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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED
MARCH 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 000-19580
INDUSTRIAL HOLDINGS, INC.
(exact name of registrant as specified in its charter)
TEXAS 76-0289495
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
7135 ARDMORE, HOUSTON, TEXAS 77054
(Address of principal executive offices, including zip code)
(713) 747-1025
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE.
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
TITLE OF EACH CLASS
COMMON STOCK, $.01 PAR VALUE
CLASS B REDEEMABLE WARRANT
CLASS C REDEEMABLE WARRANT
CLASS D REDEEMABLE WARRANT
Indicate by check mark whether the registrant (i) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (ii) has been subject to such
filing requirements for the past 90 days. Yes [ ] [X] No
The aggregate market value of common stock held by non-affiliates of the
registrant was $16,224,926 at June 9, 2000. At that date, there were 15,111,097
shares of common stock outstanding.
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<PAGE>
INDUSTRIAL HOLDINGS, INC.
INDEX
PAGE NO.
PART I FINANCIAL INFORMATION
Item 1 Financial Statements (unaudited)
Consolidated Balance Sheets at March 31, 2000
and December 31, 1999 ............................1
Consolidated Statements of Operations for the
Three Months ended March 31, 2000 and 1999 .......2
Consolidated Statements of Cash Flows for the
Three Months ended March 31, 2000 and 1999 .......3
Notes to Consolidated Financial Statements..........4
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations....10
Item 3 Quantitative and Qualitative Disclosures about
Market Risk......................................22
PART II OTHER INFORMATION
Item 1. Legal Proceedings..................................23
Item 2. Changes in Securities (no response required)
Item 3. Defaults upon Senior Securities....................23
Item 4. Submission of Matters to a Vote of
Security Holders (no response required)
Item 5. Other Information (no response required)
Item 6. Exhibits and reports on Form 8-K (None)............24
i
<PAGE>
PART I
FINANCIAL INFORMATION
INDUSTRIAL HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
2000 1999
------------- -------------
ASSETS (unaudited)
Current assets:
Cash and equivalents ......................... $ 1,167,807 $ 1,738,244
Accounts receivable - trade, net ............. 32,794,283 38,510,825
Cost and estimated earnings in excess
of billings ................................ 4,161,587 3,704,496
Inventories .................................. 39,558,092 38,259,523
Employee advances ............................ 59,397 59,397
Notes receivable, current portion ............ 4,122,379 4,175,180
Other current assets ......................... 2,233,959 4,701,563
------------- -------------
Total current assets ..................... 84,097,504 91,149,228
Property and equipment, net .................. 63,666,447 64,706,601
Notes receivable, less current portion ....... 324,651 1,119,778
Investment in unconsolidated affiliates ...... 532,321 (1,005,120)
Other assets ................................. 7,534,158 7,172,425
Goodwill and other intangible assets, net .... 25,774,970 26,099,794
------------- -------------
Total assets ............................... $ 181,930,051 $ 189,242,706
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable ................................ $ 43,188,560 $ 46,192,562
Accounts payable - trade ..................... 25,887,929 24,687,805
Billings in excess of costs and estimated
earnings ................................... 1,067,935 2,170,095
Accrued expenses ............................. 12,371,759 11,410,494
Current portion of long-term obligations ..... 43,483,963 42,766,929
------------- -------------
Total current liabilities ............... 126,000,146 127,227,885
Long-term obligations, less current portion .. 8,821,360 9,902,936
Other long-term liabilities .................. 2,360,972 2,202,566
Deferred income tax liability ................ 305,741 305,741
------------- -------------
Total liabilities ...................... 137,488,219 139,639,128
------------- -------------
Shareholders' equity:
Preferred stock $.01 par value, 7,500,000
shares authorized, no shares issued or
outstanding
Common stock $.01 par value,
50,000,000 shares authorized, 15,111,097
shares issued and outstanding .......... 151,110 151,110
Additional paid-in capital ................ 54,305,383 54,200,383
Retained deficit .......................... (9,334,903) (3,868,157)
Notes receivable from officers ............ (679,758) (879,758)
------------- -------------
Total shareholders' equity ........... 44,441,832 49,603,578
------------- -------------
Total liabilities and shareholders'
equity ............................. $ 181,930,051 $ 189,242,706
============= =============
See notes to unaudited consolidated financial statements
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<PAGE>
INDUSTRIAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
THREE MONTHS ENDED MARCH 31,
2000 1999
------------ ------------
Sales ............................. $ 53,566,249 $ 72,324,728
Cost of sales ..................... 43,181,794 57,458,031
------------ ------------
Gross profit ...................... 10,384,455 14,866,697
Selling, general and administrative
expenses ....................... 12,759,739 10,493,392
------------ ------------
Income (loss) from operations ..... (2,375,284) 4,373,305
------------ ------------
Earnings from equity investments
in unconsolidated affiliates..... 20,109 563,131
Other income (expense):
Interest expense ............... (3,093,693) (1,995,745)
Interest income ................ 66,152 74,682
Other income (expense), net .... (84,030) 529,280
------------ ------------
Total other income (expense) ...... (3,111,571) (1,391,783)
------------ ------------
Income (loss) before income taxes . (5,466,746) 3,544,653
Income tax expense ................ -- 1,411,518
------------ ------------
Net income (loss) ................. ($ 5,466,746) $ 2,133,135
============ ============
Basic earnings (loss) per share ... $ (.36) $ .14
Diluted earnings (loss) per share . $ (.36) $ .14
Weighted average number of common
shares outstanding - basic ...... 15,111,097 14,758,122
Weighted average number of common
shares outstanding - dilutive.... 15,111,097 15,393,132
See notes to unaudited consolidated financial statements
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INDUSTRIAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
2000 1999
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ............................. ($5,466,746) $ 2,133,135
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization ........... 1,976,004 1,821,958
Equity in earnings of unconsolidated
affiliates ............................ (20,109) (563,131)
Deferred income tax benefit ............. -- (829)
Deferred compensation expense ........... 158,406 19,665
Deferred gain on demolition contract .... -- (250,000)
Changes in assets and liabilities:
Accounts receivable ..................... 5,716,542 (763,939)
Employee advances ....................... -- (574)
Inventories ............................. (1,298,569) (1,278,567)
Notes receivable ........................ 976,928 543,357
Other assets ............................ 1,753,780 (3,125,540)
Accounts payable ........................ 1,200,124 (1,762,431)
Accrued expenses and other .............. (140,895) 4,255,665
----------- -----------
Net cash provided by
operating activities ............ 4,855,465 1,028,769
Cash flows from investing activities:
Purchase of property and equipment ............ (1,209,025) (3,392,083)
Proceeds from disposals of property and
equipment, net .............................. 597,999 75,583
Investment in unconsolidated affiliates ....... (1,446,332) (500,051)
----------- -----------
Net cash used in investing ....... (2,057,358) (3,816,551)
Cash flows from financing activities:
Net borrowing (repayment) under
revolving line of credit .................... (3,004,002) 2,303,991
Proceeds from the issuance of long-term
obligations ................................. 1,925,067 246,637
Principal payments on long-term obligations ... (2,289,609) (1,776,436)
Proceeds from issuance of common stock ........ -- 85,717
----------- -----------
Net cash provided by (used in) by financing
activities ............................... (3,368,544) 859,909
----------- -----------
Net decrease in cash and cash equivalents ........ (570,437) (1,927,873)
Cash and cash equivalents, beginning of period ... 1,738,244 3,412,411
----------- -----------
Cash and cash equivalents, end of period ......... $ 1,167,807 $ 1,484,538
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid for:
Interest ................................... $ 722,600 $ 1,803,683
Income taxes ............................... -- --
Supplemental schedule of non-cash investing
and financing activities:
Issuance of warrants ....................... 157,500 --
</TABLE>
See notes to unaudited consolidated financial statements
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<PAGE>
INDUSTRIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MARCH 31, 2000
1. BASIS OF PRESENTATION AND MANAGEMENT PLANS
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and
Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring accruals)
considered necessary for fair presentation have been included. These
financial statements include the accounts of Industrial Holdings, Inc.
and subsidiaries (the "Company"). All significant intercompany
balances have been eliminated in consolidation. Operating results for
the three months ended March 31, 2000 are not necessarily indicative
of the results that may be expected for the year ended December 31,
2000. For further information, refer to the consolidated financial
statements and footnotes thereto included in the Company's annual
report on Form 10-K for the year ended December 31, 1999. Certain
amounts have been reclassified from previous periods to conform to the
current presentation.
The accompanying unaudited consolidated financial statements have been
prepared on a going concern basis, which contemplated the realization
of assets and the satisfaction of liabilities in the normal course of
business. As disclosed in the financial statements, the Company had
current liabilities in excess of current assets of $36,078,657 and
$41,902,642 and debt in default at December 31, 1999 and March 31,
2000, respectively. In addition, the Company incurred a net loss of
$19,033,290 for the year ended December 31, 1999 and $5,466,746 for
the three-month period ended March 31, 2000. These conditions raise
substantial doubt about the Company's ability to continue as a going
concern. The accompanying unaudited consolidated financial statements
do not include any adjustments that may result from the outcome of
this uncertainty.
The Company has a $15 million note payable to EnSerCo, L.L.C.
("EnSerCo") that became due on November 15, 1999. The Company was
granted an extension of the due date through January 31, 2000. On
January 31, 2000, the Company was unable to repay the amounts borrowed
and defaulted on the note payable. EnSerCo has not called this note
due; however, it retains the right to do so. The Company has held
preliminary discussions with EnSerCo to modify the terms of the
original note agreement, which include extending the due date.
Although the Company and EnSerCo have exchanged non-binding term
sheets that outline certain concepts that might be included in an
amendment to the credit agreement in the future, including (i)
increasing the principal amount to reflect unpaid accrued interest to
date, (ii) extending the maturity date to February 28, 2001, and (iii)
increasing the interest rate to a 15% annual rate, payable at
maturity; no agreement has been reached between the parties.
Furthermore, no assurances can be given that the Company will be able
to successfully conclude the arrangement being considered.
The Company has a $55 million revolving line of credit with Comerica
Bank-Texas, National Bank of Canada and Hibernia Bank (the "Senior
Lenders"), which expires in June 2001. The Company was not in
compliance with certain financial covenants at each of the required
quarterly reporting dates during 1999 and 2000. The Company requested
and received waivers from the Senior Lenders for the March 31, 1999
and June 30, 1999 reporting periods; however, the Company did not seek
waivers for the reporting dates of September 30, 1999, December 31,
1999 or March 31, 2000. The Company is in violation of the credit
agreement and although the Senior Lenders have not expressed the
intent to call this obligation, the Senior Lenders retain the right to
do so. The Company has held preliminary discussions with the Senior
Lenders to modify the terms and covenants of the credit agreement. The
Company has reached an agreement in principle with the Senior Lenders
that would (i) accelerate maturity to January 31, 2001, (ii) reduce
the revolving credit line to the lesser of $50 million or the defined
borrowing base, (iii) increase the interest rate to prime plus 3%,
payable weekly and (iv) modify the financial covenants to require
maintenance of minimum consolidated tangible net worth,
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<PAGE>
and earnings before interest, taxes, depreciation and amortization
("EBITDA")-to-debt-service ratio as well as require limitations on
capital expenditures. In addition, the Senior Lenders would waive all
prior violations under the credit agreement. However, no assurances
can be given that the Company will be able to successfully conclude
the arrangement being considered.
In connection with the proposed credit agreement amendment, St. James
Capital Corp. or its affiliates (collectively, "St. James") would be
required to provide a $2 million guaranty to the Senior Lenders in
order to secure any over-advances that may occur under the terms of
the proposed credit agreement amendment. In exchange for providing
this guaranty, the Company plans to (i) issue to St. James warrants to
acquire 400,000 shares of the Company's common stock at $1.25 per
share (valued at $84,000), and (ii) forgive a $0.35 million note
receivable from St. James. In addition, if the guaranty is funded, the
Company plans to issue to St. James up to 500,000 warrants to acquire
its common stock at $1.25 per share (valued at up to $105,000),
depending on the amount of the funding.
The Company has a $9.5 million term note with Heller Financial, Inc.
("Heller"), which expires on September 30, 2004. The Company was not
in compliance with certain financial covenants at each of the required
quarterly reporting dates during 1999 and 2000. The Company requested
and received waivers from Heller through the September 30, 1999
reporting period; however, the Company did not seek waivers for the
reporting dates of December 31, 1999 or March 31, 2000. The Company is
in violation of the credit agreement and although Heller has not
expressed the intent to call this obligation, it retains the right to
do so. The Company has held preliminary discussions with Heller to
obtain waivers for the events of non-compliance; however, no
assurances can be given that the Company will be able to successfully
obtain the required consents.
In July 1998, the Company acquired Beaird Industries, Inc. ("Beaird")
from Trinity Industries, Inc. (the "Seller") for $35.0 million in cash
and receivables and a $5.0 million note to the Seller. Under the
purchase agreement, the Seller assumed all liabilities and retained
certain accounts receivable of Beaird. The Company believes that it is
entitled to receive $2.2 million of excess purchase price paid to the
Seller under the purchase agreement resulting from liabilities
incurred by the Company in connection with the acquisition, and $1.84
million in other claims arising from breaches of representation and
warranties. On July 15, 1999, the first installment of $1.8 million
was due on the Seller note. It is the Company's position that it has
offset the amount owed under the purchase agreement against this
principal and interest payment. Although the Seller agrees that the
Company is owed an amount, in January 2000, the Seller filed suit
against the Company in the 134th Judicial District in the District
Court of Dallas County, Texas, in a suit styled TRINITY INDUSTRIES,
INC. V. INDUSTRIAL HOLDINGS, INC. In the lawsuit, the Seller alleged
that the Company defaulted on the $5 million note payment and asserted
that the amount it owes is not sufficient to pay the first principal
and interest payment and additionally cannot be offset against the $5
million note payment. In response, in February 2000, the Company filed
a counterclaim alleging the Seller's fraud in failing to disclose, and
in misrepresenting, certain facts about Beaird. The Company and Seller
are currently in discussions to resolve this disagreement. The
principal is classified as current portion of long-term obligations at
March 31, 2000.
The Company's continuation as a going concern is dependent upon its
ability to generate sufficient cash flow to meet its obligations on a
timely basis, to obtain the refinancing discussed above or new
financing as may be required.
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<PAGE>
2. INVENTORY
Inventory consists of the following:
MARCH 31 DECEMBER 31
2000 1999
----------- -----------
Raw materials $11,397,195 $11,791,300
Finished goods 23,467,273 22,087,638
Other ........ 4,693,624 4,380,585
----------- -----------
$39,558,092 $38,259,523
=========== ===========
3. REPORTABLE SEGMENTS
The Company's determination of reportable segments considers the
strategic operating units under which the Company sells various types
of products and services to various customers. The Company evaluates
performance based on income from operations excluding certain
corporate costs not allocated to the segments. Intersegment sales are
not material. Substantially all sales are from domestic sources and
all assets are held in the United States.
<TABLE>
<CAPTION>
HEAVY
FASTENERS FABRICATION ENERGY MACHINES CORPORATE CONSOLIDATED
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
AS OF AND FOR THE
THREE MONTHS ENDED:
MARCH 31, 2000
Sales ........... $ 30,644,222 $ 7,964,062 $ 11,970,264 $ 2,987,701 $ 53,566,249
Income (loss)
from operations 1,337,784 (1,482,269) (13,207) 56,654 $ (2,274,246) (2,375,284)
Total assets .... 99,498,296 35,866,261 35,355,815 3,261,771 7,947,908 181,930,051
MARCH 31, 1999
Sales ........... $ 34,259,693 $ 25,594,204 $ 11,126,325 $ 1,344,506 $ 72,324,728
Income (loss)
from operations 2,151,022 707,743 2,137,746 (97,889) $ (525,317) 4,373,305
DECEMBER 31, 1999
Total assets .... 98,908,496 44,986,642 33,132,805 2,621,617 10,593,146 189,242,706
</TABLE>
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<PAGE>
4. EARNINGS (LOSS) PER SHARE
The following table presents information necessary to calculate basic
and diluted earnings (loss) per share for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
2000 1999
------------ ------------
<S> <C> <C>
EARNINGS (LOSS) FOR BASIC AND DILUTED
COMPUTATION:
Net income (loss) used for basic earnings per share ($ 5,466,746) $ 2,133,135
Interest on convertible debt securities, net of tax 43,828
------------ ------------
Net income (loss) available to common shareholders . ($ 5,466,746) $ 2,176,963
============ ============
BASIC EARNINGS (LOSS) PER SHARE:
Weighted average common shares outstanding ......... 15,111,097 14,758,122
============ ============
Basic earnings (loss) per share .................... $ (.36) $ .14
============ ============
DILUTED EARNINGS (LOSS) PER SHARE:
Weighted average common shares outstanding ......... 15,111,097 14,758,122
Shares issuable from assumed conversion of common
share options, warrants granted and debt conversion -- 635,010
------------ ------------
Weighted average common shares outstanding,
as adjusted ....................................... 15,111,097 15,393,132
============ ============
Diluted earnings (loss) per share .................. $ (.36) $ 0.14
============ ============
</TABLE>
Stock options and warrants were not included in the loss per share
computation for 2000 as their effect was anti-dilutive due to the loss
recorded.
5. DEBT
Certain of the Company's debt arrangements contain requirements as to
the maintenance of minimum levels of working capital and net worth,
minimum ratios of debt to cash flow, cash flow to certain fixed
charges, liabilities to tangible net worth, current ratio, and capital
expenditures. At December 31, 1999 and March 31, 2000, the Company was
not in compliance with several of these covenants. Because of the
losses incurred, the Company did not meet certain required levels of
working capital and net worth, ratios of debt to cash flow, cash flow
to certain fixed charges, liabilities to tangible net worth and
current ratio required by the debt agreements. Additionally, the
Company does not anticipate being in compliance with these covenants
any time during 2000 absent modifications from the specific lenders.
The Company has not received waivers for these covenant violations,
and as a result, has classified these obligations as current in the
accompanying consolidated balance sheets at December 31, 1999 and
March 31, 2000. Although the lenders have not expressed the intent to
do so, they have the ability to accelerate repayment of these
obligations.
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<PAGE>
6. COMMITMENTS AND CONTINGENCIES
In July 1998, the Company entered into an option agreement that
granted it the right to purchase approximately 95% of Belleli Energy
S.r.L. ("Belleli") through 2003. Belleli is an Italian company that
manufactures thick-walled pressure vessels and heat exchangers, as
well as designs, engineers, constructs and erects components for
desalination, electric power and petrochemical plants. Under the terms
of the option agreement, the Company was obligated to provide certain
interim funding to Belleli. Because of its financial condition in
1999, the Company could no longer provide financial support to
Belleli. In February 2000, SJMB, L.P. ("SJMB"), an affiliate of St.
James Capital Partners, L.P. ("SJCP"), a large shareholder of IHI
(SJMB, SJCP and its affiliates, collectively "St. James"), acquired a
majority interest in Belleli from Belleli's shareholder, Impianti. As
a result of this transaction, all of the Company's obligations with
respect to Belleli have been released and discharged. The Company
retains a 3.5% minority interest in Belleli.
As a part of the Belleli transaction the Company will issue warrants
to purchase 750,000 shares of its common stock to SJMB at an exercise
price of $1.25 per share (valued at $157,500). Additionally, the
Company is obligated to reimburse SJMB for satisfying its installment
payment obligations under the option agreement of approximately
$280,000.
In May 2000, the Company filed suit against some of the former Blastco
Services Company shareholders in Harris County District Court, in a
suit styled INDUSTRIAL HOLDINGS, INC. AND INDUSTRIAL HOLDINGS
ACQUISITION FOUR, INC. V. GARY H. MARTIN, WORLD WIDE LEASING,
LUBRICATION SERVICES, INC. AND WILLIAM R. MASSEY. In the lawsuit, the
Company alleged Messrs. Massey and Martin's fraud in failing to
disclose, and in misrepresenting, certain facts about Blastco, as well
as Mr. Martin's mismanagement and self-dealing as President of
Blastco. The Company has not yet served the defendants.
In addition to the above, the Company is involved in various claims
and litigation arising in the ordinary course of its business. In the
opinion of management, the ultimate liabilities, if any, as a result
of these matters will not have a material adverse effect on the
Company's consolidated financial position or results of operations or
cash flows.
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7. DIVESTITURES
In March 2000, the Company sold its U.S. Crating subsidiary to its
general manager for $400,000 and recognized a gain of approximately
$68,000. U.S. Crating provides crating, inspection, preparation and
partial documentation services for domestic and international movement
of goods. Revenues for U.S. Crating were $105,342 and $415,809 for the
three month periods ended March 31, 2000 and 1999, respectively.
In January 2000, Midland Recycle, L.L.C. ("Midland") in which the
Company owned a 30% interest was liquidated for less than its net book
value. As a result, the Company wrote off a $343,000 intercompany note
receivable and recognized a $280,000 loss on the investment in 1999.
8. SUBSEQUENT EVENTS
PROPOSED ACQUISITION OF REMAINING 51% OF OF ACQUISITION, L.P.
PARTNERSHIP INTEREST
In June 2000, the Company reached an agreement in principle with St.
James, subject to customary closing conditions and shareholder
approval, to acquire from SJMB the general partnership interest and
the 51% of limited partnership interests of OF Acquisition, L.P.
("Orbitform") that the Company does not already own (the "St. James
Transaction"). In the St. James Transaction, the Company would issue
secured subordinated debt that is convertible into a number of shares
of Common Stock and warrants that are convertible into a number of
shares of Common Stock that would exceed 20% of the Company's
currently issued and outstanding shares. For that reason, and because
the Company would be entering into a transaction with a
greater-than-5% shareholder, The Nasdaq Stock Market (the "Nasdaq
NMS") requires that the Company submit the St. James Transaction to
its shareholders for their advance approval.
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<PAGE>
PROPOSED SALE OF BLASTCO SERVICES COMPANY
In June 2000, the Company reached an agreement in principle to sell
Blastco back to its former shareholders, including its current
President. The sales price of Blastco is $2.0 million in cash, $0.8
million in notes receivable, and 1,586,265 shares of the Company's
common stock that the former shareholders of Blastco received in the
Company's acquisition of Blastco in a pooling-of-interests
transaction. Also, the Company will retain inventory and equipment
with a net book value of $0.3 million. Blastco's 1999 sales were $12.1
million. Blastco will retain its minority ownership ownership in AWR.
While this transaction is expected to close in the second quarter of
2000, there can be no assurances that it will be successfully
completed on the terms as described above.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
GENERAL
We own and operate a diversified group of middle-market industrial
manufacturing and distribution businesses whose products include metal
fasteners, large and heavy pressure vessels, high-pressure industrial
valves and related products and services. Operations are organized
into four business segments: (i) fastener manufacturing and
distribution; (ii) heavy fabrication; (iii) valve manufacturing and
repair (now know as "energy"); and (iv) machine tool distribution.
In addition to our current focus on refinancing our indebtedness (see
Liquidity and Capital Resources), our business strategy is to increase
the sales, cash flow and profitability of each business segment
through a turnaround plan that was developed and implemented by the
Company to address the operational difficulties that occurred during
1999 and into 2000. This turnaround plan entails streamlining our
operations and refocusing on our core competencies in the following
three areas:
ENHANCE REVENUE GROWTH. We believe that significant opportunities
exist to enhance revenue growth in our business segments. We plan to
achieve this growth by (i) promoting cross-selling opportunities
across our customer base; (ii) identifying new applications and new
markets for our existing products, production capabilities, and skill
base; and (iii) acquiring companies that are strategic fits within our
business segments. To date in the fastener segment, we have integrated
the sales of certain product lines across each of the related
companies within this segment. In the valve segment, rather than
integrate the sales of our product lines across the companies within
that segment, we have begun to integrate our customer base through the
joint marketing of the individual companies' products and services to
the entire valve segment customer base. Over the next year, we
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<PAGE>
will continue to expand on these efforts. In the heavy fabrication
segment, we have focused our efforts on developing and expanding our
power generation customers in order to solidify our position in this
burgeoning market. We believe that our strong market positions within
the niche markets we serve enhance our ability to effectively
implement this aspect of the turnaround plan. Although historically
much of our growth has been through acquisition, acquisitions will not
be an area of emphasis until our turnaround plan has been fully
executed and our financial performance has returned to historical
levels.
ELIMINATE WASTE. We believe that significant opportunities exist to
reduce or eliminate waste by: (i) reducing working capital levels
company-wide through increased inventory turns and accelerated
collection of receivables; (ii) selling non-strategic assets that are
not part of our core competencies; (iii) consolidating selected
facilities, (iv) converting our present manufacturing processes to
"lean" or more efficient manufacturing techniques, and (v) fully
implementing our ERP systems, which will allow our managers to obtain
and use production information faster and more efficiently than
before.
During the past sixteen months, we have (i) consolidated three of our
facilities into other existing facilities, (ii) sold two non-core
business units, (iii) closed and liquidated four non-core and
unprofitable business units, (iv) completed the installation of two
ERP systems, (v) converted one plant from a traditional "batch and
queue" operation to one that employs one-piece flow or cellular
production, and (vi) reduced inventory and receivables. On a
going-forward basis, we intend to (i) consolidate an additional plant
into an existing facility, (ii) sell three parcels of excess real
estate, (iii) convert the distribution operations of our fastener
segment to a common ERP system, and (iv) continue the implementation
of "lean" manufacturing techniques. We plan to continue to pursue
similar measures when it is our best interest to do so.
DEVELOP EMPLOYEES. We believe that employee development is an integral
part of our turnaround plan. Across all of our businesses, our
management, sales and operations teams have participated in numerous
training and development programs that focus on management, sales,
production, technical, safety and quality issues. We believe that this
training is a valuable tool in the development and enhancement of our
employees' skill sets and that we will continue to be rewarded for
these efforts by a better trained, more knowledgeable and skilled
workforce.
Our results of operations are affected by the level of economic
activity in the industries served by our customers, which in turn may
be affected by other factors, including the level of economic activity
in the U.S. and foreign markets they serve. The principal industries
served by our clients are the automotive, home furnishings,
petrochemical and oil and gas industries. An economic slowdown in
these industries could result in a decrease in demand for our products
and services, which could adversely affect our operating results.
During 1998 and into 1999, oil and gas prices declined significantly,
resulting in a decrease in the demand for our products and services
that are used in the exploration and production of oil and gas.
Exploration and production expenditures generally lag improvements in
oil and gas prices; therefore, although oil and gas prices have
improved during 1999 and into 2000, we did not experience significant
sales increases through the end of 1999. We have experienced increased
sales and backlog in the first quarter of 2000.
This section should be read in conjunction with our consolidated
financial statements included elsewhere.
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RESULTS OF OPERATIONS
The following table sets forth certain operating statement data for
each of our segments for each of the periods presented.
THREE MONTHS ENDED
MARCH 31,
2000 1999
-------- --------
Sales: (000's omitted)
Fastener Manufacturing and
Distribution ................. $ 30,703 $ 34,260
Heavy Fabrication ................ 7,964 25,594
Energy ........................... 11,911 11,126
Machine Tool Distribution ........ 2,988 1,345
-------- --------
53,566 72,325
Cost of Sales:
Fastener Manufacturing and
Distribution ................. 23,421 26,236
Heavy Fabrication ................ 8,015 23,044
Energy ........................... 9,408 7,191
Machine Tool Distribution ........ 2,337 987
-------- --------
43,181 57,458
Selling, General and Administrative:
Fastener Manufacturing and
Distribution ................. 5,945 5,872
Heavy Fabrication ................ 1,431 1,842
Energy ........................... 2,516 1,798
Machine Tool Distribution ........ 594 456
Corporate ........................ 2,274 526
-------- --------
12,760 10,494
Operating Income (Loss) ............ ($ 2,375) $ 4,373
======== ========
THREE MONTHS ENDED MARCH 31, 2000 COMPARED WITH THREE MONTHS ENDED
MARCH 31, 1999.
SALES. On a consolidated basis, sales decreased $18.8 million or 26%
for the three months ended March 31, 2000 compared to the three months
ended March 31, 1999.
Fastener Segment sales decreased $3.6 million or 10% for the three
months ended March 31, 2000 compared to the three months ended March
31, 1999. Sales decreased due to the consolidation of one distribution
facility and reduced sales into the upstream oil and gas market.
Heavy Fabrication Segment sales decreased $17.6 million or 69% for the
three months ended March 31, 2000 compared to the three months ended
March 31, 1999. The decrease is attributable to the completion of a
major contract for wind turbine towers in June 1999 that has not been
replaced. A substantial percentage of this segment's revenues is
derived from customers in the hydrocarbon processing industry.
Customers in the processing industry materially reduced their capital
spending during 1999 and into 2000, which directly impacted sales in
this segment. Additionally, heavy competitive pressure from overseas,
particularly Korean competition, has negatively impacted sales in the
markets the Company has traditionally served. The Company actively
pursued sales in new markets in the first quarter of 2000 and is
beginning to see results from these efforts. Backlog at Beaird as of
March 31, 2000 has increased 64% over December 31, 1999. However, due
to the long-
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term nature of the contracts in this segment, sales in the second
quarter are expected to approximate sales in the first quarter.
However, sales in the second half of 2000 are expected to exceed sales
in the first half of the year.
Energy Segment sales increased $0.8 million or 7% for the three months
ended March 31, 2000 compared to the three months ended March 31,
1999. The increase is attributable to internal growth primarily as the
result of improved economic conditions in the energy sector.
Increasing worldwide demand for oil and gas coupled with declining
production has resulted in more stable prices and the worldwide rig
count has increased. Should oil and gas prices remain at or near
current levels, we expect sales to continue to increase in this
segment.
Machine Segment sales increased $1.6 million or 122% for the three
months ended March 31, 2000 compared to the three months ended March
31, 1999, as demand for machine tools in our sales region has
increased with the improvement in the energy sector. Sales in future
periods will be negatively impacted in this segment due to the sale of
our export crating business, which reported sales of $1.6 million for
all of calendar 1999. However, we do not expect this transaction to
have a material impact on operating results of this segment and the
loss in sales due to this transaction is expected to be more than
offset by increased sales of machine tools.
COST OF SALES. Cost of sales decreased $14.3 million or 25% for the
three months ended March 31, 2000 compared to the three months ended
March 31, 1999.
Fastener Segment cost of sales decreased $2.8 million or 11% for the
three months ended March 31, 2000 compared to the three months ended
March 31, 1999 primarily as a result of the decrease in sales
described above as gross margin remained relatively constant.
Heavy Fabrication Segment cost of sales decreased $15.0 million or 65%
for the three months ended March 31, 2000 compared to the three months
ended March 31, 1999. In response to the declining sales, Beaird
attempted to reduce costs in all areas and substantially reduced its
workforce. Gross margin decreased from 10% in the first quarter of
1999 to 0% in the first quarter of 2000 as sales decreased to levels
that were insufficient to generate enough gross profit to cover fixed
costs.
Energy Segment cost of sales increased $2.2 million or 31% for the
three months ended March 31, 2000 compared to the three months ended
March 31, 1999. Gross margin decreased from 35% for the first quarter
of 1999 to 21% in the first quarter of 2000. The significant decrease
in margin was primarily in the refinery demolition business. Costs of
sales in the refinery demolition area were not reduced in response to
declining refinery demolition sales, resulting in a significant
decline in profitability in that market. We anticipate gross margins
in the second quarter of 2000 to be comparable to the first quarter of
2000; however, we anticipate gross margin in the second half of 2000
to improve substantially as we expect to close the proposed sale of
the company that operates in the refinery demolition market.
Machine Segment cost of sales increased $1.4 million or 137% as a
result of the increase in sales described above. Gross margins for the
first quarter of 2000 were 22%, as compared with 27% for the first
quarter of 1999 primarily as a result of a change in sales mix as
export crating represented a higher percentage of total sales for this
segment in 1999. Gross margins have historically been higher for
export crating compared to machine sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased $2.3 million or 22% for the three
months ended March 31, 2000 compared to the three months ended March
31, 1999.
Fastener Segment selling, general and administrative expense was $5.9
million in the first quarter of 2000 and 1999.
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Heavy Fabrication Segment selling, general and administrative expense
decreased $0.4 million or 22% for the three months ended March 31,
2000 compared to the three months ended March 31, 1999 due to a
reduction in the workforce and cost reduction measures implemented as
a result of the decrease in sales detailed above.
Energy Segment selling, general and administrative expenses increased
$0.7 million or 40% for the three months ended March 31, 2000 compared
to the three months ended March 31, 1999 primarily as a result of an
increase of $0.5 million at Blastco, the company's refinery demolition
subsidiary. Of this increase, $0.2 million was associated with this
subsidiary's private aircraft, which it did not lease in the first
quarter of 1999, and $0.1 million was an increase in travel expenses.
Machine Segment selling, general and administrative expenses increased
$0.1 million or 30% for the three months ended March 31, 2000 compared
to the three months ended March 31, 1999 primarily as a result of the
increases in sales described above.
Corporate selling, general and administrative expenses increased $1.7
million or 332% for the three months ended March 31, 2000 compared to
the three months ended March 31, 1999 due primarily to $1.0 million in
professional fees and other expenses associated with the company's
refinancing efforts.
EARNINGS FROM EQUITY INVESTMENTS IN UNCONSOLIDATED AFFILIATES. On a
consolidated basis, earnings from equity investments decreased $0.5
million for the three months ended March 31, 2000 compared to the
three months ended March 31, 1999 primarily as a result of the
company's equity investee involved in demolition activities which had
earnings in the first quarter of 1999 and had no earnings in 2000 as
anticipated losses on its contracts were accrued as of December 31,
1999.
INTEREST EXPENSE. Interest expense increased $1.1 million or 55% for
the three months ended March 31, 2000 compared to the three months
ended March 31, 1999, primarily as a result of higher debt levels and
interest rates.
OTHER INCOME (EXPENSE), NET. Other income (expense) was an expense of
$0.1 million for the three months ended March 31, 2000 compared to
income of $0.5 million for the three months ended March 31, 1999
primarily because of losses on equipment sales in 2000 in comparison
to gain on equipment sales in 1999, and a $0.25 million deferred gain
recognized on the sale of a demolition contract.
INCOME TAXES. The Company recognized no tax benefit for the three
months ended March 31, 2000 as a result of an increase in the
valuation allowance to offset the deferred tax asset associated with
its additional net operating loss carry forwards.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2000, we had a deficit in retained earnings of $9,149,903
and a working capital deficit of $41,902,642 as a result of
$86,672,523 in debt maturing on or before March 31, 2001.
PRINCIPAL DEBT INSTRUMENTS. As of March 31, 2000, we had an aggregate
of $95.5 million borrowed under our principal bank credit facility and
debt instruments entered into or assumed in connection with
acquisitions as well as other bank financings. In June 2000, we
reached an agreement in principle to amend our credit agreement with
our senior lenders, which represents $54.5 million of debt, through
January 2001.
We are currently exploring various financing alternatives to meet our
future liquidity needs. We anticipate refinancing certain of our debt
facilities in 2000, although no assurances can be given that we will
be able to refinance such facilities or that we will be able to obtain
terms that are as favorable as those that currently exist.
We have a $55 million revolving line of credit with Comerica
Bank-Texas, National Bank of Canada and Hibernia Bank (the "Senior
Lenders"), which expires in June 2001. We were not in compliance with
certain financial covenants at each of the required quarterly
reporting dates during 1999. We requested and received waivers from
the Senior Lenders for the March 31, 1999 and June 30, 1999 reporting
periods; however, we did not seek waivers for the reporting dates of
September 30, 1999,
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<PAGE>
December 31, 1999 or March 31, 2000. We were in violation of the
credit agreement and although the Senior Lenders have not expressed
the intent to call this obligation, the Senior Lenders retain the
right to do so. The principal amount of the credit facility is the
lesser of $55 million at March 31, 2000 or a defined borrowing base.
The credit facility bore interest at the prime rate of Comerica plus
2% at December 31, 1999 (which was 11% at March 31, 2000), and allows
the borrowing of funds based on 80% of eligible accounts receivable
and 50% of eligible inventory. At March 31, 2000, we had no
availability under the credit facility. At June 9, 2000, we had
availability under the credit facility of approximately $0.4 million.
We have held preliminary discussions with the Senior Lenders to modify
the terms and covenants of the credit agreement. We have reached an
agreement in principle with the Senior Lenders that would (i)
accelerate maturity to January 31, 2001, (ii) reduce the revolving
credit line to the lesser of $50 million or the defined borrowing
base, (iii) increase the interest rate to prime plus 3%, payable
weekly and (iv) modify the financial covenants to require maintenance
of minimum consolidated tangible net worth, and earnings before
interest, taxes, depreciation and amortization
("EBITDA")-to-debt-service ratio as well as require limitations on
capital expenditures. In addition, the Senior Lenders would waive all
prior violations under the credit agreement. However, no assurances
can be given that we will be able to successfully conclude the
arrangement being considered.
In connection with the proposed credit agreement amendment, St. James
would be required to provide a $2 million guaranty to the Senior
Lenders in order to secure any over-advances that may occur under the
terms of the proposed credit agreement amendment. In exchange for
providing this guaranty, the Company plans to (i) issue to St. James
warrants to acquire 400,000 shares of the Company's common stock at
$1.25 per share (valued at $84,000), and (ii) forgive a $0.35 million
note receivable from St. James. In addition, if the guaranty is
funded, the Company plans to issue to St. James up to 500,000 warrants
to acquire its common stock at $1.25 per share (valued at up to
$105,000), depending on the amount of the funding.
We have a $15 million note payable to EnSerCo, L.L.C. ("EnSerCo") that
became due on November 15, 1999. We were granted an extension of the
due date through January 31, 2000. On January 31, 2000, we were unable
to repay the amounts borrowed and defaulted on the note payable.
EnSerCo has not called this note due; however, it retains the right to
do so. We have held preliminary discussions with EnSerCo to modify the
terms of the original note agreement, which include extending the due
date. Although we have exchanged non-binding term sheets with EnSerCo
that outline certain concepts that might be included in an amendment
to the credit agreement in the future, including (i) increasing the
principal amount to reflect unpaid accrued interest to date, (ii)
extending the maturity date to February 28, 2001, and (iii) increasing
the interest rate to a 15% annual rate, payable at maturity; no
agreement has been reached between the parties. Furthermore, no
assurances can be given that we will be able to successfully conclude
the arrangement being considered.
We have a $9.5 million term note with Heller Financial, Inc.
("Heller"), which expires on September 30, 2004. We were not in
compliance with certain financial covenants at each of the required
quarterly reporting dates during 1999. We requested and received
waivers from Heller through the September 30, 1999 reporting period;
however, we did not seek waivers for the reporting dates of December
31, 1999 or March 31, 2000. We are in violation of the credit
agreement and although Heller has not expressed the intent to call
this obligation, it retains the right to do so. We have held
preliminary discussions with Heller to obtain waivers for the events
of non-compliance; however, no assurances can be given that we will be
able to successfully obtain the required consents.
We are in default of a $5 million note payable to Trinity Industries,
Inc. ("Trinity"). We and Trinity have entered into litigation
regarding the note payable. (See Part II Other Information Item 1.
Legal Proceedings.)
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<PAGE>
Our liquidity has been constrained by our borrowing base limitations
and by our operating losses and, as a result, our financial position
and cash flows have been adversely effected. We have experienced an
increase in the level of our accounts payable at December 31, 1999 and
March 31, 2000 as compared to prior periods. We continue to explore
various alternative to improve our liquidity, including refinancing
our indebtedness with other lenders. In addition, we have identified
and are pursuing the sale of non-strategic assets as well as raising
additional debt and equity capital. There can be no assurance that we
will successfully refinance our indebtedness with other lenders, or
successfully sell non-strategic assets.
During the third quarter of 1999, we developed and implemented a
turnaround plan to streamline our operations and refocus on our core
competencies through enhanced revenue growth, elimination of waste and
development of employees. As a part of this turnaround plan, we closed
duplicate facilities, reduced personnel, eliminated certain products,
wrote-off the related inventory, and adopted uniform information
systems platforms in the fastener segment. On a going-forward basis,
we intend to (i) consolidate an additional plant into an existing
facility, (ii) sell three parcels of excess real estate, (iii) convert
the distribution operations of our fastener segment to a common ERP
system, and (iv) continue the implementation of "lean" manufacturing.
We will continue to pursue other similar measures when it is our best
interest to do so.
The energy segment, excluding our refinery demolition operations, is
closely tied to the price of oil and gas. Sales and operating income
within the energy group have been adversely effected over the past
twelve to fifteen months. This reduction in sales volume and
profitability has been primarily attributable to reductions in the
worldwide and gulf coast rig counts, continued caution regarding the
long-term hydrocarbon price environment, consolidation within the oil
and gas industry, and ongoing cost reduction efforts by oil and gas
companies. Within the energy segment, we believe that sales reached
their lowest levels during the second and third quarters of 1999.
Increasing worldwide demand for oil and gas coupled with declining
production in many areas should support a more stable and favorable
level of oil and gas prices in the future, resulting in increased
exploration and production spending in 2000 and an improved demand for
oilfield services. We have experienced such a trend for the first
quarter of 2000 in our energy group, with increasing backlog and sales
in the first quarter of 2000 over the fourth quarter of 1999.
Within the fastener segment, the stud bolt and gasket group serves
both the oil and gas exploration and production industry and the
hydrocarbon processing industry. The stud bolt and gasket operations
have experienced results similar to the energy segment operations. As
a result in 1999, we closed an unprofitable distribution location,
eliminated the personnel at that location and wrote-off inventory. Our
expectation is that with increasing oil and gas prices, sales and
profitability within these operations will improve. We have
experienced such a trend for the first quarter of 2000 in our stud
bolt and gasket operations, with increasing backlog and sales in the
first quarter of 2000 over the fourth quarter of 1999.
Within the fastener segment, the engineered fasteners group's
operating profits have been adversely effected by over capacity and
resulting inefficient operations. As a result, we have closed two
manufacturing facilities and have consolidated their operations into
the three remaining facilities. Personnel reductions and inventory
write-offs took place in connection with these facility
consolidations. We expect the full benefit of the various overhead and
cost reductions to occur in 2000.
The heavy fabrication segment's sales and profitability have decreased
significantly in the second half of 1999 compared to 1998. This
segment's customers have seen a reduction in their margins because of
the volatility of oil feedstock prices during 1999, and have
significantly reduced their capital spending. In addition, it has
experienced significant competitive pressures from overseas. Mainly
because of these factors, revenues continued to decline in the fourth
quarter of 1999 and the first quarter of 2000. However, in response to
this revenue decline, we have continued to reduce overhead
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and make other operational improvements to increase the efficiency of
our operations as well as seek new markets for our products. The
composition of our backlog at the end of the first quarter of 2000
reflects this approach since a significant portion consists of
products for the power generation industry as opposed to our
traditional products that serve the hydrocarbon processing industry.
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES. For the quarter
ended March 31, 2000, net cash provided by operating activities was
$4.9 million compared to the quarter ended March 31, 1999, which
provided cash of $1.0 million.
NET CASH USED IN INVESTING ACTIVITIES. Principal uses of cash are for
capital expenditures and acquisitions. For the quarter ended March 31,
2000 and 1999, the Company made capital expenditures of approximately
$1.2 million and $3.4 million, respectively. Additionally, the Company
made investments in unconsolidated affiliates of $1.4 million and $0.5
million, respectively.
NET CASH PROVIDED BY FINANCING ACTIVITIES. Sources of cash from
financing activities include borrowings under our credit facilities
and sales of equity securities. Financing activities used net cash of
$3.4 million in the quarter ended March 31, 2000 compared with
providing $0.9 million in 1999. During the quarter ended March 31,
2000, we had net borrowings of $3.0 million under our credit
facilities compared to net repayments of $2.3 million during the same
period in 1999. During the quarter ended March 31, 2000, we had
proceeds from issuance of long-term obligations of $1.9 million,
compared to proceeds of $0.2 million in the quarter ended March 31,
1999. During the quarter ended March 31, 2000, we made principal
payments on long-term obligations of $2.3 million compared to $1.8
million the quarter ended March 31, 1999.
FORWARD LOOKING INFORMATION AND RISK FACTORS
Certain information in this Quarterly Report, including the
information we incorporate by reference, includes forward-looking
statements within the meaning of Section 27A of the Securities Act of
1933 and Section 21E of the Securities Exchange Act of 1934. You can
identify our forward-looking statements by the words "expects,"
"projects," "estimates," "believes," "anticipates," "intends,"
"plans," "budgets," "predicts," "estimates" and similar expressions.
We have based the forward-looking statements relating to our
operations on our current expectations, and estimates and projections
about the oil and gas industry and us in general. We caution you that
these statements are not guarantees of future performance and involve
risks, uncertainties and assumptions that we cannot predict. In
addition, we have based many of these forward-looking statements on
assumptions about future events that may prove to be inaccurate. Our
actual outcomes and results may differ materially from what we have
expressed or forecast in the forward-looking statements.
WE ARE IN DEFAULT UNDER OUR CREDIT FACILITY AND TERM LOANS AND OUR
LENDERS HAVE THE RIGHT TO DECLARE ALL OUTSTANDING AMOUNTS IMMEDIATELY
DUE AND PAYABLE.
We have a $15 million note payable to EnSerCo that was due on November
15, 1999 and extended to January 31, 2000. On January 31, 2000, we
were unable to repay the amounts borrowed and defaulted on the note.
EnSerCo has not called this note; however, they retain the right to do
so. We have held preliminary discussions with EnSerCo to modify the
terms of the original note agreement, which include extending the due
date. Although we and EnSerCo have exchanged non-binding term sheets
that outline certain concepts that might be included in an amendment
to the credit agreement in the future, including (i) increasing the
principal amount to reflect unpaid accrued interest to date, (ii)
extending the maturity date to February 28, 2001, and (iii) increasing
the interest rate to a 15% annual rate, payable at maturity; no
agreement has been reached between us. Furthermore, no assurances can
be given that we will be able to successfully conclude the arrangement
being considered and we remain in default.
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We have a $55 million revolving line of credit with Comerica
Bank-Texas, National Bank of Canada and Hibernia Bank (the "Senior
Lenders"), which expires in June 2001. We were not in compliance with
certain financial covenants at each of the required quarterly
reporting dates during 1999. We requested and received waivers from
the Senior Lenders for the March 31, 1999 and June 30, 1999 reporting
periods; however, we did not seek waivers for the reporting dates of
September 30, 1999, December 31, 1999 or March 31, 2000. We are in
violation of the credit agreement and although the Senior Lenders have
not expressed the intent to call this obligation, the Senior Lenders
retain the right to do so. We have held preliminary discussions with
the Senior Lenders to modify the terms and covenants of the credit
agreement. We have reached an agreement in principle with the Senior
Lenders that would (i) accelerate maturity to January 31, 2001, (ii)
reduce the revolving credit line to the lesser of $50 million or the
defined borrowing base, (iii) increase the interest rate to prime plus
3%, payable weekly and (iv) modify the financial covenants to require
maintenance of minimum consolidated tangible net worth, and earnings
before interest, taxes, depreciation and amortization
("EBITDA")-to-debt-service ratio as well as require limitations on
capital expenditures. In addition, the Senior Lenders would waive all
prior violations under the credit agreement. However, no assurances
can be given that we will be able to successfully conclude the
arrangement being considered.
In connection with the proposed credit agreement amendment, St. James
would be required to provide a $2 million guaranty to the Senior
Lenders in order to secure any over-advances that may occur under the
terms of the proposed credit agreement amendment. In exchange for
providing this guaranty, the Company plans to (i) issue to St. James
warrants to acquire 400,000 shares of the Company's common stock at
$1.25 per share (valued at $84,000), and (ii) forgive a $0.35 million
note receivable from St. James. In addition, if the guaranty is
funded, the Company plans to issue to St. James up to 500,000 warrants
to acquire its common stock at $1.25 per share (valued at up to
$105,000), depending on the amount of the funding.
We have a $9.5 million term note with Heller Financial, Inc.
("Heller"), which expires on September 30, 2004. We were not in
compliance with certain financial covenants at each of the required
quarterly reporting dates during 1999. We requested and received
waivers from Heller through the September 30, 1999 reporting period;
however, we did not seek waivers for the reporting dates of December
31, 1999 or March 31, 2000. We are in violation of the credit
agreement and although Heller has not expressed the intent to call
this obligation, it retains the right to do so. We have held
preliminary discussions with Heller to obtain waivers for the events
of non-compliance; however, no assurances can be given that we will be
able to successfully obtain the required consents.
In July 1998, we acquired Beaird Industries, Inc. ("Beaird") from
Trinity Industries, Inc. (the "Seller") for $35.0 million in cash and
receivables and a $5.0 million note to the Seller. Under the purchase
agreement, the Seller assumed all liabilities and retained certain
accounts receivable of Beaird. We believe that we are entitled to
receive $2.2 million of excess purchase price paid to the Seller under
the purchase agreement resulting from liabilities incurred by us in
connection with the acquisition, and $1.84 million in other claims
arising from breaches of representation and warranties. On July 15,
1999, the first installment of $1.8 million was due on the Seller
note. It is our position that we have offset the amount owed under the
purchase agreement against this principal and interest payment.
Although the Seller agrees that we are owed an amount, in January
2000, the Seller filed suit against us in the 134th Judicial District
in the District Court of Dallas County, Texas, in a suit styled
TRINITY INDUSTRIES, INC. V. INDUSTRIAL HOLDINGS, INC. In the lawsuit,
the Seller alleged that we defaulted on the $5 million note payment
and asserted that the amount it owes us is not sufficient to pay the
first principal and interest payment and additionally cannot be offset
against the $5 million note payment. In response, in February 2000, we
filed a counterclaim alleging the Seller's fraud in failing to
disclose, and in misrepresenting, certain facts about Beaird. We are
currently in discussions to resolve this disagreement.
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OUR SECURITIES MAY BE DELISTED FROM THE NASDAQ NMS, POSSIBLY ADVERSELY
IMPACTING THEIR LIQUIDITY AND VALUE.
We attended our scheduled hearing before the Nasdaq Listing
Qualifications Panel on June 1, 2000. We indicated that we plan to
file the 1999 Annual Report on Form 10-K and this Form 10-Q for the
quarter ended March 31, 2000 shortly after June 10, 2000.
Additionally, we believe that, at the hearing, we were able to
demonstrate our ability to sustain long-term compliance with all of
the maintenance criteria for continued listing on the Nasdaq NMS.
While we expect to have met those filing requirements, we can't ensure
that Nasdaq will not delist our securities. If that happens, our
securities would be immediately eligible to trade on the
over-the-counter market.
As a result of delisting from the Nasdaq NMS, current information
regarding bid and asked prices for our Common Stock may become less
readily available to brokers, dealers and/or their customers, which
may reduce the liquidity of the market for our Common Stock and which
in turn may result in decreased demand, a decrease in the stock price,
and an increase in the spread between the bid and asked prices for our
Common Stock.
EVEN IF WE SUCCESSFULLY RESTRUCTURE OUR CREDIT FACILITY AND TERM
LOANS, OUR SUBSTANTIAL DEBT COULD ADVERSELY AFFECT OUR BUSINESS,
FINANCIAL CONDITION, RESULTS OF OPERATIONS OR PROSPECTS.
We have a significant amount of debt, which requires us to dedicate a
substantial portion of our cash flow from operations to payments on
our debt, thereby reducing the availability of our cash flow to fund
current working capital, capital expenditures and other general
corporate needs. In addition, it could:
- increase our vulnerability to general adverse economic and industry
conditions;
- limit our ability to fund future working capital, acquisitions,
capital expenditures and other general corporate requirements;
- limit our flexibility in planning for, or reacting to, changes in
our business and our industry; and
- place us at a competitive disadvantage compared to our competitors
that have less debt.
EVEN IF OUR LENDERS DO NOT DECLARE ALL AMOUNTS UNDER OUR CREDIT
FACILITY AND TERM LOANS IMMEDIATELY DUE AND PAYABLE, WE WILL REQUIRE A
SIGNIFICANT AMOUNT OF CASH TO SERVICE OUR DEBT.
Our ability to service our debt and to fund capital expenditures will
depend on our ability to generate cash in the future. Our ability to
generate sufficient cash, to a large extent, is subject to general
economic, financial, competitive, legislative, regulatory and other
factors that are beyond our control. We cannot assure you that we will
generate sufficient cash flow or be able to obtain sufficient funding
to satisfy our debt service requirements.
We also cannot assure you that our business will generate sufficient
cash flow from operations or that future borrowings and financing
alternatives will be available to us under our credit facility or from
alternative sources in an amount sufficient to service our debts or to
fund our other liquidity needs.
EVEN IF WE SUCCESSFULLY RESTRUCTURE OUR CREDIT FACILITY AND TERM
LOANS, OUR DEBT TERMS IMPOSE CONDITIONS AND RESTRICTIONS THAT COULD
SIGNIFICANTLY ADVERSELY IMPACT OUR ABILITY TO OPERATE OUR BUSINESSES.
Our proposed revised credit agreements contain restrictive covenants
that, among other things, impose certain limitations on us and require
us to maintain specified consolidated financial ratios and satisfy
certain consolidated financial tests. Our ability to meet those
financial ratios and financial tests may be affected by events beyond
our control. If we fail to meet those tests or breach any of the
covenants in the future, the lenders may still declare all amounts
outstanding under the credit facility, together with accrued interest,
to be immediately due and payable. If we are unable to repay those
amounts, the lenders could proceed against the collateral granted to
them. Our assets may not be sufficient to
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repay in full that indebtedness or any other indebtedness.
EVEN IF WE ARE SUCCESSFUL IN ATTRACTING BUYERS FOR OUR NON-STRATEGIC
ASSETS AND INVESTMENTS, WE MAY NOT BE ABLE TO RECOVER THE CARRYING
VALUE OF SUCH AMOUNTS.
We are in the process of selling a number of non-strategic assets and
investments as a part of our turnaround plan. Due to the current
carrying values of certain of our non-strategic assets and investments
on our consolidated balance sheet, we may not be able to dispose of
certain of these non-strategic assets and investments at a price that
will allow us to recover the carrying value of such non-strategic
assets and investments.
THE MARKET VALUE OF OUR COMMON STOCK MAY DECLINE FURTHER IF WE
CONTINUE TO INCUR NET LOSSES.
For the 1999 fiscal year, we incurred a net after-tax loss of $19.0
million, and a net after-tax loss of $5.5 million for the three months
ended March 31, 2000. The price of our common stock, which has
declined significantly in the past year, depends on many factors, most
importantly our financial performance. If we continue to incur net
losses, our stock price could decline further.
SOME OF THE MARKETS FOR OUR PRODUCTS ARE CYCLICAL, WHICH MAY ADVERSELY
IMPACT SALES OF THOSE PRODUCTS DURING A DECLINE IN THOSE MARKETS.
Some of our products are sold in markets that are affected by the
state of both the U.S. and worldwide economies and by conditions
within the industries that purchase our products. Therefore, sales of
these products may be reduced as a result of conditions in the markets
in which they are sold. Even though the markets in which we sell our
products are diversified, decreased sales in some of these markets may
not be offset by sales in our other markets, which may result in a
material adverse effect on our business, financial condition, results
of operations or prospectus. A significant percentage of our 2000
sales, most of which are attributable to our energy segment and stud
bolt and gasket operations, are derived from the domestic oil and gas
industry.
OUR ACQUISITION STRATEGY MAY NOT ACHIEVE OUR OBJECTIVES AS A RESULT OF
A NUMBER OF POTENTIAL FACTORS.
Our acquisition strategy has been a significant component of our
business plan, and we plan to resume our acquisition strategy after
our turnaround plan has been accomplished and our financial
performance has returned to historical levels. While we evaluate
business opportunities on a regular basis, we may not be successful in
identifying any additional acquisitions or we may not have sufficient
financial resources to make additional acquisitions. In addition, as
we complete acquisitions and expand our operations, we will be subject
to all of the risks inherent in an expanding business, including
integrating financial reporting, establishing satisfactory budgetary
and other financial controls, funding increased capital needs and
overhead expenses, obtaining management personnel required for
expanded operations, and funding cash flow shortages that may occur if
anticipated sales and revenues are not realized or are delayed,
whether by general economic or market conditions or unforeseen
internal difficulties. Our future performance will depend, in part, on
our ability to manage expanding operations and to adapt our
operational systems for these expansions. We may not succeed at
effectively and profitably managing the integration of our current or
any future acquisitions.
We may fail or be unable to discover liabilities in the course of
performing due diligence investigations on each business that we have
acquired or will acquire in the future. Liabilities could include
those arising from employee benefits contribution obligations of a
prior owner or noncompliance with federal, state or local
environmental requirements by prior owners for which we, as a
successor owner, may be responsible. We try to minimize these risks by
conducting due diligence as we deem appropriate under the
circumstances. However, we may not have identified, or
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in the case of future acquisitions, identify, all existing or
potential risks. We also generally require each seller of acquired
businesses or properties to indemnify us against undisclosed
liabilities. In some cases, this indemnification obligation may be
supported by deferring payment of a portion of the purchase price or
other appropriate security. However, we cannot assure you that the
indemnification, even if obtained, will be enforceable, collectible or
sufficient in amount, scope or duration to fully offset the possible
liabilities associated with the business or property acquired. Any of
these liabilities, individually or in the aggregate, could have a
material adverse effect on our business, financial condition, results
of operations or prospects.
MANY OF THE INDUSTRIES IN WHICH WE PARTICIPATE ARE HIGHLY COMPETITIVE,
WHICH MAY RESULT IN A LOSS OF MARKET SHARE OR A DECREASE IN REVENUE OR
PROFIT MARGINS.
Many of the industries in which we operate are highly competitive.
Some of our competitors within each of our segments have greater
financial and other resources than us. In our key fastener product
areas of semi-tubular engineered fasteners and cold-formed specialty
fasteners, safety and straight pins and threaded stud bolts, we face
competition from very small manufacturers as well as from the
operations of companies much larger than ourselves. Our competitors
within our heavy fabrication segment vary based on the products
fabricated. As the size and complexity of the products increase,
competition is generally less. The market for each of our key heavy
fabrication products is very competitive, and we face competition from
a number of different manufacturers in each of our product areas. In
our energy segment, we believe that we are subject to competition from
less than ten similarly-sized remanufacturing businesses. Factors that
affect competition within all of our segments include price, quality
and customer service. Strong competition may result in a loss of
market share in the segments in which we operate and a decrease in
revenue and profit margins.
THE LOSS OF KEY PERSONNEL COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR
RESULTS OR OPERATIONS.
Our success depends largely upon the abilities and experience of
certain key management personnel. If we lose the services of one or
more of our key personnel, it could have a material adverse effect on
our business and results of operations. We do not have non-compete
agreements with all of our key personnel. In addition, we generally do
not maintain key-man life insurance policies on our executives.
OUR INSURANCE COVERAGE MAY BE INADEQUATE TO COVER CERTAIN CONTINGENT
LIABILITIES.
Our business exposes us to possible claims for personal injury or
death resulting from the use of our products. We carry comprehensive
insurance, subject to deductibles, at levels we believe are sufficient
to cover existing and future claims. However, we could be subject to a
claim or liability that exceeds our insurance coverage. In addition,
we may not be able to maintain adequate insurance coverage at rates we
believe are reasonable.
OUR OPERATIONS ARE SUBJECT TO REGULATION BY FEDERAL, STATE AND LOCAL
GOVERNMENTAL AUTHORITIES THAT MAY LIMIT OUR ABILITY TO OPERATE OUR
BUSINESS.
Our business is affected by governmental regulations relating to our
industry segments in general, as well as environmental and safety
regulations that have specific application to our business. While we
are not aware of any proposed or pending legislation, future
legislation may have an adverse effect on our business, financial
condition, results of operations or prospects.
We are subject to various federal, state and local environmental laws,
including those governing air emissions, water discharges and the
storage, handling, disposal and remediation of petroleum and hazardous
substances. In particular, our refinery demolition business involves
the removal of asbestos and other environmental contaminants for which
we are responsible for handling and disposal. We have in the past and
will likely in the future incur expenditures to ensure compliance with
environmental laws. Due to the possibility of unanticipated factual or
regulatory developments, the
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amount and timing of future environmental expenditures could vary
substantially from those currently anticipated. Moreover, certain of
our facilities have been in operation for many years and, over that
time, we and other predecessor operators have generated and disposed
of wastes that are or may be considered hazardous. Accordingly,
although we have undertaken considerable efforts to comply with
applicable laws, it is possible that environmental requirements or
facts not currently known to us will require unanticipated efforts and
expenditures that cannot be currently quantified.
Item 3. Qualitative and Quantitative Disclosures About Market Risk.
Market risk generally represents the risk that losses may occur in the
value of financial instruments as a result of movements in interest
rates, foreign currency exchange rates and commodity prices.
We are exposed to some market risk due to the floating interest rate
under our revolving line of credit and certain of our term debt. As of
March 31, 2000, the revolving line of credit had a principal balance
of $43.2 million and an interest rate that floats with prime. We also
have $24.5 million of long-term debt bearing interest at Libor plus
2.5% to 5% and long-term debt of $10.9 million and an interest rate
that floats with prime. A 1.0% increase in interest rates could result
in a $0.8 million annual increase in interest expense on the existing
principal balance. We have determined that it is not necessary to
participate in interest rate-related derivative financial instruments
because we currently do not expect significant short-term increases in
interest rates charged under the revolving line of credit.
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PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
In July 1998, the Company acquired Beaird Industries, Inc. ("Beaird")
from Trinity Industries, Inc. (the "Seller") for $35.0 million in cash
and receivables and a $5.0 million note to the Seller. Under the
purchase agreement, the Seller assumed all liabilities and retained
certain accounts receivable of Beaird. The Company believes that it is
entitled to receive $2.2 million of excess purchase price paid to the
Seller under the purchase agreement resulting from liabilities
incurred by the Company in connection with the acquisition, and $1.84
million in other claims arising from breaches of representation and
warranties. On July 15, 1999, the first installment of $1.8 million
was due on the Seller note. It is the Company's position that it has
offset the amount owed under the purchase agreement against this
principal and interest payment. Although the Seller agrees that the
Company is owed an amount, in January 2000, the Seller filed suit
against the Company in the 134th Judicial District in the District
Court of Dallas County, Texas, in a suit styled TRINITY INDUSTRIES,
INC. V. INDUSTRIAL HOLDINGS, INC. In the lawsuit, the Seller alleged
that the Company defaulted on the $5 million note payment and asserted
that the amount it owes the Company is not sufficient to pay the first
principal and interest payment and additionally cannot be offset
against the $5 million note payment. In response, in February 2000,
the Company filed a counterclaim alleging the Seller's fraud in
failing to disclose, and in misrepresenting, certain facts about
Beaird. The Company and the Seller are currently in discussions to
resolve this disagreement. The principle is classified as current
portion of long-term obligations at March 31, 2000.
In May 2000, the Company filed suit against some of the former Blastco
shareholders in Harris County District Court, in a suit styled
INDUSTRIAL HOLDINGS, INC. AND INDUSTRIAL HOLDINGS ACQUISITION FOUR,
INC. V. GARY H. MARTIN, WORLD WIDE LEASING, LUBRICATION SERVICES, INC.
AND WILLIAM R. MASSEY. In the lawsuit, the Company alleged Messrs.
Massey and Martin's fraud in failing to disclose, and in
misrepresenting, certain facts about Blastco, as well as Mr. Martin's
mismanagement and self-dealing as President of Blastco. The Company
has not yet served the defendants.
In addition to the above, we are involved in various claims and
litigation arising in the ordinary course of business. While there are
uncertainties inherent in the ultimate outcome of such matters and it
is impossible to currently determine the ultimate costs that may be
incurred, we believe the resolution of such uncertainties and the
incurrence of such costs should not have a material adverse effect on
our consolidated financial condition or results of operations.
Item 3. Defaults upon Senior Securities
See Item 1. Financial Statements (unaudited) Note 1 Basis of
Presentation and Management Plans and Item 2. Management's Discussion
and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources for a discussion of the Company's debt
in default.
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Item 6. Exhibits and Reports on Form 8-K
(a) Reports on Form 8-K (None)
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant, Industrial Holdings, Inc., has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
INDUSTRIAL HOLDINGS, INC.
Date: June 14, 2000 By: /s/ CHRISTINE A. SMITH
------------------------
Christine A. Smith,
Chief Financial Officer and
Executive Vice President
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