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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
COMMISSION FILE NUMBER: 0-19580
INDUSTRIAL HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
TEXAS
(State or other jurisdiction
of incorporation or organization)
76-0289495
(IRS Employer Identification No.)
7135 ARDMORE, HOUSTON, TEXAS 77054
(Address of principal executive offices, including zip code)
(713) 747-1025
(Registrant's telephone number, including area code)
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of Common Stock held by non-affiliates of the
registrant was $77,708,696 at March 19, 1998. At that date, there were 8,322,080
shares of Common Stock outstanding.
THE REGISTRANT'S PROXY STATEMENT, TO BE FILED PURSUANT TO REGULATION 14A
OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, WITH RESPECT TO THE 1998
ANNUAL MEETING OF STOCKHOLDERS, IS INCORPORATED BY REFERENCE INTO PART III OF
THIS REPORT.
TABLE OF CONTENTS
FORM 10-K
PAGE
----
PART I
ITEM
----
1. Business.................................................. 1
2. Properties................................................ 11
3. Legal Proceedings......................................... 11
4. Submission of Matters to a Vote of Security Holders....... 11
PART II
5. Market for Registrant's Common Stock and Related
Stockholder Matters....................................... 12
6. Selected Financial Data................................... 13
7. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 14
8. Financial Statements and Supplementary Data............... 20
9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure....................... 20
PART III
10. Directors and Executive Officers of the Registrant........ 21
11. Executive Compensation.................................... 21
12. Security Ownership of Certain Beneficial Owners
and Management............................................ 21
13. Certain Relationships and Related Transactions............ 21
PART IV
14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K.................................................. 22
PART V
15. Recent Sales of Unregistered Securities................... 23
PART I
ITEM 1. BUSINESS
INTRODUCTION
Industrial Holdings, Inc. (including its subsidiaries, the "Company") was
incorporated in August 1989. The Company's principal executive offices are
located at 7135 Ardmore, Houston, Texas 77054, and its telephone number is (713)
747-1025.
The Company's business is organized into three segments: the Fastener
Manufacturing and Sales Segment (the "Fastener Segment"), comprised of Landreth
Engineering Company ("Landreth"), Connecticut Rivet ("CRivet"), American Rivet
Company, Inc. ("American"), LSS-Lone Star-Houston, Inc. ("Lone Star") and WALKER
BOLT Manufacturing Co. ("WALKER"); the Valve and Supplies Sales Segment (the
"Valve Segment") which includes Pipeline Valve Specialty ("PVS"), Industrial
Municipal Supply ("IMSCO"), Manifold Valve Services, Inc. ("MVS") and Rogers
Equipment ("Rogers"); and the Machine Sales and Services Segment (the "Machine
Segment") which includes Regal Machine Tools ("Regal"), Rex Machinery Movers
("RMM"), U.S. Crating ("USC") and Rex/Paul's Machine Sales ("RPMS"),
collectively The Rex Group, Inc. ("REX").
The Fastener Segment manufactures industrial metal fasteners, including
special cold-formed fasteners and threaded fastener products for sale primarily
to manufacturers in the furniture, home appliance and automotive industries and
to the petrochemical, chemical, petroleum refining and energy industries. The
Valve Segment remanufactures and distributes pipeline valves, manifold valves,
industrial valves, blowout preventers and other products for sale primarily to
drilling contractors, petrochemical, chemical and petroleum refining industries
and to the pipeline transportation and product storage industries. The Machine
Segment sells new and used machine tools, conducts machine moving operations,
and provides international export crating services.
For information concerning each of the Company's industry segments, SEE
Note 13 of Notes to Consolidated Financial Statements.
STRATEGY
The Company's business strategy is to:
o Identify and pursue acquisitions within the business segments in
which the Company currently operates as well as in related markets;
o Continue to diversify each segment's customer bases and geographical
markets; and
o Expand into international markets and increase export sales.
1
Since its inception, the Company has expanded its business through
acquisition. The Company's acquisitions since its formation are listed below:
YEAR
NAME LOCATION ACQUIRED DESCRIPTION
---- -------- -------- -----------
IMSCO Baytown, Texas 1989 pipe, valves and fittings
distribution
PVS Houston, Texas 1992 valve remanufacturing
Landreth Houston, Texas 1992 rivet manufacturing
REX Houston, Texas 1993 machine tool distribution
CRivet Waterbury, Connecticut 1995 rivet manufacturing
American Chicago, Illinois 1996 rivet manufacturing
Lone Star Houston, Texas 1997 fastener manufacturing
MVS Jennings, Louisiana 1997 valve remanufacturing
Rogers Houston, Texas 1997 blowout preventer repair
WALKER Houston, Texas 1997 fastener manufacturing
The Company has financed these acquisitions with cash provided by operations,
borrowings under its credit agreements and public and private financings. The
Company anticipates that future acquisitions, if any, will be similarly
financed.
RECENT DEVELOPMENTS
In January 1998, the Company completed an offer (the "Offer") to the
holders of its issued and outstanding Class B Warrants to exchange each Class B
Warrant and $10.00 cash for one share of the Company's Common Stock, one Class C
Warrant and one Class D Warrant. The holders of 1,101,689 Class B Warrants
tendered their Class B Warrants and purchased 1,101,689 shares of Common Stock
and were issued 1,101,689 Class C Warrants and 1,101,689 Class D Warrants. The
Company received net proceeds of $10,910,000 after deducting approximately
$100,000 of expenses incurred in connection with the Offer. After the completion
of the Offer, there are 152,725 Class B Warrants, 1,723,603 Class C Warrants and
1,101,689 Class D Warrants outstanding.
In February 1998, the Company acquired all the capital stock of Philform,
Inc. ("Philform") and certain leased operating assets for 419,773 shares of the
Company's common stock valued at $4,520,000. Simultaneously, Philform
contributed the Equipment and its activities to OF Acquisition L.P., a limited
partnership (the "Partnership"), in exchange for a 49% limited partnership
interest. Philform manufactures and sells forming and fastening systems
primarily to the automotive industry. Its 1997 revenues were $13.4 million.
After the acquisition, the business and operations previously conducted by
Philform will be conducted by the Partnership.
2
The Company has entered into a preliminary agreement to purchase Belleli
Energy srl, an Italian company which manufactures high pressure vessels and heat
exchangers for the petrochemical industry worldwide. The agreement is subject to
significant conditions. Given these conditions, there can be no assurance that
the acquisition will be consummated. If and when it is consummated, the
acquisition is expected to be financed through an increase in the Company's
existing credit facilities and seller financing.
SEGMENT DESCRIPTION
Through its three business segments, the Company serves the following
industries: furniture, home appliances, automotive, petrochemical, chemical and
petroleum refining, energy, pipeline transportation and product storage. Its
customers within the oil and gas, petrochemical, chemical and manufacturing
industries are concentrated in the Gulf Coast region of the United States. New
and used machine tools are sold primarily to customers in Texas and Louisiana.
The following table summarizes the products, markets and distribution
methods by segment:
FASTENER MANUFACTURING AND SALES
DISTRIBUTION
PRODUCTS AND SERVICES MARKETS METHODS
--------------------- ------- -------
Landreth, CRivet and Cold formed fasteners Furniture, home appliance National network of
American (collectively and threaded fastener and automotive industries commission based
"LEC") products manufacturer's
sales representatives
directed by national
sales manager
Lone Star and Stud bolts, speciality Refineries, petrochemical Inside and outside
WALKER fasteners and coating and chemical plants, sales staff and
services power generations distributors
generation plants,
offshore oil and gas
installations
VALVE AND SUPPLIES SALES
PVS, MVS, Rogers and Pipeline valves, high Drilling contractors, Inside and outside
IMSCO pressure valves, indus- pipeline transportation sales staff
trial valves and other and storage companies,
products; blow out pre- petroleum, petrochemical
venter remanufacturing and chemical refineries
MACHINE SALES AND SERVICES
New (primarily Okuma) Manufacturers in the Gulf Inside and outside
and used machine tools, Coast area sales staff
machinery moving and
REX export crating services
3
FASTENER MANUFACTURING AND SALES SEGMENT
RIVETS
PRODUCTS AND SERVICES. Landreth, CRivet and American (collectively "LEC")
manufacture industrial metal fasteners, including special cold-formed fasteners
and threaded fastener products for sale to national manufacturers primarily in
the furniture, home appliance and automotive industries. LEC manufactures these
fasteners in solid, semi-tubular, tubular or multi-dimensional form. LEC
emphasizes the manufacture of special cold-formed fasteners that are primarily
targeted to more highly-engineered applications, such as the automotive original
equipment manufacturers ("OEM") and electronic industries. These special
cold-formed fasteners can, in many cases, replace more expensive machined parts.
Industrial metal fasteners, or rivets, are typically constructed of low-carbon
steel and can be plated with a variety of protective coatings through LEC's
semi-automatic plating process or through plating services provided by third
parties. These fasteners can also be made from aluminum, copper, monel, brass or
stainless steel. LEC manufactures these industrial fasteners in a variety of
sizes, with diameters ranging up to 5/8" and lengths up to 4 1/2".
CUSTOMERS AND MARKETING. LEC's customers are primarily national
manufacturing companies in the furniture, home appliance and automotive
industries. LEC sells its products to over 2,000 different manufacturing
customers, with the 10 largest customers accounting for, in the aggregate, 26%
of LEC's sales for 1997. During 1997, no single customer accounted for over 10%
of LEC's sales.
LEC manufactures and distributes its products from its facilities in
Houston, Texas, El Paso, Texas, Waterbury, Connecticut and Franklin Park,
Illinois. LEC conducts sales efforts and serves its customers by using a
combination of its employees and a national network of 19 manufacturer's sales
representatives that work on a commission basis. These representatives are under
the supervision of LEC's national sales manager. The majority of LEC's products
are sold according to specific customer orders. LEC manufactures its products
according to customer specifications, and accordingly, does not maintain an
extensive inventory of industrial fasteners. LEC inspects all of its products at
the time of production and mechanically inspects such products prior to shipment
to its customers. LEC also conducts, at the request of its customers,
statistical process control procedures. All locations are pursuing QS 9000
certification by December, 1998.
SUPPLIERS. LEC purchases raw materials from both domestic and foreign
sources. LEC currently purchases steel wire from three principal suppliers, and
the Company believes that other acceptable sources are available. LEC has
encountered no difficulty in meeting its supply requirements of any raw
materials necessary for the manufacture of its products and maintains raw
materials inventory levels for approximately 30 days of operations.
COMPETITION. LEC generally is subject to competition from approximately
ten rivet manufacturing companies, some of which may have greater financial
resources than the Company. In the special cold-formed fastener market that is
concentrated primarily in the automotive and electronic markets, LEC also faces
competition from larger public companies and foreign manufacturers, many of whom
have greater financial resources than the Company. LEC believes
4
that its competitive advantages include its range of production capabilities,
its emphasis on high volume and low overhead production processes, its in-house
tooling operations and its national marketing strategy. The Company believes
that LEC's ability to compete effectively in the future will be primarily
dependent on maintaining trained and skilled production personnel and the
highest possible level of product quality.
STUD BOLTS AND SPECIALTY FASTENERS
PRODUCTS AND SERVICES. Lone Star manufactures ASTM Grade stud bolts and
threaded fasteners, with emphasis on value added services such as
electroplating, coating and special machining. Lone Star also distributes a full
line of fasteners to meet the needs of their customers. The Lone Star facility,
including its fully equipped testing laboratory which is certified by Lloyd's
Registry, operates in accordance with an ISO 9002 quality program. A growing
percentage of sales are done on an integrated supply basis.
WALKER produces specialty industrial fasteners - bolts, screws, studs,
nuts and washers all made to order, in inch and metric measurements, through 4"
diameter. Primary manufacturing processes include forging, heat-treating,
machining, grinding and threading. To focus on dependable service and quick
deliveries, orders are limited to quantities of 1,000 or less. To ensure the
required level of quality, carefully selected and trained personnel are
supplemented by comprehensive destructive and nondestructive testing
capabilities in its NIST (National Institute for Standards and Technology)
accredited Quality Control ("QC") laboratory.
CUSTOMERS AND MARKETING. The 700 customers of Lone Star are primarily in
the petrochemical, chemical and petroleum refining and energy industries.
Approximately 80% of its sales are in the Gulf Coast area. The top 25 accounts
represent two-thirds of sales. A significant amount of Lone Star's sales are on
an annual contract basis. About half of Lone Star sales are shipped from
finished inventory, with the balance manufactured, machined, coated or
electroplated according to specific customer order.
Lone Star is on the approved manufacturer and coating vendor lists of
major oil and chemical companies such as Shell, Exxon, DuPont, Union Carbide,
Phillips Petroleum, Aramco, and Esso Production Malaysia Inc. A feature very
popular with these and other customers is LSS's stamping of an individual heat
code on each part for traceability.
Lone Star maintains a backlog of approximately 10 days sales, due to short
lead times, with over 50% of all orders filled within 72 hours of placement. The
manufacturing plant in Spring, Texas operates 24 hours a day, five days a week,
with a small fleet of Company operated delivery trucks to enhance customer
service in certain areas.
Lone Star's sales are handled through experienced inside sales staff in
Spring, Texas. Lone Star also has an extensive network of distributors and sales
representatives throughout North America.
5
Approximately 45% of WALKER's sales are in the Gulf Coast area, Arkansas
and Oklahoma. The other 55% are shipped to 43 of the remaining states plus 5
provinces in Canada. Its top 35 customers account for 50% of total sales,
indicating a broad customer base. Without an outside sales force, WALKER relies
on trained and experienced inside sales staff and a customer network of over 500
distributors throughout its North American market area.
No single customer accounts for greater than 10% of Lone Star and WALKER's
combined sales.
SUPPLIERS. Lone Star purchases raw materials primarily from four domestic
and foreign steel mills, who must comply with strict specifications. Finished
goods are purchased either by direct import or from domestic manufacturers and
distributors. The approved vendor list contains an adequate number of vendors to
provide required deliveries while maintaining competitive purchase prices.
Almost half of the material purchased is steel bar and alloy hex nuts. This
product is purchased three to six months in advance, with delivery spaced so
that the inventory turns regularly with no stock interruptions.
Because of the limited quantities and diversity of materials, WALKER
purchases all of its raw materials from warehouses. Twenty-five vendors supply
bar stock which is predominantly domestic in origin, although a few special
requirements come from overseas sources, principally Western Europe. All are
acceptable sources of supply and no shortage of raw materials are anticipated.
WALKER has the in-house capability and accreditation to analyze and certify the
chemistry of incoming material from any source.
COMPETITION. Lone Star competes with nine stud bolt manufacturers on a
national basis, the largest of which are located in the Houston area. Lone Star
also competes with six coating companies in the Houston market. No single
competitor has more than a 20% market share. Lone Star is the only combined
manufacturing and coating facility, which is a competitive advantage in both
price and delivery. The quality, appearance and traceability of the Lone Star
product along with superior customer service allows Lone Star to receive a
slight premium for its fasteners.
Primary competitors of WALKER include 5 local manufacturers and 3 national
producers located elsewhere. With its commitment to quality of product and
service, WALKER enjoys a widespread reputation as a dependable, but not low
cost, supplier of specialty fasteners.
VALVE AND SUPPLIES SALES SEGMENT
PRODUCTS AND SERVICES. The Valve Segment remanufactures or reconditions
used or malfunctioning valves for subsequent sale in a remanufactured condition
as well as distributes pipe, valves and fittings to companies in the
petrochemical, chemical and petroleum refining industries for use in the
refining process, pipeline transportation and storage companies and oil and gas
drilling industry. The valve and supplies market is primarily in the Gulf Coast
area between Mobile, Alabama and Brownsville, Texas.
6
PIPELINE VALVES are used to regulate the flow and storage of natural
gas and refined petroleum products. Pipeline valves bear serial numbers that are
traceable to the OEM and permit each end-user to determine the OEM, the original
purchaser and the specifications of the valve, thereby allowing the end-users to
verify the specifications and quality of the valves. They range in size from 2"
to 60" in diameter, depending on the nature (liquid or gas), quantity and
desired speed of the flow of natural gas or refined petroleum products regulated
by the pipeline valve and are typically made of carbon steel.
HIGH PRESSURE VALVES (primarily gate valves) are manufactured to
withstand greater pressures than either industrial or pipeline valves and are
principally used in oil and gas drilling applications. These valves (either sold
separately or assembled by MVS in a composite known as a drilling manifold) are
critical for the drilling contractor to assist in controlling bottom hole
pressures during drilling. The manifold and the drilling blowout preventer
("BOP") work in concert with one another. Occasionally, a third discrete
component (often including a separate hydraulic choke and control console
located on the drilling rig) known as a drilling choke, is combined to form the
principal components of the pressure control system of a drilling rig. The gate
valves MVS remanufactures have orifices ranging from 1-13/16 inches to 4-1/8
inches, with working pressures up to 15,000 PSI. The valve brands that MVS
regularly remanufactures include original equipment manufactured by Cameron,
Flocon, Shaffer, QVM, Demco, WKM, McEvoy, and Vetco.
INDUSTRIAL VALVES are flow inhibitors used with pipe that are
typically constructed of either carbon or alloy steel and are manufactured and
sold in a variety of forms, including gate valves, globe valves, check valves,
ball valves, plug valves and butterfly valves. Valves sold by IMSCO range from
1/2" to 36" in diameter and are available threaded or with a socket-weld,
flanged or butt-weld end.
CONTRACT REMANUFACTURING services are performed for certain
customers. These contract services typically consist of remanufacturing or
modifying the customer's existing valves by installing stem extensions and/or
mounting actuators on the valves, preparing such valves for underground or
underwater use and conducting performance testing of such valves.
PIPE is typically sold in 20-foot or 40-foot lengths, in sizes
ranging from 1/2" to 72" in diameter, for use in the refining process by
chemical plants and refineries. Pipe is sold in a variety of sizes and wall
thicknesses, depending on the nature (liquid or gas) and quantity of the product
to be transported or processed through the pipe as well as the desired pressure
levels for transporting and processing the product through the pipe.
ADDITIONAL PRODUCTS include gaskets, pipe hangers, steel, strainers,
swages, fasteners, tools, tubing and mill supplies. Mill supplies typically
consist of incidental construction-related items such as gloves, boots, ladders,
rope, blades, lubricants and other hardware items.
ADDITIONAL SERVICES. In addition to gate valves and manifold
packages, MVS offers repair services for diverter ball valves, reset relief
valves, double and single sub sea block valves, drilling choke and control
panels, crosses, tees, DSAs, and spools. MVS maintains a 100% customer
satisfaction warranty policy, which states that "MVS warrants its repair and
remanufacturing work
7
to be free from defects caused by workmanship for one year." MVS remanufactures
and services BOPs through its Houston-based facility ("Rogers"). Rogers rebuilds
BOPs ranging from 7 inches to 21 and 3/4 inches, with working pressures ranging
from 2,000 pounds to 15,000 pounds working pressure. The BOPs serviced and
rebuilt are originally manufactured by Cameron, Shaffer, and Hydril. Rogers also
sells rubber goods and replacement parts for BOPs.
CUSTOMERS AND MARKETING. PVS sells its products to over 200 different
customers primarily in the pipeline transportation or product storage business.
Remanufacturing and distribution of pipeline valves are conducted from South
Houston, Texas. PVS sells new, used and remanufactured pipeline valves from its
existing inventory and pursuant to special customer orders. By maintaining a
broad inventory of types of pipeline valves, the Company believes that PVS is
able to respond quickly to its customers' needs. Per-job orders account for
substantially all of the remanufacturing work performed and pipeline valves sold
by PVS. In the past, PVS has not entered into exclusive supply contracts with
any particular customer. PVS maintains an internal quality control program to
help ensure the quality of its remanufacturing process. Many of PVS' customers
monitor and approve its quality standards by sending quality assurance personnel
to PVS' facilities to ensure that the reconditioned valves meet their standards.
PVS also conducts seminars, often at the request of its customers, for training
field personnel in pipeline valve preventive maintenance.
MVS' customers include domestic and international drilling contractors,
rental tool supply companies and oil and gas operators. The majority of MVS'
work is performed for the offshore drilling contractor. A small portion of its
repair work is for equipment based on production platforms. MVS' customers
operate worldwide, wherever exploration and production of oil and gas occurs.
IMSCO's customers consist primarily of petrochemical, chemical and
petroleum refining plants and construction companies performing services at the
plant locations. Its distribution operations are conducted from its Baytown,
Texas headquarters and one branch location. Each location has inventories for
distribution of products directly to customers. While IMSCO enters into blanket
distribution contracts that provide for the distribution of certain products at
set prices with particular customers, such contracts do not represent a material
portion of IMSCO's business. IMSCO primarily distributes products to customers
located within 50 miles of its two office warehouse facilities.
No single customer comprises over 10% of Valve Segment sales.
SUPPLIERS. PVS acquires its pipeline valves from bid lists from
approximately 300 suppliers including pipeline transportation companies,
individual brokers and from other remanufacturing companies or OEMs. Pipeline
transportation companies construct new pipelines and repair segments of existing
pipelines. After completion of original construction or repair, the new valves
(consisting of unused excess pipeline valves or used pipeline valves that
require remanufacturing) are sold to dealers through bid lists. PVS continuously
receives and bids on these bid lists, as do all other remanufacturers of
pipeline valves. PVS also acquires some of its products from individual brokers
that buy and resell excess pipeline valves. Typically, PVS places pipeline
valves purchased from individual brokers in its inventory because of favorable
pricing. When PVS receives an order and
8
the products are not available in its inventory, it may also purchase the
ordered products from other remanufacturing companies or OEMs. Typically, a
majority of the valves purchased from brokers or other remanufacturing companies
were originally purchased from bid lists.
Most of the products distributed by IMSCO may be obtained from numerous
alternative sources of supply. Because the demand for pipe, valves and fittings
is particularly price and time sensitive, IMSCO has historically elected to
concentrate its efforts in establishing and maintaining relationships with
manufacturers or suppliers who can provide the lowest prices and quickest
delivery time. During the last fiscal year, approximately 300 vendors supplied
substantially all of IMSCO's purchases of pipe, valves and fittings.
IMSCO warehouses certain products but purchase the majority of their
products on an as-needed basis, depending on demand or the availability of
inventory that can be acquired at favorable prices. IMSCO does not have written
contracts with any of their suppliers. Purchases from suppliers, including
credit arrangements, are negotiated on an order-per-order basis. Accordingly,
all arrangements are terminable by either party immediately or on short notice.
Relationships with suppliers are believed to be satisfactory and no single
vendor supplies 10% or more of the products purchased during the year.
COMPETITION. PVS is subject to competition based primarily on pricing and
customer service. The Company believes that Oilfield Fabricating and Machine,
Inc. is its major competitor in the industry and that PVS is subject to
competition from less than ten similarly-sized remanufacturing businesses. PVS'
management believes that its broad inventory of pipeline valves and its
remanufacturing facility are its primary competitive advantages and that its
ability to compete effectively is dependent on maintaining its inventory levels,
retaining existing business relationships and responding to its customers' needs
through timely service and providing quality products.
MVS' primary competitors are the major equipment manufacturers which sell
primarily new products. Other competitors are small valve repair facilities with
low overhead which compete primarily on price.
IMSCO faces competition based on pricing and the ability to service
customers and timely respond to their needs. IMSCO competes with numerous larger
and smaller distributors of pipe, valves and fittings, many of whom have greater
financial resources than the Company. Major competitors with IMSCO include
McJunkin Corp., Hughes, Inc., Wallace/Tyler Dawson, Redman Supply Co. and R.J.
Gallagher. The Company believes that the level of customer service provided by
IMSCO is its primary competitive advantage. The Company believes that for IMSCO
to compete effectively, it must adhere to the "overall quality program"
instituted by the Company, maintain existing business relationships, respond to
the needs of its customers through quality service and provide price-competitive
products to its customers.
9
MACHINE SALES AND SERVICES SEGMENT
PRODUCTS AND SERVICES. REX distributes new machine tools in South Texas
and Louisiana for certain manufacturers including Okuma Machinery, Inc.
("Okuma") on an exclusive basis, and other manufacturers on a non-exclusive
basis. REX sells used machine tools primarily to large corporations and machine
shops in the Gulf Coast region. Machine tools are used in various industries in
the manufacturing process to cut metal and are sold in a variety of sizes
depending upon the task they are designed to perform. In addition, REX sells
parts and services for machine tools and contracts on a job-by-job basis to move
machine tools, predominantly in the South Texas region. For 1997, the sale of
machine tools accounted for 81% of REX's revenues.
REX provides crating services for a variety of products for export.
Typically, a freight forwarder or Company exporting its own product will
contract with REX for a specified product to be crated. The products are
forwarded to the REX facility, where the crating services are performed. REX
then forwards the crates to the shipping source, which is typically an
ocean-going vessel. For 1997, export crating services accounted for 16% of REX's
revenues.
CUSTOMERS AND MARKETING. REX sells its products and services to over 2,000
customers, with no single customer accounting for more than 10% of REX's sales
in the year ended December 31, 1997. REX conducts its sales efforts from its
Houston, Texas location.
SUPPLIERS. REX has several exclusive distribution agreements, including
agreements with Okuma, for South Texas and Louisiana. All machines are purchased
on an order-by-order basis.
COMPETITION. Machine tool sales are subject to competition from machine
tool distributors of competitive machine tools manufacturers. Depending upon the
size and use of the product manufactured, the competitor will vary. The Company
believes REX has a competitive advantage in its range of product offerings. The
Company believes REX's ability to compete effectively in the future is primarily
dependent upon maintaining trained and skilled machine tool personnel and the
retention of its Okuma distribution line.
REX typically competes with three crating companies in the Houston area
and generally does not compete outside this region. The Company believes it has
a competitive advantage in this market because of its facilities, personnel and
experience and its proximity to Houston ports.
BACKLOG
As of December 31, 1997, the backlog for the Fastener Segment, Valve
Segment and Machine Segment was $9,676,000, $2,088,000 and $4,288,701,
respectively, compared to $6,440,000 for the Fastener Segment at December 31,
1996.
REGULATION
The Company's business is affected by governmental regulations relating to
its industry segments in general, as well as environmental and safety
regulations that have specific application
10
to the Company's business. The Company does not believe that compliance with
federal, state or local environmental laws adversely affects its business,
earnings or competitive position. The Company cannot predict whether future
legislation will have any effect on its operations. The Company does not believe
that environmental laws have had a material impact on industry standards and/or
quality control procedures.
ITEM 2. PROPERTIES
The Company manufactures and distributes its products and services
throughout the United States, Canada and Mexico. The Company has eleven
manufacturing facilities and two distribution facilities in five states. At
December 31, 1997, these facilities contained an aggregate of approximately
657,000 square feet of which approximately 27% is owned and the remainder
leased.
The Company maintains its principal executive offices at 7135 Ardmore,
Houston, Texas. The office facility portion of this property consists of
conventional office space and is, in the opinion of management, adequate to meet
the Company's needs for the foreseeable future. The Company believes that all
existing office and warehouse facilities leased or owned by its subsidiaries are
adequate to meet the needs of the Company for the foreseeable future and are
suitable for the business conducted therein.
The following chart shows the number of employees and the number and
square footage of facilities by segment.
NUMBER OF NUMBER OF SQUARE
SEGMENT EMPLOYEES FACILITIES FOOTAGE
- ------- --------- ---------- -------
Fastener Manufacturing and Sales 518 6 404,000
Valve and Supplies Sales 122 5 98,000
Machine Sales and Services 84 2 155,000
Corporate 6 -- --
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in litigation arising in the ordinary course of
its business. In the opinion of management, the ultimate liability, if any, as a
result of these matters will not have a material adverse effect on the Company's
consolidated financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders in
the fourth quarter of 1997.
11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Common Stock trades on The NASDAQ Stock Market ("Nasdaq") under the
symbol "IHII." The following table sets forth the high and low closing sales
prices of the Common Stock, for the periods indicated below:
PRICE RANGE
---------------------
HIGH LOW
---- ---
1996
First Quarter $ 6.75 $ 3.75
Second Quarter $10.50 $ 6.50
Third Quarter $10.13 $ 7.00
Fourth Quarter $11.25 $ 9.25
1997
First Quarter $14.00 $10.63
Second Quarter $11.25 $ 9.88
Third Quarter $15.88 $10.88
Fourth Quarter $16.00 $11.81
All of the foregoing prices reflect interdealer quotations, without retail
mark-up, mark-downs or commissions and may not necessarily represent actual
transactions in the common stock.
On March 19, 1998, the last reported sales price of the Common Stock, as
quoted by Nasdaq, was $12.25 per share. On March 19, 1998, there were
approximately 580 record holders of the Common Stock.
The Company has never paid dividends on its Common Stock and does not
anticipate paying any cash dividends in the foreseeable future. The Company
presently intends to retain future earnings to support the Company's operations
and growth. Any payment of cash dividends in the future will be dependent on the
amount of funds legally available therefor, the Company's earnings, financial
condition, capital requirements and other factors that the Board of Directors
may deem relevant.
12
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data presented below are derived from and should be
read in conjunction with the Company's Consolidated Financial Statements and
related notes. This information should also be read in conjunction with Item 7 -
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
YEARS ENDED DECEMBER 31,
--------------------------------------------------------
(in thousands except for per share amounts)
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
INCOME STATEMENT DATA:
Sales ........................... $ 83,564 $ 51,423 $ 38,983 $ 34,730 $ 35,113
Cost of sales ................... 63,277 41,045 31,111 27,485 27,377
-------- -------- -------- -------- --------
Gross profit .................... 20,287 10,378 7,872 7,245 7,736
Selling, general & administrative 14,493 7,806 6,401 6,569 6,198
-------- -------- -------- -------- --------
Operating income ................ 5,794 2,572 1,471 676 1,538
Other income (expense) .......... (1,217) (1,037) (824) (575) (666)
-------- -------- -------- -------- --------
Income before income taxes ...... 4,577 1,535 647 101 872
Income tax provision ............ 1,868 408 102 69 109
-------- -------- -------- -------- --------
Net income ...................... $ 2,709 $ 1,127 $ 545 $ 32 $ 763
======== ======== ======== ======== ========
Basic earnings per share ........ $ .44 $ .31 $ .18 $ .01 $ .29
Diluted earnings per share ...... $ .39 $ .26 $ .17 $ .01 $ .27
Weighted average common
shares outstanding - basic ... 6,113 3,688 3,037 2,942 2,613
Weighted average common
shares outstanding - diluted . 7,027 4,338 3,134 3,038 2,786
DECEMBER 31, (IN THOUSANDS)
--------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
BALANCE SHEET DATA:
Working capital ................. $ 5,891 $ 3,101 $ 1,459 $ 2,254 $ 1,164
Total assets .................... 67,089 43,690 27,494 20,848 20,819
Long-term obligations(1) ........ 10,553 7,326 5,891 3,568 3,229
Total liabilities ............... 36,752 27,135 19,891 13,965 14,386
Shareholders' equity ............ 30,338 16,554 7,603 6,883 6,433
- ----------
(1) Excludes deferred income taxes and deferred compensation.
13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
The Company was formed in August 1989 and acquired IMSCO in December 1989,
PVS in January 1992, Landreth in October 1992, REX in April 1993, CRivet in
December 1995, American in November 1996, Lone Star in February 1997, MVS in
March 1997, Rogers in August 1997 and WALKER in November 1997.
RESULTS OF OPERATIONS
1997 1996 1995
----------- ----------- -----------
Sales:
Fastener Segment ............... $48,840,795 $22,523,401 $13,204,532
Valve Segment .................. 19,098,713 12,472,456 13,449,344
Machine Segment ................ 15,624,347 16,427,093 12,329,194
----------- ----------- -----------
83,563,855 51,422,950 38,983,070
Cost of Sales:
Fastener Segment ............... 36,351,460 17,769,223 10,510,794
Valve Segment .................. 13,467,617 9,466,712 10,534,463
Machine Segment ................ 13,458,243 13,808,638 10,065,971
----------- ----------- -----------
63,277,320 41,044,573 31,111,228
Selling, General and Administrative:
Fastener Segment ............... 8,182,946 2,689,183 1,432,471
Valve Segment .................. 3,002,128 2,232,541 2,227,406
Machine Segment ................ 2,423,430 2,085,818 2,103,374
Corporate ...................... 884,040 798,647 637,781
----------- ----------- -----------
14,492,544 7,806,189 6,401,032
Operating Income ..................... $ 5,793,991 $ 2,572,188 $ 1,470,810
=========== =========== ===========
YEAR ENDED DECEMBER 31, 1997 COMPARED WITH YEAR ENDED DECEMBER 31, 1996.
SALES. On a consolidated basis sales increased $32,140,905 or 63% in 1997
compared to 1996.
14
Fastener Segment sales increased $26,317,394 or 117% in 1997 compared to
1996, primarily as a result of the acquisition of Lone Star in February 1997 and
the inclusion of a full years' operations of American which was acquired in
November 1996.
Valve Segment sales increased $6,626,257 or 53% in 1997 compared to 1996,
primarily as a result of the acquisition of Manifold in March 1997. This
increase in sales was offset by a $4.6 million decrease in sales at IMSCO as a
result of the loss of key salesmen in late 1996. By late 1997, all key salesmen
had been replaced and as a result, fourth quarter sales for IMSCO increased 21%
over the third quarter and were only $198,000 less than the fourth quarter in
the preceding year.
Machine Segment sales decreased $802,746 or 5% primarily because of delays
in receipts of machine tools from the manufacturer which caused some
cancellation of orders by customers as well as deferral of shipments to
customers to 1998. Management does not expect this delay in the receipt of
machine tools to continue in 1998.
COST OF SALES. On a consolidated basis, cost of sales increased
$22,232,747 or 54% in 1997 compared to 1996. However, cost of sales as a
percentage of sales was 76% in 1997 compared to 80% in 1996.
Cost of sales for the Fastener Segment increased $18,582,237 or 105% in
1997 compared to 1996, primarily as a result of the acquisitions of Lone Star
and American. Cost of sales as a percentage of sales was 74% in 1997 compared to
79% in 1996. The 1996 cost of sales percentage was unusually high because of the
relocation of the Connecticut manufacturing facility in late 1996 and the
accompanying loss in production efficiency during the period of the relocation.
Cost of sales for the Valve Segment increased $4,000,905 or 42% primarily
as the result of the acquisition of Manifold coupled with the decrease in cost
of sales at IMSCO as a result of the corresponding decrease in sales. Cost of
sales as a percentage of sales was 71% in 1997 compared to 76% in 1996 as lower
margin sales at IMSCO were replaced with higher margin sales at PVS and MVS.
Cost of sales for the Machine Segment decreased $350,395 or 3% as a result
of the decrease in sales. Cost of sales as a percentage of sales was 86% in 1997
compared to 84% in 1996. The increase in cost of sales as a percentage of sales
was primarily due to the opening in 1997 of the crating facility located at the
Houston Ship Channel and to increased lumber costs in the export crating
operations. Lumber costs remain high in 1998.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. On a consolidated basis,
selling, general and administrative expenses increased $6,686,355 or 86% in 1997
compared to 1996.
Selling, general and administrative expenses for the Fastener Segment
increased $5,493,763 or 204% primarily as the result of the acquisitions of Lone
Star and American. Selling, general and
15
administrative expenses increased a greater percentage than sales because of the
inclusion of goodwill amortization associated with the acquisitions of Lone Star
and American.
Selling, general and administrative expenses for the Valve Segment
increased $769,587 or 34% primarily as the result of the acquisition of MVS
coupled with a decrease in selling, general and administrative expenses at
IMSCO. This increase was less than related increase in sales as most costs at
MVS are accounted for as cost of sales.
Selling, general and administrative expenses for the Machine Segment
increased $337,612 or 16% for 1997 compared to 1996 primarily as a result of the
hiring of four additional sales people in 1997.
There was no significant change in Corporate selling, general and
administrative expenses.
INTEREST EXPENSE. On a consolidated basis, interest expense increased
$408,689 or 31% in 1997 compared to 1996. The increase was the result of
increases in debt related to the acquisitions of Lone Star and American. This
increase was partially offset by a reduction in interest expense at LEC as a
result of a $3,093,000 conversion of debt to equity in 1997.
OTHER INCOME. On a consolidated basis, other income increased $228,608 or
165% in 1997 compared to 1996. This increase was primarily the result of a
$270,000 insurance gain related to a fire at an unused manufacturing facility.
INCOME TAXES. Income taxes increased $1,459,122 or 357% in 1997 compared
to 1996. The effective tax rate for 1997 was 41% compared to 27% for 1996.
During 1996, the Company reduced its deferred tax asset valuation allowance by
$239,000. No similar reduction occurred in 1997.
NET INCOME. Net income was $2,709,465 in 1997 compared to $1,126,712 in
1996 as a result of the foregoing factors.
YEAR ENDED DECEMBER 31, 1996 COMPARED WITH YEAR ENDED DECEMBER 31, 1995.
SALES. On a consolidated basis sales increased $12,439,880 or 32% in 1996
compared to 1995.
Fastener Segment sales increased $9,318,869 or 71% as a result of the
inclusion of a full year of operation of CRivet acquired in December 1995 and
the acquisition of American in November 1996.
Valve Segment sales decreased $976,888 or 7% as a result of the loss of
key salesmen at IMSCO in late 1996.
16
Machine Segment sales increased $4,097,899 or 33% as a result of increase
in new machine sales.
COST OF SALES. On a consolidated basis, cost of sales increased $9,933,345
or 32% in 1996 compared to 1995. Cost of sales as a percentage of sales was 80%
in 1996 and 1995.
Fastener Segment cost of sales increased $9,318,869 or 71% in 1996
compared to 1995. Cost of sales as a percentage of sales was 79% in 1996 and 80%
in 1995. The increase in cost of sales was primarily the result of the
acquisitions of CRivet and American. Cost of sales as a percentage of sales was
unusually high in 1996 because of the relocation of the Connecticut
manufacturing facility in late 1996 and in 1995 as a result of the inclusion of
$1,036,580 in wire sales at a 4.8% gross margin.
Valve Segment costs of sales decreased $976,888 or 7% in 1996 compared to
1995. Cost of sales as a percentage of sales was 76% in 1996 and 78% in 1995 as
lower margin sales at IMSCO were replaced with higher margin sales at PVS.
Machine Segment cost of sales increased $3,742,667 or 37% in 1996 compared
to 1995. Cost of sales as a percentage of sales was comparable at 84% in 1996
and 82% in 1995.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. On a consolidated basis,
selling, general and administrative expenses increased $1,405,157 or 22% in 1996
compared to 1995.
Selling, general and administrative expenses for the Fastener Segment
increased $1,256,712 or 88% for 1996 compared to 1995. This increase was
primarily attributable to the acquisitions of CRivet and American.
There was no significant change in selling, general and administrative
expenses for the Valve Segment or the Machine Segment. There was no significant
change in Corporate selling, general, and administrative expenses.
INTEREST EXPENSE. Interest expense increased $353,650 or 36% in 1996
compared to 1995 due to increases in debt as a result of the acquisition of
CRivet and American which was partially offset by a reduction in interest rates
in 1996 compared to 1995.
OTHER INCOME. Other income increased $121,030 in 1996 compared to 1995.
This increase was primarily the result of $100,000 in non-recurring fee income
earned for consulting services performed in 1996.
FEDERAL INCOME TAXES. The Company's effective tax rate was 27% in 1996
compared to 16% in 1995. During 1996, the Company reduced its deferred tax asset
valuation allowance by $239,000. A portion of the reduction, approximately
$101,000, was to reflect deferred tax assets used in 1996, the remainder was to
recognize a deferred tax asset of $138,000. Based on management's assessment
17
of earnings trends, expected revenues and cost reductions and the expiration
dates of carryforwards, management determined that it was more likely than not
that these assets would be realized.
NET INCOME. As a result of the foregoing factors, the Company had net
income of $1,126,712 in 1996 compared to net income of $545,147 in 1995.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, the Company had cash of $636,147, working capital of
$5,891,299 and additional borrowing capacity under its line of credit of
$2,753,964. The Company's operations provided cash of $1,204,962 during 1997
compared to $971,918 and $1,233,412 during 1996 and 1995. These cash flows were
primarily attributable to increased net income and depreciation and amortization
over the three year period as a result of acquisitions of businesses which was
offset by increases in current assets which have increased as sales have
increased.
Capital expenditures in 1997 for property and equipment were comparable to
1996 as both years included major equipment purchases for the Fastener Segment
as well as the relocation in 1997 of the Landreth Texas manufacturing facility
and the relocation in 1996 of the Connecticut manufacturing facility and the
related increases in leasehold improvements. In 1997, the Company used cash of
$2,150,622 in the acquisition of businesses. In 1996, the Company acquired net
cash of $1,244,666 in the acquisition of American. In 1995, the Company used
cash of $826,003 to purchase CRivet.
Financing activities provided cash of $450,922 in 1997 compared to
$2,866,955 in 1996 and $738,136 in 1995. The Company raised $2,136,978 in 1997
from the issuance of common stock compared to $6,248,281 in 1996. The 1996
proceeds were used to repay approximately $4,271,224 in debt associated with the
acquisition of American as well as other financing and to purchase property and
equipment for its Fastener Segment. Net borrowing under the revolving line of
credit increased in 1995 as a result of borrowings by CRivet to fund increases
in working capital.
Additionally, the Company has a Demand Note and Line of Credit dated
November 1, 1996 ("Demand Note") among the Company and Comerica Bank-Texas
("Comerica"). The Demand Note is in the principal amount of $14,000,000
($18,000,000 subsequent to 1997) or the lesser of a borrowing base as defined,
bearing interest at the prime rate of Comerica and is payable on demand. This
Demand Note allows the Company to borrow funds based on 80% of eligible accounts
receivable and 50% of eligible inventory. At December 31, 1997, the borrowing
capacity under the Demand Note was $14,000,000 and availability was $2,753,964.
If the principal amount had been $18,000,000 at December 31, 1997, availability
under the Demand Note would have been $4,473,006. The Demand Note is secured by
substantially all of the assets of the Company.
In connection with its acquisitions of businesses, the Company has entered
into various term loans in the principal amount of $10,669,805 secured by the
machinery and equipment and real estate of the businesses acquired.
18
At December 31, 1997, the Company had working capital of $5,891,299,
long-term debt of $10,552,592 and shareholders' equity of $30,337,552. In
January 1998, the Company completed an offer (the "Offer") to the holders of its
issued and outstanding Class B Warrants to exchange each Class B Warrant and
$10.00 cash for one share of the Company's Common Stock, one Class C Warrant and
one Class D Warrant. The Company received net proceeds of $10,910,000 after
deducting approximately $100,000 of expenses incurred in connection with the
Offer. The Company anticipates that its operating cash needs for 1998 can be met
with cash generated from operations, borrowings under its credit facilities with
Comerica and private placements of debt securities. Any acquisition of
additional companies in connection with the Company's acquisition strategy will
require additional financing, which likely would include a combination of debt
and equity financing.
INFLATION
Although the Company believes that inflation has not had any material
effect on operating results, there can be no assurance that the Company's
business will not be affected by inflation in the future.
SEASONALITY
The Company believes that its business is not subject to any significant
seasonal factors, and the Company does not anticipate significant seasonality in
the future. However, the business and operating results of the Company are
dependent on numerous economic and other factors affecting the industries to
which the Company provides products and services. An economic slowdown in these
industries could result in decrease in demand for the Company's products and
services, which could adversely affect the Company's operating results.
YEAR 2000 COMPLIANCE
The Company is conducting a program to review and, if necessary, resolve
data processing issues relating to whether its computer systems will recognize
the year 2000 or will treat any date after December 31, 1999 as a date during
the twentieth century. The Company does not currently have any information
concerning the year 2000 compliance status of its customers or vendors. Although
the Company currently anticipates that it will not incur material expenditures
or disruption of operations relating to year 2000 processing issues, if the
Company or its customers or vendors are unable to resolve any significant
processing issues that may arise in a timely manner, such inability could have
an adverse effect on the Company's business, financial condition and results of
operations. Accordingly, the Company plans to devote the necessary resources to
resolve all significant year 2000 issues in a timely manner.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income
and SFAS No. 131, Disclosures About Segments of an Enterprise and Related
Information. SFAS No. 130 establishes standards
19
for reporting and displaying comprehensive income and its components. SFAS No.
131 establishes standards for the way that public business enterprises report
information about operating segments and related information in interim and
annual financial statements. SFAS Nos. 130 and 131 are effective for fiscal
years beginning after December 15, 1997. Management is evaluating what, if any,
additional disclosures may be required upon the implementation of SFAS No. 130
and 131.
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
This report includes "forward looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21B of the
Securities Exchange Act of 1934, as amended. All statements other than
statements of historical fact included in this report are forward looking
statements. Such forward looking statements include, without limitation,
statements under "Management's Discussion and Analysis of Financial Condition
and Results of Operations Liquidity and Capital Resources" - regarding the
Company's estimate of sufficiency of existing capital resources and ability to
raise additional capital to fund cash requirements for future operations.
Although the Company believes that the expectations reflected in such forward
looking statements are reasonable, it can given no assurance that such
expectations reflected in such forward looking statements will prove to have
been correct. The ability to achieve the Company's expectations is contingent
upon a number of factors which include demand for the Company's products, need
for additional capital for newly acquired companies and the Company's ability to
complete new acquisitions.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements required by this item begin at page F-1 hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
20
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by this item is incorporated by reference to the
material appearing under the heading "Election of Directors" in the Proxy
Statement for the 1998 Annual Meeting of Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this item is incorporated by reference to the
material appearing under the heading "Executive Compensation" in the Proxy
Statement for the 1998 Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information required by this item is incorporated by reference to the
material appearing under the heading "Principal Stockholders" and "Certain
Transactions" in the Proxy Statement for the 1998 Annual Meeting of
Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by this item is incorporated by reference to the
material appearing under the heading "Certain Transactions" in the Proxy
Statement for the 1998 Annual Meeting of Stockholders.
21
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
a. FINANCIAL STATEMENTS
See index to consolidated financial statements on F-1.
b. REPORTS ON FORM 8-K
The Company filed a Current Report on Form 8-K dated December 2,
1997, disclosing the acquisition of WALKER, the related financing
and pro forma financial statements.
The Company filed a Current Report on Form 8-K dated December 23,
1997 disclosing the Commencement of its offer to its Class B
Warrantholders.
On January 26, 1998, the Company filed an amendment to its Current
Report on Form 8-K dated December 23, 1997, announcing the final
results of its offer to its Class B Warrantholders.
On February 11, 1998, the Company filed an amendment to its Current
Report on Form 8-K dated December 23, 1997, filing a letter to its
Class C Warrantholders notifying them of the extension of the
expiration date on the Class C Warrants.
The Company filed a Current Report on Form 8-K dated February 9,
1998 and a related amendment disclosing the acquisition of
Philform, Inc.
c. EXHIBITS
See the Exhibit Index appearing on page EX-1.
22
PART V
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In January and February 1997, McBlue Corporation exercised warrants to
purchase 25,000 shares of Common Stock at $3.80 per share. These warrants were
issued in 1995 in exchange for consulting services performed for the Company.
In a series of transaction from January to July 1997, Renaissance Capital
Partners II Ltd. ("Renaissance") converted $1,060,000 of its 12% Convertible
Debenture (the "Renaissance Debenture") at $3.26 per share to 325,154 shares of
Common Stock. Additionally in February 1997, Double Bar S, Inc. ("DBS")
exercised warrants to purchase 50,000 shares of Common Stock at $4 per share
that DBS had acquired from Renaissance. The proceeds from the Renaissance
Debenture were used to finance the acquisition of Landreth Engineering Company
in 1992.
In a series of transactions from January to September 1997, St. James
Capital Partners, L.P. or its limited partners ("St. James") exercised warrants
to purchase 189,068 shares of Common Stock at $3.27 per share. These warrants
were issued in 1995 in connection with the acquisition of certain assets and
liabilities of MRMC, Inc. ("CRivet").
In January 1997, Don Willy exercised warrants to purchase 6,000 shares of
Common Stock at $4.00 per share. These warrants were issued in 1995 in exchange
for consulting services performed for the Company.
In February 1997, the Company issued 84,211 shares of Common Stock to
Judith Jandl, the sole shareholder of LSS-Lone Star-Houston, Inc. ("Lone Star"),
in connection with the acquisition of Lone Star. These shares were valued at
$606,000.
In March 1997, the Company issued 644,250 shares of Common Stock to
Catalyst Energy Services, Inc. the sole shareholder of Manifold Valve Services,
Inc. ("MVS") in exchange for the outstanding capital stock of MVS. These shares
were valued at $5,074,000.
In May 1997, the Company sold 46,530 shares of Common Stock to
individuals in a private placement. Proceeds from the sale were $395,505.
In June 1997, the Company sold 25,000 units, each unit comprised of one
share of Common Stock plus two Common Stock purchase warrants with an exercise
price of $10 per share, for $10 per unit to McBlue Corporation.
In June 1997, St. James converted at a conversion price of $10 per share
a $1,900,000, 12% note payable (the "St. James Note") together with $133,000 in
accrued interest into 203,300 shares of Common Stock. The St. James Note was
entered into in 1996 to fund a portion of the purchase price of American Rivet
Company, Inc. ("American").
23
In September 1997, St. James exercised warrants to purchase 19,032 shares
of Common Stock at $7 per share. These warrants were issued in 1996 in
connection with the acquisition of American.
In February 1998, the Company issued 375,692 shares of Common Stock
valued at $4,070,000 to the shareholders of Philform, Inc. ("Philform") in
exchange for all the outstanding capital stock of Philform.
In February 1998, the Company issued 44,081 shares of Common Stock valued
at $450,000 to SMS Industries, Inc. in exchange for an 8% interest in equipment.
All of the above sales were exempt from registration under Section 4(2)
of the Securities Act, no public offering being involved.
24
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 23rd day of
March 1998.
INDUSTRIAL HOLDINGS, INC.
By: /s/ CHRISTINE A. SMITH
Christine A. Smith (Chief Financial
Officer and Vice President)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons and in the capacities
indicated on the 23rd day of March 1998.
SIGNATURE TITLE
- --------- -----
By: /s/ROBERT E. CONE Chairman of the Board of Directors, President and
Robert E. Cone Chief Executive Officer (Principal Executive Officer)
By: /s/CHRISTINE A. SMITH Vice President and Chief Financial Officer (Principal
Christine A. Smith Financial Officer and Chief Accounting Officer)
By: _______________________
Charles J. Anderson Director
By: /s/JAMES H. BROCK, JR.
James H. Brock, Jr. Director
By: /s/JAMES W. KENNEY
James W. Kenney Director
By: /s/JOHN P. MADDEN
John P. Madden Director
By: /s/BARBARA S. SHULER
Barbara S. Shuler Director
By: ______________________
John L. Thompson Director
25
INDEX TO EXHIBITS
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER IDENTIFICATION OF EXHIBIT PAGE
------ ------------------------- ----
3.1 -- Amended and Restated Articles of Incorporation of the Company.
Exhibit 3.1 from Amendment No. 1 to the Company's Registration
Statement on Form S-1 (No. 333-13323) (the "1996 Registration
Statement") is incorporated herein by this reference.
3.2 -- Amended and Restated Bylaws of the Company. Exhibit 3.2 from
the 1996 Registration Statement is incorporated herein by this
reference.
4.1 -- Specimen Certificate of Common Stock, $.01 par value, of the
Company. Exhibit 4.1 to the Company's Registration Statement on
Form S-1 (No. 33- 43169) dated October 7, 1991 (the "Registration
Statement"), as amended, is incorporated herein by reference.
4.2 -- Class B Redeemable Warrant Agreement and specimen of Class B
Redeemable Warrant Certificate. Exhibit 4.2 to the Company's
Registration Statement is incorporated herein by this reference.
4.3 -- Designation of Warrant Agent (Class B Redeemable Warrant),
dated as of November 1, 1996. Exhibit 4.3 the 1996 Registration
Statement is incorporated herein by this reference.
4.4 -- Class C Redeemable Warrant Agreement and specimen of Class C
Redeemable Warrant Certificate. Exhibit 4.4 to the 1996
Registration Statement is incorporated herein by this reference.
4.5 -- Designation of Warrant Agent (Class C Redeemable Warrant),
dated as of November 1, 1996. Exhibit 4.5 to the 1996 Registration
Statement is incorporated herein by this reference.
4.6 -- Class D Redeemable Warrant Agreement and specimen of Class D
Redeemable Warrant Certificate. Exhibit 4.5 from Amendment No. 1
to the Company's Registration Statement on Form S-2 (No.
333-37915) (the "1997 Registration Statement") is incorporated
herein by this reference.
10.1 -- Second Amendment to Employment Agreement of Robert E. Cone.
Exhibit 10.1 to the 1996 Registration Statement is incorporated
herein by this reference.
10.2 -- Third Amendment to Employment Agreement of James H. Brock, Jr.
Exhibit 4.6 from the 1996 Registration Statement is incorporated
herein by this reference.
10.4 -- 1995 Non-Employee Director Stock Option Plan incorporated
herein by reference to the Proxy Statements dated May 27, 1997 and
May 25, 1994.
10.5 -- 1994 Amended and Restated Incentive Stock Plan. Incorporated
herein by this reference to the Proxy Statement dated May 27, 1997
and May 26, 1995.
10.7 -- Promissory Note dated December 6, 1995, by and among the
Company, Landreth Engineering Company and General Electric
Corporation. Exhibit 10.1 to the Company's Current Report on Form
8-K dated December 7, 1995 is incorporated herein by this
reference.
10.8 -- 12% Convertible Promissory Note dated December 8, 1995, by and
among the Company and St. James Capital Partners, L.P. ("St.
James"). Exhibit 10.1 to the Company's Amendment A2 to its Current
Report on Form 8-K dated December 7, 1995 is incorporated herein
by this reference.
10.13 -- Convertible Debenture Loan Agreement date October 8, 1992, by
and among the Company, Pipeline Valve Specialty, Inc. ("PVS") and
Renaissance Capital Partners II, Ltd. Exhibit 2.2 to the Company's
Current Report on Form 8-K dated October 26, 1992 is incorporated
herein by this reference.
EX-1
10.14 -- Line of Credit Facility and Demand Note dated November 1, 1996,
by and among the Company and Comerica. Exhibit 10.1 to the
Company's Current Report on Form 8-K dated November 18, 1996 is
incorporated herein by this reference.
10.15 -- Term Loan dated November 1, 1996 by and among the Company, PVS,
Landreth, Imsco, REX, American and Comerica. Exhibit 10.2 to the
Company's Current Report on Form 8-K dated November 18, 1996 is
incorporated herein by this reference.
10.16 -- 12% Promissory Note dated November 18, 1996 by and among the
Company and St. James. Exhibit 10.3 to the Company's Current
Report on Form 8-K dated November 18, 1996 is incorporated herein
by this reference.
10.17 -- 12% Promissory Note dated November 18, 1996 by and among the
Company and St. James. Exhibit 10.4 to the Company's Current
Report on Form 8-K dated November 18, 1996 is incorporated herein
by this reference.
10.18 -- Stock Purchase Warrant Agreement dated November 18, 1996, from
the Company in favor of St. James. Exhibit 10.5 to the Company's
Current Report on Form 8-K dated November 18, 1996 is incorporated
herein by this reference.
11* -- Statement regarding computation of per share earnings. Ex-1
21* -- Subsidiaries of the Company. Ex-2
23.1* -- Independent Auditors' Consent of Deloitte & Touche LLP Ex-3
23.2* -- Consent of Price Waterhouse LLP Ex-4
- -------------------
* Filed herewith.
EX-2
INDUSTRIAL HOLDINGS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report of Deloitte & Touche LLP F-2
Report of Independent Accountants F-3
Consolidated Balance Sheets at December 31, 1997 and 1996 F-4
Consolidated Statements of Income For the Years Ended
December 31, 1997, 1996 and 1995 F-5
Consolidated Statements of Cash Flows For the Years Ended
December 31, 1997, 1996 and 1995 F-6
Consolidated Statements of Shareholders' Equity For the
Years Ended December 31, 1997, 1996 and 1995 F-8
Notes to Consolidated Financial Statements F-9
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Industrial Holdings, Inc.:
We have audited the accompanying consolidated balance sheet of Industrial
Holdings, Inc. and subsidiaries (the "Company") as of December 31, 1997, and the
related consolidated statements of income, stockholders' equity, and cash flows
for the year then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our 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, such consolidated financial statements present fairly, in all
material respects, the financial position of Industrial Holdings, Inc. and
subsidiaries as of December 31, 1997, and the results of their operations and
their cash flows for the year then ended in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
Houston, Texas
March 18, 1998
F-2
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Industrial Holdings, Inc.
In our opinion, the consolidated financial statements listed in the Index
appearing on page F-1 present fairly, in all material respects, the financial
position of Industrial Holdings, Inc. and its subsidiaries at December 31, 1996,
and the results of their operations and their cash flows for each of the two
years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Houston, Texas
March 5, 1997
F-3
INDUSTRIAL HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-------------------------
1997 1996
----------- -----------
ASSETS
Current assets:
Cash and equivalents ............................. $ 636,147 $ 3,087,925
Accounts receivable - trade, net ................. 12,573,808 6,756,218
Inventories ...................................... 13,346,210 9,970,337
Employee advances ................................ 58,823 77,086
Notes receivable, current portion ................ 1,303,859 207,549
Other current assets ............................. 646,285 333,839
----------- -----------
Total current assets ......................... 28,565,132 20,432,954
Property and equipment, net ......................... 23,639,249 15,579,410
Notes receivable, less current portion .............. 1,634,014 1,464,393
Other assets ........................................ 1,398,382 714,495
Goodwill and other, net ............................. 11,852,299 5,498,271
----------- -----------
Total assets ................................... $67,089,076 $43,689,523
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Notes payable .................................... $10,496,037 $ 9,615,917
Accounts payable - trade ......................... 6,413,550 4,601,082
Accrued expenses and other ....................... 3,308,588 1,721,487
Current portion of long-term debt ................ 2,455,658 1,393,712
----------- -----------
Total current liabilities ................... 22,673,833 17,332,198
Long-term debt, less current portion ................ 10,552,592 7,326,444
Deferred compensation payable, less current portion . 241,778 285,532
Deferred income taxes payable ....................... 3,283,351 2,190,902
----------- -----------
Total liabilities .......................... 36,751,554 27,135,076
----------- -----------
Commitments and contingencies
Shareholders' equity:
Preferred stock $.01 par value, 7,500,000 shares
authorized, no shares issued or outstanding
Common stock $.01 par value, 50,000,000
shares authorized, 6,642,619 and 4,851,494
shares issued and outstanding for 1997 and
1996, respectively ............................ 66,426 48,515
Additional paid-in capital ....................... 26,416,500 15,360,801
Retained earnings ................................ 3,854,596 1,145,131
----------- -----------
Total shareholders' equity ............... 30,337,522 16,554,447
----------- -----------
Total liabilities and
shareholders' equity ................... $67,089,076 $43,689,523
=========== ===========
See notes to consolidated financial statements.
F-4
INDUSTRIAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31,
--------------------------------------------
1997 1996 1995
------------ ------------ ------------
Sales .................................. $ 83,563,855 $ 51,422,950 $ 38,983,070
Cost of sales .......................... 63,277,320 41,044,573 31,111,228
------------ ------------ ------------
Gross profit ........................... 20,286,535 10,378,377 7,871,842
Selling, general and administrative
expenses ............................. 14,492,544 7,806,189 6,401,032
------------ ------------ ------------
Income from operations ................. 5,793,991 2,572,188 1,470,810
------------ ------------ ------------
Other income (expense):
Interest expense ................... (1,744,593) (1,335,904) (982,254)
Interest income .................... 160,231 160,078 140,173
Other income, net .................. 367,520 138,912 17,882
------------ ------------ ------------
Total other income (expense) . (1,216,842) (1,036,914) (824,199)
------------ ------------ ------------
Income before income taxes ............. 4,577,149 1,535,274 646,611
Provision for income taxes ............. 1,867,684 408,562 101,464
------------ ------------ ------------
Net income ............................. $ 2,709,465 $ 1,126,712 $ 545,147
============ ============ ============
Basic earnings per share ............... $ .44 $ .31 $ .18
Diluted earnings per share ............. $ .39 $ .26 $ .17
Weighted average number of common shares
outstanding ......................... 6,113,190 3,687,523 3,037,060
Weighted average number of common shares
outstanding plus potential dilutive
common shares ....................... 7,026,867 4,338,011 3,134,202
See notes to consolidated financial statements.
F-5
INDUSTRIAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31,
-----------------------------------------
1997 1996 1995
----------- ----------- -----------
Cash flows from operating activities:
Net income ...................................... $ 2,709,465 $ 1,126,712 $ 545,147
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization ................ 2,427,730 1,291,451 865,241
Deferred income tax provision (benefit) ...... 244,583 363,397 (67,422)
Deferred compensation paid ................... (43,754) (109,203) --
Income tax benefit from stock options
exercised .................................. 163,664 -- --
Other ........................................ -- 7,500 (12,289)
Changes in assets and liabilities,
net of acquisitions:
Accounts receivable ........................ (1,277,242) 224,690 (1,361,604)
Employee advances .......................... 18,263 (11,876) 127,540
Inventories ................................ 77,515 (803,949) 178,460
Notes receivable ........................... (1,265,931) 53,466 208,687
Other assets ............................... (810,165) (473,134) 18,148
Accounts payable and accrued expenses ...... (1,039,166) (697,136) 731,504
----------- ----------- -----------
Net cash provided by operating
activities ............................. 1,204,962 971,918 1,233,412
Cash flows from investing activities:
Purchase of property and equipment .............. (2,561,347) (2,408,476) (605,878)
Proceeds from disposals of property and
equipment, net ............................... 604,347 13,923 8,036
Purchase of businesses, net of cash ............. (2,150,662) (826,003)
Cash obtained in purchase of American .......... -- 1,244,666 --
Additional consideration paid to former
shareholders of Landreth ..................... -- (29,491) (307,900)
----------- ----------- -----------
Net cash used by investing activities ... (4,107,662) (1,179,378) (1,731,745)
----------- ----------- -----------
See notes to consolidated financial statements.
F-6
INDUSTRIAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
YEAR ENDED DECEMBER 31,
-------------------------------------------
1997 1996 1995
------------ ------------ -----------
Cash flows from financing activities:
Net (repayments) borrowings under revolving
line of credit ......................... $ (608,760) $ 112,490 $ 442,065
Proceeds from issuance of long-term debt .. 2,582,556 777,408 614,745
Principal payments on notes payable and
long-term debt ......................... (3,659,852) (4,271,224) (593,790)
Proceeds from issuance of common stock .... 2,136,978 6,248,281 275,116
------------ ------------ -----------
Net cash provided by financing
activities ........................... 450,922 2,866,955 738,136
------------ ------------ -----------
Net increase (decrease) in cash and
equivalents ................................ (2,451,778) 2,659,495 239,803
Cash and equivalents, beginning of year ..... 3,087,925 428,430 188,627
------------ ------------ -----------
Cash and equivalents, end of year ........... $ 636,147 $ 3,087,925 $ 428,430
============ ============ ===========
Supplemental disclosure of noncash
investing and financing activities:
Accounts receivable reclassified
to notes receivable ...................... $ 140,614
Conversion of debt to equity .............. $ 3,093,000 $ 1,619,100
Acquisition of businesses:
Assets acquired ....................... 23,064,501 11,443,214 5,624,319
Liabilities assumed .................... 20,913,839 12,687,881 4,798,316
Supplemental disclosures of cash flow
information: Cash paid for:
Interest ............................... $ 1,717,702 $ 1,269,380 $ 1,012,880
Income taxes ........................... 1,201,735 5,856 786
See notes to consolidated financial statements.
F-7
INDUSTRIAL HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1997, 1996 AND 1995
COMMON STOCK
------------------------ ADDITIONAL RETAINED
PAR PAID-IN EARNINGS
SHARES VALUE CAPITAL (DEFICIT) TOTAL
--------- ------- ----------- ---------- -----------
Balance, January 1, 1995 2,997,750 $ 29,978 $ 7,379,517 $ (526,728) $6,882,767
Issuance of common stock 93,412 934 274,182 275,116
Shortfall on sale of stock
by former PVS shareholders-
Note 9 (100,037) (100,037)
Net income 545,147 545,147
--------- ------- ----------- ---------- -----------
Balance, December 31, 1995 3,091,162 30,912 7,553,662 18,419 7,602,993
Issuance of common stock:
Private placement 300,000 3,000 1,007,000 1,010,000
Tender offer to Class A
warrantholders, net 621,914 6,219 3,562,681 3,568,900
Exercise of warrants
and options 373,418 3,734 1,665,647 1,669,381
Conversion of debt to equity 465,000 4,650 1,614,450 1,619,100
Shortfall on sale of stock
by former PVS shareholders-
Note 9 (42,639) (42,639)
Net income 1,126,712 1,126,712
--------- ------- ----------- ---------- -----------
Balance, December 31, 1996 4,851,494 48,515 15,360,801 1,145,131 16,554,447
Issuance of common stock:
Acquisitions 728,461 7,285 5,672,683 5,679,968
Private placement 71,530 715 644,790 645,505
Exercise of warrants and options 462,680 4,627 1,486,846 1,491,473
Income tax benefits from stock
options exercised 163,664 163,664
Conversion of debt to equity 528,454 5,284 3,087,716 3,093,000
Net income 2,709,465 2,709,465
--------- ------- ----------- ---------- -----------
Balance, December 31, 1997 6,642,619 $66,426 $26,416,500 $3,854,596 $30,337,522
========= ======= =========== ========== ===========
See notes to consolidated financial statements.
F-8
INDUSTRIAL HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION:
Industrial Holdings, Inc., operates three segments (i) the Fastener
Manufacturing and Sales Segment comprised of Landreth Engineering Company
("Landreth"), American Rivet Company, Inc. ("American"), Connecticut Rivet
("Crivet"), which manufacture industrial metal fasteners for sale primarily to
manufacturers in the furniture, home appliance and automotive industries,
LSS-Lone Star-Houston, Inc. ("Lone Star") and WALKER BOLT Manufacturing Co.
("WALKER") which manufacture industrial metal fasteners for sale primarily to
the petrochemical and chemical refining and energy industries, and the Energy
Products and Services Division comprised of; (ii) the Valve and Supplies Sales
Segment which includes Pipeline Valve Specialty, Inc. ("PVS"), Manifold Valve
Services, Inc. ("MVS"), Rogers Equipment ("Rogers") and Industrial Municipal
Supply ("IMSCO") which remanufacture and sell pipeline valves, high pressure
valves and industrial valves and distribute other products primarily to the
petrochemical, chemical and petroleum refining industries, the pipeline
transportation and storage industries and energy industries; and (iii) the
Machine Sales and Service Segment comprised of The Rex Group ("REX") which sells
new and used machine tools, provides machine moving services and international
export crating services.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Industrial
Holdings, Inc. and its wholly-owned subsidiaries (the "Company"). Significant
intercompany balances and transactions have been eliminated in consolidation.
REVENUE RECOGNITION
Revenues are recognized upon shipment of the product or as the services are
performed.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Earnings are charged with a provision for doubtful accounts based on a current
review of the collectibility of the accounts. Accounts deemed uncollectible are
applied against the allowance for doubtful accounts. The allowance for doubtful
accounts was $145,395 and $179,965 at December 31, 1997 and 1996, respectively.
CREDIT RISK
The Company extends credit to its customers in the normal course of business and
generally does not require collateral or other security. The Company performs
ongoing credit evaluations of its customers' financial condition and
historically has not incurred significant credit losses. Notes receivable are
collateralized by land, buildings and equipment.
F-9
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of primarily cash, trade accounts
and notes receivable, accounts and notes payable, and debt instruments. The book
values of cash, trade receivables and accounts payable are representative of
their respective fair values due to the short-term maturity of these
instruments. It is not practicable to estimate the fair values of the related
party amounts due to the nature of the instruments. The fair values of the
Company's debt instruments (see Notes 7 and 8) are representative of their
carrying values based upon (i) variable rate terms or (ii) management's opinion
that the existing rates are equivalent to the current rates offered to the
Company for fixed-rate long-term debt with the same maturities and security
structure. The fair value of notes receivable is estimated by discounting the
future cash flows using current rates at which similar loans would be made to
borrowers with similar credit ratings and for the same remaining maturities.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost includes, where
applicable, manufacturing labor and overhead. The first-in, first-out method
("FIFO") was used to determine the cost of substantially all of the inventories.
PROPERTY AND EQUIPMENT
Property and equipment are stated on the basis of cost. Depreciation is computed
using the straight-line method over the estimated useful lives of the related
assets (3 to 15 years for automobiles, furniture and equipment and 31 years for
buildings). Maintenance and repairs are charged to expense as incurred; major
renewals and betterments are capitalized.
LONG-LIVED ASSETS
The Company records impairment losses on long-lived assets used in operations
when events and circumstances indicate that the assets might be impaired and the
undiscounted cash flows estimated to be generated by those assets are less than
the carrying amounts of those assets.
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill represents the excess of the purchase price over the fair market value
of net tangible assets acquired. Goodwill is amortized over 20 years. At
December 31, 1997, goodwill was $11,787,380, net of accumulated amortization of
$1,130,506. Other intangible assets consist primarily of loan origination fees
and are amortized over the life of the related loans.
STOCK-BASED COMPENSATION.
The Company adopted Statement of Financial Accounting Standard No. 123 ("FAS
123"), Accounting for Stock-Based Compensation beginning with the Company's
first quarter of 1996. Upon adoption of FAS 123, the Company continued to
measure compensation expense for its stock-based employee compensation plans
using the intrinsic value method prescribed by APB No. 25, Accounting for Stock
Issued to Employees, and has provided pro forma disclosures of the effect on net
income and earnings per share as if the fair value-based method prescribed by
FAS 123 had been applied in measuring compensation expense. SEE Note 11.
F-10
INCOME TAXES
The Company utilizes the liability method in accounting for income taxes. Under
this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected to reverse.
EARNINGS PER SHARE
Basic earnings per share has been computed by dividing net income by the
weighted average number of common shares outstanding. Diluted earnings per share
has been computed by dividing net income by the weighted average number of
common shares outstanding plus dilutive potential common shares.
The following table presents information necessary to calculate basic and
diluted earnings per share for the periods indicated, with 1996 and 1995 being
restated to conform with the requirements of Statement of Financial Accounting
Standards No. 128, Earnings Per Share, described below:
YEAR ENDED DECEMBER 31,
------------------------------------
1997 1996 1995
---------- ---------- ----------
EARNINGS FOR BASIC AND DILUTED COMPUTATION
Net income ..................................... $2,709,465 $1,126,712 $ 545,147
========== ========== ==========
BASIC EARNINGS PER SHARE
Weighted average common shares outstanding ...... 6,113,190 3,687,523 3,037,060
========== ========== ==========
Basic earnings per share ........................ $ .44 $ .31 $ .18
========== ========== ==========
DILUTED EARNINGS PER SHARE
Weighted average common shares outstanding ...... 6,113,190 3,687,523 3,037,060
Shares issuable from assumed conversion of common
share options and warrants granted .......... 913,677 650,488 97,142
---------- ---------- ----------
Weighted average common shares outstanding,
as adjusted ................................. 7,026,867 4,338,011 3,134,202
========== ========== ==========
Diluted earnings per share ...................... $ .39 $ .26 $ .17
========== ========== ==========
STATEMENT OF CASH FLOWS
For purposes of the consolidated statement of cash flows, cash equivalents
include all highly liquid investments with original maturities of three months
or less. Changes in assets and liabilities are presented net of the effect of
the purchase of businesses.
ESTIMATES
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Management
believes that the estimates made in connection with these financial statements
are reasonable.
F-11
RECLASSIFICATIONS
Certain reclassifications have been made to the prior-year amounts to conform to
the current-year classification.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, Earnings Per
Share. SFAS No. 128, which was effective for periods ending after December 15,
1997, specifies the computation, presentation and disclosure requirements of
earnings per share and supercedes Accounting Principles Board Opinion No. 15.
SFAS No. 128 requires a dual presentation of basic and diluted earnings per
share. Basic earnings per share, which excludes the impact of common share
equivalents, replaces primary earnings per share. Diluted earnings per share,
which utilizes the average market price per share as opposed to the greater of
the average market price per share or ending market price per share when
applying the treasury stock method in determining common share equivalents,
replaces fully diluted earnings per share.
In February 1997, the FASB also issued SFAS No. 129, Disclosure of Information
about Capital Structure, which establishes standards for disclosing information
about an entity's capital structure. SFAS No. 129 was effective for periods
ending after December 15, 1997. The adoption of SFAS No. 129 did not impact the
Company's capital structure disclosures.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income and
SFAS No. 131, Disclosures About Segments of an Enterprise and Related
Information. SFAS No. 130 establishes standards for reporting and displaying
comprehensive income and its components. SFAS No. 131 establishes standards for
the way that public business enterprises report information about operating
segments and related information in interim and annual financial statements.
SFAS Nos. 130 and 131 are effective for periods beginning after December 15,
1997. Management is evaluating what, if any, additional disclosures may be
required upon the implementation of SFAS No. 130 and 131.
3. BUSINESS ACQUISITIONS:
In February 1997, the Company acquired Lone Star, in March 1997, the Company
acquired MVS, in August 1997, the Company acquired the assets and assumed
certain liabilities of Rogers and in November 1997, the Company acquired WALKER.
The aggregate purchase price of the acquisitions was $17.4 million cash and
assumed liabilities plus 728,461 shares of common stock valued at $5,680,000.
The aggregate excess of cost over the fair value of net assets acquired was $7.0
million. In November 1996, the Company acquired American for $11.4 cash and
assumed liabilities. The aggregate excess of cost over the fair value of net
assets acquired in connection with the American acquisition was $3.7 million. In
December 1995, the Company acquired the assets and assumed certain liabilities
of CRivet for $5.7 million cash and assumed liabilities. These acquisitions have
been accounted for by the purchase method of accounting and, accordingly assets
and liabilities have been recorded at their estimated fair values at the date of
acquisition. The final purchase price allocation of WALKER is subject to certain
adjustments relating to the appraised value of assets and to certain other
accruals. The results of operations of the acquired businesses have been
included in the consolidated financial statements from the respective
acquisition dates.
On a pro forma unaudited basis, as if the 1997 and 1996 acquisitions had
occurred as of January 1, 1996, sales, net income and basic and diluted earnings
per share would have been $91,370,000, $3,177,000, $.52
F-12
and $.44 for 1997 and $86,233,000, $2,010,000, $.46 and $.39 for 1996. On a pro
forma unaudited basis, as if the 1996 and 1995 acquisitions had occurred as of
January 1, 1995, sales, net income and basic and diluted earnings per share
would have been $59,122,000, $1,396,000, $.38 and $.28 for 1996 and $56,565,000,
$1,312,000, $.43 and $.34 for 1995. The pro forma financial information does not
purport to be indicative either of results of operations that would have
occurred had the purchases been made at January 1, 1996 or future results of
operations of the combined companies.
4. INVENTORIES:
Inventories at December 31 consist of:
1997 1996
----------- ----------
$ 1,900,320 $1,477,051
Raw materials ....................... 7,728,897 7,130,702
Finished goods ...................... 3,716,993 1,362,584
----------- ----------
Other ............................... $13,346,210 $9,970,337
=========== ==========
5. NOTES RECEIVABLE:
Notes receivable at December 31 consist of the following:
1997 1996
---------- ----------
Note receivable from former shareholder
of MVS due March 1998 ......................... $1,108,632 --
Mortgage note receivable with interest at
9.53% due in monthly installments of
$15,166 through February 2007 secured
by land and building .......................... 1,109,838 $1,182,244
Notes receivable from officers
due June 1999, unsecured ..................... 329,983 --
Note receivable from asset sale due in
monthly installments of $3,790
through July 1999, unsecured .................. 74,673 105,786
Various installment notes receivable from
equipment inventory sales due through
2000, secured by equipment .................... 308,608 334,624
Other notes receivable ........................... 6,139 49,288
---------- ----------
2,937,873 1,671,942
Less current portion ............................. 1,303,859 207,549
---------- ----------
$1,634,014 $1,464,393
========== ==========
F-13
6. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment at December 31 consist of:
1997 1996
------------ ------------
Land ..................................... $ 1,486,892 $ 1,193,892
Buildings and improvements ............... 4,711,140 3,005,180
Machinery and equipment .................. 20,612,730 12,803,338
Furniture and fixtures ................... 1,571,924 1,133,483
Construction in progress ................. -- 592,622
------------ ------------
28,382,686 18,728,515
Less - accumulated depreciation
and amortization ...................... (4,743,437) (3,149,105)
------------ ------------
$ 23,639,249 $ 15,579,410
============ ============
7. NOTES PAYABLE:
Notes payable at December 31 consists of the following:
1997 1996
----------- ----------
Revolving line of credit with a bank which provides for borrowings up to the
lesser of a defined borrowing base or $14,000,000, $2,753,964 available at
December 31, 1997, principal due on demand, interest payable monthly at prime
(8.5% at December 31, 1997), secured by substantially all assets of the Companies ............. $10,496,037 $7,665,917
12% notes payable to individuals, principal due on demand, interest
payable monthly and secured by certain notes receivable ....................................... -- 50,000
12% promissory note with principal and interest due October 31, 1997, secured by
substantially all the assets of the Companies, exchanged for 190,000 shares of
common stock in 1997 .......................................................................... -- 1,900,000
----------- ----------
$10,496,037 $9,615,917
=========== ==========
8. LONG-TERM DEBT:
Long-term debt at December 31, consists of the following:
1997 1996
---------- ----------
Note payable to a financial institution with monthly principal payments of
$111,111 plus interest at libor + 2.5% (8.22% at December 31, 1997), maturing
December 2003 and secured by certain equipment ............................................... $7,888,889 --
9.85% term loan payable in monthly installments of $53,620 including interest,
maturing December 1, 2001 and secured by machinery and equipment ............................. 2,069,470 $2,523,218
12% convertible debentures due October 1, 1999, with principal of
$25,000 and interest payable monthly. Principal was converted into
325,154 shares of common stock in 1997 ....................................................... -- 1,060,000
F-14
Revolving line of credit with a bank expected to be refinanced with 180 monthly
principal payments of $9,333 plus interest at prime, secured by the real estate
of American ................................................................................... -- 1,680,000
Note payable to bank with monthly principal payments of $6,240 plus
interest at prime, maturing on December 1, 2004, secured by real
estate property ............................................................................... 711,446 814,306
8% note payable to former shareholder of Lone Star with quarterly
principal and interest payments of $30,575, maturing in Januuary 2002 ........................ 437,033 --
Notes payable to a bank with monthly principal payments of $26,126 plus interest
at prime, maturing on November 1, 1997 through 2002, secured by certain assets
of the Companies .............................................................................. 1,263,804 2,538,799
Non-interest bearing notes payable to certain former vendors of
MRMC, Inc., principal due in monthly installments of $5,475 through
March 1998 .................................................................................... 16,001 76,230
Various installment notes, payable in monthly installments through
2000, including interest ranging from 8% to 12%, secured primarily
by equipment .................................................................................. 621,607 27,603
----------- ----------
13,008,250 8,720,156
2,455,658 1,393,712
----------- ----------
Less - current portion ........................................................................ $10,552,592 $7,326,444
=========== ==========
The aggregate maturities of long-term debt at December 31, 1997 are as follows:
Year ended December 31:
-----------------------
1998 $ 2,455,658
1999 2,400,320
2000 2,395,450
2001 2,195,490
2002 1,066,214
Thereafter 2,495,118
----------
$13,008,250
----------
The note payable to a financial institution contains restrictive covenants which
require the Company to maintain a minimum leverage ratio and fixed charge
coverage ratio. At December 31, 1997, the Company was in compliance with these
restrictive covenants.
F-15
9. COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS:
The Companies have entered into noncancellable operating leases with related
parties (former shareholders of Landreth and MVS) and other third parties
expiring in various years through 2002. Rent payments to the former shareholders
of Landreth and MVS were $156,800 for 1997 and $106,800 annually for 1996 and
1995. Operating leases relate to offices, buildings and certain equipment.
Aggregate rent expense on such leases amounted to $1,087,380, $935,845 and
$657,328 for the years 1997, 1996 and 1995. Future minimum lease payments are as
follows:
Year ended December 31:
-----------------------
1998 $ 1,191,279
1999 1,074,153
2000 589,040
2001 281,219
2002 115,697
----------
$3,251,388
==========
The lease with the former shareholders of Landreth is $106,800 annually through
2002 with an option to renew for an additional five years. The Company has an
option to purchase the leased premises at a price equal to the outstanding
indebtedness at the time the option is exercised. The lease with the former
shareholder of MVS is for $60,000 annually through 1999.
In connection with the 1997 purchase of Lone Star, the Company issued a note
payable to the former shareholder of Lone Star with quarterly principal and
interest payments of $30,575, maturing in January 2002 (see Note 8).
During 1996, the Company and a partnership providing a portion of the financing
for the American acquisition, entered into a consulting agreement whereby the
Company provided consulting services to the partnership relating to the
acquisition and operation of one of the partnership's investee companies. Fees
for these consulting services were $100,000 and are included in other income in
1996.
In connection with the purchase of Landreth, the former Landreth shareholders
were entitled to additional consideration based upon the level of Landreth's
pretax profits through 1997, not to exceed $500,000 in the aggregate. For 1996
and 1995, the Company paid these shareholders $29,491 and $207,863 as additional
consideration. No amounts were payable under this agreement for 1997 and no
further obligation exists.
In connection with the purchase of PVS, the former PVS shareholders agreed not
to sell their shares except in accordance with an agreement with the Company.
The Company was obligated to pay two of the former PVS shareholders the
difference between $5 and the proceeds they received upon sale of their common
stock. These obligations were satisfied in 1996.
The Company is involved in litigation arising in the ordinary course of its
business. In the opinion of management, the ultimate liability, if any, as a
result of these matters will not have a material adverse effect on the
Companies' consolidated financial position or results of operations.
F-16
10. INCOME TAXES:
The provision for income taxes for the years ended December 31 is as follows:
1997 1996 1995
---------- --------- ---------
Current:
Federal ....................... $1,484,936 $ (31,635) $ 142,886
State ......................... 138,165 76,800 26,000
---------- --------- ---------
1,623,101 45,165 168,886
Deferred , primarily federal ...... 244,583 363,397 (67,422)
---------- --------- ---------
Income tax expense ................ $1,867,684 $ 408,562 $ 101,464
========== ========= =========
The Company and its subsidiaries file a consolidated federal income tax return.
At December 31, 1997, the Company has net operating loss (NOL) carryforwards of
approximately $826,000 for income tax purposes which expire in 2007. These
losses may presently be offset against the future income of the applicable
subsidiary only. Of the carryforward amount, $123,300 may be used at any time
prior to its expiration. The remaining net operating loss carryforwards are
subject to annual limitations.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the carrying amounts for income tax purposes, primarily resulting
from the acquisitions of the Company's subsidiaries. During 1996 and 1995, the
Company reduced the deferred tax asset valuation allowance by $238,873 and
$223,110, respectively, to reflect $101,000 and $26,000, respectively in
deferred tax assets used and to recognize deferred tax assets of $138,873 in
1996 and $197,110 in 1995. The recognized deferred tax assets are based upon
expected utilization of net operating loss carryforwards and reversal of certain
temporary differences. The Company has assessed its past earnings history and
trends and that of its subsidiary, REX, as well as expected revenues, cost
reductions and expiration dates of carryforwards and has determined that it is
more likely than not these deferred tax assets will be realized.
The major components of deferred income tax assets and liabilities at December
31 are as follows:
1997 1996
----------- -----------
Deferred income tax liabilities:
Depreciation ................................... $(3,410,901) $(2,747,473)
Other .......................................... (1,035,632) (443,590)
----------- -----------
Total deferred income tax liabilities .. (4,446,533) (3,191,063)
Deferred income tax assets:
Net operating loss carryforwards ............... 280,820 318,216
Inventory ...................................... 345,093 356,258
Other .......................................... 537,269 325,687
----------- -----------
Total deferred income tax assets ....... 1,163,182 1,000,161
----------- -----------
Deferred income taxes ............................ $(3,283,351) $(2,190,902)
=========== ===========
F-17
A reconciliation of income tax expense computed at statutory rates to income tax
expense for the years ended December 31 is as follows:
1997 1996 1995
---------- --------- ---------
Tax at statutory rate .................. $1,556,231 $ 521,993 $ 219,848
Effect of permanent difference ......... 200,737 68,897 58,249
Reduction in deferred tax asset
valuation allowance ................. -- (238,873) (223,110)
Other .................................. 19,528 5,857 29,317
State income taxes, net of
federal benefit ..................... 91,188 50,688 17,160
---------- --------- ---------
$1,867,684 $ 408,562 $ 101,464
========== ========= =========
11. SHAREHOLDERS' EQUITY:
WARRANTS TO ACQUIRE COMMON STOCK
The following table sets forth the outstanding warrants to acquire 2,598,810
shares of common stock as of December 31, 1997:
NUMBER OF
SECURITY COMMON SHARES
-------- -------------
Class B redeemable warrants to acquire common stock at $10.00 per share issued
in connection with initial public offering and with tender offer to Class B
warrantholders, currently exercisable, expiring on January 14, 1999, redeemable upon
30 days notice ............................................................................................... 1,254,414
Class C redeemable warrants to acquire common stock at $15.00 per share issued
in connection with tender offer to Class B warrantholders, currently
exercisable, expiring on January 14, 1999, redeemable if closing bid price of
common stock equals or exceeds $20.00 for 20 consecutive days ................................................. 621,914
Warrant to acquire common stock at $10.00 per share, currently exercisable, expiring
on June 18, 2007 .............................................................................................. 50,000
Warrant to acquire common stock at $3.27 per share issued in connection with private
financing, currently exercisable, expiring on December 8, 2000 ................................................ 136,514
Warrant to acquire common stock at $5.00 per share, currently exercisable, expiring
on January 10, 1999 ........................................................................................... 15,000
Warrant to acquire common stock at $7.00 per share issued in connection with
acquisition financing, currently exercisable, expiring on November 18, 2001 ................................... 520,968
F-18
EMPLOYEE STOCK OPTION PLAN
At December 31, 1997, the Company has a stock-based compensation plan under
which shares or options can be granted to employees. The Company measures
compensation cost for this plan using the intrinsic value method of accounting
prescribed by APB Opinion No. 25 "Accounting for Stock Issued to Employees."
Given the terms of the plan, no compensation cost has been recognized for stock
options granted under the plan.
Under the 1994 Amended and Restated Incentive Stock Plan (the "Employee Plan"),
the Company may grant incentive or nonqualified options to key employees. As of
December 31, 1997, there were no shares of common stock reserved for issuance
under the Employee Plan. The option price per share is generally the fair market
value on the date the option is granted and each option is exercisable into one
share of common stock. The options under the Employee Plan are exercisable
immediately to seven years after the grant date in accordance with the vesting
provisions of the individual agreements set forth at the time of the award. All
options expire ten years from the date of the grant.
The following table summarizes information about employee stock options
outstanding at December 31:
1997 1996 1995
------------------------- ------------------------ ------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
FIXED OPTIONS SHARES PRICE SHARES PRICE SHARES PRICE
- ---------------------------------------- ----------- ----------- --------- ---------- ----------- ----------
Outstanding at beginning of the year.... 438,000 $4.09 253,000 $2.97 238,000 $2.93
Granted................................. 208,750 $9.87 233,000 $5.09 25,000 $3.31
Exercised............................... (124,000) $2.90 (45,000) $3.00 (10,000) $3.13
Forfeited............................... -- -- (3,000) $3.13 -- --
----------- ----------- --------- ---------- ----------- ----------
Outstanding at end of year.............. 522,750 $6.68 438,000 $4.09 253,000 $2.97
----------- ----------- --------- ---------- ----------- ----------
Options exercisable at end of year ..... 293,250 $5.34 296,000 $3.33 253,000 $2.97
Weighted-average fair value of options
granted during the year at market
price................................. 208,750 $2.92 83,000 $1.64 25,000 $1.21
Weighted-average fair value of
options granted during the year where
exercise price is greater than market
price at grant date................... -- -- 150,000 $2.22 -- --
DIRECTORS' STOCK OPTION PLAN
The Company has a stock option plan for Non-Employee Directors (the "Director
Plan"). At December 31, 1997, there were 100,000 shares of common stock reserved
for issuance under the Director Plan. Pursuant to the terms of the plan, each
non-employee director is entitled to receive options to purchase common stock of
the Company upon initial appointment to the Board (initial grants) and annually
thereafter. Grants vest over nine months and are exercisable until the tenth
anniversary of the date of grant. Grants have an exercise price equal to the
fair market value of the Company's stock on the date of grant.
F-19
The following table summarizes information about directors stock options
outstanding at December 31:
1997 1996 1995
------------------------ ------------------------ ------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
FIXED OPTIONS SHARES PRICE SHARES PRICE SHARES PRICE
- ---------------------------------------- ---------- ----------- ------ ---------- ---------- -----------
Outstanding at beginning of the year.... 80,000 $ 2.90 60,000 $2.38 60,000 $2.38
Granted................................. 25,000 $11.60 25,000 $4.06 -- --
Exercised............................... (45,000) $ 2.56 (5,000) $2.38 -- --
---------- ----------- ------ ---------- ---------- -----------
Outstanding at end of year.............. 60,000 $ 6.78 80,000 $2.90 60,000 $2.38
---------- ----------- ------ ---------- ---------- -----------
Options exercisable at end of year ..... 60,000 $ 6.78 80,000 $2.90 60,000 $2.38
Weighted-average fair value of
options granted during the year....... 25,000 $ 3.25 25,000 $1.19 -- --
The following table summarizes significant ranges of outstanding and exercisable
options at December 31, 1997.
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------- ----------------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
NUMBER REMAINING AVERAGE NUMBER AVERAGE
RANGE OF OUTSTANDING AT CONTRACTUAL EXERCISABLE EXERCISABLE AT EXERCISABLE
EXERCISABLE PRICES DECEMBER 31, 1997 LIFE PRICE DECEMBER 31, 1997 PRICE
- --------------------------- ------------------ --------------- ------------- ------------------ -------------
$2.38 15,000 6.8 $2.38 15,000 $2.38
$3.13-$3.31 91,000 6.1 $3.18 91,000 $3.18
$4.00-$4.25 121,000 7.8 $4.13 101,000 $4.15
$5.00-$5.50 100,000 8.1 $5.25 50,000 $5.00
$8.13-$12.50 255,750 9.3 $9.97 96,250 $10.17
The Company's reported net income and earnings per share would have been reduced
had compensation cost for the Company's stock-based compensation plans been
determined using the fair value method of accounting as set forth in SFAS No.
123 "Accounting for Stock-Based Compensation." For purposes of estimating the
fair value disclosures below, the fair value of each stock option has been
estimated on the grant date with a Black-Scholes option-pricing model using the
following weighted-average assumptions: dividend yield of 0%; expected
volatility of .451%; risk-free interest rate of 5.7%; and expected lives of 3 to
7 years for stock options granted. The effects of using the fair value method of
accounting on net income and earnings per share are indicated in the pro forma
amounts below:
1997 1996 1995
---- ---- ----
Net income As reported........................ $2,709,465 $1,126,712 $545,147
Pro forma.......................... $2,291,550 $ 900,160 $496,637
Earnings per share:
Basic As reported........................ $ .44 $ .31 $ .18
Pro forma.......................... $ .37 $ .24 $ .16
Diluted As reported........................ $ .39 $ .26 $ .17
Pro forma.......................... $ .33 $ .21 $ .16
F-20
12. SAVINGS PLAN:
The Company has a 401(k) savings plan which permits participants to contribute
up to 18 percent of their compensation each year. The Company will match at
least 50 percent of a participant's contributions, up to a maximum of 3 percent
of gross pay. The Company's results of operations reflect expenses associated
with the plan of approximately $145,096, $70,300 and $31,500 for 1997, 1996 and
1995.
13. SEGMENT INFORMATION:
The Company operates three segments: fastener manufacturing and sales; valve and
supplies sales; and machine sales and services. Summarized financial information
by business segment for 1997, 1996 and 1995 is presented below.
ENERGY PRODUCTS AND SERVICES DIVISION
-------------------------------------
VALVE AND MACHINE SALES
FASTENERS SUPPLIES AND SERVICES
--------- -------- ------------
1997
- ----
Operating revenues $48,840,795 $19,098,713 $15,624,347
Operating profit (loss) 4,306,389 2,628,968 (257,326)
Identifiable assets 46,601,482 14,713,948 4,872,691
Depreciation and amortization 1,755,905 420,786 238,085
Capital expenditures 1,456,699 911,684 162,363
1996
- ----
Operating revenues $22,523,401 $12,472,456 $16,427,090
Operating profit 2,064,995 773,203 532,637
Identifiable assets 29,424,959 6,071,785 5,870,376
Depreciation and amortization 829,408 227,996 195,329
Capital expenditures 2,147,064 24,143 227,576
1995
- ----
Operating revenues $13,204,532 $13,449,344 $12,329,194
Operating profit 1,261,267 687,475 159,849
Identifiable assets 14,700,531 6,856,931 5,452,240
Depreciation and amortization 330,462 189,462 172,386
Capital expenditures 478,908 35,891 79,119
Operating profit is operating revenues less cost of sales and operating
expenses. Corporate expenses and income taxes have not been included in the
computation of operating profit of individual segments.
F-21
14. QUARTERLY FINANCIAL DATA (UNAUDITED):
Summarized quarterly financial data for 1997, 1996 and 1995 are as follows (in
thousands, except per share data):
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
1997
- ----
Sales .......................................... $17,304 $21,283 $21,054 $23,922
Gross profit ................................... 4,550 5,253 4,885 5,598
Net income ..................................... 518 826 666 699
Earnings per share:
Basic ....................................... .10 .14 .10 .10
Diluted ..................................... .09 .12 .09 .09
1996
- ----
Sales .......................................... $12,015 $13,612 $12,870 $12,925
Gross profit ................................... 2,512 2,762 2,641 2,463
Net income ..................................... 237 319 206 365
Earnings per share:
Basic ....................................... .08 .09 .05 .09
Diluted ..................................... .07 .07 .05 .07
1995
- ----
Sales .......................................... $10,406 $ 9,317 $ 9,072 $10,188
Gross profit ................................... 1,919 2,014 1,978 1,960
Net income ..................................... 202 152 130 61
Earnings per share:
Basic ....................................... .07 .05 .04 .02
Diluted ..................................... .07 .05 .04 .01
15. SUBSEQUENT EVENTS:
In January 1998, the Company completed an offer (the "Offer") to the holders of
its issued and outstanding Class B Warrants to exchange each Class B Warrant and
$10.00 cash for one share of the Company's Common Stock, one Class C Warrant and
one Class D Warrant. The holders of 1,101,689 Class B Warrants tendered their
Class B Warrants and purchased 1,101,689 shares of Common Stock and were issued
1,101,689 Class C Warrants and 1,101,689 Class D Warrants. The Company received
net proceeds of $10,910,000 after deducting approximately $100,000 of expenses
incurred in
F-22
connection with the Offer. After the completion of the Offer, there are 152,725
Class B Warrants, 1,723,603 Class C Warrants and 1,101,689 Class D Warrants
outstanding.
In February 1998, the Company acquired all the capital stock of Philform, Inc.
("Philform") and certain leased operating assets for 419,773 shares of the
Company's common stock valued at $4,520,000. Simultaneously, Philform
contributed the Equipment and its activities to OF Acquisition L.P., a limited
partnership (the "Partnership"), in exchange for a 49% limited partnership
interest. Philform manufactures and sells forming and fastening systems
primarily to the automotive industry. Its 1997 revenues were $13.4 million.
After the acquisition, the business and operations previously conducted by
Philform will be conducted by the Partnership.
F-23