shares, or about 10.1%, of
our 13,524,832 outstanding shares of Common Stock. If you approve the
issuance of the Acquisition Securities and the Credit Support Securities, and
if SJMB fully converted and exercised the Acquisition Securities and the
Credit Support Securities, fully exercised the warrants it currently owns to
purchase 1,257,994 shares of our Common Stock and fully funded its $2.0
million over-advance guaranty to our Senior Lenders, SJMB and its affiliates
would own a total of 12,461,237 shares, or about 50.6% of our 24,620,939
outstanding shares, assuming no other issuance or redemptions of our shares.
As a result, SJMB and its affiliates would be able to significantly influence
and possibly control the vote on most matters submitted to a vote of our
shareholders. See "Proposal 2 - SJMB's Maximum Potential Stock Ownership."
o Except for your approval and for notifying the Nasdaq NMS that we will issue
securities that are convertible into more than 10% of our currently
outstanding shares, we are not aware of any required regulatory approvals or
filings for the Acquisition or the issuance of the Acquisition Securities or
the Credit Support Securities required by us. See "Proposal 2 - Regulatory
Approvals."
o If we do not obtain your approval of the issuance of the Acquisition
Securities and the Credit Support Securities, then we will not complete those
transactions on the terms described in the proxy statement. This will in turn
adversely affect us in the following ways: (i) we would be in default of the
amended credit agreement with our Senior Lenders; (ii) our short-term
liquidity and results of operations would be negatively impacted; (iii) the
general partner of Orbitform, an affiliate of SJMB, will cancel the
management agreement currently in place by which we have been receiving a
management fee equal to 100% of the taxable income of Orbitform, reducing
future cash flows to us from Orbitform; (iv) the value of our 49% limited
partnership interest may be significantly diminished if SJMB sells the
Orbitform Partnership Interests to someone else; and (v) we may lose the
services of Mr. Shirkey, the newly-elected head of our the Engineered
Products Group, because we will not own 100% of Orbitform. See "Proposal 2 -
The Acquisition."
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PROPOSAL 1- ELECTION OF DIRECTORS
At the Annual Meeting, three Class III Directors are to be elected, each
to hold office until the third Annual Meeting of Shareholders following his or
her election.
The persons named in the accompanying proxy have been designated by the
Board of Directors and unless authority is withheld, the members of the Board of
Directors intend to vote for the election of the nominees named below to the
Board of Directors as Class III Directors. Two of the nominees for Class III
Directors previously have been elected by the shareholders to serve as members
of the Board of Directors. One of the nominees, Charles E. Underbrink, was
appointed to the Board of Directors on February 16, 2000, to fill the vacancy on
the Board created by the resignation of Mr. James Brock in June 1999. Although
the Board of Directors does not contemplate that any of the nominees will become
unavailable for election, if such a situation arises before the Annual Meeting,
the persons named in the enclosed proxy will vote for the election of such other
person(s) that the Board of Directors nominates, or the size of the Board may be
reduced accordingly.
PRINCIPAL POSITION DIRECTOR
NAME WITH THE COMPANY AGE SINCE
---- ---------------- --- -----
CLASS III DIRECTORS WHOSE TERM (IF RE-ELECTED) WILL EXPIRE IN 2003
Robert E. Cone Chairman of the Board and Director 48 1989
Charles E. Underbrink Director 45 2000
Barbara S. Shuler Secretary and Director 53 1991
CLASS I DIRECTORS WHOSE TERM WILL EXPIRE IN 2001
Charles J. Anderson Director 76 1991
James W. Kenney Director 57 1992
CLASS II DIRECTORS WHOSE TERM WILL EXPIRE IN 2002
John P. Madden Director 57 1992
John L. Thompson Director 40 1997
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DIRECTORS AND EXECUTIVE OFFICERS
Set forth below is certain information with respect to each of the
nominees for the office of director, each director whose term of office will
continue after the Annual Meeting and each other executive officer.
NOMINEES FOR DIRECTORS
ROBERT E. CONE is currently Chairman of the Board and a director, having
been replaced as President and Chief Executive Officer effective June 1, 2000.
He founded the Company in 1989 and served as President, Chief Executive Officer,
Chairman of the Board and director of the Company from 1989 until June 1, 2000.
BARBARA S. SHULER has served as Secretary of the Company since February
1992 and as a director of the Company since September 1991. Since 1974, Ms.
Shuler has been self-employed in auction management, marketing, advertising and
promotional aspects of the equine industry, serving as President of Shuler, Inc.
CHARLES E. UNDERBRINK was appointed as a director of the Company on
February 16, 2000 to fill a vacancy on the Board of Directors. He is the Chief
Executive Officer and Chairman of St. James Capital Corp. and SJMB, L.L.C.,
which are Houston-based merchant banking firms. Mr. Underbrink has been, from
August 1996 to the present, a principal of HUB, Inc., which is a lender to small
capitalization businesses and an operator of mini-storage facilities located in
Minnesota and Wisconsin. Additionally, he is a director of Black Warrior
Wireline Corp., Sommerset House Publishing, Inc. and Monorail Computer
Corporation.
OTHER DIRECTORS
CHARLES J. ANDERSON has served as a director of the Company since
September 1991. Since 1985, Mr. Anderson has been engaged in private business
investments. Prior to 1985, Mr. Anderson served as Senior Sales Vice President
and Director of Sales and was a partner of the Delaware Management Company, the
manager of the Delaware Group of Mutual Funds and certain other private pension
funds.
JAMES W. KENNEY has served as a director of the Company since October
1992. Since October 1993, Mr. Kenney has served as Executive Vice President of
San Jacinto Securities, Inc. From February 1992 to September 1993, he served as
the Vice President of Renaissance Capital Group, Inc. Prior to that time, Mr.
Kenney served as Senior Vice President for Capital Institutional Services, Inc.
and in various executive positions with major southwest regional brokerage
firms, including Rauscher Pierce Refsnes Inc. and Weber, Hall, Sale and
Associates, Inc. Mr. Kenney is a director of Consolidated Health Care
Associates, Inc., a company that operates physical rehabilitation centers;
Scientific Measurement Systems, Inc., a developer of industrial digital
radiography and computerized tomography; and Tricom Corporation, a company that
develops products and services for the telecommunication industry.
JOHN P. MADDEN has served as a director of the Company since October 1992.
From January 1992 to April 1993, Mr. Madden served as Chairman of the Board of
The Rex Group, Inc. (the "Rex Group"), which was purchased by the Company in
1992. Mr. Madden is Chairman and Chief Executive Officer of Ashburn Industries,
Inc., a metalworking fluids manufacturer, and Mr. Madden is engaged in private
industrial commercial real estate activity.
JOHN L. THOMPSON has served as a director of the Company since 1997. Mr.
Thompson is a director and President of St. James Capital Corp. and SJMB,
L.L.C., which are Houston-based merchant banking firms. Prior to co-founding St.
James in August 1995, Mr. Thompson served as a Managing Director of Corporate
Finance at Harris Webb & Garrison, a regional investment-banking firm with a
focus on mergers and acquisitions, financial restructuring and private
placements of debt and equity issuances. Additionally, he is a director of Black
Warrior Wireline Corp., and Collins & Ware, Inc.
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OTHER EXECUTIVE OFFICERS
MICHAEL N. MARSH, 48, was elected our President and Chief Executive
Officer effective June 1, 2000. From 1996 to May 2000, he was Chief Executive
Officer of Growth Resources, Inc., an oilfield service company engaged in marine
and offshore vessel cleaning, decontamination and waste management. From 1993 to
1996, Mr. Marsh was a principal of Financial Modeling, Inc., a merger and
acquisition consulting firm. From 1991 to 1993, Mr. Marsh served as Vice
President of Foster Wheeler Environmental Services, Inc., a subsidiary of Foster
Wheeler Corp., with responsibility to integrate and manage acquired companies
involved in the environmental assessment, engineering and remediation business.
During the period from 1970 to 1990, Mr. Marsh was employed by The Brand
Companies, Inc., an industrial and environmental services company. While at
Brand, Mr. Marsh's principal responsibility was the reorganization and
integration of acquired companies. Many of the acquired entities were
geographically diverse and engaged in widely disparate service lines; for
example, nuclear plant inspection, underwater construction, specialty
manufacturing and environmental remediation.
BENJAMIN B. ANDREWS, 46, was elected President of the Stud Bolt and Gasket
Group effective June 1, 2000. He served as Chief Operating Officer of the
Company from August 1999 through May 2000. From April 1, 1998 through July 1999,
Mr. Andrews served as Chief Operating Officer of the Fastener division. From
April 1995 until March 31, 1998, when we acquired GHX, Incorporated, Mr. Andrews
was an employee and shareholder of GHX. Prior to that, Mr. Andrews was a
principal of The Spinnaker Group, an investment banking firm providing services
primarily to manufacturing and distribution companies.
ANDREW CORMIER, 57, was elected President of the Energy Group effective
June 1, 2000. Prior to that, he was President of Manifold Valve Services, Inc.
THOMAS C. LANDRETH, 52, was elected Chief Technology Officer of our
Engineered Products Group effective June 1, 2000. He served as our Executive
Vice President and President of our Fastener Manufacturing and Sales Division
from September 1996 through May 2000. He has served as the President of Landreth
Engineering Company since 1977.
MICHAEL SHIRKEY, 45, was elected President of the Engineered Products
Group effective June 1, 2000. Prior to that, he was President of Orbitform.
CHRISTINE A. SMITH, 47, has served as an Executive Vice President and our
Chief Financial Officer since January 1995. From April 1989 through December
1994, Ms. Smith was a principal of The Spinnaker Group, an investment banking
firm providing services primarily to manufacturing and distribution companies.
Prior to joining The Spinnaker Group, Ms. Smith, a certified public accountant,
was a Senior Manager with Ernst & Young.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
our officers and directors, and persons who own more than 10% of a registered
class of our equity securities, to file reports of ownership and changes of
ownership with the Securities and Exchange Commission. Officers, directors and
greater than 10% shareholders are required to furnish us with copies of all
Section 16(a) reports they file. Based solely on our review of the forms
received by us, we believe that during 1999, all filing requirements applicable
to our officers, directors and greater than 10% shareholders were timely met.
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BOARD AND COMMITTEE ACTIVITY: STRUCTURE AND COMPENSATION
Our operations are managed under the broad supervision of the Board of
Directors, which has ultimate responsibility for the establishment and
implementation of our general operating philosophy, objectives, goals and
policies. During 1999, the Board of Directors held five meetings. Each director
attended at least 75% of the meetings held by the Board or meetings of Board
committees of which he was a member during his tenure in 1999, except for Mr.
Anderson who attended only one of the meetings. During 1999, outside directors
received $1,500 for attendance at Board meetings and $500 for attendance at
Committee meetings, as well as reimbursement for reasonable travel expenses
incurred in attending such meetings. In 1999, no options were awarded to the
non-employee directors (Messrs. Anderson, Kenney, Madden and Thompson and Ms.
Shuler) under the Company's 1995 Non-Employee Director Stock Option Plan (the
"Director Plan") or 1998 Incentive Plan (the "Incentive Plan").
Under delegated authority, various Board functions are discharged by the
standing committees of the Board. The Audit Committee of the Board of Directors,
composed of Messrs. Madden and Kenney and Ms. Shuler, makes recommendations to
the Board of Directors concerning the selection and engagement of our
independent public accountants and reviews the scope of the annual audit, audit
fees and results of the audit. The Audit Committee also reviews and discusses
with management and the Board of Directors such matters as accounting policies,
internal accounting controls and procedures for preparation of financial
statements. The Audit Committee held two meetings in 1999.
The Compensation Committee is composed of Messrs. Madden, Thompson and
Kenney, and met twice in 1999. The Compensation Committee sets the compensation
for executive, managerial and technical personnel of the Company and administers
the Company's stock option and other compensation plans. The Board of Directors
does not have a Nominating Committee.
8
<PAGE>
OTHER INFORMATION
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The table below sets forth certain information regarding the beneficial
ownership of Common Stock at June 23, 2000, by (i) each person known to us to
beneficially own more than 5% of our Common Stock, (ii) each director, (iii)
each executive officer named in the Summary Compensation Table, and (iv) all
directors and executive officers as a group.
NUMBER OF SHARES
NAME OF BENEFICIALLY PERCENTAGE OF
BENEFICIAL OWNER OWNED(1) CLASS
---------------------------------------- ------------------- --------------
St. James Capital Partners, L.P. (2)
777 Post Oak Blvd., Suite 950
Houston, Texas 77056............... 1,049,520 7.7%
SJMB, L.P. (3)
777 Post Oak Blvd., Suite 950
Houston, Texas 77056............... 1,573,604 10.7%
Directors and Executive Officers:
Robert E. Cone (4).................. 419,785 3.1%
Thomas C. Landreth (5).............. 100,445 *
Christine A. Smith (6).............. 174,416 1.3%
Benjamin B. Andrews (7)............. 174,607 1.3%
Charles J. Anderson (8)............. 77,000 *
James W. Kenney (9)................. 15,000 *
John P. Madden (10)................. 141,473 1.0%
Barbara S. Shuler (9)............... 71,795 *
John L. Thompson (11)............... 10,000 *
Charles E. Underbrink (12).......... 19,005 *
All directors and executive officers
as a group (10 persons) (4) - (12).. 1,203,526 8.6%
--------------------------
*Less than 1%
(1) Subject to community property laws where applicable, each person has sole
voting and investment power with respect to the shares listed, except as
otherwise specified. Each person is a United States citizen. This table is
based upon information supplied by officers, directors and principal
shareholders and Schedules 13D and 13G, if any, filed with the Securities
and Exchange Commission.
(2) Includes 107,994 shares that may be acquired upon the exercise of warrants
exercisable within 60 days. These warrants are owned by St. James Capital
Corp., an affiliate of St. James Capital Partners, L.P.
(3) Includes 1,150,000 shares that may be acquired upon the exercise of warrants
exercisable within 60 days.
(4) Includes 240,000 shares that may be acquired on the exercise of stock
options exercisable within 60 days. Also includes 13,500 shares held in
trust for persons related to Mr. Cone for which Mr. Cone is the executor of
the trusts and for which Mr. Cone is deemed to have beneficial ownership.
(5) Includes 28,750 shares that may be acquired on the exercise of warrants and
stock options exercisable within 60 days.
(6) Includes 78,750 shares that may be acquired on the exercise of stock options
exercisable within 60 days.
(7) Includes 5,000 shares that may be acquired on the exercise of stock options
exercisable within 60 days.
(8) Includes 20,000 shares that may be acquired on the exercise of stock options
exercisable within 60 days.
(9) Includes 15,000 shares that may be acquired on the exercise of stock options
exercisable within 60 days.
(10)Includes 25,000 shares that may be acquired on the exercise of stock
options exercisable within 60 days. Excludes 44,325 shares owned by persons
related to Mr. Madden, but as to which Mr. Madden disclaims beneficial
ownership.
(11)Includes 10,000 shares that may be acquired on the exercise of stock options
exercisable within 60 days. Excludes a total of 1,365,130 shares and
1,257,994 warrants owned by St. James Capital Partners, L.P. and SJMB, L.P.,
though Mr. Thompson is a director and president of their general partner and
may be deemed to share voting and investment power with respect to such
shares.
(12)Includes 10,400 shares held in trust for Mr. Underbrink's daughter for which
Mr. Underbrink is the trustee of the trust and for which Mr. Underbrink is
deemed to have beneficial ownership. Excludes a total of 1,365,130 shares
and 1,257,994 warrants owned by St. James Capital Partners, L.P. and SJMB,
L.P., though Mr. Underbrink is chief executive officer and chairman of their
general partner and may be deemed to share voting and investment power with
respect to such shares.
9
<PAGE>
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE. The following table provides certain summary
information covering compensation paid or accrued during 1999, 1998 and 1997 to
our former President and Chief Executive Officer and the other executive
officers, whose annual compensation, determined as of the end of the last fiscal
year, exceeds $100,000.
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
------------------------------------- -------------------------------
SECURITIES
NAME AND UNDERLYING ALL OTHER
PRINCIPAL POSITION YEAR SALARY ($) BONUS ($) OTHER ($) OPTIONS (#) COMPENSATION ($)
-------------------------------- ------- ---------- --------- ----------- ------------ ----------------
<S> <C> <C> <C> <C> <C> <C>
Robert E. Cone (1).............. 1999 250,000 18,800 92,300(2) 90,000 0
Former President and 1998 259,153 16,000 4,800(2) 400,000(3) 0
Chief Executive Officer 1997 185,000 -- 4,000(2) -- 0
Benjamin B. Andrews (4)......... 1999 146,297 -- -- -- 0
Former Chief 1998 116,250 -- -- 5,000 0
Operating Officer 1997 -- -- -- -- 0
Thomas C. Landreth (5).......... 1999 187,000 55,470 11,000(2) -- 0
Former Executive Vice 1998 175,780 19,553 11,000(2) 10,000 0
President and President - 1997 132,455 7,070 12,000(2) 25,000 0
Fastener Manufacturing
and Sales Division
Christine A. Smith.............. 1999 160,000 18,800 35,167(2) 60,000 0
Executive Vice President 1998 160,000 16,000 6,000(2) 200,000(3) 0
and Chief Financial Officer 1997 111,833 -- 6,000(2) 25,000 0
</TABLE>
-----------------------
(1) Mr. Cone was replaced as President and Chief Executive Officer effective
June 1, 2000. He currently serves as Chairman of the Board.
(2) Fringe benefits of $4,800 for Mr. Cone, $11,000 for Mr. Landreth, and $6,000
for Ms. Smith. Also included in these totals is debt forgiveness of $87,500
for Mr. Cone and $29,167 for Ms. Smith.
(3) The Compensation Committee cancelled these options in April 1999.
(4) Mr. Andrews joined the Company on April 1, 1998. Effective June 1, 2000, he
became President of the Stud Bolt and Gasket Group of the Company.
(5) Effective June 1, 2000, Mr. Landreth became Chief Technology Officer of the
Engineered Products Group of the Company.
10
<PAGE>
OPTION GRANTS IN 1999. The following table provides certain information
with respect to options granted to the executive officers during 1999 under our
stock option plans:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------------------------------
POTENTIAL REALIZABLE VALUE AT
ASSUMED ANNUAL RATES OF STOCK
NUMBER OF SHARES OF PERCENT OF TOTAL PRICE APPRECIATION FOR OPTION
COMMON STOCK OPTIONS GRANTED TO TERMS(3)
UNDERLYING OPTIONS EMPLOYEES IN EXERCISE PRICE ------------------------------
NAME GRANTED ($) FISCAL YEAR ($/SHARE)(2) EXPIRATION DATE 5% ($) 10% ($)
---- ------------------- ------------------ -------------- --------------- --------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Robert E. Cone........ 90,000(1) 60.0% 3.19 11/02/09 180,442 457,277
Benjamin B. Andrews... --- --- --- --- --- ---
Thomas C. Landreth.... --- --- --- --- --- ---
Christine A. Smith.... 60,000(1) 40.0% 3.19 11/02/09 120,295 304,851
</TABLE>
-------------------
(1) These options were fully vested at December 31, 1999.
(2) The exercise price is the market value of the Common Stock on the date
of grant. The market value is calculated by averaging the closing bid
and ask price for the stock as quoted by the Nasdaq NMS on the date of
grant.
(3) The indicated 5% and 10% rates of appreciation are provided to comply
with Securities and Exchange Commission regulations and do not
necessarily reflect our views as to the likely trend in the stock price.
Actual gains, if any, on stock option exercises and the sale of Common
Stock holdings will depend on, among other things, the future
performance of the Common Stock and overall stock market conditions.
OPTION EXERCISES DURING 1999 AND YEAR END OPTION VALUES. The following
table sets forth information on options exercised by the executive officers
during 1999 and unexercised options and the value of in-the-money, unexercised
options held by the executive officers at December 31, 1999.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS AT
SHARES AT FISCAL YEAR END (#) FISCAL YEAR END ($)(1)
ACQUIRED ON VALUE ------------------------------------------- ----------------------------------
NAME EXERCISE (#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ------------- ------------- ------------------- ---------------------- ------------------ --------------
<S> <C> <C>
Robert E. Cone........ --- --- 240,000 --- 0 ---
Benjamin B. Andrews... --- --- 5,000 --- 0 ---
Thomas C. Landreth.... --- --- 28,750 --- 0 ---
Christine A. Smith.... --- --- 78,750 --- 0 ---
</TABLE>
---------------
(1) Represents the difference between the average of the closing bid and ask
price for the Common Stock as quoted by the Nasdaq NMS on December 31, 1999
(2 9/16), and any lesser exercise price.
EMPLOYMENT AGREEMENTS
Effective July 1, 1991, we entered into an employment agreement with Mr.
Cone, which was subsequently amended and extended. As amended, the term of
employment is for four years and automatically renews annually unless and until
terminated (i) upon the failure or inability for any reason other than illness
or temporary disability not exceeding 90 consecutive days, of Mr. Cone to devote
the lesser of (x) 40 hours per week or (y) sufficient time to perform the duties
of any corporate offices he holds; (ii) following his criminal conviction by any
state or federal court of any illegal or criminal act, except for minor traffic
violations or minor misdemeanors, (iii) due to Mr. Cone's death, or (iv) as
otherwise mutually agreed to by the parties in writing. The Employment Agreement
provides for an annual salary of $250,000.
11
<PAGE>
We have no employment agreements with any of our other executive officers.
PERFORMANCE GRAPH
The following performance graph compares the performance of our common stock to
the NASDAQ Composite Index and to the Index of NASDAQ Industrial Companies. The
graph covers the period from December 31, 1994 to December 31, 1999.
[LINEAR GRAPH PLOTTED FROM DATA IN TABLE BELOW]
NASDAQ NASDAQ
COMPOSITE INDUSTRIAL IHI
--------- ---------- -------
Dec. 31, 1994 100.000 100.000 100.000
Dec. 31, 1995 139.918 127.974 115.773
Dec. 31, 1996 171.689 147.203 312.237
Dec. 31, 1997 208.834 161.981 347.320
Dec. 31, 1998 291.597 173.021 245.580
Dec. 31, 1999 541.160 297.020 71.934
[Graph]
12
<PAGE>
COMPENSATION COMMITTEE REPORT
The Compensation Committee of the Board of Directors has furnished the
following report on executive compensation for 1999:
Under the supervision of the Committee, the Company has developed and
implemented compensation policies, plans and programs designed to enhance the
profitability of the Company, and therefore shareholder value, by aligning
closely the financial interests of the Company's senior executives with those of
its shareholders. The Committee has adopted the following objectives as
guidelines for making its compensation decisions:
- Provide a competitive total compensation package that enables the Company to
attract and retain key executives.
- Integrate all compensation programs with the Company's annual and long-term
business objectives and strategy, and focus executive behavior on the
fulfillment of those objectives.
- Provide variable compensation opportunities that are directly linked to the
performance of the Company and that align executive remuneration with the
interests of shareholders.
Executive base compensation for senior executives is intended to be
competitive with that paid in comparably situated industries and to provide a
reasonable degree of financial security and flexibility to those individuals who
the Board of Directors regards as adequately performing the duties associated
with the various senior executive positions. In furtherance of this objective,
the Committee periodically, though not necessarily annually, reviews the salary
levels of a sampling of companies that are regarded by the Committee as having
sufficiently similar financial and operational characteristics to provide a
reasonable basis for comparison. Although the Committee does not attempt to
specifically tie executive base pay to that offered by any particular sampling
of companies, the review provides a useful gauge in administering the Company's
base compensation policy. In general, however, the Committee considers the
credentials, length of service, experience, and consistent performance of each
individual senior executive when setting compensation levels.
To ensure retention of qualified management, the Company entered into an
employment agreement with its President and Chief Executive Officer. The
employment agreement established annual base salary amounts that the Committee
may increase based on the foregoing criteria.
The Incentive Plan is intended to provide key employees, including the Chief
Executive Officer and other executive officers of the Company and its
subsidiaries, with a continuing proprietary interest in the Company, with a view
to increasing the interest in the Company's welfare of those personnel who share
the primary responsibility for the management and growth of the Company.
Moreover, the Incentive Plan provides a significant non-cash form of
compensation that is intended to benefit the Company by enabling it to continue
to attract and to retain qualified personnel.
The Compensation Committee is authorized to make incentive equity awards
("Incentive Awards") under the Incentive Plan to key employees, including
officers (whether or not they are also directors), of the Company and its
subsidiaries. Although the Incentive Awards are not based on any one criterion,
the Committee will direct particular attention to management's ability to
implement the Company's strategy of geographic expansion through acquisition
followed by successful integration and assimilation of the acquired companies.
In making Incentive Awards, the Committee will also consider margin improvements
achieved through management's realization of operational efficiencies, as well
as revenue and earnings growth. During 1999, stock options to purchase 90,000
shares of Common Stock were awarded to Mr. Cone.
1999 COMPENSATION COMMITTEE OF THE BOARD OF DIRECTORS
JOHN P. MADDEN, CHAIR
JOHN L. THOMPSON
JAMES W. KENNEY
13
<PAGE>
CERTAIN TRANSACTIONS
We enter into transactions with related parties only with the approval of a
majority of the independent and disinterested directors and only on terms we
believe to be comparable to or better than those that would be available from
unaffiliated parties. In our view, all of the transactions described below meet
that standard.
In connection with the purchase of Landreth Engineering Co. ("Landreth") in
1992, we entered into a lease agreement with Scranton Acres, a general
partnership of which Mr. Thomas C. Landreth is a partner, for the Landreth
facility. The lease expires in 2002. Rental payments are $106,800 annually.
In the second quarter of 1999, we realized proceeds of $2.6 million from the
issuance of 349,580 shares of our common stock to SJMB. The shares were valued
at $7.44 per share based upon the closing market price for our stock immediately
preceding the consummation of the sale.
In July 1998, we entered into an option agreement that granted us the right
through 2003 to purchase approximately 95% of Belleli Energy S.r.L. ("Belleli").
Belleli is an Italian company that manufactures thick-walled pressure vessels
and heat exchangers, as well as designs, engineers, constructs and erects
components for desalination, electric power and petrochemical plants. Under the
terms of the option agreement, we were obligated to provide certain interim
funding to Belleli. Because of our financial condition in 1999, we could no
longer provide financial support to Belleli. In February 2000, SJMB acquired a
majority interest in Belleli from Belleli's shareholder, Impianti. As a result
of this transaction, all of our obligations with respect to Belleli have been
released and discharged. We retain a 3.5% minority interest in Belleli.
As a part of the Belleli transaction, we issued warrants to purchase 750,000
shares of our common stock to SJMB at an exercise price of $1.25 per share.
Additionally, we are obligated to reimburse SJMB for satisfying our installment
payment obligations under the option agreement of approximately $280,000.
At June 23, 2000, Mr. Robert E. Cone, our Chairman of the Board, had two
loans outstanding from us, one in the amount of $83,333 relating to personal
matters and one in the amount of $321,875 relating to the exercise of employee
stock options, plus accrued interest of $49,289. Additionally, Mr. Cone has
received advances of $21,686 for personal expenses and $50,000 for payment of
income taxes. The largest aggregate debt balance outstanding during the period
was $656,498. During 1999, the Board of Directors forgave $87,500 of this
balance and in January 2000 an additional $90,158 as compensation to Mr. Cone.
Interest rates on these loans are at the current treasury rate.
At June 23, 2000, Ms. Christine A. Smith, our Chief Financial Officer, had
two loans outstanding from us, one in the amount of $66,667 relating to personal
matters and one in the amount of $262,050 relating to the exercise of employee
stock options, plus accrued interest of $30,717. The largest aggregate debt
balance outstanding during the period was $395,468. During 1999, the Board of
Directors forgave $29,167 of this balance as compensation to Ms. Smith. Interest
rates on these loans are at the current treasury rate.
At June 23, 2000, Mr. Thomas C. Landreth, Chief Technology Officer of our
Engineered Products Group, had a loan outstanding from us in the amount of
$62,500 relating to the exercise of employee stock options, plus accrued
interest of $6,586. The largest aggregate debt balance outstanding during the
period was $69,086. The interest rate on this loan is at the current treasury
rate.
14
<PAGE>
PROPOSAL 2 - APPROVAL OF THE ISSUANCE OF THE ACQUISITION SECURITIES AND
THE CREDIT SUPPORT SECURITIES
Our Common Stock is listed on the Nasdaq NMS. Nasdaq Rule 4460 (i)(1)(D)
(the "Nasdaq 20% Rule") requires your approval before we may issue, in
connection with certain transactions (other than a public offering), securities
that are convertible into or exercisable for a number of shares of our Common
Stock equal to 20% or more of the then-outstanding shares or 20% or more of
then-outstanding voting power, at a price (or in the case of convertible
securities, at a conversion price) less than the greater of the book or market
value of our Common Stock. In addition, Nasdaq Rule 4460 (i)(1)(B) (the "Nasdaq
Control Rule") requires your approval before we may issue securities that would
result in a change of control.
Our issuance of the Acquisition Securities and the Credit Support
Securities will exceed 20% of the number of shares outstanding and the voting
power outstanding before their issuance, and SJMB and its affiliates may acquire
the underlying shares at exercise prices ranging from $1.15 to $2.00 per share,
subject to anti-dilution adjustments. As of the Record Date, the closing price
of a share of our Common Stock was $1.594 per share. The book value of our
Common Stock at March 31, 2000 was $3.29 per share. And though SJMB and its
affiliates will hold about 29.8% of our outstanding shares after they convert
Acquisition Note A and exercise the Acquisition Note Warrants (36.1% if they
fully fund, and then acquire and convert the Credit Support Securities; and up
to a maximum potential amount of 50.5% if certain other events occur), there is
no concrete test to determine the number of securities the would result in a
change of control of the Company under the Nasdaq Control Rule. Depending on the
facts and circumstances, our issuance of securities representing less than a
majority of the Company's outstanding voting power may result in a change of
control under the Nasdaq Control Rule. Therefore, we are seeking your approval
of the issuance of the Acquisition Securities and the Credit Support Securities
in order to ensure our compliance with the Nasdaq 20% Rule and the Nasdaq
Control Rule. Your approval of the issuance of the Acquisition, the Acquisition
Securities or the issuance of the Credit Support Securities is not otherwise
required as a matter of Texas law or Federal or state securities laws or under
our Certificate of Incorporation or Bylaws.
THE ACQUISITION
We have signed a letter of intent with SJMB to acquire the Orbitform
Partnership Interests and to present the Acquisition to our shareholders for
approval (the "SJMB Letter Agreement"). SJMB and its affiliate, which own the
Orbitform Partnership Interests that we are proposing to acquire, have indicated
to us that they may consider selling the Orbitform Partnership Interests to
another purchaser if you do not approve the issuance of the Acquisition
Securities and the Credit Support Securities.
We currently own 49% of Orbitform's limited partnership interests (the
"Minority Interest") through Philform, Inc. ("Philform"), our wholly owned
subsidiary, and reflect our interest through "Investment in Unconsolidated
Affiliates" on our balance sheet, and through "Earnings from Equity Investments
in Unconsolidated Affiliates" on our income statement. We acquired all of
Philform's outstanding capital stock in February 1998 and contributed Philform's
intangible assets including its business activities and trade name "Orbitform"
to Orbitform in consideration for the Minority Interest. Orbitform's general
partner is St. James Management, L.L.C., which is owned by St. James Capital
Corp. ("SJCC").
During 1999 and the first quarter of 2000, we received 100% of the taxable
income of Orbitform through our management fee arrangement with Orbitform. If we
do not obtain your approval of the issuance of the Acquisition Securities and
the Credit Support Securities, the general partner of Orbitform, and affiliate
of SJMB, has informed us that our management fee arrangement will be terminated,
resulting in our loss of the cash flow represented by 100% of the taxable income
of Orbitform.
If we do not obtain your approval of the issuance of the Acquisition
Securities and the Credit Support Securities, then we will not complete the
Acquisition or the Credit Support Agreement on the terms described in the proxy
statement. This, in turn, may result in the following:
o We would be in default of the amended credit agreement with our Senior
Lenders, which in turn would cause us to default under the Credit Support
Agreement, which is available to cure any future financial covenant
defaults that may occur under the amended credit agreement. If we were in
default under the
15
<PAGE>
Credit Support Agreement, then SJMB may elect not to cure a future
financial covenant default with our Senior Lenders, which may subject us
to more onerous conditions in our amended credit agreement, including
increased fees and interest rates. The Senior Lenders may accelerate our
senior secured debt and exercise their remedies provided in the amended
credit agreement. Alternatively, in order to come back into compliance
under the amended credit agreement, we may choose to take certain actions
that we would not otherwise consider as appropriate at that time, such as:
o We may find it necessary to sell certain assets, including some of
our existing businesses, to raise cash and pay down indebtedness. We
may realize less value for these assets than we would be otherwise
able to if they were to be retained or sold at a more opportune
time.
o We may find it necessary to raise equity capital in an amount
sufficient to offset the loss of collateral and cash flow that
Orbitform would have represented. This required infusion of equity
capital may significantly dilute our existing shareholders.
o Our short-term liquidity and results of operations would be negatively
impacted if we do not obtain the cash flow and collateral value that would
result from our 100% ownership of the Orbitform business. In 1999, for
example, Orbitform generated EBITDA, adjusted for the management fee
charged by us to Orbitform, of $2.3 million, while we were only able to
recognize $0.8 million in income as a result of our Minority Interest.
Additionally, because of our minority ownership position, Orbitform's
assets are currently excluded from our borrowing base, which supports our
borrowings under our amended credit agreement. Upon the acquisition of the
Orbitform Partnership Interests, we would be able to include the
receivables ($1.9 million as of May 31, 2000) and inventory ($2.7 million
as of May 31, 2000) of Orbitform in our borrowing base calculation
(subject to customary limitations and exclusions), representing potential
additional liquidity of about $2.8 million. Currently, Orbitform has less
than $100,000 in borrowings advanced against accounts receivable and
inventory.
o SJMB, which owns the Orbitform Partnership Interests, has indicated to us
that it may sell the Orbitform Partnership Interests to another party. The
value of our Minority Interest may be significantly diminished if SJMB
sells the Orbitform Partnership Interests to someone else.
o We may lose the services of an executive officer. Orbitform's President
has recently joined IHI as President of our Engineered Products Group and
now has responsibility over a division that generated $39.7 million in
sales for 1999 and had about $50.0 million in total assets as of March 31,
2000.
In approving the Acquisition, the Board determined that it was in the best
interests of the Company to acquire the Orbitform Partnership Interests because,
among other factors, Orbitform's manufacture of engineered fastener-setters,
described in detail below, is a strategic complement to our existing manufacture
of engineered fasteners.
The purchase price for the Orbitform Partnership Interests is comprised of
the Acquisition Notes, the Acquisition Warrants, and the forgiveness of $835,425
of debt that SJMB owes to the Company, for a total consideration of
approximately $7.8 million. See "Price Paid for the Acquisition" below.
o ACQUISITION NOTES.
- Acquisition Note A will mature on December 31, 2001 and will carry
interest at 11% that is accrued but not paid until maturity. SJMB may
convert all or any portion of the principal and accrued interest into
shares of our Common Stock at a conversion price of $1.15 per share, which
would be decreased to the lower price if we issue or sell any shares or
securities convertible into shares of our Common Stock at less than $1.15
per share, that are not issued under employee stock incentive plans or
agreements that currently exist, and that are not issued in connection
with any acquisitions we may make. Subject only to this conversion right,
we may prepay all amounts due under Acquisition Note A at any time without
penalty.
16
<PAGE>
- Events of default under Acquisition Note A are (i) our default on the
payment or mandatory prepayment of principal or interest on Acquisition
Note B; (ii) our default that is not cured within 30 days, of any covenant
contained in (a) the SJMB Letter Agreement; (b) the Acquisition Warrants;
(c) the Registration Rights Agreement covering the Acquisition Warrant
Shares; (d) either Acquisition Note; (e) our Reimbursement Agreement with
SJMB; (f) the Subordinated Security Agreement or the Subordinated Pledge
Agreement (collectively, the "Subordinated Security Agreements") that we
are giving to SJMB in connection with the Acquisition Notes and the Credit
Support Note; (iii) any representation or warranty in the Acquisition
Warrants, the Registration Rights Agreement or either Acquisition Note is
found to have been materially untrue as of the date it was made; (iv) our
default under any other debt in the aggregate principal amount of
$500,000; (v) the entering by a court of competent jurisdiction of a final
judgment against us or our properties or assets of more than $100,000 in
excess of our insurance coverage; (vi) our commencement of voluntary
bankruptcy or insolvency proceedings or our assignment for the benefit of
our creditors or admission in writing of our inability to pay our debts
generally as they become due; (vii) the entering by a court of competent
jurisdiction of involuntary bankruptcy proceedings; (viii) a change of
control, or the acquisition by any person or group other than SJMB or its
affiliates of 40% of the total voting power of our securities, that is not
cured or waived within 90 days of such change of control; and (ix) our
merger or consolidation with or into another company, or the merger or
consolidation of a significant subsidiary into another company (unless we
or another of our subsidiaries is the acquiring or surviving entity), our
dissolution, or our sale of a substantial portion of our assets to other
than one of our subsidiaries. Acquisition Note A will automatically
accelerate and become immediately due and payable on any of the events of
default described in (vi), (vii) or (ix), and SJMB has the option to
accelerate all amounts due under Acquisition Note A on the occurrence of
any other event of default described above. Acquisition Note A will be
subordinated in right of payment to all of our existing secured debt,
which totals about $70 million. Acquisition Note A will be secured by a
second lien on all of our assets on which our Senior Lenders have a first
lien - except as covered by permitted liens, our accounts receivable,
machinery, fixtures, inventory, general intangibles, etc. Acquisition Note
A is also secured by the pledge of our subsidiaries' capital stock
subordinate to our pledge to our Senior Lenders. Any event of default
under the Acquisition Notes or the Reimbursement Agreement or Subordinated
Reimbursement Notes will be an event of default under the Subordinated
Security Agreements that allow SJMB to declare all amounts due and
payable.
- Acquisition Note B contains all of the same terms as Acquisition Note A,
except that SJMB does not have the option to convert any of the principal
amount or any accrued interest thereon until June 30, 2001, and the
conversion price is $2.00 per share, subject to adjustment as described
above.
o ACQUISITION WARRANTS.
- The Acquisition Warrants will be exercisable at any time for five years
after their issuance and will contain customary anti-dilution features,
one demand registration right and unlimited piggyback registration rights.
The exercise price of the Acquisition Warrants will be $1.25 per share
(the "Exercise Price"). In lieu of paying the Exercise Price in cash, SJMB
may make a "cashless" exercise of the Acquisition Warrants and receive,
without having made any cash payments, a "net" number of shares of Common
Stock determined by a formula based on the amount by which the trading
price of the Common Stock (defined as the average of the closing prices
over the 10 trading days before the date on which the determination is
made) exceeds the Exercise Price then in effect.
BACKGROUNDS OF THE PARTIES
IHI
We were incorporated in August 1989. We own and operate a diversified
group of middle-market industrial manufacturing and distribution businesses. Our
operations are organized into four business segments: (i) fastener manufacturing
and distribution; (ii) heavy fabrication; (iii) valve manufacturing and repair
(or "energy"); and (iv) machine tool distribution. We believe our businesses are
characterized by strong market positions in niche markets, high value-added
products and services, an established and diverse customer base, experienced and
committed management, cost-efficient equipment and productions facilities with a
low sensitivity to technological
17
<PAGE>
change. Our products and services are sold to a broad customer base in the
automotive, home furnishings, petrochemical, oil and gas and various other
industrial and consumer products industries. Most of our products are
manufactured to specific technical requirements and for specific customers
orders. We believe that the diversified nature of our products, services and
end-user markets reduces the effect of operating performance fluctuations in any
one of our core business segments and limits our overall exposure to cyclical
downturns within individual industry sectors.
ENGINEERED PRODUCTS GROUP
Since its inception, IHI has expanded its business through acquisition.
Our acquisitions in what has recently been renamed our Engineered Products Group
(one of the two Groups that comprise our fastener manufacturing and distribution
segment) are summarized below:
COMPANY OR DIVISION NAME LOCATION ACQUISITION DATE
Landreth Engineering Houston, TX October 1992
Landreth-Connecticut Waterbury, CT December 1995
American Rivet Chicago, IL November 1996
Philform (49% owner of Orbitform) Jackson, MI February 1998
Ideal Products Beacon Falls, CT August 1998
These companies are engaged in the manufacture of cold formed fasteners,
threaded fastener products, fastening systems and metal components that are sold
to the appliance, home furnishings, and automotive industries through a network
of commission-based manufacturer's sales representatives directed by a national
sales manager.
Effective June 1, 2000, we launched a significant initiative to reorganize
the Engineered Products Group. We recognized that while these businesses
manufactured similar fastening products and served common and complementary
industries, the individual operating units had not been fully integrated. Our
revenue derived from these businesses decreased by $3.3 million, or 8%, on a pro
forma basis, during 1999 as compared to 1998. Cost of sales for the Engineered
Products Group increased $1.3 million, or 4%, on a pro forma basis, in 1999 as
compared to 1998. Cost of sales as a percentage of sales for the Engineered
Products Group was 89% for 1999 as compared to 79% in 1998, adversely impacting
operating margins. Meanwhile by contrast, Orbitform's revenues increased 10% in
1999 compared with 1998 and its cost of sales as a percentage of sales was 61%
in 1999 and 68% in 1998.
The reorganization of the Engineered Products Group has as its lynchpin
our acquisition of the Orbitform Partnership Interests. We believe that the
realignment of the operating companies in the Engineered Products Group and the
acquisition of product lines and markets under the leadership of new management
will result in greatly enhanced operating margins, since we presently only
supply the manufactured fastener and not the machine and systems required to set
the fastener in its end-use application. We believe that this combination will
provide us with a significant competitive advantage over those fastener
manufacturers that are not able to supply the customer with setting equipment or
systems. We believe that the Engineered Products Group will achieve higher
operating income through:
(i) the rationalization of customers and product pricing to ensure that
our profitability is optimized;
(ii) the rationalization of specific part production to the most
efficient plant for that particular part;
(iii) the effective dissemination and standardization of best
manufacturing and operating practices;
(iv) the creation of Technology Centers supporting innovation and timely
response to customers' specialized product requests; and
(v) strengthened leadership through the appointment of Mr. Michael
Shirkey (currently the President of Orbitform) to the role of
President of the Engineered Products Group and Mr. Thomas Landreth
to the role of Chief Technology Officer of the Engineered Products
Group.
During 1999, the companies identified above represented 16% of our
consolidated revenues and 11% of our gross profit. Assuming we acquire the
Orbitform Partnership Interests, the Engineered Products Group would have
represented 21% of our consolidated revenues and 22% of our gross profit, on a
pro forma basis.
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<PAGE>
ORBITFORM
Orbitform manufactures high-quality forming, fastening and assembly
systems that are sold primarily to the original equipment manufacturers in the
automotive industry. Its expertise includes orbital forming, thermo-pneumatic
staking, impact riveting, fastening and assembly systems, and roller head
forming. Its brand-name products include Orbitform orbital riveters and orbital
forming equipment, Adtech impact riveting machines and Thernuform
thermo-pneumatic staking systems.
ST. JAMES AND ITS AFFILIATES
SJMB and SJCP have provided equity and debt capital to us in connection
with a number of acquisition transactions. In 1995, SJCP provided a portion of
the financing used to acquire our fastener manufacturing business in
Connecticut. In 1996, SJCP provided a portion of the financing used to purchase
American Rivet Company, Inc. And, in February 1998, SJMB contributed $5.2
million to the capital of the OF Partnership and became our partner in the
formation of the OF Partnership, and, through that Partnership, the acquisition
of Orbitform.
DESCRIPTION OF ORBITFORM BUSINESS
PRODUCTS AND SERVICES
Orbitform is a leading designer and manufacturer of orbital rivet setting
machines and also designs and manufactures a limited line of impact rivet
setting machines. As opposed to impact riveting which secures a rivet in place
through a momentary impact on the rivet which expands the impacted end of the
rivet, orbital riveting expands the end of the rivet by applying a rotating
pressure on the end of the rivet which results in a more precise formation of
the fastened rivet. Machines may be purchased from stock or designed for a
particular application. A custom designed application may include multiple
machines. Orbitform also supplies expendable tooling for the products that it
designs and sells. Many of the rivets we sell are fastened by the type of
equipment that Orbitform produces and therefore creates an opportunity for cross
selling of our current rivet production to Orbitform customers and vice versa.
CUSTOMERS AND MARKETS
Customers of Orbitform are primarily original equipment manufacturers in
the automotive industry, which comprise about 65% of its sales. Remaining sales
are to original equipment manufacturers in a variety of other markets including
the appliance, electronics assembly, hardware and tools, and home furnishings
markets. Orbitform's manufacturing facility located in Jackson, Michigan, about
65 miles west of Detroit, is strategically located to serve the automotive
industry. About 30% of its sales are within the state of Michigan with the
remainder throughout North America.
Sales are made by both a direct sales force based out of Jackson, Michigan
and a network of 13 sales agents throughout the United States, Mexico and
Canada.
Orbitform currently has about 1500 active machines in service. No single
customer accounted for over 10% of Orbitform's sales in 1999.
SUPPLIERS AND RAW MATERIALS
The principal raw materials that Orbitform uses in its manufacturing are
steel and steel castings along with controls components. Additionally, Orbitform
uses various services such as plating and heat-treating. Almost all of
Orbitform's suppliers are located within 50 miles of its manufacturing facility,
providing a significant advantage as a result of shortened lead times to obtain
required supplies, lower costs and allowing lower levels of raw materials and
supply inventories to be maintained. To date, Orbitform has encountered no
difficulties in meeting any of its supply requirements.
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<PAGE>
COMPETITION
Orbitform is subject to competition from three competitors that are
foreign-owned, with locations in the United States and one domestic competitor.
Orbitform's management believes that machine sales revenues for each of these
competitors are comparable to or less than Orbitform's. Within its specific
niche of orbital riveting machines, management believes it has about 30% of the
domestic market.
Competition for machine sales is based upon price, availability,
flexibility and quality. Customers want a supplier with a high degree of
engineering and manufacturing competence on which they can rely. As its
customers downsize and lose some of their in-house expertise, Orbitform's
management believes it has a competitive advantage in its ability to offer
customers assistance they cannot obtain elsewhere or must otherwise obtain from
multiple sources.
BACKLOG
Backlog at Orbitform was $4 million at December 31, 1999 and $3.3 million
at May 31, 2000. This represents approximately 3 to 4 months' sales, which
management believes is the appropriate level of backlog to maintain.
REGULATION
ENVIRONMENTAL REGULATION
Orbitform is subject to extensive and changing federal, state and local
environmental laws including laws and regulations that relate to air and water
quality, impose limitations on the discharge of pollutants into the environment
and establish standards for the treatment, storage and disposal of toxic and
hazardous wastes. Stringent fines and penalties may be imposed for
non-compliance with these environmental laws. In addition, environmental laws
could impose liability for costs associated with investigating and remediating
contamination at Orbitform's facilities or at third-party facilities at which
Orbitform has arranged for the disposal or treatment of hazardous materials.
Although no assurances can be given, Orbitform believes that it is in
compliance in all material respects with all environmental laws and is not aware
of any non-compliance or obligation to investigate or remediate contamination
that could reasonably be expected to result in material liability. However, it
is possible that unanticipated factual developments could cause Orbitform to
make environmental expenditures that are significantly different from those it
currently expects. In addition, environmental laws continue to be amended and
revised to impose stricter obligations. Orbitform cannot predict the effect such
future requirements, if enacted, would have on it, although Orbitform believes
that such regulations would be enacted over time and would affect the industry
as a whole.
HEALTH AND SAFETY MATTERS
Orbitform's facilities and operations are governed by laws and
regulations, including the federal Occupational Safety and Health Act, relating
to worker health and workplace safety. Orbitform believes that appropriate
precautions are taken to protect its employees and others from workplace
injuries and harmful exposure to materials handled and managed at its
facilities. While Orbitform does not anticipate that it will be required in the
near future to expend material amounts by reason of such health and safety laws
and regulations, Orbitform is unable to predict the ultimate cost of compliance
with these changing regulations.
EMPLOYEES
Orbitform has 73 employees, all of which are located at the company
headquarters in Jackson, Michigan.
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<PAGE>
ORBITFORM RISK FACTORS
CYCLICALITY OF AUTOMOTIVE INDUSTRY
About 65% of Orbitform's sales are to the automotive industry, which is a
highly cyclical industry and dependent on, among other things, consumer
spending, international economic conditions and regulations, and policies
regarding international trade. Currently, the automotive industry is
experiencing its fourth consecutive year of sales in excess of 16 million units
in the United States. General expectations are for similar levels for the next
three years. However, with recent increases in gasoline and other energy prices,
the level of activity in the automotive industry may be adversely affected in
the near term and, therefore, may have a dampening impact on the level of
Orbitform's business activity.
Orbitform's exposure to the cyclical nature of the automotive industry is
somewhat neutralized because most of what Orbitform produces is associated with
new products. Even when the automotive industry experiences a sales decline, new
products and new options must still be introduced. Consequently, even in 1987,
1991 and 1995, which were all down years in the automotive industry, the
predecessor business to Orbitform was able to maintain or increase its level of
sales.
INTEGRATION RISK
Our integration strategy with Orbitform and the Engineered Products Group
may not succeed to the degree or in the timeframe that we expect. For example,
we may face more difficulties than we expect in integrating the respective
customer bases.
COMPETITION
Orbitform faces competition from a number of companies, some of which are
larger manufacturers or are segments or divisions of large diversified companies
with substantial financial resources. Factors that affect the competitive
environment include price, quality and customer service. Strong competition may
result in a loss of market share that in turn may result in decreased revenues
and profit margins.
DEPENDENCE ON KEY MANAGEMENT
Orbitform's success has been highly dependent on the abilities and
experience of its President, Mike Shirkey. Additionally, Mr. Shirkey has agreed
to accept an expanded role as President of the Engineered Products Group for
Industrial Holdings, Inc. If we lose the services of Mr. Shirkey, or if his
expanded duties reduce his ability to influence the operations of Orbitform, it
could have a material adverse effect on its business and results of operations.
SHAREHOLDER DILUTION
If Orbitform's financial performance and its positive impact on the
financial performance of our Engineered Products Group does not meet
expectations, then our existing shareholders may experience significant dilution
as a result of the issuance of the Acquisition Securities.
LEGAL PROCEEDINGS
From time to time, Orbitform is 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, management believes
the resolution of such uncertainties and the incurrence of such costs should not
have a material adverse effect on Orbitform's consolidated financial condition
or results of operations.
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<PAGE>
MANAGEMENT
PHILIP P. SPONSLER, 41, joined Orbitform in 2000 as General Manager. From
1998 until joining Orbitform, Mr. Sponsler was Plant Manager for Albion
Industries, Inc.'s Michigan plant, where he was responsible for all facets of
manufacturing, purchasing and quality. Prior to his employment at Albion, he was
General Manager of the US Automotive Connectors organization of Aeroquip
Corporation.
PRICE PAID FOR THE ACQUISITION
We have valued the Acquisition Warrants at $63,000, using a variation of
the Black-Scholes Option Pricing Model. When added to the Acquisition Notes and
the $835,425 of debt forgiveness, the total purchase price for the Acquisition
is about $7.8 million. The purchase price represents about a 6.6 multiple of a
51% share of 1999 adjusted EBITDA.
ACCOUNTING TREATMENT
We will treat the Acquisition as a purchase, which means we will reflect
Orbitform's assets and liabilities on our books based on their estimated fair
value when we acquire them.
OUR REASONS FOR THE ACQUISITION
We propose acquiring the Orbitform Partnership Interests because the Board
believes that its control of Orbitform and its business will provide the Company
with greater opportunities to develop and enhance markets for our engineered
fasteners and engineered fastener-setting machines, resulting in a larger
customer base and greater profile (including greater brand recognition) in the
engineered fasteners market. More specifically, we believe that customers served
by the Engineered Products Group prefer to deal with a supplier that can provide
an integrated systems solution with a high degree of engineering and
manufacturing competence on whom they can depend. That is, we believe that end
product manufacturers prefer to concentrate on a limited number of expert
component suppliers. Our acquisition of the Orbitform Partnership Interests will
address this customer preference while at the same time strengthening our
position in these markets. In addition, the Acquisition will provide us the full
benefit of Orbitform's cash flow (adjusted EBITDA of about $2.3 million in 1999)
and borrowing base collateral of about $2.8 million (based on accounts
receivable of about $1.9 million and inventory of about $2.7 million as of May
31, 2000). Additionally, we believe that Orbitform's cash flow and increased
borrowing base will put us in a substantially better position to refinance our
outstanding debt with our Senior Lenders before it comes due on January 31,
2001.
OTHER TRANSACTIONS WITH SJMB AND SJCP
In 1999, we entered into the transaction with SJMB and SJCP described in
this proxy statement under "Other Information - Certain Transactions." In June
2000, SJMB agreed, under the terms of a Limited Guaranty Agreement with our
Senior Lenders (the "Guaranty"), to guarantee up to $2.0 million of any amount
the Senior Lenders advance to us in excess of our borrowing base under our
amended credit agreement. As a condition of providing the Guaranty, we entered
into a Reimbursement Agreement with SJMB that governs the terms and conditions
of our repayment to SJMB of all amounts that SJMB pays to our Senior Lenders
under the Guaranty ("Guaranty Payments") and under the Credit Support Agreement
discussed below.
Under the Reimbursement Agreement and in consideration for the Guaranty,
we issued warrants to SJMB to purchase 400,000 shares of our Common Stock at a
price of $1.25 per share, subject to reduction to the lower price if we issue or
sell any shares or securities convertible into shares of our common stock at
less than $1.25 per share, except for certain issuances under employee stock
option plans or agreements that currently exist and in connection with future
acquisitions. In addition, we agreed to issue subordinated notes to SJMB for all
Guaranty Payments and all Credit Support Payments. All such notes and all
accrued interest thereon at 11% will be due on January 31, 2002. The events of
default are substantially the same as the events of default under the
Acquisition Notes, and the debt obligations are cross-defaulted. Likewise, such
notes and all accrued and unpaid interest thereon are convertible at any time
into shares of our Common Stock at a conversion price of $1.25 per share,
subject to reduction under the price anti-dilution provision discussed above. We
also agreed to issue to SJMB warrants to
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<PAGE>
purchase a number of shares of our common stock equal to the amount of the
Guaranty Payments multiplied by 0.25, so that if SJMB makes the full $2.0
million Guaranty Payment, we will issue 500,000 warrants to acquire shares of
our Common Stock, at a price of $1.25 per share, subject to the same price
anti-dilution adjustment described above. Those warrants will be exercisable at
any time for five years after their issuance and will contain one demand
registration right and unlimited piggyback registration rights as to all shares
underlying the warrants.
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<PAGE>
SELECTED HISTORICAL FINANCIAL INFORMATION OF IHI
We derived the following selected historical financial information for
each of the five years in the period ended December 31, 1999 and for each of the
three month periods ended March 31, 2000 and 1999 from our consolidated
financial statements. Our consolidated financial statements give retroactive
effect to our acquisitions of Whir Acquisition, Inc., GHX, Incorporated, Moores
Pump and Supply, Inc., United Wellhead Services, Inc. and Blastco under the
"pooling-of-interests" method of accounting.
In our management's opinion, the financial statements for the three-month
periods ended March 31 include all adjustments, consisting only of normal
recurring adjustments, necessary to fairly present the results of operations and
financial position for such periods. The results of operations for the three
months ended March 31, 2000 are not necessarily indicative of the results to be
expected for the full year or any future period. The following information
should be read in conjunction with our consolidated financial statements and
notes thereto included in our annual report on Form 10-K for the year ended
December 31, 1999 and in our Form 10-Q for the three month period ended March
31, 2000, each of which is included in the materials mailed to our shareholders
with this proxy statement.
<TABLE>
<CAPTION>
FOR THE
THREE MONTHS
ENDED MARCH 31,
(HISTORICAL) YEARS ENDED DECEMBER 31,(1)
(UNAUDITED) (HISTORICAL)
----------------------- --------------------------------------------------------------
2000 1999 1999(2) 1998(3) 1997(4) 1996(5) 1995(6)
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Sales .................................. $ 53,566 $ 72,325 $ 242,170 $ 218,208 $ 151,228 $ 99,405 $ 75,186
Cost of sales .......................... 43,182 57,458 202,235 168,369 111,387 75,822 57,540
--------- --------- --------- --------- --------- --------- ---------
Gross profit ........................... 10,384 14,867 39,935 49,839 39,841 23,583 17,646
Selling, general
and administrative ................. 12,759 10,494 53,479 38,311 28,837 19,264 15,441
--------- --------- --------- --------- --------- --------- ---------
Operating income (loss) ................ (2,375) 4,373 (13,544) 11,528 11,004 4,319 2,205
Income (loss) before income taxes ...... (5,467) 3,545 (26,309) 10,233 8,680 2,730 739
Income tax expense (benefit) ........... -- 1,412 (7,276) 4,099 3,477 1,025 74
--------- --------- --------- --------- --------- --------- ---------
Net income (loss) ...................... (5,467) 2,133 (19,033) 6,134 5,203 1,705 665
Distributions to shareholders .......... -- -- -- 34 130 77 68
--------- --------- --------- --------- --------- --------- ---------
Net income (loss) available to common
shareholders .......................... $ (5,467) $ 2,133 $ (19,033) $ 6,100 $ 5,073 $ 1,628 $ 597
========= ========= ========= ========= ========= ========= =========
Basic earnings (loss) per share ........ $ (0.36) $ .14 $ (1.27) $ .44 $ .44 $ .18 $ .07
Diluted earnings (loss) per share ...... $ (0.36) $ .14 $ (1.27) $ .42 $ .41 $ .17 $ .07
Weighted average number of common shares
outstanding -
Basic .............................. 15,111 14,758 14,956 14,000 11,489 9,060 8,412
Weighted average number of common shares
outstanding -
Dilutive ........................... 15,111 15,393 14,956 14,726 12,403 9,710 8,510
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
AS OF MARCH 31,
(HISTORICAL) AS OF DECEMBER 31,
(UNAUDITED) (HISTORICAL)
----------- --------------------------------------------------------------
2000 1999 1998 1997 1996 1995
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET:
Working capital ......... $ (41,903) $ (36,079) $ 10,166 $ 7,768 $ 6,036 $ 4,676
Total assets ............ 181,930 189,243 203,669 95,461 62,907 42,516
Long-term obligations (7) 8,821 9,903 30,334 13,510 9,461 7,426
Total liabilities ....... 137,488 139,639 137,756 58,137 40,439 29,501
Shareholders' equity .... 44,442 49,604 65,913 37,324 22,468 13,015
</TABLE>
--------------------------
(1) Our combinations with GHX, Moores Pump, Ameritech, and United Wellhead in
March through July 1998 and Blastco in 1999 and the combination of Blastco
and Valve Repair and Supply Company, Inc. in 1997 were accounted for as
poolings-of-interest. The selected historical financial information has been
prepared as if these companies had been combined for all periods presented.
(2) We sold Rogers Equipment in October 1999.
(3) We acquired RJ Machine in January 1998, Philform in February 1998, Beaird in
July 1998, and Ideal Products and A & B Bolt in August 1998. The results of
their operations have been included from the dates of acquisition.
(4) We acquired Lone Star in February 1997, Manifold Valve Services in March
1997, Rogers Equipment in August 1997, and Walker Bolt in November 1997.
Their results of operations have been included from the dates of
acquisition.
(5) We acquired American Rivet in November 1996 and the results of its
operations have been included from the date of acquisition.
(6) We acquired Landreth Engineering's Connecticut manufacturing facility in
December 1995 and the results of its operations have been included from the
date of acquisition.
(7) Excludes current portion of long-term obligations, other long-term
liabilities and deferred income taxes.
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<PAGE>
SELECTED HISTORICAL FINANCIAL INFORMATION OF ORBITFORM
We derived the following selected historical financial information for
each of the two years in the period ended December 31, 1999 and for each of the
three month periods ended March 31, 2000 and 1999 from Orbitform's consolidated
financial statements.
In Orbitform's management's opinion, the financial statements for the
three-month periods ended March 31 include all adjustments, consisting only of
normal recurring adjustments, necessary to fairly present the results of
operations and financial position for such periods. The results of operations
for the three months ended March 31, 2000 are not necessarily indicative of the
results to be expected for the full year or any future period. The following
data should be read in conjunction with Orbitform's consolidated financial
statements and notes thereto included in this proxy statement as "ANNEX B."
FOR THE
THREE MONTHS
ENDED MARCH 31, YEARS ENDED
(HISTORICAL) DECEMBER 31,
(UNAUDITED) (HISTORICAL)
-------------------- ---------------------
2000 1999 1999 1998(1)
-------- -------- -------- --------
(IN THOUSANDS)
OPERATING DATA:
Sales ......................... $ 3,537 $ 2,344 $ 12,023 $ 10,915
Cost of sales ................. 2,426 1,529 7,984 7,454
-------- -------- -------- --------
Gross profit .................. 1,111 815 4,039 3,461
Selling, general
and administrative (2) .... 881 455 3,505 1,524
-------- -------- -------- --------
Operating income .............. 230 360 534 1,937
Income before income taxes .... 197 324 328 1,716
Income tax expense (benefit) .. 1 3 (7) 12
-------- -------- -------- --------
Net income .................... $ 196 $ 321 $ 335 $ 1,704
======== ======== ======== ========
AS OF MARCH 31,
(HISTORICAL) AS OF DECEMBER 31,
(UNAUDITED) (HISTORICAL)
----------- ----------------------
2000 1999 1998
------- ------- -------
BALANCE SHEET DATA:
Working capital ................... $ 1,011 $ 736 $ 1,511
Total assets ...................... 11,689 12,009 11,325
Long-term obligations ............. 323 340 411
Total liabilities ................. 4,827 5,343 3,995
Partners' capital ................. 6,862 6,666 7,330
(1) The period ended December 31, 1998 represents less than a full year as
Orbitform commenced initial operations as of February 9, 1998.
(2) Included in selling, general and administrative expenses are management fees
paid to IHI of $188,000 and $1.4 million for the three months ended March
31, 2000 and for the year ended December 31, 1999, respectively. There were
no management fees paid to IHI for the three months ended March 31, 1999 or
the year ended December 31, 1998.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 COMPARED WITH THREE MONTHS ENDED MARCH
31, 1999
SALES. Sales increased $1,193,000 or 51% for the three months ended March
31, 2000 compared to the same period in 1999. This increase in sales is
primarily attributable to greater sales of custom machines rather than standard
machines. Custom machines typically have higher unit selling prices but lower
gross margin than standard machines.
COST OF SALES. Cost of sales increased $897,000 or 59% for the three
months ended March 31, 2000 compared to the same period in 1999, while cost of
sales as a percentage of sales was 69% in 2000 compared to 65% in 1999.
Although, much of the increase in cost of sales is attributable to the related
increase in sales, the increase in cost of sales as a percentage of sales is
attributable to an increase in materials cost as a percentage of sales in the
2000 period coupled with a $146,000 increase in indirect labor, benefits and
other payroll related costs. Materials costs increased as a result of a change
in the product mix as more custom machines were sold in the first quarter of
2000 compared to the first quarter of 1999. Indirect labor increased as a result
of engineering support services, which in the prior year was classified as
direct labor.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $426,000 or 94% for the three months ended
March 31, 2000 compared to the same period in 1999. This increase is primarily
attributable to the inclusion of management fees of $188,000 in 2000, charged by
us, combined with no such management fees having been charged in the comparable
1999 period. If these management fees are excluded, selling, general and
administrative expenses increased $238,000, or 52%. This increase is primarily
attributable to the increase in sales.
OTHER INCOME, NET AND INCOME TAXES. There was no significant change in
other income or income taxes between the two periods.
NET INCOME. Net income was $196,000 for the three months ended March 31,
2000 compared to $321,000 for the three months ended March 31, 1999 as a result
of the foregoing factors. This decrease in net income was primarily a result of
the management fees of $188,000 charged by us in 2000 and the 4% increase in
cost of sales as a percentage of sales, which was partially offset by the 10%
increase in sales.
YEAR ENDED DECEMBER 31, 1999 COMPARED WITH YEAR ENDED DECEMBER 31, 1998
SALES. Sales increased $1,108,000 or 10% for the year ended December 31,
1999 compared to the same period in 1998. Orbitform was acquired in February
1998 and therefore 1998 included only 11 months of operations. This increase in
sales is primarily attributable to the additional month of operations in 1999.
COST OF SALES. Cost of sales increased $530,000 or 7% for the year ended
December 31, 1999 compared to the same period in 1998, while cost of sales as a
percentage of sales was 66% in 1999 compared to 68% in 1998. Although much of
the increase in cost of sales is attributable to the related increase in sales,
the decrease in cost of sales as a percentage of sales is attributable to lower
materials cost and direct labor costs as a percentage of sales in 1999.
Materials costs and direct labor decreased as a result of a favorable product
mix in 1999. Sales in 1999 included more standard machines and fewer custom
machines than 1998. Standard machines typically have a lower unit selling price
but higher gross margin than custom machines.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $1,981,000 or 130% for year ended December 31,
1999 compared to the same period in 1998. This increase is primarily
attributable to the inclusion of management fees of $1,400,000 in 1999, charged
by us, combined with no such management fees having been charged in 1998. If
these management fees are excluded, selling, general and administrative expenses
increased $581,000 or 38%. This increase is primarily attributable to a $340,000
increase in administrative and sales salaries coupled with an increase in
commissions as a percentage of sales. Administrative and sales salaries
increased because of the addition of one salesman in 1999 and increased bonuses
to administrative personnel. Commissions as a percentage of sales increased
because of changes in the mix of sales between "house" accounts with no
commissions and sales made through commission-based sales representatives.
27
<PAGE>
OTHER INCOME, NET AND INCOME TAXES. There was no significant change in
other income or income taxes between the two periods.
NET INCOME. Net income was $335,000 for the year ended December 31, 1999
compared to $1,704,000 for the year ended December 31, 1998 as a result of the
foregoing factors. This decrease in net income was primarily a result of the
management fees of $1,400,000 charged by us in 1999 and the 7% increase in cost
of sales as a percentage of sales, which was partially offset by the 10%
increase in sales.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2000, Orbitform had partners' capital accounts of $6,862,000
and working capital of $1,011,000. At March 31, 2000, Orbitform had $200,000
outstanding under its bank line of credit, $397,000 in term notes entered into
for equipment purchases and a $2,904,000 demand note payable to us. At May 30,
2000, Orbitform had $200,000 outstanding under its bank line of credit, $385,000
in term notes entered into for equipment purchases and a $2,432,000 demand note
payable to us. Historically, Orbitform's principal liquidity requirements and
uses for cash have been for debt service, capital expenditures and working
capital financing. The principal sources for liquidity have been cash flow from
operations.
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES. For the three months
ended March 31, 2000 and the year ended December 31, 1999, net cash provided by
operating activities was $293,000 and $1,693,000, respectively, compared to the
three months ended March 31, 1999, which provided net cash of $488,000 and the
year ended December 31, 1998, which used net cash of $1,354,000. Cash was
provided for the three months ended March 31, 2000 and the year ended 1999
primarily as a result of net income coupled with non-cash depreciation and
amortization expenses. The quarter ended March 31, 2000 also included $128,000
in customer deposits. The comparable quarter in 1999 included a $101,000
reduction in customer deposits, which reduced the cash provided by operating
activities for that period. The year ended December 31, 1998 used cash in
operating activities as working capital increased through the first year of
operation of the partnership, OF Acquisition, L.P.
NET CASH USED IN INVESTING ACTIVITIES. For the three months ended March
31, 2000 and the year ended December 31, 1999, net cash used by investing
activities was $5,000 and $423,000, respectively, compared to the three months
ended March 31, 1999 and the year ended December 31, 1998, which used cash of
$43,000 and $6,541,000, respectively. Investing activity consisted of equipment
purchases except for the year ended December 31, 1998, which also includes
activity in connection with the formation of the partnership.
NET CASH USED IN (PROVIDED BY) FINANCING ACTIVITIES. For the three months
ended March 31, 2000 and the year ended December 31, 1999, net cash used in
financing activities was $304,000 and $272,000, respectively, compared to the
three months ended March 31, 1999, which used net cash of $718,000 and the year
ended December 31, 1999, which provided net cash of $8,703,000. Sources of cash
from financing activities are from borrowings under the bank line of credit.
Uses of cash are repayment of term debt, outstanding balances under the credit
line, repayment of the note payable to us, and partner distributions. The year
ended December 31, 1998 also includes activity in connection with the formation
of the partnership.
28
<PAGE>
SELECTED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following selected pro forma financial information is derived from our
unaudited pro forma combined condensed financial statements included in this
proxy statement as "ANNEX A." The table presented below should be read in
conjunction with those statements and the related notes thereto.
We are providing this information to aid you in your analysis of the
financial aspects of the acquisition of the general partnership interest and the
51% of limited partnership interests of OF Acquisition, L.P. ("Orbitform") that
we do not already own (the "Acquisition"). Additionally, effective April 1,
2000, we sold our subsidiary, Blastco Services Company ("Blastco" or the
"Disposition"). The unaudited pro forma combined condensed financial information
gives effect to the Acquisition and the Disposition as if they had occurred on
January 1, 1999 for purposes of the Operating Data and March 31, 2000 for
purposes of the Balance Sheet Data.
We are providing this information for illustrative purposes only. It does
not necessarily reflect what the results of operations or financial position of
the combined company would have been if the Acquisition and Disposition had
actually occurred on the indicated dates. This information also does not
necessarily indicate what the combined company's future operating results or
consolidated financial position will be.
PRO FORMA
-------------------------------
THREE MONTHS YEAR ENDED
ENDED MARCH 31, DECEMBER 31,
2000 1999
(PRO FORMA AS (PRO FORMA AS
ADJUSTED)(1) ADJUSTED)(1)
-------------- -------------
(IN THOUSANDS)
OPERATING DATA:
Sales ...................................... $ 53,654 $ 242,085
Cost of sales .............................. 42,072 201,555
--------- ---------
Gross profit ............................... 11,582 40,530
Selling, general
and administrative ..................... 12,750 51,908
--------- ---------
Operating income (loss) .................... (1,168) (11,378)
Income (loss) before income taxes .......... (4,158) (20,693)
Income tax provision (benefit) ............. 1 (7,282)
--------- ---------
Net income (loss) .......................... $ (4,159) $ (13,411)
========= =========
Basic earnings (loss) per share ............ $ (0.31) $ (1.00)
Diluted earnings (loss) per share .......... $ (0.31) $ (1.00)
Weighted average number of common
shares outstanding - basic .............. 13,525 13,370
Weighted average number of common
shares outstanding - dilutive .......... 13,525 13,370
29
<PAGE>
PRO FORMA
-----------------
AS OF
MARCH 31,
2000
(PRO FORMA AS
ADJUSTED)
-----------------
(IN THOUSANDS)
BALANCE SHEET DATA:
Working capital ......... $ (40,679)
Total assets ............ 177,820
Long-term obligations (1) 12,585
Total liabilities ....... 134,105
Shareholders' equity .... 43,715
--------------------------
(1) Excludes current portion of long-term obligations, other long-term
liabilities and deferred income taxes.
THE CREDIT SUPPORT AGREEMENT
o SUMMARY OF TERMS.
- SJMB and SJCP have agreed, under the terms of the Credit Support
Agreement, to advance up to $1.5 million of funds to cure future financial
covenant defaults under our amended credit agreement with our Senior
Lenders. Under the Reimbursement Agreement described above, which also
applies to all funds that SJMB and SJCP advance to us under the Credit
Support Agreement, we will issue to them the Credit Support Note and
Credit Support Warrants on the same terms described above in "Other
Transactions with SJMB."
o OUR REASONS FOR THE CREDIT SUPPORT AGREEMENT.
- In the past few fiscal quarters, we have been in default under our credit
agreement with our Senior Lenders due, among other reasons, to our failure
to comply with financial covenants. We recently revised our financial
covenants in our amended credit agreement to covenants with which
management believes we can comply. But in recognition that we may again
fail one or more financial covenants and therefore default under our
amended credit agreement, our Senior Lenders and our Board desired to have
a mechanism available to cure such defaults. Under the Credit Support
Agreement, SJMB and SJCP may elect, at their sole option, to make Credit
Support Payments. Because SJMB and SJCP will only be called on to make
Credit Support Payments if we are facing a potential financial covenant
default under our amended credit agreement, and because SJMB has already
agreed to make the Guaranty Payments, the Board recognized that
incentivizing SJMB and SJCP to make Credit Support Payments would mean
further dilution to existing shareholders.
SJMB'S MAXIMUM POTENTIAL STOCK OWNERSHIP
After SJMB fully converts Acquisition Note A and accrued interest thereon
to maturity, and fully exercises the Acquisition Warrants, SJMB and its
affiliated entities would own 5,160,130 shares, or 29.8%, of the 17,319,832 then
outstanding shares of Common Stock.
Although we do not consider this to be likely, if SJMB was required to
fund the entire $1.5 million under the Credit Support Agreement, then converted
that $1.5 million Credit Support Note, plus accrued interest thereon to
maturity, into shares of our Common Stock and exercised the Credit Support
Warrants issued to SJMB upon funding, then SJMB and its affiliates would own
6,867,130 shares, or about 36.1%, of the 19,026,832 then outstanding shares of
Common Stock.
30
<PAGE>
Although we do not consider this to be likely, if SJMB and SJCP are
required by our Senior Lenders to fully fund the Guaranty that is in place for
the benefit of our Senior Lenders, then SJMB and SJCP would receive up to an
additional 1,776,000 shares of our Common Stock, including accrued interest
thereon to maturity, and 500,000 warrants to acquire shares of our Common Stock.
If (i) SJMB exercises the other 1,257,994 warrants it already owns to purchase
our Common Stock, and (ii) SJMB and SJCP received the shares and exercised the
warrants described above relating to the funding of the Guaranty, then SJMB and
its affiliates would own a total of 10,401,124 shares, or about 46.1%, of the
22,560,826 then outstanding shares of Common Stock.
Although we plan to make every reasonable effort to prepay Acquisition
Note B to SJMB in cash within one year of its issuance, together with accrued
interest thereon, if we do not to prepay Acquisition Note B, which SJMB then
converted into shares of our Common Stock, then SJMB and its affiliates would
possibly own as much as a total of 12,461,237 shares (SJMB's and its affiliates
"maximum potential stock ownership"), or about 50.6%, of the 24,620,939 then
outstanding shares of Common Stock. In the foregoing hypothetical conversion and
exercises, we assumed there were no other issuances or redemptions of our
13,524,832 currently outstanding shares.
INTERESTS OF CERTAIN PERSONS IN THE ACQUISITION AND THE CREDIT SUPPORT AGREEMENT
In evaluating the Acquisition and the Credit Support Agreement, you should
realize that two of our seven directors may have interests that are different
from, or in addition to, your interests as shareholders. Specifically, John L.
Thompson is a director and President of SJMB, L.L.C., the general partner of
SJMB, and Charles E. Underbrink is the Chief Executive Officer and Chairman of
the Board of SJMB, L.L.C. Since they have conflicts of interest in their
positions as members of the Company's board and as officers and directors of
SJMB, L.L.C., only our directors other than Messrs. Thompson and Underbrink have
voted to approve the Acquisition. All references to the "Board" in "Proposal 2 -
Approval of the Issuance of the Acquisition Securities and the Credit Support
Securities" contained in this proxy statement mean IHI's board members other
than Messrs. Thompson and Underbrink.
REGULATORY APPROVALS
Other than our obligation to notify Nasdaq that we will issue securities
that are convertible into more than 10% of our currently outstanding shares, we
are not aware of any other required regulatory approvals for the Acquisition.
RECORD DATE
You may vote at the Annual Meeting if you owned shares of Common Stock at
the close of business on June 23, 2000.
VOTE REQUIRED TO APPROVE THE ISSUANCE OF THE ACQUISITION SECURITIES AND THE
CREDIT SUPPORT SECURITIES
The approval of the issuance of the Acquisition Securities and the Credit
Support Securities would usually require the affirmative vote of a majority of
the shares present in person or by proxy at the meeting and entitled to vote.
Since the Acquisition Securities and the Credit Support Securities, if and when
converted and exercised, may result in SJMB and its affiliates effectively
controlling us, the Board of Directors is requiring that Proposal 2 receive the
affirmative vote of a majority of the shares present in person or by proxy at
the meeting and entitled to vote, in addition to the 1,365,130 shares that SJMB
and its affiliated entities currently own. Therefore while SJMB and its
affiliated entities' votes on Proposal 2 will be counted, Proposal 2 must
receive, in addition to those votes, a majority of our other shares that are
present in person or by proxy at the meeting and entitled to vote. Abstentions
and broker non-votes have the effect of negative votes. Shareholders must vote
"For" or "Against" or "Abstain" with respect to the issuance of all of the
Acquisition Securities and the Credit Support Securities.
31
<PAGE>
OUR RECOMMENDATION TO SHAREHOLDERS
In approving the Acquisition and the Credit Support Agreement, the Board
considered various factors, including but not limited to:
o whether we would be acquiring the Orbitform Partnership Interests at a
fair price and whether the terms of the Acquisition are fair and
reasonable. At about a 6.6 multiple of a 51% share of 1999 EBITDA,
adjusted for our management fee, the Board believes the price we would pay
for the Orbitform Partnership Interests is fair;
o Orbitform's strong business, current financial condition and results of
operations, including its healthy cash flow, and its positive impact on
our borrowing base;
o Orbitform's strategic fit with IHI's Engineered Products Group;
o our belief that we know Orbitform's business and industry and are already
effectively managing and operating Orbitform, and the resulting
compatibility of operations and management cultures, particularly
Orbitform's strong emphasis on employee and customer relations;
o the management skills and talent of the President of Orbitform that
will be utilized to manage the entire Engineered Products Group;
o SJMB's willingness to accept our notes with subordinated lien positions
and an 18-month balloon maturity as part of the purchase price for the
Orbitform Partnership Interests;
o the potential that the issuance of the Acquisition Securities and the
Credit Support Securities may result in SJMB and its affiliates
effectively controlling us;
o the potential that the granting of a subordinated lien position to SJMB of
certain of our assets may impair our ability to obtain additional
subordinated debt in the near future;
o the increased probability that we will be able to refinance our
indebtedness with our Senior Lenders with the addition of Orbitform's
assets and cash flow; and
o all of the possible adverse consequences that may occur if we don't
acquire the Orbitform Partnership Interests as described under "The
Acquisition."
In determining that the Acquisition was advisable and in the best
interests of IHI's shareholders, the Board considered the factors above as a
whole and did not assign specific or relative weights to those factors.
Individual directors may have given different weights to different factors.
Moreover, this discussion of reasons for the Acquisition is not intended to be
exhaustive.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR APPROVAL OF THE ISSUANCE OF THE
ACQUISITION SECURITIES AND THE CREDIT SUPPORT SECURITIES AND THE SHARES OF
COMMON STOCK ISSUABLE ON THE FULL CONVERSION OF THE ACQUISITION NOTES AND THE
CREDIT SUPPORT NOTE AND THE FULL EXERCISE OF THE ACQUISITION WARRANTS AND THE
CREDIT SUPPORT WARRANTS.
32
<PAGE>
COST OF SOLICITATION
We will bear the costs of the solicitation of our proxies in connection
with the Annual Meeting. In addition to the use of mail, proxies may be
solicited by our directors, officers and regular employees, in person or by
telephone or other means of communication. Our directors, officers and employees
will not be compensated additionally for such solicitation but may be reimbursed
for out-of-pocket expenses in connection with the solicitation. We are also
making arrangements with brokerage houses and other custodians, nominees and
fiduciaries for the delivery of solicitation material to the beneficial owners
of Common Stock and we will reimburse those brokers, custodians, nominees and
fiduciaries for their reasonable out-of-pocket expenses in connection with such
services.
RELATIONSHIP WITH INDEPENDENT AUDITORS
Deloitte & Touche LLP served as our independent auditors for the fiscal
year ended December 31, 1999 and has been selected to serve as our independent
auditors for the 2000 calendar year. No representative of Deloitte & Touche LLP
is expected to be present at the Annual Meeting.
SHAREHOLDER PROPOSALS
We must receive proposals by shareholders intended to be presented at the
2001 Annual Meeting of Shareholders at 7135 Ardmore, Houston, Texas 77054,
Attention: Barbara S. Shuler, for inclusion in our proxy statement and form of
proxy relating to that meeting no later than [March 16], 2001.
A shareholder who wishes to make a proposal at the 2001 Annual Meeting of
Shareholders without complying with the requirements of Rule 14a-8 (and
therefore without including the proposal in the Company's proxy materials) must
notify us of that proposal by [May 30], 2001. If a shareholder fails to timely
give notice, then the persons named as proxies in the proxy cards solicited by
our Board of Directors for that meeting will be entitled to vote the proxy cards
held by them regarding that proposal, if properly raised at the meeting, in
their discretion or as directed by our management.
OTHER MATTERS
Management is not aware of any other matters to be presented for action at
the Annual Meeting. However, if any other matter is properly presented, it is
the intention of the persons named in the enclosed proxy form to vote in
accordance with their best judgment on such other matters.
ANNUAL REPORT AND FINANCIAL INFORMATION
A copy of our 1999 Annual Report to Shareholders, which includes a copy of
our Annual Report on Form 10-K for the year ended December 31, 1999, and a copy
of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2000,
accompanies this proxy statement. This proxy statement incorporates by reference
the information in such Annual Report and Form 10-Q.
The Securities and Exchange Commission (the "SEC") allows us to
"incorporate by reference" information in this proxy statement, which means that
we can disclose important information to you by referring you to another
document filed separately with the SEC. The information incorporated by
reference is deemed to be part of this proxy statement, except for any
information superseded by information in, or incorporated by reference in, this
proxy statement. This proxy statement incorporates by reference the documents
set forth above that were previously filed with the SEC. These documents contain
important information about our company and its finances.
Documents that we file under Sections 13(a), 13(c), 14 or 15(d) of the
Exchange Act after the date of this proxy statement and before the date of the
Annual Meeting will be deemed incorporated by reference in this proxy statement
from the dates these documents are filed. All information appearing in this
proxy statement is qualified in its entirety by the information and financial
statements (including notes) that appear in the documents incorporated by
reference in this proxy statement. We will furnish to any shareholder without
charge, a copy of those documents
33
<PAGE>
on written request to Deborah Bonefas, Industrial Holdings, Inc., 7135 Ardmore,
Houston, Texas 77054. We will also provide a copy of any exhibits to those
documents on their written request and payment of a nominal fee.
Nothing contained in the Annual Report is to be regarded as proxy
soliciting material or as a communication by means of which a solicitation of
proxies is to be made.
BY ORDER OF THE BOARD OF DIRECTORS
CHRISTINE A. SMITH
Chief Financial Officer and
Executive Vice President
July [14], 2000
34
<PAGE>
ANNEX A
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
Effective April 1, 2000, we sold Blastco Services Company ("Blastco"), our
subsidiary engaged in refinery demolition, to two of its former shareholders. In
this transaction, we received $2 million in cash, $0.8 million in notes
receivable and 1.5 million shares of our common stock that the purchasers had
received in the original acquisition of Blastco on January 1, 1999.
Additionally, we retained inventory and equipment with a book value of $0.3
million. This transaction is referred to as the Disposition in the accompanying
unaudited pro forma combined condensed financial statements.
In June 2000, we entered into an agreement with St. James to acquire the
general partnership interest and the 51% of limited partnership interests of OF
Acquisition, L.P. ("Orbitform") that we do not already own. This transaction is
referred to as the Acquisition in the accompanying unaudited pro forma combined
condensed financial statements.
The unaudited pro forma combined condensed statement of operations gives
effect to the Acquisition and the Disposition as if they had occurred on January
1, 1999. The unaudited pro forma combined condensed balance sheet gives effect
to the Acquisition and the Disposition as if they had occurred on March 31,
2000. The unaudited pro forma combined condensed financial statements have been
prepared from: (i) the audited historical consolidated financial statements of
Industrial Holdings, Inc. ("IHI") as reported in its annual report on Form 10-K
for the year ended December 31, 1999 and the unaudited historical financial
statements of IHI as reported in its quarterly report on Form 10-Q for the three
months ended March 31, 2000; and (ii) the audited historical financial
statements of Orbitform for the year ended December 31, 1999 and the unaudited
historical financial statements of Orbitform for the three months ended March
31, 2000.
We based the pro forma adjustments that give effect to the events
described above on currently available information and upon certain assumptions
that we believe are reasonable. We have accounted for the Acquisition using the
purchase method and the resulting assets acquired and liabilities assumed are
recorded at their estimated fair market values at the date of acquisition. The
adjustments included in the unaudited pro forma combined condensed financial
statements reflect our preliminary assumptions and estimates based on available
information. We cannot assure you that the actual adjustments will not vary from
the estimated adjustments reflected in the unaudited pro forma combined
condensed financial statements.
The unaudited pro forma combined condensed financial statements may not be
indicative of the results of operations that would have occurred or that may be
obtained in the future if the transactions described above had occurred as
presented in such financial statements. In addition, our future results may vary
form the results reflected in these statements because of general economic
conditions, fluctuations in oil and gas prices, labor costs, competition and
other factors, many of which are beyond our control.
A-1
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
AS OF MARCH 31, 2000
<TABLE>
<CAPTION>
PRO FORMA
IHI DISPOSITION
HISTORICAL ADJUSTMENTS PRO FORMA
------------- ------------- -------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............ $ 1,167,807 $ $ 1,167,807
Accounts receivable - trade, net ..... 32,794,283 (1,085,382)(e) 31,708,901
Cost and estimated earnings in
excess of billings ................ 4,161,587 (1,646,278)(e) 2,515,309
Inventories .......................... 39,558,092 (3,545,983)(e) 36,012,109
Employee advances .................... 59,397 59,397
Notes receivable, current portion .... 4,122,379 300,000(e) 4,422,379
Other current assets ................. 2,233,959 (651,306)(e) 1,582,653
------------- ------------- -------------
Total current assets ........... 84,097,504 (6,628,949) 77,468,555
Property and equipment, net .......... 63,666,447 (6,096,722)(e) 57,569,725
Notes receivable, less current portion 324,651 324,651
Investment in unconsolidated
affiliates ........................ 532,321 1,041,758 (e) 1,574,079
Other assets ......................... 7,534,158 (10,000)(e) 7,524,158
Goodwill and other intangible
assets, net ....................... 25,774,970 (213,207)(e) 25,561,763
------------- ------------- -------------
Total assets ......................... $ 181,930,051 $ (11,907,120) $ 170,022,931
============= ============= =============
<CAPTION>
PRO FORMA
ORBITFORM ACQUISITION PRO FORMA
HISTORICAL ADJUSTMENTS COMBINED
------------- ------------- -------------
<S> <C> <C> <C>
Cash and cash equivalents ............ $ 861,041 $ (861,041)(d) $ 1,167,807
Accounts receivable - trade, net ..... 1,885,945 33,594,846
Cost and estimated earnings in
excess of billings ................ 2,515,309
Inventories .......................... 2,701,456 38,713,565
Employee advances .................... 59,397
Notes receivable, current portion .... 460,071
(835,425)(c)
(2,903,940)(a)
(222,943)(a)
Other current assets ................. 67,158 1,649,811
------------- ------------- -------------
Total current assets ........... 5,515,600 (4,823,349) 78,160,806
Property and equipment, net .......... 1,488,929 (446,234)(c) 58,612,420
Notes receivable, less current portion -- -- 324,651
Investment in unconsolidated
affiliates ........................ -- (1,574,079)(b)
Other assets ......................... -- -- 7,524,158
Goodwill and other intangible
assets, net ....................... 4,684,792 2,951,180(c) 33,197,735
------------- ------------- -------------
Total assets ......................... $ 11,689,321 $ (3,892,482) $ 177,819,770
============= ============= =============
</TABLE>
See accompanying notes to unaudited pro forma
combined condensed financial statements.
A-2
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
AS OF MARCH 31, 2000
<TABLE>
<CAPTION>
PRO FORMA
IHI DISPOSITION
HISTORICAL ADJUSTMENTS PRO FORMA
------------- ------------- -------------
<S> <C> <C> <C>
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable ..................... $ 43,188,560 $ (2,000,000)(e) $ 41,188,560
Note payable to IHI ...............
Accounts payable - trade .......... 25,887,929 (1,479,905)(e) 24,408,024
Billings in excess of costs
and estimated earnings ......... 1,067,935 (336,680)(e) 731,255
Accrued expenses .................. 12,371,759 (1,463,286)(e) 10,908,473
Current portion of long-term
obligations .................... 43,483,963 (2,769,789)(e) 40,714,174
------------- ------------- -------------
Total current liabilities ... 126,000,146 (8,049,660) 117,950,486
Long-term obligations, less
current portion ................ 8,821,360 (3,136,613)(e) 5,684,747
Convertible notes .................
Other long-term liabilities ....... 2,360,972 2,360,972
Deferred income tax liability ..... 305,741 305,741
------------- ------------- -------------
Total liabilities .............. 137,488,219 (11,186,273) 126,301,946
Shareholders' equity
Common stock ................... 151,110 151,110
Additional paid-in capital ..... 54,305,383 54,305,383
Retained earnings (deficit) .... (9,334,903) 2,550,825 (e) (6,784,078)
Treasury stock ................. (3,271,672)(e) (3,271,672)
Notes receivable from officers . (679,758) (679,758)
------------- ------------- -------------
Total shareholders' equity .. 44,441,832 (720,847) 43,720,985
------------- ------------- -------------
Total liabilities and shareholders'
equity ......................... $ 181,930,051 $ (11,907,120) $ 170,022,931
============= ============= =============
<CAPTION>
PRO FORMA
ORBITFORM ACQUISITION PRO FORMA
HISTORICAL ADJUSTMENTS COMBINED
------------- ------------- -------------
<S> <C> <C> <C>
LIABILITIES AND
SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable ..................... $ 200,000 $ (264,330)(d) $ 40,924,230
(200,000)(d)
Note payable to IHI ............... 2,903,940 (2,903,940)(a)
Accounts payable - trade .......... 897,319 (222,943)(a) 25,082,400
Billings in excess of costs
and estimated earnings ......... 244,116 975,371
Accrued expenses .................. 185,102 50,000(c) 11,143,575
Current portion of long-term
obligations .................... 74,200 (74,200)(d) 40,714,174
------------- ------------- -------------
Total current liabilities ... 4,504,677 (3,615,413) 118,839,750
Long-term obligations, less
current portion ................ 322,511 (322,511)(d) 5,684,747
Convertible notes ................. 6,900,000(c) 6,900,000
Other long-term liabilities ....... 2,360,972
Deferred income tax liability ..... 13,825(c) 319,566
------------- ------------- -------------
Total liabilities .............. 4,827,188 2,975,901 134,105,035
Shareholders' equity
Common stock ................... 151,110
Additional paid-in capital ..... 4,626,000 63,750(c) 54,369,133
(450,000)(b)
(4,176,000)(c)
Retained earnings (deficit) .... 2,236,133 (1,182,054)(c) (6,854,078)
(1,124,079)(b)
Treasury stock ................. (3,271,672)
Notes receivable from officers . (679,758)
------------- ------------- -------------
Total shareholders' equity .. 6,862,133 (6,868,383) 43,714,735
------------- ------------- -------------
Total liabilities and shareholders'
equity ......................... $ 11,689,321 $ (3,892,482) $ 177,819,770
============= ============= =============
</TABLE>
See accompanying notes to unaudited pro forma
combined condensed financial statements.
A-3
<PAGE>
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2000
<TABLE>
<CAPTION>
PRO FORMA
IHI DISPOSITION
HISTORICAL ADJUSTMENTS PRO FORMA
------------ ------------ ------------
<S> <C> <C> <C>
Sales ............................... $ 53,566,249 $ (3,449,852)(f) $ 50,116,397
Cost of sales ....................... 43,181,794 (3,364,581)(f) 39,817,213
------------ ------------ ------------
Gross profit ........................ 10,384,455 (85,271) 10,299,184
Selling, general and administrative
expenses ......................... 12,759,739 (805,035)(f) 11,954,704
------------ ------------ ------------
Income (loss) from operations ....... (2,375,284) 719,764 (1,655,520)
Earnings from equity invest-
ments in unconsolidated affiliates 20,109 20,109
Other income (expense):
Interest expense .................... (3,093,693) 232,894(e) (2,860,799)
Interest income ..................... 66,152 66,152
Other income (expense), net ......... (84,030) 371,912(f) 287,882
------------ ------------ ------------
Total other income (expense) .. (3,111,571) 604,806 (2,506,765)
------------ ------------ ------------
Income (loss) before income taxes ... (5,466,746) 1,324,570 (4,142,176)
Income tax expense ..................
------------ ------------ ------------
Net income (loss) available to
common shareholders .............. $ (5,466,746) $ 1,324,570 $ (4,142,176)
============ ============ ============
Basic earnings (loss) per share ..... $ (0.36) $ (0.31)
Diluted earnings (loss) per share ... $ (0.36) $ (0.31)
Weighted average number of
common shares outstanding-basic ..... 15,111,097 13,524,832
Weighted average number of
common shares outstanding-dilutive .. 15,111,097 13,524,832
<CAPTION>
PRO FORMA
ORBITFORM ACQUISITION PRO FORMA
HISTORICAL ADJUSTMENTS COMBINED
------------ ------------ ------------
<S> <C> <C> <C>
Sales ............................... $ 3,537,687 $ $ 53,654,084
Cost of sales ....................... 2,426,459 (65,676)(b) 42,071,684
(84,000)(a)
(22,312)(c)
------------ ------------ ------------
Gross profit ........................ 1,111,228 171,988 11,582,400
Selling, general and administrative
expenses ......................... 880,852 65,676 (b) 12,750,122
36,890 (d)
(188,000)(a)
------------ ------------ ------------
Income (loss) from operations ....... 230,376 257,422 (1,167,722)
Earnings from equity invest-
ments in unconsolidated affiliates (20,109)(a)
Other income (expense):
Interest expense .................... (43,112) 31,956 (a) (3,050,549)
11,156 (e)
(189,750)(e)
Interest income ..................... 4,523 (31,956)(a) 38,719
Other income (expense), net ......... 5,161 (188,000)(a) 21,043
(84,000)(a)
------------ ------------ ------------
Total other income (expense) .. (33,428) (450,594) (2,990,787)
------------ ------------ ------------
Income (loss) before income taxes ... 196,948 (213,281) (4,158,509)
Income tax expense .................. 1,050 1,050
------------ ------------ ------------
Net income (loss) available to
common shareholders .............. $ 195,898 $ (213,281) $ (4,159,559)
============ ============ ============
Basic earnings (loss) per share ..... $ (0.31)
Diluted earnings (loss) per share ... $ (0.31)
Weighted average number of
common shares outstanding-basic ..... 13,524,832
Weighted average number of
common shares outstanding-dilutive .. 13,524,832
</TABLE>
See accompanying notes to unaudited pro forma
combined condensed financial statements.
A-4
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
PRO FORMA
IHI DISPOSITION
HISTORICAL ADJUSTMENTS PRO FORMA
------------- ------------- -------------
<S> <C> <C> <C>
Sales ............................... $ 242,169,863 $ (12,107,675)(f) $ 230,062,188
Cost of sales ....................... 202,235,366 (7,969,480)(f) 194,265,886
------------- ------------- -------------
Gross profit ........................ 39,934,497 (4,138,195) 35,796,302
Selling, general and administrative
expenses ......................... 53,478,894 (4,096,930)(f) 49,381,964
Income (loss) from operations ....... (13,544,397) (41,265) (13,585,662)
Earnings (losses) from equity invest-
ments in unconsolidated affiliates (5,951,603) 6,007,643 (f) 56,040
Other income (expense):
Interest expense .................... (9,722,774) 603,287 (e) (9,119,487)
Interest income ..................... 377,521 377,521
Other income, net ................... 2,532,298 (1,011,500)(f) 1,520,798
------------- ------------- -------------
Total other income (expense) ........ (6,812,955) (408,213) (7,221,168)
------------- ------------- -------------
Income (loss) before income taxes ... (26,308,955) 5,558,165 (20,750,790)
Income tax expense (benefit) ........ (7,275,665) (7,275,665)
------------- ------------- -------------
Net income (loss) available to
common shareholders .............. $ (19,033,290) $ 5,558,165 $ (13,475,125)
============= ============= =============
Basic earnings (loss) per share ..... $ (1.27) $ (1.01)
Diluted earnings (loss) per share ... $ (1.27) $ (1.01)
Weighted average number of
common shares outstanding-basic ..... 14,956,113 13,369,848
Weighted average number of
common shares outstanding-dilutive .. 14,956,113 13,369,848
<CAPTION>
PRO FORMA
ORBITFORM ACQUISITION PRO FORMA
HISTORICAL ADJUSTMENTS COMBINED
------------- ------------- -------------
<S> <C> <C> <C>
Sales ............................... $ 12,023,460 $ -- $ 242,085,648
Cost of sales ....................... 7,983,840 (262,699)(b) 201,555,487
(95,540)(c)
(336,000)(a)
------------- ------------- -------------
Gross profit ........................ 4,039,620 694,239 40,530,161
Selling, general and administrative
expenses ......................... 3,505,186 262,699 (b) 51,907,771
(1,400,000)(a)
157,922 (d)
Income (loss) from operations ....... 534,434 1,673,618 (11,377,610)
Earnings (losses) from equity invest-
ments in unconsolidated affiliates (56,040)(a)
Other income (expense):
Interest expense .................... (216,082) 159,756 (a) (9,878,487)
56,326 (e)
(759,000)(e)
Interest income ..................... 9,578 (159,756)(a) 227,343
Other income, net ................... 345 (1,186,000)(a) 335,143
------------- ------------- -------------
Total other income (expense) ........ (206,159) (1,888,674) (9,316,001)
------------- ------------- -------------
Income (loss) before income taxes ... 328,275 (271,096) (20,693,611)
Income tax expense (benefit) ........ (6,500) (7,282,165)
------------- ------------- -------------
Net income (loss) available to
common shareholders .............. $ 334,775 $ (271,096) $ (13,411,446)
============= ============= =============
Basic earnings (loss) per share ..... $ (1.00)
Diluted earnings (loss) per share ... $ (1.00)
Weighted average number of
common shares outstanding-basic ..... 13,369,848
Weighted average number of
common shares outstanding-dilutive .. 13,369,848
</TABLE>
See accompanying notes to unaudited pro forma
combined condensed financial statements.
A-5
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED
CONDENSED FINANCIAL STATEMENTS
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
(a) To eliminate the intercompany receivable/payable balances between IHI and
Orbitform.
(b) To eliminate our 49% investment in Orbitform included in the historical
balance sheet of IHI.
(c) To record the Acquisition. The excess of the total purchase price over the
allocation of fair value to the net assets will be recorded as goodwill,
which is calculated based on the following assumptions:
Issuance of convertible notes to St. James(1) .... $6,900,000
Value of warrants issued to St. James(2) ......... 63,750
Forgiveness of note receivable from St. James .... 835,425
Estimated expenses attributable to the Acquisition 50,000
----------
Total purchase price ............................. 7,849,175
Fair market value of net assets acquired ......... 4,897,995
----------
Goodwill (3) ..................................... $2,951,180
==========
(1) The convertible notes consist of (i) one note that is convertible into
3,000,000 shares of IHI Common stock ($1.15 per share) and (ii) a second
note that is convertible into 1,725,000 shares of IHI Common stock
($2.00 per share). IHI estimates that the current fair value of the
underlying common stock is $1.09 per share.
(2) Warrants to purchase 300,000 shares of IHI Common stock at $1.25 per
share, valued at an estimated fair market value of approximately $.21 a
share.
(3) The goodwill recorded will be amortized over an estimated remaining
useful life of 18 years.
(d) The cash acquired from the Acquisition will be used to repay existing
indebtedness of Orbitform of $596,711 and to reduce IHI's outstanding
balance on its line of credit of $264,330.
(e) To record the Disposition, including the elimination of the assets and
liabilities sold and to reflect the application of the sales proceeds.
Cash(1) ..................... $ 2,000,000
Notes receivable ............ 800,000
Less: valuation allowance ... (500,000)
Common stock(2) ............. 3,271,672
-----------
Sales proceeds .............. 5,571,672
===========
Net book value of assets sold 3,020,847
-----------
Gain on sale of Blastco(3) .. $ 2,550,825
===========
(1) Pursuant to an agreement with IHI's lender, the cash proceeds of
$2,000,000 were delivered directly to the lender to reduce the
outstanding balance on IHI's line of credit.
(2) As part of the Disposition transaction, IHI will receive 1,586,265
shares of its common stock. Such common stock will be recorded as
treasury stock valued at an assumed market price of $2.06 per share.
(3) IHI expects to record a gain on the Disposition during the quarter ended
June 30, 2000.
A-6
<PAGE>
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
(a) To eliminate transactions with Orbitform included in the historical
financial statements of IHI with respect to (i) the lease agreement and the
management agreement between IHI and Orbitform, (ii) interest receivable on
a note between IHI and Orbitform, and (iii) the equity in earnings of IHI's
49% ownership interest in Orbitform.
(b) To reclassify amortization expense of Orbitform to conform with IHI's
classification.
(c) To record depreciation expense adjustments to the historical amounts related
to the application of purchase accounting applied to the Acquisition and the
corresponding change in fair value of property and equipment.
(d) To record amortization expense adjustments to the historical amounts related
to the goodwill recorded in connection with the Acquisition over its
estimated remaining useful life of 18 years.
(e) To adjust historical interest expense for obligations incurred and retired
as a result of the Acquisition and for the reduction in IHI's obligations
attributable to the proceeds from the Disposition. Interest expense
adjustments are as follows:
YEAR ENDED THREE MONTHS
DECEMBER 31, ENDED
1999 MARCH 31, 2000
---------------------------
Orbitform acquisition:
Convertible note ................... $6,900,000 $6,900,000
Interest rate ...................... 11% 11%
---------- ----------
Total ........................... $ (759,000) $ (189,750)
========== ==========
Blastco sale:
Proceeds received used to repay debt $2,000,000 $2,000,000
Interest rate ...................... 9% 11%
---------- ----------
Subtotal ........................... 180,000 55,000
Historical interest expense
on debt assumed by purchaser ...... 423,287 177,894
---------- ----------
Reduction in interest as a
result of the Blastco sale ........ $ 603,287 $ 232,894
========== ==========
(f) To eliminate the historical results of operations of Blastco in connection
with the Disposition.
A-7
<PAGE>
ANNEX B
OF ACQUISITION, L.P.
FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1999 AND
INITIAL PERIOD FROM DATE OF INCEPTION, FEBRUARY 9, 1998,
TO DECEMBER 31, 1998
WITH
REPORT OF CERTIFIED PUBLIC ACCOUNTANTS
B-1
<PAGE>
TABLE OF CONTENTS
PAGE
----
REPORT OF CERTIFIED PUBLIC ACCOUNTANTS.................................. B-3
FINANCIAL STATEMENTS
Balance Sheets.................................................... B-4
Statements of Income and Partners' Capital........................ B-5
Statements of Cash Flows.......................................... B-6
Notes to Financial Statements..................................... B-7
B-2
<PAGE>
REPORT OF CERTIFIED PUBLIC ACCOUNTANTS
To the Partners
OF Acquisition, L.P.
Houston, Texas
We have audited the accompanying balance sheets of OF Acquisition, L.P. (a
limited partnership) as of December 31, 1999 and 1998, and the related
statements of income and partners' capital and cash flows for the year ended
December 31, 1999 and the initial period from date of inception, February 9,
1998, to December 31, 1998. These financial statements are the responsibility of
the management of OF Acquisition, L.P. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of OF Acquisition, L.P. as of
December 31, 1999 and 1998, and the results of operations and cash flows for the
year ended December 31, 1999 and the initial period from date of inception,
February 9, 1998, to December 31, 1998 in conformity with generally accepted
accounting principles.
KUHL & SCHULTZ, P.C.
CERTIFIED PUBLIC ACCOUNTANTS
February 24, 2000
B-3
<PAGE>
OF ACQUISITION, L.P.
BALANCE SHEETS
DECEMBER 31
<TABLE>
<CAPTION>
ASSETS
MARCH 31,
1999 1998 2000
----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C>
CURRENT ASSETS
Cash .................................. $ 407,493 $ 808,752 $ 861,041
Accounts receivable ................... 2,506,170 1,901,002 1,885,945
Prepaid expenses ...................... 45,681 37,772 67,158
Inventory ............................. 2,779,079 2,348,051 2,701,456
----------- ----------- -----------
Total Current Assets .................. 5,738,423 5,095,577 5,515,600
----------- ----------- -----------
MACHINERY AND EQUIPMENT - AT COST ....... 1,720,768 1,297,730 1,725,301
Less accumulated depreciation ......... 200,372 81,043 236,372
----------- ----------- -----------
Net Machinery and Equipment ........ 1,520,396 1,216,687 1,488,929
----------- ----------- -----------
OTHER ASSETS
Intangible assets - net of amortization 4,750,469 5,013,168 4,684,792
----------- ----------- -----------
$12,009,288 $11,325,432 $11,689,321
=========== =========== ===========
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES
Accounts payable ...................... $ 713,689 $ 509,734 $ 897,319
Accrued expenses ...................... 641,365 307,814 185,102
Customer deposits - deferred income ... 115,958 100,540 244,116
Bank line of credit ................... 500,000 0 200,000
Current portion of long - term debt ... 74,200 74,808 74,200
Note payable - partner ................ 2,957,567 2,591,358 2,903,940
----------- ----------- -----------
Total Current Liabilities .......... 5,002,779 3,584,254 4,504,677
----------- ----------- -----------
LONG-TERM DEBT - NET OF CURRENT
PORTION .............................. 340,274 410,718 322,511
----------- ----------- -----------
PARTNERS' CAPITAL ....................... 6,666,235 7,330,460 6,862,133
----------- ----------- -----------
$12,009,288 $11,325,432 $11,689,321
=========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
B-4
<PAGE>
OF ACQUISITION, L.P.
STATEMENTS OF INCOME AND PARTNERS' CAPITAL
YEAR ENDED DECEMBER 31, 1999 AND
INITIAL PERIOD FROM DATE OF INCEPTION,
FEBRUARY 9, 1998 TO DECEMBER 31, 1998
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
1999 1998 2000 1999
------------ ------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C>
NET SALES ................... $ 12,023,460 $ 10,914,775 $ 3,537,687 $ 2,344,161
COST OF SALES ............... 7,983,840 7,453,772 2,426,459 1,529,200
------------ ------------ ------------ ------------
GROSS PROFIT ................ 4,039,620 3,461,003 1,111,228 814,961
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES .. 3,505,186 1,524,135 880,852 454,674
------------ ------------ ------------ ------------
INCOME FROM OPERATIONS ...... 534,434 1,936,868 230,376 360,287
OTHER INCOME (EXPENSES)
Interest income .......... 9,578 30,162 4,523 5,432
Interest expense ......... (216,082) (261,730) (43,112) (44,237)
Other .................... 345 11,160 5,161 2,692
------------ ------------ ------------ ------------
(206,159) (220,408) (33,428) (36,113)
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES .. 328,275 1,716,460 196,948 324,174
PROVISION FOR CITY INCOME TAX 6,500 (12,000) 1,050 3,000
------------ ------------ ------------ ------------
NET INCOME .................. 334,775 1,704,460 195,898 321,174
PARTNERS' CAPITAL
Beginning of period ...... 7,330,460 0 6,666,235 7,330,460
Capital contributed ...... 1,000 5,626,000 0 0
Distribution to partner .. (1,000,000) 0 0 (1,000,000)
------------ ------------ ------------ ------------
End of period ............ $ 6,666,235 $ 7,330,460 $ 6,862,133 $ 6,651,634
============ ============ ============ ============
</TABLE>
See accompanying notes to financial statements.
B-5
<PAGE>
OF ACQUISITION, L.P.
STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1999 AND
INITIAL PERIOD FROM DATE OF INCEPTION
FEBRUARY 9, 1998 TO DECEMBER 31, 1998
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31,
1999 1998 2000 1999
----------- ----------- ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES
Net income ..................................... $ 334,775 $ 1,704,460 $ 195,898 $ 321,174
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization ............. 382,028 321,850 101,677 83,200
Gain on asset sale ........................ 0 (11,183) 0 0
Change in operating assets and liabilities:
Accounts receivable .................. (605,168) (1,901,002) 620,225 125,978
Prepaid expenses ..................... (7,910) (37,772) (21,477) (4,773)
Inventory ............................ (431,028) (2,348,051) 77,623 (300,053)
Accounts payable ..................... 203,955 509,734 183,630 262,624
Accrued expenses ..................... 1,801,261 307,814 (523,972) 100,427
Customer deposits .................... 15,418 100,540 128,158 (100,540)
----------- ----------- ----------- -----------
Net cash provided by (used in)
operating activities ........................... 1,693,331 (1,353,610) 761,762 488,037
----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING
ACTIVITIES
Purchase of fixed assets ....................... (423,037) (1,300,017) (4,534) (42,591)
Proceeds from asset sale ....................... 0 13,470 0 0
Acquired goodwill .............................. 0 (5,200,000) 0 0
Capitalized organization costs ................. 0 (53,975) 0 0
----------- ----------- ----------- -----------
Net cash used in investing
activities ..................................... (423,037) (6,540,522) (4,534) (42,591)
----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING
ACTIVITIES
Partners capital contribution -
(distribution), net ......................... (999,000) 5,626,000 0 (1,000,000)
Proceeds from bank borrowing-
net of current year payments ................ 428,947 485,526 (317,763) 282,237
Proceeds from partner borrowing-
net of current year payments ................ (1,101,500) 2,591,358 14,083 0
----------- ----------- ----------- -----------
Net cash provided by (used in)
financing activities ........................... (1,671,553) 8,702,884 (303,680) (717,763)
----------- ----------- ----------- -----------
NET INCREASE (DECREASE)
IN CASH ........................................ (401,259) 808,752 453,548 (272,317)
CASH AT BEGINNING OF PERIOD ....................... 808,752 0 407,493 808,752
----------- ----------- ----------- -----------
CASH AT END OF PERIOD ........................... $ 407,493 $ 808,752 $ 861,041 $ 536,435
=========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
B-6
<PAGE>
OF ACQUISITION, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
OF Acquisition, L.P. (the "Company") is a manufacturer of orbital
riveting machines. Machines sold are from stock specifications or custom
built to customer specifications. The Company operates out of one plant
in Jackson, Michigan.
Inventories are valued at the lower of cost (first-in, first-out basis)
or market. Market is considered as the net realizable value.
Machinery and equipment are stated at cost. Depreciation is computed on
the straight-line method. Estimated useful lives are as follows:
Machinery 15 years
Computer equipment 5 years
Office furniture 7 years
Vehicles 5 years
The Company has elected to amortize intangible assets of goodwill and
organization costs over 20 years on the straight-line method.
NOTE 2 - INVENTORIES
Inventories consisted of the following:
MARCH 31,
1999 1998 2000
---------- ---------- ----------
(Unaudited)
Raw material and supplies $ 105,775 $ 77,704 $ 88,332
Work in process and
finished goods ........ 1,355,047 979,576 1,197,743
Component parts ......... 1,318,257 1,290,771 1,415,381
---------- ---------- ----------
$2,779,079 $2,348,051 $2,701,456
========== ========== ==========
NOTE 3 - MACHINERY AND EQUIPMENT
The following components of machinery and equipment are stated at
historical costs.
MARCH 31,
1999 1998 2000
---------- ---------- ----------
(Unaudited)
Machinery and equipment $1,459,229 $1,189,342 $1,467,363
Office equipment ....... 206,541 70,000 202,940
Vehicles ............... 38,388 38,388 38,388
Leasehold improvements . 16,610 0 16,610
---------- ---------- ----------
1,720,768 1,297,730 1,725,301
Accumulated depreciation 200,372 81,043 236,372
---------- ---------- ----------
$1,520,396 $1,216,687 $1,488,929
========== ========== ==========
B-7
<PAGE>
OF ACQUISITION, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 4 - INTANGIBLE ASSETS
Intangible assets consist of the following:
MARCH 31,
1999 1998 2000
---------- ---------- ----------
(Unaudited)
Goodwill ................. $5,200,000 $5,200,000 $5,200,000
Organization costs ....... 53,975 53,975 53,975
---------- ---------- ----------
5,253,975 5,253,975 5,253,975
Allowance for amortization 503,506 240,807 569,183
---------- ---------- ----------
$4,750,469 $5,013,168 $4,684,792
========== ========== ==========
NOTE 5 -NOTE PAYABLE - PARTNER
Demand note payable to partner dated February 7, 1998 bearing interest of
8.5% per year.
MARCH 31,
1999 1998 2000
---------- ---------- ----------
(Unaudited)
$2,889,857 $2,591,358 $2,903,940
========== ========== ==========
NOTE 6 - LONG-TERM DEBT
Note payable to Citizens Bank payable in monthly installments of $8,717
including interest at 7.98%. Note is secured by equipment.
MARCH 31,
1999 1998 2000
-------- -------- --------
(Unaudited)
Balance due .............. $414,474 $485,526 $396,711
Less current portion ..... 74,200 74,808 74,200
-------- -------- --------
Long-term debt ........... $340,274 $410,718 $322,511
======== ======== ========
Principal maturities of long-term debt in each of the next five years and
thereafter are as follows:
2000 $ 74,200
2001 80,343
2002 86,994
2003 94,196
2004 78,741
Thereafter 0
--------
$414,474
========
NOTE 7 - PENSION PLAN
The Company sponsors a salary reduction 401(k) pension plan covering
substantially all employees. Company contributions to this plan amounted
to $39,980 and $34,636 in 1999 and 1998, respectively.
B-8
<PAGE>
OF ACQUISITION, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 8 - RELATED PARTY TRANSACTIONS
MARCH 31,
1999 1998 2000
---------- ---------- ----------
(Unaudited)
Demand note payable to partner $2,957,567 $2,591,359 $2,903,940
---------- ---------- ----------
Interest payable to partner .. $ 0 $ 17,781 $ 99,368
---------- ---------- ----------
Equipment rent paid to partner $ 96,000 $ 88,000 $ 24,000
---------- ---------- ----------
Building rent paid to partner $ 240,000 $ 180,000 $ 60,000
---------- ---------- ----------
NOTE 9 - CASH FLOW INFORMATION
Cash paid for interest and income taxes:
MARCH 31,
1999 1998 2000
-------- -------- --------
(Unaudited)
Interest ........... $166,154 $243,949 $ 11,453
======== ======== ========
Income taxes ....... $ 5,062 $ 0 $ 0
======== ======== ========
NOTE 10-CREDIT RISK
The Company is required by SFAS No. 105 to disclose significant
concentrations of credit risk regardless of the degree of such risk.
Financial instruments which potentially subject the company to
concentration of credit risk consist principally of temporary cash
investments and trade receivables.
The Company places its temporary cash investments with
high-credit-quality financial institutions. Although, such cash balances
exceed the federally insured limits at certain times during the year they
are, in the opinion of management, subject to minimal risk.
The Company has established policies for extending credit and assessing
bad debts based upon factors surrounding the credit risk of specific
customers, historical trends and other information. In the opinion of
management, concentrations of credit risk with respect to trade
receivables are limited due to the credit worthiness of customers.
NOTE 11-USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results are likely to
differ from those estimates, but management does not believe such
differences will materially affect the Company's financial position,
results of operations or cash flows.
B-9
<PAGE>
INDEX TO EXHIBITS
EXHIBIT PAGE
NUMBER NUMBER IDENTIFICATION OF EXHIBIT
-- C-1 Preliminary Copy of Form of Proxy Card
4.1 D-1 Form of $3,450,000 Convertible Promissory Note A
4.2 E-1 Form of $3,450,000 Convertible Promissory Note B
4.3 F-1 Form of Warrant
10.1 G-1 OF Letter Agreement with Exhibits
10.2 H-1 Optional Credit Support Agreement
10.3 I-1 Reimbursement Agreement with Exhibits
10.4 J-1 Subordinated Pledge Agreement
10.5 K-1 Second Amendment to Amended and Restated
Credit Agreement
10.6 L-1 Consent of Independent Certified
Public Accountants
EX-1
<PAGE>
[PRELIMINARY COPY OF FORM OF PROXY CARD]
INDUSTRIAL HOLDINGS, INC.
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
FOR THE ANNUAL MEETING OF SHAREHOLDERS TO BE HELD AUGUST 14, 2000
The undersigned shareholder of Industrial Holdings, Inc. (the "Company")
hereby appoints Michael N. Marsh and Christine A. Smith, or either one or both
of them, attorneys and proxies of the undersigned, each with full power of
substitution, to vote on behalf of the undersigned at the Annual Meeting of
Shareholders of INDUSTRIAL HOLDINGS, INC. to be held at the Company's principal
offices at 7135 Ardmore, Houston, Texas, 77054, on August 14, 2000, at 10:00
a.m. (Houston time), and at any adjournments of said meeting, all of the shares
of common stock in the name of the undersigned or which the undersigned may be
entitled to vote.
1. [ ] The election as Class III directors of Robert E. Cone, Charles E.
Underbrink and Barbara S. Shuler. Instructions: to withhold
authority to vote for any individual nominee, write that nominee's
name on the line provided below.
-------------------------------------------------------------
[ ] FOR all nominees listed above (except as marked to the contrary)
[ ] WITHHOLD AUTHORITY to vote for all nominees listed above
2. The approval of the issuance (i) to SJMB, L.P. in connection with the
Acquisition of: (a) two 11% subordinated promissory notes in the aggregate
principal amount of $6,900,000, convertible into shares of our Common
Stock (the "Acquisition Notes"), (b) warrants to purchase 300,000 shares
of Common Stock (the "Acquisition Warrants"), (c) at least 4,725,000
shares of Common Stock on the full conversion of the Acquisition Notes,
together with accrued interest thereon to maturity; and (d) 300,000 shares
of Common Stock on the full exercise of the Acquisition Warrants; and (ii)
to SJMB and SJCP, in connection with their providing up to $1,500,000 of
funding to us under an Optional Credit Support Agreement with our Senior
Lenders (the "Credit Support Agreement"): (a) an 11% promissory note of up
to a maximum principal amount of $1,500,000, convertible into shares of
our Common Stock (the "Credit Support Note"), (b) on the full conversion
of the Credit Support Note, at least 1,200,000 shares of our Common Stock
(the "Credit Support Note Shares"), (c) up to 375,000 warrants to acquire
shares of our Common Stock, depending on the actual amount of funding
under the Credit Support Agreement (the "Credit Support Warrants"), and
(d) on the exercise of the Credit Support Warrants, up to 375,000
underlying shares of Common Stock.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. In their discretion, on such other matters as may properly come before the
meeting; hereby revoking any proxy or proxies heretofore given by the
undersigned.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
C-1
<PAGE>
INDUSTRIAL HOLDINGS, INC.
THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS
FOR THE ANNUAL MEETING OF SHAREHOLDERS TO BE HELD AUGUST 14, 2000
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE PROPOSALS ABOVE AND IF NO
SPECIFICATION IS MADE, THE SHARES WILL BE VOTED FOR SUCH PROPOSALS.
The undersigned hereby acknowledges receipt of the Notice of Annual
Meeting of Shareholders and the proxy statement furnished herewith.
Dated: ___________________________, 2000
----------------------------------------
Shareholder's Signature
----------------------------------------
Shareholder's Signature
Signature should agree with name
printed hereon. If stock is held in the name
of more than one person, EACH joint owner
should sign. Executors, administrators,
trustees, guardians, and attorneys should
indicate the capacity in which they sign.
Attorneys should submit powers of attorney.
PLEASE SIGN AND RETURN IN THE ENCLOSED ENVELOPE.
C-2
